Out-Outsourcing

One of the biggest economic stories of the past decade has been the practice of outsourcing jobs from the U.S. to India. From the start, it was an enormously profitable idea: American companies could create a “back office” halfway around the world that would work while the folks in the American “front office” slept. Rather than getting 8 or 10 hours per day of productive work, companies could be productive around the clock.

Of course, American companies couldn’t all just set up shop in India—the fixed costs are too great. So Indian entrepreneurs began founding companies to provide back-office services to American firms. One of these was Infosys Technologies. Now, the New York Times reports, Infosys and its Indian rivals are opening back offices of their own in Brazil, Chile, Uruguay, the Czech Republic, Mexico—and even the United States. The article states:

In a poetic reflection of outsourcing’s new face, Wipro’s chairman, Azim Premji, told Wall Street analysts this year that he was considering hubs in Idaho and Virginia, in addition to Georgia, to take advantage of American “states which are less developed.”

In other words, globalization has come full circle: now you can work in Georgia for an Indian company providing services for an American company.

Discussion Questions

1. Consider a company in Silicon Valley that outsources some of its work to Infosys in India, which in turn outsources some of its work to an office complex in Idaho. Suppose the project is handled by one programmer in each location, and suppose that each programmer is equally talented. In all probability, the wages earned by each programmer are different. What explains this difference?

2. Some jobs, like computer programming, are easily outsourced. Others, like providing haircuts or construction, are not. What effect do you think an increase in outsourcing would have on the wages of computer programmers, barbers, and construction workers? What about the relative prices of software, haircuts, and housing?

3. The increase in outsourcing over the past decade or so is what economists call a disequilibrium phenomenon. Disequilibrium occurs when there is a rapid change in the way things are done—for example, a rapid shift in a demand or supply curve—and prices and quantities have not yet fully adjusted to their new equilibrium levels. What do you think the new equilibrium will look like? What impact do those expectations have on the choices you need to make in college—such as what to major in, or what companies you should try to get a summer internship with?

Will Microcredit Reduce Poverty?

Most people in developed countries can easily use their assets to secure credit. With a stable source of income or a bit of collateral, like a house or a car, an American can take out a loan to start a business, remodel the bathroom, or buy an engagement ring.

Access to credit in relatively poor developing countries is far scarcer.

Poor peoples' incomes are inherently less stable and often too low to qualify for lending. The ill-defined property rights in many developing nations make it difficult for poor residents to prove that they own the housing or land that they occupy. Lacking both income and legitimate titles to what little collateral they actually have, the credit prospects for most of the world's poor seem bleak.

Enter microcreditors. As Tyler Cowen describes in his latest Economics Scene column for The New York Times, microcreditors are non-profit, for-profit, or government organizations that lend small sums to people in poor communities. The microloan recipients open businesses, improve their homes, or pay medical bills--using the loans to invest or consume as they see fit. Read Cowen's commentary to find out more about the benefits and controversies surrounding microcredit in India.

1. According to Cowen, microlenders like Spandana offer poor Indians better rates than traditional money lenders. How do the lending practices of microcredit organizations differ from the practices of traditional money lenders? How does Spandana use community pressure to maintain high repayment rates among its loan recipients? What other incentives encourage borrowers to repay the microloans?

2. Why do some state officials in India oppose the practices of microcreditors like Spandana? According to Cowen, what would legal caps on interest rates do to the solvency of microcreditors? How might legal caps on interest rates change the borrowing habits of India's poor?

3. Cowen visited Hyderabad--a metropolis of over 6 million residents. He suggests that microlending works fairly well for poor people in this urban setting. How might the feasibility of microcredit change in a rural setting? Rural residents in developing countries earn income from farming--a relatively risky vocation because of price volatility and unpredictable weather. Would repayment rates among rural residents likely be higher or lower than those among urban residents? How would traveling to rural settings affect the way microcreditors monitor repayment?