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Outsourcing Mary Amiti and Shang-Jin Wei

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Outsourcing Mary Amiti and Shang-Jin Wei Reprinted from F&D December 2004 Demystifying Outsourcing Mary Amiti and Shang-Jin Wei HE OUTSOURCING of services tional outsourcing of material inputs is still The numbers has received a huge amount of at- far greater than that of services, the current tention in the media and political wave of anxiety is largely about services. do not support circles in recent months, largely In the past, the service sector was largely the hype over Tbecause media reports seem to equate out- considered impervious to international com- sourcing with job losses. In just five months, petition. For example, accountants could job losses between January and May 2004, there were benefit from the cheaper imported manufac- 2,634 reports in U.S. newspapers on service tured goods that open trade allowed without outsourcing, mostly focusing on the fear fear that someone abroad would take their of job losses. But outsourcing, let alone its high-paying jobs. For this reason, service sec- consequences, does not appear to be widely tor professionals were likely to be staunch understood. The dictionary defines it as supporters of open trade. With improve- “the procuring of services or products . ments in communication technology, such as from an outside supplier or manufacturer in the Internet, services can cross political bor- order to cut costs.” However, it is not clear ders. Jobs in fields ranging from architecture what is meant by “outside.” Some people in- to radiology consequently seem much more terpret it to mean outside the firm, and oth- at risk. Although firms were able to relocate ers outside the country. Media and political abroad in the past, they had to give some- attention seems firmly focused on interna- thing up—their closeness to important mar- tional outsourcing, even though domestic kets, for example. With the new technologies, outsourcing is also common. Firms based in they can retain these links while also obtain- industrial countries that outsource services ing access to cheap but well-trained labor. have been accused of “exporting jobs” to As a result, there does appear to be a back- developing countries, with call centers and slide in support for free trade policies, partic- computing services in India the most fre- ularly among white-collar workers. A study quently reported examples. conducted by the University of Maryland Many people would argue that outsourcing found that, among individuals in the United has been a normal part of international trade States with incomes over $100,000, those for decades—and they would be right. The actively supporting free trade slid from 57 growing outsourcing of services in industrial percent in 1999 to 28 percent in January countries is simply a reflection of the ben- 2004. Furthermore, there has been a push efits from the greater division of labor and in some industrial countries—for example, trade that have been described for manufac- the United States and Australia—to intro- tured goods since the time of Adam Smith duce legislation that would limit the out- and David Ricardo. What is tradable depends sourcing activities of firms with government on technology, and advances in technology contracts. Given that little empirical work (especially in information processing, com- has been done to distinguish facts about munication, and transportation) are increas- outsourcing from exaggerated claims, we ingly making it possible to trade services that thought it would be useful to examine the previously were too costly to trade. Although, trends in outsourcing and whether it really for a typical industrial economy, the interna- means job losses. On the whole, welfare 87 Financial Globalization Financial Globalization 87 ©International Monetary Fund. Not for Redistribution Employees at a call center in the southern Indian city of Bangalore. should improve, but in the process some groups or individ- business services—like trade in goods—is low compared uals could be made worse off. The finer the disaggregation with that of the rest of the world. In smaller countries, trade of data in the analysis, the more likely we are to observe generally accounts for a larger share of GDP. Among the “winners” and “losers.” Drawing on the experiences of the top 10 outsourcers of business services are small developing United States and the United Kingdom, we can say that, in countries, such as Angola, Republic of Congo, Mozambique, the aggregate, outsourcing does not appear to be leading to and Vanuatu (see table). The pattern is similar for imports net job losses—that is, jobs lost in one industry often are of computing and information services. Among the top offset by jobs created in other growing industries. outsourcing countries in that category are Guyana and Namibia but also small developed countries, like Belgium Trade in services and Sweden. This should not be surprising since industrial How extensive is service outsourcing? All the media hype countries have the capacity to produce domestically a large would lead one to believe that service outsourcing is explod- proportion of the services they need, whereas many of the ing. But the data reveal that, although service outsourcing developing countries do not have this capacity. has been steadily increasing globally, it is still at very low lev- els in industrial countries like the United States. In its balance of payments statistics, the IMF reports Chart 1 imports of services, which include the categories that are Who’s outsourcing? most closely related to outsourcing—other business services Known as a major recipient of outsourcing, India is also a and computing and information services. Other business large outsourcer of business services. services comprise accounting, management consulting, call centers, and other back-office operations; computing and (imports of business services as a percent of GDP) 2.5 information comprise hardware consultancy, software imple- United States mentation, and data processing. According to these statistics, United Kingdom 2.0 India U.S. business service imports as a share of GDP have roughly People’s Republic of China doubled in each of the past several decades, from 0.1 percent 1.5 in 1983 to 0.2 percent in 1993 and 0.4 percent in 2003 (see Chart 1). In the United Kingdom, the share is about 1 per- 1.0 cent of GDP. India, reported to be the recipient of significant outsourcing, itself outsources a large amount of services. Its 0.5 business services grew from 0.5 percent of GDP in 1983 to 0 almost 2.5 percent of GDP in 2003. 1983 85 87 89 91 93 95 97 99 2001 03 In value terms, the United States is the largest importer Source: IMF, Balance of Payments Statistics Yearbook, 2003. of business services. But, as a proportion of GDP, trade in 88 Financial Globalization ©International Monetary Fund. Not for Redistribution Trade is a two-way street Like trade in goods, trade in services is a two-way street. In addition to being a large importer of services, the United “Outsourcing does not appear to States is also a large exporter of services. The United States has a net surplus in all services, in contrast to its goods trade, be leading to net job losses—that in which it has a net deficit. In fact, the United Kingdom and the United States have the largest net surpluses in business is, jobs lost in one industry often services (see Chart 2) and hence would suffer the most in terms of the forgone dollar value of such trade if other coun- are offset by jobs created in tries cut service outsourcing. But that is not true of all industrial countries. The data other growing industries.” reveal no clear pattern of developing countries being net ser- vice exporters and industrial countries net service importers or vice versa. For example, in addition to the United Kingdom and the United States, India also has a net surplus in business private services—which has been the focus of most of the services. Indonesia has a large net deficit in business services, media attention. They increased from 0.45 percent in 1992 to but so do Germany and Ireland. nearly 2 percent of total imports of business services in 2002. Who’s trading with whom? Contrary to popular percep- The largest supplier of private services to the United States is, tion, most U.S. trade in services actually takes place with in fact, Canada. other industrial countries rather than with developing coun- Similarly, the bulk of U.S. exports are destined for indus- tries. Using statistics from the U.S. Bureau of Economic trial countries. Only 39 percent of total U.S. exports of private Analysis, we found that the share of imports of “private ser- services go to developing countries. This fraction remained vices” from developing countries to the United States is low. relatively constant between 1992 and 2002. (The category “private services” comprises education, finan- cial services, insurance, telecommunications, business, pro- U.S. and U.K. realities fessional and technical services, and other services.) In 1992, Are more jobs disappearing than are being created as a result only 28 percent of U.S. imports of private services came from of outsourcing? To gain some insights, we studied the effects developing countries. Although this share increased between of foreign outsourcing of services on employment and labor 1992 and 2002, it still remains quite low at 32 percent; productivity in U.S. industries between 1992 and 2001. The 68 percent of these service imports originate in other indus- sample included all manufacturing services and five service trial countries. Interestingly, only a very small proportion industries for a total of 100. comes from India. In 1992, imports of private services from Our results show that increases in service outsourcing in India were only of 1 percent of total U.S.
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