Trade and Employment From Myths to Facts - International Labour ...

Trade and Employment: From Myths to Facts
Beyond their record on employment creation and labour relations, Farole (2010)
notes that EPZs have a highly uneven record as tools of industrial policy. Few of
them have led to substantial skill development, the most notable exception being
Malaysia’s Penang Skills Development Centre. In Africa, in particular, EPZs do not
seem to have played the role of catalyst for foreign investment that authorities hoped
for them. In essence, EPZs were viewed by governments — and sometimes donors
— as ways of cutting through “impossible reforms”. When reforms aimed at the elimination
of red tape, high tariff or non-tariff barriers on intermediate products, or
predatory taxes seemed impossible, it was hoped that fencing exporters in a sort of
good-governance enclave could offer an attractive alternative. But, as Farole notes,
EPZs have tended to flourish in countries that were otherwise improving governance
and moving forward with reforms. In countries plagued by bad governance and political
instability — in particular, in sub-Saharan Africa — EPZs failed to shelter investors
and consequently never really took off.
Farole’s cross-country regression of EPZ export performance on EPZ characteristics
showed little correlation with labour costs (suggesting that “social dumping”
was a poor way of luring investors) and even with the size of fiscal incentives; instead,
performance seemed to correlate with the EPZs’ infrastructure and logistics quality.
The main lesson from Farole’s study (whether from the econometrics or from
the narrative based on case studies) is that EPZs are no substitute for domestic reforms.
Far from being sheltered enclaves, they reflect the general quality of the host country’s
business environment. Thus, countries whose export portfolios are dominated by a
few primary products can hardly count on EPZs alone to generate export diversification.
Ironically, the failure of Africa’s EPZs to generate sizeable employment in
the garment sector prompts Farole to recommend targeting natural-resource based
sectors for EPZ development in Africa, thus eliminating the possibility of export diversification.
7.6 IMPORT DIVERSIFICATION, EMPLOYMENT AND INDUSTRIAL
POLICIES
Trade diversification concerns imports at least as much as exports. With trade liberalization,
countries increase their imports at the intensive margin (i.e., an increase in
the size of already existing imports) but they also import new goods/varieties. This
leads to a higher import diversification, which has important implications for aggregate
welfare, productivity, employment and inequality. The next sections focus on these
areas.
7.6.1 Gains from diversity and “import competition”
Following Krugman’s (1979) seminal paper, several theoretical papers include a “lovefor-variety”
element capturing the gains from trade resulting from the imports of new
varieties (i.e. an increase in import diversification). Empirical work assessing these
gains remains scarce, however. Broda and Weinstein (2006) do just this, showing that,
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