Garibi Hatao with ICT

There is little doubt that outsourcing and offshoring have contributed to the economic growth and wealth in some of the leading supplier countries. In India, for example, revenue earnings of the IT services and ICT enabled services industry grew from less than $1 bn in 1990 to almost $60 bn in 2009. The industrys share of total Indian exports (merchandise plus services) increased from less than 4% in 1998 to 16% in 2008, and expected to reach at least 1820% in 2009-10. In 2008, the IT and ICT enabled services contributed about as much to Indias GDP growth as did the agricultural sector. In the Philippines, BPO export revenues rose from $100 mn in 2001 to $6 bn in 2008. In fact, on a per capita basis, its IT and ICT enabled services sector is bigger than that of India.

Despite the proven wealth generation potential, few studies have focused on the implications of this sector for poverty reduction. Potential channels for poverty reduction include overall economic growth, direct and indirect employment, worker remittances, taxation, and corporate social responsibility (CSR). Most of the empirical evidence presented below relates to India, which has the longest and most widespread experience from this industry.

Direct and Indirect Employment

In the leading developing country exporters, the IT and ICT enabled services sector has emerged as a significant generator of jobs. In India, direct employment in this industry was estimated at about 2.2 mn in March 2009, of which 1.7 mn catered for the export market. In the Philippines, the government estimates that the BPO sector employed about 400,000 people in 2008, and this number is expected to grow to more than 900,000 by the end of 2010.

In addition, this expansion has had multiplying effects on other parts of the economy with additional job creation. In India, for example, it is estimated that every new job in IT services or ICT enabled services generates another 3.6 mn indirect jobs in related areas. In the Philippines, it has similarly been found that each new job results in 2-3 new jobs in other industries. Opportunities offered outside the IT-BPO industry itself include formal or informal sector work in facility maintenance and security, transportation and other communication services, restaurant, shops, construction and various small business vendor entrepreneur operations, as well as domestic workers.

For example, in Bengaluru, India, the number of maid servants and construction workers has surged. In contrast with ICT goods manufacturing, people who seek employment in this industry generally need to meet certain requirements in terms of language skills, ICT skills, and other more specialized capabilities to be hired.

Those working in the IT-BPO sector are typically paid 50100% more than those in other service jobs, and tend to fall into the top income quintile. Consequently, the entry barrier to be employed is relatively high, making it difficult for poor people with limited or no education to be hired. Most direct job generation in the IT and ICT enabled services industry has benefited the middle class, but not so much the very poor ones.

The greatest chances for poor people to find direct employment are in segments with the lowest entry barriers and compensation levels, such as facility maintenance, security, transports, and low-end data entry. There may also be greater opportunities to find employment in companies servicing the domestic rather than export markets.

From Urban Centers to Rural Areas...

A common feature of this industry is high concentration into a few large cities. In India, 91% of employment in the industry is found in the so-called tier-1 cities, such as Bengaluru, Chennai, Hyderabad, Kolkata, Mumbai, the National Capital Region (NCR), and Pune. In the Philippines, as much as 80% of all the BPO activity is concentrated in and around the capital, Manila. One effect has been more migration into the rapidly expanding cities.

For the expansion of the ICT sector to have a significant impact on the rural poor, linkages between the urban and the rural areas are important. Earlier studies pointed to virtually no links between IT and ICT enabled services and the rural economy. However, similar to the example of ICT manufacturing in China, migrant workers typically remit significant amounts of money to their dependants, some of whom belong to poor communities in rural areas and smaller townships. Moreover, there appears to be, albeit starting from a low level, a growing interest among companies in seeking out outsourcing opportunities outside the main metropolitan centers. In both India and the Philippines, companies have begun to spread to tier-2 and tier-3 cities, and some ICT enabled services are even being established in the rural areas. For example, the Tata group has stated that it aims to hire 5,000 people for its rural BPO activities over the coming years, and other companies are voicing similar plans. In India, employment in tier-2 and tier-3 cities has increased by 50% since 2007, and the rural BPO segment is set to grow by over 10 times until 2012. In FY09, rural BPO segment contributed an estimated $10 mn in sales. If the expansion into new cities and smaller towns continues, it may create new direct and indirect employment opportunities for the poor.

Tax Revenues and CSR Initiatives

Although the IT and ICT enabled services sector has emerged as one of the biggest employment and income generators in India, its contribution to government tax revenue remains modest. In FY09, the industry and its employees contributed about $4.2 bn in taxes. As part of the governments strategy to promote the sector, most of the industry has been exempted from paying corporate tax since the early 1990s. Tax revenues generated are mainly the result of direct taxes paid by the employees. There is a debate as to whether the tax exemption should be maintained, given the very high profit levels achieved in recent years. Greater tax revenue could, if wisely spent, provide more funds for investment in poverty reduction projects.

