The Hindu : Business : Fears on outsourcing exaggerated: WTO

Online edition of India's National Newspaper
Friday, Jul 01, 2005

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Fears on outsourcing exaggerated: WTO

R. Gopalakrishnan

Services import on same rationale as merchandise

CHENNAI: Outsourcing of computer and information services (CIS) to countries like India, Ireland and the Philippines by developed countries is neither a harbinger of high levels of employment in the host countries nor of massive loss of jobs in the latter compared to the overall employment market in the countries concerned, according to the World Trade Organisation (WTO).

"Most of the expectations and fears related to the size and dynamics of offshoring of IT services are exaggerated. At present, the impact of offshoring services jobs is far stronger in the popular perception than on actual production, employment and trade patterns,'' says an `essay' on offshoring of services released as part of the WTO's annual World Trade Report 2005.

Emphasising that the rationale behind the outsourcing of services is the same as in the case of merchandise or physical goods, namely, comparative advantage, the essay has brought out the incompatibility and ambiguity in statistics on business process outsourcing (BPO) that are cited by governments, global consultants and industry associations like India's Nasscom (National Association of Software and Service Companies).

The WTO says that in the case of India, the most dynamic component of services offshoring "is not within the high-skill-intensive IT (information technology) sector but in the generally low-skilled business services sector.'' Even the "broadly defined IT sector'' (namely, combining both IT services and low-end IT-enabled services like call centers and medical transcription), accounts for less than 0.25 per cent of the employed Indian labour force. However, "there are pockets of relatively high-skilled services being offshored to state-of-the-art firms, for example, in India or South Africa,'' it says.

Few high-skilled jobs

With only a small section of outsourced jobs being high-skilled, there would be a negligible negative impact on high-skilled jobs in the developed countries. Also, rising wages in developing countries and the need for personal contact with the customer in the case of several services would act as a check on outsourcing. Any sharp increase in import of services by developed countries would lead to a weakening of their currencies and thus act as a counter to unbridled growth of outsourcing. Risks arising from poor legal framework and poor infrastructure tend to drive offshored jobs to middle income countries rather than to least developed countries.

The WTO says that while the U.S. and the U.K. are the leading outsourcing countries, the success of India and Ireland in attracting offshoring business has been partly attributed to the English-speaking workforce. "Outsourcing from the other leading industrial countries is much less extensive'' and largely restricted to countries closer home geographically and/or culturally. A large share of German outsourcing contract goes to Central Europe, while the bulk of Spain's outsourcing contracts go to Latin America.

Even while highlighting the supportive role played by the Indian government through the creation of the STPI (Software Technology Parks of India Ltd.) to put up quality infrastructure, tax benefits and FDI (foreign direct investment)-friendly regulations, the WTO says this alone could not be credited for the success of India's s IT and IT-enabled services industries and that due role was played by "companies with managerial skills to take advantage of low-cost labour and new market opportunities.''

It adds that offshoring could be a part of multilateral market access commitments under the ongoing GATS (General Agreement on Trade in Services) negotiations.

This, however, would be far easier if definitional improvements regarding Mode 1 (cross- border supply of services) and Mode 2 (consumption of services abroad) are effected.

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