By Niny Khor & Devashish Mitra
While it is understood that trade leads to higher economic growth, the question of whether increased trade and openness to global markets benefits workers is still debated. Below, Niny Khor and Devashish Mitra argue that trade is beneficial for both employment and its quality, provided the right kind of complementary domestic policies are in place.
On April 24, 2013, an eight-storey building in Bangladesh collapsed, killing more than 1,100 workers, many of whom worked for export-oriented garment enterprises in the building. The disaster was one of the worst industrial accidents in recent years, and the outcry was immediate — igniting allegations that once again, globalisation is hurting workers in poor countries.
This is not the first time that foreign trade and foreign direct investment (FDI) have been blamed for the misery of workers. But is that a fair allegation? That trade leads to higher economic growth is one of the rarer facts that most economists agree upon. However, whether increased trade and openness to global markets benefits workers is still an open question.
In our recent publication, the edited volume Trade and Employment in Asia,1 several experts from all over the world examine the trade-labor nexus in the context of Asia, which has been growing rapidly over the last three decades and at the same time has been undergoing significant structural changes in an increasingly globalising world (Figure 1). This period in Asia has seen job creation at a rapid and robust pace. At the same time, economic growth has led to substantial poverty reduction. Employment is transitioning from agriculture to industry and services.
However, the global financial and economic crisis that began in the second half of 2008 has led to a rise in unemployment together with underemployment across the world. This acts as a major disruption in Asia’s steady march towards universal productive employment. Especially because of the region’s reliance on exports for its growth in income and employment, the slowdown and the threat of a double dip recession in the Organisation of Economic Cooperation and Development (OECD) countries has posed a major challenge to Asian countries. As a result, within policy circles of many Asian countries, there have been discussions about rebalancing their respective economies towards domestic demand and away from exports.
The studies in our edited volume suggest that withdrawing into protectionism would be a mistake: in general, increased openness has benefited the average worker in Asia. Recent work by McMillan and Rodrik (2011) underscores the importance of the right kind of structural change engendered by globalisation for the benefits from globalisation to be realised.2 Globalisation leads to at least partial specialisation and therefore to an expansion of certain sectors and the contraction of others. If the productivity of jobs in the expanding sectors exceeds the productivity of jobs in the shrinking sectors, we will see an improvement in overall employment quality and growth as a result of globalisation.
Here we highlight some of the major findings of our edited volume. First and foremost, trade in the region (which accounts for about 34% of total merchandise exports globally) has increased significantly in the past decade. This is particularly true of the exports of the People’s Republic of China (PRC), India, the Republic of Korea, Thailand, and Viet Nam. The resulting spectacular economic growth has increased real wages. Nowhere is this more apparent than in the PRC, where average real wages more than tripled just in the past decade.
Second, trade is found to be associated with job creation. Certainly, this is evident in the coastal regions of the PRC, where trade is estimated to have generated approximately 25% of all manufacturing jobs. Trade has powered the spectacular urbanisation of Shenzhen, the first special economic zone in the PRC, from a population of three hundred thousand to a sprawling megacity of more than ten million inhabitants, all within three decades of reforms. Export-oriented jobs were also created in various free trade zones in Asia, such as textiles and electronic-assembly factories in Malaysia and Thailand. Additionally, trade has created jobs indirectly in services supporting the exporting industries and through general increases in labor demand as the economy expands. The chapter by Haryo Aswicahyono, Douglas Brooks and Chris Manning in our edited volume presents evidence that in Indonesia, each $1million in manufacturing exports in 2005 created 181 manufacturing jobs and 341 service-sector jobs.
Third, trade improves productivity by enhancing specialisation and also moving workers to more productive sectors. Many Asian countries started out exporting labor-intensive manufactures, whose production employed workers previously engaged in agriculture. This has been an important source of productivity growth, since agriculture is still the biggest employer in Asia, with over 700 million workers. Over time, countries could reach high-income levels through successfully upgrading into more sophisticated manufacturing with higher value-added. Japan and the Republic of Korea managed to do so and industrialised within fifty years. Their export-orientation has been attributed to their success.
Fourth, trade and FDI often create jobs with higher wages and better conditions. The chapter by Robert Flanagan and Niny Khor in our volume demonstrates a complete lack of evidence for a general degradation of working conditions and labor rights due to increased trade. In fact, they show that trade-flows can improve working conditions and most labor rights indirectly through their positive impact on GDP. For instance, the average monthly compensation per worker paid by foreign affiliates of US multinationals can be over 10 times higher than the prevailing local wages, such as those in Bangladesh, India, and Indonesia. These companies can afford this by increasing the productivity of workers through technical and managerial advantages, which often also have positive spillover effects leading to higher productivity in other companies. The authors also show that since 1999, incidences of industrial accidents in Asia have actually declined by 22% and child labor has declined by 23%. Correspondingly, civil liberties rankings have also improved on average for Asian countries.
