Until recently, outsourcing by global financial firms to India conjured up an image of commoditised low end services outsourcing: call centres, peripheral systems programming, and testing and maintenance. However, in recent years, there is a new rise of more sophisticated work. This reflects supply and demand factors. Global financial firms are keen to cut costs. Capabilities of operations in India — both captives and independant firms — have grown for many reasons:
- The individuals involved in this field in India have gained experience (”learning-by-doing”) and credibility.
- New management practices and improved telecommunications technologies have improved the extent to which teams and projects are handled in a more non-local way.
- The Indian diaspora has been rising to senior management levels in global firms, and is better able to envision what can be done in India and to obtain execution.
A European investment bank was among the first to experiment by bringing in teams in India into critical projects. This was a landmark change as a lot of inertia about confidentiality was overcome. Other banks followed suit. New management practices, higher pay, greater meritocracy came in, which helped Indian teams make the transition from low-end work where the HR and management techniques used are quite different. Demand for high skill labour has helped induce greater supply, with a lag, as individuals were more inclined to tool up with advanced degrees and high-end knowledge.
Alongside the developments in finance, parallel developments were taking place in the field of offshoring which have driven up skill levels, and helped create a high skill ecosystem in India. Top tier consulting firms launched `centres of excellence’ in India, hiring grads from IITs, IIMs, IISc, statisticians, economists. While education in India has huge problems, the raw talent available in India was of good quality, particularly when we focus on individuals who were able to read on their own and reinvent themselves (”never let your school come in the way of your education”). This process has been helped by globally recognised certification exams such as the FRM and the PRM.
IT firms have have been evolving from core development and maintenance to an entire gamut of IT strategy and consulting for financial firms. Many smaller KPO firms with specialised domain knowledge in finance have emerged, who cater to smaller hedge funds, trading houses, not just outsourcing increasingly complex pieces of work, but also advising them on the entire outsourcing strategy. All this has helped create a pool of high skill labour which is moving between multiple employers in India and able to build knowledge through diverse kinds of experience.
The most impressive development of recent years has been the growth of offshore trading units of global brokerages and trading houses, where people sitting in India take independent trading decisions in international financial markets based on their own skills and judgement. In some ways, this is the highest level of transfer of decision functions to India, albeit at relatively low monetary stakes.
In this fashion, within a period of 15 years, India had graduated from doing repetitive low value tasks to Knowledge Process Outsourcing (KPO) for the global financial system. While these activities are primarily in Bombay, they are also taking place in Gurgaon and Bangalore. The number of high-end finance workers in Bombay has never been greater than it is today. It is estimated that there are now 50 individuals working in Bombay doing work for global financial firms who have Ph.D. degrees in quantitative fields. This is starting to become a big enough number for them to talk with each other and get network effects going. From an employer’s point of view, it is now possible to shop in the labour market in Bombay and recruit a 10-man team all with Ph.D. degrees so as to get a new group going. This is a sea change when compared with conditions just a few years ago.
To appreciate this change a little further, it was interesting to take a look at some of the capabilities of finance focussed KPOs, divided mainly into 4 broad categories, catering to Sales and Trading, Middle office and Back office:
- Quantitative Research and Analytics Support:
- Equity and FICC Analytics: Model Validation, Price Verification jointly with clients: these are pretty quant heavy functions which require in-depth understanding of products.
- Technical and Fundamental Analytics.
- Index and Portfolio Analytics: Index maintenance, design, construction, operations and after sales, Portfolio tracking, decomposition and correlation analysis, performance measurement and attribution support.
- Derivatives and Risk Analytics: Measurement of derivatives Greeks, Value at Risk, Tolerance checks.
- Equity and FICC Research: Company research, Credit Research, Economics research etc. to augment senior analysts in money centres.
- Trade idea generation and back testing: Sales pitches for clients and internal trading desks.
- Country, Sector, Company profiling, trends, news and projections: Pitch book generation and support.
- 24×7 weather patterns tracking for global energy trading outfits
- Overnight trade and market tracking to feed in summary reports, Market Dashboards, news letters, morning meetings and agendas
- Market Research: Pre-entry market research and positioning survey for bank’s clients.
- Data Analysis and Modelling:
- Data sourcing from multiple heterogeneous sources, refining and maintenance: Static data, Live and Historical market data maintenance. Data research and statistical studies feeding into trading strategies.
- Data Mining solutions.
- Data modelling, smoothing: Providing data solutions for Algo trading desks.
- Operations and Control
- Derivatives trade processing and documentation: Trade review of structured trades and complex documentation. End to end life cycle management of trades e.g., matching, broker confirmations and fee calculations.
