How the process of Globalisation might have affected the position of labour in industrialized and developing countries.

AS and A Level Economics

EO314 Issues in International Economics

Submitted to

Frank Brouwer

London Metropolitan University

December 2nd, 2004

Iolanta Lyebyedyeva

ID: 02019931

This essay aims to explain the question how the process of globalisation might have affected the position of labour in industrialised and developing countries with the focus on effects of trade on skilled and low/unskilled workers, especially how on how trade affects employment and wages, in developed and developing countries.

As a starting point, it might be useful to look at what is actually meant by Globalisation, because many people definitely know whether they are for or against it, without even considering what exactly it is.

There are hundreds of definitions of globalisations. Following a British sociologist Martin Albrow (1990) “globalisation refers to all those processes by which the peoples of the world are incorporated into a single world society, global society”. According to Robert Cox (1994) globalisation includes “the internationalizing of production, the new international division of labour, new migratory movements from South to North, the new competitive environment that generates these processes, and the internationalizing of the state…making states into agencies of the globalizing world”. Thus, globalisation provides, or it IS increasing links between different parts of the world.

On the other hand, this “global linkage” is perceived as forcing actions from the nowadays’ “empires” – powerful developed countries, such as USA, UK, Germany, etc. This is similar to what the director of Christian Aid partner the Third World Network (TWN) Martin Khor (1995) insists: “globalisation is what we in the TWN have for several centuries called colonization”.

Different sources argue different starting point of globalisation, however there is still no agreed time: some point to the time of the traders of the ancient world, others to the colonialism and imperialism of previous centuries. However, mostly it is agreed the modern era of globalisation is qualitatively different and it has its roots in :

Rise of transnationals/multinationals
Collapse of Soviet Union
China’s move towards a market economy
Development of new technologies
Development of inter-governmental trade & finance organisations (IMF, WTO, World Bank)
Neo-liberalism

Globalisation is based on the theories of Absolute Advantage (AA, Adam Smith) and Comparative Advantage (CA) (David Ricardo) and free movements of goods between borders in a market that is free from governmental involvement. AA assumes that everyone benefits when countries produce and sell freely what they do best. Ricardo focused on differences in labour productivities. CA presumes if a country is less productive at producing everything, then it must specialise in what it does relatively better than the others, then trade would be also beneficial.

Another widely spread theory then talking about Globalisation & Trade and which basically determines nations’ trade patterns is the Heckscher – Ohlin theory, also called Standard International Trade theory. It predicts that a country exports the products that use its abundant factors intensively and imports the products using its scare factors intensively:

A country is relatively labour-abundant will specialise and export labour intensive products
Countries with a relatively abundant supply of capital will specialise and export capital intensive products

Globalisation has significantly affected and increased International Trade between countries. Table1 below illustrates World Trade measured in Billions USD, where World shows the total world trade, OECD total is a total trade of OECD (Organisation of Economic Co-operation & Development) member countries and non-OECD total – all other countries’ total trade; however, generally, these increasing numbers can simply be seen as an indicator of growing trade.

Table 1 World Trade

There are thousands of debates about who gains and who loses from this trade, from this openness. Moreover, this question is being split into 2 sub-categories, I would say, into 2 sub-questions: do industrialized/developed countries lose or gain? And do developing countries lose or gain? Plus, I think it is important to distinguish between developing and least developed countries, because much more attention needs to be paid for LDCs than for the others.

Referring back to the trade theories, how industrialized countries can benefit from international trade?

Lower costs of production
International trade promotes competition in domestic markets
Consumers are free to choose among goods that satisfy their needs & wants the most

What about developing countries:

Rising employment
Introducing new technologies
Greater access to foreign capital
Training opportunities

All this according to the theories, but does it apply to reality?

First of all, how can trade lower down costs of production? As developing countries open up their markets, industrialized countries relocate their companies or its parts to new locations, because the benefit will include cheaper labour and a reduction or even absence of tariffs and tax exemptions offered by host countries. At the same time, it gives employment opportunities to host countries. A good example might be a move of the telecommunication industry to India: we get cheap phone calls, cheap internet, etc., while Indians get their jobs. May look like two targets with one shot.

However, here the question comes how does it affect labour in developed countries? There are two main issues to be considered: first, what happened to the jobs in case of companies moving outside the country and, second, do cheap imports (may be from the same company that lowered its cost of production and thus, reduced its prices for consumers) cost jobs?

Let’s look at the problem from the theoretical side and assume that industrialised countries produce two types of products: financial services (human capital intensive) and basic manufacturing (low-skilled labour intensive). “Opening up for trade with the developing countries increases the supply of low-skilled labour intensive goods”. This means, in order to compete (have an absolute advantage) industrialized countries must keep their costs of production low by cutting down wages or increasing productivity. But increased productivity leads to higher wages. This is confirmed by Figure1 below. The figure shows a strong tendency for the average wage to be higher in ...