The shadows of globalisation
It is important to realise that while freer trade increases the size of the pie, not everyone gets a bigger slice. This is especially true in the short run. Heavy reliance on exports means that higher rates of unemployment could result from slumps in global demand, as happened during the global financial crisis. Even in the PRC, exports shrank 16% in 2009 relative to the previous year before bouncing back in 2010. Moreover, trade can generate additional structural change in an economy, and lead to (temporary) increases in inequality as workers adjust and transition to a different sector as was the case in Hong Kong, China. The expansion in export-oriented services there created high-paying jobs for high-skilled workers while the labor market absorbed displaced low-skilled workers at lower wages instead of throwing them into a state of unemployment. These observations are made and confirmed in James Vere’s chapter where he presents econometric evidence that it is growth in the GDP share rather than employment share of a sector that leads to higher real wages. Thus employment expansion from labor demand-related and labor supply-related reasons have different implications for the equilibrium wage.
The chapter by Moritz Meyer and Paul Vandenberg looks further at the interplay of globalisation, labor market regulation and firm behavior. Government intervention in the labor market, in the form of labor regulation, has to strike a balance between protecting workers and providing firms the flexibility in adjusting their inputs, especially with globalisation. Export markets can be quite seasonal and fairly volatile, which may result in the need for quick adjustments to output and input levels including the employment of labor. Since it is not easy to strike this balance, labor-market regulations overall have been quite controversial as a result. Meyer and Vandeberg find that firms that are constrained by labor regulations report a relatively higher perceived level of labor regulations. Such firms include exporting firms, firms in some labor-intensive industries (food, textiles and construction, in particular) and firms located in the capital city.
In this context, it is important to ask whether trade reduces the bargaining power of workers. In their chapter in this volume, Devashish Mitra and Jeongeun Shin present some evidence from Korean manufacturing firms that trade liberalisation reduces overall the share of wages in total revenue. However, they find fairly strong evidence that it decreases the share of wages in revenue in the least labor-intensive firms relative to other firms and it increases, in relative terms, this share in the most labor-intensive firms. There is also some weak evidence in the Korean data for the hypothesis proposed by economist Dani Rodrik that trade liberalisation leads to a decline in the bargaining power of workers. The authors find some evidence in the Korean data that trade liberalisation reduces the monopoly power of domestic firms. Therefore, there is a reduction in the rents to be shared between workers and employers.
The effects of globalisation on the bargaining power of workers get even more complicated in the presence of international labor mobility, such as the case of Malaysia, where foreign workers grew to over 21% of the labor force by 2008. Prema-Chandra Athukorala and Evelyn Devadason in their chapter find evidence of a fairly small wage-suppressing effect of the presence of foreign workers. They also find strong evidence for the prevailing view in Malaysian policy circles that the relationship between foreign and domestic workers was one of complementarity to begin with but has evolved into being one of competition with increasing scarcity of manufacturing jobs (as the presence of migrant workers has become a more ‘permanent’ feature of the economy).
Challenges and opportunities in the future
There are several challenges ahead for Asia. While exports are expected to remain vital to the region in the next two decades, global economic growth is expected to be slower, leading to decelerating or even reduced exports. Demographic changes also mean fewer future workers in some countries, which would increase costs for labor-intensive sectors. Lastly, environmental constraints would become more serious in the future.
The right policy mix, emphasising inclusive growth, is essential to make sure all segments of society share the gains from trade. As trade expands, not all workers will benefit simultaneously. Workers in sectors with rising profits will be the first to see increased wages. Others in declining industries might see their wages declining, or even jobs disappearing. Yet, these types of inequality do not have to be permanent if the policies are there to increase worker productivity, mobility, and re-skilling.
How do we prepare workers for this structural transformation? Rather than wage increase mandates, inclusiveness could also be accomplished through policies that encourage innovation by firms, and the accumulation of human capital by workers through training and better schooling. The computable general equilibrium projections in John Gilbert’s chapter indicate that the PRC and India will continue leading in regional and world trade expansion for the next twenty years, with India’s export growth rate overtaking that of the PRC’s over the period 2020-30 (driven by the faster accumulation of human capital). The economies of ASEAN, notably Indonesia and Viet Nam, are also projected to expand their world trade share. More importantly, the future demand for labor in Asia will be moving towards skilled labor, while the demand for unskilled labor in the region is projected to decrease starting 2030. For the PRC, demand is expected to shift towards skilled labor even earlier, by 2020. The implication of this shift is clear: workers with less than high school education would see lower demand for their labor, and probably face declining real wages in the future. Here stronger social safety nets, higher quality basic education, re-training, as well as vocational education and training programs could help workers switch into expanding industries.
