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GB.276/WP/SDL/1
276th Session
Geneva, November 1999


Working Party on the Social Dimensions of the Liberalization of International Trade

WP/SDL


FIRST ITEM ON THE AGENDA

Country studies on the social impact of globalization:
Final report

Contents

Synthesis report

A. Background

B. Globalization: Perceptions, definition and measurement

C. The social impact of globalization

D. The role of policies

E. Follow-up and ILO action

References

Tables

  1. Merchandise exports as percentage of GDP in sample countries
  2. Comparison of world exports and turnover in foreign exchange markets
  3. Correlation between capital flows and real exchange ratesof selected countries
  4. Household income distribution before and after trade liberalization
  5. Part-time work as a share of total employment
  6. Temporary employment as a share of total salaried employment
  7. Indicators for "unprotected" salaried employment
  8. Taxes on international trade and government revenues

Graphs

  1. World exports of goods and services as a share of world GDP
  2. Exports of goods and services as a share of GDP by group of countries
  3. World exports of services as a share of total world exports
  4. Trends in capital flows
  5. Switzerland: Labour market characteristics of the industrial specialization
  6. Bangladesh: Diverging trends in real per capita income of richest and poorest households
  7. Chile: Estimated determinants of wage and income inequalities
  8. South Africa: Labour market performance of manufacturing sectors by trade orientation
  9. Republic of Korea: Estimated impact of trade on employment by level of education
  10. Trade and inter-sectoral employment flows
  11. Mauritius: Percentage of government current revenue from international trade
  12. Top marginal tax rate on individual income in 1986 and 1998:
    A. High-income countries
    B. Middle-income countries
    C. Low-income countries

Appendix: Summaries of the country studies

Synthesis report

Summary

1. The Office has completed studies on the social impact of globalization in seven countries (Bangladesh, Chile, Mauritius, Poland, Republic of Korea, South Africa and Switzerland). The purpose of this report is to provide a synthesis of the main results of this work and to discuss a range of analytical and policy issues of relevance to ILO member countries in general. This final report is an updated version of the progress report issued in March 1999.(1) 

2. Though the term globalization is widely used, its meaning is not always entirely clear and the report defines it as a process of rapid economic integration among countries driven by the liberalization of trade, investment and capital flows as well as rapid technological change. Compared with past episodes of economic history, globalization involves enterprises and workers of nearly all countries, in goods as well as services sectors. As a result, the bulk of the workers are directly concerned, whereas in the past practically only industrial workers were affected by international competition. International trade and foreign direct investment flows have intensified and the information technology revolution has facilitated economic transactions. Short-term capital flows have grown spectacularly and, partly reflecting the integration of financial markets, transactions in foreign exchange markets are nearly 80 times larger than world trade. Globalization gives rise to concern on the part of developed countries which fear competition from low-wage economies, while firms from developing countries find it difficult to compete against powerful multinational companies from the "North".

3. Given the multifaceted nature of the process, it is not possible to identify a simple relationship between globalization and social progress. As historical experience and empirical evidence show, the liberalization of trade and foreign direct investment hold the prospect of rising standards of living, but the process is neither instantaneous nor painless. Adjustment costs of some size are involved. Moreover, the report shows that trade is associated with greater labour market turnover, with particularly detrimental consequences for workers with only modest transferable skills. A trend towards wider income inequalities can be observed not only in most of the countries under study, but also in other member countries. There is little evidence that trade is the main direct factor at work. The adoption of new technology in response to greater pressures from international competition has tended to increase the demand for skilled labour, to the disadvantage of unskilled workers. In addition, the study documents a near-universal trend towards lower taxation on high incomes, suggesting that the tax system is becoming less redistributive. Indeed, between 1986 and 1998, 67 countries out of the 69 for which information on their tax systems could be collected for this report had witnessed a decline in the maximum tax rate on high incomes. In certain cases the cut in taxes on high incomes has been spectacular. The taxation of high-incomes had reached excessive levels in some countries and its reduction may well be welcome. However, the phenomenon might also reflect competition, since high-income earners tend to be relatively mobile internationally. If the trend continues, governments will soon be deprived of an important mechanism that can help correct rising income inequalities. The fact that globalization occurs in a context of rising inequalities and perceptions of job insecurity gives rise to preoccupations about the social and political sustainability of the process.

4. In addition, there is some concern among developing countries that globalization has rendered their economies more vulnerable to international shocks, especially where their export base is very narrow and their exposure to changes in the terms of trade is correspondingly high. There is also a more practical problem regarding the effective participation of those countries in multilateral discussions and conflict-resolution bodies, which often require highly technical expertise.

5. There is growing international concern about the volatility of short-term capital flows. Especially detrimental are the effects of free capital mobility on countries where internal financial institutions are probably too weak to sustain the large swings in short-term capital movements. The report shows that there is a danger that short-term capital flows, far from being a mere reflection of economic fundamentals, will determine exchange rate fluctuations and, consequently, output and employment.

6. Importantly, none of the countries under study has expressed a desire to adopt protectionist solutions. Instead, the policy challenge is to improve the benefits of globalization while minimizing the costs. Contrary to the commonly held view that social institutions and policies would be threatened by globalization, the report advocates action in the areas of education and training, social safety nets, labour law and industrial relations, and core labour standards. Adequate enforcement of these four "social pillars" can greatly contribute to making globalization successful and socially sustainable. Finally, the last section of the report presents areas for possible follow-up activities by the ILO.

A. Background

7. Concerns about the effects of labour standards on the competitive advantages of exporters from different countries are by no means new (Charnovitz, 1987; Servais, 1989). However, the debate on the subject attracted unprecedented attention during the 1980s, when controversy erupted over proposals for including a social clause in agreements negotiated during the Uruguay Round of multilateral trade negotiations. In the event, no reference was made to a social clause in the Final Act embodying the results of the Uruguay Round that was signed at Marrakech in April 1994.(2)  Within the ILO, the Governing Body decided in 1994 to set up a working party to discuss "all relevant aspects of the social dimensions of the liberalization of international trade".(3)  At the WTO's first regular biennial Ministerial Conference that took place in December 1996 in Singapore, the ILO's competence in relation to core international labour standards was explicitly recognized.(4) 

8. In order to gain a better insight into the main concerns to which economic globalization had given rise among ILO constituents, the Office was asked to carry out a survey to collect information on the effects of globalization and trade liberalization on the attainment of the ILO's social objectives.(5)  One of the ways in which respondents felt that a better understanding of the social and labour market effects of these developments could be obtained, was through a series of case studies of countries that had expressed interest in this initiative.(6) 

9. An ILO Task Force was set up to carry out this research and a progress report on its work was presented at the last meeting of the Working Party.(7)  The seven studies have been completed and discussed at national tripartite meetings.(8)  Summaries of the studies are given in the appendix for information. This report draws mainly on the findings and conclusions of the studies conducted, which include countries from four regions (Asia, Latin America, Africa and Europe), with different levels of economic development and distinct social and political institutions. It also draws on further research including broader international comparisons.

10. Section B of this report reviews the international debate on globalization and proposes a simple definition. An attempt is also made to identify indicators of increasing integration of national economies. The report then examines the possible relationship between different aspects of globalization such as trade, foreign direct investment and financial capital flows on the one hand, and labour markets and income distribution on the other (section C). Drawing on the findings of the country case-studies, section D examines the roles of social and labour policies and related legislative and institutional reforms for enhancing the benefits arising from globalization while reducing social costs and facilitating the adjustment to a more competitive international economy. Section E proposes for consideration areas for future ILO action as follow-up on the research activities. Recommendations put forward at the national tripartite meetings at which the country case studies were discussed, observations made by members of the Working Party over the years and the findings of the studies themselves, have all provided indications of the direction in which future activities may be pursued.

B. Globalization : Perceptions, definition
and measurement

The international debate on globalization

11. Globalization is certainly one of the most widely used terms in debates on economic and social development in the 1990s. Appreciations of the outcome of globalization could not be more divergent: while some see it as a main driving force towards new prosperity in which the poorer countries can catch up in the world economy, others fear that globalization will have perverse effects on workers, jeopardize social rights, and aggravate social inequalities.

12. Although the general perception of globalization is that it is inevitable, it raises apprehension in developed and developing countries alike. The international media reflect the scepticism about the possible benefits of globalization. For developed countries the main concern is about the competition of cheaper imported goods from developing countries. Developing countries fear that they may be unable to compete with developed countries in a liberalized environment and that they may become marginalized in the international economy. Moreover, developing countries generally view globalization as requiring economic reforms that cause considerable hardship that may not necessarily be of a temporary nature.

13. Part of the uneasiness about globalization stems from the perception that national policies are increasingly dictated by international constraints. Indeed, macroeconomic imbalances may have more negative effects in a liberalized environment than in one that is relatively more protected. In some cases globalization is used as a justification for certain policy measures, for example cutbacks in social protection schemes. There is, however, no empirical backing for the argument that countries with relatively "open" economies have more restricted or less expensive social protection systems than those with more "closed" economies. If anything, it appears that countries exposed to higher levels of external risk have higher government spending on welfare than is the case with countries that are less exposed (Rodrik, 1997). Thus, while the reform of social protection systems to make them more effective and efficient may be necessary with or without globalization, the dismantling of social protection systems cannot be justified on the grounds of external constraints (see section D below). It is nevertheless true that, as capital is increasingly mobile, the tax base is partly eroded, making it difficult to finance social benefits.

A simple definition of globalization

14. Globalization has economic, political and cultural dimensions, all of which can have a social impact. The Task Force restricted its analysis largely to the effects of economic globalization.

15. Economic globalization can be simply defined as a process of rapid economic integration between countries. It has been driven by the increasing liberalization of international trade and foreign direct investment, and by freer capital flows. The process manifests itself mainly through an intensification of activities in the following areas:

16. The different dimensions of the process are interrelated and mutually reinforcing. Thus, international information flows that enable real-time transactions not only facilitate trade and investment, but also make it possible for enterprises to stay informed of international prices for the inputs they require in order to obtain similar price levels from their national providers. Although no trade may actually take place, there will be an impact on local enterprises. The international flow of "soft" technology -- knowledge of management practices and methods of work organization -- is another facet of globalization.

Measuring globalization

Trade flows

17. The increase in trade flows can be illustrated by looking at the trends in the share of exports of goods and services in GDP. Some authors have compared contemporary trade flows with historical data, and have come to the conclusion that the trade/GDP ratio increased at a rapid pace during the nineteenth and early twentieth centuries. A similar trend can be discerned between 1950 and the early 1970s. Rather than a unique process, it is argued, we have been observing periods of increasing and diminishing openness in trade. Some have even claimed that today's degree of economic openness is less than at the beginning of the century.

18. Although this historical perspective is enlightening, it would be an exaggeration to claim that today's economy is no more globalized than it was earlier in the century. As table 1 shows, for most countries for which long-term data are available, the share of exports in GDP is higher now than ever before in history.

19. Graph 1A shows that world exports as a share of world GDP in current prices recorded rapid growth from the mid-1960s to the mid-1970s, and following a period of stagnation between the mid-1970s and mid-1980s have resumed a steep upward trend. Today world exports account for nearly one-fifth of world GDP, that is, five percentage points more than in the mid-1980s. At constant prices, the increase is much more pronounced, reflecting the fact that, on average, export prices have grown at a slower pace than the prices for domestically produced goods and services (graph 1B). The recent rise in the exports/GDP ratio has been much stronger in low- and middle-income countries than in high-income countries (graph 2).

20. One important characteristic of the expansion of world exports is that exports of services are rising faster than exports of goods (graph 3). Improved possibilities for the storage, processing and communication of data are facilitating international trade in a growing number of services. The case of the software industry in Bangalore (India) that carries out software development services -- detailed design, coding/programming and testing -- for US and European clients is but one example. Some 25,000 workers in India are estimated to work in "remote services" ranging from typing telephone directory entries to conducting basic research. Their numbers are expected to exceed one million within the next ten years.(9) 

21. Moreover, in a number of countries, economic sectors that used to operate within the boundaries of nation states have recently opened up to foreign companies. Construction, telecommunication services and engineering projects can be mentioned as important examples. The extent to which these sectors have become globalized cannot be easily apprehended, since little trade is involved.

Capital flows

22. Foreign direct investment (FDI) involves a long-term relationship and reflects a lasting interest and control of an entity resident in one economy in an enterprise resident in an economy other than that of the foreign investor.(10)  Data on gross FDI flows worldwide show a considerable increase during the last 15 years. While the share of these flows in total GDP was below 1.5 per cent up to 1986, it has fluctuated around 2 per cent in the 1990s. The data, however, also reveal considerable fluctuations rather than an uninterrupted increase (graph 4A). A related, but not identical, indicator of globalization, is the growth in cross-border mergers and acquisitions that started in the 1980s.(11) 

23. Short-term capital flows have increased even more dramatically, particularly in the "emerging market economies". Net portfolio investment in developing and transition countries was negligible in the 1970s and 1980s, but attained considerable amounts during the 1990s (graph 4B). However, these short-term flows show important year-on-year fluctuations and are generally more volatile than FDI flows.(12)  This volatility can create an unstable economic environment that is detrimental to economic growth (see section C for a detailed analysis).

