Working Party on the Social Dimensions of the Liberalization of International Trade
SECOND ITEM ON THE AGENDA
Progress report on the country studies on
the social impact of globalization
1. At the request of the Working Party, the Office has been undertaking a series of case studies to analyse the social impact of globalization in a number of countries; the studies are being carried out by a Special Task Force.(1) The purpose of this exercise, and of the report summarizing the Task Force's findings, is (a) to provide some empirical and conceptual background to the debate on the social dimensions of globalization, and (b) to identify measures that might contribute to enhancing the benefits of globalization while containing its possible social costs. At its last meeting the Working Party asked for a progress report.(2) This report is in response to that request.
I. Progress made
2. The Task Force has completed its studies of Chile, the Republic of Korea and Mauritius and is submitting a summary to the Working Party for information.(3) In the case of Chile and the Republic of Korea, a tripartite discussion was held in each on the findings of the study. The common analytical framework that was proposed at the Working Party's meeting in November 1997 indicated that the studies drafted by the Task Force would be submitted to a tripartite meeting in the country concerned. In the case of Mauritius the Government's timetable was such that the tripartite meeting could not take place before the end of October.
3. The studies on Bangladesh, South Africa and Switzerland are almost complete and the corresponding tripartite meetings will probably be spread over the period from the end of November 1998 to the end of January 1999. Preliminary contacts have been made with Poland, and work on this case study should be starting soon.
4. For lack of time, the studies on Jamaica, Jordan and Venezuela have not yet started, though statistics and publications on the subject are already being compiled. In some cases the data seem rather limited for such a major task, which would make it difficult to carry out an in-depth analysis of the complex interplay between globalization and social progress that is comparable to those conducted in the other countries; the methodology would have to be adapted accordingly.
5. Work is going ahead on the summary report, for which international data on a large number of industrialized, emerging and developing countries have been compiled.
II. Some preliminary findings
6. It is as yet too early to draw any general conclusions from these studies. A summary report will be submitted to the next session of the Working Party. However, some major findings concerning the social impact of globalization and the Organization's activities are already apparent.
Findings with regard to the social impact of globalization
7. Globalization is certainly a complex and multifarious phenomenon. The case studies focused mainly on economic globalization, which can be defined as the increasing interrelationship of national economies, as reflected essentially in the rapid development of international trade, the intensification of direct investment flows between countries, and a more "global" technological progress, e.g. through the acquisition of capital goods incorporating new technologies and the dissemination of new technologies by multinational enterprises. The studies also show that international competition is encouraging more and more countries to adopt management techniques such as subcontracting and outsourcing. Finally, the globalization of financial markets -- as a result both of the liberalization of capital movements and the progress in communications and information technology -- has been spectacular, with vast volumes of capital moving from one market to another without any other limitation than the speed of communication. In different degrees, these various dimensions of the globalization of the economy are apparent in all the countries that have been, or are in the process of being, studied.
8. The studies have concentrated on certain dimensions of the phenomenon, and notably those more directly relevant to the economic process, i.e. international trade and direct foreign investment. At the macroeconomic level the long-term impact on employment and income would seem to be positive -- though in South Africa further research is being carried out to determine whether the drop in the level of employment in recent years is to any extent attributable to certain transitional effects of structural adjustment or if, on the contrary, the situation would have been worse if the economy had not opened up. Generally speaking, trade and direct investment are major contributors to economic development. There is, however, a danger that economic development might cause an increase in inequalities and, consequently, that certain social categories might benefit more than others. This is mainly because, to keep up with international competition, enterprises tend to adopt new technologies that are more reliant on skilled workers and less on the relatively unskilled. One interesting finding of this research is that globalization tends to go hand in hand with an increasing "rotation" in the labour market, one of the main effects of which is that employees change job more often than in the past (empirical data will be included in the summary report). Here again, it is the less qualified workers who tend to suffer, as their specialization is often linked very closely to the enterprise or sector in which they work.
