As a little-known proponent of globalization, I’m rarely asked, “Sandy, you work in the Internet biz. Doesn’t it make it odd that you still support free trade, or is it just because your ox has yet to be gored?”
I’m glad you didn’t ask. Despite that, I’m going to answer the question. [sighs, mutterings of “we’re in for a long one”, shuffling of feet]
At the risk of becoming a shadow-blog, I’ll just cite this Tyler Cowen piece on India’s election, as it’s what triggered me to say a few things that have been on my mind about offshoring and globalization in general.
As far as offshoring goes, I’m in a somewhat exposed position: a Web programmer who doesn’t cater to clients who require me to have citizenship and a security clearance. I have been fearful for my job in the last few years, but my fears related more to the downturn in the U.S. economy and less to the threat that somebody with a nice suit and more hair than brains would replace me with an Indian.
I don’t doubt that in the short run many of my colleagues have lost and will lose jobs that are immediately replaced with cheaper Indian workers, in the long run (say the next two to three years) I’m not worried. Those jobs will either come back or new, better ones will be created. However, many jobs during the dot-com boom were the result of “irrational exuberance,” and the $70 to $100K per year HTML jockey jobs are never coming back. I gambled that taking a lower salary with a firm that is profitable would get me more job security, and I won that gamble. Now, I have to make sure my job doesn’t get offshored.
I’m not overly worried about that. Why?
In 1993, the World Bank issued a report on the ‘Economic Miracle’ of East Asia. Though ridiculed during the 1997/98 “Asian Flu” fiscal crisis, some parts of the report still stand as valid: those economies are still doing well, largely to the extent that they get the “fundamentals” right. These fundamentals include macroeconomic stability, a willingness to let market forces rather than bureaucratic whims choose winners and losers, and a stable regulatory environment. Not all of these were followed, especially as regards the banking and financial sectors, and the Asian Flu revealed these distortions.
Hernando de Soto has done a lot of work on the role of private property rights in wealth creation. If you can’t be assured that your assets won’t be seized by someone with a bigger gun, be they competitors or the government, you are unlikely to invest in long-term, durable goods. In the U.S. we take it for granted that when we buy a house, we have a right to that property and can capture the profits from any improvements we make to it when we resell it, and we have a lengthy and arduous legal process to ensure it, as any homebuyer knows.
All of these factors are part of the reason I’m a minarchist libertarian rather than an anarchist. Governments are essential to create the ground rules for the market to work. I’m a minarchist because governments can easily be used to slant the playing field to one party or another, so it’s best to get what’s essential and leave the rest.
India is a case in point. I was talking with a contractor at work who is of Indian descent. He really doesn’t want to go back, even though he’s in the same situation I’m in–a Web programmer in America. He could go back and be assured a job. However, there’s no such thing as central air there, except for large companies and hotels. Rooms are cooled by individual air conditioners, largely because the infrastructure for building houses that can be fitted with central air and the components of central air systems themselves just aren’t there. Several other services Americans take for granted, such as reliable electricity, always-on hot water, and good sewer systems are by no means guaranteed, even to comparably rich families.
In such an environment, cheap labor can go a long way, and multinationals have the resources to exploit it. It’s much easier to start a business in the U.S. than almost any place in the world–at least legally. If many Indian businesses are technically illegal, they are very vulnerable to rent-seeking bureaucrats who will demand bribes in exchange for not reporting the business.
All those are economic arguments. I was trained in international relations, and I work as a Web programmer. So let me present some additional reasons not to worry from those perspectives.
As Don Boudreaux argues, governments cause externalities, that is, forces outside a market that can affect it, such as pollution. One extreme externality in global trade is political risk. In India, every time India and Pakistan, both armed with nuclear weapons, get into a disagreement there is a strong risk of war. War is the ultimate externality–it can devalue more investments faster than most other government actions. (Were I Japan, I’d be worried about my exposure to Chinese political instability.) Three or four years ago, India and Pakistan were again set to go to war, and border skirmishes and shellings are still alarmingly common. The next time tensions flare up, a lot of U.S. businesses will panic and bring a lot of jobs back, or at least shift them elsewhere.
From a Web business perspective, our company has had some experience with offshoring. We’ve been forced to farm some tasks out because we simply didn’t have the resources to absorb the influx of new work. It’s revealed a few things.
Offshoring is not necessarily cheap. Whereas before we would have used a programmer to program, that programmer is now spending some of his time managing the offshore programmers. However, managing them has proved to be very time-consuming and has sucked up quite a lot of that programmer’s time. Language difficulties abound, and that makes the coordination harder.
Until we started using outside contractors, especially the offshore firm, many of my managers didn’t know how easy they had it during the dot-com boom. They were used to coming to us programmers with a vague description of some features they’d like to see on a client site. Based on that and our experience with how particular managers liked their Web applications, we’d take off and produce something for them to react to. It was inefficient, as there were many more back-and-forths than a fully stated set of requirements would have, but there was enough money and more importantly a set of programmers who knew the types of features our clients needed. It also greatly helped that these programmers sat, in many cases, right next to the project managers. So any time they had a question or wanted to see how feasible a solution was, they could just come to our desks and ask.
Now, the programmers have been pushing to get a more formal requirements process, since it helps us be more efficient and spend less time producing something that isn’t what the project manager wants. But the reality of having to define tasks such that they could hold an offshore company responsible for delivering all the work exactly as they want it has brought home the necessity of writing detailed requirements and thinking through all the features that they want. This has made thier job harder than it was–they don’t get to just have some conversations with a client, propose some broad solutions, and then simply relay these ideas to a programmer, who then does the drudge work of figuring out how many items appear on a page, what fields should be displayed, etc. etc. Now they have to think through this in advance without seeing a working copy in front of them.
By contrast, we U.S.-based programmers have gotten more efficient as our managers have taken to writing requirements. We can more accurately estimate tasks and deliver them to a schedule. We still have our knowledge of our clients’ subject area and the types of solutions our project managers and strategic consultants like. We’re still within easy walking distance. So we can spot potential issues or less costly ways to achieve an effect and negotiate with the project manager quickly.
Somebody with an eight to ten hour time difference who has no experience with our managers or our clients and who doesn’t speak English natively can never do this as easily as we can. So while our offshore projects take longer than expected and are more costly to manage, our onshore projects are more efficient. Offshoring exposed inefficiencies in our organization that had nothing to do with the expense of U.S. programmers. It has made upper management aware of the relative cost of programmers versus project managers.
In short, we’ve moved up the food chain. We are not just replaceable widgets, but a recognized strategic asset to the company. Other companies are beginning to learn that you shouldn’t outsource your core assets, lest your vendor become your competitor.
So my job is by no means assured, but I think another terrorist attack that triggers another recession is a bigger threat to it than Indians. So no, I’m not particularly worried that DEY’LL TAKE MAH JAHB!