NCPA - National Center for Policy Analysis

INDIAN OUTSOURCING PROBLEM SOLVED

May 19, 2004

The great outsourcing controversy is now over. In elections last week, the voters of India fixed the problem by turning their country away from liberalism and back toward statism. Should India's new leaders follow through on their campaign promises, there will be a lot fewer businesses there doing outsourcing or anything else, says Bruce Bartlett.

Basic trade theory says that nations will tend to export whatever they have a lot of. In India's case, it obviously has a lot of labor:

  • Its legacy as a former British colony means that many of its workers are well educated and speak English fluently.
  • This naturally led to the establishment of many businesses providing labor-intensive high tech services, such as keying in vast amounts of data.
  • Also, India benefited from having many successful nationals living in Europe and America, who knew how to exploit its advantages once given the opportunity.

Growth of the outsourcing industry led to growth of a true middle class in India. Although wages are still much lower there than in the United States, the gap is closing fast:

  • IT workers in India have seen their wages rise 15 percent per year, which is quickly eroding their cost advantage.
  • As a result, outsourcing companies are working harder to compete on quality and are even establishing subsidiaries in foreign countries as Indian wages become less competitive.

The Hindu nationalist party, which had been in power since 1998, strongly supported India's high-tech industry. But last week, it was thrown out of office by the left-wing Congress Party. Thus India's voters may unwittingly have solved the outsourcing problem here in a way that America's protectionists never could, says Bartlett.

Source: Bruce Bartlett, "Indian Outsourcing Problem Solved," National Center for Policy Analysis, May 19, 2003.

 

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