- P&L and balance sheet control: Generation and reporting of P&L for vanilla products. Some banks have started moving exotics P&L functions to India. This is quite a significant milestone as such activities require high degree of confidentiality and direct user (e.g., traders) interaction who have zero tolerance for mistakes.
- Risk Stress testing, VaR back testing, Risk reporting to senior management.
- Auditing: external auditing of valuation marks of trading desks and control processes around it.
It should be noted here that since the funding crisis of 2008, these jobs have become quite complex as most banks have built more sophistication into their analytics. For example, most yield curves would now have multiple basis spreads (like tenor basis, xccy basis) and not just rates desks but even credit and equities desk have been using such advanced discounting curves.)
The biggest push probably has been in quantitative middle-office functions with an ever increasing emphasis on valuations and counterparty risk management. Given the way markets have adopted collateral based pricing of derivatives, and the regulatory push on managing counterparty default risk, some captives have started building quantitative teams who will develop and manage CVA, DVA, etc. processes for all trading desks.
The new regulatory climate (Dodd Frank, Basel III etc) has lead to a substantial increase in costs due to additional checks and reporting requirements e.g., centrally cleared OTC trades, real time trade reporting to regulators, exhaustive risk reporting – all of which can are leading to fresh volumes of activity in offshoring.
All high quality banks have a team of techno-quants who work closely with the sales/trading desk, risk managers etc, on their day to day needs as well as on strategic projects. It is now feasible to move such high impact roles to India. It would be possible to have “extended front office teams” where dedicated staff support traders in money centres, doing real time risk analysis and client profiling, while the trade is being dealt overseas.
For a back-of-envelope calculation, if we think of internal billing rates of $100,000 per person per year, and if there are 10,000 persons at this average price, then this is services export of $1 billion a year, which is a sizeable amount. It appears that the early beach-head is in place, and this area will grow dramatically now.
This blog post reflects my experience, which is in investment banking and money management. A similar escalation of complexity of work in India is taking place in retail banking, insurance, etc., reflecting similar compulsions and opportunities.
There is a certain tension between the push towards offshoring to India, and the activities that regulators consider `key in-house activities’ that cannot be outsourced.
There are serious constraints with education in India. The top institutions are producing some quantitative skills (e.g. fluency with matrix algebra, fluency in numerical computation). On one hand, there are weaknesses of broad intellectualisation that shapes cognition, creativity and malleability. On the other hand, there is essentially nothing in place by way of a finance education in India. A small amount of high-end finance research is taking place (example) but for the rest, there isn’t much capacity in the existing academic campuses. New approaches to learning and training need to be devised through which high quality individuals, with strong quantitative skills, can be converted into full fledged participation in high-end global finance work. A mix of public and private initiatives are required in order to jump to the next level.
There are strong synergies between the sophistication of the Indian financial system and the work that is done for global financial firms. There is a two-way feedback loop here: Better domestic capabilities will help do sophisticated offshore work, and the brainpower built for offshore work will strengthen domestic capabilities. The best example of this is found in the equity derivatives market, where India has a world-class market. The individuals with a domestic background here are ready for offshore jobs in fields like algorithmic trading, and individuals with capabilities built in offshore work are useful in the domestic setting. This is where India can set itself apart from Malaysia and the Philippines. To the extent that Indian financial reform makes progress, this will fuel the rise of high-end outsourcing to India.
I am grateful to Anand Pai, Paul Alapat and Gangadhar Darbha for useful discussions.
I have long been aware of Amazon’s `Mechanical Turk’, a mechanism through which tasks are farmed out to a large bank of humans. Each human worker has full flexibility on how many hours are worked and when. From the customer’s point of view, Amazon supplies an API and access to a very large pool of humans who can perform small tasks. The median wage is $1.4 or Rs.80 per hour. In effect, Amazon has created a large market through which workers can find work, and firms can find workers to perform well defined tasks.
In a recent issue of The Economist, I was surprised to discover (a) that Amazon’s Mechanical Turk has 0.5 million workers and (b) that roughly a third are from India. That’s roughly 150,000 persons in India who are plugged into Amazon’s Mechanical Turk. We don’t know how many hours/week are spent in doing labour supply, but it’s still a lot.
There are a few other such systems also. Here are links for exploration: oDesk, CrowdFlower, Elance, Amazon’s Mechanical Turk.
