LINKAGES BETWEEN TRADE, FDI, JOBS, PRODUCTIVITY AND EQUALITY: MYTHS AND EVIDENCE

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1 LINKAGES BETWEEN TRADE, FDI, JOBS, PRODUCTIVITY AND EQUALITY: MYTHS AND EVIDENCE Expert Group Meeting on Inclusive and Job-Enhancing Trade: Asia-Pacific Opportunities 14 December 2012 UN ESCAP Susan Stone, Development Division Trade and Agriculture Directorate

2 Introduction Linkages are many and not well understood: Trade generally thought to be growth enhancing but notable exceptions reported. Productive firms tend to export rather than exporting creating productive firms. Inequality thought to be more a function of SBTC but trade can be a vector of technology transfer. OECD Trade and Agriculture Directorate 2

3 Inclusive trade Broad concept access to opportunity. Can relate to labour markets on numerous levels: Wages Income (including transfers) Formality Quality of work Distribution of returns (between types of labour as well as between capital and labour) OECD Trade and Agriculture Directorate 3

4 Links Some Facts Trade generates jobs and raises incomes. Neither rising trade integration nor financial openness has been found to have a significant impact on either wage inequality or employment trends within the OECD countries (OECD 2011). FDI can lead to spillovers in both economic activity and technology adoption. Being a foreign affiliate has been positively linked with technological innovation and productivity increases (Hallward- Driemeier, et al. 2002). Participation in international activity (both importing and exporting) can lead to productivity gains. Intermediate imports have been empirically linked to firm level productivity gains (Stone and Shepherd 2011). OECD Trade and Agriculture Directorate 4

5 Market Openness Yields Benefits for the Labour Market Source: Flanagan and Khor (2011) 5

6 Market Openness Yields Benefits for the Labour Market Table 4. Labor Conditions - Recent Developments 2008 Percent Change Since 1999 Working Conditions Asian Non-Asian Asian Non-Asian Hourly compensation Annual Work Hours Job Accident Rate 5.9 n.a n.a. Labor Rights Asian Non-Asian Asian Non-Asian Child Labor Civil Liberties Note: Labor force w eighted estimates. Sources: See Appendix A. Source: Flanagan and Khor (2011) 6

7 Other Findings for Asia Broad improvement in labor conditions in Asia and other countries accompanied globalization of late 20 th and early 21 st century (Hoekman and Winters 2007). Main influence of increased trade flows on labor conditions is indirect through its impact on per capita GDP. Advances in per capita GDP advance labor conditions Flanagan and Khor 2011). Poor labor conditions do not attract disproportionate shares of world FDI. Market size and investment risk are the dominant influences on FDI (OECD 2008). 7

8 Links Some Myths Import substitution preserves domestic employment (McMillan, et al. 2010). FDI always leads to technology spillovers. Participation in GVCs leads to economic upgrading (Harrigan and Reshef 2012). Export led growth leads to improved labour market outcomes. Evidence from China shows exporters pay lower wages and are less productive than non-exporters (Seker 2011). Its possible to assign blame for economic outcomes exclusively on the shoulders of trade. OECD Trade and Agriculture Directorate 8

9 Workforce Composition of Five GVCs Type of Work Economic Upgrading Source: Barrientos et al. (2010) OECD Trade and Agriculture Directorate 9

10 International Participation and Wage Outcomes Even if trade tends to raise average incomes and wages across countries, it is important to look beyond averages and consider the distributional consequences. Trade may have some effect on wage inequality for workers in the formal sector as skilled workers tend to benefit disproportionately in both rich and poor countries although evidence is partial and mixed. More importantly, the trade literature has shed virtually no light on its effects on the distribution of household incomeand consumption inequality. OECD Trade and Agriculture Directorate 10

11 Trade and Labour Market Conditions Trade more commonly associated with improved working conditions, contrary to the popular misconception of race-to-the-bottom oppressive conditions. Whether the measure is child labor, injuries on the job, informality, or effects on female labor, the evidence is that these dimensions are more often than not determined by levels of per capita incomes, labor policies, and regulations rather than trade. And to the extent that trade tends to raise per capita incomes, it would impact positively the working conditions. OECD Trade and Agriculture Directorate 11

