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Tuesday, October 21, 2003

The Information Revolution and the Pele/Ronaldo Effect

My Money Files Column

The Information Revolution and the Pele/Ronaldo Effect

One of histories deeper mysteries might revolve around what these two topics have in common, short of the fact that they are flying round my head at the time of writing. Let's see if I can find a connection.

To start at the begining: one of the information revolution's least commented details can be found in the number of US H1B vouchers issued to workers in the technology industry in 2002: this went down, in comparison with 2001, and by a whopping 75% according to a recent department of homeland security (DHS) report. The H1B visa programme, which allows foreigners to work in the US for up to six years, has enabled thousands of Indians to take up well-paying jobs in the US high-tech sector, especially in Silicon Valley. The number of H1B visas for initial employment fell from 105,692 in 2001 to 27,199 in 2002, according to the San Jose Mercury News. The percentage of H1B visas issued to technical workers also declined from 52.5 per cent in 2001 to 26.3 per cent in 2002, the paper said. The news came as the annual limit on the number of visas was about to be lowered from October 1.

Of late, the visa programme has attracted much criticism inside the United States in view of the relatively high unemployment rates currently being experienced there, with opponents of the visas arguing that US workers are losing jobs because companies are hiring less-expensive foreign workers. Now if this is how the situation is seen from within the US, it may be just worth asking, and what about India, what is the impact there? And this is where the situation gets interesting. But in order to appreciate this fully, perhaps we should go back to an older debate, that of the migration of persons from the less developed parts of the world (when I was a kid this used to include Europe) to the more developed part, and in particular to the United States.

This movement had an old name: the 'brain drain'. Now the brain drain is a topic which has produced a larger literature than I care to contemplate reading, but some stylised observations can be extracted. Perhaps one starting point for this would be a Foreign Affairs essay by Indian Economist Jagdish Bhagwati. As Bhagwati suggests:

"The reality is that borders are beyond control and little can be done to really cut down on immigration. At the same time the societies of developed countries will simply not allow it. The less developed countries also seem overwhelmed by forces propelling emigration. Thus, there must be a seismic shift in the way migration is addressed: governments must reorient their policies from attempting to curtail migration to coping and working with it to seek benefits for all."

As Bhagawati indicates:

"emigration occurs after study abroad. The number of foreign students at U.S. universities, for example, has grown dramatically; so has the number who stay on. In 1990, 62 percent of engineering doctorates in the United States were given to foreign-born students, mainly Asians. The figures are almost as high in mathematics, computer science, and the physical sciences. In economics, which at the graduate level is a fairly math-intensive subject, 54 percent of the Ph.D.'s awarded went to foreign students, according to a 1990 report of the American Economic Association.

Of these, about 2,000 come from the Indian Institutes of Technology (IITS), which are modeled on MIT and the California Institute of Technology. Graduates of IITS accounted for 78 percent of U.S. engineering Ph.D.'s granted to Indians in 1990. And almost half of all Taiwanese awarded similar Ph.D.'s had previously attended two prestigious institutions: the National Taiwan University and the National Cheng Kung University. Even more telling, 65 percent of the Korean students who received science and engineering Ph.D.'s in the United States were graduates of Seoul National University. The numbers were almost as high for Beijing University and Tsinghua University, elite schools of the People's Republic of China.He adds -- "A realistic response requires abandoning the "brain drain" approach of trying to keep the highly skilled at home. More likely to succeed is a "diaspora" model, which integrates present and past citizens into a web of rights and obligations in the extended community defined with the home country as the center. The diaspora approach is superior from a human rights viewpoint because it builds on the right to emigrate, rather than trying to restrict it."

Now, as Reuben Abraham points out , Bhagawiti's numbers may well seriously understate the numbers. Reuben points out that the state of Karnataka alone produces something like 15,000 engineers per year. His guess is that India graduates about 150,000 engineers every year of which around 50,000 or so are from IT-related courses.

But what is the real impact of the Brain Drain? Most commentators have assumed that the loss of qualified people is a pure liability for the society which produces them: I think this view is over simplified, and this is where our footballers - Pele and Ronaldo - enter the picture . Well-known footballers have long been leaving Brazil to earn their living with the more lucrative European clubs. Has this had a detrimental effect on Brazilian football? Not that I have noticed. You only have to look at all those young Brazilian children kicking the ball around in the Favellas and on the beaches to realise that there is something wrong with this view. The football exodus is producing more good footballers not less. So: is the 'brain drain' good for you? Well yes and no.Obviously you lose talent. So this is bad. But the success of this talent encourages others. So this is good. To cut a long story short, from very small beginings (isn't this the whole complexity/chaos idea?) you can generate a very big process where everyone copies everyone else.

This seems to have happened in India, with even people from relatively small villages saving money to send their children to college to learn about IT. An enormous education and training industry developed.Then comes the crunch. The Nasdaq crashes. No more H1B's. But there is a river of people as big as the Ganges training-up ready to go. So what happens? The water in the river 'backs up', and gets diverted into tributaries locally. Then the 'boys on the bench' start to arrive home with nothing to do and plenty of experience. So some intelligent entrepreneurs (Schumpeter had it sooooo right) step-in and start the ball rolling. The next thing you know, Silicon valley is dying. Incredible thing globalisation, isn't it?

Now for the other half of the equation: if the 'brain drain' isn't necessarily cerebrally damaging for the sending country, what about 'brain switchback', the mass-bagpack flight in reverse of those trained IT engineers. Is this really so damaging for the former host. Well again, not necessarily. According to a recently released report from India's National Association of Software and Service Companies outsourcing will plug the hole in the US labour market produced by the retiring of the baby boomers.

"The report outlines the cost-savings and increased flexibility that global sourcing will provide to US companies, thereby keeping them competitive in the global marketplace. Forecasts for the US indicate an annual GDP growth of 3.20%, which will lead to an increased demand for labor. However, the US will face a domestic labor shortfall of 5.6 million by 2010 due to an aging population, which can potentially cost the US economy $ 2 trillion if appropriate measures are not taken well in time............ The report also found that offshoring keeps US businesses competitive, creates new markets for US goods and services, and fills the shortfall in services labor that the US is expected to face in the next seven years." Over the next decade, the US economy will mirror the growth of the 1990s leading to an increased demand for labor. There will be a domestic labor shortfall of approx. 5.6 million workers by 2010 due to slow population growth and an aging population. If the labor shortfall is not met, the US economy will lose out on growth opportunities resulting in an estimated cumulative loss of $2 trillion by 2010. Global sourcing in the form of immigration, temporary workers and offshoring can overcome this shortfall. For every $100 of call-center work offshored by US firms, $143 is invested back into the US economy in the form of repatriated profits, increased sales of telecom equipment and cost-savings. Similarly, the amount invested back into the US economy (for every $100 of work) is $133 for IT services, and $142 for high-end knowledge services like equity research, underwriting, tax preparation and risk management."

The figures for $143 dollar return for every $100 dollar spent may seem exaggerated until you take into account the positive feedback effects of growth in India. This activity leads naturally to increased internal demand in India itself, and hence to increased markets. Of course, what proportion of this market goes to the US is another question, there are remember new competitors arriving, like, for example, Huawei. To be able to take advantage of the new Indian market US companies need to become cost competitive. This, of course they can do, by outsourcing manufacturing to China, but then, with their own ageing workforce might they not succumb to the 'Japanese illness'? Bottom Line there is no guarantee here. But that the new found growth boom in India and China potentially offer an opportunity as well as a challenge for the US, I think that this is beyond doubt. The US is reputedly a society that likes risk, and likes the challenge. Well, now's your opportunity.

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