From the July 2006 issue of Wealth Manager Web • Subscribe!

Hello India!

A great sucking sound was how H. Ross Perot characterized the hundreds of U.S. jobs he said would be siphoned off to Mexico as he railed against the North American Free Trade Agreement in the early 1990s. Somehow this doesn't sound quite so funny any more. Millions of jobs have migrated from the U.S., but it is actually India and China that have been the greatest beneficiaries.

What happened between the implementation of NAFTA in 1994 and today--when countries are literally ranked in consulting firm A.T. Kearney's Global Services Location Index according to how attractive they are for offshoring such services as IT, back-office support and call centers?

Numerous observers point to lower computer prices, broadband communications capability and the Internet as the key culprits. The first wave of globalization--for manufactured goods--pushed down computer prices and led to worldwide fiber-optics cable. The Internet made remote computing a reality.

Before long, white-collar workers--accountants, engineers, architects and even journalists--discovered their own positions were at risk. A self-employed technical writer recently told The Wall Street Journal that the $100,000 she was earning before outsourcing dropped to $12,000 the year after.

And outsourcing is only expanding. According to a December 2005 McKinsey Global Institute report, U.S. companies employ more than 900,000 offshore service workers who do anything from software R&D to answering customers' questions. And that number is expected to rise to more than 2.3 million by 2008.

Still, experts say the volume of job losses in the U.S. is not that great--just 1.2 percent of all service jobs created per year--as overall job growth here has continued to be fairly robust since 2000. The big question is: Can outsourcing be good for the U.S. economy going forward? "Looking at the outsourcing of the production of hardware, we know that prices decreased by 10 to 30 percent, which led to higher productivity growth and GDP gains--more than one for one," says Catherine L. Mann, senior fellow at the Institute of International Economics. "This is even truer for services. The numbers for potential gains are greater." That's because services really drive our economy.

Research bears this out: For every dollar of the cost of services that U.S. companies move offshore, at least $1.14 of value is created for the economy in return. "Evidence suggests that as the costs of doing business are lowered through offshoring, new business opportunities are opened, and that, in turn, leads to more jobs being created," explains Diana Farrell, director of the McKinsey Global Institute.

So everything is okay, right? Well, not so fast. There will continue to be Americans who earn below-average wages--people who used to work for call centers, for example, but whose jobs have gone to India and Ireland. The number of Americans who were employed in such lower-end service jobs has fallen by more than 30 percent, Mann notes, citing the 2004 Bureau of Labor Statistics' survey. But those who interact with client needs, whose jobs use analytical skills, have seen increases of 30 percent with good salaries.

Overall, wages have been changing. Stephen Roach, chief economist at Morgan Stanley, reported in March that over the past 16 quarters, productivity in the non-farm U.S. business sector recorded a cumulative increase of 13.3 percent, or 3.3 percent per annum. That's more than double the 5.9 percent rise in real compensation per hour over the same period. Roach says it's no coincidence that the relationship between productivity growth and worker compensation has broken down as the forces of globalization have intensified, and the global knowledge pool expanded overseas. But not everyone agrees: "There's evidence wages are beginning to catch up," says Kristin Forbes, professor of economics at MIT's Sloan School of Management.

Labor supply is another consideration. Says Paul Laudicina, managing director of A.T. Kearney's Global Council: "By 2010, it's estimated there'll be a 6 million to 7 million worker shortage; by 2030, there will be 35 million jobs that go unfilled. Therefore, we either have to import labor or export jobs," he reasons.

An interesting thought given current concerns over undocumented aliens. "No one leaves home when the economy is good where they are," reminds Myles Matthews, president and CEO of Global Trade & Technology Center in New York. Demand is created as the middle class expands in lower-wage countries. "It goes both ways," adds Tanweer Akram, a senior economist for Moody's "New markets are rising for products and services that our country offers, like financial services and computers."

How will the U.S. respond to workers who lost jobs to outsourcing? "Those who hurt the most need the most assistance to help them change from losers to gainers. Our answers as a country need to be much more creative," Mann says. But calls to limit offshoring are seen as panicky. "As more higher-end jobs are moved overseas, the result is a push back against offshoring, politically," says Laudicina. And a protectionist backlash will only ultimately hurt the economy.

Janice Fioravante is a New York-based writer who has covered a wide range of business topics.

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