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Thursday, September 11, 2003

IT Outsourcing in Rumania

This is really a little off-subject for India Economy, but it does indicate how general the services outsourcing phenomenon is becoming. The language and cultural element is probably important in continental Europe. Not good news for the high wage economies:

For European businesses, Romanian IT workers are cheaper and have fewer cultural differences than in India--making the country the first choice for outsourcing, a report says. The rising costs for U.K. companies that provide and use Indian offshore information technology services could drive businesses to cheaper locations, such as Eastern Europe, according to a new report.

A report by Pierre Audoin Consultants (PAC) says that Romania and other Eastern European countries are virtually ignored by U.K. companies but are predominantly the first outsourcing choice for the rest of Western Europe. The report, Offshore Romania 2003, claims that not only is the cost of using and providing IT services in Romania much cheaper than in India, but the country is also home to an abundance of well-educated and highly skilled workers who have a better understanding of Western European culture than their Asian counterparts.

Companies in the United States have also recently started considering Eastern Europe as a resource for outsourcing, which is the sending of tasks such as such as data center or payroll operations to other companies. Hector Ruiz, chief executive of chipmaker Advanced Micro Devices, said earlier this year that he has his eye on Eastern Europe, citing the availability of engineering talent in Hungary, Poland, the Czech Republic and Russia. Complex math "is one area that Russia really put a lot of effort into, and it is paying off," he said. The Sunnyvale, Calif.-based chipmaker has built a factory in Dresden, formerly part of East Germany.

Pete Foster, a research director at PAC, said the United Kingdom's use of India is largely driven by historical and cultural links to the country, but companies may be forced to look elsewhere, as skills and resources become scarcer and costs start to rise. "There is great competition for cost, and there is a view that India is getting more expensive. Europe represents a good opportunity and a new area to find resources--but it is virtually ignored by the U.K.," he said.

There is the opportunity both for service providers to improve their competitive edge--by acquiring resources and companies in Romania more cheaply than in India--and for users to buy comparable levels of IT service at a much lower cost. "(Romania) is the area of choice for everyone else in Europe," Foster said. "From the business point of view, it is quite backward compared to Western Europe and probably no better than the Indian and Asian alternatives. But it is arguably closer in cultural affinity. The language and education are good enough."
Source: Business Week

Another Routine Day on the Services Front

Just another routine day, with Reuters and Fidelity adding their names to the list of those who 'may' set up shop in India. Meantime back in the US new unemployment signings take another surprise jump this week.

Outsourcing of back-office financial work to India is to get another boost with two major international names, Reuters and Fidelity, deciding to start operations in Bangalore. Reuters have made no formal announcement in this regard but have reportedly started making real estate enquiries in the city. Fidelity has already begun recruitments and has located its CEO.

The British news agency turned financial information services company, going by its conservative nature, appears to be initially planning to recruit around 200 people. Indications are that this will be scaled up to 1,000 in two years’ time. Sources say the initial outsourced work will not be “core” operations which would have implied news and advanced analytics but corporate information work, something of a little higher order than data entry. However, an expert who has been closely observing the ramp up pattern of BPO operations is Bangalore feels confident that both the scale and nature of work handled will undergo a rapid change as the company finds how well the work is going.

He feels that the pattern of recruitment will quickly shift, after the initial stage, to financial journalists, CAs and MBAs. Fidelity is coming in with not one but two operations: 1) software services and 2) back office work for Fidelity Employee Services Co (FESCo), US, which currently provides a range of HR services to 11 million employees through administration of 11,000 programms for retirement, pension, health and payroll services. It is expected that the latter part of the work will ramp up quickly with financial and risk analysis service being offered to clients out of Bangalore.

