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Outsourcing: the acid test for India's liberalisers

By Phoebe Griffith. Source: Global Thinking, Spring 2004

The world's two largest democracies – India and the US – go to the polls this year. But when it comes to political rhetoric about free trade and jobs, the contrasts are stark. While both Republicans and Democrats fret about the deracination of white collar America, Indian Prime Minister Atal Bihari Vajpayee launched an election campaign called "India is Shining". Based on India's stunning 8% economic growth in the last quarter of 2004, the campaign is characterised by its feel-good factor. Outsourcing plays a role in both elections.

In America "outsourcing" has turned into one of the central political issues of the presidential campaign. Recent months have seen the sharpest ever drop in support for free trade; abuse heaped on Bush's 'pro-outsourcing' economic advisor and the introduction of a ban on the outsourcing of government work to non-Americans. Even the US's membership to NAFTA and support for the WTO are currently being questioned partly as a result. Meanwhile, outsourcing shines as the most treasured jewel in India's new crown. Some analysts are even going as far as assigning outsourcing the power of not only "doing for India what manufacturing did for China" but of seeing it as a force in defeating conservatism, decreasing ethnic tensions and even transforming gender relations in Indian households.

Outsourcing is not a development magic bullet and the jobs generated represent just a drop in the ocean for a job starved economy like India. Moreover, Americans are right to point out that the outsourcing frenzy may have created a globalised mirage which hides the fact that India is a very reluctant liberaliser. Internet use may be growing at 136% per year but with average agricultural tariffs standing at 112% (compared to an average of 12% in the US) India is still one of the most protectionist countries in the world.

Even so, outsourcing has undoubtedly had an important effect on Indian national morale and its global outlook. The fact that Indian firms such as Tata, Infosys and Wipro are today global entities which are actively courted by giants like IBM, American Express and Citigroup is a source of national pride and has played an important role in driving investment-led growth. Furthermore, even though the lion's share of jobs will be going to India, its outsourcing success story is becoming an icon for much of the developing world. Service providers are also emerging in countries as varied as Bangladesh, Brazil, China, the Philippines, Romania, Russia, Singapore, Thailand, Venezuela and Viet Nam. And other countries are joining the queue: the South African government recently issued reports urging businesses not to miss the boat on offshoring; even Rwanda and Uganda have produced strategies to promote local SMEs in low-skill sectors such as transcription and data input.

The momentum that has gathered behind outsourcing therefore raises the stakes in terms of our economic relations with the developing world. Taking this lifeline away, particularly at a time when the developed nations are bitter about our failure to live up to promises on agriculture at Cancun, could have dire consequences adding to the litany of accusations which are currently driving globalisation-sceptic agendas in countries like India where economic nationalism is never far from the surface. In the words of Sunil Mehta, vice president of the leading Indian IT body NASSCOM: "Developed economies should be wary of the way in which their actions get interpreted in India. Globalisation is still a new concept in the popular imagination and antipathy for foreign companies and investors could easily be whipped up by politicians with populist agendas."

Importantly, the offshoring row could fuel further impatience with multilateral trade liberalisation and the WTO among free traders who are becoming frustrated with the lack of progress on the negotiating table. Trade experts like Jagdish Bhawati have already warned of the danger that developing countries today would rather avoid becoming embroiled in the costly and tortuous processes of the WTO. So-called 'can do' nations naturally prefer the easy option of bilateral trade agreements, even if in so doing they deny themselves the ability to hold their partners to account. This impatience is likely to become even more intense when it comes to trade in services. The problems in resolving agricultural disputes is dwarfed by the challenges facing the General Agreement in Trade in Services (commonly referred to as GATS), which is likely to become more acute as the number of 'tradable' services increases due to advances in technology and business models.

Offshoring has opened a new front in debates about the world trade. However, the defence cannot be left to economists alone. Leaders in the developed nations, particularly the US, need to look at the international implications of their paranoia about jobs disappearing "off-shore". Ignoring the advice of economic advisors and announcing, for example, blanket bans on the outsourcing of government contracts, while raising cheers at home, will further sour our relations with much of the rest of the world and the health of the multilateral system.