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Jobs and Development Blog - The Jobs Knowledge Platform > Posts > Friday Smorgasbord: More Trade is Better for Jobs
Friday Smorgasbord: More Trade is Better for Jobs
August 16, 2012 | Contribution by GLADYS LOPEZ-ACEVEDO

By Gladys Lopez-Acevedo, Senior Economist, Poverty Reduction and Economic Management, the World Bank

How can policymakers in developing countries create “good” jobs at a time when most economies are now firmly integrated into the global economy? This goal is critical because the Great Recession that began in 2007-08 has left many economies with far too little job creation and uncomfortably high unemployment rates, especially among youth. As a result, in some countries, there have been renewed calls for greater protectionism.

Women working in an Indonesian rubber plantation, Java
Women working in an Indonesian rubber plantation, Java by Steward Leiwakabessy 2011

But a major new study by the International Collaborative Initiative on Trade and Employment (ICITE) – a joint undertaking of 10 international organizations, among them the World Bank – argues that closing markets would be counterproductive. Its main message: governments that foster open markets and resist protectionism have the best chance of stimulating inclusive economic growth and creating high-value jobs.

Designing policies to improve labor markets

In spite of international labor market differences, countries worldwide hope to improve the ability of workers to find alternative jobs or income sources when negative shocks hit, remove barriers that limit the ability of workers to move to higher paying jobs, enhance job prospects for workers hurt by trade fluctuations, and improve the long-run capacity of an economy to generate jobs.

But the way they go about this varies sharply. Russia recently joined the World Trade Organization (WTO) and is in the process of implementing its trade policy commitments. Likewise, Kazakhstan is negotiating its WTO membership as well as its participation in a Customs Union with Russia and other European and Central Asian countries. Both governments are opening up their economies but concerned about how workers in industries that will be liberalized (and may possibly shrink) will be affected – prompting them to seek help in adopting policies to reduce adjustment costs. However, other countries, such as Argentina, Brazil, and Indonesia, are pursuing policies aimed at raising the level of protection for certain industries – a move that will have labor-market implications in terms of wages and employment, because any change in relative prices across industries can bring some reallocation of labor.

Protecting workers, not jobs

To better understand how trade interacts with jobs and what policies are required to maximize the benefits of trade for labor markets, ICITE partners undertook a major multi-year investigation, drawing on numerous studies covering various parts of the globe and countries at quite different levels of development. Their findings, recently released in a volume entitled “Policy Priorities for International Trade and Jobs,” underscore the vital role that trade can play in sparking the global economy, especially at a time when fiscal budgets are under pressure. Key conclusions might be summarized as follows:

First, trade can play a powerful role in contributing to rising incomes, creating jobs, and boosting average wages in both rich and poor countries. Over the 1970-2000 period, manufacturing workers in open economies benefitted from pay rates that were between 3 and 9 times greater than those in closed economies, depending on the region. In Chile, workers in the most open sectors earned on average 25 percent more in 2008 than those in low-openness sectors.

Second, to reap the full benefits of open trade on growth and employment, countries must also adopt complementary policies – such as sound macroeconomic policies, a positive investment climate, flexible labor markets, and adequate social safety nets.

Third, protectionist and discriminatory trade measures don’t protect or preserve jobs. On the contrary, closing markets is actually more likely to stifle productivity growth and put additional pressure on labor markets.

Fourth, imports don’t increase unemployment. There is no systematic link between imports and unemployment (see figure). Instead, evidence shows that in country after country, both exports and imports push productivity growth upward while helping create better skilled and higher paying jobs.

Rising imports aren’t correlated with unemployment… in the long run
(Percentages, selected OECD countriesa)

a) Australia, Austria, Belgium, Canada, Denmark, Finland, Former Federal Republic of Germany until 1991, France, Germany, Iceland, Italy, Japan, Korea, Luxembourg, Netherlands, New Zealand, Norway, Portugal, Spain, Sweden, Switzerland, Turkey, United Kingdom, United States (simple averages).
Source: Newfarmer, R. and M. Sztajerowska, “Trade and employment in a fast-changing world” in OECD (2012), Policy Priorities for International Trade and Jobs, (ed.), D. Lippoldt, e-publication, available at: www.oecd.org/trade/icite.

Fifth, offshoring and outsourcing by developed countries – oft-cited drawbacks of globalization – often complement, rather than replace domestic jobs, while creating new, higher-wage

Sixth, trade doesn’t systematically undermine working conditions in developing countries. In fact, there is some evidence that trade contributes to better working conditions, either directly through foreign direct investment, or indirectly through growth effects.

Upcoming presentation on the ICITE report

On September 13, 2012, the OECD Director for Trade and Agriculture, Ken Ash, will present the new ICITE report in Washington DC at a roundtable organized by the Jobs Knowledge Platform to debate ideas on how to boost employment and wages through trade-induced economic growth.

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