Reuters and Fidelity will be strengthening a trend which has already begun. Earlier in the year, investment bank JP Morgan Chase announced plans to set up an offshore equities research unit in Mumbai. Its initial hiring target for the current year was 40 junior analysts and support staff. Capital One, a leading US credit card issuer, is in the process of setting up a risk management center after earlier shifting back office work to one third party service provider and entrusting work to another on a BOT basis. Eventually Capital One will take over the latter operation. There are several established captive BPO operations of financial services firms in Bangalore, most prominently led by HSBC which does support, call center and back office work. Indigo, a subsidiary of Unilever, does high end processing work out of the city. PWC, now part of IBM, falls in another category. It has set up third party operations for back office processing of financial work in the city.
Source: Business Standard India

Wednesday, September 10, 2003

Welcome To India Economy Watch

Welcome to India Economy Watch. This is an economics blog, and not a systematic source of information on the Indian economy. The objective is not to replace the existing sources of information, but to complement them. To complement them in that unique and highly personal fashion which characterises weblogging. My aim here is to provide some kind of focus, and hopefully forum, for refections on the evolution of the Indian Economy (and of course on Indian society and culture). I do not claim any special expertise on any of these topics. Just enthusiasm and a willingness to learn. In part that is what blogging is, a learning experience. But blogging is also about sharing. As you learn you share with others (including, sometimes, your mistakes!!).

I have had a lifelong interest in India, and Indians. (This interest also seems to be a family affair, since my son, who studies in the UK, once brought five 'friends' here (to Barcelona that is) to stay. I don't think it was any coincidence that three of them were Indian). My 'excuse' for starting this page now: really the latest round of employment data from the US, which shows the pace at which 'services outsourcing' is gathering momentum. But if I hadn't started this now, I would have done so later anyway. India is important. The sheer numerical impact on the planet guarantees that. But India is important culturally. To me it is no accident that several of my favourite contemporary English language authors have Indian origins (I would say several of the best, even if my choice would not always meet with universal approval). I think I am also starting this page to ask myself the question: what can we in the west learn from India? I don't pretend to know the answer. At least not yet.

So don't look here for know-it-all-ism. And don't look here for an uncritical eye. Sometimes what we all need to do most is look at ourselves full-face in the mirror. But if you want up to date info, critical reflection, humour, and a bit of personal chit chat, then this is the place to come.

BTW, even as I was playing around setting up this page, fellow blogger and Random Notes editor, Kaushik Banerjee contacted me with some very kind comments.

Thank you for creating this weblog. I was fretting about the lack of a central source of information on Indian economy only recently. I linked to it from my weblog. I would also forward the link to my friends interested in Indian economy. I don't know how you managed to absorb and process so much information every day!

Incidentally, the CMIE website (that Rediff quoted) is here. the site is not all that hot. It doesn't seem to care all that much about their web presence yet. But it is well respected in India ...

My Indian bloggers section isn't up to much yet, but I will be adding links over the next few days. If you have an Indian weblog, and you want me to link, please get in touch. The same goes for comments and collaboration, anything you would like to send me is more than welcome.

Stephen Roach on Services Outsourcing

Those of you who are familiar with my posting over at Bonobo Land will be well aware of the fact that, in the services outsourcing debate, I am an unqualified admirer of the arguments Morgan Stanley's Stephen Roach has been advancing:

There can be no mistaking the extraordinary external leakages now evident in the US economy. Even in the face of rebounding domestic consumption, incremental product is being sourced offshore at the cost of disenfranchising domestic supply -- both labor and capital -- from the US macro equation.

The role of the Internet is particularly critical in reshaping the service sector dynamic in this cycle. It gives a critical new twist to the outsourcing story. Services have long been dubbed non-tradables because of a high profusion of knowledge-based content that can only be delivered on site. Now, however, courtesy of real-time e-based connectivity, a multitude of increasingly high-value added services can be transferred anywhere around the world instantaneously. That’s increasingly true of the output of software programmers, design and engineering teams, accountants, back-office processing functions, data centers, network infrastructure and management services, and a broad array of business consulting functions. Reflecting this trend, India’s IT-enabled services sector has become one of the fastest growing major industries in the world. One study estimates this segment of the Indian economy will increase by ten-fold between now and 2007 -- rising from US$1.5 billion in 2001-02 to $17 billion by 2008 (see NASSCOM’s The IT Industry in India: Strategic Review 2002).

