How labor markets in South Asia can benefit from higher exports

Since the 1980s and 1990s, South Asian economies have taken several steps to liberalize trade. By 2016, import tariffs had fallen sharply, giving trade a jolt. 

Yet across the region, the ratio of trade to GDP, an indicator of trade openness, remains low.

Exports of goods represent only about 10 percent of GDP, compared to above 20 percent in East Asia and the Pacific, and more than 30 percent in Europe and Central Asia. 

In other words, South Asia is still struggling with many closed markets and protectionist tendencies. 

This low exposure to international trade also affects South Asian labor markets which are marked by low-quality jobs—informal jobs are widespread—sizeable wage gaps between demographic groups, and pressure from high population growth.

More international trade could boost economic growth, create jobs, and improve labor market outcomes. 

But how much of a boost can South Asia expect by beefing up its exports?

More international trade could boost economic growth, create jobs, and improve labor market outcomes.

In recent years, several studies have shown how more imports can affect local labor market outcomes, but few have looked at exports. 

To fill that gap, our joint report with the International Labour Organization uses cutting-edge econometric techniques and historical data to estimate how greater global demand for South Asian exports would affect wages, employment, and informality rates for workers.

In short, our results show that higher exports translate into better local labor market outcomes for districts exposed to trade.   

Here are four interesting facts about how exports impact South Asia’s labor markets:

First, higher exports go hand in hand with higher wages.

We find that exports increase average wages by 2.9% for a worker initially employed in an industry at the 75th percentile of export growth measure relative to a worker at the 25th percentile of export growth measure. 

Second, higher exports seem to draw workers from the informal sector into the formal sector in regions that are more exposed to such an export shock, especially female and low-skilled workers. 

In India for example, 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 country’s labor force.

Third, higher exports do not benefit everyone equally: Districts that are more exposed to this export shock experience higher increases in wage inequality. 

Fourth, higher exports do not correlate with higher overall employment in local labor markets. 

Contrary to many studies on import competition in advanced economies, we do not find any impact of an export shock on the number of jobs in South Asia.

The reason is that in developing and emerging economies, the majority of workers cannot afford to be unemployed as social safety nets may not be an option. 

In developing and emerging economies, the majority of workers cannot afford to be unemployed as social safety nets may not be an option

Therefore, higher exports are reflected in higher incomes or lower informality rates, and not employment figures. 

However, not all groups benefit equally from higher exports, as indicated by greater wage inequality as well as geographical and socioeconomic divergence.  

Thus, governments have a role to play and need to develop policies to better share the gains from trade.

Policies 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 , and to better connect the export hubs with the rest of the country.

Other steps would involve raising skills and helping groups such as women and youth, who face disadvantages, enter the labor force which is discussed in a forthcoming blog.