Outsourcing and Comparative Advantage

Are you as tired of reading the next article on the out-sourcing of white-collar jobs from the US to India as I am? If not, here is one by Katharine Mieszkowski in Salon.com called “Gone in the blink of an eye”.

A couple of UC Berkeley economists, Ashok Bardhan and Cynthia Kroll, estimate that 14 million white-collar jobs are at risk of being outsourced, or about 11 percent of the total, by 2015.
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Use it instead of merely exporting IT.

ICT and Development

ICT presents an opportunity for developing countries to make more efficient use of the available resources. However, ICT is neither necessary nor sufficient for economic development. The advanced industrialized countries were underdeveloped (by today’s standards) once upon a time and their transition from subsistence to a modern exchange economy did not involve modern ICT.

In contrast to the experience of the advanced industrialized countries, the developing countries find ICT available to them at a much earlier stage of their development. These economies don’t have highly optimized economies and the use of ICT has the potential to help them transit from a subsistence to an exchange economy relatively rapidly. For this to happen, ICT must be targeted for domestic use, and not just seen as an avenue for foreign exchange earnings.

ICT is arguably strategically important for economic growth of all less developed countries (LDCs). However, government policies tend to emphasize only the export-led growth potential of ICT. India’s success in the IT-export sector is often used as an example to be emulated by countries similarly placed along the development spectrum. It is important to recognize that while IT export-led growth is an attractive goal, it is not as relevant for sustainable economic growth for rural India. However, a policy that stresses the use of ICT within the country could lead to the development of a domestic IT industry that can serve as an engine of growth by its direct contribution to job creation and GDP growth in rural India, in addition to its contributions to the urban economy. (Needless to say, other appropriate technology can also have a multiplier effect on resources available.)

Production versus Use

The production of IT related products and services targeted for export markets is generally done in high-technology enclaves. The benefits of the production and the use of IT is therefore limited to the small number of producers in the LDC while the majority of the benefits accrue to the users of the IT products and services in the importing developed countries. The products address the needs of the importing countries and they gain significantly from the use of IT produced at low cost in the LDCs.

Increasing the Income Divide

While the IT-export sector may be earning foreign exchange through IT production, there is no benefit from the use of IT products and services to the country as a whole. The vast majority of the people are completely unaffected and do not obtain any gains from the use of IT; only the producers of the IT products increase their human capital. Consequently, the income inequality within the country itself grows which has adverse macroeconomic consequences.

ICT for Sustainable Economic Growth

For economic development to be sustainable, it has to be broad-based. IT-export led growth alone cannot result in broad-based growth because the knowledge-goods produced by the country are targeted not to a domestic market but to an export market.

Economic growth models emphasize the importance of capital – both human and physical – state of the technology and the dependence of growth on the size of the market. We view IT in this context as an enabler of delivery of services. Domestic demand for IT products and services will spur the domestic production of IT and knowledge-goods. There are important forward and backward linkages in the domestic consumption of IT products and services that go beyond the benefits attained by IT exports alone. For instance, the use of IT in the education and health sectors will provide a large user base which will not only have access to new technology but also participate in the information economy.

Evidence of the effect of ICT on Economic Growth

Is there any hard evidence that ICT has an effect on growth? Most of us believe that the ICT does have a positive effect on growth. In a recent book, Matti Pohjola reports that The Working Group of the United Nations Commission on Science and Technology for Development recommends that each country establish a national ICT strategy aiming at maximizing the benefits of ICTs and minimizing their risks. He concludes that

“… in recent years IT has had a strong influence on economic growth in industrial countries and at least in those newly industrialized countries (that is, Korea and Singapore) studied in this volume. Admittedly, however, developing countries seem to have neither invested in IT nor benefited from such investments to the same extent as industrial countries. There is concern that information is becoming a factor, like income and wealth, by which countries are classified as rich and poor. To prevent this from happening, developing countries need to formulate national IT strategies to promote the use of these new technologies.”

It can be argued that more than the production of IT goods and services, the use of IT goods and services is more critical for economic growth. The question whether ICT contributes to growth or not is akin to the question whether transportation contributes to growth. Both are instrumental and provided that they are used appropriately, growth enhancing. Investment in ICT for developing countries is not anymore an option than investing in a transportation network is an option. It is absolutely necessary, although it is far from sufficient to ensure growth.

The two most important functions for ICT are these. First, improving the functioning of markets. What to produce, how to produce, what to sell, how to sell, where to sell — all these are critical questions that directly affect growth. Clearly ICT is indispensable for this function. The second function is in the area of production and delivery of educational content. When the majority of the population is illiterate, the resources needed for educating them (and not just making them literate) is formidable. ICT provides the only hope of leveraging limited resources to address this problem.

The proximate causes of poverty can be seen as two gaps: the ideas gap and the objects gap. The objects gap is the lack of physical resources – too little land, too little capital stock, etc – that contributes to persistent poverty. The ideas gap is the lack of know-how about how to make the best use of the resources one has. It is the ideas gap that ICT can most effectively bridge.

The Case for India

India has had a reasonable amount of success in the export of ICT products and services. But until IT is used, it is hard to predict what exactly the impact will be. However, it is a reasonable expectation that IT cannot but have a beneficial effect by its use.

Domestic ICT use must be given the attention it deserves because only through broad-based ICT use can the benefits of modern technology be made available to all and bridge the income divide. Domestic use will have important linkages to the supply of human capital required for the export of ICT products and services.

For a large country such as India, domestic demand for ICT products and services can provide the necessary base for sustaining the industry and to shield it from external shocks. Therefore, India must create the institutions that encourage the use of ICT domestically.

The Power of Ideas

As an economist trained in the neo-classical tradition, I am constantly on the lookout for market failures. Externalities are a reliable source of market failures and when I come across a positive externality, I get a warm and fuzzy feeling. Consider a story that exhibits the benefits of positive externalities.
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