Manufacturing leakages are one thing, but if they also hit services, it’s a different matter altogether for the US economy. Currently, the services sector accounts for fully 80% of total private employment in the US -- about six times the 13.5% share in manufacturing. To the extent that outsourcing options are now shifting increasingly into services, the jobless bias of the US economy can only increase. Moreover, this development could well be exacerbated by businesses’ persistent lack of pricing leverage in this post-bubble era. That puts unrelenting pressure on continued cost-cutting as the principal means to boost margins and deliver earnings. And that puts a premium on the outsourcing-driven efficiency solutions that lie at the heart of America’s jobless recovery.

All this underscores one of the great ironies of the current cyclical recovery in the US economy. Notwithstanding the temporary impacts of powerful stimuli from tax cuts and home mortgage refinancing activity, America is lacking in sustenance from the job creation and income generation that typically drive the internal dynamics of its business cycle.
Source: Morgan Stanley Global Economic Forum

NASSCOM on IT Services

One interesting site as far as IT services goes is the National Association of Software and Service Companies (NASSCOM). In particular NASSCOM produces a number of very interesting publications, inter alia their annual review of the Indian ICT sector:

The Indian IT sector has proved to be the country’s fastest growing segment, even in troubled times—in the globally challenging economic environment of 2001-2003. The software and services industry, a major component of India’s IT sector, showed significant momentum, higher than that of other industries in the country. India continued to be a compelling investment destination, as leading companies either set up shop here or beefed up their existing infrastructure. Outsourcing of IT requirements by leading global companies to Indian majors also picked up pace during 2002-03, in line with worldwide trends.

Software and services exports continued to remain on top of the IT industry’s revenue table. The export-driven software sector saw major long term projects come to Indian ICT leaders and Indian companies bagging a larger and larger share of the global outsourced business. The software export sector logged in a revenue of Rs. 47,500 crore during 2002-03, a jump of around 30 percent, as compared to the previous year.

In terms of software services delivery, offshore project revenues grew by a blazing 49 percent as compared to on-site revenues, growth of which was pegged as 12 percent during 2002-03. In terms of geographies, Indian ICT companies began tapping regions outside the US market, even though the country remained the largest user of software solutions from India. The revenue contributions by the US market continued to rise on account of the large number of ITES/BPO projects getting outsourced to India.

Some of the key service lines for Indian players continued to be:

Custom Application development and maintenance
Applications outsourcing
IT enabled services
R&D services
Indian companies also made modest headway in segments such as packaged software support and installation, product development and design services and embedded software solutions.

NASSCOM estimates indicate that during 2002-03, the IT-enabled services segment grew by a phenomenal 65 percent. Revenues from this sector rose from around Rs. 71 billion in 2001-02 to approximately Rs. 117 billion in 2002-03. Compared to other competing ITES nations such as Ireland, the Philippines and China, India drew the bulk of the global ITES/BPO business on account of its unmatched price/performance/quality proposition.

The ITES/BPO industry took root in most of India’s leading cities. Some of the leading hubs of these services were NCR, Mumbai, Bangalore, Chennai, Kolkata, Hyderabad, Kochi, Ahmedabad and Pune. Some of the key players in this market (including captive and third party ITES/BPO vendors) were AMX, Convergys India Services, GE Capital Standard Chartered, Dell, Healthscribe India, EXL Services, Daksh eServices, Wipro Spectramind, 24/7 Customer, among others.

The Indian ITES/BPO engine continued to surge forward on account of the following reasons:

India’s vast pool of English speaking and skilled manpower, which rates high on qualification, capabilities, quality of work and work ethics
India’s telecom and physical infrastructure, which is approaching parity with other developed countries
The strong quality orientation of Indian ITES players
The strong cost/value proposition associated with outsourcing non-core processes to India. Customers are stated to realize cost savings of the order of 40-60 percent by moving some processes to Indian shores
India’s unique geographical location enables 24x7 service offering and reduction in turn around time due to time zone difference.
The presence of a regulatory environment that’s conducive to the growth of the ITES market
Some of the key ITES services lines include:

Customer care
Web sales/marketing
Billing services
Database marketing
Transaction document management
Benefits administration
Tax processing
HR hiring/administration
Biotech research

The domestic IT market touched revenues of Rs. 317 billion during 2002-03, of which software and services accounted for around Rs. 137 billion. The ICT market during 2001-02 has been worth Rs 291 billion. The Indian software and services sector continued to lag behind the export segment on account of issues such as higher piracy levels, pressure on software prices and lower level of IT spending for domestic companies. The growth in the domestic software market fell to around 13 percent during 2002-03 as compared to 2001-02 when it was pegged at around 18 percent. A reduction in IT spend by key spending segments such as banking and manufacturing is stated to be responsible for this trend.

