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

Trade and Employment: From Myths to Facts
count openness. How much of a problem this is in practice is still a matter of
dispute. Indeed, since Samuelson-Stolper (as well as the factor-price equalization
theorem), there has been an unresolved tension between trade theorists, policymakers
and even some members of the economics profession. 9
Nothing about globalization prevents a developing country from adopting the
labour standards and associated transfers to shape their societies in ways they see
fit. Stepped-up public sector intervention to resolve wage inequality is wholly consistent
with mainstream economic theory, so long as: (1) the citizens of the country
authorize the expenditure in the form of voting for the required tax increases; and
(2) transfers are made in lump sums and do not disturb the prices or wages prevailing
in the market. To the extent that planning was an attempt to circumvent these conditions,
it would not be sustainable in the long run.
The extent to which government intervention is desired may depend on the
nature of trade and also on the extent of the positive supply response following
trade reform. It is, for instance, often pointed out that within-sector trade tends to
winnow less productive, uncompetitive firms from the branch of production, allowing
the fitter firms to enjoy a Darwinian prerogative. 10 Workers need not be reskilled to
suit the expanding subsector, since they were recently discharged from the similar
firms. Excess supply, local to the branch in question, will reduce wage demands,
which will help to maintain competitiveness of the survivors. Since the losers are
probably less competitive precisely because they are more labour intensive, an expanded
role of the public sector may still be called for if sectoral employment falls.
The scope and potential damage to macroeconomic variables, such as the public
sector borrowing requirement (PSBR) to GDP ratio and subsequent exchange rate
overvaluation, is less if the emerging sector is successful. Indeed, if exports rise
rapidly, the budgetary implications will be positive. Wage inequality will certainly
emerge, but it will be a marker of the success, not the failure, of the policy.
It also needs to be pointed out that poverty may decrease in developing countries
even in the context of increasing wage inequality. Indeed, many economists
would agree that the poor benefit from trade reforms because they rely on local industries
for most of the goods they consume, industries that escape the cost-reducing
effects of competition (Hertel and Winters, 2006). Real income of the poor increases
with the rate of growth of their share plus the rate of growth of real GDP. If trade
then accelerates GDP growth but causes the share of the poor to fall in the same
proportion then the poor are no worse off as a result of trade liberalization, despite
9 Samuelson himself has recently argued that trade may well damage the interests of US workers
(Samuelson, 2004).
10 In a closed economy, the rising concentration ratios might well raise market-power flags. Trade,
however, brings the best of both worlds in that firms enjoy increasing returns to scale yet, at the
same time, foreign competition ensures that the benefits of scale economies are passed on to
consumers.
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