M4 Assignment 1 Discussion

International Off-shoring: Changes in the World Economy

Fred Maidment Department of Management Ancell School of Business

Western Connecticut State University Danbury, Ct 06810

(203) 837 – 9287 [email protected] (Office)

These universities in the developing world have educated a significant number of highly qualified workers, and, costs in the developing countries are much lower than in developed countries.

Multinational corporations know about the differences in labor costs and the abilities of their employees.. Smaller organizations may also utilize these workers through a “third-party provider”, common in IT (Sullivan, 2004).

ABSTRACT Globalization of labor and the use of off-shoring as well as the impact of taxes as a tool of public policy on economic growth are discussed. Keywords Outsourcing off-shoring, globalization, labor, taxes, economic growth. 1 INTRODUCTION Developing countries have critical masses of well-educated workers who are capable of performing advanced tasks at very high levels (D’Costa, 2003). Until recently, these types of tasks could only be performed by individuals in advanced societies. Today, that is not the case. To a large degree, this is the result of over fifty years of student exchanges between the US, Europe and the developing world. The US and Europe welcomed the first exchange students to their universities at the close of World War II. Many of them went back home where they became leaders and teachers. These countries have established universities that produce well educated potential employees, many of whom are the equal to those graduated by institutions in the developed world (Promfret, 2003).

2 PUBLIC POLICY RESPONSES The Continental European Approach The continental European approach to off- shoring has been more protectionist. Government, unions, and corporations in Europe have a much closer historic relationship (Wallace, 2003). Unions in Europe are far more politically involved and the labor/management relations are friendlier than in the US. Continental European employees have many protections against termination. Corporations in continental Europe hire new employees only when absolutely necessary, and employees do not leave. There are some consequences of this: 1. Unemployment in continental Europe has been high for the past 15 years (Maidment, 2004). 2. Restrictive labor market practices, along with high rates of taxation, have resulted in low economic growth in Europe over the past fifteen years. (Maidment, 2003).

. The United States Approach The US approach to these changes may also be found in history. The labor movement in the US never had the degree of political involvement or

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economic penetration as in Europe. Only a small percentage of the private sector is unionized. US workers do not have the same kind of protections as Europeans. US firms, with the exception of unionized shops, operate under the doctrine of “employment at will”. While this doctrine has been changed over the years to account for certain types of specific discrimination, it is still alive. US companies are not as constrained as continental European organizations, even in unionized environments. US organizations can expand or contract their workforces more easily than continental European or Japanese organizations. This places the burden of responding to changes in the economy on the workers, not management. In the US, the workers must make themselves more marketable in the workforce. In continental Europe, more of the burden of maintaining a competitive workforce is placed on the firm. In the US, workers whose skills are no longer needed, may be terminated at relatively little cost to the company. The company may then hire new workers with more current skills to replace the terminated ones making them more competitive. The US approach has pluses and minuses:

1. The US economy has grown more than any other developed country over the past 15 years.

2. US unemployment has been generally half that of Germany, Italy or France during the 1990’s (Maidment, 2003).

3. American workers have become far more productive. (Koreans, Czechs, Americans are hardest workers, 2001).

The British Approach The UK approach is somewhat different from the US and the continental European economies. In Britain, it is more difficult to fire employees than in the US, but easier than in the rest of the EU. The British have experienced generally lower taxes than the rest of Europe, but higher than the US. This combination has lead to an unemployment rate that favorably compares with the US (European Marketing and Data Statistics, 2003) (International Data and Statistics, 2003) and an economic growth rate of almost 40 percent, total, for the 1990’s (European Marketing and Data Statistics, 2003).