Bringing it All Back Home

This weeks meeting in Cancun on the Doha round is important for a number of reasons. Europe and the US are going to come under a lot of pressure to 'play fair' in the globalisation process. Having rightly emphasised the importance for third world economies of opening themselves up, and constructing solid and transparent institutions, the developed world is now finding that the third world (or at least parts of it) is bringing the argument 'home to mummy' and saying fine, but what about agriculture and services. I will try and post something on the agriculture debate in another moment, but for now, lets think the big topic of the week, and especially as far as India is concerned: services:

WTO negotiations in services and export prospects for services are complementary in nature. The Doha declaration states that negotiations on trade in services shall be conducted to promote economic growth of all members and in the development of developing and least-developed members. The Negotiating Guidelines recognise the primacy of the request-offer approach as the main method of negotiations.

The stand adopted by many developing countries is that issues related to them are not being adequately considered despite Article IV and Article XIX:2. Developing countries have been asked to give higher market access and national treatment commitments, while developed members are not giving adequate market access in sectors and modes of supply of export interest to them. The Prasad Committee on International Trade in Services has highlighted some important issues related to WTO Negotiations.

Issues important to the US in services negotiations and the steps taken by it which can help understand developed countries’ priorities include:

* Emphasis on deeper commitments in finance and telecommunications and better commitments of existing WTO members in distribution, travel and tourism, audio-visual, health, construction, education, and environmental services.

* Emphasis on the issue of government procurement.

* Promoting improved commitments on Mode 3 commercial presence so that US service suppliers can choose their preferred form of business.

* Using the new WTO Accessions and Regional Initiatives for immediate gains for the US.

* Strategy of gaining from initiatives like the Free Trade Areas of the Americas (FTAAs), the Transatlantic Economic Partnership (TEP) with EU, assisting the Japanese government’s efforts in financial services “Big Bang” and major capacity-building component to help Africa.

The US is pursuing a negotiating strategy designed to obtain maximum benefits for its suppliers of services. Developed countries have a headstart in making a proactive agenda, with the US having set up a Special Services Negotiating Committee. Developing countries like India, which have a potential in services sector, while being proactive, should also be cautious, so that they do not lose in sectors they are considered to have a potential, as the US and other developed nations have established a firm base in many WTO member nations. Thus, post-Doha negotiations will be a completely new ball game where economic details and market intelligence is more important.............

In case of supply of services, consumption abroad and movement of persons mode are important, while for others cross-border supply and commercial presence mode are important. The export potential in this sector has to be examined by taking note of the diversity in the services sector, the supply base for services and the status of commitments and WTO negotiations. Some examples which can help in showing these inter-relations between export prospects and WTO negotiations in services are as follows:

Super-specialty Hospital Services: India has a good supply base and can supply them under all modes, though consumption abroad is the most important mode. However, good marketing and publicity is needed. The HS System in countries like the UK virtually deny market access though their WTO commitments do not show any limitations. In the US, the main limitation is that medical expenditure incurred abroad is ineligible for government reimbursement. Besides, there are limitations like need-based quantitative limits, the need to be natural persons, accreditation rules, etc.

Satellite Mapping Services: India has a good supply base for economic application of SMP, which is also cost-competitive. Public sector institutions are the main suppliers of these services. But there are limitations due to defence reasons, non-inclusion of these services in commitments to WTO and the fact that these services cannot be viewed only from a commercial angle.

India has a good potential for exports of Printing Services. Efforts to be cost competitive and leveraging our capacities in the software sector can help.

