The Three Revolutions and Outsourcing

Fascinating essay in the recent issue of Foreign Affairs.

The author is an Economics Professor at Princeton and was Vice Chairman of the Board of Governors of the Federal Reserve from 1994 to 1996.

Foreign Affairs: Offshoring: The Next Industrial Revolution?
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.

The author recounts how the first revolution was the Industrial Revolution .He takes special note that Smith's Wealth of Nations, published in 1776 (same traditional year for the American Revolution and the Foundation of the Weishaupt's Bavarian Illuminati) was a radical depature but that even it couldn't predict the profound social and demographic changes that that Industrial Revolution brought about, particularly:

1. The shift of the bulk of jobs in western nations from agriculture to manufacturing
   
2. The change from home industry to factory scale industry
   
3. The movement of the population from the countryside into the cities

The Second Revolution (we're talking economic revolutions here of course) was that of the expansion of the Service Industry, and its going on right now. Similar to the above, in that we saw a loss of manufacturing positions, and switch to where the bulk of jobs that the public had were in the Service Industry. Outsourcing of course plays a role here, with developing countries being able to perform manufacturing tasks at roughly the same level of quality (heck, you're certianly willing to pay just as much anyway for the item) at a much lower cost, in addition to developed countries surpassing the US (re: the Japanese and German auto-industry).

Around the same time that the first revolution is occuring there is a change in how public education is perceived, and we start to see scholiasts like Dewey gaining great influence. Similarly, with the expansion of the Service industry, we see another shift in education, such that nowadays its a given that a young american would, after graduating high school, continue on (as if it were a normal process) to College.

Now comes the third revolution, the Information Age.

The cheap and easy flow of information around the globe has vastly expanded the scope of tradable services, and there is much more to come. Industrial revolutions are big deals. And just like the previous two, the third Industrial Revolution will require vast and unsettling adjustments in the way Americans and residents of other developed countries work, live, and educate their children

The author stresses the difficult to predict changes in what types of 'products' (whether actual physical items or the services of an individual, like retail, or tourism or the health profession) are going to become 'tradeable' in the global market and thus be open to outsourcing.
For example, one might think that the health profession is surely not something that can be outsourced. And yet in India we regularly have radiologists who received scans from medical equipment, interpret them, and then send the results and recomendations to the Dr. in your hospital or practice, who then implements those results. And as practically everyone is aware, customer service lines are moving en mass to India.
The special attention to India here is interesting, in that the author notes that its largely due to the existence of large populations in that country that easily speak english, as opposed to, say, china, where there simply isn't as large a population that can do this.

The author makes some recommendations, and notes that he hopes that the article will get people talking about these things. He specifically singles out the stress amougn western worker populations that will result from outsourcing. He states, wrt protectionism:

Most obvious is what to avoid: protectionist barriers against offshoring. Building walls against conventional trade in physical goods is hard enough[...]The Coast Guard cannot interdict "shipments" of electronic services delivered via the Internet. Governments could probably do a great deal of harm by trying to block such trade, but in the end they would not succeed in repealing the laws of economics, nor in holding back the forces of history.

He recomends:

the United States will have to reorganize the nature of work to exploit their big advantage in nontradable services[...]specializing more in the delivery of services where personal presence is either imperative or highly beneficial. Thus, the U.S. work force of the future will likely have more divorce lawyers and fewer attorneys who write routine contracts, more internists and fewer radiologists, more salespeople and fewer typists.

And futher warns, ominously:

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.

Finally he also considers education, and notes:

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 I said, a really interesting analysis. What do some of you think about this?

[edit on 8-3-2006 by Nygdan]

No argument from me.We are already seeing alot of these things happening here in Australia, in fact there is certainly a growing resentment to the off shore movement of customer service centres, particularly to India.
What we musnt lose sight of though is that these changes in the global marketplace will ultimately be of benefit to all. If the divide between rich and poor can be further bridged, which is one of the side effects to this next revolution, then their should be more contentment than resentment imo.
Our biggest challenge lies in the skills our children will need to survive and prosper, as the world gets smaller.Developed countries taking on the role of mentor to the developing countries is needed, but the challenge will be in finding leaders capable and determined enough to take it on, as it wont win them votes.
The scariest part of the article for me was the suggestion that there would be an increase in divorce lawyers LOL. Isnt the world in bad enough shape as it is.(my attempt at not being serious or funny as i shrug sheepishly).

Too Sweet
M4S

Yes, the divorce lawyers line made me chuckle too, but the point that it makes is interesting also. He notes that there won't be a need for accountants, traders, etc, in the US, because those functions, like call centers, will be transfered to the rest of the world. Or even regular lawyers who handle non court transactions (which is the bulk of them), there won't be as much of a need for them. But meanwhile cab drivers, he specifically notes, wouldn't be something that you can have done remotely.

So, amusingly, whereas cab drivers have a reputation as being from the middle east (is that true in Oz also, btw?), before long we might see that the joke is that they're americans who used to work for accounting firms and the like.

Yeh it seems to be that alot of cabbies are ethnic/african etc. Perhaps as some of these would be new to our country it is a job that enables you to readily assimilate. It doesnt seem to be a requirement to actually know your way around to get a job as a cabbie though.

From what i can see then of the article, it seems that it is the white collar workers in the main whose jobs will be outsourced.Will this mean that skilled blue collar workers are going to see an increase in esteem towards them from the rest of society.Will the land scape gardener, garbo's, cabbies and others whose work is a physical service become the new elite.

Will getting your hands dirty now be viewed by parents as an acceptable career path for their children given the changes in the labor market.

And will it eventually turn full circle(not in my lifetime) that as India's affluance increases that they will then begin outsourcing.

Interesting stuff.