Fingering India.

So far, no one has convinced me that the “outsourcing” discussion that has suddenly gained steam on both sides of the Atlantinc is not mainly a consequence of two agenda-dominating events: The looming EU enlargement over here, and the Presidential elections over there.


In my experience, this discussion is largely a cyclical phenomenon much less determined by facts than by their political representation. The last German outsourcing debate I remember was in 1996, and not by chance did it occur during a regional electoral campaign. Since then, quite a few jobs have been outsourced, while others have been created without having been realized by too many people.



But there is one element in the current debate that is different from the earlier ones: The usually applied meritocratic “education, education, education-solution” really doesn’t sound too convincing anymore when system developers’ jobs are wired down to Bangalore. And there is a related realization that, suddenly, those possibly affected are our friends – or ourselves -, which makes the analysis and evaluation of the phenomenon a little bit trickier than it was beforehand. Suddenly Ulrich Beck’s quip that there is only one thing worse than being exploited by a multinational corporation – not being exploited by a multinational corporation does not sound too funny anymore.


As for education – the economy does not only consist of system developers. Thus, the “education-solution” is certainly very much valid on the other side of the qualification scale, even in the best known non-tradable industry of all: hairdressing. To be sure, most hairdressers do not a need an advanced degree in chemistry. Yet while the German government is currently attempting to placate the Social Democrat’s loony left by taxing businesses for not employing vocational trainees, local hairdressers, just as other companies, are increasingly angry about the prospect of being taxed for the failures of education policies in addition to having to cope with a pronounced lack of trainees who can count.


With respect to the other end of the education scale, today, Brad DeLong tries to demonstrate by counting some of his fingers that increased pressure on the higher income brackets in advanced economies could actually turn out to be socially beneficial, even if those affected would only make that decision behind a veil of ignorance. It is certainly a thought provoking model, even though I am not too sure about his conclusion when looking at Germany – or much of Europe for that matter. Over here, the labour income spread is, in my opinion, far too compressed already.


But what most people tend to forget when looking at outsourcing is that the foreign beneficiaries, those who are poor now and willing to work hard for much less than we do, do not intend to keep it that way. Far from it.


Last Sunday, the Frankfurter Allgemeine Sonntagszeitung portrayed some SAP programmers in Bangalore who currently work for 8000 Dollars a year. But despite an increasing pool of highly skilled technical workforce in India (and the fact that 8000 Dollars are a real fortune in the country), the upward pressure on their wages is already impressive. Just as their employer, the men portrayed are very much aware that they can leave SAP and work next door at GE at any time should they not receive the expected 15% annual pay rise. At 15%, their current income would double in 5 years, or quadruple in ten. Then, at 16,000, or certainly at 32,000 Dollars, Indian competition would clearly not look too fierce anymore.


How fast can the supply of skilled workers expand and thus limit the upward pressure on these wages? And would their newfound wealth not increase Indian economic growth and thus limit their availability to work in industrial core outposts? Of course, no one knows just what is going to happen. That’s the problem with the future, we don’t know it until we’ve seen it. Brad DeLong’s model might be true, but it could also be an illustration of a rather special case within a socially more disruptive development.


But for now, I’m still claiming that the faster India, and eastern Europe, grow, the better for all of us. For Indians, for Eastern Europeans, but also for outsourced blue and white collar workers in the – current – industrial core. But we do need to teach everyone how to count.

2 thoughts on “Fingering India.

  1. As ever, I post with my warning “I’m a genetic engineer, not an economist”.

    For all the “Kinder statt Inder” rhetoric, I cannot see any actual reason that 1) Indian computer specialists (or telephone call-centre operators, or whatever) are not competitors for German jobs if they stay in India as opposed to actually migrate here. 2) I’d like to actually hear both sides of the argument, namely that a job in India (or wherever, outside the EU, US, Japan etc) equates to a 1:1 job lost “here”. As far as I can grasp (again I must point out my idiotically simplistic scientific background), aren’t the people who are now earning cash in India, Tunisia and such countries actually a new market “we” can sell to?

  2. “no one has convinced me that the “outsourcing” discussion that has suddenly gained steam on both sides of the Atlantinc is not mainly a consequence of two agenda-dominating events”

    You may be right Tobias that these events are fuelling ‘the debate’, I wouldn’t really want to get into that. Maybe it would be better if we talked about ‘globalisation’ rather than outsourcing. My feeling is that something important has changed in globalisation post 2000 (a more or less arbitrary date).

    In the first place China is really having an impact on global alignment – look at Latin America, and of course the rising prices of raw materials and energy.

    Secondly we have the transition from an industrial to an information economy. In the industrial economy certain key third world countries were short on the capital investment side due to the huge quantities of initial commitment, and on the tacit knowledge side for the actual realisation.

    In the information economy this changes: initial set up costs are much less, and the capital shortage is more than compensated by the relative abundance of human capital, and the relatively cheap costs of producing it. It is not only that India has a lot more young people than Europe, but young people are cheaper to educate there. And the inbuilt advantage of the Japanese and German production teams (where knowledge gradually passes from one generation to another) is greatly reduced in the context of digitally transferable skills.

    Of course, you are right to point out that India can have a short term skills bottleneck, but if you look mid-term (5 to 10 years), the higher earnings expectations will undoubtedly attract millions more. And of course this is just where we get into the boomer retirement, and where India gets into the youth bulge. The pressures are going to be enormous.

    The point is (and I recommend strongly you read Atanu Dey at Deesha, or Suhit at ‘the world is green’), even several million extra knowledge workers will do relatively little to address the huge problem of xcess labour in India, as people gradually move away from the land. So internal deflationary pressures inside India are again going to be enormous.

    The technical economic question is what part of your income you could consider an economic rent. Quantifying this is quite difficult: but if a significant part of your salary might come from leveraging a monopoly position acquired via participation in a nation state community, or from an overly expensive education, then you may well be about to be arbitraged downwards.

    This is structural, this is bigtime, and I don’t think it comes and goes with the electoral cycle. It is the transition from a more localised ‘physical’ services and industry model to a global ‘virtual’ information one.

    To end where I started: outsourcing (although I am the person who created the section here) may be a misnomer. As Neil is suggesting there may be no actual job migration, but there may be a vacuum in the new employment market. We can see a rapid slowdown in job-loss in the US right now, but (barring one months figures) a relative difficulty in creating new employment. No jobs need to move, it’s just that as the saying goes ‘life is now elsewhere’. Whether this tendency is confirmed we need to wait and see.

    In conclusion:

    “aren’t the people who are now earning cash in India, Tunisia and such countries actually a new market “we” can sell to?”

    This is just it: if only a minority in China and India see the relative value of their worth rise due to the enormous ‘reserve pool’ keeping average wages on a flatline, it is going to be very difficult to sell more than machinery and equipment and some very specialised services to these countries. Remember China will be exporting industrial products and India information products across the third world, this is their strategic play (and good luck to them). If China follows the Japan model, and eventually has its own machinery sector, then even machine-building prices will be set in China, and if business services gets commoditised then those prices will be set in India, and as the saying goes ‘the devil take the hindmost’.

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