In the case of Accounting, Auditing and Book-keeping Services, where India has a great potential for exports, the limitations are mainly in the form of licensing, accreditation, in-state residency and state-level restrictions in countries like the US. Horizontal limitations on entry for specialty occupations automatically restrict opportunities in this sector.
Source: H A C Prasad, Financial Express

Tuesday, September 09, 2003

Spectral Imaging

A spectre, it was once said, is haunting Europe. Fastforwarding a little, perhaps it would be more appropriate to say that at the present time there is a spectre haunting the entire OECD. But this spectre - surprise, surprise - is not, at least this time round , a demographic one. It is for all that a no less revolutionary one. The spectre I have in mind has little in common with the obsessions and broodings of the expression's Teutonic creator: except, that is, insofar as the reflections of the former on the demise and plight of the Indian handloom weaver might now justly be deflected towards those who every day seem more likely to become their modern-day equivalent, the run-of-the-mill IT sofware professionals who work in America's great 'valley of opportunity'.

The 'efficient cause' of this current reflection: well Friday's latest round of US employment statistics, with the glaring presence of a total of 67,000 service jobs lost in August, begin to give us the clue, and perhaps Ben Bernanke has given us the name - the job-loss recovery. Now that the US economy is losing jobs in the agricultural and industrial areas would neither be new nor shocking. These sectors - at least in the information age - are assumed to be in decline across the OECD world. That the world's most advanced economy is a net loser of jobs in manufacturing industry is entirely comprehensible - anti-China xenophobia notwithstanding. But, at least according to normal economic theory, what should accompany the historic decline of the industrial and agricultural sectors should be a growth in activity in the relatively higher-value services sector. And it is precisely here that the problem is to be found. As the late Walt Whitman Rostow said: it's all about sectors.

Interestingly enough, recent research by the New York Fed has highlighted the way the characteristics of the job creation process in the recovery phase may be changing, and this may well indicate a long term structural trend, which deserves more analysis in its own right. This may be important since we may well find with the benefit of hindsight that the US has been on this path for longer than we imagine. But today I am going to limit myself to 'efficient' not 'final' causes.

As you will all have probably noted by now, the US press is full of almost daily articles on the 'employment drift' off-shore. And when it isn't wasting it's amunition firing off at the distinctly non-impressionable Chinese, it lets off a salvo in the direction of India. The two cases are in fact quite distinct, since the majority of activity being sourced in China is manufacturing (although this may, as I am noting in the blog, lead to longer term technological issues) while the case in point with India is the displacement of services. (BTW don't miss the irony in all the fuss over the rinban valuation, the Indian rupee is actually floating and going up, from 49 to 45 to the dollar in recent months: see how 'they've all gone quiet over there'). Recognition for identifying this 'services' issue really deserves to be given to Morgan Stanley's Stephen Roach, who has long been flagging the question in connection with the deflation debate and the lack of resilience in US service prices. There is no immunity platform underneath services, as we are now finding out. (Incidentally India is by no means the only provider in the game - a recent Forrester report mentions the Philipinnes, Russia, the Baltic countries, Mexico and Costa Rica - and I personally can add Bulgaria to this list on the basis of my own research). The critical 'intitial condition' which precipitated what may well now be the present point of no-return may well have been the internet boom and the Y2K problem, both of which placed an overload on US (and other OECD) IT capacity and lead to the need to find alternative supply sources. As Forrester's Stephanie Moore says: " for them, Y2K and the Internet was their Trojan horse..........They got into the companies and did a good job." Now the dynamics work the other way round, and the same offshore providers who benefited from the supply shortage of the mid-1990s are providing the cost savings and efficiency that U.S. companies need and can't find at home in the 'slow recovery' of the early 2000's. And the leak hasn't just sprung in IT. According to press reports, companies like San Diego-based Chembridge and New Jersey-based Pharmacopeia show the trend may have started seeping into biotechnology. Chembridge, which does chemistry work for drug companies, employs more than 300 chemists in Russia, another locale where doctoral degree-level professionals are paid a fraction of what they would receive in the United States. Pharmacopeia, the parent company of San Diego-based Accelrys, has information technology operations in Bangalore, India.

