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Friday, September 10, 2004

Paul Samuelson joins the debate about offshoring via NYTimes

Paul A. Samuelson, the Nobel Prize-winning economist and professor emeritus at the Massachusetts Institute of Technology,asserts as untrue the assumption that the laws of economics dictate that the American economy will benefit in the long run from all forms of international trade, including the outsourcing abroad of call-center and software programming jobs. Sure, Mr. Samuelson writes, the mainstream economists acknowledge that some people will gain and others will suffer in the short term, but they quickly add that "the gains of the American winners are big enough to more than compensate for the losers."That assumption, so widely shared by economists, is "only an innuendo," Mr. Samuelson writes. "For it is dead wrong about necessary surplus of winnings over losings."Mr.Samuelson says that,"Up to now, the gains to America have outweighed the losses from trade, but that outcome is not necessarily guaranteed in the future". Mr.Samuelson says that while low-wage nation that is rapidly improving its technology, like India or China, has the potential to change the terms of trade with America in fields like call-center services or computer programming in ways that reduce per-capita income in the United States. "The new labor-market-clearing real wage has been lowered by this version of dynamic fair free trade," doesn't purchasing cheaper call-center or programming services from abroad reduce input costs for various industries, delivering a net benefit to the economy? Not necessarily as per Mr.Samuelson - To put things in simplified terms, he explained in the interview, "being able to purchase groceries 20 percent cheaper at Wal-Mart does not necessarily make up for the wage losses." His student and another distinguished ecconomist, Jagdish Bhagwathi refuts Mr.Samuelson's view saying that his concerns are misplaced.The magnified concern, Mr. Bhagwati said, is that China will take away most of American manufacturing and India will take away the high-technology services business. Looking at the small number of jobs actually sent abroad, and based on his own knowledge of developing nations, he concludes that outsourcing worries are greatly exaggerated.Mr. Bhagwati pointed to the often-repeated estimates that, because of the Internet, as many as 300 million well-educated workers, mostly from India and China, could now enter the global work force and compete with Americans for skilled jobs.In their paper, Muddles against outsourcing Mr. Bhagwati and his co-authors write that such an assessment of the education systems of India and China "almost borders on the ludicrous." In an interview, Mr. Bhagwati said, "You have a lot of people, but that doesn't mean they are qualified. That sort of thinking is really generalizing based on the kind of Indian and Chinese people who manage to make it to Silicon Valley." I agree with Jagdish Bhagwati's views,"The Samuelson model,yields net economic losses only when foreign nations are closing the innovation gap with the United States."But the US can change the terms of trade by moving up the technology ladder," he said. "The U.S. is a reasonably flexible, dynamic, innovative society. That's reason for being optimistic." Even if all of Mr.Samuelson's views are correct, what is the choice - when globalisation happens and others catch up with US in terms of offering equivalent services at more economic prices, it can only do good to U.S economy to embrace this faster - while conceding that change management could be difficult.

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