24. The importance that short-term financial transactions have acquired in the international economy is illustrated by the fact that their volume is much higher than the volume of the exchange of goods and services. The worldwide daily turnover in foreign exchange markets in 1998 was at least 78 times the daily volume of exports of goods and services, up from 56 times in 1989 (table 2).

The importance of multinational corporations and the
reorganization of production networks on an international scale

25. Enterprises are increasingly working on an international scale. The enhanced information technologies and transport facilities (and the consequent declining costs of moving information or goods from one country to another) contribute to make the present process of globalization more encompassing than previous experiences of international integration. The increasing role of multinational corporations in the international economy can be measured by the share of the production of foreign affiliates in world GDP. This share increased from around 5 per cent in the early 1980s to almost 7 per cent in 1996-97.(13) 

26. In order to adapt to increasing international competition, enterprises not only introduce more flexibility in their internal operations: they also change their relationships with domestic and foreign enterprises. Many enterprises try to concentrate on core activities -- which are those where they are unique or difficult to imitate and which offer a superior source of value -- and those that can provide a gateway to new markets (Palpacuer, 1998). Focusing on core areas of competence allows firms not only to develop superior capabilities through specialization, but also find new ways of taking advantage of their environment. By externalizing non-core activities, firms can reduce their fixed costs and thus enhance their ability to shift resources quickly and seize new opportunities in response to unexpected environmental changes.

27. The outsourcing of inputs or services can take place either nationally or internationally. Recent developments indicate that large auto-makers are now implementing these network strategies on a global scale, relying on selected subcontractors to supply particular components for their worldwide operations (Humphrey, 1998). European and US garment enterprises have progressively extended their subcontracting network to Asia and Latin America, and even garment producers in middle-income countries such as Chile are increasingly taking advantage of the possibilities for outsourcing labour-intensive production to Asian developing countries (ILO Task Force, 1998).

28. For the manufacturing sector as a whole, the extent of international outsourcing can be measured by the increased share of imported inputs in total inputs, as documented for countries such as the United States, the United Kingdom, Canada and Mexico.(14) 

C. The social impact of globalization

29. It is extremely difficult to assess the consequences of a complex and all-embracing phenomenon such as globalization. There are substantial theoretical, methodological and empirical problems involved. It is particularly difficult to isolate empirically the impact of any one dimension of globalization from the impact of other economic or political changes.

30. Theoretical considerations and empirical evidence suggest that globalization has the potential to increase peoples' welfare. Most cross-country studies conclude that increased trade and foreign direct investment flows are, at least in the long run and in most cases, correlated with higher rates of economic growth and productivity increases for the economy as a whole.(15)  The impact of short-term capital flows is much more ambiguous as demonstrated below.

31. The potential gains are not automatic, nor are they instantaneous. They depend on initial conditions, external economic developments and policies. For the benefits to materialize, some adjustment is necessary. This adjustment, almost by definition, involves intersectoral flows of employment and related adjustments costs for displaced workers. Even beyond these transitional costs, globalization leads to labour market adjustments that can have a social impact in terms of increased social inequalities. Some individuals or groups may benefit more than others: for example, skilled as opposed to unskilled workers (as in Switzerland) or urban vis-ŕ-vis rural areas (as appears to be the case in Bangladesh). This will translate into either wage inequalities, employment inequalities, or both.

32. The studies carried out by the Task Force have also shed new light on the link between globalization, on the one hand, and economic and labour market insecurity on the other. Globalization is likely to be associated with increased uncertainty. As markets become more global, even well-established positions of enterprises can be challenged. Moreover, it has become technically possible to outsource part of the production process and locate it in other countries. The comparative advantage of countries is increasingly subject to change, to the extent that some observers have coined the term "kaleidoscopic comparative advantage" to describe this development. A cross-country analysis carried out by the ILO Task Force confirms that the more open the economy, the more intersectoral employment flows can be observed (see below). Globalization is also associated with the erosion of the standard "Fordist" model of salaried employment. New forms of employment are emerging. Although these non-standard forms in many cases correspond to new options for many workers, there is justified concern about their negative social consequences, in particular for low-skilled workers.

The cost of free capital movements

33. The merits and demerits of free capital movements have been hotly debated over the last few years, particularly since the Asian financial crisis. Free capital movements have often been advocated by international financial institutions and in certain academic circles.(16)  The main rationale behind this proposal is that freer capital flows would lead to a more efficient allocation of savings across countries. This was believed to be especially beneficial for developing countries, which suffer a chronic shortage of savings, in much the same way as, in the 1980s, the liberalization of domestic financial markets was seen as a way to alleviate credit constraints while also improving resource allocation. Reflecting these views, many countries embarked on a process of liberalizing their capital accounts.

34. For example, reflecting the wider access of Korean firms and banks to foreign loans, the total foreign debt doubled between 1993 and 1997 by over US$140 billion -- about 90 per cent of the total exports of goods and services, or US$3,000 per Korean (ILO Task Force, 1999c).

35. In Chile, capital flows have also been liberalized somewhat, but certain restrictions have been maintained in the form of non-remunerated reserve requirements. Thus, despite the difficulties in controlling short-term capital flows (investors quickly learn to circumvent existing control measures, and new mechanisms have to be sought continuously), the Government of Chile has managed to avoid excessive volatility of capital flows (ILO Task Force, 1998). More fundamentally, Chile's current account deficit, which reflects a high domestic investment rate, has been financed mainly by long-term capital inflows. Somewhat paradoxically, the reserve requirements were removed by the Central Bank of Chile precisely at a time where there was growing public discussion about the advantages of having some restriction on short-term capital flows. In that discussion the Chilean regulations were perceived as one possible model of transparent and well-administered control.

36. Liberalization measures have resulted in the build-up of a large stock of financial capital that can move from one country to another almost instantaneously and at limited transaction costs. As a result, national economies have become more vulnerable to the changing perceptions and interests of international investors.

37. More fundamentally, the financial economy may have acquired a certain autonomy with respect to economic fundamentals and may even have a negative impact on them. Indeed, when examining recent financial and economic trends, it can be argued that there is a real danger that capital flows will increasingly determine exchange rate movements, in turn affecting trade, output and employment levels. By contrast, in the past, an opposite causation running from economic fundamentals to capital flows was the rule.

38. Work carried out for this report shows that this may already have happened, at least in the seven emerging market economies for which the work was carried out (India, Indonesia, Republic of Korea, Mexico, Philippines, South Africa and Thailand).(17)  As table 3 shows, in the 1980s movements in the real exchange rate in one particular quarter were often caused by developments in the basic balance of payments in the previous quarter (i.e. the current account balance plus net FDI flows). A positive basic balance exerted increasing pressure on the currency, and conversely in the case of a basic balance deficit. As expected, the correlation coefficients shown in the table are relatively high and statistically significant in five out of seven cases. This causality has almost completely disappeared in the 1990s, with the possible exceptions of Mexico and the Philippines. Correlation coefficients have become very small and insignificant. While the basic balance of payments plays less of a role in exchange rate determination, private capital flows have become an important determining factor: during the 1980s there was no significant causal link between net private capital flows in one particular quarter and real exchange movements in the following quarter, whereas this appears to be so in the 1990s, as illustrated by the fact that correlation coefficients have increased and several of them are statistically significant.

Globalization and social inequalities

39. According to standard economic theory, under certain conditions trade holds the promise of diminishing income inequalities in developing countries, while threatening to increase inequalities in industrialized countries. Compared to industrialized countries, developing countries have abundant unskilled labour for which the demand is likely to grow as trade flows between developing and industrialized countries intensify. This in turn would raise the wages of unskilled workers relative to those of skilled labour, thereby diminishing income inequalities. The opposite process is expected to occur in industrialized countries.

40. The ILO Task Force's study on Switzerland provides evidence that import penetration is associated with reduced wages mainly in industries producing relatively homogeneous products such as textiles. Where competition takes place mainly through export differentiation (as in the mechanical and engineering industries), there is no evidence that trade leads to reduced wages. To the extent that niche industries have a higher intensity in skilled labour than those that make homogeneous goods, trade may contribute to widening income inequalities (ILO Task Force, 1999e; graph 5).

41. The evidence concerning the developing countries studied by the ILO Task Force shows that international trade has not always led to a decrease in income inequalities (table 4). In Chile and Bangladesh, income inequalities grew during the process of trade liberalization. Widening income inequality in Bangladesh has led to a stagnation of the incomes of the poorest households, despite sizeable increases in average household incomes (graph 6). This is troubling, as it shows that individuals do not participate in the globalization process on an equal footing. International trade is certainly not the only explanatory factor: a quantitative assessment suggests that the direct contribution of international trade to the increase in income inequality in Chile between 1960 and 1996 may be around 10 per cent (graph 7). However, to the extent that technological change is linked to international trade and biased towards the use of skilled labour, an indirect contribution of trade to inequalities can be assumed (ILO Task Force, 1998, 1999a). In South Africa, income inequality decreased between 1990 and 1995, presumably as a consequence of the end of the discriminatory apartheid regime. According to the Task Force's assessment, the net effect of trade liberalization may be a widening of inequalities. Apparently, trade liberalization so far has reinforced the capital-intensive international specialization of the South African economy and the already high unemployment rates have experienced further increases (ILO Task Force, 1999d). Interestingly though, the negative employment impact of trade liberalization is not directly related to import competition, as the relative employment losses between 1994 and 1997 have been bigger in export-oriented sectors than in import-competing ones (graph 8).(18)  Studies of other middle-income developing countries such as Mexico, Colombia and Costa Rica also conclude that trade liberalization has tended to increase income inequalities (Robbins, 1996; Hanson/Harrison, 1995; Wood, 1997).

42. However, this result is not verified in all countries. In Mauritius, export-led growth over the past 15 years has been accompanied by an improvement in the distribution of income.(19)  In the Republic of Korea income distribution has improved, although trade is found to have reduced the demand for unskilled labour (graph 11). The supply-side changes in the form of an upgrading of the labour force have been sufficient to offset the potential negative distributional impact of trade. The educational upgrading of the labour force is thus an important part of strategies for avoiding negative distributional consequences of globalization (ILO Task Force, 1999b, 1999c).

43. There are two main explanations for the fact that trade liberalization has in many developing countries increased the relative demand for skilled workers rather than unskilled workers:

44. In many developing countries globalization has been associated with the greater participation of women in the labour force. For example, the majority of workers in export processing zones in Mauritius are women -- 81 per cent in 1983 and 71 per cent in 1995 (ILO Task Force, 1999b). However, globalization has generally not been able to reduce gender-based discrimination. Occupational segmentation has not changed decisively, and in many countries women are still over-represented in jobs with relatively low wages, high job insecurity and poor working conditions.

45. Finally, it is often argued that the increased international mobility of capital has shifted the power balance between capital and labour in favour of capital. As labour in one particular country appears to be relatively easier to replace with labour in other countries, labour's bargaining position may be weakened and a diminishing wage share in GDP can be expected. Indeed, the wage share in GDP, even correcting for the increased number of self-employed workers, has decreased since the 1980s in all but two of the 15 EU countries. The average wage share for the EU was 73.2 per cent for the period from 1981 to 1990, but only 68.3 per cent in 1998. Japan has also experienced a decrease in the wage share during the same period (from 75.1 per cent to 72.7 per cent), while the United States shows a very slight increase from 71.6 per cent to 72.4 per cent (European Commission, 1998).

Globalization and job insecurity

46. It is sometimes argued that globalization causes labour market instability. Workers can be displaced by competing imports, labour saving technology and FDI (e.g. through the relocation of certain activities abroad). The increased elasticity of the demand for labour affects especially low-skilled workers, who tend to have limited mobility and are therefore more likely to face job insecurity and precariousness (Rodrik, 1997). Globalization is widely considered to be synonymous with shifts in the competitive position of enterprises in world markets and in the position of countries in the international division of labour. These changes inevitably have repercussions at the level of the individual worker, as trade can lead to job creation in industries where comparative advantage lies, and job losses in import-competing industries. Studies such as that by Addison, Fox and Ruhm (1996) suggest that the risk of job loss is relatively higher in sectors that are exposed to import competition.

47. Between the 1980s and the 1990s a widespread, and in some cases quite sharp increase in individuals' perceptions of job insecurity has been observed in most OECD countries, including those where the unemployment rate has been either relatively low or falling, such as Japan, the United States and the United Kingdom.(20) 

48. However, an examination of the average job tenure of workers does not yield conclusive results. No significant changes in average tenure or gross job flows have been found.(21)  There is however evidence of higher job turnover in certain countries and for specific segments of the population. In Chile, the rate of job creation and job displacement has grown considerably since the start of trade liberalization and has remained high ever since.(22) 

49. Relatively little research has focused on the nature or size of the adjustment costs associated with trade liberalization. This report attempts to address this issue, based on the assumption that adjustment costs will be larger, the greater the difference between job requirements in expanding industries and job losses in those that are declining. When both expanding and declining industries belong to the same sector, it is usually easier for displaced workers to find a new job. By contrast, moving into employment in entirely different sectors is likely to be more difficult, especially in the case of low-educated workers, whose skills and competencies are often sector-specific.

