7:17 AM Mar 20, 1996


Geneva 19 Mar (Chakravarthi Raghavan) -- There does not appear to be any economic causality between globalization and unemployment in the industrial world, but there are political links and labour concerns in the industrial world are becoming a foreign policy issue, speakers suggested at a two-day seminar on Labour and the International Economy here last week.

Several economists at the seminar said current knowledge was inadequate to formulate policy responses and more studies, of long-term effects and using general equilibrium models are needed for any policy conclusions.

The seminar was organized jointly by the United States Council on Foreign Relations, the British Royal Institute of International Affairs and the ILO's International Institute for Labour Studies.

The seminar perhaps was caught up in the straight-jacket of the US politics and the neo-classical macro-economic orthodoxy of the American and European establishments.

Even the opening remarks of the Chair, Ms. Carol O'Cleireacain, Economic Consultant of the Foreign Policy Council, explained the Council's (a political US East Coast establishment) involvement and referred to the Buchanan effect in the US primaries.

While no conclusions were drawn, in a summing up of the two-day discussions, O'Cleireacain said that while no causal link was established between globalization and unemployment in the industrial world, there is a political link and the concerns of labour in the industrial world is being linked to foreign policy issues. The problem, she said, seemed to lie more in domestic policies rather than trade and capital movement, and in distributional policies in the Industrial Countries are important in this matter. Trade sanctions for labour standards in the developing world, she said, has been unduly emphasized and it is only part of a larger picture. One had to look at differences in domestic and macro-economic policies for solutions. But attention has to paid to the problem of core labour standards and mechanisms that could be used to deal with promotion and observance. But it should not be sanctions based.

In an introductory presentation, Mr. Don Davis, Prof of Economics of the Harvard University, noted that while migration, capital mobility and trade were the forces underlying 'globalization', capital mobility and trade had grown in importance in recent years and that capital mobility was a real issue of concern as it could shift the incidence of labour standards more fully to relatively immobile labour.

The issue of labour standard harmonization, Davis noted, had arisen in its sharpest form in discussions of effects of North-South trade and, prominent within this discussion, has been the concern that with greater capital mobility, lower standards in the South might attract capital from the North, raising the costs of North's standards. This has given rise to the demand that the South should adopt standards approximating those in the North.

But in such a scenario, if compensation for workers is taken as a fixed proportion between wages and standards, raising the standards can come only at the cost of lower of wages and a mandate for higher labour standards in the South would result in the worker in the South being forced to take a sub-optimally large share of his compensation in the form of standards in place of real wages. With mobile capital earning a fixed return, insistence on common standards for labour in the South and North would result in real welfare of the Southern workers being actually depressed via high standards, he added.

Mr. Mathew Slaughter of Dartmouth College, in his paper, said that while in theory outsourcing by TNCs could cause within-industry shifts in relative factor demands and thus relative factor prices, the empirical results indicate that in practice TNCs in the 1980s were not outsourcing to a large extent. This was the impression from the assembled stylized facts and estimated cost functions in his study.

Most stylized facts were inconsistent with widespread outsourcing. Home and foreign production labour, at best, seem to be weak price substitutes and in fact may be price complements. Together, these findings indicated that US TNCs were not motivated predominantly by international factor price differentials and thus outsourcing contributed very little to rise income inequality.

While there has been a shift in labour demand, from unskilled to skilled, the similarity between parents and affiliates in their employment and investment trends suggest that 'skill-based' technological change was occurring both in the US and abroad. But additional work was needed to determine whether this was the case, and whether technological progress in affiliates consisted of simple efficiency gains or changes more similar to those in parents.

But neither of the two presentations appeared to address the problem that has brought the issue up on the political agenda of North, and of the Council on Foreign Relations in an US election-year politics.

This problem -- linked to the neo-liberal macro-economic policy stances in the North and the governmental bias towards big corporate capital -- is the fact that unemployment is not short-term, but structural and long-term, and involves not merely unskilled labour in labour-intensive industries of the North facing competition with labour-intensive industries of the South, but increasingly encompasses white-collared middle class and middle level professionals who, when they lose jobs, can get employment only at lower earnings, and engenders middle class insecurity.

While the studies and papers brought out a solution does not lie via the trade route, none posed a challenge to the basic neo-liberal policies and economics in the North.

In a case-study of France, Mr. Patrick Messerlin of the Institut d'Etudes politiques de Paris, that trade had at most had a "modest impact" on total employment which depended more upon macroeconomic factors and policies and structure of labour and product markets. Even when calculations are disaggregated between skilled and unskilled labour embodied in French trade, this picture did not change. French exports were not particularly skilled-labour intensive compared to rest of the world. France was both relatively well endowed with skilled labour compared to certain developing country trading partners, and relatively intense in unskilled labour relative to major OECD countries.

Messerlin said trade has had an impact on relative wages, with liberal trade is associated with better, rather than more jobs. The influence of trade on wages in France was dampened by domestic labour market policies and regulations, especially those for young workers and those close to retirement.

Also, focus on outward FDI by import-competing industries was misleading, as outward FDI was essentially by export sectors while inward FDI is in downstream industries and in exporting sectors. This, he said, showed that French firms ignored opportunities to invest in France that foreign investors found profitable.

The results of the study, Messerlin said, were close to those in US, and given the relative rigidity in French labour markets, the similarity was interesting.

