The outsourcing story continues

According to the International Labor Organization, India outsourced $14 billion worth of IT and business services by the end of the fiscal year 2003-2004. Popular wisdom has it that outsourcing is bad for people in the economy which does it. The logic goes something like this:

1. Country A outsources services.
2. These services were earlier performed in Country A itself, and will now be performed in Country B.
3. Country B benefits with jobs and money while Country A loses jobs.

While this is a nice bit of logic which appeals to politicians, lobbyists and people who have unfortunately, had to bear the brunt of shifting jobs, the reality is that outsourcing helps an economy compete where it couldn't do so otherwise. This is how I believe outsourcing really operates:

1. Country A faces competition from other countries where production is either more efficient, cheaper or both.
2. Instead of going down, Country A outsources services to Country B where production is more efficient/cheaper or both.
3. Country A still retains industries which would have gone down otherwise, is still able to sell products and is able to maintain economic growth.
4. Country B gains money and jobs which did not exist earlier and experiences economic growth of its own.
5. Country B now outsources certain services on its own to other countries including Country A based on the specific strengths of Country A.
6. Everyone benefits since there is a growth in producers and consumers everywhere.

See it happen : The $14 billion that India outsourced was 2.4% of its GDP (compared to the $41 billion which the US outsourced - 0.4% of its GDP) making it the fifth largest outsourcing nation in the world after the US, Germany, UK and Japan. Guess where India outsourced the bulk of this $14b? the very same nations mentioned above. The way the world does business is changing, and on a global level it is better for everyone. On a local level, it is still better for everyone - when an economy grows, the effects trickle down to everyone. (I'm not an economist, so correct me if I'm wrong) [ related: the outsourcing weblog]