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Outsourcing_IMF WP04-186_2004

Outsourcing_IMF WP04-186_2004 - Demystifying Outsourcing...

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HE OUTSOURCING of services has received a huge amount of attention in the media and politi- cal circles in recent months, largely because media reports seem to equate outsourcing with job losses. In just five months, between January and May 2004, there were 2,634 reports in U.S. newspapers on service outsourcing, mostly focusing on the fear of job losses. But outsourcing, let alone its consequences, does not appear to be widely understood. The dictionary defines it as “the procuring of services or products . . . from an outside supplier or manufacturer in order to cut costs.” However, it is not clear what is meant by “outside.” Some people interpret it to mean outside the firm, and others outside the country. Media and political attention seems firmly focused on international outsourcing, even though domestic outsourcing is also common. Firms based in industrial coun- tries that outsource services have been accused of “exporting jobs” to developing D emystifying Outsourcing The numbers do not support the hype over job losses Mary Amiti and Shang-Jin Wei Finance & Development December 2004 36 T Photo above shows employees at a call center in the southern Indian city of Bangalore.
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countries, with call centers and com- puting services in India the most fre- quently reported examples. Many people would argue that outsourcing has been a normal part of international trade for decades— and they would be right. The grow- ing outsourcing of services in industrial countries is simply a reflection of the benefits from the greater division of labor and trade that have been described for manu- factured goods since the time of Adam Smith and David Ricardo. What is tradable depends on technol- ogy, and advances in technology (especially in information process- ing, communication, and transporta- tion) are increasingly making it possible to trade services that previously were too costly to trade. Although, for a typical industrial economy, the inter- national outsourcing of material inputs is still far greater than that of services, the current wave of anxiety is largely about services. In the past, the service sector was largely considered impervious to international competition. For example, accountants could benefit from the cheaper imported man- ufactured goods that open trade allowed without fear that someone abroad would take their high-paying jobs. For this reason, service sector professionals were likely to be staunch supporters of open trade. With improvements in communi- cation technology, such as the Internet, services can cross political borders. Jobs in fields ranging from architecture to radiology consequently seem much more at risk. Although firms were able to relocate abroad in the past, they had to give something up—their closeness to important markets, for example. With the new technologies, they can retain these links while also obtaining access to cheap but well- trained labor.
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Outsourcing_IMF WP04-186_2004 - Demystifying Outsourcing...

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