The Impact of Offshore Outsourcing on Low Income Countries

1. The Impact of Offshore Outsourcingon Low Income Countries Satya Gabriel and Eva Paus February 27, 2006 CS/Econ/IR/Politics 125

2. Potential Benefits of FDI for Low Income Countries • Increased investment • Increased employment and higher wages • Expansion of host country’s technological capabilities through technology transfer and spillovers. CS/Econ/IR/Politics 125

3. 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 CS/Econ/IR/Politics 125

4. The Uneven Distribution of Offshoring Benefits among and in Low Income Economies CS/Econ/IR/Politics 125

5. Why China is Kicking Butt Or How a Strong State and a Modernist Marxist Vision Combined to Produce Extraordinary Growth CS/Econ/IR/Politics 125

6. 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. CS/Econ/IR/Politics 125

7. Transition from State Feudalism to State Capitalism CS/Econ/IR/Politics 125

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9. 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). CS/Econ/IR/Politics 125

10. 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. CS/Econ/IR/Politics 125

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12. 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 CS/Econ/IR/Politics 125

13. 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. CS/Econ/IR/Politics 125

14. 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. CS/Econ/IR/Politics 125

15. 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. CS/Econ/IR/Politics 125