Exploding the Myths of Offshoring

In the heated public discourse in the US on outsourcing the aspect that is most often highlighted is the threat of American job loss to low-wage workers in India. In this essay a former Clinton administration economist Martin Baily and Diana Farrell , director of the McKinsey Global Institute make the case that outsourcing is in fact win-win for both the countries. They say that with the digital revolution and the dramatic fall in international telecommunications costs many white collar jobs in the developed countries can be performed in places like India where the cost is substantially lower. While this puts certain types of jobs in the US at risk but better allocation of resources by companies enables them “to invest more in the next-generation technologies and business ideas that create new jobs.” Even then , the authors point out, the new jobs created in India because of outsourcing are viable only in a low-wage environment and wouldn't exist in the United States. Thus the fact of half a million people in India working in outsourced sector would not mean equal number of jobs can be brought back to the United States and Europe. Apart from the fact that as the world's most flexible and innovative economy, the US is well positioned to benefit from the trend it can draw a host of other benefits such as corporate savings, offering a better deal for consumers, additional exports to countries where jobs are being outsourced, repatriation of profits from the US-owned outsourcing companies and creation of new jobs in the US. They conclude: “True, some US workers will lose their jobs, but this painful reality doesn't weaken the case for free trade. Given the benefits of offshoring, the logical response is to make the US labor force and economy more flexible and able to cope with change.” YaleGlobal.

Exploding the Myths of Offshoring

Martin N. Baily
Thursday, July 1, 2004

Click here for the original article on The McKinsey Quarterly's website.

Martin Baily, a McKinsey alumnus, is now a senior fellow at the Institute for International Economics and a senior adviser to the McKinsey Global Institute. He was formerly chair of the President’s Council of Economic Advisers under President Clinton. Diana Farrell is the director of the McKinsey Global Institute.

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