Trade Liberalization, Employment and Global Inequality

Article excerpt

Trade liberalization-- which, together with marked improvements in transport systems and communications/information technologies, has been driving globalization - has suddenly acquired the status of a muchmaligned monster. Industrialized nations, which earlier vigorously preached the virtues of free trade, now worry about its vices. Many developing countries feel marginalized in the emerging world economy and wonder whether their fear of free trade was not justified after all. Economists are engaged in (as yet inconclusive) debates on the "rights" and "wrongs" of trade liberalization and popular opposition to it has grown so much that a crisis of legitimacy looms.

Three main concerns underlie these developments. First, it is suspected that trade liberalization has been a major contributory factor in the growing international economic inequality. Second, it is widely believed that trade liberalization has had serious adverse effects on employment and the wages of low-skilled workers in industrialized countries. Third, there are apprehensions that trade liberalization is leading to a deterioration of global labour standards.1

Unfortunately, in the popular view, these perfectly legitimate concerns tend to assume the status of well-established facts. The political pressures thus generated now threaten to stall the process of trade liberalization. At the international level, there is growing demand for global enforcement of environmental and labour standards. At the national level, non-tariff barriers to trade have tended to increase in the industrialized world. Labour market policies in some industrialized countries have also been increasingly geared to a cheapening of unskilled labour for the employers through various forms of wage subsidies, the reform of social security and unemployment benefit systems, and the flexibilization of labour markets.

Yet, to economists, the concerns only suggest hypotheses to be explored through empirical research. That international economic inequality has been growing is not in serious dispute,2 but it is certainly not clear whether and to what extent trade liberalization is responsible for this. There is consensus among economists that less skilled workers in the industrialized world have been facing either declining real wages or rising unemployment, or both, but empirical research is yet to establish that such trends have been generated by the growth of trade with the developing world. As for global labour standards, it is not even known whether they have deteriorated.

Against this backdrop, an attempt is made here to examine the extent to which the concerns have valid empirical foundation. The internationally available statistical data are analysed to study the nature and effects of growth of trade between industrialized and developing countries on international economic inequality, employment and wages in individual countries and on global labour standards. This article concentrates on examining the implications of the relevant empirical results and avoids presenting detailed descriptions of methodology and statistics. The empirical results are drawn from a larger study by the author (Ghose, 2000)3 which reviews the literature, provides detailed descriptions of the database and methodologies, and develops many of the arguments and observations more fully.

Trade and international economic inequality

Contrary to a common misconception, there has been no explosive growth of world trade since the early 1980s even though trade liberalization has certainly gathered pace. Two facts suggest this: the first emerges from figure 1, which shows the movement in the share of world exports in world GDP over the period 1960-96. The share showed a steady, rising trend for the entire period but no noticeable deviation from the long-term trend in the 1980s or 1990s. The second fact is that over the same period the growth of world GDP had actually been decelerating: the average annual rate of growth of world GDP was 5. …