Wednesday, December 29, 2004

The trouble with outsourcing

The country's forex earnings on account of software and BPO service exports were around $12.5 billion for the year ending March 2004. Never did any sector grow in the country at such speed and in such a short span. Exports to the US alone account for 68 per cent and have been growing at 30 per cent per annum.

When the controversy over outsourcing broke, the initial attempt of the academia was to minimise its impact. Daniel Drezner wrote in Foreign Affairs (May/June 2004) allaying the fears about "The Outsourcing Bogeyman." Economists like Mann and Schwartz at the Brooking's questioned the estimates of job losses given by consultants like Forrester.

Three well-known Indian economists (Jagdish Bhagwati, Arvind Panagariya and T. N. Srinivasan) analysed the "Muddles over Outsourcing" (The Journal of Economic Perspectives, Fall 2004) and tried to dispel the fears.

Surprisingly, in the paper by Bhagwati and two other Indian economists referred to earlier, such a notion, that is, India and China acquiring sophisticated skill, is dismissed as "ludicrous."

Paul Anthony Samuelson, has joined in the debate to upset the apple cart. In an article in the same journal (Summer 2004), he dismisses their claims about the US gains being large enough to compensate the losses as "dead wrong." His thesis is that a low-wage nation that is rapidly improving its technology has the potential to change the terms of trade in technical fields and reduce per-capita income in the US. "The new labour-market-clearing real wage has been lowered by this version of dynamic fair trade."

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