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Doing the math on outsourcing

outsourcing summit

Natural capital, which ought to be scientifically measurable and systematically analyzed, is neither taken into account in the public debate about outsourcing, nor factored into the accounting industry’s “true and fair value” approach to financial statements.

The upshot is that outsourcing is not what it seems, and we lack the information to have a proper debate about it.

I was in Beijing in late January and the environmental catastrophe there was plain to see: No visible sky, deadly pervasive smog, pollutant indices off the charts, people going about their business wearing masks and the local media up in arms. At the time, 103 neighbourhood factories faced mandatory shutdowns to combat severe health hazards.

This is the forgotten impact of outsourcing jobs to China.

It has become conventional wisdom that jobs outsourced to emerging markets such as India, Mexico, the Philippines and China are a terrible thing for the economies “losing” these jobs. Politicians and pundits in the U.S., U.K., Canada and elsewhere score points with the public by accusing their rivals of outsourcing jobs overseas. Outsourcers are demonized in news stories and their headlines.

It is true that when a job moves from, say, the U.S. to China so that goods and services can eventually be exported back to the U.S., it results in a manufacturing job loss for America and a manufacturing job gain for China. But this is a simplistic way of looking at the benefits and losses from such an exchange.

For instance, it doesn’t take into account the amount of water or energy consumption that is shifted to China from the U.S. It also doesn’t account for the resulting pollution, which Chinese citizens are increasingly aware of and, in some cases, protesting loudly. Tied to this is the rising health-care costs shifted from the U.S. to China because of pollution-related illnesses.

In other words, while the U.S. may have “lost” a job and India or China may have “gained” one, the picture is incomplete unless natural capital is fully factored into the calculation. Done correctly, that math presents a completely different picture: The economy that “lost” jobs through outsourcing would also be seen to have shifted massive health-care liabilities to the country that gained jobs, while banking large savings from reduced water and energy use.

Looked at from this perspective, outsourcing contributes to the impairment on the economies gaining jobs and to a benefit for those losing jobs. Potentially, savings achieved by losing an energy- or water-intensive job could outweigh the economic contribution of the lost job. Those savings could then be reinvested in higher value-added employment opportunities with much enhanced natural capital footprints – clean energy production is one example.

On the other hand, under current accounting rules the Chinese company benefiting from the outsourced American job may be profitable on paper, even if it is polluting the air, water, ecosystems and forests, as well as affecting the health and safety of thousands, even millions of people.

Current accounting standards, in other words, are ignoring natural capital. In doing so, they are masking a complete picture of corporate profitability, and as a result are misleading shareholders, investors and the markets, not to mention perpetuating a debate about outsourcing based on myths and incomplete information.

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