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Outsource or Bust
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by Ton Lansink, CBI 17 the future of Developing Countries

Club of Amsterdam event about the future of Developing Countries
November 30, 2004
Speech by Ton Lansink, CBI

Today I wish to share with you some of the experiences that my organization has had with economic development in developing countries. I hope to be able to convince you that we can best help developing countries by helping ourselves. And that by doing so we are also preparing our selves in the best possible way for the onslaught of the economic storm that is building on our horizon.

My organization, CBI, the Centre for the promotion of Imports from Developing Countries to the European Union, exists since 1971. In 1998 it became an agency of the Netherlands Ministry of Foreign Affairs. CBI’s mission is to contribute to poverty eradication in the Third World. We do this by creating economic prosperity through export-promotion from those countries to the European markets. We have an order-portfolio of roughly € 120 mln and a yearly turnover of € 15 mln. We expect to grow to a yearly turnover of a little less than € 20 mln in four years time.

Let me briefly introduce myself. I joined CBI in the summer of 2002. Before that I worked in countries such as Egypt, Iraq, India and the United States. My last assignment before joining CBI was head of the South Asia department of the Ministry of Foreign Affairs, where my responsibilities included the bilateral relations with India, but also Afghanistan. I have thus had a first hand experience with different economic systems. I moved from Egypt where tight regulations had created a thriving black or informal economy, to the Iraq of Saddam Hussein where government planning deprived the population of fresh produce for more than six months a year, to India where import-substitution was impoverishing the very people it was meant to protect. My stay in the US taught me that it was the land of opportunity, but on general only for those who are rich, healthy and young. Finally, I returned to Europe, The Netherlands where the balance between prosperity and the privileges of the poor, sick and elderly is under constant strain.

CBI was founded in 1971. In a completely different world. A world without computers, where travelling around the world was for the happy few. One thing was the same though, the worry about the weakening of the dollar. Our clients in those days were complete strangers to Europe; they hardly knew what was going on in Europe. In those days CBI’s coaches and trainers were figures of authority simply by the fact that they actually lived in Europe. How times have changed. The CBI clients of today do not resemble their predecessors. They have more often than not academic degrees from universities with high standards and they have an intimate knowledge of developments in Europe. They all know how to ‘google’, how to ‘blog’. And, for us its challenging to remain attractive to them.

The development of the so called developing countries over the last three decennia has indeed been astonishing. Most of us do not even remember that countries as diverse as Portugal, Japan and South Korea were once categorized as less developed. That the average income of Asia was less than that of Africa. That a country like Singapore would once have sent out its scouts to places like Sri Lanka and Kenia to learn how to develop. Who still remembers a book with the title “Asian drama” by Gunnar Myrdal?

Development was however not evenly distributed. After Japan, came the Asian Tigers. Now it is China, and to a lesser extend India, that is growing at breakneck speeds. Countries in Latin America are struggling to keep up. African countries on the other hand have fallen behind and are still loosing ground. The number and quality of participants in CBI’s programmes reflect these trends. In order to retain a presence of African producers in our programmes, we had to design “African” programmes. These programmes are designed not to train the entrepreneurs in obtaining and expanding market share. They are designed to avoid that they further loose market share.

One factoid I would like to bring to your attention. In the last thirty years the European Union has tried to promote the trade with African countries through a system of trade privileges, under the Lomé-agreement. African countries were and are entitled to lower tariffs and higher quota on the European markets. During those thirty years these privileged countries did however not gain market share; instead they lost market share. I’m not that naïve to suggest that they lost market share because they were privileged, because they were smothered, but I think you will agree that those privileges did not make the difference for the economic development of those countries. It’s a conclusion that led the European Union to negotiate a new system, called the Cotonu-agreement. Under this agreement the emphasis is on border-in issues.

In trade there are always three area’s. Border-in, border en border-out. Border out deals with the foreign markets. That’s CBI’s area of expertise, the intricacies of the European export markets. Border is about transportation and customs. Border-in is another word for business climate. Unfortunately there are only limited possibilities for outsiders to positively influence the business climate of a specific country. Obviously it would also help if foreigners would refrain from negatively influencing the business climate. I’m not just referring to rogue companies that corrupt those in power with lavish payments. But also to the negative side-effects of the dumping of second hand clothes or agricultural surpluses on fragile markets. It is now commonly understood that the EU common agricultural policy is actually hampering development in developing countries. The EU therefore offered, within the framework of the Doha-round, to do away with the agricultural export-subsidies. That is a good first step. But still much remains to be done. Let’s not forget that almost half of the budget of the European Union is used to subsidize agricultural production. It’s a huge ocean of money blocking the access and thus development of a crucial sector of production in developing countries.

The matter of tariffs, subsidies and quota is, as I explained, on the international agenda and progress is possible and attainable in these areas. At the same time a new phenomenon is becoming increasingly relevant. It’s the issue of the so called non-tariff measures or non-tariff barriers. It entails measures on health, safety, the environment and social conditions. In Europe a dual system is evolving, partly designed and implemented by governments including the European commission, partly designed and implemented by the private sector. And it’s the latter that is sometimes the most stringent and doing the most harm to producers in third world countries. Last year several thousand farmers from Kenia were, after years of profitable trade with the European Union, blocked from providing “haricots verts” to the European supermarkets, not because of government regulations, but because of regulations by a conglomerate of European supermarkets implementing guidelines aimed at protecting food safety.