These mechanisms add up to a whole new world for the functioning of the labour market. For first world customers who would like to connect up to cheap labour in India, our traditional view was that there had to be a man in the middle – a Datamatics or a TCS or an IBM. What these new systems seem to suggest is that for a certain class of tasks, it is possible to disintermediate the Datamatics or TCS or IBM.
For many individuals in India, the flexibility of working from home without rigidity about how many hours are supplied, and when, these systems could be a big win. At present, many households do not have computers and broadband connections, which is an important impediment. But this is also a constraint that is being rapidly eased through 3G, LTE, etc. These developments, put together, could become a whole new chapter in the story of India’s connecting up to globalisation.
The top selling Indian newspapers according to Amazon’s kindle subscriptions.
India’s courts may be in a slow process of reshaping India into a liberal democracy. Here is a Supreme Court ruling which blocks the Maharasthra government from interfering with the rights of a citizen to read a certain book. Sadly, it was done on a technicality.
Manish Sabharwal in the Financial Express on an important new initiative of the Ministry of Labour.Eric Bellman in the Wall Street Journal on the rise of Madras in automobile manufacturing. There is much strength there in electronics manufacturing also.
Dhiraj Nayyar in the Indian Express on the interfaces between mobile telephony and banking. [also see].
Kerala is Number 1 by Mahesh Vyas in the Business Standard.
On the difficulties of ULIPs and the recent ordinance, see Dhirendra Kumar in the Financial Express.
A story by Steve Lohr and John Markoff in the New York Times suggests that low end outsourcing to India could be under attack from new technology.
B. S. Raghavan in the Hindu Business Line on inflation targeting at RBI.
Hindustan Times and Mint have built an interesting new web page : The Indian innovation revolution.
We in India are very convinced that it is good to have a world where every single individual is numbered and trackable. But there are many nice things about anonymity and the creation of anonymous personas. See this story of Why, a person who did some amazing things anonymously, and then shut down this life when it looked like his anonymity was under threat. The idea of being able to create and live multiple anonymous invented personas has long been a meme in the hackish community – e.g. see True names by Vernor Vinge.
An interesting interview by Samir Sachdeva with Nandan Nilekani in Governance NOW magazine.
As I read Lose a general, win a war by Thomas E. Ricks in the New York Times, I was struck by this remarkable flexibility of labour contracts, which must work wonders for shaping incentives correctly.
Tarun Ramadorai on empirical analysis of the efforts at banning short selling of recent years.
David Friedman has released a free pdf of the 2nd edition of his important book The machinery of freedom. Hmm, that’s a good strategy: authors should open source edition $n$ when they start on edition $n+1$. Also see: a surge in interest in Friedrich von Hayek’s The road to serfdom.
Ruuel Marc Gerecht has some interesting ideas in the New York Times on the use of information technology to assist the resistance in Iran. I wonder if similar ideas can be deployed on the problems of China as well.
Tom Wright has an article in the Wall Street Journal about Zeeshan-ul-hassan Usmani, a Pakistani scientist working on explosions and suicide bombings. Also see Pervez Hoodbhoy on Pakistan’s existential problems.
Calzolari, Levi, Navaretti, Pozzolo, writing on voxEU, show that multinational banks were a source of stability in the crisis. Also see Internal capital markets and lending by multinational bank subsidiaries by de Haas and van Lelyveld, in the Journal of Financial Intermediation.
Ila Patnaik on the Chinese exchange rate regime and its implications for India.
Inflation targeting turns 20 by Scott Roger, in Finance & Development, March 2010.
Edward Glaeser reviews a book by Joel Mokyr on what made the industrial revolution. It makes you think about the nascent capitalism that we see in India.
The advantages of going virtual for companies are obvious. One
of the greatest of these, yet one that’s often overlooked, is the ability to
select employees without geographical limitations or relocation costs. This
also carries cost-of-living possibilities even within national borders, as, for
example, the price of an editor outside of New York City is rather lower than
the price of one in Manhattan.
However, the most obvious and admittedly greatest saving for
companies is the real estate or total lack thereof. The comparison between a
month’s rent in an office complex to a month’s hosting on a web server is
laughable, and when IBM freed their sales and service personnel from corporate ties,
the savings on office space alone ranged from 40% to 60% per location and
totaled $35 million annually. AT&T gave their sales staff wifi laptops and
turned them loose, also letting go almost ten stories of office space and
cutting costs by 50%.
In addition to reducing direct property costs such as
maintenance and utilities, this also reduces other, less tangible ones as well,
such as liability premiums. After all, how many customers have ever slipped and
broken a leg on a website?
