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Outsourcing And The End Of Emerging Markets

If American IT workers are having a tough time competing against their Indian counterparts, what's going to happen when emerging, even-lower-wage countries like Vietnam get into the offshoring game? The answer, in fact, bodes well for U.S. technologists.

A study released last week by outsourcing consultancy neoIT says entry-level programmers and help-desk workers in Vietnam earn an average, annual salary of about $3,000 per year. By contrast, India's IT graduates are paid about $5,400 -- not a lot, but almost twice as much as the Vietnamese.

While this could understandably cause more angst among beleaguered U.S. tech workers, it shows that trade in technology services is following a predictable pattern that will ultimately benefit America.

As offshore destinations like India and China become more expensive, some IT work will move to even cheaper locales until, in the words of Whitebox Advisors executives Andrew Redleaf and Richard Vigilante, it has "nowhere to run." At that point, Redleaf and Vigilante argue, in Monday's New York Post, global wage gaps will narrow and business will flow to areas where productivity is highest.

They note that in 1955, Japanese factory workers earned about 20 cents per hour. Now, their wages exceed those of U.S. assembly liners. Similarly, factory pay in Korea increased 22-fold between 1975 and 1995. The same phenomenon can be expected to unfold in IT services -- wages always catch up with productivity, making global distortions temporary and arbitrage opportunities finite.

However, the years ahead will differ from the post-war period in that there will soon be no more "emerging markets" left to emerge. "Whether it takes 15 years or 30, by the time China and India achieve rough effective labor cost parity with the rest of the industrialized world, there will be no place left for manufacturers to run. For the first time in history, the overwhelming majority of people will be living in moderate- to high-wage economies," Redleaf and Vigilante argue.

This is encouraging for future generations of U.S. IT workers. Their contest with foreign labor will be fought on the basis of skill and productivity, not wages. Americans, historically, have done pretty well in a fair fight.

Will offshore outsourcing eventually run out of room? What do you think?

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