Offshoring: The Next Industrial Revolution?

Alan S. Blinder

From Foreign Affairs, March/April 2006

Summary:  Economists who insist that "offshore outsourcing" is just a routine extension of international trade are overlooking how major a transformation it will likely bring -- and how significant the consequences could be. The governments and societies of the developed world must start preparing, and fast.

Alan S. Blinder is Gordon S. Rentschler Memorial Professor of Economics at Princeton University. He served on the White House Council of Economic Advisers from 1993 to 1994 and as Vice Chairman of the Board of Governors of the Federal Reserve from 1994 to 1996.

To repeat, none of this is to suggest that there will be massive unemployment; rather, there will be a massive transition. An effective safety net would ease the pain and, by so doing, speed up the adjustment.

IMPERFECT VISION

Despite all the political sound and fury, little service-sector offshoring has happened to date. But it may eventually amount to a third Industrial Revolution, and industrial revolutions have a way of transforming societies.

That said, the "threat" from offshoring should not be exaggerated. Just as the first Industrial Revolution did not banish agriculture from the rich countries, and the second Industrial Revolution has not banished manufacturing, so the third Industrial Revolution will not drive all impersonal services offshore. Nor will it lead to mass unemployment. But the necessary adjustments will put strains on the societies of the rich countries, which seem completely unprepared for the coming industrial transformation.

Perhaps the most acute need, given the long lead-times, is to figure out how to educate children now for the jobs that will actually be available to them 10 and 20 years from now. Unfortunately, since the distinction between personal services (likely to remain in rich countries) and impersonal services (likely to go) does not correspond to the traditional distinction between high-skilled and low-skilled work, simply providing more education cannot be the whole answer.

As the transition unfolds, the number of people in the rich countries who will feel threatened by foreign job competition will grow enormously. It is predictable that they will become a potent political force in each of their countries. In the United States, job-market stress up to now has been particularly acute for the uneducated and the unskilled, who are less inclined to exercise their political voice and less adept at doing so. But the new cadres of displaced workers, especially those who are drawn from the upper educational reaches, will be neither as passive nor as quiet. They will also be numerous. Open trade may therefore be under great strain.

Large-scale offshoring of impersonal-service jobs from rich countries to poor countries may also bear on the relative economic positions of the United States and Europe. The more flexible, fluid American labor market will probably adapt more quickly and more successfully to dramatic workplace and educational changes than the more rigid European labor markets will.

Contrary to current thinking, Americans, and residents of other English-speaking countries, should be less concerned about the challenge from China, which comes largely in manufacturing, and more concerned about the challenge from India, which comes in services. India is learning to exploit its already strong comparative advantage in English, and that process will continue. The economists Jagdish Bhagwati, Arvind Panagariya, and T. N. Srinivasan meant to reassure Americans when they wrote, "Adding 300 million to the pool of skilled workers in India and China will take some decades." They were probably right. But decades is precisely the time frame that people should be thinking about -- and 300 million people is roughly twice the size of the U.S. work force.

Many other effects of the coming industrial transformation are difficult to predict, or even to imagine. Take one possibility: for decades, it has seemed that modern economic life is characterized by the ever more dehumanized workplace parodied by Charlie Chaplin in Modern Times. The shift to personal services could well reverse that trend for rich countries -- bringing less alienation and greater overall job satisfaction. Alas, the future retains its mystery. But in any case, offshoring will likely prove to be much more than just business as usual.