Part Two The International

Economy and Employment

Introduction to Part Two Helen Hughes AUSTRALIA AND WORLD BANK

I THE PROBLEMS

The remarkable liberalisation of international economic relations since the end of the Second World War, and its contribution to the unexpectedly and unprecedentedly high worldwide economic growth of the 1950s and 1960s, have received wide acknowledgement. It is less widely acknowledged that by long-term historical standards growth continued to be exceptionally high even in the 1970s. The industrial countries' growth of some 3 per cent was very high in comparison to the 1920s and 1930s (and earlier decades), and most middle-income developing countries grew at some 4.5-8 per cent, thus 'catching up' with the industrial countries. There was a remarkable improvement in food supply in South Asia. Only in Africa South of the Sahara did most countries lag behind, and even here there were some remarkable exceptions. 1 The creation of productive employment was highly cor­related with long-run growth. The experience of the last thirty years thus suggests that national policy-making is the principal determinant of growth, although international economic conditions clearly also played an important role.

The liberalisation of economic relations contributed markedly to full employment in the industrial countries in the 1950s and 1960s by increasing their industrial efficiency through trade and capital flows. Most of the employment creation came in rapidly growing (not always well-conceived) service industries. Some developing countries were also helped to increase their employment substantially by the provision of access to industrial country markets for labour and for labour-intensive exports, while capital and technology flowed in the reverse direction.

1 For developing country progress see World Bank, World Development Reports, 1978-1981, passim.

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But most developing countries, in contrast, during these two decades substantially increased their protection, particularly for manufactured goods, to stimulate infant-industry growth, and controlled capital inflows and outflows, often quite restrictively. In these countries employment growth lagged. In the 1970s structural rigidities ex­acerbated inflation and increases in the price of petroleum slowed industrial country growth, leading to substantial unemployment and a sharp reduction of migrant flows to Europe. It was widely thought that the developing countries' growth would be severely impeded by increasing petroleum prices and falling primary commodity prices resulting from the industrial countries' recession. A retreat towards industrial country protectionism, particularly against developing coun­tries; seemed imminent. Such gloomy prognostications fortunately proved to be wrong. The petroleum-exporting countries sharply in­creased their demand for labour and imports, and the protection impetus of the industrial countries was limited, and directed mainly toward other industrial countries. Participation in international econ­omic flows proved to be even more critical to developing country growth in the mid- and late-1970s than it had in the booming 1960s, helping those developing countries that took advantage of large trade and

TABLE 11.1 DEVELOPING COUNTRIES GNP AND GNP PER CAPITA GROWTH BY REGION

(Average annual percentage growth rates in 1980. USS at official exchange rate)

GNP GNP per capita

1960-70 1970-80 1960-70 1970-80

Developing Economies Petroleum Importers: 5.8 5.0 3.4 2.7

Southern Europe 7.2 4.5 5.7 2.9 Latin America and Caribbean 5.3 5.9 2.7 3.4 East Asia and Oceania 7.8 8.3 4.9 5.7 Middle East and North Africa 5.0 5.6 2.4 2.7 South Asia 4.2 3.3 1.8 1.1 Sub-Saharan Africa 4.2 2.9 1.7 0.0

Capital-deficit petroleum exporters 6.5 5.4 3.8 2.7

Capital-surplus petroleum exporters n.a. 8.3 n.a. 4.2

Capital Industrial Market Economies 5.2 3.2 4.1 2.4 European Centrally Planned Economies n.a. 5.5 n.a. 4.6

Source: World Bank data.

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capital flows to maintain growth and employment. These developing countries' exports of manufactures expanded their share of the indus­trial countries' domestic as well as of other developing countries' markets, while the capital markets were able to intermediate the excess savings of petroleum-exporting countries into capital flows for invest­ment in other developing economies.

International flows of goods and services, labour, capital and technology are both complementary and competitive. Direct foreign investment embodies technology and management skills that can bring jobs to workers in developing countries, and trade can bring the finished products to the industrial countries at low cost. Where local en­trepreneurship is available together with technical skills- and this is increasingly the case in many industrialising developing countries - the capital flows can be in the form of borrowing from financial institutions, and technology and technical and management skills can also be obtained separately. But international economic flows have a direct impact on employment, leading to internal shifts in employment in the countries participating in the transactions. In so far as international movements of goods and services and factors of production lead to greater possibilities for specialisation, economies of scale and com­petitiveness and thus to higher productivity, they also affect overall growth and employment indirectly, and such 'efficiency' effects, though impossible to measure, are even more important than the direct employment impacts. Moreover, provided that transactions take place in a relatively open, competitive environment, all the participants­individuals, enterprises and countries- usually gain on balance when the costs and benefits of international transactions are weighed up.

