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Outsourcing and “Benedict Arnold”

Jim Moore writes yesterday about outsourcing in the IT industry, an issue that seems likely to be a major part of the debate over economic policy leading up to the US presidential elections. John Kerry is reported in the New York Times today (which has three separate pieces on outsourcing) to “castigate(s) ‘Benedict Arnold companies and CEO’s’ for moving jobs overseas”.

Jim asks us to frame the issue from a Ghanaian perspective:

Think of it this way. If you lived in Ghana (where I have done recent research on economic development and information technonology), would you think it better if Ghana did its own white collar work, or worse? You’d think it better, because of the anciliary benefits that come with having high tech and white collar workers in your local economy and society: educated people, stronger middle class, more effective political advocacy, higher value on education, etc. etc.

He goes on to make an important observation: it’s not just the jobs associated with outsourcing that matter to Ghanaians, it’s the fact that IT can act as the “special sauce” that make existing industries more efficient. By having IT competency in the nation, other industries have a better chance of competing on a global stage. I refer to this as “digital independence” and suggest it’s what developing nations should be striving for, rather than developing a sector that can compete with India for software outsourcing contracts. While some developing nations may be able to make money through call centers or offshore development, all will need indigenous IT expertise to be able to export agricultural or manufactured products to the wired world.

My views diverge from Jim’s halfway through his post. He worries that

We are outsourcing our high value information technology and financial services jobs, and relocating them into other economies and societies. This is a good thing for the world–it is perhaps the most generous thing this country has ever done–bigger than the Marshall Plan after World War II.

But the way we are doing this, we are losing our own core competencies in our economy. We are reducing our local access to information technology and financial services expertise. Long term, this means less and less spillover of expertise into our other businesses, and slowing innovation.

It’s a scary scenario, but not one the facts back up. Yes, the number of high-skilled IT jobs in India and China are growing. But they’re growing in the US as well, just not as quickly. The Forrester report that has everyone talking predicts a some of 500,000 software jobs overseas by 2015 – that’s a modest number in a US economy with 130 million workers, where literally millions of jobs are created or eliminated every month.

I believe that the jobs really in danger are the jobs already in danger of being lost to automation – customer service and data entry. It’s quite hard to outsource the most creative and interesting IT jobs, the ones where technically skilled people work with customers to design products. Indeed, the NYT reports that IBM will simultaneously move 3,000 white collar jobs overseas, while creating 4,500 new jobs in the US, particularly around designing software for specific customer applications. So I think Jim’s worry that we’re going to lose out core competency is premature.

What I do think we should be worried about is the alignment of outsourcing with a larger trend in American society – the dissapearing middle class. One thing the wonderful tools over at Gapminder will show you is that the distribution of income in the United States shows two distinct peaks – a large upper class and a large underclass. The low-paying jobs – retail, custodial – aren’t going anywhere, as they require physical presence. It’s that disappearing middle class – unionized manufacturing jobs, low-end white collar jobs – that are in the most danger of moving overseas.

Kerry’s firey rhetoric aside, there’s no easy solution to this problem. When Bush took steps to protect the domestic steel industry, he didn’t just piss off other countries – he pissed off the domestic auto industry, which suddenly faced a higher price for steel. The same economics apply to customer service jobs – firms that can access high quality, low cost service people overseas will be at a competitive advantage over those who can’t. Protect your domestic industries too aggresively and very quickly your domestic markets suffer.

About a year ago, I was at a trade show in NYC, giving a standard Geekcorps pitch for digital independence. I got accosted by a passerby, who called me a traitor for trying to build the middle class in Africa. “It’s people like you who are trying to destroy our country.” I expect to hear a lot more of this in the next nine months as everyone tries to figure out just what we want the US economy to look like.