50. Economies are continuously exposed to shocks, trade being only one of them. However, the analysis of manufacturing employment data for 77 countries from 1986 to 1995 carried out for this report(23)  shows that trade is likely to produce more damaging displacement effects than other shocks because of the substantial inter-sectoral labour turnover to which it gives rise, as follows.

51. In most of the countries under study, globalization has translated into a structural shift in employment from manufacturing to services. A similar shift occurred at the time of the industrial revolution, when productivity gains in the agricultural sector caused a movement of agricultural labour into industry. The country studies show that employment in export sectors has grown, but that these gains have not compensated the losses recorded in import-competing sectors. The reason is that substantial productivity gains have occurred in manufacturing taken as a whole. These gains have translated into lower relative industrial prices, permitting welfare gains for consumers: in other words, industrial goods have become cheaper. Instead of buying more of these goods, however, consumers have tended to demand more services.(24) 

Globalization and the new patterns of employment

52. Up to the 1970s most discussions on salaried employment were either implicitly or explicitly based on the model of a "standard" employment relationship with the following characteristics: the existence of only one employer and workplace; the existence of an indefinite work contract; full-time work; and the existence of some degree of social and legal protection.

53. Although even during the 1970s this standard employment relationship was far from universal (especially in many developing countries), non-standard or atypical forms of work are on the rise in many countries.

54. The lack of comprehensive data and differences of definitions in this area make cross-country comparisons difficult. Analyses of trends within countries and within groups of countries are somewhat more reliable. Part-time work has increased since the mid-1970s in most of the countries for which data are available: in the 12 countries that were already Members of the European Union in 1987, part-time work as a share of total employment rose from 8.9 per cent in 1987 to 10.2 per cent in 1990 and 12.2 per cent in 1997 (table 5). Temporary employment has increased since the mid-1980s in all the sample countries except Japan, where it has remained largely unchanged, and the Republic of Korea, where it has decreased substantially (table 6). In many developing countries, non-standard employment often takes the form of "unprotected" employment without a written work contract or without the legally established social security coverage. Although this kind of "informal" paid work is of course not new, available data for a sample of Latin American countries indicate that unprotected salaried employment has increased in all of them since the early 1990s (table 7).

55. It is difficult to tell whether globalization is the main factor responsible for this. There are reasons to believe that some correlation exists. As the demand for labour becomes more volatile, non-standard forms of employment can be used by enterprises to increase external flexibility (that is, adapting the quantity of labour to the changing requirements). There is evidence for several countries and sectors which tends to confirm the link between non-standard employment and globalization. For example, some enterprises in South Africa have reacted to increased competitive pressure by transforming dependent workers into "independent contractors".(25)  In Chile, over 90 per cent of employment in export-oriented agricultural activities is temporary, while the proportion is only 55 per cent in the case of import-competing activities.(26)  The hiring of large numbers of temporary workers appears to be one of the strategies adopted by manufacturing enterprises in Morocco in response to trade reform in the 1980s (Currie/Harrison, 1997). However, a more quantitative assessment of the correlation is still largely an issue for future research.

56. In addition to globalization, developments on the supply side have also contributed to the surge in certain forms of non-standard employment such as part-time work. So far mainly women have opted for this arrangement, which enables them to combine paid employment with family responsibilities. It is also true that non-standard employment is more frequently found in economic sectors not directly exposed to international competition (e.g. non-traded services).

57. The rise in non-standard work does not necessarily mean a higher degree of precariousness. Part-time or temporary work may be chosen freely by certain individuals. For example, in 1997, 58.5 per cent of part-timers in the 15 EU countries did not want a full-time job, and a further 9.5 per cent combined part-time work with school education or training. The share of voluntary part-timers was even higher among women.(27) 

58. In the case of temporary work, the share of those persons who are voluntarily in this type of employment is much lower. However, in some professions, such as computer programming, media specialists (e.g. Internet) and consultants, temporary employment can sometimes provide better opportunities for learning and career development than a permanent job with a single employer. More generally, in an environment of rapid domestic and international economic and technological changes, non-standard forms of employment can, in certain cases, allow for the efficient allocation of labour to activities with higher productivity and consequently higher incomes.

59. On the whole, it seems that while highly skilled workers may often take advantage from non-standard forms of employment, those with lower skills are often negatively affected. Non-standard forms of employment may in some contexts make workers more vulnerable to the effects of economic fluctuations. Legally established rights may not always be respected, and collective bargaining may not cover such workers.

60. It is hence essential to design regulatory frameworks that give a measure of social protection to workers in non-standard forms of employment in contexts where such protection does not exist. The extension of social insurance mechanisms to these workers is also an important issue.

Taxes and globalization

61. As mentioned above, globalization can improve business opportunities, thereby raising output and government revenues. On the other hand, globalization can also affect the tax base in various ways. First, implementing trade reforms, whereby significant tariff reductions take place, can impose severe revenue losses for certain countries, in particular developing ones. Secondly, partly reflecting capital liberalization and technological change, the mobility of financial capital and businesses, as well as high income groups, has increased substantially. As a result, governments face pressure to reduce taxation levels on these mobile production factors. Under these circumstances, governments would have to either increase taxation on immobile production factors such as low-income labour or reduce expenditure, including that on social protection and education. Developed countries may be better armed to face this situation, as they can find other tax handles more easily than developing countries where governments have difficulties in providing even basic public services. The purpose of this section is to describe taxation trends in the context of globalization.

Trade taxes

62. Table 8 compares the share of trade taxes in total government current revenues between two periods (1976-1985 and 1986-1995) in three groups of countries -- developed, middle-income and low-income countries. Trade taxes include both import duties and export tax revenues. As can be seen from the table, trade taxes have declined between the two selected periods for the three groups of countries under study. The decline is particularly pronounced in the case of developing countries.

63. It could be argued that the reduction in trade taxes may have been compensated by higher revenues from other sources. This is because government can compensate the revenue losses by either increasing other types of taxes or by collecting more revenues as a result of higher output than presumably arises from trade liberalization. There is some evidence in support of this argument in the case of middle-income and developed countries. Indeed, as shown in table 8, total government revenues as a per cent of GDP have increased in parallel with the reduction in trade taxes. However, an opposite trend can be observed in developing countries, suggesting that trade liberalization may have eroded the tax base and affected the capacity to fund social programmes in those countries.

64. More generally, one cannot ignore the trade-off that governments must face when confronted by increasing economic integration. On the one hand, it can be argued that tariffs and taxes in general can introduce distortions in consumption and production patterns in the economy, with concomitant welfare costs. On the other hand, the removal of these taxes implies revenue losses for the authorities, as well as a reduced autonomy in implementing policies. As acknowledged by Tanzi (1995), diminished fiscal revenues may be deplored or welcomed depending on society's preferences regarding the size of government and its degree of intervention in the economy.

Taxation on revenues of high-income individuals and corporations

65. In both developed and middle-income countries, the reduction in trade taxes has been accompanied by higher revenues from other sources. It could therefore be argued that trade liberalization has not affected the tax base in these countries. However, important distributive effects may have been at work in this process, especially taking into account evidence of an almost universal reduction in taxation on high-income individuals. Practically all developed countries have indeed witnessed a significant reduction in the top marginal rate of income tax (graph 12.A). In the case of middle-income and developing countries, the reduction is even more spectacular (graphs 12.B and 12.C).

66. To some extent, the reduction in such taxes has responded to a deliberate attempt to improve the incentives to work, save and invest among high-income groups. In this sense some observers have argued that such a reform may be in the interest of all individuals, rich and poor. There is no simple relationship between tax rates and revenues, and lower tax rates can hence lead to higher or lower fiscal revenues depending on a variety of factors, such as the impact of tax reforms on growth. Nevertheless, it should be noted that taxes on middle and low incomes, social contributions and indirect taxes have tended to stabilize or even increase, and the reduction in top marginal income taxes has conceivably had a negative impact on income distribution.

The multilateral trade liberalization process and developing countries

67. The Final Act of the Uruguay Round of multilateral trade negotiations, signed in April 1994, was hailed as a historic event for a number of reasons. First, it was the longest trade negotiation ever (it began in 1986). Secondly, the high participation rate of developing countries had a bearing on its agenda and was a determining factor in formulating the rules of the new trading system. Thirdly, wider coverage of new areas such as services, intellectual property rights and investment measures was achieved. Moreover, a programme for agricultural trade liberalization and the full integration of trade in textiles and clothing within the GATT framework of rules was introduced. The agreement led to the creation of the World Trade Organization, which is responsible for strengthening the rule of law governing international trade and ensuring its application through an effective integrated dispute-settlement mechanism consolidated by more transparent and stronger rules. It has contributed to the reduction of tariffs on manufactured products, the gradual phasing-out of the Multi-Fibre Arrangement and voluntary export restraints, and the rolling back of non-tariff measures. In this context, several influential studies predicted the advent of a period of high growth, which would translate into an additional increase in world output and living standards worth hundreds of billions of dollars.

68. Today, the process of trade liberalization is not questioned: none of the countries studied has considered a return to less liberal trade practices. Even so, concern has been expressed about the effects of the Uruguay Round agreement, notably concerning its implications for developing countries. Developing countries now account for three-quarters of WTO membership (out of a total of 131 members), compared to two-thirds in 1982. These countries account for one-fifth of world exports, compared with one-tenth in 1982 (World Bank and WTO 1998). Yet there are several problems regarding both their participation in the multilateral system and the socio-economic implications of the trade agreements:

69. In this context, a number of initiatives have been taken to help the international integration of the least developed countries. For example, the United Kingdom is supporting, in collaboration with UNCTAD, projects for training officials of the trade and environment departments of developing countries.

70. Similarly, in 1997 the Commonwealth set up a Trade and Investment Access Facility, which among other functions, funds capacity-building in the field of legal implementation of the WTO Agreements. In 1998, the Commonwealth Secretariat set up a joint Task Force on Small States with the World Bank, at the request of Commonwealth Heads of Government at their meeting in Edinburgh in 1997, to examine the strategic concerns of small States. The first meeting of the Joint Task Force took place in Washington DC on 8 October 1998. The main objectives of the Task Force's project were to "analyse the implications for small states of recent significant changes in the global economy and régimes governing international trade, propose ways of overcoming problems (in terms of what the EU, WTO and other organizations might be asked to do) and set out measures that will enable small States to take advantage of opportunities created by these developments" (Commonwealth Secretariat, Final Report, Terms of Reference, 1998). In the same context, the Commonwealth Secretariat published its final report on "The trade implications for small vulnerable States of the global trade régime shift" in December 1998. The Joint Commonwealth Secretariat/World Bank Task Force held its second meeting in St. Lucia in February 1999 to discuss, among other issues, the first draft of the report on "Small States: A Composite Vulnerability Index".

71. More generally, under the WTO agreement, it is stipulated that the least developed countries recognised as such by the United Nations will only be required to undertake commitments and concessions to the extent consistent with their individual development, financial and trade needs or their administrative and institutional capabilities. In line with the Agreement governing the Structure of the WTO -- which recognises that there is a need for positive efforts designed to ensure that developing countries, and especially the least developed among them, secure a share in the growth in international trade commensurate with the needs of their economic development -- the General Council established the WTO Committee on Trade and Development on 31 January 1995, which in turn established the WTO Sub-Committee on Least-Developed Countries on 5 July 1995.

72. Important as they are, these efforts do not fully integrate the concerns of developing countries, in particular from the point of view of the socio-economic implications of the trade liberalization process. The risk is that, in the absence of a more pro-active approach, social support for trade liberalization in developing countries will be undermined. This would be detrimental for all the economies, at all stages of development, all the more so because developing countries can become the main engine of the world economy. This is why, at the last meeting of the Working Party, the government representative of Bangladesh suggested the creation of a globalization fund. The ILO could explore this important issue further.

D. The role of policies

73. The findings described above suggest that globalization means new business opportunities and therefore better economic prospects, but it can also entail significant adjustment costs. More generally, there is concern about employment stability at a time when firms adjust to the pressures arising from greater international competition. Some are well placed to gain from this process, while others may be worse off in either relative or absolute terms. However, none of the countries under study has considered protectionist measures with respect to trade and foreign direct investment as a solution to these problems. Instead, the challenge lies in selecting the appropriate mix of measures (by governments and social partners) to improve the returns from globalization while reducing the social costs. The country studies show that, in contrast to the view that national governments are powerless in the face of globalization, domestic policies can have a strong bearing on the relationship between globalization and social progress. There is indeed scope for improving the domestic competition environment and, in so doing, taking advantage of the business opportunities arising from globalization. More importantly, the four "social pillars" can provide a meaningful contribution to a successful globalization process:

The purpose of this section is to explain why and, more importantly, how these policies matter.

