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Offshoring of services and the mounting challenge to the

By Henry Gray,2014-06-17 20:56
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Offshoring of services and the mounting challenge to the

    Revision of the Washington Consensus, and its implication for the offshoring of services

    Abstract

    The ‘Washington Consensus’ is usually described as agreement by prevailing politic opinion centred on Washington on the desirability of free trade and a global economy open to the unrestricted movement of goods, services, and capital. The Washington Consensus was, however, always silent on the movement of labour because of popular opposition to

    immigration. Offshoring has seemed to reconcile the mobility of capital with the relative immobility of labour. In the past offshore outsourcing was focussed on manufacturing and the main impact in the developed countries was on unskilled jobs. Offshoring of services which has recently become much more prominent is different because it is often the more highly skilled jobs which are at risk. The paper surveys the changes and the growing unease amongst political elites in the United States, and the implications this has for international business.

Introduction

    The expression ‘Washington Consensus’ has been at the centre of ideological controversy

    for such a long time that it is not surprising that the term has come to mean different things to different people, causing its original author, John Williamson (Williamson 1990), to distance himself from most interpretations. In 2003, he called it a ‘damaged brand name’(Williamson 2003) and in a more extended conference paper the following year he revisited his reflections

when he coined the term in 1989, and identified the deviants (Williamson 2004). On one side,

    he rejects as ‘market fundamentalists’ the neo conservatives, the neo liberals, and generally all

    those advocating monetarism, supply side economics, and minimal government, while, on the

    other, he rejects the interpretation of leftwing critics that Washington Consensus refers to

    policy prescriptions ‘imposed’ by Washington on an innocently passive developing world.

    Instead, Williamson reminds us that by Washington Consensus he merely referred to a list of

    ten economic policy reforms which he thought at that time, in 1989 - commanded a degree of consensus “in the political Washington of Congress and… among.. . senior members of the

    administration and the technocratic Washington of the international financial institutions, the

    economic agencies of the U.S. government, the Federal Reserve Board, and the think tanks.

    The list of ten policies included: fiscal discipline, reordering public expenditure priorities, tax

    reform, liberalising interest rates, a competitive exchange rate, trade liberalisation, liberalisation

    of inward foreign direct investment, privatisation, deregulation and property rights. This list was

    intended as a prompt to a line-up of distinguished authors who were invited to a conference to

    report on the extent to which such policies and their supporting attitudes were already

    successfully being put in place in debt-ridden Latin American countries. Williamson ruefully

    reflects that ‘universal convergence’ – a term proposed by a supportive colleague - would have constituted less controversial terminology. Whether we use the term ‘convergence’ rather than

    ‘consensus’, it is striking that there has been little agreement on what was being advocated, and

    one author has likened the prescriptions of the Washington Consensus (for want of a better

    term) to the fads of the fashion industry (Naim 2000) (Marangos 2007) (Williamson 2007).

    However, whatever the disputes about policies and means, there remained a large degree of

unanimity, in Washington and amongst academics and elite policy makers more generally about

    the desirability of the objectives and ends. It is this unanimity which, as we shall see, is in the

    process of unravelling.

    Be that as it may, the purpose of this rewinding of the track to the source, is to establish

    that whatever our interpretation, right or wrong, the original list of policies, while undeniably

    having had the desired effect of freeing up international movements of goods, services and

    capital, (in short, globalisation) did not make mention of the one factor or commodity which

    commands our attention in this paper, and which I would argue, holds the key to understanding

    the present unease with the putative success of globalisation itself. This factor is labour.

    Writing in the mid 1990s the noted development economist Robert Wade (Wade 1996)

    succinctly described the Washington Consensus thus:

    Reflecting the demise of Keynesianism and the ascendancy of supply-side

    economics in the US and some parts of Europe, the consensus—the ‘Washington

    consensus’, as it has been called—was based on the twin ideas of the state as the

    provider of a regulatory framework for private-sector exchanges (but not as a director

    of those exchanges), and of the world economy as open to movements of goods,

    services, and capital, if not labour.