II THE MOVEMENT OF LABOUR

The industrial countries of'new settlement' were traditionally countries of immigration, and they still have relatively low densities of settlement. The United States remains the most popular (and together with Canada the most open) country of immigration, attracting migrants from a variety of developing (as well as of industrial) countries, particularly from Central and Latin America. The ending of the colonial era and the associated political settlements also led to some migration to other industrial countries, principally France and the United Kingdom in the 1950s and 1960s. With full employment in industrial countries in the 1960s a new type of short-term immigration began to flow to the rapidly

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growing countries of northwestern continental Europe. Germany and Switzerland were the principal host countries for those 'guest workers'. Flows of workers among developing economies were also increasing, mainly from slowly to rapidly growing countries. Such migration was growing in Africa and Latin America in the 1960s, and the rapid economic growth of the low-population petroleum-exporting countries of the Middle East led to a new wave of migration from neighbouring states and from South Asia as already indicated. The United States annually admits some 400,000 people legally, but estimates of illegal immigrants, mainly from Latin America, now residing in the United States range from 3 to 6 and more million people. There were about 6 million temporary migrants in Europe at the peak of migration in the late 1960s, with as many dependents. Estimates suggest that about 2 million people have migrated in Africa (including to South Africa) and 3 million in Latin America. Immigration into the Middle East has involved some 2 to 4 million people. 2

To the individuals concerned, the benefits of such migration evidently exceed the costs. There have always been more applicants than places for short- and long-term migration, and the pressure for illegal migration has been very strong, and into the United States, successful. Although migrants have for the most part come into the workforce at the lowest prevailing wages and for the least attractive jobs, both wages and jobs were more attractive than those in their home country. The European host countries also pay substantial social security benefits to the migrants, either together with their wages or as a lump sum on their return home. While living conditions for temporary workers are usually inferior to those enjoyed by the local population, they are rarely as bad as, and are often much better than, those in the home country. The workers accumulate considerable savings and they usually return to their home country uith new skills and sufficient capital to improve their living standards markedly. For permanent migrants the industrial economies offer an unequalled opportunity to improve their living standards.

Workers' remittances have been important in breaking the balance of payments constraints in the developing countries bordering the Mediterranean, some Caribbean and Latin American countries, and Middle Eastern and South Asian countries. In the late 1970s, workers' remittances contributed some $20 billion to developing country foreign

2 Gurushri Swamy, 'International Migrant Workers' Remittances: Issues and Prospects', World Bank Staff-Working Paper No. 481, August 1981.

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earnings (compared to some S30 billion in aid and official flows and S50 billion in private direct investment and other private flows). Workers' remittances were particularly important for low-income countries such as Egypt, India and Bangladesh that had not been able to formulate and implement appropriate policies to stimulate exports.

The first of the papers on this topic presented at the conference dealt with the growth of migration to the capital-surplus petroleum-exporting countries of the Middle East. Zafer Ecevit discussed the importance of the immigrants to the development plans of these countries, going on to present a balance of the costs as well as the benefits to the migrants and their home and host countries. It was argued in the discussion that followed that emigration draws away the skilled and enterprising workers, relatively few of whom return to inject skills, enterprise and capital back into the economy. In the industrial countries immigration may delay technological change, investment, and hence increases in productivity with concomitant declines in international competitive­ness. There are, moreover, social costs in countries of emigration and immigration, and these, particularly in countries of immigration, tend to become politically important. Immigration into Europe was slowed down in the early 1970s by the host countries for social and political reasons and similar trends may now be observed in the Middle East.

Barry Chiswick, in a paper discussing illegal migration to the United States, indicated that the pressures to migrate remain greater than the political acceptability of immigration or emigration. The desire to emigrate is still thought to be a criticism of the country of emigration, and estimates of the numbers of illegal migrants currently in the United States- mostly of Latin American origin- were accordingly hotly debated by the Congress participants.

The paper by Kazuo Uega and Keichi Hamada analysed the impact of different forms of taxation in home and host countries on migration. This issue is mainly relevant to the migration of professionals such as medical doctors, so that it is not of concern to the bulk of migrants. It does, however, have an interest in relation to the various proposals for the appropriation by the home country of some or all of the rents accruing to education given in the home country but reaped by the migrants (abroad) and by the host country.