For employees, the benefits also seem obvious: save on
transportation, stress, clothing, and dry cleaning, work at home rather than fight
the traffic, live anywhere rather than stick near the office, be home for the
kids, dogs, Maytag repairman. But economically speaking, is it that simple?
In their thought-provoking book Revolutionary Wealth,
Alvin and Heidi Toffler put forward the concept of the “third job.” A person’s
first job, of course, is employment, what we do to earn money; the second,
unpaid job is the tasks that make up the background of life, such as running
the kids to soccer practice or cleaning the kitchen. But the third job, also
unpaid, consists of all the jobs that employees of businesses used to do for us
as part of customer service, but which we are now expected to perform for
The classic example of the third job is banking, and the
very alteration of the word symbolizes the change. The word “bank” used to be a
noun. It was a place people went to deposit or withdraw money, get a copy of a
check, or clear up a discrepancy in one’s statement. Now, however, the word has
become a verb, something that we’re supposed to do for ourselves either online
or at an ATM. The teller behind the counter hasn’t yet become a dinosaur, but
their employment trend is definitely on a downward slope.
This same dynamic is at work in telecommuting. The cost of a
brick-and-mortar establishment doesn’t evaporate; it’s shifted onto the
employee as a percentage of her home is reallocated to serve as her office. To
the mortgage or lease can be added supplementary costs such as electricity,
telecommunications, water and sewage, and even coffee. Additional expenses that
may be incurred include a back-up computer, equipment insurance, and
uninterruptible power supply. While some of these costs would, of course, be
taken as tax deductions or reimbursed by the parent company, or offset by the
savings in other areas, the idea of itemizing one’s beverage of choice is
humorous rather than businesslike. Yet the reality of the cost increase remains.
This third job has been touted as self-service, the ability
to manage our time and tasks for ourselves, and truly there is a gain in
convenience. But that convenience comes at a cost as efficiency is achieved not
through higher productivity per se but through fewer employees.
In addition, rather than merely collecting a paycheck, the
employee is now expected to request reimbursement for those costs considered
reasonable—that third job again, convenient but at a cost of time and effort
nevertheless. It’s also worth noting that the burden of proof has also shifted,
as a business generally pays their own light bill without question but scours employee
reimbursement requests for the same utility for evidence of artificial
The concept of an employee-less society seems to be in the
Join the forum discussion on this post - (2) Posts
same category as the paperless office we were promised in the 1980s. But the
parameters of employment are changing. As the Tofflers point out in Revolutionary
Wealth, the job as we currently know it is less than 300 years old; before
that time, craftsmen were expected to provide their own tools and workspace.
Perhaps that wheel is completing its circle.
One of our readers left an interesting comment regarding the medical profession and its desire to seek profits for its members. I quote from his comment:
The nature of the AMA, a protected and virtually untouchable union, certainly believes in maximizing its members’ profits. It clearly restricts the supply (as all unions do) in face of a steadily growing demand, forcing prices high and higher.
This sheds some interesting light on the medical profession. It is often overlooked by consumers that the medical profession is limited in its numbers and doctors themselves are part of the reason there is a shortage of doctors. In particular, the number of physicians trained in the United States is far less than the need for doctors. As a country full of patients, we are bulging at the seams and in need of more doctors.
However, the number of physicians in this country is limited by the number of U.S.-trained physicians as well as the number of foreign medical graduates coming here to finish training and to practice. The physicians’ lobby in Washington ,D.C., is very strong in limiting the expansion of training programs. In some specialties, there is such a shortage of physicians that you have to wait several months in some communities to see a doctor.
An example of this would be the surgical subspecialty of Ear, Nose, and Throat Surgery, also known as Otolargyngology or Head and Neck Surgery. There are only a few hundred training positions available in the United States each year for this specialty. If these specialists were evenly divided up across the country, that would leave only 3 or 4 per state. However, physicians tend to be concentrated along both coasts and the Midwest, leaving huge gaps in many states across the country. Thus, the demand is very high, and the supply is low. Like many other specialties in medicine, the lobby is strong to limit the expansion of residency positions, keeping the supply low.
Thus, inherent in the system is a type of unionization to prevent competition. The profession protects itself and is profit driven. However, this monopolization and protectionism is not unique to medicine. If you look at almost any other industry, you will find that there is intense national protectionism from offshoring and outsourcing in the form of tariffs, tax credits, and favorable legislation. Similary, in the U.S. the medical profession limits the number of physicians and creates arduous licensing and credentialing requirements to limit supply.
Let’s try and reason together on what offshoring is fundamentally doing to the economy. Economic situations are complex only because of the large number of factors that need to be taken into consideration for a given situation. However, the factors themselves are usually simple.