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Figure 1 Average Labour Productivity and Average Wage in Manufacturing, 1995

‼Debate‼ Global Policy Forum (GPF) claims absolutely contradictory statistics for the US: “In 1998, weekly wages were 12 percent lower than in 1973 on an inflation-adjusted basis. Productivity rose 33 percent over that period. Had pay kept pace with productivity, the average hourly wage would now be $18.10, rather than $12.77. That translates into a difference in annual pay of $11,000 for a full-time, year-round worker.”

Thus, there are two ways: either protect domestic jobs by imposing different tariffs, quotas & barriers on imported goods or simply allow cheap imports.

In first case, is it worth to raise up tariffs & non-tariff barriers? How much does it cost to protect a job? For example, it was estimated that it costs US consumers $60,000+ to buy US made clothing for each job “saved” by protectionism. However, the total gain in wages and profits is far less than $60,000. Krugman estimated that US consumers spent an additional $110,000 for each job saved in the auto industry.

According to Patrick A. Messerlin’s (professor of economics at the Institut d' Etudes Politiques de Paris, 2001) examination, he estimated similar effects for 22 highly protected industries in the EU for 1990 (Figure2 below). He found that, the EU “consumers pay an average of about $191,000 per job maintained. Per year, this is over 6 times the average compensation for manufacturing worker in each country”.

Figure 2 Costs of jobs saved by protectionism in the EU for 1990.

Relaying on the data above, we can say that protectionism is expensive. While the Globalisation and Outsourcing Conference in New York, June 15, 2004, the first Deputy Managing Director of International Monetary Fund (IMF) Anne Krueger asserted that the important reason why protectionist pressure so often succeeds “is that it is easy to see where a job, or jobs, might be lost because of change, but virtually impossible to see where new jobs might have been created because of the new opportunities that technology or trade might bring”. She also agreed that some jobs will be lost through trade, “just as some firms lose out because they are not sufficiently competitive. That this is so is not a new development, of course. Some skills inevitably become obsolete. That is where social safety nets come in, to help those affected get financial assistance, job retraining, and so on. Expensive job protection is not the answer”.

So from a choice of two, the cheapest, and probably, the best way for industrialized countries is just to liberalize trade and allow cheap imports and shift from “mass” labour to the generation of “elite” (knowledge, skilled) labour force (Comparative advantage, HO theory). Figures 3&4 present the empirical evidences of this shift: Figure3 shows a steady decline of proportion of manufacturing employment in selected countries between 1970 and 1996, while Figure4 illustrates a constant rise in service employment in that countries during the same period of time.

Figure 3

Figure 4

However, trade liberalisation may result in a permanent reduction in relative demand for low-skilled labour in the industrialized countries; that in turn leads to a relative fall in low-skilled wages (Stolper-Samuelson Theorem).

The debate here is that on the other hand, it also might result in an increase in relative demand for skilled-labour, leading to a relative rise in skilled wages. So this is where an increasing wage inequality takes place.

For example, Business Week reports that in 1999 top executives earned 419 times the average wage of a blue-collar worker, up from 326:1 in 1998. In 1980, the ratio was 42:1

However, the importance of the above is that it may not let low-skilled unemployment to rise significantly even though it lowers down wages; and on the contrary, if wages are stable or rising, it will lead to an increased low-skilled unemployment, and this is what practically happened in Germany between 1970 and 1995 (see Figure5 below).

Figure 5 Relative Employment and Relative Wage of Low-skilled Employees in German Manufacturing Industries 1970-1995

Referring back to the question what happened to the jobs if companies re-locate partly or fully abroad, from the total employment level perspective, nearly all workers who lose their jobs will be re-employed sooner or later, even if sometimes for less paid jobs. As mentioned before, this may push them into thoughts about getting a higher education, go for training and qualify for a skilled job.

Relaying on the theory above and the position of labour in industrialized countries, let’s turn our attention to developing countries.

As we have already seen that developed countries are turning towards producing human capital intensive goods and demand for low/unskilled labour has lowered there. Thus, according to the Stolper-Samuelson theorem, this will raise demand for low-skilled labour in developing countries and they will specialise in labour intensive goods (manufacturing goods), that in order will decrease unemployment and increase wages. Does the theory prove in the real word?

According to the Asia Regional Information Centre (ARIC) which provides an array of regularly updated information about the economic performance & prospects of 16 Asian nations, there is no evidence to support the theory. Table 2 below illustrates unemployment rates from 1990 to 2003 in some of the nations. The general trend of rising unemployment is clearly visible.

