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(originally published by Booz & Company)


India and China May Not Be the Answer

Taiwan has virtually no natural resources, but it has developed substantial human resources of energy, ambition, and talent. And that talent was on display in a 2006 educational survey by the Organisation for Economic Co-operation and Development’s (OECD) Program for International Student Assessment, which examined the performance of 400,000 students in 57 countries, accounting for 90 percent of the world’s economy. Taiwan placed first in mathematics and fourth in science. This sort of brainpower drives Taiwan’s world-class electronics and chip design sectors and makes the small country a perfect offshoring location for knowledge-based activities well into the future.

Labor productivity is another critical factor that has gotten short shrift in offshoring decisions — an important oversight, given the relatively poor ranking of China and India. According to the OECD, China’s GDP per hour worked is only about 8 percent of that of the U.S., and India’s is 7 percent. By contrast, Estonia’s is 40.8 percent and Slovakia’s is 53.4 percent. The impact of this productivity gap was illustrated best by the experience of a global bank that set up a wealth management analytics team in India to provide equity research for private banking clients. At first the team seemed like a bargain: Indian research analysts were paid quite a bit less than their counterparts in London or New York. Yet, when bank executives examined productivity metrics, they made a troubling discovery: Although the Indian analysts were equal to or slightly better than their global colleagues in mathematical modeling, they were well below average in synthesizing the data, as well as in writing and producing the actual research and recommendations. This turned out to be a productivity cost not recognized prior to the launch.

An even more refined view of predicting output is provided by the U.N. Development Program’s human development index (HDI), a composite measurement that assesses a country’s average achievements in three basic areas: health, knowledge, and living standards. The HDI was created to emphasize that people and their capabilities, not basic economic growth figures, should be the ultimate criteria for assessing the strength and development of a country. Since the HDI measures human development at the macro level, a high score could indicate that a country is a sustainable environment for knowledge worker outsourcing. This is chiefly because poor health and sanitary conditions create security risks and impact worker productivity, and the lack of education affects on-the-job performance. In the 2009 HDI report, Singapore ranked 23rd in the world and Estonia came in at number 40, whereas China trailed at 92 and India at 134 (just ahead of the Democratic Republic of the Congo, Cambodia, and Myanmar [Burma]).

Social stability should count as well. A nation roiled by economic and environmental unease does not hold out much hope that its workers will be reliable and industrious, not to mention creative or self-motivating. Again, India, the number one offshoring location today, ranks poorly. It is essentially two different countries — a small part of its population generates GDP roughly as high as Mexico’s, but the rest has the GDP (as well as the inflation and malnutrition rates) of sub-Saharan Africa. India’s much-trumpeted “demographic dividend” — the population surge that will increase its workforce to 800 million by 2016 — may turn out to be more of a threat than an opportunity. India has 18 percent of the world’s population but only 4 percent of its fresh water and slightly more than 2 percent of its land area. Many of the country’s aquifers are already in critical condition. Moreover, India imports 70 percent of its oil from the Middle East and has no strategic reserves.

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