12 Trade versus FDI Complex relationship between investment, and trade flows especially with the rise of GVCs. To the extent that globalization contributes to income inequality, the main element appears to be financial flows associated with direct investment rather than trade flows per se and these refer to affects in developed economies (OECD 2011). Productivity gains associated with exporting might be related to FDI. Firms getting ready to become exporting as part of global network. OECD Trade and Agriculture Directorate 12

13 How might outcomes for Developing Countries Differ? Where developed economy literature focuses on selfselection by productive firms, evidence of learning-byexporting more prominent for developing economies (e.g. Van Beisebroeck, 2005). Benefits shown to depends on where along the value chain economic actors reside (e.g. Bacchetta et al 2009, Menezes-Filho and Muendler, 2011) Affected by the underlying skill-employment mix in the economy (e.g. Harrigan and Reshef, 2012, Isgut, 2012). OECD Trade and Agriculture Directorate 13

14 Preliminary Results from OECD study Labour demand and wage equations provide results consistent with those seen in developed country literature: International participation (exporting, foreign affiliates and importers) hire more workers and pay higher wages. Results for labour demand positive and strong. Wage results cast doubt on findings for some key economies. No significant wage effects found for Brazil, China, India, Indonesia, and South Africa. OECD Trade and Agriculture Directorate 14

15 Summary of findings for skilled workers Contrary to evidence for developed economies, exporting is not significantly associated with hiring more skilled workers. Consistent with developed country evidence, foreign affiliates do hire more skilled workers. But only true for entire sample, not Key Partner or OECD subsamples. Contrary to emerging findings, importers are associated with hiring fewer skilled workers. However, not statistically significant for Key Partner countries. OECD Trade and Agriculture Directorate 15

16 Summary of Findings for Female Workers More evidence of positive role of (proxied) GVC participation: Exporters and importers show strong positive association for whole sample. Key Partners exporters show weak positive association. Foreign Affiliation seems to only matter in OECD subsample. OECD Trade and Agriculture Directorate 16

17 So What to do About Effects of Trade Opening? Very real effects on distribution. Time Differentials. Spillovers both positive and negative Growing evidence of heterogeneous firms: Many different types of firms (especially in terms of productivity). Role of policy to influence economic outcomes: Moving up ladder. OECD Trade and Agriculture Directorate 17

18 Is Trade Policy the Right Tool? Why does trade have to be inclusive when most forms of economic growth are not? Focus should be on complementary policies that assist in transition and structural reform. Issue one of timing trade improves prospects for growth and economic opportunities but not to all and not at the same time. About adjustment costs. Need to manage opportunities brought with open markets but what goes on behind the border matters. OECD Trade and Agriculture Directorate 18

19 But Policy Does Matter For lower -income countries, greater attention to financial market development (to enable new investment in job-creating internationally competitive sectors). Social safety nets, conditional cash transfer programs and the like, must be in place. Over the longer term, policies to support growth have positive interaction (in terms of job creation) in the presence of open trade regimes. These include investments in education and infrastructure which attract international activity. Working with other countries to bring down trade barriers at the multilateral level can expand opportunities for firms to sell to wider markets, import new products and technologies, and grow faster. OECD Trade and Agriculture Directorate 19

20 Capturing the Gains Inclusively As trade becomes more about tasks and productivity of individual (firms and people) key is the ability of labour to supply appropriate range of skills. How does the growing importance of networks impact labour market? The interdependence of imports and exports. The importance of foreign investment and capital mobility. Relative distribution of returns across labour types and between capital and labour. Labour s share in national income Fallen since the 1990s in nearly three quarters of the 69 countries for which data were available. OECD Trade and Agriculture Directorate 20

21 Thank you for your attention Susan Stone Trade and Agriculture Directorate 21

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