outsourcing — the buying of parts of a product to be assembled elsewhere, as in purchasing cheap foreign parts rather than manufacturing them at home.
offshoring — the practice of moving business processes or services to another country, esp. overseas, to reduce costs.
The hysteria raised by US and British groups over the migration of skilled "white collar" jobs to places such as India and Thailand is nothing new. It is in the best interest of companies (and ultimately everyone) to find the most efficient and low-cost methods of conducting business. On the surface, it seems that outsourcing and offshoring jobs will lead to increased unemployment in the countries from which those jobs migrated, however reality and history paint a different picture.
Industries such as IT and even financial journalism have established a thriving presence in cities such as Bangalore and Bangkok. While true, Western workers once performed many of these job functions, the offshoring process will ultimately benefit those economies from which those jobs came.
Throughout the history of Industrialism, modernization and outsourcing have altered job functions. When Henry Ford developed the assembly line for automobiles, scores of blacksmiths decried the development as a threat to their horseshoe business. In fact, workers that would have entered the economy as blacksmiths now had new industries to pursue such as tire production, oil exploration/ refinining, steel manufacturing and road construction. There was a net increase of jobs and economic strenghth from the mass production of autos. The blacksmiths were correct: horses would be replaced and their specific job function would become obsolete, however they were incorrect in suggesting that the auto would cause increased unemployement.
The fundamental rule of economics is to look at a policy effect on the whole rather than on a constituent parts. The blacksmiths were (rightly so) looking after their own self-interest; they can’t be faulted for trying to preserve their industry. However, the critical element is that the government did not attempt to prevent the auto industry from expanding.
As former House Speaker Tip O’Neil once said, "All politics is local." As a result, politicians will attempt to fashion policies tailored toward their constiuencies. The result is that the rest of the economic picture falls victim to special interest dynamics. The US people as a whole benefited far more than the losses suffered by blacksmiths. As a result, the standard of living and employment increased overall. The auto industry also expanded the economy by creating new business where none existed before.
With outsourcing and offshoring, some jobs are leaving the US. However, there is a net gain of jobs and economic strenghth because of several reasons. First, businesses are becoming more efficient which leads to either lower costs or increased value to shareholders. This lower cost will allow more people to afford products they might not have afforded before. Even higher corporate profits benefit the economy and the individual. If shareholders are making more money, they will invest more capital in creating new business and thus new jobs. The Internet is a great example of this phenomenon. The web-development and e-commerce industry did not exist a generation ago. Yet, the expansion of the web (by mostly commercial interests) has led to jobs that did not even exist in concept years ago. So while Michael Moore loves to harp upon the decline of the auto industry in Michigan in the 1980s, the reality is that the closing of plants led to increased profits which allowed shareholder/ investors to create new companies in other industries, such as IT. The unemployeed auto-workers initially suffered from the transition, but a new category of employee emerged from the ashes of the plant shutdowns. The average American benefited from auto industry realignment, in the form of higher quality products at a lower cost and increased capital available to finance entirely new industries.
The hysteria of outsourcing and offshoring is unfounded. With increased globalization comes increased opportunity for everyone. With the migration of tech jobs to India, comes an increase of Indian purchasing power which will lead to an increase in overall product and service demand. China is another example. Workers are often paid extremely low wages in developing countries, however this low wage is more than they were receiving prior to increased globalization. This is now allowing the average Chinese to purchase goods that they could not purchase (or didn’t exist) before. The number of cell phones in China now versus ten years ago is an example.
For the US and Western Europe to remain competitive, they must extract themselves from the politically expedient attitude of the blacksmiths. They must invest more capital in research, development and education. If the average US high school student cannot even find Nebraska on a map, how can the US expect to compete within the global economy? Rather than decrying globalization, the US should instead be condemming the educational system that sets up American students to fail on the world stage.
There are a few recommendations that would pay huge dividends for the US economy. First, comprehensive economic education should be integrated into junior and high school curriculums. Adults rarely use high-school chemistry in their life, but economic theory pervades almost every aspect of my life. An understanding of both is important. Topics such as supply and demand, foreign currency and taxes are essential learning for students to ensure that when they reach voting age, they understand the effects of economic policy on their future employment prospects. Traditional classes such as algebra should be redesigned to integrate practical applications such as banking, calculating loan interest and even fuel efficiency of a car. The entire math curriculum needs to become relevant. This will provide two benefits: students will learn the topics more thouroghly and students will be able to use the skill towards furthering their own career, regardless of field.
Secondly, their should be an emphasis placed on foreign cultures in the modern world. While history is essential, Americans are at a critical disadvantage when it comes to understanding cultural differences across the world and how they affect US market access. Cultural understanding is not about "tolerance," but about competitive advantage. Even topics suchs as the American civil rights movement can be integrated into an economic curriculum. There was a profound negative effect of slavery on the economic strenghth of the South, which most would argue led to the defeat of the Confederacy in the Civil War. The economic superiority and victory of the North had much to do with increased labor efficiency and industrial accumen. Robert E. Lee was a better General than Grant, but the South was hampered by inefficiencies caused by an antiquated labor system. Women’s rights had a similarly important economic effect. The increase of women’s rights led to an enourmous increase of US productivity through the addition of more women to the workplace. In Korea, students study Western culture primarily to increase their effectiveness as multi-national managers and for when they are negotiatiating with Western companies.
Finally, within the cultural education curriculum there should be dramatically increased foreign language education, especially in languages such as Korean, Russian, Thai and Chinese. Spanish and French are tired and dead for the most part on the global stage and serve very little in advancing the US economic health. The school systems should revamp their goals towards successful navigation of a world economy, not simply survival in a US-centric environment.
There is no excuse for failure, except perhaps apathy. Apathy is a far greater threat to American success than outsourcing or offshoring.
For futher reading:
Economics in One Lesson by Henry Hazlitt.
The Lexus and the Olive Tree by Thomas Friedman