By taking a single factor and removing the rest, we can follow up on the effect and thus be able to understand the direction in which it takes us. Let us do this with offshoring. We will be touching on issues like the meaning of wealth to the printing of money. Keep in mind, that we aren’t professional economists. Just following up on some ideas that are interesting.
So what is offshoring? Offshoring, or outsourcing, means the taking of a job and giving it to someone else who is in another country. Obviously this person needs to be paid, albeit at a lower cost. Now an economy works by everyone contributing something. This means that the customer who is at a supermarket is actually serving someone else somewhere. So a customer in a grocery store can become the salesman in a shoe shop, and a teller in the grocery store will become the customer in a shoe shop.
Image Credit: re-ality
So all employees are customers for someone else. If there was just one big corporation in the whole country, then all the employees of that corporation would also have to be it’s customers. This is necessary for the circulation of money. The employees of this big corporation will buy goods from it with the same money that they receive in salaries from that very corporation. So it goes round and round.
In real life, there is more than one corporation, but the basic principle does not change. Money that is handed out as salaries is flushed back into companies that give out the salaries after passing through many hands. For example, a man gets paid to work in a grocery store. He uses the money to buy shoes and pays the owner of the shoe shop who then uses that money to buy groceries and pays the grocery store owner. What goes around comes around.
Now what happens in offshoring? I can see two interesting things happening. First of all, when you pay a person in another country, the person is not going to use that money to buy goods in your country. That money is gone forever from the economic system. Second, that person is going to spend money in her country that has not come from any business generated in that country.
Let us look at the first point. Since money has gone out of the system never to return, the total amount of money in the country has gone down. And since the total amount of money is finite, logically, this cannot continue forever unless new money comes in. Most of the time, offshoring is one way. That is, if one country offshores to another country for a cost advantage, then the offshoring country will not provide services back for the destination country because it is by definition more expensive. So the offshoring country only outsources and does not return the favor.
This means that the new money can only come from printing extra money. If this doesn’t happen, then the cost of goods in the offshoring country will fall because there is now less money chasing more goods. If this happens, then the cost advantage in offshoring will slowly be nullified! It makes your head spin.
Conversely, the cost of goods in the providing country will increase because there is more money chasing fewer goods since the goods or services are being exported out. This means that, due to inflation, the cost advantage of the providing country will be gradually reduced, and offshoring will become even less viable.
Where does this end? The only way to prevent this is for the offshoring country to print more money and thus keep the amount of money in circulation constant. But then this means money is being printed for the sole purpose of buying goods and services from outside. This will lead to disastrous consequences for the value of the currency.
Of course, this is just one extremely simplistic view. If we factor in the fact that the economies of both countries are growing, then it becomes a race to see which is more: the rate of offshoring or the growth of the economy? In other words, are you paying others more than you are earning yourself?
I hope you’ve enjoyed this discussion and will post your comments in order to give a better insight into the dynamics of this complex and exceedingly interesting issue.
By the time November rolls around, Americans will have heard more economic numbers crunched in more creative ways than anyone ever would have imagined possible. That’s the mathematical formula for recreating any candidate in the image of a populist hero: numbers and more numbers. Bury ‘em in numbers, and if they start asking questions, well, pull out some more numbers!
While Mark Twain’s infamous line about “liars, damn liars, and statistics” is more than apt here, it’s also true that sometimes numbers tell a story more powerfully than any orator. Such is the case with a pile of numbers put together in an article in the New York Times by Princeton economist Alan Binder, who took the time to discover that, statistically speaking, during the period from 1948 through 2007, the U.S. economy grew faster under Democratic presidents than Republican presidents. (See chart below right.)
Binder reports that “data for the whole period from 1948 to 2007, during which Republicans occupied the White House for 34 years and Democrats for 26, show average annual growth of real gross national product of 1.64 percent per capita under Republican presidents versus 2.78 percent under Democrats.” He continues that that statistical difference between parties of 1.14 points, “…if maintained for eight years, would yield 9.33 percent more income per person, which is a lot more than almost anyone can expect from a tax cut.”
In other words, what Binder is not-so-subtly suggesting is that if Americans had stayed with Democratic economic policies instead of experimenting with Republican supply-side theories, ordinary people would be a lot better off financially today: specifically, 9.33% better off. While hindsight is always 20/20, these numbers are interesting to say the least. And what’s more, they only tell half of the story.
