Photo by PRASANNAPIX, Adobe Stock File 591373215.
For decades, international trade has been seen as a generator of jobs and a steppingstone to greater well-being. Consider South Korea. In the 1960s, it was a poor, largely agricultural economy. Since then, it has harnessed export-led growth to vault itself into the ranks of rich nations, its companies furnishing some of the world’s best-known brands of cars, appliances, and other goods.
Lately, however, economists have raised doubts about the advantages of trade. Some say a handful of big players has appropriated the benefits of globalization, leaving workers and firms in developing economies behind. Others fear that global differences in labor and environmental standards could initiate a “race to the bottom” among developing countries.
Meanwhile, calls for protectionism and greater economic self-sufficiency have grown amid supply-chain disruptions caused by the COVID-19 pandemic and Russia’s attack on Ukraine.
A new World Bank report, “Leveraging Trade for More and Better Jobs,” uses solid economic analysis to evaluate such concerns. Building on a database of indicators for employment, earnings, productivity, and job quality across a wide range of developing and advanced economies, it finds that integration into global trade and value chains has delivered considerable benefits since 1995. It:
boosted labor earnings and productivity on average;
reduced inequality in earnings in many low- and middle-income economies;
and improved the quality of jobs as workers moved from informal employment—think of street vendors—to jobs that offer benefits such as job security and pensions and into more fulfilling kinds of work.
Still, the report—which is to be presented at the World Trade Organization’s Public Forum in Geneva on September 10—documents exceptions to this generally positive picture. These must be addressed to maintain social cohesion and prevent harmful policy responses.
For low-income countries—as opposed to middle-income economies like Mexico and Thailand—trade appears to have a smaller impact on job creation and inequality reduction. (Although there are other benefits: As productivity improves, workers in low-income countries are more likely to move into more formal jobs rather than getting higher wages.) A second concern: The positive effects of trade have weakened since the global financial crisis of 2007.
These two concerns suggest that integrating into international markets alone may not be enough to generate more and better jobs in developing countries. They may also need to adopt broader development strategies. Across all levels of development, complementary policies are needed to ameliorate the disruptions that trade can bring for some people, places, and sectors.
Such policies can include upgrading the skills of workers as some sectors and technologies decline and others take their place. Policies aimed at helping some localities may be needed if labor mobility is low. Countries should also take steps to improve the business climate—by reducing corruption and red tape, for example—to help companies reap the opportunities trade presents to invest and hire.
It’s not clear why trade hasn’t been as effective in creating more and better jobs since the global financial crisis. One explanation is that robots and computers have made manufacturing less labor-intensive, diminishing the job-creating value of trade for poor countries with large pools of low-wage workers.
But one thing is clear: The global system of rules-based trade is under increasing pressure. Geopolitical tensions and concerns about access to key supplies such as semiconductors and solar panels have prompted countries to erect trade barriers and provide trade-distorting subsidies to domestic players. Such unilateral actions have undermined the dispute-settlement mechanism, weakening the global trading system.
In this environment, developing nations will likely lose out more than developed economies, for two reasons. They depend more strongly on trade for growth, jobs, and productivity gains vis-à-vis developed and larger economies. And second, they will lose the stable investment climate that a global, rules-based system provides.
That is why preserving and strengthening that rules-based trade system is crucial to reducing global poverty and providing the dignity and security that come with a well-paid job.
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