The Telegraph
Since 1st March, 1999
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- For the US, outsourcing may be good economics but is bad politics

The American citizen and Harvard trained economist, N. Gregory Mankiw, happens to be the current chairman of the American president’s council of economic advisers. His contributions to economic science would not add up to a couple of minor footnotes embellishing learned text-books. It should not, however, be held against him if he, too, in one of the coming days, receives the Nobel prize in economics: as long as one is a citizen of the United States of America, even a crashing mediocrity runs the danger of receiving that accolade.

And yet, Gregory Mankiw is at the moment a household name in the US. The reason: he recently made a howler. In the council of economic advisers’ annual report to the president, he had slipped in a seemingly innocuous sentence, which read as follows: “When a good or service is produced more cheaply abroad, it makes more sense to import it than to make or provide it domestically.” The sentence conveys the core of the doctrine of economic efficiency that is the base of globalization and liberalization. The wisdom embedded in it has been the standard prescription doled out over the years to the poor countries by the World Bank, the International Monetary Fund and the World Trade Organization: if, for minimizing cost, one has to shun domestic labour for foreign labour, or a domestic piece of machinery for a foreign piece of machinery, by all means one should do so. Since such a measure lowers cost, it automatically increases efficiency.

To survive and prosper in this wide, intensely vulnerable world, practising efficiency is an imperative. Which is why national frontiers need to be opened up and goods and services imported from overseas in case these are available at lower cost abroad than at home; even if it leads to rising unemployment and increasing closure of farms and factories on the domestic front. While reaching decisions on such matters, one must not allow oneself be swayed by sentimental considerations, for instance, the prospect of intensified economic distress at home. Forget the travails the current generation of countrymen has necessarily to undergo. Once the country’s economic structure is rendered efficient by ruthless decision-making based on the least cost principle, the domestic economy is bound to grow more and more competitive in the world market and therefore begin to flourish: income and employment will rise at home and future generations will reach the pinnacle of comfortable existence.

Poor Gregory Mankiw, all he wanted was to share this honest bit of economic wisdom with the American people and, in the process, endorse the cause of “outsourcing”: if Indian or Chinese labour can do the job at one-tenth the price of what American labour has to be paid, why, it is eminently sensible for American industry to “outsource” the work, that is to say, deny American labour and instead reward Chinese and Indian labour, the latter are available at a cheaper rate and it is sound economics to buy in a cheaper market. Is this not precisely what the US governments and its vassal institutions — the World Bank, the IMF and the WTO — have been telling the poor countries for donkey’s years'

Unfortunately, what is sauce for the foreign goose is not sauce for the home gander. It is quite all right to render advice to wretched under-developed foreigners which will reduce them to rack and ruin. But if the home crowd is inculcated with the same piece of wisdom, hell will break loose, severe political repercussions will ensue, particularly if it is an election year.

This kind of open advocacy of outsourcing by the US president’s very own council of economic advisers has led to a deafening uproar. The CEA has come to its heel and its chairman, N. Gregory Mankiw, has made an abject public apology. The chairman has learned the hard way that learning gathered at Harvard or some other reputed school of economics is not adequate; he has to re-learn some of his economics; outsourcing may be good for the poor countries, it is poison for Americans.

The wearer knows where the shoe pinches, and outsourcing is putting a strain on the US economy. The spectre of joblessness is haunting the American nation. Labour-saving innovations are taking place at an overwhelmingly fast pace, productivity is growing by leaps and bounds even as demand for labour is shrinking. Since the demand for goods and services too is not able to cope with the galloping rise in productivity, job opportunities are under squeeze. If, in this situation, a certain proportion of potential jobs is denied to American citizens and orders are placed in remote countries, social indignation cannot but boil over. It is boiling over in the US at this moment.

American industrial leaders are befuddled. To maintain profit, they have to economize on cost: this is what they are trying to do by outsourcing work, in conformity with the spirit of the religion they have imbibed since the dawn of consciousness. The public ire though is not strictly directed at them, but at the US administration, which is allegedly not doing enough to protect American jobs. Come November, George W. Bush and his party would receive the lesson of their lives unless in the meantime they reform themselves and impose a blanket ban on outsourcing. John Kerry, the near-certain Democratic party candidate for presidency, is roaring like a lion. The US Senate and the House of Representatives have sprung to emergency legislation. Outsourcing has suddenly become the dirtiest word in American lexicology.

The Bush administration is caught in a bind. Some types of outsourcing American society has long winked at, for example, offshore shipping or offshore gambling. To escape the rigours of the US tax net, ship-owners have sailed their boats under Panamanian or Monrovian flags. Ten or twenty miles away from the coast line of San Francisco, mafia groups have kept anchored ships with gambling casinos, thereby escaping the orbit of American law. These have been, however, fringe activities and have at most affected revenue earnings of the government. Besides, mafia elements have always had their line of communication with powerful politicians; the ruling principle has been live and let live.

Outsourcing of work, for which a pool of unemployed US technologists is available, but which is subcontracted to low-paid Chinese or Indian labour, is a different proposition. It hurts Middle America and therefore affects electoral calculations. Given the extent of outrage over Mankiw’s faux pas, the US administration, will no doubt have to do some backtracking in the course of the next few weeks.

In that eventuality, the sun will shine a little less brightly on the landscape of the National Democratic Alliance-ruled India. When push comes to shove, the good Americans will look after their own political interests rather than those of their pet politicians in New Delhi. The outcome is likely to be a drastic cut-back of outsourcing with severe consequences for India’s information technology sector, particularly the bubbling software industry. A section of the Indian middle class, which had been developing an ambivalence towards globalization because of job opportunities that were being opened up by software and ancillary activities will consequently be forced to do some quick re-thinking.

The actual issue suffers from little ambiguity. There can be no economics without politics. Not the least-cost principle, but political expediency, makes economics what it is. Even the presentation of economic data can be, and is, the function of political manoeuvres. Despite the skulduggery in the name of statistical estimations currently being practised by official Indian quarters, three crucial facts about the national economic trends are hard to refute: (a) The rate of industrial growth in the country in the post-globalization period is less than one-half of what it was in the decade immediately preceding globalization; (b) the rate of national farm growth in the post-globalization phase is below the rate of population growth; and (c) the years since 1991 constitute a dark era of unmitigated joblessness in both the public and the private sectors.

But the ill times visiting the nation’s majority are not a matter of concern either to media groups or to ruling politicians. Besides, a teaming up has recently taken place between external parties gaining from India’s liberalization and a minority of Indians who too have gained as a spin-off of foreigners’ gains. The hawkers of software are a part of this minority. It will be now their turn to discover that economics is mostly bunk, economists write the essays politicians ask them to write. They are even forced to retract with profuse mea culpa statements politicians disapprove of.

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