The other half of the story, the half you may have heard much more about, is that income inequality has been steadily growing over the last 30 years, largely as a result of Republican economic policies. While the original idea was something to the effect of: more money at the top will result in more jobs and eventually more money for everyone; we know that in practice what has happened is that more money has simply floated to the top and stayed at the top. Real wages are falling, jobs are moving overseas, the middle class lifestyle that once flourished during the manufacturing era is showing signs of critical strain.
What’s worse, the trend is strengthening.
In 1947 the median family income in the U.S. was $23,400. By 2007 it had (roughly) doubled to $50,233, after hitting a pinnacle of $58,400 in 2005. During that same time period, the income of the top one tenth of one percent of all households has soared from $2 million to over $10 million. So, while the family smack in the middle of the census tables saw a doubling, more or less, of household income, the family at the very top 1/10th of 1% saw household income increase fivefold.
According to an AP article released on Labor Day, “all the data that Wall Street has seen lately seems to be pointing to a dual economy, one in which businesses are generally faring better than consumers.” The article continues, stating, “Evidence of this divergent economy keeps building — the average consumer is suffering, but business spending, particularly abroad, appears to be keeping the U.S. economy from sinking severely, even as the financial sector continues to struggle.”
In other words, yet another batch of numbers seem to show that U.S. businesses are holding up because exports and investment overseas are going well. Consumers, who have seen their jobs go overseas with all that corporate investment, are hurting. The fact that business has been able to thrive and prop up the economy while Americans wither on the vine is disturbing to say the least. That raw fact raises difficult questions about the capacity for the free market to self-regulate in ways that are not severely harmful to the U.S. populace at large. The mantra of the free market is sounding more and more hollow; and for sure it isn’t helpful at the grocery store or the pump these days.
If healthy businesses do not create healthy families, plentiful jobs, and consumers with money to spend, what interest should working Americans take in keeping business healthy? At the very least, the latest statistics indicate that issues of free trade, fair wage and labor laws, bankruptcy, and health are urgently in need of review and probably reform. The similarities to the the Depression era are striking.
The U.S. is not facing another Great Depression, or that, at least, is the consensus among experts. However, the U.S. working family is facing a painful protracted period of declining wages, increasing costs, and seeming governmental indifference.
When rhetoric, ad campaigns, and punditry grow tiresome (and do they ever), sometimes it helps to look at the numbers and ask yourself, am I voting my own interest? Am I better off than I was ten years ago? More and more Americans know the answer to that question without even having to think about it. They don’t need Alan Binder to prove it to them statistically, but it’s nice to know he can.
Even in our modern world, sweatshops remain a horrifying reality, with hundreds of thousands of the world’s poor and defenseless people exploited by wealthy factory owners and greedy supervisors. Their jobs, perhaps better termed slavery, involve back-breaking hours in pitiful conditions, sometimes using toxic chemicals without adequate ventilation or protective gloves or goggles, for pennies per day. Stories of children stitching fancy beadwork by candlelight at midnight, female workers forced to provide sexual favors to keep their jobs and workers refusing to drink fluids in sweltering heat to prevent the necessity of bathroom breaks are all too common and all too true.
So, how could there be a good side to this? And why would any self-respecting industrialized nation purchase products made in such a fashion? The instinctive, gut-level reaction is to boycott these goods; is that wrong?
In a word, yes.
On average, the employees of sweatshops work there because they have no better alternative. Children work in such conditions, not instead of going to school but because they have no school to attend or no means to support themselves if they do. Parents work there because the alternative is watching their children drop out of school and work themselves or starve.
Better Than the Alternatives?
It’s a painful fact that boycotting goods made by sweatshop labor only hurts the workers, not the factory owners. In 1993, a U.S. boycott forced Bangladeshi factories to quit utilizing child labor. According to Oxfam, most of those displaced children were forced into worse positions, including prostitution—when their first choice had been to sew clothing for Wal-Mart shoppers.
Being without better alternatives, the people who have sweatshop jobs are often glad to have them and see them as a positive beginning for a better life. Nicholas D. Kristof and Sheryl WuDunn, who won the Pulitzer Prize in 1991 for their coverage of China’s Tiananmen Square massacre, recounted multiple stories of Chinese sweatshop workers who were puzzled when Western journalists bemoaned their twelve-hour plus workdays, seven days per week. More than one young woman they interviewed said how great it was that the factory allowed them to work such long hours, and others commented they had taken that job deliberately over others in the area to earn more hourly pay.
