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In India, more exports can create better jobs and higher wages

Hartwig Schafer's picture
Exports to Jobs: Boosting the Gains from Trade in South Asia


South Asia has grown strongly to reduce poverty and create jobs, but the region remains a development paradox. Despite strong growth, job creation remains weak and is often of poor quality.

This is especially true for India, which grew at a rate of 7.2 percent in 2017 and which managed to reduce the number of poor people considerably.

But the growth of new job opportunities is below what many had hoped for; most Indians still lack a regular job in the formal economy, and huge differences in pay exist among workers. Strong population growth also puts pressure on labor markets, with millions of Indians entering the job market every year.

Employment creation is failing to keep up with labor force growth. And those who work often do so only in the informal sector, which is larger than in any other region in the world. Some groups, like women or workers in rural areas, are at particularly high risk of having to work in the informal economy, where wages are often lower.

Meanwhile, trade in goods as a share of the economy is much lower than in other regions. The trends in India and much of South Asia differ from other regions, where trade, growth, and jobs are directly connected and go hand in hand.

This South Asian paradox raises the question of how governments can boost job growth, and how to raise the quality of new jobs so that economic development brings more shared prosperity.

A new report by the World Bank and the International Labour Organization (ILO) finds that increasing exports through globalization has the potential to contribute to a broader strategy for promoting growth, job creation and shared prosperity.

 Realizing the Gains from Trade, report shows how higher exports can translate into benefits for workers across the country
Photo: World Bank

Titled “Exports to Jobs: Realizing the Gains from Trade,” the report shows how higher exports can translate into benefits for workers across the country, and it therefore recommends policies to expand exports together with policies that help to share these benefits more widely, for example through measures that help workers get the skills needed to complete for new formal-sector jobs.

Traditionally, economic research on the relationship between globalization and labor markets has focused on the impact of falling tariffs or rising imports, with few studies examining the growth of local labor market opportunities and challenges that follow from increased exports.

The new World Bank-ILO report takes a novel analytical approach by combining household-level or worker-level surveys with trade data to construct a unique dataset that bolsters our understanding of how big changes in trade can impact local labor markets. It builds on new literature that credibly assesses the response of employment and wages to a greater exposure to trade.

In short, the report quantifies the potential benefits of trade to address the South Asian paradox. It finds that increasing exports per worker could lead to higher wages and better jobs, including more formal-sector jobs for women. It also shows that the impacts of trade are geographically localized, and the effects do not easily disseminate across all regions and all groups of workers.

The report finds that increasing exports would boost average wages, in particular for skilled workers, urban workers, experienced workers, and male workers in India.

Increased exports can explain the conversion of about 800,000 jobs from informal to formal between 1999 and 2011, representing 0.8 percent of the labor force. Increased exports also could result in a shift in workers, particularly low-skilled, from the informal sector to formal-sector jobs with greater wages and benefits. They could also lead to greater formalization rate for females than for males. In India, more than 90 percent of workers are in the informal sector.

To expand and widely share the benefits of exports, the report recommends policies including raising skills and helping groups such as women and youth, who face particular disadvantages, enter the labor force.

Greater participation of women in export-oriented industries also could improve labor market outcomes. This would require reducing economic and social obstacles to women joining the workforce in India, such as changing potentially discriminatory regulations now in place.

Boosting exports in labor-intensive industries, which is a comparative advantage for South Asia, could also significantly lower informal-sector employment, particularly for rural and less-educated workers.

Other steps to extend labor market gains more widely include investing in infrastructure, removing trade barriers, and increasing the ability of workers to move to areas and into occupations where new jobs are being created.

Regional challenges also must be addressed. Intra-regional trade accounts for just over five percent of South Asia’s total, compared with 50 percent in East Asia.

Greater global integration provides an opportunity to help address the South Asian paradox of remarkable growth with persistent labor market shortfalls and a stagnant or declining openness to trade.

The new World Bank-ILO report offers a fresh analysis on the way forward.

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