Friday, December 4, 2015


By 2004, the Indian information technology industry was booming, and the US programming industry was sinking, thanks to wireless export of data from one country to the other. It was due to the wage differential which, as I argued in this Business World column of 11 March, was due to the difference in price level.

Why did it not happen before?

The latest issue of Business Week cites the examples of two young persons of about the same age. Stephen Haberman, 22, is just about to finish his master’s in software engineering from Carnegie Mellon University – the one which created the CMM standards so coveted by Indian software firms. Deepa Paranjpe, 24, is finishing a master’s degree from Indian Institute of Technology, Bombay. Steve knows 11 computer languages; Deepa knows 9. Steve married Amy, a fellow computer science student from Nebraska. She cannot find a programming job, and is instead writing a novel with a Christian theme. No high-tech software firms are coming to Carnegie Mellon, and Steve has contempt for the banks and brokers that come to offer jobs. He hopes to go to Omaha, a small town, and service the software needs of local shops and hospitals. Deepa has got a job with Veritas, a US firm in Poona, starting in June; but she is aiming to start out on her own and make it big. Over there, dashed hopes; over here, soaring ambition. And over there, it is not simply a matter of ambitions being scaled down; it is a matter of jobs lost and livelihoods destroyed. This story is being repeated a thousandfold.
Why is this happening now? It is, of course due to a difference in costs. Deepa will earn $10,620 a year. The lowest programmers in the US earn five times as much. These salary differentials could be protected as long as the programmer in the US did not have to compete with the one in India. The US is the world’s largest software market, accounting for about two-thirds of the turnover. It controls competition that foreigners can offer American workers through its visa regime. The number of work visas issued is calibrated to the requirements of the US economy; US Congress cut down the number of H-1B visas annually issued from 195,000 to 65,000 last October.
But still the job haemorrage in the US continues. For Deepa no longer has to go to America to take an American’s job; she can do it sitting in Poona. This is the consequence of advances in wireless technology; an 8-foot disk on the terrace of her office building beams to her the data that her US client wants mined. She mines it and sends the finished product back by wireless and satellite.  American Congressmen can control jobs in America; but American software firms no longer need to employ someone in America to do the job.
But is it that different now? When there were no VSATs, software could still be shipped on tapes and disks. And as the Heckscher-Ohlin theorem stated in the 1930s, much before the advent of satellites, people do not have to move across borders for their wages to be equalized; the movement of goods is enough. The fact that cloth made on British-made looms in India could be sold in Britain should have raised Indian wages to the British level – and if British wages continued to be higher, it should have caused unemployment in Britain.
Which it did; over a fifth of the labour force in Britain was unemployed in 1930. And not just in Britain, but also in the US, and in Europe. Those countries liked equalization of wages as little as they do now. That is why the US imposed import duties in the 1930s that were higher than India’s today – and India is the worst imposer of duties. That is why Britain used Imperial Preference in 1934 to create a wall of tariffs around the empire.
Joan Robinson called these beggar-my-neighbour policies; and so they were – they exported unemployment to other countries. But a country can have unemployment only if the unemployed cannot compete with and take away jobs from the employed – if wages are insensitive to employment. They are not entirely; programmers’ wages in the US, for instance, have fallen 15% since the downturn of 2000. But they would need to fall 80% for them to be competitive with Indian programmers – and they cannot because the US cost of living is roughly 5 times the cost of living in India.

That is where our competitive advantage lies – in our low price level. That is what we should try to protect – by eliminating inflation, and by not allowing the Rupee to appreciate.