It’s not only in agriculture that we can make progress to create prosperity in third world countries. The industrial sector and the service sector also face challenges and these challenges can be confronted in many ways. CBI is active in several industrial sectors and service sectors. We deal on a daily basis with companies from those sectors; companies that are fully competent to do business with European buyers. Let me emphasize that doing business with European buyers while you’re based outside the European Union is a impressive achievement. An example. If you are a software developer from the Philippines you can be as competent as your European counterpart, be cheaper, and still not get any business. Why? Because if your from outside the European Union the market dictates that you require a certificate of competence. To get that certificate you have to spend € 50.000,--. There is no level playing field. Outsiders have to invest more to be able to play on the same field.

The point I would like to stress is that a system where the visiting team faces a different playing field than the home team has two outcomes. First there are the visiting companies who do not succeed or stop trying. The second category are those visiting companies that do succeed. What is interesting about the second category is that the system gave them an excellent training in becoming more competitive. Once they have an established position on the market, they could an do blow away the competition.

Current trends seems to predict another period of creative destruction as a well-known economist once described it. Economic development in Asia and elsewhere is creating strong enterprises that, like in the case of Japan, Taiwan, South Korea, before them will want to conquer market share also on the European markets. Producers in the European Union will face stiff competition. Their very existence may sometimes be at stake. In my analysis outsourcing is a way of dealing with this process. It is a win-win strategy: it creates prosperity in third world countries and it secures a sustainable future for our production base.

What’s this all about? Well it’s about the question posed to John Kerry and George Busch on the way to deal with the Chinese ‘threat’. Not the military one, but the economic one. John Kerry’s answer was enlightening. He said that one can do little if a software developer from China or India earns $ 25 and one from the States $ 50 per hour. This is just one example. CBI encounters many on a day to day basis. For instance in the medical markets, where a silent revolution is taking place because of the cost consciousness of the health insurers. We also expect similar developments to occur in sectors as diverse as castings and forgings, fine and speciality chemicals, furniture, mobile equipment parts, natural ingredients for cosmetics, personal protective equipment, cut flowers and potted plants, etc. Across the line we see the maturing of industries from developing countries that are not only cheaper, but sometimes more advanced than companies from the European Union. Above all we see a whole new range of outsourcing possibilities.

Outsourcing is a fancy word for something humanity has been doing since ages. It simply means that you buy from other humans, other producers what they can produce better and more cheaply. It’s the basis of our affluence, the motor that creates our prosperity. Take electricity. Few companies produces their own power; they have outsourced the production of power. Because of transportation and communication costs, outsourcing used to be a spatially constrained phenomenon. Thanks to a dramatic drop in transaction costs, such as transportation, communication and availability of capital, outsourcing has come of age and has become a global phenomena.

Some of us may remember the demise of the textile industry in The Netherlands. Now let me give you an example of an industry that may follow suit. An industry that less than hundred years ago exemplified a breakthrough in production: the automotive industry. The T-ford was produced in one factory. Every single component was produced in that factory: glass for the windshield, steel for the engine; only the production of raw materials was outsourced. That industry has seen huge changes over time and is currently again experiencing a turbulent period. Now there only are a limited number of so-called “Original Equipment Manufacturers”. These OEM’s produce cars such as Volkswagen, Opel, Peugeot in the European Union. However the factories that produce those cars do not resemble the original T-ford concept. Nothing is produced in those factories; they are strictly assembly lines. The OEM’s are increasingly focussing on marketing and sales only. The so-called first tier suppliers are not producers either. They focus on innovation and logistics. They deliver the products to the assembly line on time and sometimes even provide the worker for the assembly. The second tier suppliers are the actual producers, but again up to a point. They have a third tier of suppliers that actually produce the components for the products the second tiers sell to the first tiers.

For the OEM there is increasingly less necessity to assemble in high labour cost countries like Germany and France. Transport costs are coming down and because of information technology the management of the assembly process can follow the example of the textile or television industry. Assembly lines are already moving to middle European countries. Countries where, by the way, the first Chinese automobile producer also intends to have an assembly line foothold. In future these assembly lines may be moved to countries like Thailand. Which unfortunately poses a problem to CBI, since we cater to a lot of second and third tier producers. If their customers move outside Europe we loose our business.

The same process of production subdivision followed by outsourcing is now gathering speed in white collar work. Apart from software developers and call-centres we expect a huge increase in the trade of services in the medical sector, the legal sector, accounting, engineering, etc. In contrast to blue collar work the processes of white collar workers are less standardized, which hampers the growth of trade in these sectors. But it’s my firm belief that the possibilities and attractions of outsourcing will create an strong impetus to standardization.

So a lot is still possible, many economic benefits can be reaped through labour division, specialization and outsourcing. The question to ask is whether the European economies will be able to react with flexibility. We have a choice. We can adopt the agricultural model, build walls to shield us from the economic tide and hamper out growth behind the wall. Or we can – through outsourcing - try to negotiate the tide and ride the wave. If we do the latter not only will we benefit, it will benefit the developing world.

One final concluding remark. I’m sometimes reminded of the frog as explained in the book of Peter Senge on the “Fith Discipline”, a book on the learning organization. We humans have difficulty in seeing incremental change. Like the frog that does not sense that the water gradually heats up to a boiling point. We look through yesterdays glasses at the world and see developing countries with a lot of needy people. We should however look at the developing world as a powerhouse of economic activity that will keep us on our toes for the years to come.

Thank you for your attention.

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