Furthermore, Asian countries need to continue to improve their productivity in manufacturing. In the past, the driver of Asia’s export growth has been the strong growth of global demand for labor-intensive exports. Today, the productivity of manufacturing in developing Asia remains much lower than in developed regions. Furthermore, Asian productivity in services and agriculture is much lower than in manufacturing, which translates into even lower wages in those two sectors. The good news here is that over the past decade, as reported by Yothin Jinjarak and Kanda Naknoi in their chapter of our book, in countries like the PRC, India, Indonesia, Japan, Singapore, Thailand, and Viet Nam, the rising industries have outnumbered the declining ones in terms of comparative advantage. More importantly, which industries are rising or falling have not been determined solely by the labor-intensity of those industries (driven by low labor costs). The authors argue that Asian economies can raise minimum wages to reflect total factor productivity growth, without an inflationary effect on competitiveness. It is important here to keep in mind that wage growth should not exceed productivity growth, to make sure there is no loss in competitiveness of exports in world markets.
Cai Fang and Du Yang in their chapter show that exporting helps the PRC with creating greater job opportunities. Innovation to move further up the value chain is absolutely crucial, because in some middle-income countries such as the PRC the current export-related jobs are no longer the highest-quality jobs in terms of wages, hours of work, and conditions. However, the relative importance of export-oriented sectors in employment generation has been decreasing recently while domestic demand is becoming more important. Their data from the PRC also show two important recent trends: most export-sectors continue to be labor-intensive but capital-intensity has increased significantly.
To conclude, policies that encourage research and development (R&D) and innovation by firms would help countries move up the global value chain, thereby improving employment quality and increasing wages through productivity improvements. There is sufficient firm-level evidence showing that among the strongest drivers of Asian wages are capital and R&D intensity of the firm, after controlling for other important variables (such as industry to which the firm belongs, geography, export orientation, and education levels of workers).
Lastly, increasing labor productivity in services is important. Already, services account for the largest share of GDP in 32 out of 40 economies in Asia, and exports of services are increasing. Further improvements in logistics and financial services would lower the costs of doing business, boosting exports and domestic productivity, eventually creating more jobs economy-wide. This has the added benefit of limiting carbon growth as well.
The bottom line is that while trade is good for growth, it is also good for both employment and its quality, provided the right kind of complementary domestic policies are in place. In the presence of such policies, trade should lead to ‘inclusive growth’ that will benefit workers.
About the Authors
Niny Khor is an economist at the Asian Development Bank (ADB) Resident Mission in the People’s Republic of China in Beijing. She was previously based in the Economics and Research Department of ADB, where she also represented ADB in the steering committee for the International Collaborative Initiative on Trade and Employment (ICITE). Prior to joining ADB, she was an economist at the UBS headquarters in Switzerland, and a post-doctoral fellow at the Stanford Center for International Development. She holds a Ph.D. in Economics from Stanford University. Her current research focuses on Chinese economic growth and the structural transformation of its factor markets.
Devashish Mitra is Professor of Economics and Gerald B. and Daphna Cramer Professor of Global Affairs at the Maxwell School of Citizenship and Public Affairs at Syracuse University, where he was also Chairman of the Economics Department from 2006 to 2010. Professor Mitra is Co-editor of Economics and Politics and Associate Editor of the European Economic Review, Journal of Development Economics, Journal of International Economics, International Journal of Business and Economics and International Review of Economics and Finance. His main areas of research include the political economy of trade policy and the impact of trade on labor. He has published his research in top journals such as the American Economic Review, Economic Journal, Journal of Development Economics, Journal of International Economics and Review of Economics and Statistics. He has also been a consultant to the World Bank and the Asian Development Bank.
References
1. Khor, Niny and Devashish Mitra (2013). Trade and Employment in Asia. UK: Routledge.
2. McMillan, Margaret S. and Dani Rodrik, (2011). ‘Globalisation, Structural Change and Productivity Growth’ in M. Bachetta and M. Jansen, eds., Making Globalisation Socially Sustainable, International Labor Organization and World Trade Organization, Geneva
