By Chang Se-moon
One presidential candidate in the United States has repeatedly attacked the other candidate for outsourcing jobs when he worked in the private sector. Remember that the same criticism can also be directed to Korea’s booming multi-national corporations that have operations outside Korea. Let us take a close look at the issue to determine whether outsourcing is really as bad as politicians claim it to be. Let me tell you a story, first.
It appears that there are many good doctors who can cure cancers of all types so long as they are discovered during their very early stages. The doctors are really saving lives, and thus deserve to be paid well. Assume that the cancer doctor is paid $500 per hour. Doctors are notoriously poor hand-writers, and need a typist to help them out. The cancer doctor thus hires a typist, paying him (the typist) $10 per hour. Let us make an assumption that the doctor is a better typist than the typist she (the doctor) just hired. Stated in simple terms, the doctor hires a typist, but can type better than the typist. In this story, the doctor has an absolute advantage not only in treating cancer patients, but also in taking care of typing duties. Should the doctor take care of both patients and typing duties, and not hire the typist?
Clearly, the answer is no. If the doctor takes care of typing as well as patients, the doctor will lose $500 to save $10. In this case, the doctor is said to have a comparative advantage in taking care of patients, while the typist has a comparative advantage in taking care of typing. Both benefit from specialization and trade. Keep in mind that the same explanation applies just as well if the doctor is one country and the typist is another country. This theory of comparative advantages has been the basis for promoting free trade for about 200 years.
Outsourcing may take place in many different forms. A Korean company may contract a firm in India for service calls for the company’s products. A U.S. company may open manufacturing plants in other countries through a partnership agreement. A Korean or U.S. company may hire a distributor in other countries to sell the products that the company produces. No matter what shape an outsourcing may take, it is all based on comparative advantages. Outsourcing is usually a calculating act of a company to lower costs so that it can survive the competition.
Let me give you another example that shows the importance of outsourcing. Note that any opposition to outsourcing is a two-way street. If we want our businesses to open plants and hire our people in our country, people in other countries will want to do exactly the same. In the county where I live, the number of employed persons is about 180,000 and the rate of unemployment is around 10 percent. The county is also the home of many well-known foreign companies such as ThyssenKrupp, Airbus, Degussa, Mitsubishi, Austal Shipbuilding, and more. The number of workers hired directly by these foreign companies is approximately 10,000. Through the multiplier effect, these 10,000 direct employees have created roughly another 10,000 jobs in such supporting industries as accountants, janitors, clothing stores, restaurants, and the like.
If we assume that these companies are forced to close because they feel so much pressure from short-sighted political leaders of their countries, about 20,000 of well-paying jobs out of 180,000 jobs will disappear and the rate of unemployment will increase to well over 20 percent from the current 10 percent. If these companies have to close their doors, it is highly unlikely that they will be able to open comparable plants in their own countries. Everyone loses.
If a country is prosperous, the country will have healthy domestic industries and many successful operations in other countries that easily translate into global power beyond jobs. Dr. Chang is a panelist of the CESifo World Economic Survey.
Dr. Chang is a panelist of the CESifo World Economic Survey.