The Impact of Offshore Outsourcing on Low Income Countries

CS/Econ/IR/Politics 125

The Impact of

Offshore Outsourcingon

Low Income Countries

Satya Gabriel and Eva Paus

February 27, 2006


Potential Benefits of FDIfor Low Income Countries

Increased investment

Increased employment and higher wages

Expansion of host country’s technological capabilities through technology transfer and spillovers.


Does Offshore Outsourcing Provide New Potential Benefits ?

(1) Growing fragmentation of global commodity chains:=> smaller low income economies might get a ‘piece of the pie.’

(2) Growing globalization of production, incl. by small and medium-sized countries:=> more low income economies might attract FDI.

(3) Increasing offshoring of more skilled production processes and services, incl. R&D:=> greater potential for expansion of technological capabilities


The Uneven Distribution of Offshoring Benefits among and in Low Income Economies

FDI Inflows to Developing & Transition Economies (millions of U.S. dollars)

0

50,000

100,000

150,000

200,000

250,000

300,000

1990 2000

Developing & transition economies Africa South America Central America &Caribbean Asia Central & Eastern Europe


Why China is Kicking Butt

Or How a Strong State and a Modernist Marxist Vision Combined to Produce Extraordinary Growth


Relevant Facts About China

Approximately 1,300 million population. GDP per capita (purchasing power parity): $6,200 GDP growth rate in past year was about 9%. Last month China’s GDP exceeded that of Britain and France, moving the People’s

Republic into fourth place in the GDP race. Pearl River Delta region has a larger economy than the Phillipines, Malaysia, and

Singapore. As of December, China moved ahead of the United States to become the world’s top

exporter of information technology products. China now produces more than 40% of all personal computers manufactured on the

planet. China’s per capita income in purchasing power parity is about $6,200. Chinese growth is being generated mostly by government controlled firms, particularly

rural-based and community government controlled township-village enterprises. In 2001, almost 600 million Chinese citizens were making do on less than $2 per day,

below the official poverty line, and 150 million were living on less than $1 per day. China has the fastest growing NGO sector in the world.


Transition from State Feudalism to State Capitalism

$183

$1,268

1979 2004

TimeG

DP

pe

r c

ap

ita

$177

$1,650

1979 2004

Time

GD

Pb

illio

ns

of

US

$ (i

n 2

002

pri

ces)



Relevant Facts About India

1,080 million population. GDP per capita (PPP): $3,400 Economic growth has been nearly 7% per annum for the past

decade. India is expected to have a larger economy than Italy by 2015. Services are the leading sector in generating economic growth. Bangalore has become a world center for computer programming,

other I.T. services, and English-language customer service centers.

300 million Indians live on less than $1 per day (twice the number of Chinese who live at this sub-poverty level).

India has 40% of the world’s poor. India has 20% of the world’s out of school children. India has the world’s second largest HIV positive population (~6

million people).


China and India: Some Structural Aspects in Common

Strong States: Chinese and Indian governments directly controlled large parts of their respective economies and infrastructures.

State sector employment provided significant work and administrative experience.

Nuclear Powers with well disciplined and nationalistic military bureaucracies: no history of military coups

Long History of Import Substitution Industrialization Large State-owned/controlled Enterprise Sectors Most Populous Nations on the Planet Strong History of Anti-Imperialism Various Interpretations of Marxism Has Been Influential on Intellectual

Development of Leadership: Indeed, the Indian leadership’s choice of name for the early reform process, New Economic Policy (NEP), was borrowed from early reforms in the USSR under Lenin that were later terminated by Stalin.

Public Education Has Been a Key Public Policy: Both countries have a large number of highly trained specialists, scientists, engineers, etc.

China and India are major trading partners. India imports more from China than from the United States, but exports more to the United States. China is also a major exporter to the United States.



Low Income economies need the right location-specific assets to attract TNCs

Political and macro-economic stability

Peaceful labor relations

Infrastructure, esp. IT-related

Low labor costs for unskilled labor for low-level manufacturing FDI

Low labor costs for skilled labor for higher-level manufacturing and services


Attracting FDI is not enough for development…..

Technological spillovers do not happen automatically !!

Need for pro-active government policies to promote indigenous capabilities.

Washington Consensus Policies often reduced the very state capacity that is needed to foster indigenous capabilities.


FDI-Development Links are Becoming more difficult

More intense competition for FDI (at all level of technology)

Higher barriers for integration into TNCs’ value chains

Less time to realize technological spillovers

Reduced space for development policies

Tax competition among countries + growing global capital mobility reduce governments’ ability to increase revenues at a time when it is particularly needed.


Conclusion: Growing Inequality

Within countries, premium on high-skilled labor

Between capital and labor

Among economies which can take advantage of offshore outsourcing and those that can not.

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The Impact of Offshore Outsourcing on Low Income Countries