9. On the other hand, some fears have been voiced about short-term capital movements, which are looked upon as having a destabilizing effect on the real economy. Countries tend to attract a large volume of short-term capital so long as the prospects of making a profit are good, but at the slightest real or perceived sign of a country's currency weakening it goes somewhere else, sometimes in a climate of panic. This may cause excessive fluctuations in exchange rates and a serious disruption of financial markets, especially in emerging and developing economies whose financial systems are not yet strong enough. These financial disruptions have a direct and major impact on enterprises, and of course on the labour market. The study on Chile suggests that the introduction of a degree of control over capital movements has been fairly effective. This experience could be of some interest in the context of the growing debate over the desirability of maintaining some control over short-term (or "speculative") capital movements, at least in emerging and developing economies. Far from being looked upon as protectionist, this solution is supported by such ardent defenders of free trade as J. Bhagwati and J. Sachs.(4)
10. None of the countries studied, however, is contemplating going back to the earlier situation and the political will to continue with the liberalization of trade is still alive. Globalization in any case is not thought to be the main reason for social problems, which are more often than not attributable to domestic causes. From the standpoint of government action, the question is therefore how best to take advantage of globalization, if necessary by curbing some of its more questionable aspects such as movements of short-term capital. One of the more surprising findings of the studies, considering that the countries are a priori in very different situations, is that some of the same themes crop up in every case. For example:
11. Of course, these initial findings need to be confirmed by the research that is currently under way. The discussion on this subject, together with the underlying empirical data, will form the basis of the first version of the summary report to be submitted to the Working Party in March 1999.
Findings with regard to countries' expectations
vis-à-vis the ILO
12. Quite apart from the actual findings of this research, it is interesting that some of the quarters consulted are keen to see the Organization participate more directly in the formulation of appropriate responses to globalization. More generally, while certain aspects of "deregulation" of the labour market are being questioned, if not criticized, governments seem to be adopting an approach that combines a degree of flexibility (which is indispensable) with a minimum of social protection. Moreover, and this is perhaps new, fundamental rights at work and social protection are now seen as factors of economic progress. In the last analysis, the real question is not (or is no longer) one of knowing whether fundamental rights and social protection need to be guaranteed but rather in what way these rights can be implemented so that the productive system can be made more efficient.
13. Though it will demand a major effort, it should be possible to complete a second series of four studies (Bangladesh, Poland, South Africa and Switzerland) by March 1999 and to submit a first version of the summary report to the Working Party. The findings of these studies could then be submitted to one or more joint meetings with other international institutions working in this area, such as the World Bank, so as to compare the findings, methodologies and implications of all this national and international research.
Geneva, 27 October 1998.
Summaries of the studies on the social impact of globalization
in Chile, the Republic of Korea and Mauritius (6)
Chile provides one of the most remarkable examples of integration into the world economy. Trade liberalization was initiated in the early 1970s when import tariffs exceeded 90 per cent, on average, and non-tariff barriers were pervasive. Following a short period of trade restrictions, the process of trade liberalization has again gathered momentum over the last decade or so. Today, the trade regime is one of the most liberal in the world, for which the WTO has recently praised the Chilean Government. Reflecting the liberalization process, trade and investment flows have grown rapidly, both in dollar terms and as a share of GDP.
During a relatively long initial phase, trade liberalization was accompanied by economic and social costs of some size. But, since the mid-1980s, GDP has grown uninterruptedly at a healthy 7 per cent rate, on average, while inflation has been brought to single-digit levels. In addition there is no fiscal deficit. The relatively large current account deficit is the counterpart of private sector savings-investment imbalances, which are officially estimated to be sustainable. These favourable macroeconomic conditions are reflected on the employment front: since the mid-1980s, over 1.5 million jobs have been created, permitting substantial inroads in the unemployment rate, which stands at less than 6 per cent. During the same period, poverty has been halved to one-quarter of the population, and health indicators also point to a substantial improvement.
These results compare favourably with other countries in Latin America and elsewhere. They demonstrate the potential benefits of trade liberalization and, in the eyes of many observers, have transformed the country into a "model" of economic reform.
