The Economics of Outsourcing: How Should Policy Respond?

By Palley, Thomas | Foreign Policy in Focus, March 2, 2006 | Go to article overview

The Economics of Outsourcing: How Should Policy Respond?


Palley, Thomas, Foreign Policy in Focus


Abstract

Outsourcing is a central element of economic globalization, representing a new form of competition. Responding to outsourcing calls for policies that enhance national competitiveness and establish rules ensuring acceptable forms of competition. Viewing outsourcing through the lens of competition connects with early 20th century American institutional economics. The policy challenge is to construct institutions that ensure stable, robust flows of demand and income, thereby addressing the Keynesian problem while preserving incentives for economic action. This was the approach embedded in the New Deal, which successfully addressed the problems of the Depression era. Global outsourcing poses the challenge anew and calls for creative institutional arrangements to shape the nature of competition.

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"A wild horse can do a lot of damage, but a bridled horse can be ah invaluable asset."

Posted by Proud UAW Member in response to "Politics of Globalization" at www.thomaspalley.com, December 27, 2005.

I. Understanding outsourcing

Outsourcing is a central element of globalization, and policymakers need to understand its economic basis if they are to develop effective policy responses. The practice of outsourcing should be understood as a new form of competition, and responding to it calls for the development of policies that enhance national competitiveness and establish new rules governing the nature of global competition.

Viewing outsourcing through the lens of competition connects with early 20th century American institutional economics. The policy challenge is to construct institutions that ensure stable flows of demand and income, thereby addressing the Keynesian problem while preserving incentives for economic action. This was the approach that was embedded in the New Deal, which successfully addressed the problems of the Depression era. Global outsourcing poses our current economic challenge and its solution requires a new set of institutions. The task is compounded by problems associated with a lack of global regulatory institutions and changes in the balance of political power that make it difficult to enact needed reforms.

Global outsourcing is enormously facilitated by technological innovations associated with computing, electronic communication, and the Internet. However, it is important to recognize that the debate surrounding outsourcing is not about the benefits of technology. It is a debate about the nature of competition and what constitute appropriate rules for governing competition within and between countries. Failure to recognize this can distract and confuse the issue.

II. The economics of outsourcing

Globalization has dramatically changed the structure of international competition. In many regards the process of change can be identified as beginning in the 1950s and 1960s with the emergence of multinational corporation (MNC) production. Initially, this output was primarily for local markets, as evidenced by the activities of such companies as Ford Europe and General Motors Europe, which manufactured for the European rather than the U.S. market. However, in the 1980s and 1990s the pattern changed significantly, when MNC production became increasingly targeted for export back to the United States. This change is exemplified in Mexico and China, which have become MNC production platforms.

There are two important economic features about the MNC revolution. First, MNC manufacturing has provided an important arena for business to learn how to render state-of-the-art technology and production methods globally mobile. Second, MNC activities offered a first margin within which capital was able to put American labor in international competition, and this competition has had significant adverse impacts on manufacturing wages, employment, and union membership (Bronfenbrenner, 2000; Bronfenbrenner and Luce, 2004). …

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