Offshoring: Political Myths and Economic Reality

Overseas outsourcing, commonly known as offshoring, is an aspect of globalisation that has attracted significant political and media attention. In this lecture David Smith discusses the phenomenon and examines the costs and benefits both to the companies and countries from which activities are being outsourced and to the host economy. He concludes from a review of the evidence that there are indeed significant benefits, and that they mainly accrue to the outsourcing country, in the form of lower inflation, faster growth in real incomes and an improved productivity performance (the shift to higher value-added activities). So why is there so much political sensitivity about offshoring? One is that, unlike in the case of manufacturing, the jobs being offshored are commonly seen as those in which advanced economies retain comparative advantage. Another is that the new, higher value-added jobs that will be created are in areas and activities that barely exist at present. The biggest problem, he concludes, is that while the victims of offshoring can be easily identified, and have a political constituency, the gains are spread more thinly across the economy. This is the challenge for economists and pro-free trade politicians.