Some Indian and foreign companies with operations in this industry in India have established CSR programs. Activities include education and training, health care, and food programs for the poor. Overall, industry contributions to social development exceeded $50 mn in FY09, and almost 2/3 of the companies in this industry reportedly undertake some socially or environmentally relevant activities. For example, the Akshaya Patra Foundations program, sponsored mainly by Infosys Technologies and others, in 2009, provided free daily meals to more than 1 mn poor children, and aims to reach to 5 mn children by 2020. Infosys has committed to set aside 1% of its gross total revenue to charity mainly to the poor (Infosys, 2009). Similarly, the activities of the Nasscom Foundation aim at helping the poor and other underprivileged groups. With the continued growth in the wealth of entrepreneurs in the Indian IT and BPO industry, charitable work in this sector is expected to increase.

The Case of Social Outsourcing

Another representation of the intersection between business and society is the relatively new phenomenon called social outsourcing. It refers to the targeting of outsourcing contracts to poor communities in developing countries with an explicit aim of poverty alleviation or the achievement of other socio-economic development objectives.

A number of such initiatives involve outsourcing of IT or ICT enabled services. This kind of outsourcing can be done by the governments, the private sector, or civil society organizations, and is an interesting way to encourage greater links between rural and urban areas in the context of ICTs. As in many other related activities, India and the Philippines have been pioneers.

In Kerala, the state government saw a need to outsource some of its IT activities to promote computerization, and find skills that were not available inside the government offices. Other examples have been noted elsewhere in India, such as in Rajasthan, as well as in the Philippines and Cambodia.

Potential Downsides

From a poverty reduction perspective, the limited number of cases reviewed above point towards potential opportunities from outsourcing and offshoring. However, it is clear that benefits to the poor segments of the society are not without side effects. For example, concerns that the expansion of the IT and ICT enabled services sector in India will lead to a more polarized and uneven development, should not be brushed aside.

In India, the expansion of IT and ICT enabled services has also had certain adverse effects. It has contributed in attracting more migrants from the rural areas to the metropolitan cities, fueling the development of urban slums. Social critics have argued that poor persons, who have migrated to large urban centers from rural areas or smaller towns, would have been better off not doing so as they lose out on social interactions and other aspects important for the overall quality of life.

The trend observed above, of companies setting up ICT enabled services outside the metropolitan centers may lead some people to seek out job opportunities locally rather than migrating to urban areas. Moreover, the expansion of the industry has led to higher prices for land, housing, and various other services.

In some cases, land has been taken away from the poor with compensation offered below the actual market prices. Urban poor living in central locations have been, therefore, forced to move to more remote or less attractive places where land, housing, and other services are more affordable.

Finally, some observers have noted that the rapid change in the socio-economic context spurred by the expansion of the IT and BPO industry in certain cities in India has resulted in greater focus on individual profit maximizing behavior, and the erosion of traditional community ties and value systems.

Conclusion

The outsourcing and offshoring of services are still at a nascent stage in most developing countries. Nonetheless, many governments have their eyes set on this phenomenon, and are eager to tap the opportunities created by better broadband connectivity. In general, often due to the demanding skills requirement for the production of related services, there are limited opportunities for the poor to enter this industry.

The poor classes whose livelihoods are most likely to be affected by the IT and ICT enabled services production include those who live in major cities or their urban peripheries (or who are willing to migrate to a major city), and those who command at least basic education and English language skills. Parts of the population with little or no chances to benefit directly include those who are illiterate, and are culturally or otherwise marginalized in modern society. Probably, the most important effect on the poor in the short term is linked to the indirect job creation and other second order effects from an expanding ICT services sector.

Some recent developments of potential relevance for poor people are worth highlighting. First, in both India and the Philippines, there is a trend among companies to explore tier-2 and tier-3 cities. This may extend the possibilities for more people to be affected directly. Secondly, there are examples of BPO services being established in some rural areas. This is particularly interesting in the light of the fact that the bulk of poor people lives in rural locations. However, as illustrated by the all woman run Source for Change, in order to succeed rural based companies may have to defy existing prejudices, and prove to the potential clients that it is possible to deliver high-quality services from a rural location. Thirdly, the trend towards social outsourcing is promising. Although still small in magnitude, governments and other stakeholders may view social outsourcing as a development tool.

In order to reduce the risk of polarization and social tensions linked to the widening income disparities, the policymakers can focus on skills development, rolling out infrastructure, and exploring possible ways of catalyzing the emergence of enterprises that can provide outsourced services to potential public and private clients, and market themselves as BPO providers.

People who work for such enterprises, especially in IT services, have a chance of upgrading skills that are generally in high demand in the society. There is also some evidence that working in this industry has contributed to the empowerment, and an improved status in the local community. Finally, governments also need to be aware of the difficulties involved in entering this market. While there are clear opportunities emergingas the trend is likely to grow in scope and sizein order to succeed, countries need to meet stringent requirements in terms of infrastructure quality and cost, availability of skills, and the regulatory framework.

Extracted from Information
Economy Report 2010 by UNCTAD
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