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Saturday, October 11, 2003

NASCOMM: The Impact of Global Sourcing on the US Economy

The National Association of Software and Service Companies (Nasscom) has just released a report (jointly prepared with Evalueserve) on the impact of Indian outsourcing on the US economy. The report is enormously upbeat, pointing out, among other things, that such outsourcing will plug the hole in the US labour market produced by the retiring of the baby boomers. The figures for $143 dollar return for every $100 dollar spent may seem exaggerated until you take into account the positive feedback effects of growth in India. This activity leads naturally to increased internal demand in India itself, and hence to increased markets. Of course, what proportion of this market goes to the US is another question, there are remember new competitors arriving, like, for example, Huawei. To be able to take advantage of the new Indian market US companies need to become cost competitive. This, of course they can do, by outsourcing manufacturing to China, but then, with their own ageing workforce might they not succumb to the 'Japanese illness'?

The report outlines the cost-savings and increased flexibility that global sourcing will provide to US companies, thereby keeping them competitive in the global marketplace. Forecasts for the US indicate an annual GDP growth of 3.20%, which will lead to an increased demand for labor. However, the US will face a domestic labor shortfall of 5.6 million by 2010 due to an aging population, which can potentially cost the US economy $ 2 trillion if appropriate measures are not taken well in time............

The report also found that offshoring keeps US businesses competitive, creates new markets for US goods and services, and fills the shortfall in services labor that the US is expected to face in the next seven years."

Over the next decade, the US economy will mirror the growth of the 1990s leading to an increased demand for labor. There will be a domestic labor shortfall of approx. 5.6 million workers by 2010 due to slow population growth and an aging population

If the labor shortfall is not met, the US economy will lose out on growth opportunities resulting in an estimated cumulative loss of $2 trillion by 2010. Global sourcing in the form of immigration, temporary workers and offshoring can overcome this shortfall

For every $100 of call-center work offshored by US firms, $143 is invested back into the US economy in the form of repatriated profits, increased sales of telecom equipment and cost-savings

Similarly, the amount invested back into the US economy (for every $100 of work) is $133 for IT services, and $142 for high-end knowledge services like equity research, underwriting, tax preparation and risk management

Offshoring of IT services has enabled US workers move to specialized and creative roles while moving process oriented programming to offshore locations. The proportion of specialists in the US IT workforce increased from 38% in 1983 to 74% in 2002

Utilization of offshore facilities results in the growth of the local economies and an increase in the disposable income leading to the expansion of the global market for US goods and services. For example, in India the proportion of the consuming class in the overall population expanded from 14% to 30% in the 1990s and is set to reach 40% in 2006-07. The Indian retail sector is expected to grow from $180 billion in 2003 to $300 billion by 2010

There will be a short-term impact on the US labor force. About 1.3 million jobs will move offshore between 2003-2010, impacting about 1 million US workers. Of these, about 0.7 million (0.4% of the labor force) will be unemployed for a short duration. Over 8 million jobs are reallocated every quarter in the US economy and hence, the reallocation process will not be a strain for those who are temporarily unemployed

About 0.3 million workers (0.2% of the workforce) will be unemployed for more than 3 months due to offshoring. This segment will require re-training and redeployment

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