Free Software and Offshoring

by on June 5, 2007 · 10 comments

Here’s one other section of Braden’s post that I found problematic:

You don’t have to be a Nobel prize-winning economist to understand that an emphasis on building an ICT sector around inexpensive labor will drive wages down. In a global economy, a worker in a lesser developed country could live on just dollars a day. A race to the bottom is the kind of race the EU will wish it hadn’t entered, let alone run.

The FLOSS study authors say that developers will be so inexpensive that even small and medium-sized companies will hire them to work in-house, which they say will help local employment. However, in a globalized race to the bottom, it’s not a stretch to say that the EU would lose to even cheaper programmers in China, India and the former Soviet bloc. In the U.S., for example, the cost savings of IT offshoring in 2004 reached $7.0 billion, according to a study by ITAA — a 36.2% savings rate…

By increasing demand for FLOSS through preferences and mandates, the EU will find that in a “Flat World”, lower cost developers from other countries would rush to fill that demand. The result is more likely to be an increase in offshoring to China and India—not job creation in the EU.

I think it’s debatable if free software will drive down programming wages, or if most of those jobs can be outsourced to China in either event. But let’s assume he’s right about both of those things. When he writes that this would be “a race to the bottom is the kind of race the EU will wish it hadn’t entered, let alone run,” he seems to be suggesting that such a “race to the bottom” would be a bad thing. It seems to me that this is at odds with the principles of basic economics.

Let me just a quote a famous 2004 statement by Greg Mankiw, who was the Chairman of the president’s Council of Economic Advisors at the time:

“One facet of increased services trade is the increased use of offshore outsourcing in which a company relocates labor-intensive service industry functions to another country…. Whereas imported goods might arrive by ship, outsourced services are often delivered using telephone lines or the Internet. The basic economic forces behind the transactions are the same, however. When a good or service is produced more cheaply abroad, it makes more sense to import it than to make or provide it domestically.”

The statement attracted a firestorm of controversy among pundits and the general public, but as free-market economist Bruce Bartlett pointed out:

One would have a hard time finding a reputable economist anywhere who disagrees with this analysis. No nation has ever gotten rich by forcing its citizens to pay more for domestic goods and services that could have been procured more cheaply abroad. Nations get rich by concentrating on doing the things they do best and letting others produce those things they can produce better and more cheaply. It is called the specialization of labor and it is the foundation for economic growth. That is why even Democratic economists like Janet Yellen, Laura Tyson, Brad DeLong and Robert Reich have come to Mankiw’s defense.

Unless I’m misreading Braden’s post, he appears to disagree with Mankiw about the benefits of offshoring. He appears to be urging Europe to focus on hiring expensive European workers to perform programming tasks that could be done more economically by overseas workers. Such a policy might be good for European programmers, but it’s not good for European consumers or the efficiency of the European economy as a whole.

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