Emergic: Rajesh Jain's Blog

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On Outsourcing

November 25th, 2003 · No Comments

VentureBlog has an explanation:

Economically, trade is no different than other technologies. Economist David Friedman of Santa Clara University puts it most succinctly: there are two ways to make a car — you can either make it in Detroit or grow it in Iowa. You already know how to make it in Detroit. You get a bunch of iron ore, smelt it into steel, and have an assembly line of robots and workers shape it into a finished vehicle.

To grow it in Iowa, you plant car seeds in the ground (also known as “wheat”), wait until they sprout, and harvest them. Take the harvest and put it into a big boat marked “to Japan” and let it sail off. A few months later a brand new car comes back.

As far as the economy is concerned, it has exactly the same effect on workers and consumers if we use a boat marked “to Japan” or a fantastic new technology invented in Silicon Valley called the “wheat-to-car-converter”. Either way, if it takes you less effort to grow wheat into a car than it does to make it in Detroit, then you should grow wheat. Either way, jobs in Detroit would be lost, and either way people get cheaper cars. Trade is just another technology.

And now this revolutionary technology of trade is hitting the same Silicon Valley engineers that have revolutionized other industries in America. Every engineer knows a company that is outsourcing engineering work to India or China, and many are wondering if their jobs are next. Engineers in Silicon Valley are now waking up to the same angst that their technologies have caused in workers elsewhere. Silicon Valley, welcome to America.

the Chinese government is not worried that their economy is tanking because manufacturing jobs are vanishing. The Chinese economy is producing 8% more this year than last. The only way to achieve that with a stable population is more efficient use of labor. Being able to produce more with less people means there is more to go around. People are moving from poverty to self-sufficiency at a faster rate in China than anywhere else in the world. All of this management and information technology helping companies become more efficient is good for China. As the economy grows at a rapid clip, people put out of work find other useful things to do.

The same applies to America — more efficiency means more production with the same people, and more to go around. Productivity gains are the source of long term economic growth, and long term income growth for Americans. This economic growth brings with it demand for new services, creating new jobs for Americans.

Tags: Emerging Markets

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