Service outsourcing to smaller cities in the Philippines: The formation of an emerging local middle class

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14 Service outsourcing to smaller
cities in the Philippines
The formation of an emerging local
middle class
Niels Beerepoot and Emeline Vogelzang
Introduction
In the past few years, considerable attention by the popular press and by interna-
tional agencies has been given to what is considered the ‘new’ middle class in
developing countries (see e.g. World Bank 2007, Asian Development Bank 2010).
As part of shifting global economic power structures a new group of Southern
beneficiaries of globalization has become more visible and has gained growing
international attention. This ‘new’ or ‘Southern’ middle class is often used as a
term to describe how the benefits of globalization reach larger parts of the
population in the Global South (see e.g. Fernandes and Heller 2006, Kharas 2010).
Research on this new, Southern, middle class has so far mainly been within the
realm of the work of international agencies, consultancy firms and international
banks. Academic research on the emergence of a new middle class in developing
countries is, with some exceptions, still limited. Some studies have noted that
members of the new middle class are mostly working in knowledge-intensive jobs
in the private sector: information technology (IT), the banking sector or other
business services (see Fuller and Narasimhan 2007, Murphy 2011, Krishnan in this
volume). In the Philippines, the country occupying centre stage in this chapter, the
sustained growth of the ITES-BPO (IT-enabled business process outsourcing)
sector has been perceived to fuel the growth of a new middle class that drives
private consumption, notably the consumption of non-essential miscellaneous
goods and services (World Bank 2013).
Of even more recent date is the growing attention for the spread of the ITES-
BPO sector to smaller provincial cities in the Philippines (see Beerepoot and
Hendriks 2013, Kleibert 2014, Laysiepen 2014). Many second-tier cities within the
timespan of only a few years have seen the emergence of a sizeable service
outsourcing sector that (as in the case of e.g. Iloilo, Baguio and Bacolod) has created
around 8,000–10,000 jobs per city. These cities essentially skip the industrial stage
of development and instead become part of global services production networks.
Given that these cities usually have much smaller and less diverse economies
(Andriesse et al. 2011), the impact of the emergence of the service outsourcing
sector is more profound here than in large metropolises such as Metro Manila and
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Mumbai. Employment opportunities for college graduates have so far been limited
in smaller cities in the Philippines. With the rise of the service outsourcing sector,
better-paying employment is available, stimulating young people to stay longer in
Iloilo instead of moving to larger cities such as Manila or Cebu or going abroad. This
chapter examines how in one smaller city in the Philippines (Iloilo) the expanding
service outsourcing sector is leading to the formation of a new middle class and
whether workers perceive themselves to be ‘new’middle class. Particular attention
will be given to their consumption practices as these have become the way to
understand the middle class (see Fernandez and Heller 2006, Jaffrelot and van der
Veer 2008, Guarin and Knorringa 2014). Consumption is of particular importance
in the identity formation of the new middle classes in developing countries (Murphy
2011). It is consumption, not income, which has become the marker for middle class
status in common parlance (Nijman 2006). Surprisingly, few studies so far have
looked into the consumption practices of workers in the service outsourcing sector.
Through examining their consumption practices this chapter will add to a further
understanding of the local impact of the service outsourcing sector in the recipient
locations in developing countries.
This chapter is based on semi-structured interviews with 31 workers and a
survey among 554 workers in the ITES-BPO sector in Iloilo carried out in 2013.
The next section provides an overview of the literature on the service outsourcing
sector and how the sector can add to the formation of a new middle class. The
chapter then outlines the methodological framework of the research and then
concentrates on the characteristics of the service outsourcing sector in the
Philippines and Iloilo. The next two sections respectively provide a profile of the
workers in the Iloilo ITES-BPO sector and discuss their consumption patterns in
order to examine whether they are a new middle class in the making. Finally the
chapter draws some conclusions.