Enhancing business opportunities
arising from globalization

74. All too often, the employment debate focuses almost exclusively on the issue of labour-market reform. For example, it is sometimes claimed that greater labour-market flexibility can help increase the employment content of economic growth. Leaving aside the ambiguity of the term "flexibility", it is somewhat surprising that relatively little attention is devoted to the issue of how product-market reforms can help improve employment prospects. The policy thinking around globalization is no exception to this: it often ignores the fact that, for the business opportunities created by trade and foreign direct investment liberalization to materialize, it must be possible for individuals to innovate and create new enterprises for which an appropriate product-market environment must exist.

75. For example, trade liberalization will raise the profitability of export sectors, creating room for increasing output and employment in those sectors. This provides fertile ground for expanding capacity in existing firms, attracting foreign companies or creating entirely new businesses. The presence of internal competition barriers such as cartel-type arrangements between incumbent firms will weaken these favourable impacts. As a recent paper by the South African Department of Trade and Industry puts it:

76. As is well known, the import liberalization will hit import-competing sectors when imported goods compete with domestic production. But it is no less obvious that the process will also reduce import prices and, pari passu, raise consumers' real incomes. Given the relatively high consumption propensity for services, the real income gains so realized are often spent on services. In other words, import liberalization tends to raise the demand for domestic, often non-tradeable services. Therefore, creating a favourable competition environment for the delivery of services is probably a key factor for improving the effects of globalization. The development of small enterprises, which are dominant in certain service sectors, is considered in all the countries under study.

77. The financial intermediation role of banks also comes into play. The extent to which credit is allocated efficiently will shape firms' response to globalization. It is interesting to note in this respect that the Korean Government and social partners have identified the ties between big conglomerates (chaebol) and banks as an important factor behind the recent financial crisis. Some chaebols have long believed that they could be bailed out by commercial banks and, if necessary, government. This "too big to fail" mentality had apparently encouraged risky investments on the part of these groups. The Government, in consultation with the social, partners has undertaken important reforms regarding this issue. Thus, consolidated financial statements of the chaebol have to be presented in 1999. In the same spirit, management responsibilities in the case of management failure are to be clarified. In order to strengthen the rights of minority shareholders, listed corporations will have to appoint external directors. Also, intra-group debt guarantees have been phased out since April 1998, the intention being to reduce the ties between different parts of the conglomerates. In the case of Bangladesh, the financial sector is handicapped by weak institutional capabilities, a fragmented and ineffectual regulatory framework and lack of skilled staff. Commercial banks are saddled with sizeable non-performing assets, which seem to reflect inefficiencies in their intermediation role. But this problem is not without its solutions, as illustrated by the large number of banks specializing in loans to poor individuals that have been created over the past 15 years or so. They have been rather successful, and have also encouraged new initiatives among disadvantaged groups. The unique example of the Grameen Bank in Bangladesh and its record of performance in micro-credit delivery to the poor is a case in point. With an average loan size slightly above US$100, the borrowers, often women, secure a self-employed job. In this way, the Bank claims that 54 per cent of Grameen's borrowers have crossed the poverty line.(29) 

78. In short, competition policy and financial-sector reforms can play a key role in enhancing the benefits of globalization. These policies can also serve social objectives. For example, in South Africa, given the racially skewed and inequitable distribution of assets, competition policy has a developmental aspect by controlling the concentration of economic power (referred to as "public interest considerations").(30)  In Switzerland there are high-income professions -- such as medicine and law -- to which access is restricted. Following a comprehensive government programme in the field of competition policy, entry into these professions should be progressively facilitated, thereby contributing to job creation and a more equitable distribution of income.(31) 

Strengthening the four social pillars

1. Education and training

79. There is universal consensus that education and training are an important long-term response to the challenges of globalization. Globalization makes national policies related to the development of human resources more important than ever. There are several economic and social reasons for this. First, education and training have a strong bearing on the ability to innovate, develop new technologies, improve product-marketing, etc. Secondly, as shown in section C, one of the engines of globalization -- technological change -- tends to raise the demand for skilled labour to the detriment of unskilled labour. The increasing misfortunes of low-skilled workers in many countries, including those examined by the Task Force, bear testimony to this problem. Thirdly, as mentioned above, there is evidence that trade is associated with labour market turnover, and workers whose skills are firm- or sector-specific (often the low-skilled) are likely to suffer more than workers that have transferable, general skills. In a context of ever-changing economic conditions, an open economy requires a high degree of professional mobility. Finally, the issue of equality of opportunity -- notably in access to high-quality education -- is a crucial one from the point of view of social equity. Social mobility is extremely difficult for the poor in the absence of equal opportunities. There is also a political economy dimension to the issue of equality of opportunity: when social inequalities widen and feelings of insecurity grow, there is the possibility that a large segment of the population will oppose economic reforms in general and trade liberalization in particular, even though these may not be the main factors at work. In the presence of unequal education opportunities, this danger is understandably highly significant.

80. The Republic of Korea, a country that has elevated education to the rank of a national priority since the early stages of economic development, provides an interesting case in point. Access to secondary education was generalized in the 1960s and early 1970s. Since then, substantial efforts have been made in the area of tertiary education. Thus, the enrolment ratio for higher education almost doubled between 1975 and 1980, again more than doubled during the first half of the 1980s, and has continued to rise since then. The enrolment ratio for higher education rose from 9 per cent in 1970 to 58 per cent in 1995; during the same period the proportion of college graduates in the total population over age 25 increased remarkably from 4.9 per cent to 19.1 per cent. These trends have changed the structure of the labour market. Since 1980, the proportion of college graduates in the labour force has grown from 6.7 to 20.3 per cent, and that of high-school graduates from 21.8 to 42.9 per cent. Conversely, the number of middle-school graduates and those with fewer than nine years of schooling has shrunk significantly -- the share of such workers in the total labour force has nearly halved to slightly over one-third. Reflecting the priority devoted to education, educational attainment is now one of the highest in the world. According to various measures, including the incidence of Bachelor degrees, the Republic of Korea outperforms several industrialized countries. Better education has helped reduce the pressure towards labour market inequalities often associated with globalization.

81. In the Republic of Korea substantial progress has been made in the area of education in both quantitative and qualitative terms. According to some observers, however, comparatively less efforts have been devoted to improving vocational training. In the present vocational training system, employers are required to spend a given proportion of the wage bill on training. The proportion in question, determined by the Ministry of Labour, varies across industries, but generally represents somewhat less than 2 per cent of the wage bill. A training levy is imposed on employers that do not meet the requirement. It seems that many employers prefer to pay the levy rather than meet their training obligations. Importantly, the system is rather centralized in that the Ministry of Labour is designated as the relevant authority to approve training plans, although it has to consult a "deliberation" committee.

82. In Switzerland equal access to a high-quality education and training system is ensured, partly explaining the fact that Swiss firms have specialized in niche, high value added markets. These "niche" markets are characterized by a high degree of product differentiation, which has helped sustain enviably high wages and good working conditions. One important characteristic of the Swiss education system are the relatively low drop-out rates. Finally, the dual system that combines theoretical classroom courses with practical training and on-the-job experience has proven to be effective in facilitating the transition from school to work.

83. Vocational training can help adapt skills in the face of ever-changing economic conditions. It can also upgrade competencies to meet the challenges of technological change. However, even though the importance of training is often recognized, practical action faces substantial implementation obstacles in most if not all the countries under study. First, for training to be useful, it must be designed in a way that takes into account labour market requirements, which is not an easy task. Secondly, there is always the risk that, once trained in one enterprise, workers will be hired by another enterprise -- the so-called free-riding problem. This can be a powerful disincentive to training at the enterprise level, which is often the most relevant one.

2. Social safety nets

84. A well-functioning social safety net serves two complementary purposes:

85. Recently, in two of the countries under study -- Chile and the Republic of Korea -- the social safety net has been strengthened. The characteristics of the Chilean insertion into the international economy imply a relatively high degree of labour market instability for significant parts of the active population. There is, however, relatively little unemployment protection in Chile. There are as yet practically no unemployment benefits (and, moreover, as discussed below, employment protection legislation is relatively lax). As a result, given that many services such as high-quality health and education have to be paid for, even temporary job loss can have a considerable impact on the affected households. A proposal for the introduction of a "System of Protection for the Unemployed Worker" (PROTRAC) based on individual savings accounts and a joint contribution by employers and workers, is currently under discussion. In the Republic of Korea, until now the role of the State as a provider of social benefits has been modest (except in the case of health care, a system guaranteed by the State to all individuals). For example, the Korean pensions system is mainly company-based. Until the recent creation of the Wage Claim Guarantee Fund, retirement allowances arising from the pensions system were not guaranteed by the State. As a result, the system covers only some 55 per cent (as of April 1998) of all workers at retirement age. Given the heavy reliance on enterprise benefits, the share of government expenditure on social security and welfare was only 6.1 per cent in 1996, or less than 1 per cent of GDP, a low figure by international comparison. Since the advent of the crisis, important steps have been taken towards the creation of a social safety net. In particular, the unemployment benefits system has been reinforced, government support for work-sharing efforts aimed at preventing lay-offs has been made available, company-pensions rights have been strengthened and the Wage Claim Guarantee Fund has been created. The adoption of these measures has reduced the pain of adjustment while also reducing opposition to the reform process under way.

86. Although the importance of social safety nets is widely recognized, they have to face the difficult challenge of helping low-income groups which, according to the evidence presented above, seem to be on the rise. In addition, it seems that traditional safety nets such as the family have been weakened, thereby raising the demand for government support. The case of Mauritius vividly illustrates these emerging problems. Mauritius is referred to as a welfare state in government documents: it has free education, free health services and a free non-contributory old-age pension for everyone above age 60. There are also payments to the disabled, pensioned widows, orphans, destitute families with dependants, unemployed heads of low-income households, and low-income households; food aid for around one-quarter of all households, as well as subsidized rice and flour prices. Social expenditure has accounted for approximately 40 per cent of government expenditure in recent years, with education responsible for approximately 17 per cent of expenditure, health for 8 per cent and social welfare for 19 per cent (with non-contributory pensions accounting for around 70 per cent of social welfare expenditure). This emphasis on social welfare is necessary because political stability requires social cohesion in the light of Mauritius' ethnic and religious diversity and small island setting. As stated in a recent official document, it is likely that this concern for social welfare has also contributed to economic development. Despite this positive picture, there is concern over the emerging social challenges facing the country, such as the increasing incidence of divorce and suicide, as well as drug addiction and alcoholism.

87. Another thorny issue is how low-income groups can be helped while at the same time maintaining the incentive for these groups to participate actively in the labour market. In order to address this issue, the Swiss Government has developed a set of active labour market programmes with the aim of maintaining the employability of unemployed individuals. In view of the international debate on the advantages and disadvantages of different support systems such as negative income tax and the provision of a minimum income, countries have generally opted for rather pragmatic approaches combining work-availability tests, the provision of means-tested benefits and social benefits that make work pay.

88. Finally, it is sometimes argued that the tax base in many developing countries is too narrow, making it difficult to create social safety nets. In addition, as shown in the studies of Bangladesh and Mauritius, the reduction of import tariffs can strongly affect government revenues to an extent that depends on import elasticities with respect to price changes. For example, in Mauritius, while taxes on international trade accounted for approximately 52 per cent of government revenue in 1980, the figure was 31 per cent in 1996-97 (graph 11). In 1995, taxes on international trade accounted for approximately 1 per cent of GDP in developed countries and Singapore, 6 per cent in the Republic of Korea, 12-16 per cent in Malaysia and Thailand, and 24 per cent in other non-LDC African countries. However, given the stimulatory effects of globalization, other sources of revenue should expand. The rise in real incomes of the richest households that has been observed in most of the countries under study should provide ample room for improving tax revenues. Unfortunately, the trend is towards the creation and/or increase in value added taxes, which are believed to be regressive from the point of view of income distribution.

3. Labour law and industrial relations

89. Globalization raises business opportunities in certain sectors, while reducing them in others. Employment must therefore be sufficiently adaptable to facilitate adjustment. The adaptability of employment can be "numerical", meaning that employment levels adjust to changes in demand and output. But it can also be "functional", i.e. employment adjusts through internal redeployment and changes in work organization. At the same time, labour market institutions need to ensure that fundamental workers' rights and labour standards are not undermined. This is important not only from the point of view of workers' protection, particularly the most vulnerable ones, but also for reasons of economic efficiency and to ensure a degree of social stability. There is of course a difficult trade-off between numerical and functional adaptability, but international experience suggests that practical solutions can be found to each particular historical and institutional context.

