Enlightened Economics

Economics for an Enlightened Age

Posts Tagged ‘outsourcing’

• India, Ancient Economic Behemoth, to Overtake China

Posted by Ron Robins on April 12, 2011

By Ron Robins. First published March 20, 2011, in his weekly economics and finance column at alrroya.com

When Europe was going through its murderous medieval period, India was an economic behemoth controlling from one-fourth to one-third of the world’s wealth. After the death of the Indian Mughal Emperor Aurangzeb in 1707, India descended into fractious internal wars. This gave the British with their East India Company the opportunity to seize and control vast Indian assets, eventually assuming supremacy over all India.

In 1700, India’s economic output—its gross domestic product (GDP)—was almost 9 times that of Britain’s. By 1947, just before Indian independence from Britain, the tables had turned dramatically with British GDP about 1.2 times that of India, according to data by Angus Maddison in his study, The World Economy.

Now, the International Monetary Fund (IMF) believes the Indian economy has grown to be the world’s fourth largest on a purchasing power parity (PPP) basis, that is, equalising exchange rates given the purchase of a set basket of goods. A Citi study reviewed in The Times of India on February 23 said that based on PPP, India will have the largest economy in the world by 2050. And the World Bank suggests that India’s economic growth rate could surpass that of China this year. The Indian government is projecting 2011 GDP growth of near 9 per cent.

Furthermore, the US Census Bureau projects India’s population becoming the world’s largest and surpassing China in 2025. And by 2050, the Bureau sees India’s population at 1.66 billion compared to China’s 1.3 billion.

Population demographics are crucial in another sense. In Ed Dolan’s, India’s Secret Weapon in its Economic Race With China: Demographics, November 11, 2010, he writes that, “rich countries with slow population growth have high dependency ratios because they have many retirees. Low-income countries with fast population growth have high dependency ratios because they have lots of children. In between these two states, countries go through a Goldilocks period when the working age population has neither too many children nor too many parents to support… India is just entering its Goldilocks period while China, like the United States, is already leaving.”

While considering demographics, Mckinsey & Co expects India’s middle class population to grow from 50 million in 2007 to 583 million by 2025, while over 291 million will move away from desperate poverty to a more sustainable livelihood. Mckinsey also sees India’s consumer market becoming the world’s fifth largest by 2025, up from twelfth place in 2007.

Such consumption growth implies enormous economic investment. And in fact, in the next three years, a massive $500 billion is being spent on Indian infrastructure says Chris Devonshire-Ellis in his post, China Demographics Dictate India as Global Manufacturing Hub, last September 27. Citing data from Asian Comparator, he says that Indian wage rates and associated costs are highly favourable when compared to China and other Asian nations.

However, for now it is India’s service sector that is its real star. Relative to China, and given its state of development, India’s service sector is much larger too and is thus offering a different growth path to that of China. In fact, Ejaz Ghani, Economic Advisor at the World Bank, says in The Service Revolution, March 23, 2010, that the growth in services has India and other South Asian countries exhibiting the growth patterns of middle to high income countries.

Mr Ghani also says, “productivity growth in India’s service sector matches productivity growth in China’s manufacturing sector… that the effect of services growth on aggregate economic growth appears to be as strong, if not stronger, than the effect of manufacturing growth on overall growth… India’s growth experience suggests that a global service revolution—rapid growth and poverty reduction led by services—is now possible.” Incidentally, services represent about 70 per cent of global GDP, whereas manufacturing is much lower at 17 per cent. Thus services represent potentially, a much higher order of growth for India than does manufacturing.

And services continue to grow rapidly. In a February 21 article in India’s Express Computer, it says that IT-BPO (information technology-business process outsourcing) is estimated to be up 19 per cent this year with revenues of $76 billion. Exports are expected to be $59 billion of that. For fiscal year 2012 the publication says that software and services growth is expected to increase 16 to 18 per cent.

India may have yet another advantage over China: it might be more attractive to foreign executives says Mr Devonshire-Ellis. He quizzed a number of western executives who had worked in China and India and asked them where they prefer to work. He said that, “the surprising conclusion was that India was preferable. Several executives expressed a desire never to return to China.”

Also, the world’s business language, English, is used by 350 million Indians, while about 100 million speak and write the language fluently. Moreover, unlike China, much of India’s legal, political, financial and commercial framework is more familiar to developed countries’ businesses that would like to do business with or invest in India.

India has traditionally been a land of great entrepreneurial activity and wealth. The past three centuries of poverty have been an anomaly. Now its economic growth could soon surpass that of China and its economy become the biggest in the world by 2050. Its population is projected to be the largest of any country by 2025. As it grows to have the world’s biggest pool of working age individuals, its forthcoming massive investments in infrastructure, its comparative wage cost advantages, widespread use of English and globally compatible financial and legal structures, India could soon become a major world centre for both manufacturing and services.

India is rising again to become a global economic behemoth.

Copyright alrroya.com

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• Huge Migration of Service Jobs to Developing World Looming

Posted by Ron Robins on December 9, 2010

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.

Copyright alrroya.com

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