Globalization, Employment and Income Distribution in Developing Countries edited by Eddy Lee and Marco Vivarelli. Palgrave Macmillan, Basingstoke, 2006, xvii + 253 pp., ISBN 0 230 00783 X, £65.00
This book presents the findings of the second stage of a research project funded by the UK Department for International Development and carried out by the International Policy Group of the International Labour Office. The focus of the project was on the impact of trade and investment liberalization on employment, within-country inequality and poverty reduction in developing countries. While the first stage of the project carried out a general worldwide review, this book is based on country studies of Morocco, Ghana, Vietnam, Kazakhstan and Nepal.
In the Introduction, the editors review recent theoretical and empirical literature onthe subject, including a summary of the main findings of the earlier volume and summarize the country studies, discussing their policy implications. Contrary to the Heckscher–Ohlin prediction that trade and investment liberalization should expand employment in developing countries, they cite studies, including their earlier volume, suggesting that the impact is country- and sector-specific, and often negative. While employment may be created by production for export, imports might displace previously protected domestic firms, inducing labour redundancies. Even foreign direct investment (FDI), which in general has a positive effect on employment, might crowd out non-competitive domestic firms. Similarly, Lee and Vivarelli show that contrary to the Stolper–Samuelson prediction that both trade and FDI would reduce income inequality in developing countries, income inequality increased in all the countries studied. The findings also showed that the incidence of poverty was reduced in some cases but increased in others.
The country studies suggest possible reasons for the differential impact of trade andinvestment liberalization. In the study of Morocco, Lahcen Achy and Khalid Sekkat point out the need to separate the impact of trade and investment liberalization from that of other reforms. Poverty increased with the implementation of a structural adjustment programme in Morocco, and one important reason seems to have been the shifting of employment from the formal to the informal sector. In Ghana, growth of formal employment was slow, as noted in the chapter by Ernest Aryeetey, largely because of corruption and institutional inadequacies. Social disruption and ecological devastation associated with surface mining also created immense hardship for local communities. He concludes that improvement would depend on better infrastructure, reliable supplies of utilities like water, electricity and telecommunications, a labour market ensuring fairness to employers and employees, transparency and honesty of public officials, and a free flow of information.
The study of Nepal by P.P. Timilsina, M.D. Bhattarai and R.D. Bhattarai shows that there was a small increase in employment because of FDI and a shift from primary to manufactured exports, without any loss of employment in import-competing industries. Yet poverty and inequality increased significantly, as the loss of agricultural subsidies and minimum support prices pushed many farmers into poverty. Political instability discouraged investment which might have mitigated this effect.
The contrast between Vietnam and Kazakhstan, both formerly centrally planned economies, is particularly interesting. According to the study of Vietnam by Phan Thanh Ha, Pham Lan Huong and Nguyen Thi Kim Dzung, the proportion of the population below the poverty line declined from over 70 per cent at the end of the 1980s to 29 per cent in 2002. State intervention to support agriculture through continuing public provision of infrastructure (irrigation systems, transport networks, etc.) and to reduce the job-destroying effect of imports by using non-tariff barriers to protect infant industries seems to have been instrumental in ensuring a reduction in poverty. In contrast, the chapter on Kazakhstan by Kairat Mynbaev, Sabit Khakimzhanov, Sharon Eicher and Aidan Islyami records that after the collapse of the Soviet Union and independence of Kazakhstan in 1991, the economic liberalization embarked upon in 1993 was associated with soaring inflation (over 2000 per cent in 1993), a fall by more than 50 per cent in real wages, and an increase in poverty from 16 to 35 per cent between 1990 and 1996. The cessation of price controls on essential goods and services, guaranteed employment, relatively generous pensions, family allowances, sick pay and maternity benefits, and universal access to education and healthcare resulted in a fall in life expectancy from 68 years before independence to 65.6 years in 2003.
Given the ongoing debate in the development literature over the measurement of poverty and especially the comparison of poverty levels over time and space, it would have been helpful if poverty estimates had been supplemented by human development indices such as infant, under-5 and maternal mortality, malnutrition and morbidity rates, in order to provide a check on definitions of poverty, which vary from country to country and even within one country from one period to another. ‘Income inequality’ too is an ambivalent category. Increasing disparity could mean that some wages or farm incomes have risen more than others, potentially setting in motion a virtuous circle in which rising income and demand from those who have benefited most from trade and FDI creates more employment and rising incomes for others; or it could mean that living standards of workers and farmers have fallen, potentially setting in motion a vicious circle of contracting demand and employment. The difference between these two scenarios will partly be reflected in changing poverty levels, but not entirely; for example, where incomes of those just above the poverty line rise or incomes of those just below the poverty line fall, the difference will not be captured by measuring poverty levels alone.
However, the overall conclusion that liberalization of trade and FDI do not automatically generate positive effects in terms of increased employment and reduced poverty and inequality is a valuable one. If it is agreed that there is ‘a strong case to be made for adopting specific policies to deal with the social impact of globalization as part of the policy framework for economic liberalization’ (p. 18), the negative impact of these economic policies would be minimized and their positive effects enhanced.
(This review was published in the British Journal of Industrial Relations Vol.45, Issue 3, September 2007, pp.652-654.)