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.