Since that interview in 1987, more companies invested in the area and additional factories opened across southern China. Although this workers’ state could still use a few stout labor unions, workers are now more mobile, wages have more than quintupled and conditions have improved as factories compete for the best workers. More people now work for private industry than for the state (although it’s also true that unemployment has risen as a result). Although the yuan’s exchange rate is still controlled by the government, its purchasing power has risen to approximately one-sixteenth that of the U.S. dollar. The rivers of bicycles once common in Chinese cities are being replaced by cars and even SUVs, with gasoline subsidized by the government.
Allowing Developing Countries to Develop
According to an article by Michael Strong in 2006, roughly 1.2 million people rise above poverty in China every month by moving to an urban area and taking a job that pays less than US$2 per day. He claims that Wal-Mart, through allowing developing economies access to industrialized markets, has helped more of the world’s desperately poor than the World Bank and relates the story of a Mongolian student who, when he heard U.S. college students ripping into sweatshops, shouted out, “Please, give us your sweatshops!”
Strong also points out, quite correctly, that a line must be drawn between criminal exploitation and market economics. Workers deserve decent wages and working conditions that won’t kill them, not only in developed nations but also in the backwoods of beyond. But to achieve that requires not fewer sweatshops but more of them, clustered together to create competition for workers in the Chinese pattern.
If China continues growing at its current rate, in 2031 it will reach a standard of living comparable to that in the U.S. It’s the same path taken by Japan in the 1950s and 1960s and the Asian tigers in the 1970s and 1980s.
It’s an ugly path, dirty and brutal. But it’s proven to work. Can the same be said for other forms of foreign aid?
Often laws are passed to prevent or contain the undesirable effects of an economic activity. But sometimes the laws are more motivated by political considerations than economic benefits. The perfect example of this is outsourcing laws. The U.S. introduced outsourcing laws in 2005 in most of its 50 states in order to check the growing trend of outsourcing.
The most common argument against outsourcing is the resultant loss of jobs. These laws were passed to ensure that businesses kept their operations mainly in the U.S. and laid off fewer people. Instead of helping the businesses, these laws have cost local governments millions of dollars to ensure that their businesses did not leave the country. New Jersey and Indiana have paid amounts close to a million dollars more than necessary to ensure that their work is not outsourced in order to appease the anti-outsourcing lobby.
The first attempt at blocking outsourcing was made in 2004 when the Senate passed the Consolidated Appropriations Act which provides for statutory spending by different government departments. Section 233 of the act is entitled “Impact on Jobs in the United States” and requires that none of the funds appropriated by the act may be obligated or expected to provide financial incentive to a business enterprise to relocate outside the country if it is likely to reduce the number of its employees in the U.S. The act further provides that an activity or function of an executive agency that is converted to contractor performance under Office of Management and Budget Circular A-76 may not be performed by the contractor at a location outside the U.S. except to the extent that such activity or function was previously performed by federal employees outside the country. This meant that a government contract acquired by a private corporation could not be outsourced or relocated to a legal entity outside the U.S. if such inducement is likely to reduce the number of employees in the U.S. This rationale for the act is that the source of government projects is public money.
Leaving emotional issues aside, the main question is: Is outsourcing so undesirable that the government has to introduce laws to prevent outsourcing?
The answer is no.
Outsourcing has not resulted in Americans losing jobs. When the laws against outsourcing were passed, more Americans were employed since the recession ended in 2001 and unemployment was also falling. Outsourcing represents less than 1 percent of gross job turnover.
Preventing outsourcing is an attack on economic freedom of U.S. businesses. Economic freedom is necessary for economic growth, new jobs, and higher living standards. Outsourcing means efficiency – more final output with lower cost inputs – lower prices for all U.S. businesses and Americans in general. Lower prices lead directly to higher standards of living and more jobs in a growing economy.
The situation today is different from the time these laws were passed. Today the U.S. economy is on the verge of recession. However it would be wrong to blame outsourcing for its woes. The subprime crisis, housing and stock market crisis were not caused by outsourcing. Outsourcing has virtually nothing to do with the increase in gas prices. Jobs are being lost in all countries including those the opponents of outsourcing say are stealing the American jobs.
Instead on concentrating on emotive issues, had the government paid more attention to the real economic issues facing the nation, maybe the economy would not have been in the state it is in today.
We’ve all heard it, and many of us have grown up with it:
“The customer is always right!”
Today, with telecommunications corporations, banking and financial corporations, insurance companies, newspaper companies, and companies we don’t even understand gobbling each other up at a rate that makes Pac-Man look like a child’s game (oh, wait – Pac-Man is a child’s game!), the new mantra is:
Today’s CEO runs a vague, profit-driven organization that shields itself almost completely from that distasteful bottom tier of human beings once known as “customers.” That is why every corporation, from your bank to your phone company to even your doctor’s office, now uses an annoying phone tree that makes you press a lot of buttons and answer a lot of questions before being transferred to hold music for five or ten minutes.