3 SUGGESTIONS FOR REFORM Neither the continental European nor the US approach are completely satisfactory and, the UK approach could also be improved. The continental European approach, combined with a high rate of taxation, results in high unemployment and low economic growth, while providing high job security for those who are employed. The US approach produces high levels of economic growth, a relatively low tax rate, a low unemployment rate, little job security, high employee stress, low loyalty and commitment. The UK approach of low taxation, compared to its EU partners, but higher taxation than the US, coupled with a less restrictive labor policy than continental Europe, but a more restrictive policy than the US has resulted in low unemployment, and good economic growth. The challenge is how to achieve high economic growth and low unemployment without the dysfunctional results of the American approach. With the US economy on the rise, most US organizations should be considering hiring new employees, but the question is, in a global marketplace for products, services, materials, and labor, “Where are the jobs going to be?” Many “US” corporations have more than half of their employees, markets, and sales outside of the US. Such common US names as Ford, and IBM are in this category and more are joining them (Sullivan, 2004). Corporations are moving high value/high tech service sector jobs out of the US and other developed countries. This is history repeating itself. But, these are jobs that require a high degree of education. These service jobs are going to people who are prepared to do them for far less money than people in the US or other developed countries. The question for policy makers is how to respond to this shift in the economic environment. Economists call this an economic dislocation, but to the worker who has been “economically dislocated,” it means the loss of one’s source of income, often their identity, damaging their self-respect, and can result in an array of social and psychological problems. To the economist, it is an economic dislocation, the economist did not lose his or her job. To the elected official, the individual is a citizen, a constituent and a vote. The number one responsibility of a corporation in a capitalistic market economy is to make a profit for the shareholders (Freedman, 1962).

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These organizations also have other responsibilities to various stakeholders in the organization including their employees, customers, suppliers, the communities in which they do business, and others (Steiner, et al, 2001). If they do not make a profit they will soon find themselves out of business. These companies must ruthlessly cut costs, while at the same time continuously maintain, enhance and improve the quality of their products to achieve survival and profitability in a hyper-competitive, global marketplace. In the past, the US government has had a hands- off policy toward jobs and even whole industries leaving the United States for lower cost venues. This has been in the name of free trade and the US economy has usually benefited. Now the industries at risk have moved upscale and include the financial sector, IT, aerospace and other areas of high technology, considered to be important to the future of the US economy. The governments of developed countries need an industrial policy that will address the need for lowering unemployment, and enhancing economic growth. Nations in continental Europe have attempted to establish an industrial policy, but they have not been successful in meeting these goals. The US has ignored the need for a policy and essentially allowed most firms to do as they please in the new, world economy. While this has so far led to high economic growth and fairly low unemployment, those conditions may be about to change as the global marketplace for highly skilled and educated labor becomes far more competitive. It is the duty of every nation to protect and defend the people. Advances in technology cannot be stopped, nor should they, and corporations will not stop seeking to increase their competitiveness by cutting their costs and increasing their profits. But a balance between the needs of industry and the needs of the citizenry must be struck. Seeking a balance between what is right for citizens/workers/ consumers of a society and the benefits/costs/ changes that advances in technology are certain to bring will be one of the central questions facing society and governments in the twenty- first century. There are bound to be economic dislocations as workers in developing countries compete with workers in developed societies. Jobs will continue to be off-shored to less expensive locations as the cost for doing those

jobs increases in developed societies and the capability for doing those jobs increases in developing societies. Both continental Europe and the US have provided opposing examples for dealing with the problem of economic job dislocation and off- shoring. The UK has presented a middle alternative for dealing with the consequences of economic dislocation of workers and the off- shoring of jobs by making it more difficult to terminate workers while still allowing for it when necessary. They have also recognized the need for fiscal restraint on the part of government. Taxes do play a role in economic growth. One of the ways to try to grow an economy is to keep the taxes low so that the private sector can grow and support the society. Low taxes and flexibility in human resources gives firms what they need to respond to changes in the marketplace, while at the same time, giving the employees a certain amount of protection from the whims and the not unknown incompetence of management. In the UK approach, the systemic risk of the marketplace is spread to both the employer and the employee, forcing the company to take a more active role in determining the future human resources needs of the organization, as well as the technological needs the organization will have to address to make those human resources competitive. The workers still have the responsibility to maintain and improve their skills when given the opportunity to do so by their employer so that they will be desirable workers to be kept on and not outsourced/off- shored when the technological/ market/ competitive change occurs, and will not be ones shed by the firm. The US economy has demonstrated that low taxes will stimulate the economy and that corporations need flexibility to be able to respond to the hyper-competitive global marketplace. But, in light of the UK success in keeping unemployment low and problems the US seems to be having in bringing unemployment down after the last recession, there would seem to be a disconnect between the labor policies of the American government and the new systemic changes in the global marketplace. US workers do not have the protections their UK counterparts do under even the reduced version of employment at will. American workers shoulder a greater burden of