Social progress, however, has been uneven. First, income distribution is relatively unequal by international standards, with the richest population quintile earning 57 per cent of national income and the poorest quintile a mere 4 per cent. Recent trends, moreover, point to an aggravation of inequalities. Secondly, perhaps more importantly, the distribution of opportunities is also very unequal. In practice, the educational system is stratified by social origin, and there is a clear difference between private schools only affordable to the wealthy, many of them of excellent quality, and public schools of substantially lower quality. Less than one-third of the children of relatively less-educated fathers complete secondary education, while the proportion is over 90 per cent in the case of children that grow up in more educated families. Although important improvements have been made in the public system during recent years, a large gap remains between public and private schools. Thirdly, a large number of jobs being created entail little or no employment security or social protection, and the situation has worsened over the last few years: less than two-thirds of Chilean salaried workers have a stable work contract with an adequate coverage for social protection.
Importantly, it has been claimed that available statistics may exaggerate the extent of these social and labour problems. Though there is probably an element of truth in this claim, casual observation and anecdotal evidence suggest that statistics, however imperfect, reflect reality.
Several factors, more or less directly related to the globalization process, account for these labour and social problems:
This raises the issue of whether any measures should be taken to address these problems while maintaining the dynamism of Chile's economy. Some would claim that, to the extent that the Chilean economy continues to enjoy high rates of growth, income distribution will slowly become somewhat less unequal while more stable jobs are created. It can also be argued that these labour and social problems have little bearing on economic performance. Both these arguments can be challenged, however. Indeed, despite proven government expertise in the area of macroeconomic policy management, the Chilean economy is not immune from shocks -- it can even be argued that its natural resource-based type of comparative advantage makes Chile's economy rather vulnerable to terms-of-trade changes. The recent financial crisis of Asian countries, which constitute an important market for Chilean exports, has affected economic prospects. Given the relatively weak social security protection of many workers, the worsening in economic prospects may have dramatic implications for large segments of the population. Moreover, there is a complex relationship at work between inequalities and instability on the one hand, and international specialization and economic performance on the other. For example, it is difficult to improve productivity when job stability is low. This reduces the growth potential of the economy. Even though individuals at the low end of the income spectrum have an incentive to improve human capital (the incentive being all the greater, the wider the income gap), there are obvious practical obstacles that impede this upgrading process. On the other hand, in a situation of low productivity, the Chilean economy will continue to be specialized in sectors characterized by unstable jobs, which contribute to income inequalities. These factors may result in the trap of low-productivity unstable jobs.
In order to avoid this possibility while maintaining Chile's economy on a healthy macroeconomic path, the study explores several policy avenues, not just in the area of education, but also as regards social protection, labour regulations, the build-up of training institutions at the sectoral level, research and development incentives and social dialogue at the national level -- which seems to be rather limited at present. Some of these measures have a budgetary cost, involving difficult trade-offs between short-term objectives such as maintaining a constant tax rate, and long-term ones, such as paving the way for a socially sustainable participation in a globalizing economy.
In summary, the Chilean experience shows that trade liberalization can stimulate job creation while at the same time raising national income. But it does little to correct (and it can even aggravate) the presently high levels of both social inequalities and labour-market instability. This suggests that the link between trade liberalization and social progress is neither automatic nor problem-free. Policies need to address this problem. Otherwise the Chilean model may become trapped in a low-productivity logic and endanger social stability.
Republic of Korea
Until the end of 1997, the Republic of Korea was widely regarded as one of the most spectacular success stories of modern capitalism. In the late 1950s, the country emerged from the ashes of a civil war as one of the poorest in the world. Income per capita was less than $100 a year. Since then, the economy has expanded considerably, thereby permitting an impressive improvement in living standards and the creation of over 10 million jobs. During the last 15 years or so, the unemployment rate has remained at a low 2-3 per cent, while the participation rate of women has risen steadily. In addition, judged from the sound fiscal position of government accounts and the progressive improvement of income distribution, the situation looked sustainable. With these achievements in mind, most observers, including international investors, expressed until recently a sanguine view on the economic prospects of the country.
With the financial crisis of November 1997, the rapid development process has come to a sudden and unexpected halt. At the end of that year, reflecting a loss of confidence, foreign banks refused to renew credit lines to their Korean counterparts. Rather than default on its debt obligations, the Government decided to discuss a rescue package with the IMF. This package, worth some $56 billion, is assorted with stabilization and structural adjustment conditions.