Overall the discussion indicated sharp differences of perception about private and social gains from migration. To those with a market orientation and a liberal political outlook that puts a low value on nationalism, migration is the quickest way of creating employment

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opportunities and raising standards of living of people from developing countries. Only if migration is assumed to lead to a delay in the demographic transition to lower birth rates in developing countries because income from remittances does not have the demonstration effects of increased incomes earned in 'modem' activities, can it be argued in a liberal context that migration should be controlled. But economic growth is not the only criterion of public policy. Nationalism is often highly valued in both the host and home countries: the host countries do not want to swell their nations with immigrants, and home countries do not want to lose substantial number of people. The scope for migration is thus likely to remain limited, and the weight of international economic relations will have to continue to be borne by trade and capital flows.

III THE IMPACT OF TRADE ON EMPLOYMENT

More than 60 per cent of world trade is accounted for by trade among industrial economies, much of it mutual, less than 30 per cent by developing economies, and less than 10 per cent by centrally planned economies. Services represent about 20 per cent of total trade flows -a somewhat larger share than fuels and other primary products respect­ively, with trade in manufactured goods having the major share of nearly 60 per cent. Although the rate of trade growth declined somewhat in the mid- and late-1970s with the fall in industrial country growth, global trade growth trends held up unexpectedly well even in the second half of the decade at about 6 per cent per annum in real terms (compared to about 7.5 per cent per annum in the late-1960s and early-1970s).

Six of the papers, and an even larger share of the discussion, were concerned with the impact of trade and trade policies on employment. Two very divergent views emerged. A forceful paper by Anne Krueger, summarising a study of the impact of exports of manufactures on employment in ten developing economies, drew attention to developing country employment gains from trade with the industrial countries that exploited the differences in factor endowments. She concluded that ' ... it is at least plausible that a significant part of the unsatisfactory experience with growth of demand for unskilled labor in the 1960s may be explained by the fact that the countries involved had import­substitution trade strategies'. This conclusion was corroborated by the discussion of trends in interdeveloping-country trade. Protection-

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oriented regional trade agreements have led neither to growth nor to employment. Trade between developing countries did begin to ac­celerate in the 1970s, mainly in two areas: developing country exports to petroleum-exporting countries grew, and so did exports of raw materials to the rapidly industrialising countries. Taking advantage of the increasing potential for efficient trading between developing countries would require a movement toward across-the-board policy liberalis­ation in developing countries. Trade liberalisation is necessary to take advantage not only of the direct employment creation effects of trade, but partitularly of the indirect employment effects that come through competitiveness and the exploitation of opportunities for specialisation and economies of scale. J. L. Carvalho and C. L. S. Haddad analysed Brazilian capital and labour policies to determine whether market distortions created by policies in these areas had unfavourable employ­ment impacts. Views opposed to liberal policy regimes were, however, also put very forcefully, and the proponents of dirigiste economic policies in fact blamed many of the developing countries' political problems on liberal policies. The lack of data unfortunately made for an inconclusive discussion.

Alan Deardorff and Joseph Stern concluded that trade had (as expected following Anne Krueger's paper) an impact on employment allocation among sectors in both developing and industrial countries, and that it increased total employment. Jean Waelbroeck focused on the importance of the continuing expansion of trade to the industrial countries, with particular emphasis on the high costs of protection caused by wage rigidity. He analysed the way in which wage rigidity became inimical to increasing employment in industrial countries so that protection became an attractive alternative politically. Much of the discussion was on trends in protectionism in the industrial countries. It is clearly difficult to strike a balance. In the mid- and late-l970s the implementation of the Kennedy Round of multilateral negotiations under the auspices of the General Agreement on Trade and Tariffs and the conclusion of the Tokyo Round of negotiations substantially reduced actual and future industrial country tariffs. The negotiation of the Codes of Conduct was a breakthrough in the endeavours to deal with non-tariff trade barriers. On the other hand some restrictions on trade among industrial countries were introduced, the growth compo­nents of textile restrictions against developing countries were reduced, and there were other, often sporadic, quantitative restrictions on labour­intensive exports from developing countries. The East Asian exporters

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bore the brunt of such restrictions. 3 Non-border protection in the form of employment subsidies, research and development grants, and regional payments, increased up to about 1977-8 when the second increase in petroleum prices heightened the problem of budget con­straints through inflationary pressures. Export subsidies grew. All these measures no doubt reduced the developing countries' market access, but many constraints still seem to be on the supply rather than the demand side. Developing country exports of manufactures continued to grow rapidly at more than 12 per cent a year, their share of industrial country markets increased, and the exports of the East Asian countries, which faced the greatest constraints, grew most rapidly.4 The industrial countries were on the whole persuaded by such views as those expressed in the papers presented, and held the line against an overall rise of protection in spite of strong pressures for higher tariffs, quantitative restrictions on imports and subsidies for domestic producers.

