TCS Daily

Outsource and the Source of Growth

By Alan Oxley - March 1, 2004 12:00 AM

It is a mystery of modern times that the US continues be the world's leading economy but most Americans do not understand why this is the case. They know the US is the world leader in technology and innovation, but do not know that having the most open economy in the world is the key. To stop outsourcing would be to throw away one of the keys to growth in the US economy.

"Outsourcing" means American enterprises give some tasks to workers outside the US. The controversy has been over services. Call centres in places like Mexico and India provide information to US consumers. Data processing is also contracted by US companies in similar countries. Why? Because it is cheaper.

The US is the world's best economy because it has the best services industries. These are the industries that get products to consumers (transport, wholesale, retail, marketing) connect people and businesses (telecommunications, IT), enable consumers to pay for them (finance) and educate, keep healthy and feed Americans. Most don't know this.

It is still generally believed that manufacturing drives America. This hasn't been the case for a long time. Over 70 percent of the wealth in America today is generated by businesses producing services. Last year there were 134 million workers in America. Only 15.3 million worked in manufacturing. About 2.8 million worked in agriculture and mining and 8.3 million in construction. Where did the rest work? In the services industries.

In fact, in 2001 and 2002, services industries kept the US economy afloat. This has been pointed out by Harry Freeman, a former AMEX executive and Director of the Mark Twain Institute. After manufacturing went into reverse in 2001, services still expanded by 1.3 percent, holding up growth that year at 0.5 percent. Of the 2.2 percent growth in GDP in 2002, 1.7 percent was generated by services. Growth was 3.1 percent growth in 2003, 1.5 percent of that was contributed by services industries.

The reason so many US businesses are bigger and more effective than competitors in other parts of the world is because they are better at working out how to be more efficient and how to produce things more cheaply. The cheaper their products, the more they sell, the bigger they grow, the more people they employ. When products and services are cheaper, more are affordable and paychecks go further. It is win win.

Evidently, not everyone understands this, including the US Senate. In January it passed a bill preventing public sector agencies from outsourcing services. Reflect on the effect of that. Take an unemployment service which had used an offshore call centre to handle calls. Delivering that service using US workers instead would cost more and take a bigger bite out of its budget. With higher costs, fewer services could be provided to help get the unemployed back to work. Was that the Senate's aim? To reduce services?

To many people this seems a new way of thinking. They will still ask "But why not keep the jobs in the US?" Wrong question. The right question is "What creates jobs in America?" The answer is services industries that keep growing by producing low cost services; trade is a significant component of that.

Here the cynic will say, "Wait, right now the US is importing more than it is exporting. Not only are we giving jobs away, we are losing the trade race." When we look at the facts, we find a surprise. Outsourcing helps directly to boost exports. While the US is exporting more good than it imports, the reverse is the case with services. Last year the US exported US$70 billion more in services than it imported. This helps counterbalance the deficit in trade in goods.

The US is in fact the biggest exporter of services in the world, at around US$320 billion a year. Little wonder since it has the biggest and the best services industries. Some of those industries would be less competitive if outsourcing stopped. Britain is the second biggest exporter of services in the world. The Blair Government just considered if it should act like the US to "protect" jobs in the UK. It concluded that doing so would harm Britain's trade.

World trade in services is very much to the advantage of the United States. The World Trade Organization now encourages countries to open markets for services. This creates more markets for US companies and was the direct result of an initiative by US services businesses in the nineteen eighties. If the US blocks outsourcing, it is blocking imports of services from other countries. Before too long, those countries will start blocking exports of US services.

Outsourcing is vital for enabling important services industries in the US to grow, expand jobs, provide cheaper goods and services to US consumers and to export. Why would any sensible person want to stop that?


TCS Daily Archives