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Downward Dollar Delivers Blow to Outsourcing

Tags Financial MarketsGlobal EconomyProduction Theory

02/13/2008Stas Holodnak
The slowdown of the American economy and the ensuing devaluation of the US dollar deliver gloomy headlines as timely as weather forecasts. The weakening currency may excite entrepreneurs anticipating increased exports. As well, it might have a stimulating effect for American professionals who are paid in return for our services.
However, the total effect is negative insofar as it will curb the trend toward the expansion of the international division of labor. Less outsourcing means higher labor costs for American business, which means less productivity overall.
Foreign workers are increasingly affected by what is called negative translation exposure — losing money while swapping their hard-earned but depreciating US dollars for their rising home currencies.
The falling US dollar eats away at foreign workers' savings as the money is converted to their national currencies, but, more important, it discourages people leaning towards employment in the outsourced sector. The continued US dollar devaluation might open jobs previously filled by foreigners to the domestic labor market.
Willingness to learn new trades combined with high mobility are the defining characteristics of the American labor force. From the gold rush of the 19th century to the high tech boom at the end of the 20th, people changed careers en masse when opportunities presented themselves. At the time of the dot-com boom and Y2K restructuring, thousands of Americans learned the specifics of IT jobs without going to college.
Eventually with demand for skilled labor widely exceeding domestic labor supply, American companies turned for help to foreigners, particularly to Indian college graduates. Preceding the current slowdown, the US economy grew at a faster pace than the rest of the world, spurring dollar appreciation against other currencies. At the end of 2005, one dollar traded at 45 Indian rupees on spot exchange, translating the average technology salary of $69,700 — according to Dice's Annual Tech Salary Survey — into more than 3,000,000 rupees (30 lacs). That was a lot of rupees in the eyes of Indian college graduates since a very good job at home, according to the DQ-IDC India IT Salary Survey in 2005, would land them at most 10 lacs, only a third as much as the American salary.

Now, with India widely outperforming America in economic growth, more Indian college grads prefer to find work at home. The Indian currency has appreciated 13% since 2005, trading at approximately 39 rupees per dollar — 13% less pay as far as Indian specialists contemplating work in America are concerned. The dollar depreciation is a long-term trend forecasted by many economists and investors. Jay Bryson, an economist at Wachovia, is convinced that the US dollar may decline at least another 10 percent by the end of 2008. This prognosis, if realized, will certainly reduce US job appeal among Indian college graduates provided that the Indian economy is not weakened.

While US work experience is still coveted in India today, this attitude is not set in stone as more good paying jobs are created at home. Sachin Thareja, an Indian software developer and NYU graduate student, recalls how, in the late 1990s, students back in India joked that a fellow college graduate had one foot in India and another on Air India — on a one-way flight to the USA. After a recent visit to India, he says that this sentiment is no longer prevalent on Indian campuses. "Less people are willing to work in the US, and around 10% of those already here choose to return home."

The latest available data from US Citizenship and Immigration services (USCIS) indicate that there were 78,200 new H1B visas issued to professionals in Fiscal Year 2008 — a 40% drop from the 130,497 visas issued in FY 2004. Granted, there are many more candidates than there are visas available, but so far US companies are able to choose from the list of best qualified candidates. Fast-growing foreign economies with appreciating currencies will certainly make this list shorter.

Vicrant Dogra, a fellow Indian programmer, draws a line in the sand at a 20 rupees per dollar exchange rate — an additional 49% rupee rise. "At that rate most professionals will stop coming to America if the Indian economy is growing at the current level", he declares. This is a bit dramatic, but even a small decrease in foreign labor supply will leave employers scrambling to find appropriate replacements, as it takes time to fill a shortage of skilled laborers. US health care may be affected in the long run because a substantial number of doctors hail from India and a weak dollar can, at the very least, discourage new doctors from coming here.

Fewer skilled professionals are coming to America from Russia. The current exchange rate is 24 rubles per 1 US dollar. Compared with a 2002 benchmark of 32 rubles, it is a staggering 25% rise. Kirill Levin, alumni of PhysTech (a flagship Russian research institute) and a senior quantitative analyst, says that fresh graduates from his alma mater who are looking to pursue academic careers still favor US universities and research centers. He admits, however, that fewer Russian professionals are coming to the United States than any time since the fall of the iron curtain. "It has to do more with the growing Russian economy than with the weak dollar," he argues. "Many professionals are making decent money in Moscow." Carolina Friedman, a quality manager at Transprefect Translations, who deals with South American companies, agrees. "In Argentina less people are looking to work abroad than before. We know several people who returned home from the US. Lately, Argentina's economy has improved."

The depreciating dollar may prove lethal to outsourcing. Employees hired by US companies based in foreign countries usually convert earned US dollars into their national currencies. A worker based in a country with an appreciating currency will get less money when paid the same amount of dollars. Serge Lubensky, CTO of Service Channel, a procurement, validation and electronic settlement platform for multilocation facilities maintenance transactions, notices the change in attitudes that the falling dollar is causing. "People ask for raises claiming that the cost of living is going up as their salaries (fixed in US dollars) are going down. They now prefer working for European companies because the strong euro yields them more of their currency. If the dollar keeps falling like that, at some point outsourcing will make no sense."

The change in the currency rate is of course only a consequence of global economic development. However, it is this exchange rate that people scrutinize when considering a stint in the United States. The weak dollar will discourage foreign professionals from coming, thereby creating job vacancies. While presenting a good opportunity for the American professionals, the labor shortage will negatively affect US companies and the economy overall.
Contrary to popular opinion, outsourcing and internationalization has been a major source of economic growth in the last decade. If the falling dollar means an end to this era, the consequence could be highly regrettable.