Who Fears Outsourcing and Offshoring?

The pros and cons of outsourcing and offshoring have become the subject of vigorous debate in many countries. Many economists believe a combination of factors -- including high educational levels, low local wages and good governance -- are necessary for countries to capitalise fully on the advantages of a global economy. Southeast European countries are well-positioned in terms of skills and wages, but will need wise public policies in order to reap the benefits of outsourcing within Europe, argues economist and former Romanian Finance Minister Daniel Daianu.

Recent years have witnessed a rising choir of disquiet in advanced countries as to the impact of global trade on their economies. In the United States, leading politicians from both major parties have objected to what they perceive as multiplying runaway jobs due to outsourcing and offshoring. The concerns are even more acute in Western Europe; several French and German ministers have made public their worries about industrial relocation. Former French Finance Minister Nicolas Sarkozy and German Economy Minister Wolfgang Clement have been especially vocal. They have not hesitated to blame new EU member states for allegedly practicing unfair competition via lower taxes. How has it come about that advanced economies, which have traditionally been staunch supporters of free trade, seem to be having second thoughts?
Traditionally, the less benign side of global free trade has been ascribed to its effects on countries that either cannot make the best use of their comparative advantages, or that face stiff protectionism from wealthy economies in certain domains -- for example, farm products. In general, such economies are to be found in the developing world, where poor governance and the inability to absorb new technologies are widespread. This state of affairs led Harvard economist Dani Rodrik to remark that free trade is not necessarily welfare-enhancing for poor economies.
There are both theoretical and realistic reasons for this apparent partial turnaround in the public rhetoric coming from affluent countries. In terms of economics, the arguments that stress the virtues of free trade form the basis for rationalising commercial exchanges among countries; nonetheless, these arguments lose some of their power and appeal when the distribution of gains is largely asymmetrical and dynamic competitive advantages dominate. Years ago, Paul Krugman and Herschell Grossman wrote seminal pieces on what they called "strategic trade". One can posit that the economic rise of Asian economies (and most impressively that of China over the last couple of decades) is to be judged through such policy lenses -- namely, through strategic trade policy, which was embedded into a sort of development-focused industrial policy by using market forces in a smart way.
Nowadays, the new information and communication technologies (ICT) bring about great opportunities for developing economies, to the benefit especially of well-educated people. Again, Asian countries fare quite well in this respect. The "India unbound" of the last decade is the outcome of market-oriented reforms, taking place amid a vast pool of English-speaking engineers and computer/software specialists. At the same time, only some parts of India have been touched by rapid economic progress, and much of the country is still mired in abject poverty.
What matters in the global economic game is the existence of substantial wage differentials among countries and regions. It is this factor which drives industrial relocation, as globally-oriented companies shift operations to areas which combine cheap labour with adequate technologies. The intensity of this process depends both on the wage differentials and the quality of other production factors. Leading mainstream trade economists, such as Jagdish Bhagwati, argue that advanced economies have little to fear, since they specialise increasingly in higher value-added products and services; all countries, therefore, will be better off in the end. This argument, however, has been disputed recently by Paul Samuelson of MIT; writing in the Journal of Economics Perspectives, he suggests that "sometimes a productivity gain in one country can benefit that country alone, while permanently hurting the other country by reducing the gains from trade that are possible between the two countries". Samuelson goes on to argue that "post-2000 outsourcing is just what ought to have been predictable as far back as 1950", since it is the result of other economies around the world assimilating advanced technologies and catching up with the United States.
Against a backdrop of new ICTs and global wage differentials, major shifts in the distribution of industrial and service activities are probably unavoidable. Moreover, some leading industrial economies do not appear to be keeping pace sufficiently with this process as far as restructuring is concerned; the lag harms some of their labour segments, and puts pressure on real wages. As a result, anxiety about outsourcing and offshoring develops. It is easy to understand why such anxiety exists in Western Europe, where wages are a large multiple of what well-educated Eastern and Central European workers earn. Although framed in global rather than continental terms, the Lisbon Agenda was a product of this fear. The big EU member countries primarily worry about Asia and the US economy, and regard the Lisbon Agenda as a competitiveness policy response.
The fear of outsourcing and offshoring can be seen as analogous to the deep transformation depression of the last decade in post-communist economies. These went through a dramatic fall of output because resource reallocation -- at the new market clearing prices -- could not happen rapidly enough. Similar pains can be detected nowadays among some groups of workers in rich economies, who cannot compete in the new global economy, while policymakers react one way or another. Protectionist measures in various countries complicate the situation further.
The bottom line is that countries with a highly-educated population, a substantial level of investment in education and forward-looking public policies are the most likely to enjoy the fruits of technology dissemination on a global scale. Because Central and Eastern European countries have comparatively well-educated populations and low local wages, they stand to benefit greatly from outsourcing within Europe. But they will need intelligent public policies in order to make the most of this opportunity.