Offshore Outsourcing and Global Living Standards

Andy Grove, of Intel fame, “spoke out”:http://www.forbes.com/2003/10/10/1010grovepinnacor.html at a recent technology summit in Washington about the current trend towards offshore outsourcing and how it’s causing the US to *slowly but surely lose its edge* in the tech sector. A particularly insightful comment on the “slashdot discussion”:http://slashdot.org/article.pl?sid=03/10/10/2310248&mode=thread&tid=103&tid=98&tid=99 about global standards of living:

bq.. You are spot on regarding standard of living. This is something people must understand. We in the “Western” world are in for a rough ride. We have prospered greatly for many years, and we have built a social structure on that prosperity. We have a very high standard of living. Our educational systems and transparent economies have fostered our wealth. However, other nations are learning, are becoming just as well educated, are reforming their legal and economic systems, and they will be far better positioned to compete with us on an equal footing in the skills department. With falling costs of transport, and dramatically falling costs of communication, as we all know it doesn’t matter where you are for many jobs.

The thing is, we have this huge built-in cost that we, as individuals, cannot overcome. We have far higher real-estate costs, fixed living expenses. We have high taxation, government entitlements, economic and environmental regulations, health care for our aging (and soon to be non-tax-paying) populations, and so on. These are expenses that most developing nations do not have. Workers in western society can only compete to a point on price, before the wealth we have stored in fixed assets (homes, real estate, investments, so on) have to take a hit.

The problem will get only worse… many have a belief that a new, unforeseen industry will pop up to employ not only those who are displaced by foreign competition in “old” industries, but also all the new workers entering the economy each and every month. Yet, with the advances in foreign skills, communication and transportation continuing, there is no reason that the incubation period of a new industry will be long enough to create many long-term jobs in the United States, other than in service sectors.

The solution will be, as you said, a re-balancing. The standard of living, expressed in real money, must fall in the western nations. The EU attempts to fight this through the UN and treaties on global environmental/labor/human rights standards and so on, which we in the US ironically often fight on principle. In reality, we cannot compel the developing world to voluntarily raise the costs of their labor and products; they do, and will, resist. The solution will be painful for us, as we have nowhere to go but down. The rest of the world has nowhere to go but up. We will have to get used to no longer being the dominant wealthy societies, better educated, better able to demand high wages and high social/governmental benefits. Developing nations will become more expensive as their populations demand more of the “benefits” we have, yet they will be starting with, essentially, blank slates, while we have decades, even centuries, of built-up high costs and expectations to overcome. Hopefully rising costs overseas will be expressed in “Internet time.” We will all see.

>> “Slashdot”:http://slashdot.org/comments.pl?sid=81900&cid=7188486

This has been apparent to many economists over the years. While economics is not a zero-sum game, the current world system has over the last two centuries provided the western world “huge advantages”:http://www.zmag.org/content/showarticle.cfm?SectionID=40&ItemID=4332 over the rest. As these advantages (education, skilled labor force, control over the rest of the world, etc.) erode, their growth rate is going to be slower as compared to the developing world.

Bush the Second has done his almighty best to “dig”:http://ko.offroadpakistan.com/world/2003_09/calpundit_interviews_paul_krugman.html America into a “deep”:http://bodyandsoul.typepad.com/blog/2003/10/dont_cry_for_us.html “hole”:http://www.dailykos.com/archives/002850.html which is going to further retard growth for the forseeable future. The next president will be so busy cleaning up the mess that the grand old projects of yester-years will no longer be feasible.

The “upcoming oil crunch”:http://www.dailykos.com/archives/004530.html is going to further depress the world economy. This is _hopefully_ a a long ways off yet.

The depressing bit about the whole thing is that most westerner’s seem solely concerned about maintaining the current global status quo. Many speak out, but are usually “written off as liberal scum”:http://www.foxnews.com/.

“Joseph Stiglitz on The Global Benefits Of Equality”:http://www.zmag.org/content/showarticle.cfm?SectionID=13&ItemID=4268: The world should have a vested interest in resolving inequality, not just protecting its own. A reaction by another Slashdot poster :

bq. Do American’s even realise the degree to which their patriotic tendencies negatively affect other (poorer) nations? You are in a position of power and all you seem to care about is securing that power. Helping other nations and “global trade” seem to be conditional on the fact that dominance be maintained.

>> “Slashdot”:http://slashdot.org/comments.pl?sid=81900&cid=7188207

*Update”: A very interesting viewpoint:

bq.. Outsourcing of software development is fundamentally different from outsourcing of any vertical industry, because software is the fundamental differentiator for virtually every industry where the U.S. is still competitive.

..The negative impact of outsourcing on software is going to happen extremely rapidly, by international economic standards, and is going to be dramatic.

>> “Exporting Our Secret Sauce”:http://www.ftponline.com/weblogger/forum.aspx?id=1&Date=3/7/2004

p. Sounds reasonable. In the digital age everything moves faster, so why not empires and economies?

*Update:* You cannot get more high tech than this: ‘Intel processors are being completely designed in India’:http://www.theregister.co.uk/2004/05/01/intel_whitefield_uncovered/ :: All those articles about how Western industries ar going to move up the tech ladder are completely off – Intel is about as high tech as you get. Sure there are nanotechnology and biotech firms which are arguably doing more highend research work, but designing microprocessors is exactly the sort of work which was supposed to be done in the US with the manufacturing outsourced to Taiwan/China – well ironically its reveresed now, with the manufacturing being done in the US and the design in India.

h4. Related links

* “Should US Economists Start Shitting BRICs?”:http://www.plastic.com/article.html;sid=03/10/27/15593092 A recent Goldman Sachs global economics research paper by economists Dominic Wilson and Roopa Purushothaman, “Dreaming with BRICs: The Path to 2050”:http://www.gs.com/insight/research/reports/report6.html, is causing a stir with its bold prediction of what the world will look like in 2050.

* “BW Online | December 8, 2003 | The Rise Of India”:http://www.businessweek.com/magazine/content/03_49/b3861001_mz001.htm :: Growth is only just starting, but the country’s brainpower is already reshaping Corporate America.

* “The Wal-Mart Effect”:http://www.latimes.com/business/la-walmart-sg.storygallery :: The LA Times’ series on Wal-Mart and related articles.

* “Economist.com | SURVEY: AMERICA : A nation apart”:http://www.economist.com/surveys/showsurvey.cfm?issue=20031108

* “Slashdot | Outsourcing Winners and Losers “:http://slashdot.org/article.pl?sid=03/12/07/1938241

* “Slashdot: The Changing Face of Offshore Programming”:http://slashdot.org/article.pl?sid=04/01/01/1448204