INTELLIGENT SYSTEMS

 

Volume XI, Number 2                                                                                                                   April, 2004

A quarterly newsletter for clients and friends of Chenault Systems

Copyright 2004 Chenault Systems, Inc. All rights reserved.

 


Exporting Tech Jobs to India?

By Alan Reynolds

Those afflicted with an irrational phobia about international trade used to confine their raving to manufacture goods, not services.  But the United States is now said to be exporting high-paying service jobs to India, particularly in information technology.  Worrying about U.S. companies importing services from India is a classic example of the journalistic inclination to ignore the forest and focus on a few twigs.  The United States is by far the world's biggest exporter of services, just as the United States is by far the leading exporter of goods.

The United States accounted for 18.1 percent of worldwide service exports in 2001, according to the WTO, up from 17 percent in 1990.  India accounts for only 1.4 percent of world service exports.  India is in 21st place among world exporters of services and in 30th place for goods. India is running a trade deficit of about $8 billion, and that country's imports rose 20 percent in 2003.  China ranks fifth among world exporters of goods (although China accounts for 11 percent of U.S. imported goods), and it has a small and dwindling trade surplus.  China's imports rose 40 percent in 2003. Hong Kong is a significant exporter of services, but it has a trade deficit with the United States.

The United States had a $64.8 billion trade surplus in services in 2002, despite economic stagnation in Europe and Japan.  Services accounted for 30 percent of all U.S. exports and 43 percent ($3.1 billion) of U.S. exports to India.

Worrying about job changes among computer professionals is yet another example of the journalistic inclination to totally ignore any facts about the big picture and instead generalize from small and local anecdotes.  The Bureau of Labor Statistics categorizes these allegedly vanishing jobs among “computer and mathematical science occupations” -- i.e., computer programmers, software engineers, systems analysts, support specialists, network administrators, etc.  These jobs exploded with the tech boom, rising 11.9 percent in 2000 alone, but such panicky hoarding of computer geeks was no more sustainable than 5,000 on NASDAQ.  Even in 2002, however, employment in these computer-related occupations was nonetheless higher than in 1999, and so were salaries.

In 1999, there were 2,620,080 jobs in these computer-related professions at an average wage of $26.41.  In 2002, there were 2,772,620 such jobs at $29.63 an hour ($61,630 a year).  Figures on that specific job group are not available for 2003, but professional business service payrolls were up 2.3 percent by November, when compared with the year 2000, and jobs in information industries were up 4.9 percent.  Jobs in the subgroup of “computer systems design and related services” are down slightly from last year but have risen steadily for the past three months.

The notion that service jobs are being lost to India is paradoxical because similar complaints about China or Japan invariably involved disparaging U.S. service jobs as “McJobs” -- inferior to working with a sewing machine or wrench.  In the case of India, however, even the most menial computer service chores -- such as tech support and handling health insurance claims -- are now being glorified as “high-wage” jobs.  Past stories about "exporting jobs" also assumed those jobs had moved to countries with trade surpluses, such as Japan and Germany.  But India has a sizable trade deficit, and it even had a deficit in services until 2002.  This is not to suggest, however, that previous stories about trade surpluses being a sign of economic strength made sense.  On the contrary, from 1990 to 2001, employment grew by 1.2 percent a year in the United States, but by only 0.3 percent in Japan and 0.1 percent in Germany.

Trade phobia has lost any sense of direction. The United States is now said to lose jobs to countries with trade deficits as well as to countries with trade surpluses, and to lose jobs in services as well as manufacturing.  Some even suggest the United States will lose most service jobs to India and most manufacturing jobs to China.  But without jobs, how could Americans keep buying all those imports?

A New York Times report claimed India is attracting a lot of direct investment from multinational corporations. Yet Morgan Stanley reports:  “Private corporate investment (in India) is estimated to have declined to 4.7 percent of GDP in 2003 from 9.6 percent in 1996.  In April to September 2003, FDI investments have declined by 63 percent compared to the same period last year.”

The United States has always imported and exported services as well as goods.  So what?  Even if we ignore this country's huge and growing dominance of world service exports, it would still be delusional to speak of importing services as equivalent to exporting jobs.  The notion that “exports create jobs” (every commerce secretary's favorite slogan) is neither more nor less true than the idea that imports create jobs.  Work is involved in all creation and marketing of goods, services and financial assets.  Work is also involved with the extra investment resulting from a net inflow of foreign capital, otherwise known as a “current account deficit.”  Growth of employment is related to growth of the economy, not to imports or exports or the gap between them.

If the United States were really losing more jobs than it was gaining, then employment would be falling.  But employment is rising.  There were 138.6 million civilians with jobs in November, up from 136.5 million a year earlier.  The number of U.S. jobs doubled in fewer than 40 years.  If the rapidly expanding number of jobs were inferior to the ones that preceded them, then incomes would be falling.  But incomes, too, are rising.  Real hourly compensation kept rising even in the recent recession and is now up more than 26 percent since 1980.  Real disposable income (which excludes stock market gains) rose at a brisk 3.9 percent annual rate cent from April to November.

