The Grass is Always Greener on the Other Side Topic A: Outsourcing of professional and white collar work especially

that involving science and technology, to organizations located in foreign nations. For almost three decades, the liberal economic theory and neo-classical paradigm have ruled the world. Their positive perspectives on the world have shaped the lives of millions of people around the globe. In many countries, the entire economy has been restructured and peoples lives turned upside down because of this positivism. While, many have raised their voices against it, the main response was always the same, these painful policies are necessary. However, through globalization and astonishing growth in the information and communication technologies sector, the consequences of these ideologies have landed on developed economies like that of the USA. I intend neither to defend nor tackle the prevailing view, nor debate about the merit of such rationale. However, I think it is necessary to underline some double standards that are apparently became the norm in the wealthy regions and countries. The virtue of a market economy is not geographically limited; if the market mechanism works in Romania, it should work in the United States or elsewhere. Only two decades ago, the slogan, allow market forces to work freely, was considered Gods written commandment. The concern here is that conventional wisdom presumes an economy governed by certain laws, i.e., demand/supply, stable price, and institutional settings, which, in turn, act as regulators for economic activities, i.e., labor. In this self-motivated system, cost minimization and profit maximization are the driving forces. For many yeas, classical and neo-classical theories have been provided one solution-fits all to governments all over the world. The ready-made package of an orthodox economic approach" had advocated a certain core set of reforms as essential in a rapidly globalizing worldminimum standards of macroeconomic stability, liberalization of trade and exchange, and privatization. During the 1980s and 1990s, most developing countries implemented these adjustment policies aimed towards creating new economic opportunities, so that they could share the benefits of globalization. Many lost their jobs and almost their entire life-savings only because the market knows better. After all, labor is a mere factor of production in the book of positivism. Man produces goods and services, and in return he received his wage, which is determined by his productivity per hour relative to capital used. Remuneration for his effort is determined by the market mechanism, a demand and supply apparatus, which is operated by an invisible auctioneer, whose sole intention is the static point, equilibrium point. This has been the logic of the winner device, which intends to lead human civilization to prosperity in centuries to come. Economic realities appear, and are manipulated, in the current practice of a particular ideological construction, with the aim to prove the superiority of a certain economic system over all those that preceded ita free market economy appears as the best of all possible worlds, and worthy of our full confidence as a means that will ensure human progress;

when individuals, moved solely by the incentive of their private self-interest, attempt to create a system of perfect competition that will benefit the whole community. And yet, when advocates of this device see their benefits threatened, their intellectual cycle starts to manufacture issues that are far removed from the principles of the system. While outsourcing is not a new phenomenon, there is no question that the concept of offshoring has grown significantly over the last decade due to globalization enabled by recent improvements in transportation, communications and information technologies. According to Linder (2004), outsourcing means purchasing ongoing services from an outside company that a company currently provides, or most organizations normally provide, for themselves. Offshoring happens when a company outsources contracts to vendors overseas, or sends the work to its own satellite offices overseas. Over the past twenty years, it's been relatively easy to argue that increased market competition and improved business efficiencies eventually result in a net economic gain for both the United States and the world. One of the most stated reasons for outsourcing is to take advantage of the lower input costs enabled by purchasing cheaper call-center or programming services from abroad. This results in companies delivering lower-priced products and in consumers benefiting from cheaper prices. Current economic theories emphasize the efficiency gains in terms of production and transaction costs. Williamsons Transaction Cost Economics is the most frequently-used explanation of the outsourcing process. According to TCE, the total costs of carrying out an activity include production costs and transaction costs. The best mode of organizing transaction is the one that minimizes the sum of transaction and production costs. Williamson (1991) argues that companies, when making sourcing decisions for required goods and services, should take account of the best alternative as identified on basis of the cost comparison. Firms should conduct internally only those activities that cannot be performed more cheaply in the market or by another firm. In sum, TCE argues that managers choose outsourcing as an alternative to internal procurement if costs reductions can be obtained through outsourcing and risks are low. According to Mann (2003), the global sourcing of components has reduced the cost of IT hardware by up to 30 percent since 1995, boosting demand and adding as much as $230 billion to the US GDP in that period. According to Quinn and Hilmer (1994), firms who cut costs by outsourcing can concentrate their strategic focus on core-competency capabilities, in which they can provide new and better types of services for customers, while shifting to external procurement of simple, non-specific tasks for which a firm has neither a critical strategic need, nor requires special capabilities. This strategic investment will boost productivity, and this will result in new and better products for consumers. The neo-classical paradigm argued that implementation of the structural reforms was offering developing countries the chance of entering the global market and raising the living standards of their population. It is the liberalization of markets in Asia and Eastern Europe that enabled companies in these regions to take advantage of outsourcing opportunities provided by developed economies such as United States. The economic

