Tag Archives: Corporations

Outsourcing: the cure for Brain Drain?

Addressing a highly sensitive issue in a casual blog post is risky.  So let’s tackle two highly sensitive issues this week!!!

I want to preface my proposal(s) with an argument that I am surprised is not made more often by proponents of outsourcing:

Outsourcing is increasingly a countervailing force to brain drain.

I say ‘increasingly’ because, in its early days, outsourcing was just replacing a national brain drain (educated workers in poorer countries leaving for richer countries where they could make more money) with a sectoral brain drain (trained professionals in poor countries, such as doctors, leaving for call centres where they could make more money).

But now that higher value processes in healthcare, IT, finance, etc. are being outsourced, it’s possible for an educated, trained professional to stay in her home country AND stay in her field of expertise AND make a good salary.

True, even though that worker is staying in her home country and using her skills and education, most of it is going to benefit a company somewhere else.  But there are still several net benefits to this situation:

  1. An educated middle class is being created in that country, with all the advantages to democracy that follow.
  2. Those workers will be paying taxes in their home countries rather than to Western governments.  This should improve public services, infrastructure, etc. especially since #1 will create a check on corruption and mismanagement of public funds.
Of course, outsourcing is not just one big bed of roses.  Most of the benefits of outsourcing have, so far, accrued to a tiny handful of Asian and Central European countries (India accounts for anywhere between 80-90% of global outsourcing).  And of course there are the workers in the US and Western Europe who lose their jobs because of outsourcing (although many big Indian firms are now outsourcing jobs BACK to the US).
What to do, what to do?

Let’s focus on tax incentives for US companies that send jobs offshore.  These are not as straightforward as some politicians make them sound, so they’re an unwieldy tool, but for now, they’ll have to do. There is no specific “Outsourcing Deduction” but because companies are allowed to deduct business expenses, they can write off the cost of closing a facility in the US and opening one somewhere else.  Moreover, some companies successfully game the US tax system by claiming a deduction for taxes paid to foreign governments without paying taxes to the US. Democratic efforts to tighten these loopholes have been filibustered.

In my opinion, there’s nothing inherently sinister about the current incentives.  I don’t think they’re evil, just unnecessary; usually a company decides to outsource a particular function because it makes economic sense, not because of the tax incentives.  So why subsidise something that was going to happen anyway?

But simply preventing companies from writing off expenses related to outsourcing or claiming deductions on foreign taxes is too heavy-handed, not to mention politically impossible.  Here’s my proposal:

1. Limit the amount companies can deduct for outsourcing expenses.  As this will result in a net gain for the Treasury, the savings could be invested in programmes that help workers who’ve lost their jobs directly because of outsourcing (and not merely because of foreign competition) gain new skills.*

2. Adjust the amount of foreign taxes paid that a company can deduct based on how prosperous that foreign country is.  The percentage could be indexed to GNI, GDP per capita, or some other measure.  As an example, a company could claim a bigger deduction for taxes paid in Uganda than in India, and a much bigger deduction for taxes paid in the DRC than in the PRC.

Available for offshore facilities!

Why would this help?

Well, let’s make the rather straightforward assumption that outsourcing is inevitable. So as a company is deciding where to locate a new facility, it now has several more factors to consider.  A poorer country that might otherwise not have been considered, perhaps because the cost of relocating there or of  giving sufficient training to local workers was too high, is now in the running because the company could deduct a higher percentage of its foreign taxes.

The first proposal is sort of a throwaway, but taken together, these two changes could help spread the benefits of outsourcing more widely across the globe while mitigating the harm done to workers in industrialised countries.


*My more politically astute readers will note that even this proposal fails the current House Republicans’ ideological test of “cut-go.” No matter, this idea will probably still be good in 2013.

A Global Minimum Wage

Fanciful Utopia

The idea I’m about to foist upon you is not a new one, and it might not even be original (feel free to direct me to anything in the literature or blogosphere that might have scooped me on this one).

To make matters worse, it’s not even an enterprising idea — it’s a policy recommendation!  I first started formulating it when I was a wee undergrad, and when I pitched it to one of my Econ professors, he told me it sounded too much like “global utopia.”  I haven’t spent much time refining the idea since then, so it hasn’t changed,  but the times have, perhaps sufficiently to make the idea palatable…

The Idea

There are essentially just two big steps to this idea, the goal of which is to end exploitation of workers:

  1. Set a global minimum wage (GMW)
  2. Allow countries to place import tariffs on companies that pay below this global minimum wage
1. Set a global minimum wage
This will be very hard to determine.  It makes sense for whatever wage is agreed upon to be expressed in USD, but at purchasing power parity (PPP) rather than exchange rates, as that will make it more stable (If I’ve lost you, don’t worry, the rest will still make sense).
Where exactly the GMW should be set is tricky, to say the least.  It needs to be set high enough that it actually accomplishes its goal of lifting workers out of poverty and preventing exploitation, but low enough that it doesn’t push economic activity underground or off the books.
2. Allow Tariffs
This part is also tricky. I’m still not sure whether tariffs should just be allowed against companies that fail to pay the GMW or against product categories from an entire country if the respective government fails to enforce the GMW in that sector.
In any case, the enforcement for this plan would be through the World Trade Organisation (WTO).
As I said, this idea has not undergone significant revision since I first dreamed it up, but the current political climate might make it either more palatable or less so.  First, the reasons I think it might be more plausible:
Pro: Rising Protectionism
I’m not a big fan of “economic nationalism” but it’s a completely predictable consequence of a recession or downturn, and in this case it could be put to good use.  I think politicians in the US  would love the opportunity to slap tariffs on China and other emerging economies; European leaders would love it even more because they could do it in the name of Human Rights!
Con: Corporate Objections
The major opponents to this will of course be large multi-national corporations who rely on low wages at one end of their global supply chain.  Their objection to paying livable wages to workers in developing countries is nothing new, but their political power, especially in the US, has been growing significantly.
Recent Supreme Court decisions (Wal-Mart v Dukes, Brown v Entertainment Merchants Association, etc.) have solidified the Roberts court’s reputation as the most corporate-friendly in history; with the current composition of SCOTUS, it’s quite possible that any tariffs enacted in support of the GMW could be successfully challenged in court in the US, the biggest single market for imports.  And even that would require a treaty to be ratified in the first place; given the increased corporate influence over Congress authorized by Citizens United v FEC, it would be difficult, at best, to get any sort of legislation passed enshrining the GMW in law.
As with any other idealistic global scheme, it would be possible to proceed without US participation, but the effect would be reduced.