Tag Archives: outsourcing

A ‘cure’ for medical brain drain

Several months ago, I wrote a post suggesting that outsourcing (from developed countries to developing ones) should be viewed  as a potential cure for brain drain (which flows in the opposite direction).

One problem with that argument, which I acknowledged then, is that even if skilled workers stay in their home countries, they are still contributing their skills to the economies of developed countries.

But I now unveil to you, an idea which works around this problem, at least in medical outsourcing. When I say, “medical outsourcing” by the way, I’m excluding medical tourism (I don’t think that really qualifies as “outsourcing”). For a discussion of medical services that can be outsourced, see here.

The Idea

Let us establish a medical outsourcing facility in an African country that has a diaspora that includes many doctors practicing in other countries (Uganda, Ethiopia and Liberia, among many others). The doctors employed here will provide medical services outsourced by hospitals in rich countries.

BUT! We will restrict their hours to one of the following schedules:

Doctors may only work 20 hours per week -OR-

Doctors may work 40 hours per week, every other week

The agreement will be that those doctors who only work 20 hours per week will practice medicine in or around the city where the outsourcing facility is located.

Those who only work every other week, will practice medicine in rural (or otherwise more distant) areas during the alternating weeks.

This model overcomes two obstacles:

1. Doctors’ standard of living: Developed countries are sometimes accused of “looting” developing countries of their skilled professionals. In truth, it’s the individual workers who make the choice to use their skills in another country. Understandably, someone who has invested so heavily in their own education and skills wants to be compensated with a good salary and comfortable standard of living. Hospitals in the developing world are often unable to provide this, and consequently, doctors emigrate.

Although our facility would have to be able to provide a particular medical service at a lower cost to entice hospitals in the West to outsource that function, the difference in cost of living indices should allow our doctors to make a salary that is equal at purchasing power parity (but not at exchange rates) to what they would make if working in the US, Europe, Japan, etc.

2. Contribution to home country: A traditional outsourcing facility has obvious economic benefits for the workers employed there, but beyond that, it’s harder to gauge its benefit. In our setup, the doctors are practicing medicine in their home country, not just providing a second opinion on cases from somewhere else.

True, they would still only be seeing patients in their country half the time, but that is much better than practicing medicine there none of the time, which is the situation in the status quo, when a doctor chooses to practice medicine in a distant land.

Overall, this model has the potential to cure brain drain in a sector where it is particularly severe, and its consequences most harmful.

THOUGHTS???

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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.

THOUGHTS???

*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.