The Telegraph
Since 1st March, 1999
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- Why should the US perceive outsourcing as a threat'

The Telegraph carried a disconcerting news item on January 24, 2004. The senate in the United States of America has passed a legislation barring American companies from sub-contracting projects to countries like India. Outsourcing, in other words, is being frowned upon. And the reason is not far to seek. Cheap labour outside the US is posing a threat to US workers.

The reigning economic philosophies of the day, however, do not seem to suggest a crisis for the US, and there are two alternative positions one might adopt in this respect. First, faced with industrial stagnation, American companies are seeking ways to reduce costs of production. A decline in cost brings in its wake price-cuts unaccompanied by painful reductions in profit margins. Lower prices, in turn, could stimulate demand and lead the entrepreneurs to heave sighs of relief. Moreover, demand for labour services would go up bringing it closer to supply, thus resuscitating the labour market. The catch though is that the Indian workers are the ones who would reap the harvest, rather than the ones trapped in the wrong side of the US labour market.

“But is this a threat'” one could nonetheless ask, for the event seems to represent a step forward in the direction of globalization, an idea that the US itself is the most enthusiastic champion of. After all, outsourcing will generate an increase in employment for the world as a whole and this ought to be viewed as a global economic gain, unless one believes that all unemployed are unemployed, but some are more so than others.

A second approach is to banish the term, “unemployment”, itself from one’s dictionary by converting to whole-hearted marketism. This will land us in the so-called Chicago camp, founded initially by Milton Friedman and carried to its logical extreme by Robert Lucas, Jr, both Nobel laureates. According to these scholars, and the so-called Real Business Cycle School that followed hard on their heels, unemployment itself is an illusory phenomenon.

If you are out of work, it is not because you are unemployed in Dickensian fashion. Rather, you are voluntarily keeping away from the labour market by asking for wages that are outrageously high compared to what the market is willing to pay. In other words, a heart surgeon without patients is not unemployed. He is merely reluctant to accept a janitor’s income, or, what comes to the same thing, a readily available janitor’s job. Given sufficient time however, as well as search opportunities and mobility, he will be merrily performing coronary transplants once again for whatever charges satisfy his fancy.

From this point of view too then, the US workers are not under any threat at all. For no one can ever be unemployed in this “all’s for the best in the best of all possible worlds”! Admittedly, there will be a temporary lull in labour-market vibrancy, as the workers who merely imagine themselves to be workless, but are not so in actuality, search around for their preferred jobs. Surely that is a small price to pay to enjoy the benefits of a freely competitive world. Or, is one worried that the search process will cause US workers to move all the way to the Indian labour market and start competing with the workers here' But wouldn’t such worries be unfounded, if people have their hearts in the right place — namely, the sacrosanct principle of globalization'

And while we are at it, let’s push things a little harder by going further back along the course of history. The merit of free trade in commodities was established by David Ricardo as far back as the early 19th century, but the loudest of paeans was sung in its praise by the MIT celebrity and one of the earliest winners of the Nobel prize in economics, Paul A. Samuelson. The latter re-emphasized and extended the Ricardo conclusion by pointing out that free trade, hence globalization, improved the lot of the countries engaged in trade by providing them with the opportunity to produce what suited them best. In addition, he proposed the well-known Factor Price Equalization Theorem, which stated that free trade leads to a tendency for incomes of labourers and capital-owners to equalize across the trading partners. The puzzle that the FPET posed was that while free movement of commodities naturally caused their prices to be uniform in different countries, the equality of returns to capital and labour did not require workers and capital to actually change their geographical locations. Similarity among nations of the prices of commodities they help to produce guarantees that the producers’ incomes themselves tend to catch up with each other.

The phenomenal quantum of mathematical energy that was spent on establishing the truth of the FPET need not detain us here. It constitutes a part and parcel of advanced textbooks on international economics. What is important for us is to recognize the philosophical urge that researchers felt to prove the result. Scientists recognized the removal of income inequality across nations as a desirable by-product of the productive efficiency that accompanies free trade.

Many of the theories extolling the virtues of worldwide free competition have, in one way or the other, inspired the formation of the World Trade Organization. Yet one has heard of repeated protests, till recently from the developing nations alone, that free trade in commodities is far less free than what the richer nations assert. Tariff barriers and agricultural subsidies abound, mainly to protect the interests of the big brothers. And now comes the taboo on free trade in services too. US firms cannot purchase Indian labour services, a law that violates the General Agreement on Trade in Services, an integral part of the WTO itself.

From the FPET angle, obstructing free trade in commodities acts to perpetuate income inequalities across the world as a whole. Added to this is the new move to restrict direct trade in services. One wonders what on earth inspired the formation of the WTO, or for that matter, who are the ones that support its formation. The poor countries continue to oppose it, as evinced by the World Social Forum meetings in Mumbai. The nation that is economically by far the best off in the solar system is unhappy with it too, as the news item with which we began demonstrates.

Can there be a bridge then to connect philosophers’ dreams to the reality of our existence' There are umpteen examples in history that might answer the question in the negative, but none more exciting than the story surrounding one of the greatest philosophers to have ever existed — Plato. Dionysus, the ruler of Syracuse around 387 BC, was so thrilled by the doctrines of Platonic communism that he was gullible enough to invite the philosopher himself to come forth and transform his kingdom into a utopia. Legend has it, of course, that the experiment led to disaster, and the rankled monarch avenged himself by selling Plato off into slavery. Fortunately for Plato, a friend and pupil, Anniceris, came to his rescue by paying a generous ransom. Needless to say, the present day economic philosophers are better situated; neither slavery nor monarchs’ rages need to be reckoned with.

Unfortunately, the principles that have governed the affairs of the world through the ages were never inspired by idealistic beliefs. More often than not, they represented syndromes, outgrowths of opportunistic thinking, advertised in the guise of idealism, as is the case with the globalization-cum-liberalization hoopla. One need not be a cynic to ignore them. Nor does one need to be an autocratic supporter of centralized planning, which died a well-deserved death, leaving behind a trail of poverty and devastation.

A modest degree of intelligence is all one requires not to be hoaxed by the hypocrisy of the new economic order.

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