By Ron Robins. First published September 1, 2010, in his weekly economics and finance column at alrroya.com

A wave of service jobs leaving US and European shores for the developing world might hit soon. The big impetus would come from a prolonged recession. And some leading economists including Nobel economics laureate Paul Krugman, believe a new long recession could start in the months ahead. How will the US and Europe, particularly, respond to the possible exodus of millions of service jobs while their economies go south?

Companies, especially in the US, have often increased profits in the past two years by laying off many workers at home. They have cut labour to the bone. Another prolonged recession would again create inexorable profit margin pressures. Companies will ask: who else can we cut—or move?

One answer will be to move formerly untouchable key administrative and service functions to lower cost regions of the world. These functions have usually been considered unmovable as management felt some responsibility to keep them in their home town or country. However, in light of further difficult competitive conditions in a slumping economic environment, this reticence may be shattered.

The developed world’s large multinational companies already employ executives and managers from all over the globe. They are no longer one nation companies. This now allows them to think increasingly globally and employ labour wherever in the world they see fit.

Furthermore, they are ever more motivated to move activities and functions to areas of the world where their revenues are rapidly growing. Obviously, that is not to America, Western Europe or Japan.

Interestingly, there has been little media coverage in recent years of the ‘offshoring’ of corporate functions and jobs. And that is probably how multinational companies prefer it too. But in most of their organizations offshoring continues apace.

According to The Economic Times of India on July 27, “Transnational technology majors are moving more jobs to offshore locations… The offshore [employment] for firms like IBM, Accenture & EDS, [in] front-end delivery staff in offshore centres as a percentage of workforce, has risen from 25-30 per cent in 2007 to 35-40 per cent in 2009, Everest Research Institute says in a report on global sourcing trends… the average ratio can go up to the 38-42 per cent levels during 2010, Eric Simonson, managing principal of Everest Research, told ET… “

Furthermore, “the average number of countries where these firms have delivery centres has gone up from 13 in 2007 to 15 in 2009.”

Making offshoring of service functions increasingly easy and likely is the development of high speed broadband internet and videoconferencing. India, as the world’s biggest supplier of offshore services has certainly found this to be true.

For developing countries, the jobs gained by companies offshoring their service functions to them can offer a shortcut to modernity and provide higher growth than from manufacturing. This is a reversal of traditional economic thinking where the superiority of manufacturing had become perceived wisdom.

According to Ejaz Ghani, an Economic Advisor at the World Bank in an article, “the service revolution in India,” February 25, said, “India’s experience shows that growth has in fact been led by services, that labour productivity levels in services are above those in industry, and that productivity growth in service sectors in India matches labour productivity growth in manufacturing sectors in China. Furthermore, services-led growth has been effective in reducing poverty. India’s growth experience suggests that a ‘services revolution’ – rapid growth and poverty reduction led by services – is now possible.”

Mr Ghani continues, quoting Alan Blinder, “service-led growth is sustainable because the globalisation of services is just the tip of the iceberg.” Also, since around 70 per cent of global gross domestic product (GDP) is related to services compared to 17 per cent for manufacturing, the opportunity presented to developing countries by the massive offshoring of service functions might easily surpass that of manufacturing.

Of course not all service functions can be offshored. Garbage still needs to be picked up locally and doctors still need to examine patients directly—at least for now.

Service jobs offshored to India and other developing countries have been found to pay better than in other industries too. Mr. Ghani states that, “the wages of Indian BPO [business process outsourcing] workers are nearly double the average wages in other sectors of the Indian economy, according to the study titled ‘Offshoring and Working Conditions in Remote Work.’ In the Philippines, BPO employees earn 53 per cent more than workers of the same age in other industries.”

Such data offers great encouragement and inducement to Africa and other under-developed regions to participate in this new world of services’ offshoring. They may also benefit from the situation in India. There, skilled service sector labour and individuals with executive level competencies are sometimes in short supply and drive up wages significantly. Other developing regions of the world can learn from, emulate and reap the rewards of their example. For Africa and other under-developed regions it is a question of how fast and inexpensively they can gear-up their educational systems, internet services, etc., to handle a portion of that 70 per cent of global GDP related to services.

Recession or not, the offshoring of service functions and jobs from the US, Europe, and other developed countries to the developing world is going to grow mightily. But its numbers and the controversy it causes will be magnified during a persistent recession. It will test everyone’s belief in freer trade.

If the developed world was upset about the loss of manufacturing jobs, the possible much higher service jobs’ losses might cause developed countries to institute draconian new labour restrictions. Hopefully, these will be avoided. After all, everyone realizes that the offshoring of factory work to China brought down prices of numerous products we enjoy and depend on while simultaneously taking hundreds of millions of people out of poverty. The offshoring of services might do the same—and even more.

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