Upside to Outsourcing

What a fuss is made worldwide over immigration and outsourcing. This is despite the fact that both provide natural fuel to any free market, something that the whole world has decided is necessary today for survival itself. And the biggest cry baby is America, a self-styled champion of free trade. In an increasingly competitive global market some opinion makers in rich countries like America seem to advocate economic isolationism at home but unrestricted access to markets elsewhere in the world, even though this is not in the interest of their own people. Ever since the shift to India of some of their work, American information technology companies particularly have earned huge benefits from being able to provide services to their customers round the clock. And the international movement of the services industry has been positive for all kinds of different economies, most of all American. While low-skilled jobs are outsourced to lower-cost countries like India, insourcing of high-skilled jobs in engineering, management consulting, banking and legal services have generated high revenues for countries like America. For outsourcing reduces costs at home and the extra money earned goes to update technology, to expand training programs for creating more skilled hands and minds, and opening up unexpected market opportunities. In due time, outsourcing may even improve the economy of a developing country, giving birth to brand new markets and new consumers for goods from affluent economies. This is how America, once upon a time a very poor country, was helped out of its poverty by European capital in the early nineteenth century. American workers caught up eventually with the far more skilled Europeans and were soon able to compete with the best. More jobs were created on both continents. At this year’s Global Economy Lecture, hosted annually by the Vienna Institute for International Economic Studies (wiiw), Professor Robert C. Feenstra from the University of California concluded that many differences exist between the North American market as a whole and the European Union (EU). But both regions share a wide range of income and productivity levels that create new opportunities for trade, as with outsourcing, but also challenges, as with immigration. In the lecture titled Globalisation and its Impact on Labour, Dr.Feenstra reminded the audience that the EU is undoubtedly the greatest example of the spread of free trade in the world today and, to an economist, that is what globalisation is all about. Clearly, Europe is the ideal ground to look for the positive impact of trade on productivity, he said. The challenges that come with free trade are several. Outsourcing is a big issue in America, together with migration, especially from Mexico. Migration within the EU is of major concern ever since countries with lower wages like Bulgaria and Romania joined, along with ten central and eastern European countries, in 2004. Since America is the area of the world better known to Feenstra, the professor focused on NAFTA, the decade- old agreement between America, Canada and Mexico, allowing free trade within the three countries that over time resulted in workers earning relatively more everywhere. There is an analogy within North America with the large inflow of immigrants to the USA from Mexico, and other developing countries. However, the idea that immigration of both skilled workers and less skilled workers leads to downward pressure on local wages has not been realised to the extent that was feared in America. Professor Feenstra gave the example of refugees, about 125,000, who for political reasons sailed in 1980 from Cuba to Miami to increase the American city’s population by seven percent. This wave of mostly less-skilled workers did not pull down the wages of  low-skilled workers from Miami, contradicting the prediction that the inflow of low-skilled workers should bid down wages. The worldwide fear of immigrants and now outsourcing can be countered by many more multi- disciplinary studies of the cultural, political and the social concerns of people. For good news on the economic front alone is perhaps not enough to make human beings feel more at home in the world, according to Professor Michael Landesmann, Director of Research, wiiw. It is never just about the economy stupid, this economist seems to say.