WTO trade ‘wisdom’ challenged at ILO meet on globalization

Presentations delivered recently at an ILO body addressing globalization issues called into question claimed benefits of trade liberalization, with representatives of workers, governments and international organizations drawing attention to how labour and the developing world have lost out as the doors to global commerce are flung open.

by Chakravarthi Raghavan

GENEVA: The conventional, neoliberal theoretical model of trade liberalization producing growth, more employment, more consumer benefits and enhanced welfare for workers received some sharp challenges on 18 March at the International Labour Organization’s Working Party on Social Dimensions of Globalization.

While the neoliberal view (based on computable general equilibrium models) was presented by officials from the World Trade Organization, Eddy Lee, Director of the International Policy Group at the ILO, presented an updated version of the ILO’s report of last year, showing that some of the recent studies were more sceptical on the benefits of trade liberalization and suggesting that in some of the countries it had resulted in greater inequality.

An economist at the United Nations Conference on Trade and Development (UNCTAD), Richard Kozul-Wright, presented a critical view, challenging the neoliberal conventional wisdom about trade liberalization. He said (basing himself on ongoing research work at UNCTAD) that there was a disconnect or decoupling of trade from growth across much of the developing world over the last two decades, with no relationship in much of the developing world (except East Asia) between trade and income trends. There was also no strong independent link between trade and labour market problems in the industrialized world, while in developing countries, labour market performance differed greatly between those which opened up from a position of strength (East Asia) and from a position of weakness (Latin America and Africa).

A WTO official from its Research Department, Marc Bacchetta, cited the general equilibrium theories about trade liberalization, and said the evidence showed that there was an overall improvement in welfare and that those who lost out due to temporary adjustment problems could be compensated. In the long run, he said, trade liberalization and the welfare effects benefit everyone.

(However, Bacchetta did not say whether his conception of the “long run” was ‘Keynesian’ or that of Zhou En-Lai. Keynes said that in the long run we shall all be dead, while Zhou (in the 20th century), when asked to comment on the impact of the French Revolution (18th century), said it was too early to tell.)

In the Working Party discussions, some of the case studies cited (in the IMF and World Bank studies) about the benefits of trade liberalization in individual developing countries also received some sharp challenge from workers’ representatives.

A trade union representative from South Africa narrated the case of a textile and clothing factory being relocated from the centre of the town to the suburbs, where it was easier to lock up workers inside the factory and make them work in sweatshop conditions, on the ground that the firm had to compete with Bangladesh!

Also, in some brief interventions, the government representatives of India and Pakistan brought out that though they had played by the rules, the countries had not seen any benefits from the WTO. The WTO’s Uruguay Round agreements and trade liberalization were in fact creating problems for large sections of their communities.

The ILO, WTO and UNCTAD officials, who had presented reports and studies by their organizations in March 2001, intervened to update their earlier studies and conclusions.

Earlier, speaking at the Working Party, WTO Director-General Mike Moore said that the cause of trade liberalization has been greatly advanced by the work programme and negotiations launched at the 4th WTO Ministerial Conference at Doha in November 2001.

Moore cited the WTO secretariat’s report of last year (which had outlined the theoretical model and explanations of neoliberal trade theory and welfare benefits) to say that trade liberalization has the effect of lowering prices of consumer goods and of increasing consumer choice, while also allowing reallocation of production factors towards higher-productivity activities. “All these aspects have a positive effect on the well-being of people in the liberalizing economy, including workers,” Moore asserted. “Workers gain because they are consumers themselves and thereby benefit from lower prices and increased consumer choice,” he claimed, without explaining how a worker who has lost his job can consume at all. “Some workers will also benefit because they will see the demand for the services they provide increase, which will in return reflect positively on their job opportunities.”

“Less sanguine”

While Moore cited a World Bank study as showing that in eight of nine liberalizing countries, manufacturing employment was higher one year after liberalization, the updated ILO survey of literature, presented by Lee, said that a recent World Bank study on globalization took a “less sanguine view of the employment effects of trade liberalization than some of its earlier studies.” A previous World Bank study in the 1990s, Lee said, had claimed that trade liberalization did not raise unemployment even in individual sectors and led to an improvement in income distribution.

“In contrast,” the ILO updated report said, “the new study, while reiterating the benefits of trade liberalization for both employment and wages over the long run, recognizes that there are significant transitional problems that need to be faced. It noted that the skill premium, and hence wage inequality, has risen in several countries in the aftermath of trade liberalization.” The Bank study also brought out that a series of case studies on effects of trade liberalization showed a “considerable dispersion” of the net impact on employment, and highlighted the problem that small declines in employment may hide “substantial job churning” and that some important losers from globalization will be formal sector workers in protected industries.

Two further recent studies on Mexico, the paper presented by Lee brought out, showed a rise in wage inequality after trade liberalization, but offered differing explanations for this. One paper (by Zadia Feliciano in Industrial and Labour Relations Review) suggested that the rise in inequality was consistent with decreasing relative demand for low-skilled workers, and the decrease was more severe in industries directly affected by trade reforms. Another paper (by W.W. Cortez in World Development), while not testing for a causal relationship between trade liberalization and the observed rise in wage inequality, concluded that a major factor was the decline in unionization rates. A third paper on Brazil (Francis Green, Andy Dickerson and Jorge Saba Arbache, in World Development) also found rising inequality but said it coincided with an increase in demand for skilled labour (with college education) when trade reforms began to bite.

