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Policy makers cannot give in to backlash

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CIOL Bureau
New Update

Alan Wheatley



SINGAPORE: It sounds common sense: as India blossoms into the back office to the world, its low wages a magnet for millions of service jobs, policy makers will have to be on guard against a new outbreak of deflationary pressure.



But just as most economists say it is a fallacy that China is "exporting deflation" by churning out cheap manufactured goods, they say outsourcing service jobs to countries like India will have a negligible impact on price levels in the industrial world.



Jonathan Anderson, chief Asia-Pacific economist of investment bank UBS based in Hong Kong, said shifting services offshore was merely the latest phase in a perpetual process of outsourcing of labour-intensive jobs that industrial countries had coped with for more than 40 years.



"The impact of this over the next few years is likely to be still very small," Anderson said. "It's a tiny part of any macro economy. Let's not get over-excited."



Of course, for individuals who are directly affected, the quickening pace of globalization can be traumatic.



Britain's biggest insurer, Aviva Plc, said on Tuesday it would move 2,350 call-center, information technology and office jobs to India, where graduates will do the same work for a fraction of the cost. Other banks and financial service firms, including Reuters Group Plc, are also heading east.



By July of this year, U.S firms had already moved 400,000 business-processing jobs offshore, a total likely to swell to 3.3 million by 2015, according to IT research firm Forrester.



The exodus is already producing a political backlash, with some U.S. states considering laws that would restrict their governments from doing business with firms that move jobs abroad.



But a recent study by McKinsey Global Institute said it was a mistake to think money spent to buy services abroad was lost to the U.S. economy. Firms save 58 cents, mainly in wages, of every dollar of spending on business services that moves offshore, but that money gets ploughed back into new, higher-value-added jobs.



"Reduced costs are by far the greatest source of value creation for the U.S. economy," Vivek Agrawal and Diana Farrell wrote in the McKinsey Quarterly.



SEA CHANGE



To be sure, if increased outsourcing capped wages growth, it would dampen inflation at the margin. It would also change the relative prices of some services, just as toys, textiles and computers made in China are now cheaper than they used to be.



But Bruce Kasman of JP Morgan Chase in New York said the impact of what he called "low-simmering" structural forces such as globalisation paled beside that of two other factors that were coming together to reverse a two-decade trend of disinflation.



First, global policy makers had embarked on a dramatic shift toward expansionary monetary and fiscal policies after a brush with deflation during the last recession filled them with fear.



"Policy makers are more committed towards reflation after having spent the last 15 to 20 years committed towards disinflation and achieving price stability," Kasman said.



Second, the collapse in Asian demand that followed the region's 1997 currency crisis -- and magnified downward pressure on global prices -- is fading, Kasman argued.



The results of this dual sea change are already showing up in rising material and producer prices around the globe, a trend Kasman expects to be transmitted through the production chain as markets realise that the world is not awash in excess capacity after all.



"The perception that there's an unlimited supply of resources that can produce anything almost costlessly in China and India is mistaken," Kasman said.



Indeed, limits to the expansion of back-office jobs offshore may already be appearing. Dell Inc said last week it had stopped routing some service calls to Bangalore, India, after complaints from customers.



Arvind Panagariya, economics professor at the University of Maryland, said India's education system was not equipped to train enough people for all the jobs said to be heading its way.



The effect on prices would be accordingly limited. "My gut feeling is that services are going to have much less of an impact on the level of prices than manufacturing has had," he said.



GOODBYE TO INFLATION?



Surjit Bhalla, managing director of Oxus Fund Management in New Delhi, disagreed. He said the new found ability, thanks to IT, to move back-office jobs offshore had turned a host of non-tradeable services at a stroke into tradeable services.



"So where you are located is becoming less and less important in terms of the wages that we pay and therefore the prices of the goods and services that we deliver," Bhalla said.



And deep pools of excess labour in Asia and Latin America would cap the price of those goods and services.



"Competition will ensure that international prices don't rise, because any time a domestic producer tries to raise prices someone else will come in and fill up the gap.



"That gap will close over time, but it will take 30 to 40 years. So we are looking at 20 to 30 years of very normal, good growth without inflation in the entire world," Bhalla said.

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