Posted on 07/01/2003 5:41:41 PM PDT by Brian_Baldwin
India is being accused of stealing US hi-tech jobs by offering cheap outsourcing facility to American IT companies. American lawmakers have responded by trying to limit the amount of hi-tech work that can be contracted out to Indian companies This looks like very bad news for Indian software companies, particularly as the US takes about 70 per cent of her software services exports.
Indians have fought back with a free trade argument. N. Narayana Murthy, chairman of the premier Indian software company Infosys Technologies (INFY), drew attention to the fact that India has lowered barriers to American exports, and that if the US now raises barriers to exports of Indian software services it will mean that the US does not believe what it preaches about free trade and globalisation.
N. Narayana Murthy, however, has not grasped the point that there is a difference between importing labour services and importing the products of labour services. This is not an idle distinction. Wage rates are basically determined by the ratio of labour to capital. Therefore, as a rule, raising the labour ratio reduces real wage rates, while imported goods do not.
The movement in US wage rates during from 1855-1914 demonstrates what happens when the labour supply pushes against the rate of capital accumulation. The period 1855-95 saw an annual increase in real wages of 1.27 per cent but the period 1896-1916 saw the annual increase in wages slow to 0.55 per cent.
This latter period was marked by massive immigration from Europe that averaged about one million annually. The 1917-55 period experienced annual wages rises of 2.47 per cent. I think these figures demonstrate the link between real wages rates and the ratio of labour to capital.
However, for capital accumulation to outstrip the supply of labour to the extent that an increase in labour factors would actually raise total incomes. (This is a suboptimal situation and one that I believed prevailed in Germany during part of the 1960s). However, I very much doubt if many economists would argue that this is the case in the US.
The latter point is especially relevant because Indians are claiming that the US economy benefits from importing these software services. Whether they realise it or not, they are really arguing that a lagging supply of programmers was obviously hindering the US economy and that is why US companies were forced to outsource to Indian companies.
I don't think the argument holds because we are talking about labour services, which means that Indian programmes are directly competing with American programmers, just as if they were within the US itself. So no matter what the supply situation of US programmers may be, an expanding supply of competing Indian programmers must inevitably force down the wages of US programmers until rates are equalised in both countries.
But what are there so many Indian programmers? In other words, what is a country as capital starved as India doing in producing so many software engineers when most its labour force is still employed on the land?
India produces 50,000 computer science engineers a year and is training about 500,000 students annually in computer skills, including programming. But does India really need so many of these people at its present stage of economic development? Perhaps the answer lies in the fact that America has benefited enormously from Indian investments in IT training.
In 1999 Business Week reported that over 30 per cent of new enterprises in Silicon Valley were started by Asians with the overwhelming majority being Indian. These Indians have clearly brought a significantly net benefit to the US economy, as have their Chinese counterparts. However, I think there is a dark side — for the Indian economy, that is.
Approximately 75 per cent of software companies in Bangalore are Indian while only accounting for something like 33 per cent of investment, the rest being mainly American. Foreigners have invested take advantage of the area's low-cost skilled labour. Part of this push was, I think, driven by the American boom.
To escape rapidly rising wages in the IT industry these companies invested in India, which was turning out thousands, and still is, of skilled computer personnel. So we had the boom artificially fuelling the demand for labour while India obligingly moved to supply the labour. In the meantime, tens of thousands of Indian computer and software engineers immigrated to the US and became highly successful.
To cut to the chase, India has been subsidising the US economy. Think of it as foreign aid in reverse, with the benefits of Indian investments in computer science and engineering moving to the US whose highly advanced capital structure could accommodate the flow. And it is the existence of this huge flow that strongly suggests that India is greatly over investing in these areas. Of course, this is no consolation for those Americans who now find themselves competing against a surplus of highly-skilled Indian labour.
Gerard Jackson is Brookes' Economics Editor
One of the last projects I was on was about 75% complete when 4(four) of us consultant-types were let-go and replaced by an off-shore (Indian) firm.
Well, 2 years have gone by and now 120 (one-hundred and twenty!) programmers work on the same system and it is still not complete.
I just sit back and laugh at the money "saved" by the cheap labor.
The 4 of us were on track to finish in 4 months.
?.....Is the 'Pope' Jewish?
/sarcasm
After that, the locals and expatriates were equally not a good experience.
I cashed out last November and have been in culinary school ever since. At least, there, you can see progress, and feed-back is quick.
I'd rather flip burgers than try to nail jello to a tree.
/john
And don't get me started on the language barrier, especially over the phone.
Phoon? Is that a scalar or an array or procedure or what? I really do not see. On what line it is? Is that the variable that controls the access by NOFORN? < /sarcasm>
I'm with you. The lack of understanding in a normal pit is bad enough. Add a phone and the UN, and things don't get done. $$s lost.
/john
That's about 500 listings for jobs techies in the US could well do.
That's about 500 listings for jobs techies in the US could well do.
Good for them. When America fears competition, we're doomed.
And how exactly did offering cheaper voluntary alternatives become "stealing"?
In Hyderabad, there is actually an area called High Tech City. In India, education has a much higher value than in the US but there are few Indian jobs to be had there. It is slowly changing, where there is a middle class emerging. Blame their corrupt government for the poor infrastructure. India has some of the best programmers etc.. but just try using an internet connection there.. good luck.
No. Our tax and regulatory system is forcing companies to export those jobs to cheaper labor sources.
Forcing......'CFR' internationalists?
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