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World: Can Central Asia, Caucasus Imitate China's Success? (Part 2)

  • Mark Baker

Thousands of jobs are leaving relatively high-wage areas in the United States and Western Europe each year for lower-wage destinations in less-developed countries. Two countries -- China and India -- have managed to capture much of this "outsourced" economic activity, but other parts of the world are benefiting, too. One region that has not profited from outsourcing, however, is Central Asia. The follow-up to the first part --> http://www.rferl.org/featuresarticle/2004/5/3B45E8EB-45F8-4E44-ACA4-FB0A0AA11BCD.html of a two-part series on outsourcing looks at the prospects that Central Asia and the Caucasus might one day imitate the success of China or India.

20 May 2004 (RFE/RL) -- The practice of outsourcing is making headlines in the United States and Europe as workers there worry that their jobs might go to workers abroad.

But the trend is also having a major impact in the countries receiving the new jobs.

India and China stand out as the two greatest beneficiaries. In the past decade, thousands of foreign companies have set up local operations in these countries -- transferring everything from factories to payroll-processing plants and call centers.

The result is nothing short of an economic miracle. The world's two most populous countries are now among its fastest-growing economies. China's economy expanded 9 percent last year. India's grew 8 percent. Both are on track this year to match those figures.

But other areas of the world are also benefiting from outsourcing. Vincent Koen, an economist at the Paris-based Organization for Economic Cooperation and Development (OECD), lists some of the biggest recipients.
The countries that receive outsourced jobs are open to investment and are relatively well run.


"The [outsourced jobs] go to a host of developing countries -- I mean, it's Malaysia, Philippines, Sri Lanka, if we talk about Asia," Koen said. "It's South Africa or North Africa, if we talk about the African continent. It's the Latin American continent. It's all over the place."

Koen studies investment and job flows in the world's biggest economies. He said the recipient countries have many things in common -- the main ones being that they are open to investment and are relatively well run.

"These are the relatively successful emerging markets that encourage foreign direct investment and welcome the firms who want to set up shop there," Koen said. "India and China are two prominent examples. They have opened up rapidly and seen huge increases in foreign investment in recent years, but there are other successful emerging markets, as well. I think there's not much off-shoring towards poor and badly run developing countries."

Regions that have yet to see many benefits from outsourcing are Central Asia and the Caucasus. While some of the regions' economies -- particularly in Kazakhstan and Azerbaijan -- are growing, most of that growth is attributed to the oil and gas sectors. It doesn't reflect a vibrant general economy.

Steven Fries is the deputy chief economist at the London-based Bank for Reconstruction and Development. His bank advises firms that want to invest in areas like Central Asia and the Caucasus. He told RFE/RL that India and China can serve as models of how liberalization can attract investment and catalyze growth.

"I would certainly encourage policymakers [in Central Asia] to take a close look at what we've seen in India and China, where improvements in the business conditions can have real payoffs in attracting investment and creating jobs, including through outsourcing," Fries said.

On the plus side, he said Central Asia and the Caucasus enjoy some conditions -- such as low wages -- necessary for outsourcing. But he admits the response by Western companies to date has been modest.

"You do, indeed, find low wages in those countries [of the Caucasus and Central Asia]," Fries said. "Unfortunately, you also find relatively difficult business environments within which to operate. Which is one reason -- outside of the energy sectors of Kazakhstan and Azerbaijan -- that these countries have really been struggling to attract significant inflows of direct foreign investment."

Fries identified several reasons why these countries have yet to attract considerable foreign investment. Some are within the countries' powers to change -- such as improving the overall business environment.

"I think [concerning] aspects of the business environment, where we are seeing less rapid improvement are in the areas of the quality of business regulation and the often associated problem of corruption -- and those aspects of the business environment are still problematic throughout Central Asia and the Caucasus," Fries said.

One disadvantage that the Central Asian states cannot change is their relatively isolated and land-locked geography. In China, much of the growth has come in coastal areas, where transportation costs are cheaper. Relatively little investment has found its way to the Chinese hinterland.

But Fries said that policymakers can make a difference.

"Those geographical location issues -- the cost of transport and accessing markets -- are a key issue in Central Asia," Fries said. "And the Central Asian governments must do more to improve regional cooperation -- to improve regional trade and transit -- to help overcome some of the disadvantages they face in terms of their geographical location and proximity to world markets."

As developed countries continue to shed lower-wage jobs, the lesson of global outsourcing is clear -- where those jobs go is often determined by the recipient countries themselves.
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