How to make globalisation work for labour markets? Key policy lessons for developing countries*

Photograph: Africa Media Online / Ariadne Van Zandergen

Globalisation and labour markets in the developing world

The positive impact of trade on growth is reasonably well-established, both in the literature and among trade professionals.[1] Market openness is a necessary, albeit not sufficient, condition for sustained economic performance.

The relationship between trade and employment is, however, more complex and controversial among the international community.[2] This is because market opening – i.e. reduction of tariffs and other barriers limiting entry to the domestic market – spurs the process of restructuring of the economy, with varying effects on local workers. For instance, while market opening in East Asia has created many jobs and strengthened the process of welfare-enhancing structural change, the results in Africa were more disappointing, as most clearly displayed in the recent uprisings in the Middle East.

Overall long-term employment effects of trade tend to be positive. This does not mean, however, that trade will automatically deliver positive or equitable labour market outcomes for every country. The actual employment effects depend on a multiplicity of local conditions, including natural endowments and domestic institutions and policies. For example, countries that have comparative advantage in extraction of natural resources – a process that is highly mechanised – see smaller impact on employment opportunities, unless appropriate complementary policies are put in place.

Moreover, what economists tend to call “short-term adjustment costs” of market opening may significantly affect the livelihoods of workers, households and communities, especially if previously protected sectors were labour-intensive. The effects may be particularly acute for populations in developing countries, where effective social safety nets are often an elusive target.

The right policy mix

The question therefore emerges: how can developing countries render their economies more capable of benefiting from trade? Or in other words: What elements are required to transmit greater openness into tangible welfare and employment effects? Some general policy lessons can be distilled from a growing body of research on trade and jobs.

I.   Infrastructure and business climate

Ensuring an appropriate business climate and adequate infrastructure is an important part of the mix in creating jobs, trade related or otherwise. Without appropriate infrastructure, reduction of tariffs will not allow countries or regions to effectively participate in the global value-chains. This is a particularly acute problem in Africa, where the costs of just trading regionally appear to be as high as trading globally due to lacking transport routes and efficient on-border procedures.[3] Due to limited fiscal capacity of developing countries, there may be space for regional and subregional cooperation to improve connectivity. The case of Greater Mekong Subregional (GMS) Cooperation Program in Asia, encompassing Cambodia, Laos, Myanmar, Viet Nam, Thailand, Yunnan Province and Guangxi is a good example of how such common infrastructural projects reduce the costs of transportation, thus, allowing chunks of isolated rural population access to trading routes, with potentially important job creation and poverty reduction effects. Investment in infrastructure, “hardware” of commerce, should further be complemented with investment in “software” – i.e. favourable business climate and trade-facilitation measures – to ensure that benefits of opening can in fact be reaped.

II.   Education

Market opening often necessitates restructuring the economy, with some sectors shrinking and others expanding. Equipping the local population with appropriate education and skills is key for allowing the workforce to fit into new industries, adapt to new technologies and be more productive. In East Asia, labour productivity has been increasing by 10 per cent a year, half of which is attributable to investment in education and technical skills. Moreover, by contributing to accelerated innovation and technological change trade also increases demand for skilled labour, creating more and better jobs for those with an appropriate skills set. Apart from the value in education in itself, it is also a necessary investment in the country’s human capital allowing it to ride the tide of globalisation, instead of being left behind. Finally, despite certain attractiveness of supplementary training programs targeting unemployment-prone groups, such as inexperienced youth, reviews of impact evaluations by the World Bank, OECD, and others suggest that policy makers must be cautious regarding what training programs can realistically achieve.[4] Although some types of interventions, when properly designed, can be effective for certain workers, evidence suggests that these programs are hardly a panacea for unemployment and a broad-based education reform should take a priority.

III.   Labour market policies

Labour market refers to a nominal market, in which employees and employers interact, jobs are matched with workers and wages are set – in other words it is a virtual market for jobs. The usual prescription for the developed world to smooth the adjustment process associated with trade opening includes a mix of labour market flexibility, robust social safety nets, and active labour market policies (ALMPs). Albeit highly desirable, implementing effective social- and labour market policies and achieving a fine balance between flexibility and protectionism in developing countries is much more difficult due to significant fiscal and capacity constraints. The general direction remains the same: protect workers instead of jobs, i.e. allow economic adjustment, while supporting those affected. But it is easier said than done, in particular given a sizable informal sector in the developing countries. This points to a need for careful consideration of potential effects of market opening on various segments of society in developing countries. Far from legitimising isolationism, which is anti-poor, this highlights the need for development of complementary social and labour market policies in parallel with gradual market opening. With high poverty, lacking social safety nets and limited unemployed assistance programs, getting the market opening reform wrong is much more costly in the developing world than it is among industrialized economies.

* The views presented in this article are those of the author and do not reflect the views of any of the institutions with which she may be affiliated.

^[1] For a synthesis review see for instance: Hallaert 2006, available at http://www.cairn.info/revue-mondes-en-developpement-2006-3-page-63.htm

[2] See for instance the Rapporteur’s report from the recent OECD Global Forum on Trade, hosting representatives from international organisations and G20 governments: http://www.oecd.org/dataoecd/39/44/49169995.pdf

[3] von Uexkull, E. (2011), “Regional Trade and Employment in ECOWAS”, available at: http://www.oecd.org/dataoecd/2/57/48707550.pdf

[4] Martin and Grubb, 2001; Auer et al, 2005; Kluve, 2006