Offshore services and the rise of the middle class
In the past ten years a substantial body of literature has emerged on the service
outsourcing sector and the opportunities it provides for developing countries (see for
useful overviews e.g. UNCTAD 2005, 2009, Dossani and Kenney 2007, Buny-
aratavej et al. 2011, Massini and Miozzo 2012). A range of services previously
thought to be non-tradable is now being provided electronically over large distances
(World Bank 2007). Since the 1980s, outsourcing and offshoring of business
services have experienced a remarkable growth and extended from basic software
coding and call-centre work to a range of knowledge-intensive business services
and back-office functions such as payroll and accounting, financial and legal
research, and even tightly regulated activities such as drug development (Massini
and Miozzo 2012). Offshore services are still frequently associated with call-centre
work, while the sector contains a much wider variety of activities (see Beerepoot and
Hendriks, 2013). For developing countries with capable workforces, services
relocation offers enormous employment and entrepreneurial opportunities (Dossani
and Kenney 2007). The sector is considered to provide the much-preferred white-
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collar jobs for an increasingly college-educated labour force. The service out-
sourcing sector holds the potential of generating (highly) skilled jobs, which are
often missing or insufficiently available in developing countries (Dayton-Johnson
et al. 2009). In the Indian case it meant that for the first time a large but extremely
poor economy entered global competition on the basis of the labour potential of its
middle-class white-collar workers (Dossani and Kenney 2009).
Contribution to a new middle class
Various authors have debated whether (and how) the service outsourcing sector
contributes to the formation of a new middle class in developing countries (see e.g.
Fuller and Narasimhan 2007, Nadeem 2009, Murphy 2011). The much-vaunted
emergence of IT allied to the rapid economic growth rate in India since the mid-
1990s has apparently raised increasing numbers of Indians into the middle class
(Jeffrey 2008). Key issue in this debate is whether the sector predominately provides
employment to the existing middle class, and whether its benefits are internalized
by the existing middle class, or it provides new groups in society access to better
paying employment. In India, growth in the ITES-BPO sector has created better
income opportunities for high- and medium-skilled labour compared to less-skilled
or unskilled labour (Raychaudhuri and Das 2012). The economic dynamics of the
ITES-BPO sector not only rest on inequality but also tend to reproduce class and
other social divisions due to its education requirements bias, thereby excluding a
large section of the Indian population (D’Costa 2011). In Mumbai, and elsewhere
in urban India, the middle class is pulling away from the poor and low-income
classes (Nijman 2006, see also Hatekar and More in this volume).
Irrespective of whether the sector strengthens the existing middle class or
facilitates the formation of a new one (by providing new people access to a middle-
class status), the key issue remains why this new middle class is important to look
at. Here, multiple expectations of what a strong middle can contribute to a society
play a role. First, the middle class is an important prerequisite for stronger, more
sustainable economic growth and development (Asian Development Bank 2010).
Second, the existence of a strong middle class is seen as an essential condition for
a country to economically and socially progress ‘from within’ (Lange and Meier
2009). Third, the middle class is often regarded as a source of entrepreneurship
and driver of political and social change (see Economist 2011). Fourth, it functions
as a powerful idea of an open class of ordinary people who enjoy good incomes
from their hard work, and to which everyone can aspire (Ballard 2012). Therefore,
in India, the new middle class is seen to symbolize ‘modernity’ by way of its aspira-
tional lifestyle, consumerism, materialism and adoration of the West (Nijman 2006,
Krishnan in this volume).
New middle class consumer practices
The most visible aspect of new middle class status concerns consumer practices.
The ascent of hundreds of millions of developing-country nationals into the global
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middle class will produce a large group of people who can afford, and will demand
access to, the standards of living that were previously reserved mainly for the
residents of high-income countries (World Bank 2007). Various consultancy and
policy reports emphasize how the new middle class above all should be seen as a
consumer force (see McKinsey 2007, Goldman Sachs 2008, Asian Development
Bank 2010, Credit Suisse 2010, 2011). Because the middle class typically stands
at the forefront of consumption demand, a larger middle class will tend to reinforce
changes in consumption patterns (World Bank 2011). The surge in the global
middle classes must thus be seen both as an economic transformation involving an
increase in purchasing ability and discretionary income, and a socio-cultural
transformation involving changes in beliefs, attitudes, norms and motivations
(Guarin and Knorringa 2014).