When you finally do reach a person, you instantly wish you hadn’t.
If that person is in India, you may or may not be able to understand anything they say to you except perhaps their pretend, Americanized first name. Nevertheless, you should restrain your rage. If you’ve reached India, the person you are speaking to is working third shift under very unpleasant conditions and is empowered to do nothing for you except tell you restart your computer even if the problem is with your refrigerator. At some point, you will definitely hear the phrase:
“I am now going to [fill in this blank yourself], and this will fix your problem.”
If you’ve never dealt with an Indian CSR before, you may feel temporary glee, as in, eureka! This nice person is actually going to fix my problem!
This nice person is not going to fix your problem. Calm down for goodness’ sake! No, no, this person is trained to tell you your problem is fixed, then give you a confirmation number that is at least 18 digits long in case you have to call back. (Trust me, you will have to call back.) When you start all over with a new person 8,000 miles away who goes through all the same motions and gives you yet another 18 digit confirmation number, you will resolve to never, ever call again.
And that’s the whole point. Mission accomplished.
Call centers have become the sweatshops of the 21st century; whereas 19th and 20th century sweatshops actually produced a product, 21st century sweatshops produce nothing but frustration. Call centers are frustration factories. Call centers, in case you haven’t figured this out already on your own, are designed for two purposes only: 1) to shield corporate management from, ick, customers and thereby from experiencing directly any of the human consequences of their decisions and 2) to make you, the, ick, customer, go away.
It’s enough to make you want to summon the ghost of Ronald Reagan and ask him directly, “What, exactly, is trickling down here, Saint Ron? Because it’s running down my leg, and it doesn’t feel like rain.”
At a recent meeting at the large corporation where I work in a very small Dilbert-like cubicle, I was raising concerns about customer retention. I’d seen customers pull over $1.5 million out of our financial institution in the preceding week over policies designed to provide no help and no service to customers. We’ve lost billions in the first couple of quarters alone this year, so I thought (silly me) that this was a valid question.
The answer was quick, sharp, and a tad bit threatening:
“Look, from a management perspective, the customers we have just don’t matter. We want new money and that’s all we want. Get some new money out of them for us or get them off the phone. It’s not your job to worry about them. If you start solving even one of their problems, they all start to expect it, and what we are after is new money here, not talking with existing customers all day.”
I work in the “customer service” department, not sales. In the US of A. My, my.
But seriously, haven’t you suspected as much for a long, long time? I have. It was weirdly refreshing to hear someone in a position of moderate authority say it out loud so baldly. The truth! And in an election year, too! What a rare and special treat.
Credit card companies and banks, skittish about the credit crunch and facing more huge write-downs over the sub-prime debacle, are now looking for new ways to pad profit by doing even less for their customers than they were doing before. Most of these ways involve new fees, increased fees, hidden fees, and fees that are charged for spurious reasons.
But financial institutions are by no means alone in wanting to go straight for the wallet, bypassing customers entirely and “forgetting” to provide any service or product at all along the way. Cell phone companies routinely charge exorbitant contract cancellation fees to customers whose contracts have expired years and years ago, then turn their former customers over to collections when they refuse to pay. What do they have to lose if the longtime customer is leaving anyway? Sprint is a great example of this spurious practice. No wonder it is hemorrhaging money on its way down.
I think we’ve given laissez-faire capitalism, supply-side economics, or whatever you want to call it more than a fair chance to work for us for over the past couple of decades. Instead, just as a certain 19th century political theorist once theorized (hey, I’m not saying his name out loud! Are you nuts? Not while Gitmo is still in operation!), capitalism is now in the process of eating itself and its own alive as all the money floats to the top and the people at the bottom become bitter, angry, and finally, violent. Next comes complete social collapse. I’m not kidding. And I’m not alone in forecasting it, either.
It doesn’t have to be this way though. Regulation is not the dirty word some would have us believe that it is. At the very least, Congress needs to take a long hard look at credit companies, banks, and mortgage lenders and their slippery practices. It is so obvious it pains me to have to say it out loud. They got us into the sub-prime mess that is currently destroying entire cities (Cleveland, am I right?). We don’t have to just keep letting them do whatever they want to do because one dead president said it was a good idea.
Yes, Saint Ron’s ideas have created tons of new, low-paid jobs in call centers around the world. I’ll grant him that.
Want one of those jobs? I didn’t think so.
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