The media blitz about imported goods or services resulting in the best jobs being relocated to some variable list of countries -- first Japan and Germany, now India and China -- has never been anything more than unadulterated hogwash.

Alan Reynolds is a senior fellow at the Cato Institute.

This article originally appeared in Town Hall on January 4, 2004, and is reprinted with permission of the Cato Institute copyright 2003.  To learn more about the Cato Institute, visit www.cato.org

To read a recent article by Chenault System on the subject of offshore outsourcing found in the Dallas Business Journal, please refer to:  http://www.bizjournals.com/dallas/stories/2004/03/22/editorial3.html

The final word on offshore outsourcing

By Wes Gardner

 

Based on previous newsletters and our recent article in the Dallas Business Journal by Tom Chenault (we were only allowed 600 words), a reader might be inclined to conclude that we at Chenault Systems believe nothing good comes from offshore.  This conclusion would be in error.  We started this newsletter with the preceding article because it discusses many of the positive aspects of this practice.  Frankly, the article misses other points, but then it is aimed at the economic impact to this country.

Many countries are big consumers of products manufactured by firms that are for the most part American corporations.  For example, Procter & Gamble produces many goods for the Indian marketplace, which spends billions annually with this corporation alone.  When these corporations outsource IT jobs to these consumer countries they are routinely lambasted by the press.  This brings us to the question:  Should American firms only take, not give back, to countries with which they do business?  A moral issue granted, but one we believe should be considered before we scream foul when the economic taps are opened, allowing money to flow in the other direction.

Another factor is that most part outsourced jobs are not the higher paying engineering variety, but tend to fall in the lower paying areas of customer services or low level programming.  Though potentially economically devastating at the personal level, once these displaced workers find another position, the difference in income is often minimal.

The “good” now stated, many pitfalls exist with outsourcing these types of jobs; and any company contemplating such a move should take these into consideration:

·          Direct customer support is always a problem.  We concede these workers speak English.  This being the case, we must speak American.  Let’s face it, often it is hard for a Texan to understand a New Yorker and vice versa; how can we be expected to communicate with someone halfway around the world?  Frustrating customers is not a blueprint for success.

·          Sensitive information may be transported to other shores.  Cyber crime is scary enough when it may be conducted on our own soil where our laws rule.  How much more so when it may take place within another country’s borders, where alien laws – or seemingly no laws at all – apply?  As a rule, customers do not want private, sensitive information circling the globe.

·          Total cost is not predicated only on hourly rate.  Though it sounds good, touting that an Indian worker costs $10 per hour while an American costs $40 is meaningless.  There is another component to cost – time.  Nothing has been saved if Indian workers require quadruple the time to complete the same task!  And, this is often the case, as many workers are often thrown at the same task to get it completed in a similar timeframe as American counterparts.

·          Cultural and communication issues may negatively impact the finished product.  The approach to application development, how certain operational issues are normally processed, the nomenclature surrounding those processes, and language usage associated with implementing these processes may vary considerably from the United States, all potential increasing the level of confusion.  Even with well documented system requirements, these issues may require more people interfacing with those performing the work, more rework, and often more time before the final product can be perfected, all of which has an associated cost.

For better or worse, companies live in a global economy.  The short-term result of a job shipped overseas may be the loss of one here, though that may lead to additional jobs created here.  One thing is certain:  Isolationism did not work last century and it won’t work today, so companies and employees alike must come to grips with a faster and faster changing economic landscape.

For the large corporation deriving a substantial amount of income from other countries, a certain amount of offshore outsourcing is the morally correct approach.  For the remaining companies, this approach to cost savings must be weighed against the potential of upsetting clientele and the downside of potential cost overruns due to communication problems, delays due to rework, and a greater interface of staff that may already be overworked to keep issues in check.

Wes Gardner is Vice President of Operations for Chenault Systems.

Quotes Worth Noting

“Management consultants: The effective ones are the one-man shows (small firms).  The institutional ones are disastrous.  They waste time, cost money, demoralize and distract your best people, and don’t solve problems.  They are the people who borrow your watch to tell you what time it is and then walk off with it.” – Robert Townsend, CEO – Avis Rent-a-Car, 1970

“Ultimately, the offshoring fad is bad for companies not because of the short-term programmer layoffs but because technology companies will lose their capacity to innovate. Tech companies that outsource their programming talent will ultimately be replaced by competition, and then everyone will be losing their jobs.” -- Michael Bean

“Just because you do not take an interest in politics doesn’t mean politics won't take an interest in you.” -- Pericles (430 B.C.)