JUNE
2005

 

By
Larry DeBoer
 
Professor of
Agricultural Economics
Purdue University

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06-23-05

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Indiana in a Flat World


New York Times foreign affairs columnist Thomas Friedman has a new book about globalization, "The World Is Flat." What he means by this peculiar title is that a lot of barriers to communication have been flattened in the past several years. People and companies all over the world can compete and collaborate as never before. In particular, people and companies in China and India are becoming ever more competitive in providing goods and services to the American market.

One reason I like Friedman's books is that he uses examples. His books are practically wall-to-wall examples. One of his examples is about India and Indiana.

Maybe you remember it. Back in 2003, Indiana asked for bids on a contract to upgrade the state's unemployment insurance computers. The lowest bid came from a U.S. subsidiary of Tata Consultancy, which is based in India. Tata's bid of $15 million was $8 million less than the next lowest bid. No Indiana firms bid on the contract, because none were big enough to handle the job.

Of course, all heck broke loose when the news got out in June 2004. Indiana was not only outsourcing to India, it was outsourcing its unemployment insurance system upgrade to India. With the upgrade, at least the unemployed Indiana programmers would get their checks faster. Then-Gov. Kernan cancelled the contract, paid the Indians a million dollars for the work they'd already done, and broke up the task into smaller pieces so Indiana companies could bid on it.

On June 10, 2005, Gov. Daniels put out a press release about state government contracts. It had a list of criteria for being considered an Indiana company. Indiana companies have a better shot at getting Indiana government contracts.

In the press release, the governor pointed to a "greater emphasis on quality" and a "greater emphasis on getting the right price." Most important, though, was the "emphasis on buying Indiana wherever possible." You can find the press release on the governor's Web site. Click on "press releases" and look for one from June 10.

Letting contracts to provide public services is a balancing act for the state. On one side, the state is responsible to its taxpayers to get a quality product for the lowest price. Why pay more than we have to? But it's a big flat world out there. Often enough the low-price bidder is a company from outside Indiana.

That leads to the other side of the balancing act. Indiana can improve its economy if it spends public dollars inside its own borders. If an Indiana business gets a contract, jobs are created and incomes are higher. Those new and higher incomes create more spending on Indiana goods and services, which create more jobs and higher incomes.

So, what do we do if the bids from Indiana firms are high? Hire an outside firm and lose Indiana jobs? Or hire an Indiana firm, and cost the taxpayers extra money?

There's an economic argument for giving Indiana firms at least some advantage in bidding for contracts. Buying Indiana increases Indiana incomes. This increases Indiana tax revenue. The net cost of an Indiana contract is less because the state gets some of its money back in taxes. Back-of-the-envelope figuring puts that cost reduction at perhaps 10 percent.

The India bid was 35 percent less than the next lowest bid though. There's no doubt it cost the state more to buy Indiana instead of buying India.

I wonder if there's an alternative. One thing I get from Friedman's book is that the production of goods and services is going to be more and more collaborative in the future. Businesses are constructing worldwide supply chains with new communications technology.

Perhaps we could have told the Indians, "We'll give you the contract if you collaborate with Indiana companies to do the job." Our companies grow, we learn what they know and the next time they need an American collaborator, maybe they'll remember those capable people in Indiana.

Businesses in India and China are growing fast. If we can link up with them, maybe Indiana businesses can grow fast, too.

 

 

Writer: Larry DeBoer,
Editor: Olivia Maddox,