The Hindu Business Line : `Deepening trade has heightened earnings inequality, insecurity'

New Delhi June 21 The freeing up of trade worldwide, a phenomenon called globalisation, has raised people's income in rich countries as also in the emerging economies exemplified by BRICs (Brazil, Russia, India and China), though the fact remains that deepening trade over the past few decades has heightened both earnings inequality and insecurity for the workers of the developed and developing countries alike.

This is the nub of the Employment Outlook, 2007, released on Tuesday by the Paris-based Organisation for Economic Cooperation & Development (OECD), a grouping of 30 developed countries, and its report aptly sets the tone on the debate over the putative economic cost of outsourcing to home countries by putting the whole issue in proper perspective in a policy brief titled `Globalisation, jobs and wages' to the 250-page main tome.

Competition

Touching on the widely bruited fears that foreign competition — especially from China and other labour-rich emerging economies — would drive most jobs in high-wage countries out of the tradable sector and into the non-tradable sector, it said that the shift out of manufacturing into services is sometimes taken as a sign that this process is already under way.

But, OECD said, such a process could not be sustained and it is unlikely that trade would result in a reduction in overall employment in the long run. In defence of this, OECD report asserted "OECD countries that imported but did not export would soon run out of the foreign exchange required to finance their imports, requiring them either to stop importing or to resume exporting. Neither the scale of the emerging economies nor the increasing prominence of offshoring changes the logic of `mutually advantageous trade', in line with the principle of comparative advantage."

It said that rapid integration of large, low-wage countries such as Brazil, China, India and Russia into the world economy might have exacerbated anxieties that OECD workers were becoming less competitive globally. These four countries now represent 45 per cent of world labour supply, compared with less than 20 per cent for the 30 OECD countries.

Increasing imports

The BRICs are also increasingly open to trade and investment. Over the past 15 years, total trade as a proportion of GDP grew by over 50 per cent in Russia, nearly doubled in China and more than doubled in Brazil and India.

Debunking the proposition that rising imports are a source of insecurity, OECD said that while trade is a source of insecurity for workers, increased imports appear to account for only a modest share of total job displacements. Besides, good domestics policies could reduce the adjustment cost borne by displaced workers.

It said the impact of offshoring on employment is quite complex. As certain stages of production are sourced abroad (i.e., local production is replaced by imports of intermediate goods and services), production becomes less labour-intensive in the home country and employment falls for any given level of output.

Vulnerability factor

However, OECD argues, offshoring also raises productivity, permitting lower prices and higher profits, which, in turn, lead to higher sales. The additional hiring due to improved competitiveness and higher sales seems to be sufficiently large to counterbalance the job losses due to the fall in labour intensity.

Stating that there is no simple yes or no to the query as to whether globalisation made OECD workers increasingly vulnerable, the policy brief plainly states that trade appears to have made only a modest contribution to the upward trend in inequality in recent decades, while evidence is lacking for a general increase in insecurity. Recent experience confirms, "the right mix of domestic policies can generate strong labour market performance, even in very open economies," OECD observes.