Middle class consumerism and its attendant features – marketing, commercial
media, malls and shopping culture – is a leading trend across emerging societies
(Nederveen Pieterse 2009). As observed by Dupount (2011), Delhi’s insertion in
the global economy has been conspicuously translated into its urban landscape via
the development of modern infrastructure, high-end residential complexes and
exclusive shopping malls, in line with the rise of consumerism and middle-class
ideology (Dupont 2011). The malls symbolize a fast-growing consumerist culture
with window-shopping and spending time in air-conditioned postmodernist
environments emerging as a new leisure activity that is de facto restricted to the
upcoming middle classes (Dupont 2011). By providing decent incomes the service
outsourcing sector is often regarded as fuelling the growth of this new middle class.
The relatively high incomes of software engineers and other IT professionals place
them easily within the upper segments of the middle class by any income-based
definition (Upadhya 2008). They command large disposable incomes at a relatively
young age, enabling them to engage in high levels of consumption (Upadhya
2008). The higher than average compensation of ITES-BPO employees can lead
to increasing personal consumption as this sector’s workforce has a higher
propensity to consume (Magtibay-Ramos et al. 2007). These observations require
a closer look at how ITES-BPO employees stimulate new local demand for goods.
Methodology
This research is based on a combination of semi-structured in-depth interviews
with key informants (3) and ITES-BPO employees (31), a survey among ITES-
BPO employees and the study of secondary materials on the city’s outsourcing
industry. The data were collected during a ten-week fieldwork period in Iloilo City
between late January and early April 2013. The interviews concentrated on issues
such as perceptions of employment, future (career) plans, social life/activities,
expenditure patterns, social class perceptions and family relations. Among the 14
ITES-BPO firms located in Iloilo City, two granted permission to approach their
agents for interviews. From the 31 interviews, 22 were conducted inside a large call
centre and nine in a smaller non-voice BPO firm using a convenience sampling
method.After the fieldwork, interviews were transcribed and crosschecked in order
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to compare and contrast data on the discussed topics and for the purpose of
identifying inconsistencies in the data.
To incorporate quantitative data, a self-administered survey was distributed
among BPO employees. Due to time constraints and the difficulty of finding partic-
ipating companies, it was decided to conduct a non-probability sampling technique.
Respondents were selected on the basis of accessibility. Eventually, 600 question-
naires were distributed among employees in six firms that agreed to participate.
With 554 of them returned, a response rate of 91.7 per cent was reached.
Afterwards, the survey was entered in SPSS to analyse the data gathered.
The Philippine and Iloilo service outsourcing sector
The Philippines’ITES-BPO sector had its formative years in the early 1990s when
a number of foreign data encoding companies settled in the country. The sector
gained momentum in the early 2000s with the launch of international outsourcing
and offshoring of voice-based services. In recent years, the sector has been able to
grow rapidly thanks to the country’s considerable output of college graduates with
a good command of English. Currently, the service outsourcing sector employs
around 800,000 workers (BPAP 2012). Around 70 per cent of the workers are
involved in voice-based services. The Americanized English of Filipinos gives the
country a competitive edge over India (Friginal 2009). So far, the vast majority of
the ITES-BPO companies and jobs (both nearly 80 per cent) are located in Metro
Manila. Supply-side constraints in Metro Manila and active promotion of smaller
cities (see Kleibert, 2014) have led the sector to expand to other parts of the
country. The advantages of smaller cities are the lower operating costs (wage-levels
and office rental in particular) and a lower attrition rate. Here, the impacts or the
transformative and invigorative effects on the local economy are also perceived to
be much bigger as these cities have a less diverse economic structure. A major
restriction in these locations is the lack of sizable office space and extra efforts
that are required before the agents reach the required level of English (Laysiepen
2014).