90. In two of the countries under study that have faced a sizeable restructuring challenge -- the Republic of Korea and South Africa -- labour legislation and regulations have been substantially modified with a view to allowing greater scope for labour adjustments, while ensuring an adequate degree of workers' protection. In the Republic of Korea, following the successive reforms of 1997-98, conditions for dismissals have been eased somewhat. Dismissals for "urgent managerial reasons" have been made possible: in the past, the law was very restrictive in this respect, and mergers, acquisitions and takeovers can constitute urgent managerial reasons. In any case, the law provides that every effort has to be made to avoid dismissals. In particular, management should, in consultation with workers' representatives, explore alternative ways such as lower working hours, wage moderation, employment relocation and retraining. A committee on working hours should be created, with a view to identifying ways of stabilizing employment through a reduction of working time. Moreover, rational and fair standards must be set to select the workers to be laid off and, in particular, there should be no discrimination on the basis of gender. Sixty days prior to dismissal, employers must notify unions or workers' representatives of the ways to avoid dismissal and the standards to select who will be laid off, and have sincere discussions with them. Economic conditions permitting, employers should re-employ dismissed workers. In South Africa, the Labour Relations Act of 1995 allows dismissals for fair reasons such as company restructuring and according to a fair procedure.

91. The issue of the regulation of non-standard forms of employment such as dispatched labour (Republic of Korea), contract labour (Chile), on-call work (Switzerland), part-time and fixed-term contracts is a controversial one. As stressed earlier, these new forms of employment account for a large proportion of the new jobs that have been created over the last few years. They may in certain cases respond to the demands of both enterprises and the individuals concerned. However, in certain contexts they can be subject to abuse and fraud. Countries have tried to face this difficult challenge in various ways:

92. A related issue that arises in most of the country studies but which is of wider relevance, is whether collective agreements should be extended to non-parties and, if so, under what conditions. Globalization requires a certain degree of consensus and social dialogue to implement practical solutions. Collective bargaining is an appropriate instrument in this respect, but it cannot take place in certain industries and small enterprises where union presence is weak. In those sectors and enterprises, should wages and working conditions be set through individual contracts with minimum standards set by national legislation, or should collective agreements reached at the sectoral level be extended to them? In Chile and the Republic of Korea, collective bargaining takes place mainly at the enterprise level; in its absence, minimum wages and standards set by the government have to be applied. In South Africa, collective agreements can be extended to non-parties under certain conditions. Non-parties to the agreement, however, can request exemption. In Switzerland extension is also possible, but conditions are considered to be relatively stringent. Given that there is no national minimum wage, there is currently a debate over whether extension mechanisms should be strengthened in view of the perceived risks of downward pressure on the wages and working conditions of low-skilled workers that might arise as a consequence of the recently concluded bilateral agreement on the movement of workers between Switzerland and the European Union.

4. Core labour standards

93. There has been considerable international discussion on the controversial issue of core labour standards and international trade. This is largely due to the linkage that is made in some quarters between access to industrialized country markets by developing countries and their observance of minimum labour standards. Many citizens and governments in industrialized countries feel that developing countries benefit from unfair competition when they export goods and services without meeting minimum labour standards. In the developing world, on the other hand, many feel that linking trade and labour standards is done for protectionist purposes. It is not that those in the developing world are opposed to labour standards; rather, they believe that establishing a direct link between labour standards and trade is simply an excuse to restrict the flow of goods and services from developing to developed countries. These disagreements and discussions have also been reflected in discussions in the ILO Governing Body.

94. The recent ILO Declaration on Fundamental Principles and Rights at Work and its Follow-up provides the framework to move forward on this issue. It seems important for the success of the promotional nature of the Declaration that member countries understand that it is in their own interest to enforce core labour standards. Indeed, as shown in the country studies, the forces associated with globalization and trade liberalization have increased the importance of the core standards. For example:

95. The country studies carried out by the Task Force include information and analysis on three of the four fundamental rights covered by the ILO Declaration on Fundamental Principles and Rights at Work (only forced or compulsory labour was not covered, as it is not important in the countries studied). Where relevant, the situation on the core standards was documented in the studies, and analyses were undertaken of how observance of these fundamental rights contributed to both development and international competitiveness.

96. The Bangladesh garment industry provides an interesting experience of the fight against child labour. In order to deal with this situation, the Bangladesh Garment Manufacturers Association concluded a Memorandum of Understanding for the elimination of child labour in the garment industry. This provides a good example of how child labour can be eliminated from specific export industries without hurting the children who are displaced, although it must be admitted that industry-specific programmes do not address the problem of child labour in its entirety.

97. All of the country studies collected information on industrial relations and union density rates. Several of them provide evidence of the constructive roles that the social partners have played in promoting economic development, as follows.

98. Several of the country studies analyse the important role women have played in their country's economic development and in increasing their country's international competitiveness. For example, in Mauritius over the past 15 years, women entered the labour market so rapidly that their share of total employment rose from 22 to 33 per cent between 1982 and 1995. Similarly, in Bangladesh the vast majority of the workers employed in the rapidly-expanding garment sector are women. It is important to note that these and other countries need to address a considerable continuing degree of labour market inequality between men and women. For example, in Mauritius, as elsewhere, women's rapidly increasing labour market qualifications (such as improved education levels and years of work experience) should lead to rapid commensurate improvements in women's labour market position, something which does not always occur.

E. Follow-up and ILO action

99. The next step will be the publication of the complete synthesis report, together with the seven country case-studies.

100. Several ideas for further activities were put forward at the national tripartite meetings at which the country studies were discussed. First, it has been suggested that there should be follow-up on the policy issues raised in the studies. The MDTs would be best placed to carry out activities in this regard. In the case of Bangladesh, a follow-up on selected policy issues raised in the country study is being conducted jointly by the Dhaka Office and the Employment Sector, with the financial support of UNDP. Secondly, members of the Governing Body have urged the Task Force to present the main results of certain country studies at subregional meetings in order to make known the experience of the countries in question. Thirdly, other international organizations have expressed interest in the studies. It may therefore be useful to arrange joint meetings with them in order to discuss the methodologies and findings of similar research and explore avenues for carrying out complementary work.

101. One clear outcome of this work is the importance of undertaking further research in several important areas, which the Working Party may wish to consider for probable inclusion in the programme of work for the next biennium, as follows.

102. While both the country studies and the synthesis report have focused on domestic policy responses to the challenges posed by globalization, the question of whether measures should also be considered at the international level arises. For example, there is a debate on possible solutions to the volatility of short-term capital flows and the Governing Body may want to be informed and discuss, from an ILO perspective, the different proposals made. This is an important issue for the Organization, given that volatile capital flows may have a strong bearing on employment and social progress in member countries. More generally, the ILO could take a stronger role in ensuring that social and labour market dimensions are duly taken into account in international debates on financial, trade, and macroeconomic issues.

Geneva, 6 November 1999.


References

A. ILO Task Force studies

Studies on the social dimensions of globalization:

ILO Task Force, 1998, Chile (published as a working paper, Spanish version in press).

ILO Task Force, 1999a, Bangladesh (in press).

ILO Task Force, 1999b, Mauritius (in press).

ILO Task Force, 1999c, Republic of Korea (in press).

ILO Task Force, 1999d, South Africa (in press).

ILO Task Force, 1999e, Switzerland (in press).

ILO Task Force, 1999f, Poland (in press).

Bhalla, P. 1998. Globalization press review, mimeo, Geneva, ILO Task Force.

Palpacuer, F. 1998. Competitiveness, organizational changes and employment: A review of current trends and perspectives, mimeo, Geneva, ILO Task Force.

Torres, R. 1998. Studies on the social dimensions of globalization: Conceptual framework, mimeo, Geneva, ILO Task Force.

B. Other literature

Addison, J.; Fox, D.; Ruhm, C. 1996. "Trade sensitivity, technology and labor displacement", Working Paper No. 5621, Cambridge, NBER.

Altman, R.C. 1998. "The nuke of the 90s", in The New York Times Magazine, March.

Bakkenist Management Consultants, 1998. Temporary work businesses in the countries of the European Union, Brussels, International Confederation of Temporary Work Businesses.

Bank for International Settlements 1998. Central Bank survey of foreign exchange and derivatives market activity in April 1998: Preliminary global data, Basel.

Borensztein, B.; De Gregorio, J.; Lee, J.-W. 1995. "How does foreign direct investment affect economic growth", Working Paper No.5057, Cambridge, NBER.

Charnovitz, S. 1987. "The influence of international labour standards on the world trading regime: A historical overview", in International Labour Review, Vol. 126, No. 5, pp. 565-584.

Currie, J.; Harrison, A. 1997. "Sharing the costs: The impact of trade reform on capital and labor in Morocco", in Journal of Labor Economics, Vol. 15, No. 3, July, pp. S44-S71.

De Mello, L. 1997. "Foreign direct investment in developing countries and growth: A selective survey", in Journal of Development Studies, Vol. 34, No. 1, Oct., pp. 1-34.

European Commission 1998. European economy, Brussels, Directorate-General for Economic and Financial Affairs.

Governing Body, ILO: GB.267/WP/SDL/1/1; GB.268/WP/SDL/1/2; GB.270/WP/SDL/1/2; GB.273/WP/SDL/2.

De Long, B. 1998. "What's wrong with our bloody economies", mimeo, January.

Delsen, L. 1995. "Atypical employment: An international perspective. Causes, consequences and policy", Groningen, Wolters-Noordhoff.

The Economist, 16 Jan. 1999.

Edwards, S. 1998. "Openness, productivity and growth: What do we really know?", in Economic Journal, Vol. 108, Mar., pp. 383-398.

Eurostat, various years: Labour force survey, Brussels.

Feenstra, R.; Hanson, G. 1995. "Foreign investment, outsourcing and relative wages", Working Paper No.5121, Cambridge, NBER.

Hanson, G.; Harrison, A. 1995. "Trade, technology, and wage inequality", Working Paper No. 5110, Cambridge, NBER.

Humphrey, J. 1998. "Globalization and supply chain networks in the auto industry: Brazil and India", paper prepared for the International Workshop on "Global production and local jobs", Geneva, International Institute for Labour Studies.

ILO, Geneva, 1996. World Employment 1996/97: National policies in a global context.

ILO, Geneva, 1998. Declaration on Fundamental Principles and Rights at Work and its Follow-up.

ILO, various years: Panorama laboral, Lima.

IMF, 1998. Economic Outlook, Oct., Washington.

IMF, 1999. International Financial Statistics, CD-ROM, Feb., Washington.

Knight, M. 1998. "Developing countries and the globalization of financial markets", Working Paper No. 105, Washington, International Monetary Fund.

Lateef, A. 1997. "Linking up with the global economy: A case study of the Bangalore software industry", Discussion Paper No. 96, Geneva, International Institute for Labour Studies.

Maddison, A. 1995. "Monitoring the world economy 1820-1992", Paris, OECD.

OECD, various years: Employment outlook, Paris.

Robbins, D. 1996. "Evidence on trade and wages in the developing world", Technical Paper, No. 119, Paris, OECD.

Rodrik, D. 1997. "Has globalization gone too far?", Washington DC.

Servais, J.-M. 1989. "The social clause in trade agreements: Wishful thinking or an instrument of social progress?", in International Labour Review, Vol. 128, No. 4, pp. 423-432.

Singapore Ministerial Declaration, World Trade Organization Ministerial Conference, Singapore 9-13 Dec. 1996. WT/MIN(96)/DEC/W, 13 Dec. 1996.

Tanzi, V. (1995). "Taxation in an integrated world", International Monetary Fund Washington DC.

UNCTAD, various years: World investment report, New York/Geneva.

UNIDO Industrial Statistics database, Vienna.

Weller, J. 1998. Los mercados laborales en América Latina: Su evolución en el largo plazo y sus tendencias recientes, Santiago, ECLAC.

Wood, A. 1997. "Openness and wage inequality in developing countries: The Latin American challenge to East Asian conventional wisdom", in World Bank Economic Review, Vol. 11, No. 1, pp. 33-57.

World Bank, 1998. World Development Indicators, CD-ROM, Washington.

World Trade Organization (1998), "Implementation of WTO provisions in favour of Developing Country Members", Note by the Secretariat, Committee on Trade and Development, WT/COMTD/W/35.


Table 1. Merchandise exports as percentage of GDP in sample countries

(exports and GDP (PPP) at constant prices)


1820

1870

1913

1929

1950

1973

1992

1996 1


France

1.3

4.9

8.2

8.6

7.7

15.4

22.9

26.0

Germany

n.a.

9.5

15.6

12.8

6.2

23.8

32.6

n.a.

Netherlands

n.a.

17.5

17.8

17.2

12.5

41.7

55.3

60.4

United Kingdom

3.1

12.0

17.7

13.3

11.4

14.0

21.4

25.4

Total Western Europe 2

n.a.

10.0

16.3

13.3

9.4

20.9

29.7

34.6

Spain

1.1

3.8

8.1

5.0

1.6

5.0

13.4

20.3

USSR/Russian Federation

n.a.

n.a.

2.9

1.6

1.3

3.8

5.1

n.a.

Australia

n.a.