A special issue of the Journal of International Economics, which examined other channels (than the standard Heckscher-Ohlin and Stopler-Samuelson models) for impact of trade liberalization on inequality, had found that trade liberalization could affect the relative bargaining power of labour versus capital. Another study in the same journal had also found that increased mobility of capital, even more than trade liberalization, weakened the bargaining position of labour.

However, the phenomenon of the links between trade liberalization and wage inequality had been largely confined to several Latin American countries, in contrast to the experience in Asia.

An IMF staff study (by Gunnar Johnson and Arvind Subramanian) about the impact of trade liberalization on South Africa, which claimed to show significant total factor productivity growth and thus contribution to the augmenting of long-run growth potential, was challenged by the South African workers’ representative.

The IMF paper itself began with the observation that “the pendulum of academic research on the positive relationships between trade and economic growth appears to be swinging from near universal to more qualified acceptance,” and that dissatisfaction with the cross-country approach “argues for a research strategy focussing on exploring more contingent or situation-specific relationships.”

A new paper by David Greenaway, W. Morgan and P. Wright (in Journal of Development Economics) elaborated the point that “trade liberalization has produced differing results depending on country circumstances.”

Macroeconomic and financial roots

An UNCTAD study presented to the ILO last year had concluded that trade provided only a superficial explanation of unemployment and wage inequality, and the same could also be said of the other most popular alternative explanation, namely technological change. Both factors, it said, had indeed tended to reduce demand for unskilled labour in industrial countries, but dislocations of labour due to new competition or new technology were nothing new in economic history. Also, demand for skilled labour too has been weak in many countries.

“Why then has it become difficult for labour, displaced by structural change, to find remunerative work elsewhere in the economy?” UNCTAD asked. It said “the root of the problem lies in the slow pace at which demand, output and investment in most industrialized countries have been expanding over the past two decades. Even if labour is made less costly to employers and more skilled, business will invest on the scale required to provide more and better jobs only if it is confident of buoyant sales.”

In the paper, UNCTAD suggested reconsideration of the conventional policy approach in the industrialized world, and appropriate macroeconomic policies to increase productive investment and expand employment, with trade and technology reinforcing a virtuous circle of economic growth, job creation and productivity gains.

“It would also require better policy coordination among the leading industrial economies along with more effective governance of international capital flows than has been the case since the collapse of the Bretton Woods system, and a better managed exchange rate system among the G3 currencies [dollar, euro and yen],” the UNCTAD paper added.

Updating the conclusions, Kozul-Wright for UNCTAD said the paper had rejected any strong independent link between trade and labour market problems in the industrialized countries. The impact of trade liberalization on labour market performance in developing countries differed greatly between those opening up from a position of strength (as in East Asia) and from a position of weakness (as in Latin America and Africa).

Rapid financial liberalization, the UNCTAD economist said, had also negatively impacted labour market performance throughout the developing world, including previously strong performers.

The contribution of trade to labour market performance could not be divorced from the wider macroeconomic context and the workings of the global financial markets.

Disconnect between trade and income

The world was experiencing slower and more erratic growth, but one where developing countries have been trading much more and in the “right” products.

However, over the past two decades, there has been a decoupling of trade from the growth engine across much of the developing world.

The share of the developed countries in world manufacturing trade, the UNCTAD economist said, has been falling but their share of world manufacturing value-added (income) has been rising.

East Asia has been seeing a rising share of world manufacturing trade and income. But elsewhere in the developing world, there is no relationship between trade and income trends.

“In developing countries manufacturing trade tends to exceed manufacturing value-added, while the opposite is true in developed countries,” Kozul-Wright pointed out.

Also, in developing countries, the ratios of manufactured exports to GDP had been rising steeply, but not the ratios of manufacturing value-added to GDP. Since the late 1980s, the imports of developing countries have been rising much more quickly than exports, while in developed countries exports have consistently exceeded imports.

This raised the question as to why few of the countries which pursued rapid liberalization of trade and investment and experienced a rapid growth in manufacturing exports had achieved a significant increase in the share of manufacturing income.

Citing some of the studies, Kozul-Wright said that among the reasons were:

*  enclavism, with value chains restricting technological and industrial upgrading, with big gains for footloose capital;

* declining manufacturing terms of trade because of the fallacy of composition in the exports of the developing countries;

*  barriers to entry for developing countries, linked to imperfect market structures - oligopolistic market structures in the North preclude entry; there is also the mergers and acquisitions activity and non-price competition rules. In the South, there are competitive markets with new entrants, but not many exist. And competitive labour markets mean price competition rules.

In terms of a real agenda, developing countries need market access, policy space (without being forced to adopt the policies, norms and standards of the North) and debt relief, Kozul-Wright added. (SUNS5083)                         

From TWE No 276 (1-15 March 2002)