theory emphasizes the easy access to external specialized knowledge at lower costs for firms in developed countries. One of the most impressive achievements in some developing countries has been the rapid development of national schools of software engineering. According to Romania Factbook (2002), Romania has impressive number of IT experts with university degrees, which reflects one of the highest density of software graduates per thousand inhabitants, significantly greater than the rate in the USA, five times that in Russia, and nearly seven times India's rate. Furthermore, new developments in enabling and space-shrinking technologies, such as transportation and communication, made possible the effective management and coordination of globally distributed economic activities. All of these factors combined, contributed to an increasing number of software companies in developing countries exporting their services to EU and North American markets. Statistics from Romania Factbook (2002) would lead us to estimate that more than half of the Romania's software development companies are already exporting their services to EU and US markets. It is interesting to see how these attitudes are changing now that globalization, itself, is challenging the U.S. software and services industry. Predictably, given today's depressed U.S. job market, the outsourcing of call-center and software programming jobs has become a controversial media issue. While offshore projects are certainly not new, business interest in overseas software development, and other IT services are accelerating. The emerging debate now, is whether outsourcing is good or bad for the U.S. economy. Many attribute the loss of jobs in the United States to outsourcing of US jobs overseas. During the vicepresidential debate this week, Sen. John Edwards argued that the outsourcing of jobs to foreign countries means a loss of jobs in the United States. According to Economic Policy Institute (2004), the potential problems resulting from an increase in the global supply of highly educated workers could depress the living standards of American workers who historically have been much less affected by globalization1. Forrester Research estimates that by the year 2015, approximately 3.4 million US jobs will move overseas2. However, Drezner (2004) argues that the current macroeconomic indicators to support that outsourcing is destroying jobs in the United States, are misleading. The impact on the economy will be negligible since the 3.3 millions lost jobs is spread across 15 years:That would mean 220,000 jobs displaced per year by offshore outsourcing -- a number that sounds impressive until one considers that total employment in the United States is roughly 130 million, and that about 22 million new jobs are expected to be added between now and 2010. Annually, outsourcing would affect less than .2 percent of employed Americans3. The response from Congress has been to include, in a fiscal 2004 spending bill, a provision forbidding federal agencies from outsourcing some kinds of work to private companies that use workers in foreign countries. Over the last several years, many states have passed laws that forbid their governments to contact out to developing countries4. How should one analyze these reactions from a government that has promoted the liberalization of markets in developing countries?
1 2

See http://www.epinet.org/content.cfm/issueguide_offshoring_faq See Konrad (2004) 3 See http://www.foreignaffairs.org/20040501faessay83301-p10/daniel-w-drezner/the-outsourcingbogeyman.html 4 See Klinger&Sykes (2004)

The fact is that if the price of bread should be determined by the demand and supply mechanism, so should the wages of those professionals that retain highly demanded skills. If capital should fly where profit is rising, so should labor shift where there are better/higher wages.5 If governments prohibit intervention in market affairs, and hence are powerless to correct well-known market failures in the health care system and in education, they should also stand by mutely when the valuable human resources of entrepreneurs are outsourced. If competition is assumed to be perfect, why should labor be constrained to imperfect competition, e.g., restrained movement? If monopolistic competition causes dead-weight loss, why is offshoring called an illegal operation? Isnt the fact that development of emerging technologies into global sector has help to preserve the classical form of competition and a perfect market? Arent these cases a double standard? Multinational companies are supposed to adopt a neutral global perspective. For these firms, lowering software-development and customer-support costs are perfectly consistent to the positivism objectives. Thus, no matter how heated the debates over job losses, wage cuts, and even national security risks, companies will do what they believe is in their interest. Software development could just as easily be relabeled as software manufacturing, and increasingly it will be treated as such. The amount of software that the world needs is virtually limitless, and the idea that this production will remain the special preserve of highly-paid U.S. workers is, fundamentally, ludicrous. The challenge for a developed economy like United States is to demonstrate that hiring American software and service talent is a sound business decision. The US government, instead of re-erecting the barriers to labor competition from abroad, should focus on making sure that the main higher education institutions are well resourced and focused on mastering programming and other technical skills. A highly qualified supply of programmers will enable better competition from foreign labor. The bottom line is that no income-earning groups have benefited more from globalization and the positivism approach than IT professionals. The study by Daniel Trefler and Noel Gaston concludes that workers in unprotected, export-oriented industries had higher wages than workers with similar observable characteristics in protected, import-competing industries. It should be noted that this is the way most giant corporate networks were designed to benefit. To protest that globalization is now harming national security, and the IT manufacturing companies is essentially hypocritical and, is largely, pointless. Global competition doesn't come without risks, but its open-ended results are hard to argue with.

In technical terms such shift is called, Expenditure Switching.

References Drezner, Daniel W, The Outsourcing Bogeyman. Foreign Affairs, May/June 2004. Economic Policy Institute. "Offshoring", Issue Guide, June 2004. Klinger, Shannon and M. Lynn Sykes. "Exporting the Law". The National Foundation for American Policy, April 2004. Konrad, Rachel. "Offshoring of U.S. jobs said accelerating." Associated Press Online, May 17, 2004. Linder, J. Outsourcing for Radical Change, AMACOM, 2004. Mann, Catherine. "Globalization of IT services and white-collar jobs: The next wave of productivity growth", Policy Brief 03-11, Institute for International Economics, Washington, DC, December 2003. Quinn, J. and F. Hilmer. Strategic Outsourcing, Sloan Management Review 35(4): 4355, 1994 Williamson, O.E. Comparative Economic Organization: the Analysis of Discrete Structural Alternatives, Administrative Science Quarterly 36: 233-261, 1991. Trefler, Daniel and Noel Gaston. Protection, Trade, and Wages: Evidence from U.S. Manufacturing, Industrial and Labour Relations Review 47: 574-593, 1994. Romania Factbook. Country Commercial Guide FY2002, on the Internet at http://www.factbook.net/countryreports/ro/Ro_EcoTrends.htm