Up the Margins

I am writing this from somewhere over Siberia. I don't know precisely where, but it doesn't matter. Location in Siberia is defined by the time it takes to get somewhere else. Consulting a map or a resident almost never places you anywhere in particular. It usually just informs you how many hours or perhaps days you are away from someplace that has a name. I'm 30,000 feet up and five hours out of Tokyo, returning after setting up two software development offices in Eastern Europe.

Although "offshoring", particularly in software development, has received a lot of attention recently, there is really nothing new or innovative about it. At its core, software development is manufacturing, and business has been moving manufacturing offshore for decades.

What is relatively new, however, is the number of high-skill, high-paying jobs headed overseas. It's not just call centers and software development offices that are moving. Pharmaceutical research and development is now one of the fastest growing segments of the outsourcing market.

No one can reliably predict the long-term economic effects of the offshoring trend, but that doesn't stop people in all camps from angrily insisting that somehow they know exactly where all of this is headed.

Rather than add fuel to that inflamed debate, I thought it would be far more interesting, to take a look at offshoring from the point of view of each of the three participants involved.

Those running firms in developed economies tend to take a rather mercantilist view of the whole thing and see less-developed economies as simply a source of less expense and more docile labor. Which, for the moment, is pretty accurate. This group sings the strongest and most unqualified praise of offshoring. They tell us that integration of national economies will improve human rights, increase competitiveness, and result in more and higher-paying jobs at home.

Possibly, but their position is undermined by the fact that they are fighting tooth and nail to prevent consumers from having access to other markets. In America, for example, all DVD players must, by law, contain a device that prevents consumers from playing DVDs purchased in less expensive overseas markets. Bypassing this device to watch a legally purchased DVD can actually lead to jail time.

Likewise, the American pharmaceutical companies continue to relocate increasingly high-paying jobs offshore while lobbing congress to prevent consumers from buying their products in these same markets. At one point they were actually linking such purchases to funding terrorism.

It seems to me that if corporations having access to overseas labor markets is good for competitiveness, than consumers having access to overseas retail markets should be equally good.

Down the River

Workers in developed economies often see offshoring as sheer terror. A few delude themselves that their "higher" skills and educational credentials will prevent their jobs from being outsourced, but that is simply not the case. In fact, the biggest impediment to offshoring is not a lack of a skilled workforce, but what is called "insufficient business and legal infrastructure", which is just a fancy way of saying "truly astounding levels of graft and corruption."

With international communication costs dropping to almost nothing, and organizations like the WTO working with developing countries to bring their legal systems up to international standards in a way that does not unduly curtail traditional government corruption, the off-shoring trend will accelerate and expand to new industries. A large segment of today's workers may find themselves in competition with workers who are just as skilled but willing to work for a third the salary.

As scary as this all sounds, however, it is worth remembering that the offshoring of manufacturing that occurred in the 70s and 80s did not result in long-term job loss. For every manufacturing job lost, more than one higher-paying job in another industry was created. It is likely that will happen this time around as well, but you can't blame people for worrying.

Up the Ladder

Of those I spoke to, the individuals in the developing economies seem to be the ones with a long-term view of offshoring. In the immediate term, workers get jobs, corrupt government officials get substantial kickbacks, and everyone agrees that this is good.

The situation, however, is considered transient. These nations do not intend to remain a source of cheap labor, but to move up the value chain using the knowledge and skills now being acquired. It is assumed that the software and pharmaceutical companies now being created do not exist to simply service the American and European firms, but to challenge and eventually defeat them.

Many in developed economies are quick to dismiss this possibility, but that this is precisely what happened to the American manufacturing industries that massively offshored jobs in pervious decades. Profits where higher for a while, but eventually America was all but forced out of the entire industries, not just the manufacturing processes that had originally been outsourced.

Some of these developing nations have strong academic traditions and good universities. Furthermore, the recent abundance of high-paying technology jobs is resulting in the rapid creation of a highly skilled, highly educated, fiercely competitive workforce.

My crystal ball is in need of polish, so I won't pretend to know exactly where all this is heading. On the whole though, it seems that worldwide living standards will increase and national economies will become more entwined. And as far as I'm concerned, in today's world any interaction between two nations that does not involve dropping bombs on one another is a very good thing.

Of course, being a pragmatic pundit I realize that my opinions don't matter. These trends are not only in motion and accelerating, but as far as I can tell, unstoppable. Too many governments and powerful organizations are now completely committed to this path and cannot substantially change what they have set in motion even if they wanted to.

Discussion of the ultimate effects of tighter international economic ties is interesting, but it is a lot like debating the skill of this aircraft's pilot. It is an interesting diversion, but once we decide to board the plane, we can neither exit nor influence its destination.