Thursday, December 23, 2004

Globalization and Outsourcing

The key to come out of recession is job creation. Until the national economies were fairly closed; the increase in the demand due to pro investment and tax cut policies were fulfilled by the production within the national borders. And as long as the production were taking place within the national borders; it used to result in increased employment. This no longer works. As soon as the demand increases; it gets fulfilled by production done outside the national borders using the foreign labor. Effectively American demand fuels the employment in labor abundant economies like China and India. Last few years have shown Alan Greenspan may be wrong when he remarked that it does not matter where the jobs are created as long as the demand is created and fulfilled. Many economists are studying this phenomenon in larger details. Anirvan Banerjee from Economic Cycle Research Institute in New York has been pointing out for a while why the classical economic stimulus policies may not be effectively showing results in these times. (He has probably the best record in the business as far as predicting the recessions is concerned.) Stephen Roach from Morgan Stanley is another one. The point is at this inflection point of Economic Theory, the American Government needs to be flexible in terms of policies and as usual Bush Administration is adamant and applying policies almost in the rote fashion.

As a consequence of this new phenomenon of absence of job creations in response to simulative policies, explicit focus on employment generation is a possible policy. Well, it is so Socialistic to talk about “exclusively job creation”; it is obvious that died in wool conservation party like Republican Party would mock such policies. For them, employment is “a result” of Capitalism and it comes as long as Capital is allowed to flow without any hindrance. But the problem in today’s world is when America can not compete with rest of the world on cost basis and at the same time lukewarm internal demand is created due to weak employment; there is no alternative than to have an explicit eye on the employment generation policies apart from constant efforts to attack underlying cost within USA. Otherwise the society would land up with large swath of population on street. China and India follow such employment oriented policies. It is delusion to think that Globalization would propagate unfettered market mechanism everywhere. Rest of the world does not have the strong legal system and property ownership which USA has. Large part of rest of the world is under developed and their policies are employment generation oriented rather priming capital. This invariable distorts the pure market mechanism. So any faith in that pure market mechanism in the rest of world is misplaced. As a result; middle and poor class in America would continue hemorrhage as far as gainful employment is concerned. There in lies the true significance of Senator’s Kerry’s policy inclination in inspecting all Trade Treaties and evaluating them again from America’s employment point of view and in devising mechanism which would provide incentives for companies to generate employment in USA and provide the breathing time for labor which is under the gun of “outsourcing”. Somewhere along the lines, I guess large sections of middle class in this country have given up any hope for such subtle and fundamental understanding of Global Economy from the Bush Administration. Frankly speaking with their preoccupation with the so-called war on terror, with their doubtful intellectual abilities to comprehend the new complex world of Globalization and perhaps inherent biases against certain well needed policy measures; it is not possible to have any meaningful policy initiative from the Bush Administration. There seems to be no presence of issues like “effects of Globalization” on the radar for the current Administration. As Senator Kerry talks about the impacts of Globalization, outsourcing and certain policy measures to deal with these phenomena; people will start realizing gravity of the situation.

Talking of outsourcing, in my company we lost ten more engineers this week due to outsourcing. At least our executives were honest enough to admit that publicly and put forward the humane severance package for the affected employees. And this is not the only job loss. We have been loosing jobs every quarter. In the spirit of honesty our executives made it plain that this will be the case in coming days too. For a 1000+ employee public company, you are talking about 100 to 150 engineering jobs being affected in this wave of outsourcing. One of the reasons the severance package has been good is to make the remaining employees to hang around. I almost joked to my executive that he is in the spot – how does he tell the last engineer to die for the loosing war (courtesy Senator Kerry’s rhetoric 30 years back); the war wherein engineers have to impart all of our work to the foreign worker and vacate the positions. May be Senator Kerry would narrate a personal story in the coming debate about a family completely devastated by outsourcing. He must have come cross many such tragic tales while campaigning across America. It needs to be authentic. President Bush mentioned about such a tale when the family lost the husband in the Iraq war. People need to know how tragic the job situation is.

Outsourcing also has the impact on this country in terms of loosing the talent in engineering fields. I have not come across any parents in Bay Area where they want their sons or daughters to become engineers. More than half of students in Engineering courses across America are foreign students who would go back resulting in lesser and lesser engineering pool in this country. In a way, Software Programming and Engineering in general is a sunset profession in America. Around 440,000 jobs in IT were lost in USA due to outsourcing. More than half of these after the deeper part of the recession, after 2002. Bay Area is most affected. San Francisco and San Jose lost around 80,000 jobs permanently in IT in last four years.

San Jose Mercury News Editorial has officially accepted in it’s editorial that - saying Education and Retraining would help unemployed engineers to find new jobs - is more likely not to work in today’s times. The basic competition is for Knowledge Economy professions. So unless an engineer learns to go into Health care industry or Construction industry; he or she may not be employed again. It is not the question of learning new engineering or alternating engineering discipline. So all this talk of Retraining Policy of Bush Administration is meaningless and bogus. It does not solve the problem.

Engineers are not dumb enough to know that legally outsourcing can not be stopped. However, what can be done is creating right policy environment where retaining engineering, manufacturing and other jobs is advantageous to business. Trade negotiations are done in such a manner so that the torrential pace of wiping out in no time the entire employment base of large professions is decelerated; giving the economy time to adjust and people to adjust their lives. And finally public financed initiatives are instituted in new technology areas where there is potential for forming entirely new industries as happened in Computer industry. It should be made possible for those affected engineers to get an opportunity to participate in these initiatives. These engineers should not be rejected on the basis of insufficient background in these new industries. On the job training within these new industries should be possible. This way there will be huge lateral movement of capable technical talent to these potentially new research areas; areas like Alternative Energy, Aero-Space (new startups like SpaceOneShip in Southern California), Nano Technology, Stem Cell Research, Security Technology, etc. Senator Kerry is taking about many such policy initiatives and that is the way to go including a measure to extend retraining grants to engineers and white collar employees affected by outsourcing which are not included in the current measure which is restricted only for manufacturing workers.

The importance of Alternative Energy Research can hardly be emphasized. With oil at $50 and with potential to reach $100 by 2010; alternatives to oil will not come any sooner. What is needed is to provide vision and program in this regard. If America can put a man on moon in 1971; it is not beyond the reach of America to come up with new technologies where it is not hostage to foreign oil as well as is on top in many new areas so as it can successfully meet the challenges brought by competing economies like China and India.

October 3, 2004.

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