Table 2 Unemployment Rates

Another debate is increasing wages (decreasing income inequality) inside and across countries. This question is very controversial, because different sources argue entirely opposite positions and give utterly different empirical evidences and statistics: globalisation allies insist on rising income equality, while critics of globalisation claim rising inequality.

For example, the Treasury of Australian Government referring to the World Bank data declared that a proportion of people living below the internationally accepted poverty line has fallen from 28% to 24% between 1987 and 1998 with some particularly successful regions such as East Asia & the Pacific with a decline from 27% to around 15% (Figure 6). Furthermore, the Treasury emphasized that narrowing income inequality in APEC (Asia-Pacific Economic Cooperation) economies (Chart1) was greater than in the world as a whole (Chart2).

Figure 6 Proportion of People living on less than 1USD a day

Chart 1 World Inequity Chart 2 APEC Inequity

Another evidence in favour of declining inequity given by the Globalisation Guide Organisation (a child of The Australian APEC Study Centre) is that in 1980s, Americans earned 12.5 times as much as the Chinese per capita; by 1999, they were only earning 7.4 times as much. Additionally, The Globalisation Guide refers to the World Bank statistics that China’s opening to world trade has brought it growth in income from $1460 a head in 1980 to $4120 by 1999.

In contrast, it is also argued that an income gap widens as inside as well as across countries. As indicated by Bin Xu, the associate professor & faculty director of Business in Warrington College of Business, University of Florida, between 1995 and 2000 the income of skilled workers in China had grown significantly relatively to the income of unskilled workers, consequently the inequality had increased as well (Chart3).

Chart 3 China's Wage Inequality 1995-2000

A very important example here will be a case of Latin America, where since mid-1980s increased openness has widened wage differentials a lot (18 nations are below their per capita incomes of then years ago

Is it trade itself has to be blamed for such differentials? Or are there some other important causes why “rich get richer and poor get poorer”?

Many factors other than trade work against unskilled labour right now, but the most important, as many researched have concluded, is technological change. “Technological change is the dynamic heart of economic growth and development; it is fundamental to the evolution of a global economic system”. Thus, with trade or without it, unskilled, poorly educated workers are disadvantaged in the labour market.

This is similar to what Adrian Wood claims. In his work “Openness and Wage Inequality in Developing Countries: The Latin American Challenge to East Asian Conventional Wisdom” (1997) he says: “…the conflict (of evidence) is probably the result of differences between the 1960s and the 1980s, specifically, the entry of China into the world market and, perhaps, the advent of new technology biased against unskilled workers”.

Thomas A. Pugel (2004) explains two ways in which technological change may be pressuring relative wages: “First, technological progress has been faster in industries that are more intensive in skilled labour. As the cost and prices of some skill-intensive products decline, and the quality of these products is improved, demand for the products increases. As demand shifts toward skill-intensive products and their production increases, the demand for skilled labour expands, increasing the relative wage of skilled labour. Second, the technological progress that has occurred within individual industries appears to be biased in favour of using more skilled labour. This bias increase demand for skilled labour even more, reinforcing the pressure for an increase in wage inequality”

Another possible consequence of technological change on labour position in developing countries besides wage differentials and employment level is so-called “brain drain”, when skilled, highly qualified workers migrate from developing to technologically advanced countries.

According to the International Mobility of the Highly Skilled by the OECD, more and more professionals are moving abroad for jobs, but fears of “brain drain” may be exaggerated given that many of them do eventually return to their country of origin, the reports says. It also emphasises “clear benefits for the home country, if migrants return with new technological and and entrepreneurial skills obtained abroad, especially if they have capital to invest or have contacts in the international science and technology fields. The sharp expansion of high-technology industries in Chinese Taipei, South Korea and Ireland owes much to returning migrants”. Thus, “brain drain” will be replaced by “brain circulation” (definition by the Foreign Policy Organisation: a variety of two-way flows of highly skilled workers between the technologically advanced countries where they reside and the less-developed countries where they were born.)

Nevertheless, the report also suggests that in order to avoid the loss of highly qualified workers “developing countries need to build their own innovation and research facilities” (e.g. China’s launch of 100 developing universities into world-class research centres).

In conclusion, it is obvious that globalisation affects trade, drives technological change, thus affect labour markets, its levels of employment, income distribution, etc. However, it has quite different effects in industrialised and developing countries. The principle “poor get poorer, rich get richer” is being discussed globally and very controversial evidences being provided, where quite often theories do not hold in practise. However, it is mostly agreed, that this new era of Globalisation affects each country in a distinctive extent regardless common theory (China) or previous experiences of others (Latin America & East Asia).

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