    The free movement of capital, and the goods and services resulting from its investment, clearly facilitated the expansion of international business. However, the relative immobility of labour was also a vital component of this growth of international business and trade. Because the movement of people was constrained, capital from the developed countries moved to where labour was available, mainly in the developing countries, and exported the bulk of the output back to its customers in the developed world. However, if labour had been mobile then it is not certain that this would have happened, certainly not to the extent that it has. Capital did the moving, because labour could not. Other factor costs and availability aside, there is no reason to assume that capital has a preference whether to employ labour at home or abroad. In fact, it is likely that managers, as distinct from capital, would prefer to produce, if not in their own backyard, certainly within their own country. Downwind of course, but within a familiar legal and cultural environment.

    The reason for the immobility of labour lies not with capital, or even with the economic costs of establishing new infrastructure, but with democracy. Migration tends to be unpopular, especially when it is from alien places, and when the immigrants are likely to accept lower wages and conditions of work than domestic labour, and to put pressure availability and costs of housing a social resources. The White Australia policy was a product of nascent Australian democracy (Sammut 2005). Plantation slavery in the United States a case of enforced mobility

    of labour - had its origins in the pre-democratic period and did not survive the rise of democracy and its putative victory in the American civil war. The failure of the Bush administration in June 2007 to get its immigration bill through Senate, resulting in a further erosion of political legitimacy, is yet another example of how sensitive an issue migration is. The

bill was opposed in the senate from both the right and the left and aroused considerable

    popular feeling, so much so that “a flood of angry phone calls from opponents of the overhaul

    shut down the Capitol switchboard before the vote”(Weisman 2007).

    Immigration into the developed countries continues, of course, but it is constrained and funnelled. Legal immigration is organised by government in such as way as to attempt to secure

    economic benefit by relieving skill shortages and bringing capital. Numbers are relatively low,

    compared with demand, and the channelling into sectors where there is perceived to be a

    shortage of skills in the domestic work force limits popular opposition. People who do see their job not under threat from migration tend to welcome ‘Polish plumbers’, at least in limited

    numbers (Green 2006). Illegal migration, despite the costs, hardship, and dangers often

    involved, is a subdued indication of how much unsatisfied demand there is.

    If labour could not move, at least to the degree it, and employers, wanted, but capital and products could, then that appeared to provide a resolution of the issue. The result has been a

    massive shift of production (and the creation of new production) offshore from developed to

    developing countries, in particular China which has been labelled ‘workshop of the world’(Zweig

    and Bi 2005). Japan has explicitly used its aid programme to facilitate the transfer of Japanese

    manufacturing offshore (Lincoln 1993). However, in general, market forces underpinned by the

    liberalisation exemplified by the GATT and subsequently the World Trade Organization, has

    been quite sufficient. This transfer of production occurred both for goods, and for services,

    albeit at different speeds, and modes. The transfer of production of services has crucially been enabled by developments in information and communications technology (ICT).

Off Shoring: the shift to services

    The service sector has overtaken manufacturing and the primary sector combined in world production, contributing two thirds of world GDP (WTO 2006). However, world trade in services is still quite low compared to its importance in world production, partly because of continuing restrictive domestic regulations (particularly in public services such as health, utilities, and education) but also because of technical issues. Services were the last bastion to be opened up to free trade.

    If outsourcing of manufacturing production can be considered a first phase in the globalisation of production, recent years have seen a significant move towards outsourcing of services. In 2004, the World Investment Report signalled the new trend in an appropriately entitled annual report: The Shift Towards Services (UNCTAD 2004). The statistics are indeed illuminating.

    As a percentage of world trade the trade in services increased fourfold between 1984 and 2004 to stand at 20% of the total world trade. As a percentage of total stock of foreign direct investments, the service sector, in 2004, stood at 60% compared to 50% a decade earlier, and

only 25% in the early 1970s, the increase being even more pronounced in terms of inflows,

    namely 67% of the total in 2004 (UNCTAD 2005: 97-98).