The key underlying force for the outstanding economic performance of the Republic of Korea has been the government-led, export-oriented growth strategy. Since 1970, the volume of trade has been multiplied by a factor of five (in real terms). The ratio of trade to GDP soared from below 20 per cent in the 1960s to over 60 in the early 1980s, and has broadly stabilized since then. Importantly, the Republic of Korea's presence in world markets has risen substantially: Korean exports represent a noticeable 2.5 per cent of world exports, while the figure was negligible in the early 1960s. It is estimated that some 3.5 million people are working, directly or indirectly, for export sectors. These developments have gone hand in hand with profound structural changes in trade patterns, with the Republic of Korea emerging as an important exporter of relatively technologically advanced products. Indeed, manufacturing trade and, more recently, services trade have gained ground, to the detriment of agriculture and raw material imports and exports. Importantly, within manufacturing exports, the share of low-skilled, labour-intensive products such as textiles, clothing and footwear has more than halved since the mid-1970s. By contrast, industries with a relatively high technological content such as electrical and electronic products have become the main engine of exports. The government-intensified research and development investments, which helped improve the technological capacity of the country, are a major asset in the era of globalization.
Similarly, foreign direct investment has instilled dynamism in the Korean economy. Interestingly, direct investment inflows tend to create relatively skill-intensive jobs, whereas the types of foreign direct investment outflows are concentrated in unskilled labour-intensive sectors. On average, foreign companies established in the Republic of Korea pay higher wages and offer better working conditions than domestic firms. In the face of concern about the employment losses possibly arising from foreign direct outflows, the study shows that there is no evidence that these losses are significant.
Besides trade, the improved level of education undoubtedly enhanced workers' productivity. Education has traditionally been a major priority for the country. Access to secondary education was generalized in the 1960s and early 1970s and, since then, substantial efforts have been made in the area of tertiary education. Thus, in 1995, nearly 60 per cent of young people enrolled in tertiary education, compared with only 9 per cent in 1970. One-fifth of the Korean population over age 25 has a college degree. As a result of these efforts, the Republic of Korea has surpassed several developed countries in terms of educational attainment.
In an in-depth empirical investigation, the study shows that education has helped to alleviate the pressures towards the labour-market inequality typically associated with globalization. Technological change appears as an important source of inequalities, while trade has played a relatively minor role and education has mitigated both factors.
Although the Republic of Korea's sustained economic growth has been largely indebted to this government-initiated development strategy, the government intervention has also caused the distortion of resource allocation and the chronic inefficiency in financial and corporate sectors, both of which are detrimental to the nation's growth potential. More generally, certain aspects of the globalization process have proved to be unsustainable:
In agreement with the IMF, the Korean Government has announced a wide range of measures designed to cope with the crisis, including in the area of industrial restructuring, bank reform, social security and the labour market. The purpose is also to share the burden of adjustment as fairly as possible. However, the corporate governance reform is taking longer than planned, while the labour-shedding process has resumed and is gathering momentum. Foreign direct investments in the Republic of Korea have so far been relatively modest, depriving the country of much-needed stable, long-term injections of capital.
The study also examines a range of policy issues that arise in a context where the objective is to speed up adjustment, while making the globalization process socially sustainable:
Finally, it can be safely asserted that, in the wake of the crisis, the creation of a national tripartite committee has been instrumental in formulating a consistent policy framework. International experience suggests that such frameworks can help create consensus on the most urgent measures, while paving the way for a growth path based on an open economic system which is socially sustainable.
(yet to be discussed at a tripartite meeting)
It is generally accepted that Mauritius has been a success story in the past decade and a half -- it has even been referred to as an African miracle. Since the balance of payments crisis of the early 1980s, real national income has risen by an average of nearly 6 per cent per year and real GDP per capita by around 4 per cent per year. As impressive, this rapid and sustained economic growth has not been associated with some of the negative aspects of globalization and development experienced by other countries. Available evidence suggests that income distribution improved while socio-economic benefits such as education, health services and housing amenities reach virtually everyone. Importantly, Mauritius has a functioning democracy, and tripartism, although not well developed, plays an important role in policy design.