(Can I sneak a personal detail here, I am, as I keep mentioning, working a project on Bulgarian immigration in collaboration with anthropologists from the university of Sofia. Staff there earn around 150 euros a month, here in Barcelona university researchers get at least 10 times that amount. Last week I was in Valencia with a young Bulgarian research student - who at this point is even working on a voluntary basis, amor del arte, as they say. But the interesting point is that as an ethnographer he works much better than I do. The quality of information he was able to extract was much better than I could have gotten alone. The trouble is all the material is in Bulgarian. No problem, he said, we can send it back home and they will do the translations, real cheap. Not only this, anyone who has ever done qualitative reasearch knows that the real drag is typing-up the transcripts, well he said, we could also have that done there. The only important difference in attitude that I noticed was that the high cost of buying books makes it difficult to be on the sharp-end of knowledge. However an afternoon of in-service-training over at my place means that he is now reading Strogatz-Watts-Cavalli Sforza and has learnt to move much better in the internet (where most of this is free). You see, I said, the important principal here is play. Ah, 'homo ludens' he replied. You know Huizinga, I said surprised. Yassen is 23, the same age as my own son, who sure as hell doesn't know Huizinga, yet. I doubt many of my colleagues at work do either. Bottom line: the intellectual distance between the relatively poor and the relatively rich economies is not as great as it seems, and the distance is much more easily closed in the information age than it was in the industrial one. Forgive my self-indulgence).

This services outsourcing trend is not only evident in the private sector. The US government-funded San Diego Workforce Partnership, which ironically provides training to local residents and helps them find work, reputedly hired computer engineers in India to finish a data management project. In fact they paid more than $200,000 to Karna Global Technologies for engineers in India to re-write one of the organization's computer programs. Larry Fitch, chief executive of the Workforce Partnership, was quoted as saying that the organization generally hires domestic companies, but Karna was hired when the original contractor from Orange County suddenly folded.

What started off in many cases as a low-end routine-based operation, may in fact now be moving upwards. Intel for example which has invested $2.3 billion in its Malaysian operations, and which has always included some R&D in this work, now plans to build a new $80 million R&D facility there. Or try Yahoo, who have denied reports of a new R&D facility in Bangalore by insisting that the 150-person R&D facility has been around since 1996 and that the recent "news" merely refers to a reinauguration of the existing facility. A view which is not shared by India's Rediff.co which in reporting the same story quotes Yahoo's chief executive in India Venkat Panchapakesan as saying that the R&D facility will indeed hire more people soon. "We will have about 150 professionals at the center by the end of 2004. These will be new jobs created to outsource our global requirements". In fact the relative importance of the phenomenon in India can be appreciated by the fact that Rediff have a special page dedicated to the question of business services outsourcing.

How to make sense of all this, that is the question. The first point that comes to mind is that history, apparently, is not kind to its beneficiaries: it is, one might rather say, bitter sweet. The root of the 'evil' here is not money, but globalisation. Now don't get me wrong, this is not just another one of those standard anti-globalisation tirades. I am a globaliser at heart. But then I am also interested in the economic welfare of all the population of this fine planet. What seems clear to me is that, while there are many pros and cons on either side, the developed world did have something of a natural advantage when it came to the globalisation of industrial products. The third world also needed industrial globalisation, since it needed both capital and technology. But, at the same time, this was an area in which, by moving up the value chain, the 'incumbents' could always keep ahead of the pack. In the knowledge economy, as we can now see, things may not be so simple.

One of the reasons why this may be the case is the question of set-up costs. The cathedral of the industrial age was the factory, and the factory implied a high fixed-costs entrance fee. Today the situation is very different. According to economic historian Joel Mokyr:

"the 'factory' as a system is in retreat not only as a physical central location of activity, but also as a time-organising institution in which work begins and ends at given times and the lines bewteen labour and leisure are firmly drawn. Instead, work is dispersed over space as well as time, allowing workers to calibrate their trade-offs to reflect their preferences.............For services, a similar phenomenon is increasingly visible on the horizon. The twentieth century witnessed the virtual demise of the household-sized mom-and-pop corner stores, replaced by large scale department and speciality stores. The trend towards e-tailing may well encounter some teething problems, but if it continues, little in the industry besides warehouses and shipping cannot be outsourced to independent agents or assigned to employees working from their homes. The same holds true for banks, law firms, insurance companies, and higher education."
(The Gifts of Athena, pages 153/157: the whole of chapter 4 Technology and the Factory system is thoroughly recommended).

