Abstract
This book is the outcome of a joint ILO and WTO project devoted to the social dimensions of globalization. It highlights various channels through which globalization affects jobs and wages in both advanced and developing economies, and how trade liberalization, offshoring and growth in foreign direct investment affect people and communities, job creation and destruction and productivity in ‘normal’ times and in periods of economic crisis. It points out three major challenges facing policy-makers: (i) the extent to which changes in employment structure and levels resulting from globalization are positively or negatively affecting the domestic labour force and economic growth; (ii) the extent to which liberalization can increase the vulnerability of domestic labour markets to external shocks; and (iii) the extent to which gains from globalization are shared unequally among groups of workers and firms.
The book argues that in order to be able to maximize the positive potential of globalization for poverty reduction and economic growth, several preconditions are necessary. Governments have an important role to play by providing public goods, strengthening social protection, education and skill-upgrading and improving the functioning of labour and product markets. The book consists of nine chapters, grouped around three main linkages to globalization: employment, uncertainty and inequality. These are all the objects of major worldwide public concern within the framework of the social dimensions of globalization.
Globalization and employment
1 reviews the literature on the effects of trade liberalization, and of offshoring, on employment. It notes a recent shift in perception from finding no substantial link between employment levels and trade liberalization, towards recognition of a short-term impact of imports on job displacement in advanced economies due to cost adjustment and productivity growth.
The impact of offshoring on jobs is frequently associated with productivity growth and increased sales in the offshoring company, which may lead to employment growth of different jobs than those that have been offshored. As offshoring companies may offer cheaper services to other companies and cheaper products to consumers, this may (or may not) increase domestic employment. These direct and indirect labour market effects of offshoring have not been extensively studied and are difficult to assess, because offshoring coincides with technological and structural change, changes in consumers’ tastes and preferences, changes in the composition and origin of imports and in the competitive environment, to which must be added the effects of business cycle fluctuations. Nevertheless, both trade liberalization and offshoring are associated with higher job turnover, job restructuring and unemployment, which tend adversely to affect low-skilled workers, particularly those in ‘tradable occupations’ (for example, back-office administrative tasks).
The literature review is inconclusive, showing contradictory findings across sectors and countries about the magnitude of trends. The policy implications (unemployment benefits, training subsidies or employment or wage subsidies) are difficult to implement.
The linkage between globalization and patterns of structural change and growth in emerging countries is analysed in Chapter 2, which illustrates different outcomes for different world regions and countries. The authors identify three factors that determine different cross-country outcomes: first, the larger the share of natural resources in the country’s exports, the smaller the scope of productivity-enhancing structural change, because they do not generate much employment and cannot absorb the surplus labour from agriculture. Secondly, countries that maintain competitive or undervalued currencies are subsidizing industrial expansion, thus benefiting from growth-enhancing structural change. Thirdly, countries with more flexible labour markets, where labour flows easily across firms and sectors, experience greater growth-enhancing structural change. As trade barriers have been reduced, industries have either rationalized and became more productive and efficient or closed down. The overall outcome for the economy depends on resource reallocation across economic sectors – and this is where globalization has had highly divergent results, increasing the costs of resource misallocations and the benefits of appropriate policies.
A key focus of this chapter is the cross-country comparison of the impact which the decline in trade and the debt and global banking crisis had on employment and an explanation of why some types of economy were less hard hit by the recession than others.
Globalization and uncertainty
Surveys of public perceptions of globalization reflect concerns about labour market uncertainties, especially the probability of job losses. Chapter 4 examines how globalization affects the labour market, notably the resource reallocation that results in both job creation and destruction. Some firms adapt, grow and survive, while others contract or close; some workers move to higher productivity jobs, while less-skilled or less mobile workers move to lower-productivity jobs or become unemployed. Globalization plays an important role in this adjustment process and in the ensuing positive or negative outcomes for workers’ earnings and employment, but these also depend on the existence of mitigating measures. Arguably, optimum job reallocation cannot take place where quality infrastructure is lacking, where competition policy favours large firms, where banking and financial markets are not sufficiently developed to address a high failure rate among start-ups and small businesses, and where a large informal economy exists. The challenge of market and trade reforms is thus to address these sources of uncertainty which can also result from an economic crisis or from the reforms themselves.
Chapter 5 tries to assess the effect of offshoring on economic insecurity and how it relates to the national labour market institutions and to workers’ perceptions of globalization.
Chapter 6 considers the role of social protection in labour markets exposed to external shocks. The latest Great Recession and the East Asian financial crisis of the late 1990s provide insights into policies for mitigating unpredictable employment disruptions, notably massive public works (infrastructure projects) undertaken in Indonesia, Republic of Korea, Malaysia, Philippines and Thailand, which were the single most important measure. Other measures included skill-training schemes and employment services, in addition to the pre-existing social protection systems. The chapter also considers the effectiveness of social protection policies, singling out the Nordic model which achieves both equity and efficiency, drawing particular attention to the Danish ‘flexicurity’, which combines generous unemployment benefits with strict monitoring of job search and participation in training. The authors acknowledge that such systems will be difficult to implement in most low- and even middle-income countries.
Globalization and inequality
The third concern of this volume is the possible linkages between growing within-country income disparities (Chapter 7), redistribution policies in a globalized world (Chapter 8) and the possible role of education policies to make globalization more inclusive (Chapter 9).
There is some recent evidence that offshore outsourcing may have played some role in the growing wage gaps between skilled and unskilled workers in the ‘global production chains’, but skill-biased technological change is still identified by many as the main driver. Indeed, a recent IMF study showed that trade liberalization reduced inequality, whereas growing cross-country capital flows (FDIs) since the 1980s have increased it.
Chapter 8 questions whether economic globalization curtails governments’ capacity to pursue autonomous national economic policies to mitigate growing wage disparities resulting from trade and financial liberalization. It points to internal political factors that adversely affect the fair targeting of compensatory measures. Moreover, as globalization increases factor mobility, this may hinder governments’ ability to meet social demand for compensation. Current research thus argues that globalization triggers a tax and spending ‘race to the bottom’, which tend to shrink the welfare state in the advanced economies to preserve their competitiveness. However, as economies evolve, political rights and democracy may progress and lead to the development of social protection systems in emerging economies, while permitting a bigger share of labour income in advanced economies. This rather optimistic view stems from the argument that, in the long run, factor returns converge across all economies. However, the chapter does not suggest any concrete policies towards achieving such an outcome.
Chapter 9 argues that people with low educational attainment and low skills tend to be unable to take advantage of the benefits of new technologies and globalization in both advanced and emerging economies. Thus education policies should be reformed to improve educational outcomes by shifting the policy focus from school enrolment to skills actually learned. This depends on improving teachers’ quality and effort – which play a vital role in student achievement. Special efforts are necessary to attract and retain high-quality teachers, particularly in disadvantaged areas and to provide high-quality education to children from disadvantaged backgrounds – as both have a high potential for raising the equity of educational outcomes.
In the current mood of protest against the toxic impact of financialization and globalization, this book is a useful review of research, policies and outcomes, discarding some simplifying explanations and providing elements for alternative policies to achieve better social and economic outcomes. However, it falls short of indicating positive and feasible policies to ensure the social sustainability of globalization.