7.4

12.8

11.2

9.1

11.2

16.9

18.1

Canada

n.a.

12.0

12.2

15.8

13.0

19.9

27.2

37.2

United States

2.0

2.5

3.7

3.6

3.0

5.0

8.2

10.0

Argentina

n.a.

9.4

6.8

6.1

2.4

2.1

4.3

6.8

Brazil

n.a.

11.8

9.5

7.1

4.0

2.6

4.7

4.9

Mexico

n.a.

3.7

10.8

14.8

3.5

2.2

6.4

9.0

Total Latin America 3

n.a.

9.0

9.5

9.7

6.2

4.6

6.2

8.1

China

n.a.

0.7

1.4

1.7

1.9

1.1

2.3

2.4

India

n.a.

2.5

4.7

3.7

2.6

2.0

1.7

2.2

Indonesia

n.a.

0.9

2.2

3.6

3.3

5.0

7.4

7.1

Japan

n.a.

0.2

2.4

3.5

2.3

7.9

12.4

13.2

Republic of Korea

0.0

0.0

1.0

4.5

1.0

8.2

17.8

23.8

Taiwan, China

-

-

2.5

5.2

2.5

10.2

34.4

n.a.

Thailand

n.a.

2.1

6.7

6.6

7.0

4.5

11.4

12.5

Total Asia 4

n.a.

1.3

2.6

2.8

2.3

4.4

7.2

7.4

World

1.0

5.0

8.7

9.0

7.0

11.2

13.5

16.0


Notes:

1 Data for the Netherlands, Australia, Brazil, China, Indonesia, Total Western Europe, Total Latin America, Total Asia and World refer to 1995 instead of 1996.

2 Total Western Europe includes Austria, Belgium, Denmark, Finland, France, Germany, Italy, Netherlands, Norway, Sweden, Switzerland and the United Kingdom. 1995 data for total Western Europe do not include Germany.

3 Total Latin America includes Argentina, Brazil, Chile, Colombia, Mexico, Peru and Venezuela.

4 Total Asia includes Bangladesh, Myanmar, China, India, Indonesia, Japan, Pakistan, Philippines, Republic of Korea, Taiwan, China and Thailand. 1995 data for total Asia does not include Taiwan, China and Myanmar.

Data from 1820 to 1992 come from Maddison (1995). They are calculated as the ratio of exports in US$ and GDP at PPP in 1990 constant prices.

Data for 1996 are ILO Task Force estimates based on World Bank (1998) data. The series was obtained after adjustment for consistency with the Maddison series.

Sources: A. Maddison (1995) and ILO Task Force based on data from World Bank (1998), World Development Indicators.


Table 2. Comparison of world exports and turnover in foreign exchange markets

(billions of US$, 1989-1998)


 1989

 1992

 1995

 1998


Ratio of net turnover in foreign exchange markets to exports

55.6

63.5

69.7

78.0

Average daily net turnover in foreign exchange markets

590

820

1190

1490

Exports of goods and services, daily average

10.6

12.9

17.1

19.1


Note: Figures for net turnover in foreign exchange markets refer to a number of reporting sample countries. Turnover data and turnover/export ratios are thus underestimations. Export data for 1998 are preliminary.

Source: ILO Task Force based on data from Bank of International Settlements (1998), World Bank (1998), World Development Indicators and IMF (Oct. 1998), World Economic Outlook.


Table 3. Correlation between capital flows and real exchange rates of selected countries


Correlation between financial capital flows in one quarter and real exchange rates in the following quarter

Correlation between the "basic" balance of payments in one quarter and real exchange rates in the following quarter


1981Q1 to 1989Q4

1990Q1 to 1998Q4

1981Q1 to 1989Q4

1990Q1 to 1998Q4


India

-0.0

+0.3*

+0.0

+0.2

Indonesia

-0.1

+0.6*

+0.6*

+0.0

Mexico

-0.2

+0.1

+0.5*

+0.3*

Philippines

-0.1

+0.3

+0.1

+0.3*

Republic of Korea

-0.3

+0.5*

+0.7*

+0.1

South Africa

-0.3

+0.0

+0.4*

+0.1

Thailand

-0.0

+0.2

+0.3*

+0.1


Note:

The table shows correlation coefficients based on quarterly data, a "*" meaning that the coefficient is significant at the 10 per cent level. Financial capital flows include net portfolio investments, investments (excluding foreign direct investment) by banks and other private agents and errors and omissions. The "basic" balance of payments is the current account balance plus net foreign direct investment flows.

Source: ILO Task Force estimates based on IMF (Feb. 1999), International Financial Statistics.


Table 4. Household income distribution before and after trade liberalization


Country and years 1

Gini coefficient


Ratio of income dispersion 2


pre-liberalization

post-liberalization

pre-liberalization

post-liberalization


Bangladesh (1988/89, 1995/96)

0.28

0.31

7.0

8.8

Chile, first liberalization phase (1970, 1980) 3

0.43

0.47

9.1

10.6

Chile, second liberalization phase (1987, 1996)

n.a.

n.a.

13.3

13.8

Mauritius (1986/87, 1996/97)

0.40

0.39

7.8

7.6

Republic of Korea (1985, 1997)

0.35

0.29

n.a.

n.a.


Notes:

1 The parenthesis gives the pre-liberalization and post-liberalization years for which the data are presented. Reflecting data availability problems, in the case of the second liberalization phase of Chile, the pre-liberalization year is 1987 and not 1985, which would have been preferable.

2 Ratio of income of the richest 20 per cent households to the poorest 20 per cent households.

3 Santiago Metropolitan Region.

Source: ILO Task Force based on national household surveys.


Table 5. Part-time work as a share of total employment


Mid-1980s

Around 1990

1997 or latest available


EU-12 1

10.7 (1987)

11.4 (1990)

16.9 (1997)

Austria

8.4 (1983)

8.8 (1989)

14.9 (1997)

Sweden

24.8 (1983)

23.2 (1990)

23.8 (1997)

Finland

8.3 (1983)

7.2 (1990)

11.4 (1997)

Norway

29 (1983)

26.6 (1990)

26.5 (1997)

Switzerland

24.4 (1991)

28.3 (1997)

United States

18.4 (1983)

17.3 (1990)

16.9 (1998)

Canada

16.8 (1983)

17.0 (1990)

19.0 (1997)

Australia

17.5 (1983)

21.6 (1990)

25.1 (1997)

Israel

28.1 (1987)

29.3 (1990)

25.8 (1996)

Japan

16.2 (1983)

17.6 (1989)

Singapore

3.3 (1997)

New Zealand

15.3 (1983)

18.8 (1990)

23.7 (1998)

Argentina

17.6 (1987)

Mauritius

11.7 (1995)


1 EU-12 includes Belgium, Denmark, France, Germany, Greece, Ireland, Italy, Luxembourg, Netherlands, Portugal, Spain, United Kingdom.

Sources: ILO, OECD (various years), Employment Outlook, Eurostat (various years), Labour Force Survey and national labour surveys.


Table 6. Temporary employment as a share of total salaried employment


Mid 1980s 2

Around 1990 3

1997 or latest available


EU-12 1

8.9

10.2

12.2 (1997)

Austria

7.8 (1997)

Sweden

9.7

13.5 (1997)

Finland

11.2

13.1 (1991)

17.1 (1997)

Norway

11.1 (1995)

Turkey

5.2

United States

14.4 (1996)

Canada

8 (1989)

11 (1995)

Australia

21.2

19.3

24.1 (1996)

Japan

10.5

10.7 (1988)

11.4 (1998)

Singapore

1.9 (1997)

Republic of Korea

17.2 (1985)

16.8

14.2 (1998)

Argentina

8.9

10.2 (1996)

Chile

16.8 (1996)

Colombia

15.7

18 (1996)


Notes:

1 EU-12 includes Belgium, Denmark, France, Germany, Greece, Ireland, Italy, Luxembourg, Netherlands, Portugal, Spain, United Kingdom.

2 1987 unless otherwise specified.

3 1990 unless otherwise specified.

Republic of Korea: Temporary employment refers to daily workers.

Singapore: Temporary employment refers to full-time employment only.

USA: Temporary employment refers to contingent workers (individuals who do not perceive themselves as having an explicit or explicit contract for ongoing employment) as a share of total employment.
Argentina, Chile and Colombia: Temporary employment refers to workers with written work contract only.

Sources: ILO (1997), OECD (various years), Employment Outlook, Eurostat (various years), Labour Force Survey, Bakkenist Management Consultants (1998), Delsen (1995) and national labour surveys.


Table 7. Indicators for "unprotected" salaried employment

(per cent shares)


Early 1990s

1997 or latest available


Argentina

21.7 (1990)

34 (1996)

Bolivia

28 (1991)

34.8 (1997)

Brazil

31.8 (1992)

32.6 (1997)

Chile

17 (1990)

22.3 (1996)

El Salvador

59.1 (1994)

61.3 (1997)

Mexico

43.4 (1990)

49.6 (1997)

Peru

25.5 (1990)

34.1 (1996)


Notes and sources:

Brazil: Private sector employees sem carteira as a share of salaried employment, IBGE (Pesquisa Nacional por Amostra de Domicílios, various issues).

Argentina: Private employees without written work contract as a share of total private employment, Gran Buenos Aires, ILO (1997) based on data from INDEC.

Bolivia: Employees not covered by labour and social legislation as a share of total salaried employment, six Metropolitan Areas, Weller (1998) based on data from ECLAC.

El Salvador: Employed persons not covered by the Instituto Salvadoreño del Seguro Social as a share of total employment, all urban areas, Weller (1998) based on data from ECLAC.

Mexico: Employed without social benefits as a share of total employment, urban areas, Weller (1998) based on data from ECLAC.

Peru: Private employees without written work contract as a share of total private salaried employment, ILO (1997) based on the Household Survey.

Chile: Employees without written work contract as a share of total salaried employment, national, ILO Task Force (1998) based on data from the CASEN survey.


Table 8. Taxes on international trade and government revenues


Average
1976-1985

Average
1986-1995

Mean
difference

Proportion of
countries with
negative
difference (%)


Taxes on international trade
(% of current revenues)

Low-income countries (31) 1

34.1

28.6

-5.5

74.2

Middle-income countries (54)

23.7

19.3

-4.3

61.1

High-income countries (31)

8.3

6.4

-1.8

83.9

Total tax revenues (% of GDP)

Low-income countries (32)

14.3

13.3

-1.0

53.1

Middle-income countries (53)

19.3

20.6

+1.3

43.4

High-income countries (28)

25.6

27.5

+1.9

17.9

Trade (% of GDP)

Low- income countries (50)

59.9

64.3

+4.4

46

Middle-income countries (61)

84.7

89.1

+4.4

37.7

High-income countries (29)

87.1

87.5

+0.4

55.2

1 The total number of countries with usable observations is given in parenthesis.

Note: The per capita income threshold levels for the three categories are those of the World Bank in 1996: low-income countries have a GNP per capita (in 1996) of $785 or less; middle-income countries are in the range $786-$9635; and high-income countries are above $9635.

Source: ILO Task Force, based on 1997 World Bank Development Indicators CD-ROM.


Graph 1. World exports of goods and services as a share of world GDP

Graph 2. Exports of goods and services as a share of GDP by group of countries
(1987-1995, current prices)

Source: World Bank (1998), World Development Indicators

Graph 3. World exports of services as a share of total world exports

Note: 1998 data are preliminary

Source: ILO Task Force, based on data from IMF (Oct. 1998), World Economic Outlook and World Bank (1998), World Development Indicators.

Graph 4. Trends in capital flows

A. Gross foreign direct investment
(% of GDP, PPP)

B. Net capital flows to developing and transition countries
(in billions of U.S. dollars, 1970-1996)

Note:

Other capital flows include short- and long-term trade credits, loans, currency and deposits and other accounts receivable and payable.

Source: ILO Task Force based on data from World Bank (1998), World Development Indicators and Knight (1998).

Graph 5. Switzerland: Labour market characteristics of the industrial specialization
(1994)

Composition of exports and imports by level of product differentiation

Labour-market characteristics of industrial activities (low-differentiated/homogenous and differentiated products)

Note:

1 Niche industries: differentiated products (food, drinks and tobacco, chemicals, machinery and electronics, watches and jewellery.

Other industries: low differentiation of products (textile, apparel, wood, paper, printing, shoes and leather, rubber and plastic products, non-metallic minerals, metals, other manufacturing).

Source: ILO Task Force (1999e).

Graph 6. Bangladesh: Diverging trends in real per capita income of richest and poorest households
(in Taka, 1985/86 to 1995/96)

Source: ILO Task Force (1999a)

Graph 7. Chile: Estimated determinants of wage and income inequalities
(1960-1996) 

Source: ILO Task Force (1998)

Graph 8. South Africa: Labour market performance of manufacturing sectors by trade orientation
(total change in per cent during 1994-1997)

Notes:

Revealed comparative advantage is measured as the ratio of net trade flows to total trade (imports plus exports). Manufacturing sectors with a positive revealed comparative advantage in 1997 have been classified as "export-oriented", while those with a negative revealed comparative advantage have been classified as "import-competing".