Two problems then, kept the developing countries at a distance during the industrial age, the cost of entry (and the lack of capital), and the absence of the adequately trained work-teams. In the knowledge economy things are a little different. Look, for example at Google and the low tech use of PC's in parrallel, or the rise of blogging, or home-made video clips, or the uses of grid-computing. Entry costs are not what they used to be, and a little strategic capital goes a long way. Also the labour force difference is nowhere near what it was. Maybe there is still a difference between the Indian IT or accountancy graduate and the US one, but it is nothing like the difference you can find in the comparative wages. The difference is also more transparent, and hence more easily closed, than it was in the days of machine manufacture. There is tacit knowledge, but it may well be less, and it may be more easily learnt. It seems a three to five year stay in Silicon valley on a temporary contract may work wonders in this context.

Which brings me to my principal point. On 10 Sptember in Cancun the next session of the Doha round will begin. High on the agenda will be what is known as the General Agreement on Trade in Services (GATS), and central to this negotiation will be the question of of what is known as mode 4 sevices delivery: the temporary movement of natural persons (mode 1 is the delivery of the service from one country to another, cross-border supply, mode 2 is the use by a company in one country of a service in another, consumption abroad, mode 3 is the setting up of a branch or subsidiary to deliver the service, commercial presence). Already (3 September) modalities have been established to prioritise the special treatment of LDC's in these negotiations. These modalities were welcomed by Dr Toufiq Ali, Ambassador of Bangladesh, speaking on behalf of the 30 LDC Members of the WTO, at the Special Session of the Council for Trade in Services.
There are numerous estimates that indicate that the potential benefit of free trade in services may be several times that of free trade in goods..........the most important means of supplying services is through the export of services supplied by less skilled persons...........a temporary visa scheme that amounts to no more than 3 per cent of the OECD labour force would yield economic benefits for both developed and developing countries equivalent to almost US$150-200 billion.

Now the numbers referred to here were developed by Alan Winters of the University of Sussex (see 3 and 4 below), and they constitute in themselves a fairly dramatic example of how one tiny little meme can go a very very long way. In fact the call for liberalising the movement of natural persons has been taken up this week by the World Bank in its Global Economic Outlook and is also under active consideration at the OECD (see 5 below). So in some ways the 'more developed countries' (ie the OECD) are actually hoist on their own petard here. Unwilling for cultural reasons to accept third world immigrants on a legal basis to address the growing demographic shortfall, they have collectively indicated a willingness to accept temporary migrant labour. From the third world point of view this may well be a preferable alternative. Here it is necessary, I feel, to distinguish two classes of migrant worker, the skilled and the unskilled. In the case of the unskilled, the situation is not very different than that - in muanufacturing - of the direct cross-border import of the finished product. The service is simply provided in-situ by the citizen of a foreign state.

As Alan Winters puts it:

Unlike with the mass migration of less skilled workers, fears for cultural identity, problems of assimilation and the drain on the public purse are hardly relevant to TMNP. The biggest concern it raises is its competitive challenge to local less skilled workers. This is neither more nor less than the challenge posed to such workers by imports of labour intensive goods from developing countries, which has been overcome by the weight of economic gain that trade could deliver and by policies to ease adjustment among local less skilled workers in developed countries. Applied with the same sensitivity and the same sorts of policies as trade policy reform in goods has received in the past, the temporary movement of less skilled workers between countries would offer the chance to reap some very large gains from trade.

The arrival of these workers inevitably exerts downward pressure on wages in the unskilled sector (a point that is normally made forcefully by US economist George Borjas before the US Congress whenever a hearing on immigration provides him with the opportunity so to do). But these same cost reductions make things cheaper for the majority of middle-income consumers by facilitating the provision of any number of otherwise unthinkable services (like the proverbial taking the dog for a walk). They also, in a growing economy facilitate the possibility of low inflation rapid growth. From the third world point of view, they reduce pressure in the local labour market and they help the balance of payments due to the remmitances home of the migrant workers (which again are a reality, as I know only too well from my own research: it is estimated that during the first years around one third of wages earned are sent home). BTW, again both the inflow of low-skilled worker, and the outflow of mode 1 outsourcing will contibute to the generally deflationary environment inside the US as the 'sevices immunity' gradually factor falls apart.

