Transcript Higher Education: The Last Nationalized Industry?

Efficiency gains and income
transfers in outsourcing : a
trade-theoretic perspective
John Quiggin
Schools of Economics & Political
Science
University of Queensland
Paper will be available at
http://www.uq.edu.au/economics/johnquiggin/
Outsourcing and
competitive tendering
Growing importance in both public and
private sectors
‘Steeering not rowing’
‘The virtual corporation’
Outsourcing, efficiency and transfer
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Efficiency gains and income transfers
Normally outsourcing will take place only if
outside supplier has a cost advantage
This cost advantage may arise from
 Greater efficiency
Implies net efficiency gain from outsourcing
 Lower wages
Implies cost reduction is mainly an income transfer
Outsourcing, efficiency and transfer
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Economic significance
Industry Commission estimates gains from
government CTC ranging from 0.3 to 1.7
per cent of GDP
Crucial issue is whether cost savings arise
from efficiency improvements or wage
reductions
Total benefit of mid-90s productivity surge
(relative to trend) was 4.8 per cent of GDP
 Data suggests outsourcing played a major role
Outsourcing, efficiency and transfer
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A trade-theory perspective
Shift from full vertical integration to
outsourcing/competitive tendering is like
shift from autarky to free trade
Efficiency gains and comparative
advantage
Factor price equalisation
Outsourcing, efficiency and transfer
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Comparative advantage
With equal factor prices, comparative
advantage coincides with absolute
advantage
Benefits from specialisation
 Firm/country-specific technology
 Economies of scale vs economies of scope
Outsourcing, efficiency and transfer
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Factor price equalisation
Stolper-Samuelson theorem - relatively
abundant factor gains from trade
In firms controlled by capital, but with
effective shortage of labour due to unions
or contracts, outsourcing will be attractive
In presence of distortions, need not be
welfare-improving
Outsourcing, efficiency and transfer
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Welfare implications
General presumption of potential Paretoimprovement
Need not apply in the presence of preexisting distortions
Net gains are second-order
Outsourcing, efficiency and transfer
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Applying trade theory models
to outsourcing
Dixit-Norman dual approach
Krugman-Helpman on scale economies
Outsourcing, efficiency and transfer
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Formal modelling of
outsourcing
Outsourcing defined as purchase of
intermediate outputs
Profit functions
 Convex case - relative and absolute advantage
 Nonconvex case - specialisation
Outsourcing, efficiency and transfer
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Specialisation and
diseconomies of scale
Consideration of outsourcing suggests an
explanation in terms of agency theory
Unobservable contingencies in the
production of intermediate goods
increases severity of principal’s problem
Outsourcing, efficiency and transfer
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Transfers
Arise from trade between firms facing
different factor prices or wage-employment
bargains
Simplest case is that of high-wage firm
outsourcing to low-wage suppliers
Outsourcing, efficiency and transfer
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Concluding comments
Income distribution is crucial
This fact has been
 Long-recognised in debate about trade
 Largely ignored in economic discussion of
outsourcing
Outsourcing, efficiency and transfer
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