The city of Iloilo long served predominantly as a regional trading hub and node
in regional inter-island shipping. The city had an entrepot function in the sugar
production and trade that long flourished in the central Visayas. The rise of the
service outsourcing sector from the mid-2000s onwards came after a few decades
of economic decline caused by the regional sugar industry losing out to the interna-
tional competition. Currently the city has around 430,000 inhabitants. The position
of the city as a regional educational centre (guaranteeing a steady supply of
potential workers) has been instrumental to the arrival and growth of the service
outsourcing sector. During the research period in 2013 the city hosted 14 ITES-
BPO companies, of which six are call centres. Non-voice activities in Iloilo include
data entry, teaching English online, medical transcription and web design. The
sector employs around 8,500 people (in 2013), most of which work in four call
centres that employ between 1,500 and 2,000 workers each. In a related
development the city in recent years has emerged as a popular place for South
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Koreans to study English. About 1,000 of them are currently enrolled in the city’s
local language schools.
There have been various accounts of how the rise of the service outsourcing
sector transforms smaller Philippine cities into 24-hour economies since serving
Western clients means working predominately at night (see Hendriks 2010,
Laysiepen 2014). Observations in Iloilo make clear how the service outsourcing
sector stimulates indirect employment in such domains as catering, retail (malls,
leisure shopping) and transport services. As such, many recent economic develop-
ments in the city are attributed to the service outsourcing sector, as emphasized in
one interview:
The establishment of the BPO sector is a big factor for Iloilo’s economic
development. Only in the last two years we have seen new hotels come up,
new commercial centres, of which some of them are still being built right now.
New investors are coming in and I would assume it is because of the higher
purchasing power Illongos have. If you have a pool of 5,000 people who are
earning around 12,000 pesos a month, that is a lot of purchasing power.
(Interview, local government counsellor, 7 February 2013)
The purchasing power of ITES-BPO workers is therefore the most often cited, and
most visible characteristic of this group, as will be further elaborated below. New
people with spending power not just lead to the demand of new goods and services
but given the demographic characteristics of the group also to a specific set of
consumer goods.
Profiling workers in the Iloilo ITES-BPO sector
The empirical study for this chapter involved a survey among 554 workers in the
service outsourcing sector in Iloilo. The vast majority of them were born and raised
in Iloilo or the direct vicinity of the city. The average age of the respondents was
around 25 years, which reflects the young age that is typical for workers in the
sector. Most respondents are college graduates. The main motivation for them to
join the ITES-BPO sector is (not surprisingly) the financial compensation that the
sector offers. The ITES-BPO sector pays twice as much compared to other sectors
such as retail or manufacturing. Basic monthly payment lies between PHP10,000
and PHP15,000 (or US$225–337). Additional benefits that they receive during
employment involve a night work allowance, medical insurance, company parties
and performance bonus. Other motivations to join the sector include a lack of local
alternatives and joining friends who already work in the sector. One respondent
emphasized how glad she was having found a job in the ITES-BPO sector, since
no other local company would hire her as an undergraduate. The sector stimulates
workers to stay in Iloilo, whereas before they would often move elsewhere in
search of employment. This was best exemplified in an interview with an ITES-
BPO worker:
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Before joining this ITES-BPO company, I planned to work abroad if I couldn’t
get a job in Iloilo. However, since I got a prominent job now, I plan to stay and
study at the same time since I will start my master’s degree this June. If
eventually there is an opportunity to work abroad, why not? But for now I see
myself staying in this company.
(Interview, ITES-BPO worker, 11 March2013)
The quote illustrates that the sector could be instrumental in spreading the
economic benefits of service sector growth more widely, as intended at with the
Next Wave Cities promotion (see BPAP 2012, Kleibert 2014). Of the surveyed
workers, 49 per cent expected to work at least one more year in the ITES-BPO
sector while 32 per cent even preferred to work in the sector for an indefinite
period. Only a small number of workers (9 per cent) saw their job as a stepping
stone towards better ITES-BPO jobs in Manila or Cebu City. Many respondents
highlighted the acquisition of generic skills as one of the main benefits of working
in the service outsourcing sector (see also Marasigan in this volume). The most
often highlighted skills learned during employment included (in this order of
importance): self-confidence, concern for quality, communication skills and
cooperation with others. As emphasized by one respondent:
One of the things I have enhanced is my social skills. Prior to this job, I was
really introverted. I wouldn’t talk to people if they wouldn’t talk to me first.
