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Indian tech pros send shivers down America's spine

Indian tech pros send shivers down America's spine - The Economic Times

Unknowingly – and unintentionally – the Indian professional has sparked off a major economic apprehension in the US among policy-influencers.

The basic question, of course, is whether the outflow of jobs from America to India, despite lowering costs hugely for companies, is good for the US. The immediate concern is the backlash from people who have lost their jobs, which can escalate into a major issue in an election year.

Some American economists, backed by conservative politicians are not asking for a ban on offshoring in as many words, but they’re arguing that the principles of free world trade – which Washington uses to pry open markets around the world – are no longer applicable when jobs start flowing out.

Of course, with tech CEOs from America already having warned Washington not to pass legislation against exporting jobs to India and other countries – since their bottomlines benefit greatly from such moves.

The arguments on both sides are based on David Ricardo's classic theory of comparative advantage –

which championed global trade on the grounds that every country should focus on what it does best so as to increase the world's economic output and prosperity levels. To recap, Ricardo had argued that (in his example) even if Portugal produced both wine and cloth cheaper than England did, it would still make better sense for it to produce only wine, while England concentrated on cloth, which it can produce cheaper than any other product.

That is supposed to generate greater wealth and happiness all round, concluded Ricardo. But, argue Roberts and Schumer, that was when the so-called factors of production – capital, land and labour – could not be exported elsewhere, so that businessmen in one country could actually go and get their manufacturing done in another country at a lower cost. However, global flows of capital and technology, combined with the Internet, the growth of services – as opposed to physical manufacturing – and the knowledge economy are allowing companies to move their work to the cheapest spots around the world.

The outcome, believe Roberts and Schumer, can only hurt higher-cost economies like the US. Not even the resultant drop in prices of those services, because of lower costs, will help Americans, they argue, if jobs and salaries are lost. “So many people forget that the reason that highly paid US workers could compete against lowly paid Asian workers is that the US workers were much more productive due to the immobility of capital and technology. The international mobility of factors of production has stripped away the productivity advantage of first world labour. Try to imagine the political instability in store for the US as the ladders of upward mobility collapse.” Thus reads Roberts’s conclusion in his follow-up defence.

Economists will probably continue to argue back and forth on this subject – maybe a Nobel will be bestowed some day on the one who offers the best theory to fit the facts – but the economic tone to the arguments will obviously be the basis for political decision-making on the subject. With US President George Bush as well as his potential Democratic challengers beginning to take positions on the outsourcing row, it’s obvious that a battle lies ahead.