5:41 PM Sep 6, 1995


Geneva 11 Sep (Chakravarthi Raghavan) -- The scourge of unemployment in the industrialized North, with serious political and social implications, is the result not so much of North-South trade or labor-shedding technology as of lack of investment, demand and growth.

The remedy lies in an international cooperation strategy to accelerate world economic growth -- an "all-boats-afloat" strategy to create jobs in the North while benefiting, not hurting, the South. Such a strategy would remove the main threat to liberalization of trade.

This is the main policy conclusion of the UN Conference on Trade and Development in its annual Trade and Development Report (TDR-95) published today.

Unless this unemployment crisis, with its serious political and social repercussions is resolved through internationally coordinated policies to promote higher growth, demand and investment, the international trading system and liberalized trade will not survive, despite the Uruguay Round accords, TDR warns.

The TDR notes that despite growing support for globalization, liberalization and outward-oriented development in industrialized countries, joblessness is increasingly blamed on imports of manufactured products from the South. The solutions proposed range from raising import barriers (protectionism), imposing higher labor standards on Southern producers (the social clause) to lowering labor standards in the North (flexible labor markets).

But each of these responses, including the third favored by free market and free-trade advocates of minimum government, would slow the industrialization of the developing countries, without helping the unemployment problem of the North.

The TDR questions the view that labor market flexibility in the US and UK have increased jobs, though at the cost of lower wages, while in the Europe it has increased unemployment while preserving wages and earnings of the employed. If the figures for unemployment and the disguised unemployment are taken into account, the situation is not very different, it notes.

Neither orthodox prescriptions for labor market flexibility nor protectionist instruments through a 'social clause' linked to trade would resolve the problem of rising long-term unemployment and growing income inequalities in the North, TDR says.

They would only reduce welfare in the North, drastically hit employment and purchasing power of countries in the South (thus hitting the exports of the North) without 'saving' the labor-intensive industries of the North, threaten evolution of the international trading system in the right direction, aborting the benefits of the export-led growth strategies and seriously harm the development prospects of the South, Carlos Forti, Officer-in-charge of UNCTAD said at a press briefing in Geneva.

A simulation model annexed to TDR, shows that North-South trade brings considerable benefits to the North even when it gives rise to labor market problems. It also shows that some of the policy proposals often advocated as a remedy for unemployment in the North (greater labor market flexibility in the North or higher labor standards in the South) would at best have only a limited impact, and might well leave the North worse off than before.

In the absence of a strategy of tackling unemployment by "lifting all boats", Governments might find it difficult to resist political pressures for protectionist solutions, harming everyone, TDR says.

While trade restrictions linked to higher labor standards in the South might seem an easy way to reduce competition from the South, the rationale for improving labor standards in the South lies in protecting workers there, not in saving jobs in the North. Since North-South productivity differentials are much narrower than wage differentials, raising labor costs and standards in the South would not go far in saving labor-intensive Northern industries. They would only worsen the terms of trade, reduce incomes in the North and the real wages of unskilled labor in the North as import prices rise.

Yilman Akyuz, senior economist of UNCTAD, who has been closely involved in writing the report, said that in the absence of change of macro-economic stance in the North to favour investment and much higher growth rates than now, trade conflicts would arise within the North, with each country trying to export its unemployment through neo-mercantalist policies and the trading system would be unable to withstand the strains.

The TDR says that while North-South trade and technological changes have had their effects on employment, these provide merely a "superficial explanation" of unemployment. While both factors tend to reduce demand for unskilled labor, demand for skilled labor too has been weak in the North, the TDR says.

Any strategy of "adjusting" unemployment by pitting worker against worker in the arena of competitive labor markets would exacerbate conflicts among social classes and, no less, among nations, UNCTAD warns. Turning labor back into just another commodity, is not a viable recipe for advancing towards an open world economy. On the contrary it would invigorate the forces that would prefer to go in the opposite direction.

Even if labor in the North is made less costly to employers and more skilled, business will invest on the scale required to provide more and better jobs only if it is confident of buoyant sales.

But no country can expand demand on its own for long without suffering an attack on its currency and being forced into "putting its house in order" through a restriction on demand.

And dislocation of labor as a result of new competition or new technology is nothing new in economic history. In the past, during the post-war period characterized by many as the "Golden Age", such competition, first from Japan, and then other southern European countries, were faced by the advanced industrial countries because of the high rate of growth and job creation.

At that time, the growth in the economy and demand encouraged investment and new productive capacity and employment of the displaced labor. Now, displaced workers in the North, both skilled and unskilled labor, are not being absorbed in expanding industries and services. Policy recommendations, focusing on the supply side (deregulation of labor market, reform of welfare institutions, training of unskilled labor and measures to boost profits), while valuable in some cases as part of a wider employment-creating package, are often put forward on basis of a hasty comparison of labor market institutions.

All labor markets in the North are in fact undergoing deregulation over the past two decades, resulting in a declining trade union membership and rise in non-standard forms of employment.

Corporate profits too have risen in the 1980s.

But these have not brought about expansion of jobs through faster pace of capital accumulation and have done little to ease labor market problems. In countries where official unemployment figures have fallen, absorption in low-productivity sectors of the labor made redundant in industry suggests that disguised unemployment, like that seen during the Great Depression has been increasing.

By itself labor market flexibility will only determine whether the problems take the form of increased income inequality or rising unemployment. This should not be surprising since supply side policies depend very much on whether they are implemented under stagnant or growing aggregate demand conditions.

The macro-economic policies of the last two decades have been biased towards restricting demand growth, thereby itself limiting demand for labor and also blunting the impact of supply-side measures.

Avoiding convergence towards a growth rate in the North too low to reverse high and persistent unemployment posed many difficult policy challenges, and not all the same for different countries.

"But what is certain is that the consensus view of structural unemployment as a failure in a particular market is widely off the mark," the TDR says.

The unemployment can be solved only if the fundamental imbalance between investment, growth and job creation is corrected. But it does not mean adopting the same successful policies of the past.

"But it does mean finding the right mix of demand and supply-side measures to ensure both internal and external balance in the changed context of the 1990s."