Working in the ITES-BPO sector has really improved my self-confidence.
(Interview, call centre agent, 12 March 2013)
Acquisition of generic skills is more often recognized as a key benefit of work in the
service outsourcing sector (see Beerepoot and Hendriks 2013). Recently, work in
the service outsourcing sector has become evaluated more positively (see Upadhya
2008, Vira and James 2012, Beerepoot and Hendriks 2013, Marasigan in this volume)
and seen as a particular stage in peoples’ careers during which they have the oppor-
tunity to acquire skills that can be used in their further career. The sector strengthens
economic independence and self-confidence among its workers. Notwithstanding
the positive appraisal and learning opportunities that the sector provides, the
respondents do not forget to mention the negative features of work in this sector.
Doing monotonous work at night for long periods causes stress and health problems.
Still, the lack of local employment alternatives drives them towards this sector.
When asked about what defines new middle class status for them, most
respondents named the level of income, stability of income and level of education.
When subsequently asked whether since their start in the service outsourcing sector
they have experienced a change in class status, many responded positively (see Table
14.1).The main reason why they perceived a change in their class status was because
of their higher, and more stable, incomes. It should be noted that these are subjective
classifications, based on how respondents evaluated their own situation before
working in the sector and at the time of interview. Especially young respondents may
have evaluated their BPO position and (their first) income very positively.
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Table 14.1 Perceptions of class position of workers (N=538)
Before Now
Lower Lower Middle Upper Upper
class middle middle middle class
class class class
Lower class (N=95) 25 52 13 41
Lower middle class (N=206) 1 103 100 11
Middle middle class (N=209) 18184 16 0
Upper middle class (N= 4) 0110 13 0
Upper class (N=4) 00013
Total 27 164 307 35 5
Source: Survey results (2013).
Prevalent are the shifts from lower middle class to a ‘middle middle class’ status
and the preservation of an existing middle class status. This suggests that the ITES-
BPO sector predominately stimulates upward movements within the middle class.
The job selection criterion of having completed college education is instrumental
in these shifts. It confirms perceptions that the service outsourcing sector mainly
stimulates upward movements within the middle class (see also Raychaudhuri and
Das 2012). As such it could add to perceptions that the ITES-BPO sector
strengthens inequality within an urban labour market, which is beyond this chapter
to investigate. It also requires a closer investigation of consumption practices to see
how those provide a stimulus of local economic growth.
New consumer practices of ITES-BPO workers
A main feature of the ITES-BPO sector is the relatively high salaries that workers
can earn. Compared to other jobs such as nursing (US$135), teaching (US$135)
and wholesale/retail (US$112), ITES-BPO employees earn on average twice as
much per month (US$225 to US$337). With a total pool of around 8,500 workers
they form a sizeable local consumer force that reshapes local demand for goods.
An often-mentioned example among respondents of how local consumer’
demands in Iloilo have recently changed is the establishment of a Starbucks coffee
bar. Initially, doubts were raised over whether the Illongos would be willing to pay
200 pesos (or $4.4) for a cup of coffee. But soon the Starbucks became very
popular among local citizens and the owners even opened a second one in the
city. While essentially anecdotal, this illustrates how local demand for goods is
changing and people are willing to spend more money or engage in luxury or
conspicuous consumption. Many respondents emphasized how since they worked
in the ITES-BPO sector they spent more money on clothes, gadgets and other
luxury items. These are illustrations of what the World Bank (2013) regards as
consumption of non-essential miscellaneous goods and services driven by the rise
of the service outsourcing sector. One respondent highlighted that he can eat out
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at fast-food chains every day as an example that he now belongs to the middle
class:
It’s a luxury to be able to eat at Jollibee every day. Most families can only go
there four times a month, but I can go there every day.