There is little doubt that international trade and global markets played an important positive role in Mauritius' recent success. For example, many new jobs were created in export sectors, especially in garments, and as a result, unemployment rates declined sharply in the 1980s; indeed, between 1982 and 1988, new jobs created in trade-related sectors represented approximately 20 per cent of the total employment in the country.
Mauritius' success appears to be due in large part to the following positive developments:
Mauritius has now reached a crossroads in its development. Mauritius is likely to lose its preferential trade benefits early in the next century. In addition, it is becoming increasingly difficult to compete with newly emerging low-wage garment-producing countries for low-skilled garment products, as evidenced in recent years by the delocalization of these products to Madagascar. Foreign direct investment in the EPZ has fallen in recent years.
There are now strains in the labour market linked to international trade patterns. The unemployment rate has risen substantially in the 1990s, to 6 per cent according to official government estimates, and to over 10 per cent based on the international definition of unemployment. As pointed out in this report, rising unemployment in the 1990s is related to poor employment growth in Mauritius' main export sectors in the 1990s; indeed, employment fell substantially in the sugar and garment/textile sectors in the 1990s.
There are strains on the fiscal side as the government tax base has been eroded by the reduced tariff rates that have accompanied trade liberalization, since taxes on international trade provide the largest share of government revenue.
The issue then arises as to what can be done in order to address these challenges. The Government has correctly emphasized the need for a high-productivity route in the face of globalization. It envisages four outward-looking areas of growth, namely: sugar, garments/textiles, tourism and skilled labour-intensive services such as international banking. The official intention is: (a) to move up-market in the case of sugar and garment exports through investment and improving the skills of labour and management; (b) to improve Mauritius' position as a destination of high-quality tourism; and (c) to develop a financial and high-technology centre for the southern African region (similar, it is hoped, to Singapore's position in Asia). In order to improve understanding of the problems involved with this high-productivity strategy, it is useful to keep in mind several considerations, in the light of the experience of other countries:
The policy challenges are difficult. Moreover, decisions will have to be taken in an environment characterized by a certain degree of anxiety among the population. However, it is reasonable to assume that Mauritius will take advantage in international markets of its strengths, including a stable political system, a good physical infrastructure, the existence of tripartite institutions and a relatively well-trained, semi-skilled labour force. The process of regional integration (in particular in the SADC region) could help diversify export markets, while also supporting production upgrading.
In the meantime, there may be a difficult transition period, with rising unemployment, since as noted in this report employment creation in the four designated areas of growth is insufficient to absorb expected labour force growth. Even though there may be a need to reconsider priorities in terms of social expenditure, it is important that Mauritius does not succumb to the "conventional wisdom" among some neo-classical economists with regard to the welfare state and social expenditure. Mauritius must especially pay attention to vulnerable and disadvantaged groups during this transition period. The social partners should be closely involved in social and economic policy and decision-making.
1. The countries concerned are: Bangladesh, Chile, Jamaica, Jordan, Republic of Korea, Mauritius, Poland, South Africa, Switzerland and Venezuela (see document GB.270/WP/SDL/1/2).
2. A report on the conclusions of this meeting was presented orally to the Governing Body by the Chairperson of the Working Party.
3. The studies have appeared separately as working documents pending their possible publication in a single volume that could also contain the summary report. The working documents are: ILO, Task Force on the Social Dimension of Globalization (1998): The social impact of globalization in Chile; The social impact of globalization in the Republic of Korea; and The social impact of globalization in Mauritius. These will be released shortly.
4. See, for example, J. Bhagwati: "The capital myth", in Foreign Affairs, No. 77(3), May-June 1998; and S. Radelet and J. Sachs: The East Asian financial crisis: Diagnosis, remedies, prospects, Harvard Institute for International Development, Apr. 1998. Several articles have recently been written on the subject.
5. See, for example, T. Persson and G. Tabellini: "Is inequality harmful for growth?", in American Economic Review, No. 84(3), June 1994, and a commentary on this article in Partridge: "Is inequality harmful for growth? A reflection on that article", in American Economic Review, No. 87(5), Dec. 1997.
6. The full text of these studies can be found in the ILO Task Force's Working Papers cited above.