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In defence of outsourcing

I called my bank earlier this afternoon to inquire about my debit card. I was first asked by a machine to press various buttons, and then told that if none of the options listed applied to me, I could stay on the line before someone dealt with my call. I was soon put on to an Indian woman, who was able in no time at all to supply me with the details I needed. The contrast in typical attitudes to these two parts of the call prompted me to respond in detail to those who recently attacked the decision of HSBC to move its call centres to India. Because if you are like most people, your reaction to the above scenario would be to welcome the way a machine enables people to use a helpline service precisely and swiftly, but express anxiety at the way an Indian does the same. While few but those directly affected decry technological advancements when they mean a British company can have some work done by machines more cheaply or skillfully than by local workers, it is a general feeling that if a British company can have some work done by foreigners more cheaply or skillfully than by local workers, then it is a very bad thing. Robin over at PolitX deemed the latter "job poaching, pure and simple".

I forget who it was noted that anyone who invented a machine tomorrow that could inexpensively convert grain into motor cars would be widely hailed as a hero and a genius, even while it was accepted that some workers in the old car plants would need to find new employment. But, the example went on, if it were revealed that this 'inventor' was in fact surreptitiously trading the grain with foreigners for the cars that they mass produce, he would soon be condemned as a job-destroyer and a heartless profiteer. Of course, the end result is the same - input grain, output cars - but as soon as foreigners get introduced into economics, it is as though the instinctive response is to assume that their gain is our loss, that they can only make money and find employment at our expense.

Let's assume the answer machine I listened to earlier costs only one-seventh as much to maintain and keep running and updated as it cost to pay the wages of any employee doing the same job. Obviously, it is now uneconomical to keep on the full staff of call-centre employees, and some will be made redundant by the introduction of the machine. Why do people usually accept this destruction of employment as a normal part of life? Because we understand at some level or other that a business that works to be as efficient as possible is better for everyone - by not keeping people on in the same positions long after they have outlived their usefulness, these firms are able to offer a cheaper, more competitive service to the consumer, who in turn has more money to spend on other things, creating employment elsewhere in the economy to counteract the unemployment created when automation was introduced.

A grasp of history helps, of course. Barely two centuries ago, it took about 95 agricultural labourers to feed every hundred people, while it now takes about 1 or 2 to feed that many. The technological innovations that made this change possible did not ensure an unemployment rate today of over 90%: the fall in labour costs to run a farm meant farm-owners could make more profit for themselves to spend and invest, and that they could sell food more cheaply, leaving far more money in their customers' pockets to spend on other things than food, creating employment elsewhere. Yes, some people suffer temporary (and perhaps in some cases permanent) unemployment when they are made redundant by automation. But the larger effect of improving efficiency in this way is positive. It is plainly mistaken to say that a company should be forced to keep all its old employees on, neglecting all the advantages of the new technology, merely in order to save them looking for new jobs. We would not be better off today if nineteen in every twenty Britons were farmers.

This isn't a particularly controversial assertion: you mostly see attacks on "job-destroying" machinery only from people who suffer directly from it. This is rightly recognised as selfish special pleading rather than a genuine economic case against such innovation.

So why are call centres different? Everything above that was said of machinery can be said too of Indian workers. Because HSBC can now staff her call centres with people on much lower wages than previously, she makes higher profits than before. As with any bank, this will enable HSBC to loan out more money and invest more where she thinks it can generate more wealth. Part of the extra revenue will fund higher wage costs, as the company can more easily afford the greater incentives needed to attract the brightest and best employees to its fold. Part will go to shareholders. And part will go to consumers, especially once her rival banks follow her lead and the competition over who can squeeze the cheapest service out of the new lower wage costs heats up. This benefit to consumers won't come in the form of cheaper calls, but it will be apparent in the more advantageous packages offered to the bank's customers, made possible by the diversion of funds from the wages of call centre employees to other areas of the company. It may also show itself in the length of time one must wait on hold as more people are taken on to hear calls. If it costs, say, five times as much to employ a British worker at a call-centre as an Indian, then you wouldn't expect to see exactly five times as many Indians manning the lines. But it is reasonable to suppose that you will see a greater number than before when the cost of a handful more call centre employees is now a fraction of what it was.

Every one of these effects - a better return for shareholders, higher wages for some employees, more money for the bank to invest and to loan out, a better package and greater returns for customers - will leave people with more money to spend and invest, creating many new jobs.

Indirectly, the wages paid to Indian workers will help British exporters, too. This is not because the Indian workers will themselves be paid in pounds. It is because HSBC will have to trade sterling for rupee to pay those workers, and so the intermediary will be supplied with pounds, which he will in the end have to spend on British goods if he is not going to hoard them pointlessly. Just as with machines taking helpline calls, there are losers, at least in the short-term. But the gains in employment and to the general economy must not be ignored, nor shunned for the sake of forcing firms to keep people in 'a job for life' long after that job has little to offer the company.

So if there is a general gain to Britain from this process of outsourcing, what is the effect on India? Can we sleep easy at nights knowing that people are being paid sweatshop wages for our benefit? Here is one answer:

While British workers will take call-centre jobs only when they have no choice, Indian workers see them as glamorous. One technical support company in Bangalore recently advertised 800 jobs. It received 87,000 applications.

... Low as the wages for these positions are by comparison to our own, they are generally much higher than those offered by domestic employers. A new middle class is developing in cities previously dominated by caste. Its spending will stimulate the economy, which in turn may lead to higher wages and improved conditions of employment.

The quote above is not the confident apologetic of King of the capitalists Milton Friedman, but the grudging admission of Pied Piper of the protectionists George Monbiot, in a typical column which ignores all the above advantages to Britain of outsourcing. Talk of third world sweat-shops run by Western companies is almost always misleading. Are Indians who turn up for work each day to staff call-centres or sew our shirts doing so because they are too stupid to realise they are being bled dry by fat-cat capitalists? Or do they turn up every day because these Western companies are famous for their high wages and because they know that the opportunities they offer are unrivalled by any other employer? What do you think? Just as you or I wouldn't involve ourselves any voluntary trade unless we both ended up better off afterwards, no one is going to accept or offer a job unless both parties would be better off as a result. The children of the woman I spoke to probably had a better Christmas this year than they've ever had. Indians gain from outsourcing just as we do.

We should certainly be sympathetic to those workers who are made redundant by machinery or by foreigners able to work for us more efficiently or cheaply than they can. But this sympathy must be tempered by acknowledgement of the benefits of such changes, and recognition that these benefits greatly outweigh any gains from attempting to secure particular jobs for life.

Posted by Peter Cuthbertson | Permanent Link |