GENEVA (ILO News) - Many developing countries remain marginalized from the world economy and are missing out on any significant benefits from the globalization of trade, according to a paper ^* prepared for the International Labour Office's Governing Body, which is conducting its 282 ^nd session in Geneva.

Working Party on the Social Dimension of Globalization

It highlights the need for the right national economic and social policies and institutions to be in place so as to maximize the impact of trade liberalization on employment creation, including labour market policies, social protection and social dialogue.

The paper notes that under the assumptions of standard economic theory, trade liberalization is considered as unambiguously good for developing countries - since freer trade will not only increase their efficiency and growth, but will simultaneously increase employment opportunities and wages for their most abundant resource, skilled labour.

However, it also acknowledges that the assumptions underlying this theory "rarely apply in the real world." Hence, in many circumstances, "in contrast to the comfortable predictions of smooth and costless adjustment in standard theory, trade liberalization can impose heavy adjustment costs in the form of a contraction in output, high unemployment and wide trade deficits."

A series of recent ILO case studies on China, India, Malaysia, Mexico and Brazil shows that in the three Asian nations "trade growth had a generally favourable effect on employment and wages" in the manufacturing industries, but these effects were not evident in the Latin American countries.

The paper refers to ILO research showing that "international trade is associated with greater labour market turnover - with particularly detrimental consequences for workers with only modestly transferable skills." Case studies of seven countries (Bangladesh, Chile, South Korea, Mauritius, Poland, South Africa and Switzerland) did not show uniform results on the impact of trade liberalization on income inequality.

The marginalization of many developing countries, the paper finds that, is reflected in the fact that increased manufacturing exports were concentrated in just 13 countries and regions. The economies of Argentina, Brazil, China, Hong Kong (China), India, Indonesia, South Korea, Malaysia, Mexico, the Philippines, Taiwan (China) and Thailand saw their share of world manufactured exports rise from nine per cent in 1980 to 22 per cent by the mid-1990s.

Another 10 developing countries - Bangladesh, Egypt, Malta, Mauritius, Morocco, Pakistan, South Africa, Sri Lanka, Tunisia and Turkey - also experienced an increase in their share of world manufactured exports, but by a smaller margin.

In contrast, the rest of the developing world (excluding the oil exporting countries in the Middle East) "saw their collective share of world merchandize trade decline from four per cent during 1980-82 to three per cent in 1996-98."

At the same time, trade in primary commodities, a major component of developing-country exports, shrank as a per centage of international trade from 43 per cent in 1980 to less than 20 per cent in 2000, due to lower consumption resulting from technical progress and the continued development of synthetic substitutes for many raw materials.

This combination of factors has left many developing countries - particularly the least developed countries - "unable to benefit because they have been unable to shift their export base away from primary commodities to exploit the rapidly growing demand for manufactured exports," the report says. In addition "many failed to develop the physical infrastructure and the skills base necessary for the development of manufacturing."

The ILO paper underscores the importance of addressing the plight of these countries and correcting the current trajectory of the global economy - which is leading to growing inequalities between advanced and developing nations. The ILO firmly rejects trade protectionism as a solution to the problems of poverty and unemployment and argues that "an open, multilateral trading system is clearly preferable to a world economy with limited trading links."

"The gains from trade are undeniable as are the costs of protectionism, so the issue is not so much whether countries should try to benefit from freer trade, but how this should be achieved," the paper says. "Progress in liberalizing trade in agriculture will be particularly important and further liberalization of trade barriers on labour intensive manufactured products will also be helpful," it adds.

The ILO insists that there is no "blanket prescription of 'big-bang' trade liberalization that is applicable to all countries." Based on a broad survey of economic literature, the paper concludes that "the impact of trade liberalization is not uniform, but on the contrary, is strongly influenced by factors such as the nature of the liberalization programme, the extent of pre-existing distortions in the trade regime and the flexibility of markets."

Trade liberalization has had varying results in developing countries.

"In Zimbabwe, drastic trade liberalization measures implemented in the early 1990s resulted in a contraction of output and employment that was accompanied by a sharp increase in imports and a rising trade deficit. Real wages also fell in the wake of trade liberalization."

In contrast, Mauritius has far more favourable outcomes from trade liberalization: "The reduction in protection for local firms that was implemented in the period 1985-87 led to the expected rise in employment in export industries but no contraction in employment in import-competing industries."

The East Asian experience of export-led industrialization is cited as one that "epitomizes the virtues of trade liberalization ... these countries did not undertake a 'big bang' trade liberalization but moved toward a more neutral trade regime through selective export-promotion strategies," the paper says.

A study on Mexico found that in the period between 1984 and 1990, "a 10 per cent reduction in tariff levels was associated with a two to three per cent reduction in employment", with the wage differential between skilled and unskilled workers widening.

Trade liberalization in Brazil during the early 1990s had "a slight negative, short-term impact on employment". Between 1990 and 1997 in Brazil, there was a 32 per cent drop in employment in capital-intensive industries and 13 per cent decline in labour-intensive industries. Not all this decline in employment, the ILO paper says "could be attributed to trade liberalization since the trade reforms were carried out in a macroeconomic environment that was marked by high inflation and recessionary conditions.

The ILO insists that in the course of undertaking trade liberalization and economic reform "every effort needs to be made to minimize the social costs through measures such as prior analysis of their social impact, in particular the impact of price changes on the poor, of the possible destruction of markets important to poor producers and of changes in the demand for labour."

Specific measures to increase the benefits of trade liberalization to the poor would include provision of credit and the extension of support services to small farmers, as well as marketing assistance to enable them to take advantage of new export opportunities. Also important is to remove biases against small enterprises, promote subcontracting from small firms, and increase "the provision of information and marketing assistance to small firms". All these factors, says the ILO, need to be given serious attention in policy design.

However, even if progress were made in these areas, developing countries would still face severe supply-side constraints to export expansion. Low levels of education and skills in the labour force "are a basic barrier to industrial development," the report warns. Education and training policies are an obvious priority, but also needed, according to the paper are "active labour market policies to facilitate adjustment to changes in the structure of production." These can include measures to provide retraining for displaced workers and job-search assistance.

The report says that "the strengthening of social protection will be essential for mobilizing broad popular support for trade liberalization and other economic reforms."

* " Trade liberalization and employment", Working Party on the Social Dimension of Globalization, GB.282/WP/SDG/2, Geneva, November 2001.