Outsourcing out of poverty

Almost 1/10th of the world’s products are made in India. This was done using a workforce of 1,430 million people in 2012 according to a survey by Sourcing Line Computer Economics. Their study also shows that on an average, a junior BPO employee in India costs a company 10% of the cost incurred to employ a person at the same position in the US. All of these numbers put India at an unchallenged rank 1 in the global statistics for most preferred offshore outsourcing destination. Even on the face of such advantages, many people are apprehensive about this development. Questions of national economic growth, poverty alleviation, education and quality skill development as well as exploitation do follow any talk of India’s outsourcing sector. In order to understand your take on this issue, our poll question on last week’s Weekly Your View was – Are corporations that outsource work to foreign countries and pay wages at the local cheap rates guilty of perpetuating poverty?

The results suggest that we are an almost equally split two halves on this question. 41.9% of our poll takers have said yes, another 41.9% no and the remaining 5 that the answer would depend on the satisfaction of certain other conditions such as the nature of work being outsourced and compliance with local labour laws.

Outsourcing, today, is a prevalent phenomenon, especially in the manufacturing and IT industries. It not only helps companies cut costs but also provides them with a resource pool to bridge the skill gap in their own regions. But several economists and human rights activists contend that this has a downside: the unethical working conditions that are sometimes imposed on workers in these ‘sweat shops’. Long work hours, wages lower than what is paid in the countries of the corporations and poor safety regulations are some of the accusations against these sweat shops. Further, many people are worried that outsourcing labour to foreign countries results in loss of domestic jobs, leading to unemployment at home.

But how valid are these contentions? Are the outsourcing countries better off by the phenomenon or not? For answer, it is essential to look at the trends set off by this phenomenon. Outsourcing alone constitutes a 5% share of India’s GDP apart from employing over 2.8 million people in 2012 as per a Nasscom study. India’s share in the global outsourcing market has grown at a rapid 44.4% according to Price Waterhouse Coopers. Today, the income earned by a BPO employee has increased by 13% since 2005 due to growing skill shortage globally. These numbers suggest that India and the people who work in the outsourcing industries have actually benefitted a lot from the phenomenon.

Globalization is here to stay and this free trade is a necessary consequence. Whether it be goods or labour, the forces of the market will define growth and progress for any economy. And that is for good. As the theory of Comparative Advantage states,international trade will, in the long run, make all parties better off. In fact, it can be seen even now. Developing countries improve their condition by doing something that they do better than industrialized nations. A World Bank study by Chen and Ravallion titled ‘How have the world’s poorest fared since the early 1980s?’ shows that nations that embraced outsourced work showed a sharp decrease in the number of people living below the 1$ a day line as compared to nations that did not. Outsourcing is also seen to have a ripple effect on a developing country’s economy, which is generally agriculture based. With more outsourced micro jobs available in various non-agricultural sectors requiring little or no special skills, the pressure on land decreases. A growing number of industries create a pool of non-agriculture dependent urban dwellers who provide labour to factories and businesses.Competition among factories for quality labour keeps pushing the wage level up.This came to be demonstrated in India when the recent economic recession pushed employee wages up as more corporations in developed countries found it hard to pay the comparatively higher waged local skilled labour and competed for labour in offshore countries. This provided the corporations the ideal conditions to recoup after the melt down.

When it comes to working conditions and exploitation, it is important to remember that all such allegations are based on the general standards of living and working in the corporation’s own country. In most third world countries, the work conditions imposed by these foreign corporations are much better off than what the workers have been experiencing in the past. Needless to say, these corporations are also always bound by the local labour laws that protect workers in the offshore country. The corporation meanwhile benefits from lower costs in production, which also has a positive impact on prices of consumer goods. Outsourcing has greatly reduced the prices of various cheaply produced goods for consumers in the developing countries too ,thus, increasing their purchasing power for more goods and services. This cycle would eventually lead to a much higher standard of living in these nations.The greatest advantages of outsourcing are often felt by the offshore country as competition boosts skill development and education.

Trade is a question of individuals freedom to choose. Countries don’t trade, individuals and companies do. They buy foreign goods and services because of price, quality, availability, tastes, or any number of other reasons. These are voluntary transactions between individuals, distinguished only because the nationalities of the buyers and sellers differ. Free trade among individuals is a basic human right. Protectionist interventions that attack imports or outsourcing only impede economic freedom, which cannot be but a fundamental right.In fact,outsourcing and imports act in the same manner – while one is trade in labour, the other is trade in goods. Treating them differently is void of reason.

The poll referred to in the second para is our Weekly Your View posted on our social media 17th April,2014.