    In fact, so evidently seachanging are these trends, that the authors of the WIR report speak

    of a tradability revolution. They argue that from a technical point of view services, in the past,

    were the sticky point. They could not easily be traded, let alone traded across borders, because

    they were impossible to deliver across a distance, the services of hairdressers, and plumbers,

    being classic examples. But there were also a lot of services, especially information based

    services, that could not be traded because the information could not be stored, or transmitted

    rapidly or because of the habit of direct contact. Other services could not be even be turned

    into information. Digitisation is changing all that. Back office functions of any kind: accounts, logistics, data processing, drawing, testing and even R&D, all benefit from the use of ICT to

    codify, standardise and digitise, which in turn allows the production of ever more services to be

    split up, and fragmented into smaller components that can be located elsewhere to take

    advantage of cost, quality, economies of scale, and so on. As one writer put it : ‘tasks that can

    be performed elsewhere are limited only by a manager's imagination' (Outsourcing: the myths

    and facts 2004). Such fragmentation exceeds that in manufacturing and therefore the

    possibilities for relocation are greater than anything we have witnessed before. Offshoring of

    services reflects the revolution in their tradability.

    Offshoring, both of manufacturing and of services, and the interplay between the two, has had a number of global consequences but since it is in the United States that the Washington

Consensus was created, and is sustained, it is the specific impact on America which is of most

    importance and relevance to us here. The impact may be roughly divided into two, the

    economic and the political.

    The economic impact of offshoring on the US

    Economically, offshoring has contributed to the burgeoning US deficit in trade in goods and

    services. The degree of that contribution is both uncertain, and partly masked because the

    increasing deficit in merchandise trade is to some extent offset by in increase in foreign income.

    Table1: US trade 2005

    US$ millions

     Exports Imports Balance

    merchandise 905,978 1,735,061 -829,083

    commercial services 354,020 281,168 72,852

    goods and services 1,259,998 2,016,229 -756,231

    Source: WTO Trade Profiles 2007

    The deficit in trade in goods is also partly counterbalanced by a surplus in commercial

    services. However the trends shown in table 2 suggest that this offsetting is declining,

    presumably because of the increase in offshoring of these services. Imports of goods have

    grown twice as fast as exports of goods. The disparity in services is less (and services are still in

    surplus) but again imports have grown faster than exports; 1.3 times as fast over the decade.

Table 2: Trends in US trade, 1995-2005

    Annual percentage change

    Merchandise

     Exports 4

     Imports 8

     Ratio M/X 2 Commercial services

     Exports 6

     Imports 8

     Ratio M/X 1.3 Source: WTO Trade Profiles 2007

The offshoring of manufacturing has, been complemented, especially in recent years, by the

    offshoring of services, especially to India (Dossania and Kenney 2007); (Davies 2004) (WTR05

    Offshoring 2005) (OECD_ITO 2006) (Parkhe 2007) (Vashistha and Vashistha 2006) (Kehal and

    Singh 2006). Offshoring of services to China is currently much smaller than to India but growing

    fast :

    The most dynamic export sector in India is information technology (IT)-enabled

    services for global companies, including call centers and software application, design,

    and maintenance. Such activities require qualified English-speaking labor, and India has

    an abundant, low-cost supply. The principal users of these services are U.S.-based global

    companies, but offshore software development contracts from Japan and Korea are

    expected to grow (Fujita and Hamaguchi 2006). Despite their dynamism, India’s overall

    exports of commercial services ($40 billion in 2004) are less than those of China ($62

    billion), although $17 billion of India’s were in communications and software (arguably

    the high end of the sector), compared with China’s $3.6 billion in software. However,

    both countries still have relatively small world shares (1.8 percent and 2.8 percent of

    world services exports, respectively).

    Services account for only 41 percent of GDP in China (even after the recent

    revaluation), compared with approximately 52 percent in lower-middleincome countries,

    and this leaves plenty of room for growth if Chinese service providers start to master

    global service technology in the same way they have mastered manufacturing (Winters

    and Yusuf 2007: 17).

Some economists take a sanguine view of US prospects. (Trefler 2005: 2) argues

    Service offshoring is currently small. As it grows it will undoubtedly have important

    effects on America. However, the real concern is that in the longer run of 10-20 years,

    Chinese and Indian exports will devastate the United States. This concern is misplaced

    for two reasons. First, it ignores the ironclad law of comparative advantage which states

    that no country can export all goods.

This may be so, but there is no guarantee that two, or more, countries may have advantage

    over such a range, and type, of product that the effect might be ‘devastating’(Grossman and

    Rossi-Hansberg 2006) (Markusen 2005). Ricardo argued that

    Under a system of perfectly free commerce, each country naturally devotes its

    capital and labour to such employments as are most beneficial to each. … It is this

    principle which determines that wine shall be made in France and Portugal, that corn

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