Employment variation is corrected for the break in January 1996 consecutive to the inclusion of TBVC data for the manufacturing sector. The cumulated variation of employment was calculated from a composite of employment variation from 1994 to December 1995 and employment variation from January 1996 to 1997.

Labour productivity is calculated as gross output per employed person.

Source: ILO Task Force (1999d).

Graph 9. Republic of Korea: Estimated impact of trade on employment by level of education
(in thousands, 1990) 

Note: College Graduates & over includes two-year college graduates.

Source: ILO Task Force (1999c)

Graph 10. Trade and inter-sectoral employment flows
(Average incidence of net inter-sectoral employment changes in per cent, 1986-95)

Note:

The figures refer to the number of workers that move between manufacturing sectors (at 3-digit ISIC level) per job created in the total manufacturing sector of 77 countries. The higher the figure, the greater the incidence of net inter-sectoral employment flows. Countries are ranged into three groups: the first includes those where the trade-GDP ratio rises significantly faster than the average; the second those where the change in the trade-GDP ratio comes close to the international average; countries where trade-GDP ratios grow less than average belong to the last group (see text for more details).

Source: ILO Task Force based on data from the UNIDO Industrial Statistics database.

Graph 11. Mauritius: Percentage of government current revenue from international trade
(1980-1997)

Notes:

Dynamic Asian economies include the Republic of Korea, Hong Kong, Malaysia, Singapore and Thailand. No data on taxes on international trade is available for Hong Kong.

Non-Least Developed African Countries include Algeria, Bostwana, Cameroon, Republic of Congo, Côte d'Ivoire, Egypt, Gabon, Ghana, Kenya, Libya, Morocco, Namibia, Nigeria, Senegal, Seychelles, South Africa, Swaziland, Tunisia, and Zimbabwe.

Totals for Dynamic Asian economies and non-LDC African countries are unweighted averages.

Source: ILO Task Force based on data from World Bank (1998), World Development Indicators and national data from Mauritius.

 

 

 


Appendix

Summaries of the country studies

Bangladesh

One important issue in the international debate on globalization is whether there is a risk of marginalization of developing countries. There is some concern that the economic and social structures of these countries are too weak to sustain import liberalization while their export prospects would allegedly be narrowly based.

The experience of Bangladesh is interesting in this respect. Per capita income is, on average, less than $300 per year and one Bangladeshi out of four is officially estimated to be poor. Over 60 per cent of the population over age 15 is illiterate, while child labour is widespread despite the Government's commendable efforts: according to official statistics, over 6 million children are at work, that is, one child in five. Worryingly, nearly 5 per cent of young children (aged 5 to 7) are reported to be working.

Against this background, the country embarked in the early 1990s on an ambitious process of trade liberalization, which has translated into an effective reduction of import tariffs, the abolition of many quotas and other non-tariff barriers and the adoption of measures to promote exports and encourage foreign direct investment, notably through the creation of two export processing zones (EPZs). These measures are all the more impressive in that, until the early-1980s, import substitution was regarded as a key aspect of the development strategy. The issue arises, therefore, of whether this radical reorientation of economic policies may have contributed to improving the economic and social prospects of the country.

The study shows that trade liberalization has gone hand-in-hand with positive developments in certain areas:

These results, modest as they are, have marked a departure from the previous situation of economic stagnation. Moreover, the political context of these achievements is part of a move away from martial law towards the restoration in the 1980s of a multi-party democratic system.

Unfortunately, however, trade liberalization and the associated growth process have also been accompanied by increased inequalities. It is indeed estimated that the average real income of the 20 per cent poorest households has practically stagnated since 1989-90, while the living standards of the 20 per cent richest households have made a leap forward: the average per capita income of these households has increased by over 30 per cent. This may explain why both poverty rates and the incidence of child labour have not been reduced much. Development has also been unequal between urban and rural areas. Pockets of development around the capital and the two EPZs have enjoyed a dynamic economic environment compared with the rest of the country. According to a conceptual framework developed for the purposes of the study, the trends towards greater inequality may have been caused by the fact that the stimulatory effects associated with trade liberalization have operated in the context of a "dual" economy, one where rural and urban sectors follow independent development paths.

There is also apprehension over job losses in the import-competing manufacturing sector. In the same context, some industries are finding it difficult to withstand increased imports of low-priced or dumped products, arising from smuggling with border areas of India. Furthermore, privatization has led to large-scale retrenchment of workers, while according to some findings little efficiency gains have been realized. Indeed, the change in ownership has generally not been accompanied by improved management of the privatized enterprises.

Social conflicts in the form of nationwide "political" strikes (the so-called hartals) have tended to intensify of late, which might have sent a wrong signal to the much needed foreign investments, in general, and in the energy sector, in particular, where bright prospects for exploiting the country's rich gas reserves exist.

Finally, the country's low per capita income, accompanied by a concentration of exports in a few low value added products, insufficient flows of foreign direct investment and proneness to natural disasters, all point to its vulnerability in the global environment of trade liberalization and increasing competition and are indicative of the major challenges ahead.

Addressing these problems is probably the most difficult challenge for policy-makers and social partners. Wider participation of the population in the gains resulting from globalization would be justified from both the social and economic points of view, and the study therefore examines possible areas for policy action. First, there is an obvious need to improve access to education. However, it is also important to note that primary education receives little attention compared with university education -- often reserved to an elite. It is illustrative that, on average, the State spends yearly the equivalent of $14 per pupil in primary schools, compared with over $500 per university student. Teaching time in many primary schools is two hours per day. Secondly, bureaucratic hurdles are sometimes an impediment to foreign direct investment, thereby reducing the ability of the country to exploit its export capacity. Thirdly, encouraging collective bargaining in public and private enterprises would help reduce the tensions at the national level, where wages are often set. The elimination of the ban on unions in EPZs would help reduce social conflicts while allowing a more consensus-based, participatory climate. Fourthly, the study identifies other measures in the area of bank reform and export promotion that could help enhance the gains from globalization. Fifthly, the pick-up in economic growth recorded in the 1990s should help strengthen safety net programmes as part of the Government's national policy of poverty alleviation and training programmes for retrenched workers.

In sum, the country is going through the initial stages of the economic take-off. In order to accelerate the pace of development, it is important that the Government and social partners undertake a range of social and economic reforms with a view to distributing the gains from globalization more evenly. The Grameen Bank, as well as other NGO initiatives, replicated in many other countries, indicate that there is a potential for solving these problems, including some of the more thorny ones such as poverty alleviation.

Chile

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 halved to one quarter of the population and health indicators point to a substantial improvement as well.

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. Second, 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. Third, a relatively large number of jobs being created entail little or no employment or social protection and the situation appears to have worsened over the last few years. For example, less than two-thirds of Chilean salaried workers have a stable written 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 they are, 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. Also, it can 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 and threatens to trigger a substantial increase in the unemployment rate. 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 for this upgrading process to materialize. 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 a low-productivity, unstable jobs' trap.

In order to overcome this trap 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, i.e. paving the way for a socially sustainable participation in a globalizing economy.

In sum, 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 get trapped in a low-productivity logic and endanger social stability.

Mauritius

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. Equally impressively, 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: 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 expected 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 in the 1990s, which is related in part 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 which 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 cylinders of growth: sugar, garments/textiles, tourism and skilled labour-intensive services such as international banking. The official intention is (a) to move upmarket 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. Mauritius, though, has certain advantages in international markets, such as its stable political system, a good physical infrastructure, the existence of tripartite institutions, a high savings rate and a relatively well trained, semi-skilled labour force. The process of regional integration (in particular in the SADC region) might also help diversify export markets, while also supporting production upgrading. Mauritius should take advantage of its continuing high economic growth to address issues such as those noted above, since the probable loss of preferential trade arrangements and a more challenging international economic environment in a few years' time will be less conducive to making difficult policy choices.

In a recent joint paper submitted to the WTO, the Government of Mauritius, together with five other small countries, stresses that trade liberalization and trade preferences should take into account the vulnerability of small economies, as it is felt that such countries are especially vulnerable in today's globalized economy. This paper cites factors such as their being far from the main markets, subject to large price shocks for often important export commodities, and subject to reliance on very few export products because their economies are too small to develop economies of scale. Additional case-study papers have been submitted to WTO by Fiji and Mauritius.

In the meantime, there may be a difficult transition period, with rising unemployment, since as noted in this report employment creation in the designated four cylinders of growth is insufficient to absorb expected labour force growth. 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. It is important that Mauritius, a self-confessed social welfare state, does not succumb to the "conventional wisdom" among some neo-classical economists with regard to dismantling the welfare state and the privatization of many social expenditures.

Poland

For a long time, Poland used to be regarded as a country with difficult, indeed almost insurmountable economic problems. At the end of the 1980s, following several decades of central planning strategies, the country faced the historical challenge of adapting its structures and institutions to market principles. The task was further complicated by the presence of a large external debt the servicing of which absorbed a significant part of the hard currency receipts that were available. In the face of these difficulties, the then government adopted an all embracing programme of reform measures which initiated a period of economic and social transition, encompassing, inter alia, price deregulation, privatization and trade liberalization.

Developments during the first stages of the transition were marked by rapidly falling output and employment and most forecasts were for a further deterioration in the economic climate. Since then, however, the Polish economy has enjoyed an impressive economic performance. Since 1993, GDP growth averaged 5.5 per cent, while the unemployment rate has been brought to 10.5 to 11 per cent, down by more than 4 percentage points with respect to the historical peak. The liberalization of international trade has proceeded at a relatively fast pace. Many non-tariff barriers have been dismantled and the average import tariff rate has been reduced to a mere 3.3 per cent. Foreign direct investment (FDI) flows have also been considerably liberalized. The volume of foreign trade has more than trebled, with EU countries becoming the main trading partner, while Poland has become an important location of multinational affiliates. More fundamentally, the private sector has become the main engine of the economy -- it now represents nearly 70 per cent of national output and employment.

The speed and depth of the transition process make it difficult to isolate the specific impact of globalization vis-ŕ-vis other factors such as privatization. Within these strict limitations, the study suggests that trade and FDI have contributed to the economic expansion recorded since the early 1990s. Despite the "downsizing" effects often associated with the restructuring process in general and trade liberalization in particular, Poland has tended to specialize in the export of labour-intensive products. In addition, there is some evidence that FDI has contributed to expand the production and export capacities of the country. Average wages in foreign-owned manufacturing companies are 50 per cent higher than is the case in the domestic manufacturing private sector. It can be safely asserted that trade and investment liberalization have contributed to upgrade and modernize the production system.

Economic and socio-political factors might suggest a continuation of these positive trends. First, there is still considerable unused capacity which could make room for further increases in output and living standards. In particular, a large proportion of the labour force is either unemployed or underemployed. Thus, agriculture makes for over one-quarter of total employment, but only 6 per cent of GDP. Second, the country is involved in negotiations for its accession to the EU, which, combined with the pursuit of reform measures in several areas, should continue to stimulate FDI inflows and trade. Third, the historical ties between the workers' movement and government have facilitated the transition process, making it socially acceptable.

Important as they are, these factors should not divert attention from the fact that the growth process is unbalanced, which is problematic from the social point of view but also for reasons of economic efficiency:

It is sometimes claimed that market forces of their own will progressively contribute to redress these imbalances. There is indeed an incentive: (a) for investors (domestic and foreign) to locate production in rural areas where costs are relatively low; (b) for low income agricultural workers to move to economically dynamic urban centres; and (c) for outward oriented enterprises, notably in the agro-food industry, to create "backward linkages" with suppliers established in the countryside. However, in practice, these incentives are probably too weak (or they might operate too slowly). This is because the regional imbalances are mainly attributable to structural factors, most of which can only be corrected by way of government intervention, in cooperation with social partners. First, internal migration flows have been constrained by the high rents and housing prices prevailing in major urban centres. In addition, for historical as well as socio-cultural reasons, many households living in rural areas consider agricultural land as a safety net. Second, except in Warsaw and other big cities, the physical infrastructure network suffers notorious deficiencies, thereby reducing the trade and development potential of both the rural economy and the country as a whole. Roads, railways, telecommunications and, particularly, motorways are increasingly insufficient to sustain the rapid expansionary phase. Third, the vocational training system has adapted relatively slowly, sometimes generating a mismatch between the skills acquired at school and labour market requirements. The problem has been especially acute in rural areas. Fourth, institutional support for the diversification of the agricultural sector is still relatively weak.

The study examines these policy issues in some depth and documents recent government initiatives that should contribute to address the problems. It considers the development of physical infrastructures and human capital as a relatively urgent policy priority for Poland. Action in this area would no doubt improve the chances of a successful integration in the EU. At the same time, government plans are for a substantial cut in both corporate taxes and personal income taxes -- both would be brought to levels significantly lower than in most EU countries. There is a danger that lower taxes, in the absence of a major effort to tackle the regional imbalances, will aggravate the imbalances. Therefore, in view of the much needed infrastructure and education projects, it might be useful to consider a tax reform over a longer time span than is presently planned. This is a difficult trade-off, one which would deserve extensive dialogue within the framework of national tripartite institutions.