At the other end of the scale are the skilled temporary workers, and it is here I think, more than anywhere, that our difficulties in accepting the arrival of those from other countries have lead us - in the west - to shoot ourselves in the foot (Again a disclaimer. I am not especially upset by this, the world is an unjust and unequal place, and anything which helps to 'even the odds' is fine by me. What I am pointing to is the fact that this is the unintended consequence of a selfish act). For temporary high-skill contracts are the perfect, learning-by-doing, training scenario. If this were the old Russia you would probably have to pay a great deal of money to bribe your way out having learnt what you had learnt, and we 'send them back' (xenophobism has always seemed a perverse phenomenon to me). So really here we are in the middle of one of those typical non-linear, up-side/down-side swings produced by what many consider to be the most 'effective monetary policy in history'. And meanwhile - with our central bankers carefully targeting short-term inflation rates as the 'clavis universalis' for economic policy - we have been through an enormous assest boom-bust cycle, a cycle which seems to have carried as one of its side effects the 'freeing' of parts of the third world from their one-sided dependence on us. For as we went up in the cycle we sucked them in, during the ride we trained them up, and now on the way down we have told them to pack their bags and leave for home. Advice which they have meticulously followed to the letter whilst taking part of the business back with them!

That this lesson has not entirely gone unlearnt is shown by the conclusions drawn by Armind Virmani of the Indian Council for Research on International Economic Relations in yasterday's Indian Financial Express

The USA activated the GATS when it perceived that its comparative advantage was shifting from manufacturing to services. At that time the USA and other OECD countries opened up their service sector to cross-border imports (Mode 1), while we had some justification for taking a cautious approach to an area in which the rich countries appeared to have an increasing comparative advantage. More by accident than by design our position has been completely transformed since then. At the beginning of the 21st century, India is poised to become the largest developing country exporter of Service in the World by the end of the decade. What is needed is a change in our mind set, by transiting from a defensive to an activist posture. We must lock-in 'free trade in services' under mode 1, against the emerging threat from the new protectionists in the rich countries, the 'unions of white collar workers'.

This also requires that we be more forthcoming with respect to opening sectors in mode 1 where we have been excessively defensive. We must trade in greater access for FDI from the rich countries under mode 3 against clear and transparent rules for 'temporary migration' of skilled and semi-skilled personnel from India to these countries under mode 4. The focus of the latter (mode 4) must be on facilitation of cross-border export of services under mode 4, not on the export of labour per say.

Monday, September 08, 2003

Indian Services Growth

Indian services grew at a spectacular rate this year:

Clocking its highest growth in the last two years, the services sector has recorded a nine per cent increase in sales during the quarter-ended June 2003, a leading economic think-tank said on Monday. Outstanding investments envisaged in the manufacturing sector increased by 9.5 per cent by July 2003 compared to such investment during the year-ago period, Centre for Monitoring Indian Economy said in its monthly review. This surge, which is led by steel and automobiles, is expanding in the infrastructure sector, excluding power. Listed Indian companies performed quite well during April-June 2003 with sales growing by 10.4 per cent and post tax profits rising by 56 per cent, the CMIE said. The manufacturing companies' sales growth was 10.5 per cent and their profits were up by 95.5 per cent, it said adding, the focus on restructuring and saving costs led to a 10 per cent increase in expenses of the manufacturing sector. Expenses in the corporate sector rose at a much higher rate of 19 per cent resulting in subdued growth in PBIDT (profit before tax, interest, depreciation and tax) at a mere 7.3 per cent, it said. The VRS expenses in both manufacturing and services sectors increased substantially during June-April period. The Index of Industrial Production grew by 5.7 per cent in June 2003 as compared to 4.5 per cent increase in June 2002. Mining and quarrying recorded 5.9 per cent growth while manufacturing sector grew by 5.8 per cent, CMIE added.
Source: Rediff.Com