(Interview, call centre agent, 14 March 2013)
The importance attached to consumption is deeply woven into the service sector,
especially in call centres, in the form of ‘aesthetic labour’ where the agent’s presen-
tation is part of the product: ‘sounding right, looking good’(Warhurst and Nickson
2009). One interviewed agent stressed that having a good dressing style is part of
the ITES-BPO culture. It is part of the ITES-BPO lifestyle to buy new clothes or
a new pair of shoes every payday. Among the respondents, 45 per cent said they
cared more about their clothing and looks after getting into the sector. In a similar
research on middle-class formation among Indian ITES-BPO employees, it was
argued that Indian ITES-BPO workers have become part of an emergent global
middle class (Murphy 2011, see also Krishnan in this volume). The phenomena of
consumer culture, luxurious lifestyles and social class identity are all vital
components of the emerging new middle class that distinguishes itself from other
groups in society as they are more influenced by Western values and lifestyles
through the global aspect of their job. One of the agents in this research also
stressed the need to learn about Western lifestyles for her ITES-BPO job:
We learn to adapt to different cultures, because we need to learn general
information about the country and their manners, like what type of food they
are into, what arts they like, music, everything. It is important to learn this so
that by the time we communicate and make calls we don’t just listen and take
their concerns or resolve their issue; we get to engage with the customer.
(Interview, call centre agent, 14 March 2013)
Despite being exposed to a culture of conspicuous consumption, ITES-BPO
employees did not appear to spend their money only or even mainly on miscel-
laneous goods. On the contrary, almost all respondents reported contributing a
percentage of their income to their family’s income (varying from 20 to 99 per cent).
One respondent mentioned that his income enabled two sisters to study nursing.
Most workers saw their job as a stable source of income to support their own and
their family’s expenses. This implies that they contribute to maintaining their own
and their family’s middle class status. These responses are similar to what can be
observed among overseas workers who also often highlight the importance of
supporting the family with their newly earned income (Asis et al.2009).
Conclusion
This chapter has looked at how the rise of the service outsourcing sector in Iloilo
fosters the formation of a new middle class in this city. Service outsourcing is no
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longer only impacting primary cities in Southeast Asia, as illustrated in various
case studies in this book, but is increasingly driving changes in lower-tier cities as
well. In smaller provincial cities in the Philippines the sector provides new local
employment opportunities, albeit and in a direct sense only for a selective group
of workers. The rise of the service outsourcing sector has stimulated young people
to stay longer in Iloilo instead of trying their luck in larger Philippine cities or
abroad. The new middle class is often characterized as a new consumer force
whose higher spending power is based on new service sector employment opportu-
nities provided through globalization. The service outsourcing sector workers in
Iloilo fit in this picture. Their consumption practices are often highlighted as the
most visible local transformation due to the rise of the service outsourcing sector.
In Iloilo the ITES-BPO sector has enabled workers to make upward movements in
class status, though these mainly involve changes within middle class status.
Similar to the accounts by Nadeem (2009), Murphy (2011) and Krishnan (in this
volume), these workers have become exposed to a culture of consumption that is
often stimulated through their peers in the sector. Workers engage in more visible,
luxury consumption and perceive that, through their new employment, they have
made upward movements in their class status. Still, workers often emphasize their
responsibility towards supporting the family income.
Further research could concentrate on the indirect employment generated
through the rise of the service outsourcing sector. As emphasized by Kumar in this
volume, this involves looking at businesses supporting the growth of the ITES-
BPO sector and how they provide employment opportunities to other segments of
the urban labour market. Such research provides an input to a more general
understanding on the longer-term growth prospects of the ITES-BPO sector in
developing countries. As argued by Roubini (2014) eventually technology will
replace service jobs in developing countries as well. And soon enough voice-recog-
nition software will replace the call centres of Bangalore and Manila (Roubini
2014). In the Philippines, critical concerns have recently been raised on the ‘jobless
growth’ that the country is currently experiencing (Syed 2013). Despite rapid
economic growth (stimulated through the rise of the service outsourcing sector)
the national unemployment rate has increased in the recent years. Herewith more
fundamental questions can be raised about whether (offshore) service sector growth
provides a viable pathway for development of underdeveloped countries, partic-
ularly when the sector displays high levels of footlooseness (given its low fixed
investments) and just as quick as the sector emerged in places like Iloilo city, it
could disappear.
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