For the ‘donor’ country, the cumulative effects can be drastic. For example, between 1979 and 1995, the United States lost more than 43 million jobs through outsourcing. This has a significant effect on income from taxation, unless compensated for by a corresponding increase in tax returns from company profits. For those of the working population that no longer have employment, however, future prospects may be bleak.
The recipient country may partially solve some of its problems, but for some work only relatively unskilled labour at the lowest price possible is required. Often the task involves repetitive assembly work, and will probably only pay ‘survival’ wages to the workforce. Furthermore, working conditions will reflect the laws applicable in the country of operation, and workers’ health may be adversely affected where these laws are not stringent enough. There is also a constant outflow of money, for a proportion of profits normally are returned to the parent company.
There is a risk that the purchasing company may not stay for an agreed period. The company may decide that due to shifting global conditions and requirements, it will be more profitable to move elsewhere, and suddenly remove its business completely. The same result could be triggered by a change in laws or conditions affecting the local business environment.
For privatization to take place, government regulations must be relaxed on the relevant sector to allow at least a degree of foreign ownership, even if not a majority. Where prices have been bundled in the interests of the consumer, unbundling the prices separates the more profitable aspects from the less profitable. The more profitable are those which are taken up privately, leaving the less profitable and loss-making in the hands of the government. If an industry or service is saddled with debt, it is most unlikely that the purchaser will be willing to take this on. The debt will be left as the government’s responsibility. Where profitability is low, prices are adjusted to bring it up to acceptable levels to enable a sale to be completed. Where a quick sale is desired, profitability levels will be artificially high.
The net effect is to increase costs to the government on the remainder, and to increase prices to the consumer on the product or service.
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