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global, hyper-competition than their British or continental European counterparts. 4 SUMMARY AND CONCLUSION The world has become a global economy that is hyper-competitive and far less forgiving than the national economies of just a few years ago. To survive in this world, corporations must produce the highest quality goods possible while at the same time ruthlessly cutting costs, a major component of which is almost always labor. Off-shoring and outslourcing of jobs to less expensive venues is old news, What is news is that jobs requiring a high degree of education are now being off-shored to developing countries where the cost of similarly educated employees is much less than in developed countries. This results in increased unemployment, because the jobs have left the country. Corporations will continue to seek to become more competitive. The European model results in high unemployment and low growth. The US model generates low unemployment, high economic growth, but there are other consequences of this approach. The UK approach is between the two in terms of taxes and the ability to terminate workers. These approaches to the changes in the global economy and the burden of dealing with those changes present policy makers with alternatives for the future of labor relations in the twenty-first century. Combining the best features of these approaches to the problems of economic growth in mature economies and unemployment/off- shoring/outsourcing of jobs to less costly, developing economies will be a major challenge that will face policy makers. Government policy makers have a vested interest in the actions of corporations in the society and in how they treat their workers. Off-shoring, and other practices that result in job loss, result in increased expenditures for society and government, often at times when the government can least afford it. If the government is going to accomplish its primary task of protecting the citizenry/workers/voters, then it is going to have to take an active role in establishing an industrial policy that will do that. At the same time, government must allow private industry to have the necessary flexibility to grow, prosper, and provide the standard of living that will benefit all of the citizens. There will be no easy answers.

REFERENCES D’Costa, A. P. (2003). Uneven and combined development: understanding India’s software experts, World Development, January, p. 211. European Marketing and Data Statistics, 2003, Euromonitor, PLC, London, UK Friedman, M., (1962). Capitalism and Freedom, The U. of Chicago Press, Chicago, Illinois. International Marketing and Data Statistics, 2003, Euromonitor, PLC, London, UK Keynes, J.M. (1964). The General Theory of Employment, Interest and Money, Harcourt, Brace and World, Inc., New York Koreans, Czechs, Americans are hardest workers (2001). EAP Associates Exchange, September- October, p. 32. Maidment, F. (2004). Germany and the United States: two countries, two directions, European Business Review, p, 267-271. Maidment, F. (2003). Labor’s role in driving economic growth: a comparison of the EU and NAFTA, Proceedings of the Annual Meeting of the Northeast Business and Economics Association, September, Parsippany, NJ Pomfret, J. (2003). China’s first space traveler returns home a hero, The Washington Post, October 16, p. A. 01. Steiner, G.A., & Steiner, J.F. (2001). Business, Government and Society, McGraw-Hill/Higher Education, Burr Ridge, Illinois Sullivan, L. (2004). The O word: outsourcing overseas: IBM is doing it. So is Dell. Amazon, Cisco Systems, Motorola and Merrill Lynch are also in on it. Congress Is filibustering on the topic and presidential candidates are debating it. So what exactly is all the excitement over outsourcing jobs overseas? Risk Management, July, p. 24. Wallace, C. P. (2003). A difficult labor: German unions are loosing support and influence. Is militancy or moderation the way to regain their clout? Time International, August 4, p. 51.

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