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 per 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 advent of the financial crisis in November 1997, the rapid development process has come to a sudden and unexpected halt.

The key underlying force for the outstanding economic performance of the Republic of Korea until the crisis has been the government-led, export-oriented growth strategy. Since 1970, the volume of trade has been multiplied by a factor of 5 (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 about 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. The Government intensified investment in research and development, which has helped improve the technological capacity of the country, and constitutes a major asset in the era of globalization.

Likewise, foreign direct investment has instilled dynamism in the Korean economy. Interestingly, direct investment inflows tend to create relatively skill-intensive jobs, whereas foreign direct investment outflows are concentrated on 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.

Besides trade, the upgrading of educational attainment has proved a key engine of growth. Education has traditionally been a major priority in 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. The study shows that education has contributed to alleviating the pressures towards labour market inequality that can be associated with globalization. Technological change stands out as an important source of inequalities, while trade has played a relatively minor role and education has mitigated both factors.

However, certain aspects of the globalization process have proved unsustainable:

At the end of 1997, 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, includes stabilization and structural adjustment conditions, 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 from 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 in the face of the crisis, 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.

South Africa

The last few years have marked an historical turning point in South African political and economic systems. In 1994, following several decades of apartheid, democratic elections were held and new institutions comprising representatives from all major social groups emerged. Significantly, the new Government initiated a much needed process of economic reform, with the aim of creating an outward-oriented economy going hand in hand with efforts to improve social equity and income distribution.

The challenge was widely regarded as immense at the start of the transformation process (and the risk of political instability was considered to be high). Several decades of relative economic isolation meant that firms were not well prepared to take advantage of the opportunities arising from trade liberalization, while the potential adjustment costs were correspondingly high. A major recession during the early 1990s had led to falling living standards for the majority of the population. In addition, past economic policies had tended to favour capital-intensive sectors, to the detriment of labour-intensive ones -- a rather peculiar policy feature in a country characterized by an abundant (unused) labour force. In 1994 the unemployment rate had reached alarming levels. More fundamentally, following several decades of segregation, the African population aspired to both a rapid improvement in political rights and better social and economic conditions. In a way, the main policy issue was to satisfy these legitimate aspirations while at the same time creating a stable macroeconomic framework and enhancing the integration of South Africa in the international economy. Objectively, the initial economic conditions made the task problematic: the country was simply not well prepared to take advantage of economic and trade reforms.

Today, it can be asserted that economic performance has been better than feared by many. Economic growth has recovered somewhat (since 1994, GDP growth has picked up to a modest annual average of 2.5 per cent), inflation was until recently on a downward trend and there are no major fiscal or financial imbalances. Trade liberalization has proceeded, including a scheduled gradual decrease in import tariffs from 1994 onwards, permitting a significant increase in trade flows. Not only have most non-tariff barriers been lifted, but tariff rates themselves have been brought down and are expected to be reduced further over the next few years. Export subsidies have been suppressed. South Africa has become an active member of the WTO; it is the most important participant of the SADC; and it is engaged in trade discussions with the European Union. Likewise, progress has been made in the area of foreign direct investment (FDI) liberalization. At least until the recent Asian crisis, FDI inflows were on the rise.

The situation on the employment front has deteriorated, however. Unemployment remains very high and has even been increasing recently, endangering social stability and partly explaining the preoccupying rise in the crime rate. Some have argued that trade and FDI liberalization have substantially aggravated the employment situation, presumably because higher imports have caused job losses. The study examines this issue closely and comes to the following main results:

In sum, the legacy of protective industrial policies that favoured capital-intensive sectors, combined with a shortage of real and human capital, have reduced the ability of the South African economy to benefit from trade and FDI liberalization. The Government and social partners have taken important steps in addressing the underlying factors at work:

Despite these efforts, the social situation remains bleak. Further reforms may be called for, in particular to create a more favourable environment for business start-ups. In addition, it is important to help disadvantaged groups in a way that does not reduce the incentives to either work, invest or take initiative. In this regard, there is extensive international experience of targeted active labour market policies and social benefits on which South Africa can draw.

While much remains to be done, social dialogue within the framework of NEDLAC and other relevant institutions appears to be an important asset which can help maintain the reform momentum in a consensual and socially sustainable way.

Switzerland

In many respects, Switzerland would seem to be one of the main beneficiaries of globalization. Despite its relatively small size, it is the home of some of the most important multinational companies. The country is the eighteenth main exporter of goods in the world, the thirteenth in the case of the export of services. Swiss enterprises have a solid reputation as reliable producers of innovative, high-quality products. This excellent performance is reflected in its enviable social indicators. For example, all children have access to high-quality public education. In 1996, the average annual income of Swiss nationals came close to $25,000, while the unemployment rate has long been one of the lowest in Europe.

To some extent, these achievements can be attributed to the outward orientation of the Swiss economy. In particular, the study identifies three interrelated aspects of the Swiss export model, as follows.

These are important assets in the era of globalization. Switzerland, however, has not exploited all the gains that could have been expected of it, as shown in the relatively poor employment and export record of the 1990s.

Since 1990-91, most economic and social indicators have shown a deterioration not only vis-ŕ-vis national, historical standards, but also by international comparison. Low-skilled and older workers are finding themselves more vulnerable to job displacement and facing difficulties in re-entering the labour market. Disturbingly, the share of Swiss exports in world exports has declined substantially. The situation is far from alarming, but it raises the issue of how the strengths of the Swiss economic system can be maintained, while addressing concerns about its relative stagnation. A combination of macroeconomic and structural factors may have contributed to this relatively disappointing performance.

First, during most of the 1990s, the Swiss economy has had to operate in the context of rather tight monetary conditions. High interest rates and large inflows of short-term capital have been accompanied by a spectacular real appreciation of the currency. A relatively less stringent monetary policy has been pursued since 1995, given the very low inflation rate and in a bid to facilitate economic growth. In addition, fiscal policy was also tightened in the mid-1990s, thereby adding downward pressure on domestic demand.

Secondly, at a more structural level, competition in internal markets is relatively weak. Access to certain professions (e.g. medicine, law, private professional services) is heavily regulated. Cartels are not uncommon, but are considered unlawful if they significantly affect competition without justification on grounds of economic efficiency or if they lead to the suppression of effective competition. Identical to the law of the European Union, the abuse of a dominant position is reprehensible and can justify legal action. New legislation has been introduced within the framework of an important reform programme in this field. However, it is too early to assess its results. It would appear that the process has been slow in certain cases, which may be one major source of exceedingly high prices in Switzerland -- which, according to evidence presented in the study, is the most expensive country in the world. High prices may explain the impressive gap between labour costs for employers ("too high") and the purchasing power of wages for Swiss workers ("too low"). Indeed, the study confirms that Swiss wages are among the highest in the world (although unit labour costs need not be, since productivity is also high) but that, because of the high level of domestic prices, the real purchasing power of Swiss wages comes close to the average for developed countries. A weak domestic competition environment also inhibits business initiatives, thereby reducing the country's potential for job creation.

Importantly, improving domestic competition would be justified not only from the point of view of economic efficiency, but also for social reasons: high income groups are the main beneficiaries of regulations that have the effect of restricting competition. Therefore, more competition in this area would improve income distribution while stimulating job creation. However, since experience has shown that the opening-up of certain sheltered sectors to competition tends to be accompanied by restructuring with the resultant loss of jobs, this needs to be taken into account when the timing for implementing liberalization policies is being decided. In the event of labour displacement, support measures are called for.

The study examines this issue as well as other policy requirements, particularly in the area of training, labour regulations and social protection. The main finding is that, by international comparison, the labour regulatory framework provides for a relatively high degree of adaptability. This, however, does not appear to cause an unduly high degree of insecurity of employment, except for the growing practice of having "on-call" workers in certain industries. The legal protection of these workers is limited and social partners may consider ways to address this problem. More generally, the number of workers in low-wage jobs would seem to be on the rise. There is justification for improving their social protection and better targeting training and active labour market policies to meet their specific needs. Obviously, social dialogue is of paramount importance for addressing problems faced by workers, especially those who are low paid and low skilled.

Fears regarding wages and employment have been exacerbated with the recent conclusion of the bilateral agreement with the EU. The experience of economic unification in the European Union suggests, however, that labour market mobility in Europe is relatively stable, especially among unskilled workers. This implies that there would be little risk that application of the bilateral agreement will lead to a large inflow of workers from these countries. Moreover, should the level of immigration be considered problematic, the agreement provides for the temporary reduction of quotas as a safeguard measure.

Overall, the experience of Switzerland suggests that globalization tends to aggravate the perverse effects of domestic policy distortions such as the relatively weak product-market competition environment that has long prevailed in Switzerland. Interestingly, the Government has undertaken reforms in this area broadly in parallel with the EU, with which it conducts the bulk of its trade. This provides a vivid illustration of how developments in the EU have a bearing on Swiss legislation and economic policy, even though the country does not participate in the European decision-making process.


1. GB.274/WP/SDL/2.

2. A decision was taken to set up a Preparatory Committee for the World Trade Organization which would, inter alia, deal with suggestions for including additional items on the agenda of the WTO's work programme. The Chairman of the Trade Negotiations Committee, in concluding comments, also referred to the importance that certain delegations accorded to the relationship between trade and internationally recognized labour standards.

3. Governing Body, minutes of the 260th Session (June 1994).

4. The full text of the relevant paragraph reads as follows: "We renew our commitment to the observance of internationally recognized core labour standards. The International Labour Organization (ILO) is the competent body to set and deal with these standards, and we affirm our support for its work in promoting them. We believe that economic growth and development fostered by increased trade and further trade liberalization contribute to the promotion of these standards. We reject the use of labour standards for protectionist purposes, and agree that the comparative advantage of countries, particularly low-wage developing countries, must in no way be put into question. In this regard, we note that the WTO and ILO secretariats will continue their existing collaboration." Singapore Ministerial Declaration, 1996 (para. 4). See GB.268/WP/SDL/1/3(Corr.) and Add.1, and http://www.wto.org/wto/archives/mc.htm.

5. GB.267/WP/SDL/1/1; GB.268/WP/SDL/1/2. At the 268th Session of the Governing Body (March 1997) it was reported that 180 respondents from 98 countries had replied to the questionnaire.

6. GB.273/WP/SDL/2.

7. GB.274/WP/SDL/2.

8. Bangladesh, Chile, Republic of Korea, Mauritius, Poland, South Africa and Switzerland.

9. Lateef, 1997; The Economist, 16 Jan. 1999.

10. UNCTAD, 1998.

11. UNCTAD, various years.

12. In its latest World Investment Report, UNCTAD (1998: 14-16) presents calculations for the 1992-97 period that confirm the higher volatility coefficients for portfolio investment compared to foreign direct investment. Commercial bank loans proved an even more volatile source of capital.

13. UNCTAD, 1998.

14. Campa/Goldberg, 1997; Feenstra/Hanson, 1995; Hanson/Harrison, 1995. In contrast, the use of imported inputs decreased in Japan between the 1970s and the 1990s. It is also interesting to note that certain firms that had outsourced part of their activities have reportedly admitted that the economic outcome of this decision has not met their expectations. A process of re-internalization may hence take place in certain cases.

15. For example, Edwards (1998), using comparative data for 93 countries and different openness indicators, finds that more open countries have experienced faster total factor productivity growth, and that this result is robust to the use of openness indicator, estimation technique, time period and functional form. On the link between foreign direct investment and economic growth, see de Mello (1997) and Borensztein, De Gregorio and Lee (1995).

16. See for example De Long (1998) and Altman (1998).

17. Owing to lack of data, it has not been possible to extend this research to other emerging economies.

18. Econometric estimates confirmed the absence of any direct link between increased import penetration in manufacturing sectors and relative employment losses (ILO Task Force, 1999d).

19. This may be because Mauritius has a relatively developed social security system.

20. OECD, 1997.

21. ILO, 1996; OECD, 1997.

22. ILO Task Force, 1998.

23. The analysis is based on data from UNIDO. The use of net employment flows between sectors is not an optimal indicator for displacement and adjustment. Employment flows can occur in both directions and the number of concerned workers (gross employment flows) is therefore higher. However, no consistent data set on gross employment flows in a sufficiently big number of sample countries is currently available.

24. Indeed, the income elasticity of the demand for services is usually greater than unity.

25. ILO Task Force, 1999d.

26. ILO Task Force, 1998.

27. Eurostat, 1998.

28. ILO Task Force, 1999d.

29. ILO Task Force, 1999a.

30. ILO Task Force, 1999d.

31. ILO Task Force, 1999e.


Updated by VC. Approved by NdW. Last update: 26 January 2000.