Stephen Magee sought to provide a theoretical framework that would explain why, in the face of overwhelming economic evidence that trade has very considerable benefits while protection has extremely high costs, protectionist views remain politically viable and, in some industrial countries, still quite strong.

IV CAPITAL FLOWS AND EMPLOYMENT

The real flows of capital to developing countries continued to increase rapidly in the 1970s (though not, apparently, at a much greater rate than in the 1960s). The levels of aid flows were largely maintained with some increases in the aid to some of the lowest income countries. There was a considerable change in the composition of private flows, with a marked movement from equity to commercial bank flows. Private flows thus continued to increase despite the decline in savings in industrial countries. International capital markets were able to transform the savings in the capital-surplus petroleum-exporting countries into invest­ment in the middle-income developing countries. Capital flows helped to maintain and increase employment in countries suffering steep declines in barter terms of trade by permitting investment rates to be maintained

3 See L. M. Gard and James Riedel, 'Safeguard Protection of Industry in Developed Countries: Assessment of the Implications for Developing Countries', Weltwirtschaftliches Archiv, Kiel, September 1980.

4 Helen Hughes and Jean Waelbroeck, 'Can Developing Country Exports Keep Growing in the 1980s?', The World Economy, 4, No. 2, June 1981.

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from foreign capital inflows in the period of adjustment to the price changes. The ability to service the interest payments on capital flows has, of course, been critical to their continuation. By and large only the strong exporters were able to borrow in international capital markets. There has been an increase in the ratio of debt to the developing countries' national income, but the increase of the ratio of debt to exports has been much smaller, and reserve to debt ratios have risen. If account is taken of direct investment, there seems to have been little increase in the developing countries' debt situation in the 1970s compared to the 1960s. But the ability to borrow in world capital markets is a sign of many developing countries' strong economic performance and growing policy sophistication. s Debt, and the desire to continue borrowing (as the countries of 'new settlement' did in the nineteenth century) have, moreover, become important factors in the impetus toward liberalisation in developing countries. Debt has become a new 'engine of growth' in a political economy as well as in a direct sense.

Economic literature, despite the shift from private direct investment to banking flows, continues to be preoccupied with transnational corporations, and particularly with their role in developing countries. This was the subject that monopolised the discussion of capital flows at the Congress. Yet the concern with transnational corporations in large measure seems to arise from non-economic issues, notably from a fear of political domination. This is often accompanied by fears of economic domination, and particularly of technological dependence. The evi­dence suggests that the issues are simpler than is often supposed. Private direct foreign investment does have costs of various kinds for both the host and the home country, and these are political and social as well as economic. But it also has benefits, which may also be political and social as well as economic. The papers by V. Balasubramanyam and Ernesto Tironi indicate that the actual impact of transnational corporations on a host economy -whether the benefits exceed the costs or vice versa­depends largely on the host countries' policies. V. Balasubramanyam's argument was mainly couched in terms of the choice of technique and ensuing capital-labour intensity difference between indigenous and transnational corporations' practices. Where domestic policies enable the transnational corporations to reap monopolistic rents by choosing

s Nicholas Hope, 'Developments in and Prospects for the External Debt of the Developing Countries: 1970-80 and Beyond', World Bank Staff Working Paper No. 488, October 1981.

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capital-intensive techniques of product, the corporations do so, but so do local firms, to the detriment of employment and national growth. Where the policy environment encourages vigorous and equitable growth, market prices tend to reflect social values, and transnational corporations can make a substantial contribution to growth at low cost. The example of Hong Kong was particularly relevant in this respect, so that the discussion again turned to the importance of a liberal policy environment in achieving desired employment objectives. Ernesto Tironi outlined the very great difficulties of policy-making in a regional economic grouping. Given regional tariffs it is almost impossible to find policies that will avoid special benefits flowing to transnational corporations.

V CONCLUSIONS

The discussions were wide-ranging and they did not result in a consensus on the relationship of trends in international economic relations to employment, but one point emerged quite clearly. The debate about economic trends, and particularly about economic policies, only clarifies issues if it is conducted within the constraints of logic and against the background of scholarly analytical work that rests on factual evidence.