"It confirms that trade policy is the wrong instrument to address labour issues, a message particularly useful if one takes into account the fact that the US and France have been among the staunchest supporters of the introduction of a 'social clause' in the GATT arena," he added.

In a case-study of Indonesia - on the links between trade, investment and labour standards - Debora Spar of the Harvard Business School noted that in the early 1990s that country had jointed the ranks of rapidly emerging markets. As against just $319 million in FDI in 1985, by 1994 it was receiving $24 billion - with the bulk going into light manufacture, chemicals and consumer products.

The combination of late development and authoritarian state had made Indonesia a particularly potent mix. Anecdotal evidence offers support for the view that firms come to the country to take advantage of the vast pool of labour, exploit the labour force without any fear of retribution from government or opposition parties and export their goods or profits without leaving behind them any of the benefits that FDI has created elsewhere. While data on working conditions are not readily available, anecdotal evidence generally highlights the same key features: crowded factories, dormitories with 3-4 people sharing a single room and strict shop-floor practices etc.

But labour conditions in Indonesia appear to be determined, not by foreign investment or even necessarily by government policy, but rather by the natural, if gradual, progression of industrialization and economic development, Spar said. While labour force in the 1980s had grown at a 3.6% rate, dampening pressure for wage hikes, real wages nevertheless had grown at 6.4% a year compared to 2.6% growth rate in China, 3.3% in India and 2.5% in Malaysia.

While in the long run, fragmentation of the Indonesian state and the authoritarian bent of its government may still prove decisive in limiting political freedom or political stability, it is difficult to blame Western firms for being more than benign observers at what may not even prove to be a race to the bottom, Spar concluded.

Mr. Abraham Katz of the US Council for International Business said cooperation should be the preferred route for improving labour standards and current attempts to press the social clause in the trade or investment context will simply not get off the ground. There is wide realization that social clause will choke off the economic growth and rising standards on which improvement of workers' conditions depend. ILO is the chosen instrument for pressing a multilateral cooperative approach and for this it must overcome the virtual stalemate imposed by its tripartite structure, and which is also the source of its potential strength.

Labour standards, Katz said, don't belong in the WTO system of rules and disciplines which give business a certain degree of certainty and predictability based on contractual individual member rights and obligations and which is enforced by a dispute settlement system which, at the end of the process, authorizes rebalancing concessions.

The possibility that the contractual advantages could be set aside on grounds not required to fulfil the commercial purpose of the contract would destroy the fundamental guarantee on which successful trade and investment takes place, he said.

The WTO, he noted, has no provision for collective condemnation and sanction of one of its members. "If a social clause were to permit imposition by one country of sanctions against others i.e. destroying the contract, the result would be to fragment the system and encourage invocation of the clause for protectionist purposes. The social clause would obviously involve the international community in punitive measures in matters of domestic governance that do not affect the characteristics of the produced being traded."

Katz rejected any analogy to IPR protection where discipline over domestic practices is essential to permit commercial exploitation granted by the contract.

The goal of raising conditions of workers can best be accomplished through cooperation and the business community and industry initiatives can play an important role. But Katz excluded efforts to impose regulations or guidelines by international or national codes. Such an objective voiced by human rights or labour groups was invariably accompanied by demand for enforcement and it was "flip investment side of the trade social clause".

Mr. Angelo Gennari, Chief of Studies and Research of the Italian Confederation of Workers' Trade Unions, while advocating the use of a social clause linked to trade to enhance core labour standards, suggested that the credibility and effectiveness of the US case for this would be enhanced if the US itself would ratify and enforce Conventions 87 and 98, dealing with freedom of association and rights of working people to organize trade unions of their own choice for collective bargaining. The US excuse that the USA was made up of 50 sovereign states and this made ratification more complex.

This was "only a lame alibi", Gennari said and asked: "How can the American government propose to go on supporting and promoting a 'social clause' when its own house is such a glaring disorder?"

But earlier, Gennari gave fulsome support to the efforts of the USTR, Mickey Kantor to introduce a social clause in the WTO and said that the US support was crucial to defeat the resistance of many in the WTO. He also dismissed the argument about competence, and that the issue should be dealt with in the ILO, and said that competence question had not prevented the WTO in dealing with foodstuffs and agricultural commodities which was in FAO jurisdiction nor in dealing with IPRs which remained "the fief and competence of the WIPO".

He also rejected the 'national sovereignty' arguments about a social clause, and said there were many external interferences in developing countries which also intruded on sovereign rights, but which were being accepted -- the IMF 'interference' and day-to-day meddling of structural adjustment plans and implementation, and the blatant open military interference.

Gennari denied that the international labour movement and Northern unions were seeking labour standards as a protectionist measure. They were not seeking an international minimum wage or levelling out of wage levels, but that they wanted countries to ratify and implement some specific ILO core labour standards -- those prohibiting forced labour, guaranteeing freedom of association, forbidding on-the-job discrimination and the Convention against Child Labour.

While trying to dispel notions that trade-labour rights linkages were protectionist, Gennari went on to suggest that trade unions of wealthier countries should propose that "customs duties or levies generated on the basis of a social clause enforcement -- in compensation not for wage differentials but unacceptable social differentials in basic human rights -- should go to a special solidarity fund .. to help build-up more effective, even if minimal, coverage of unemployment, health care, or retirement assistance."

That the intent was to protect Northern labour came out though from Gennari's justification of his proposal: "That way, we, the unions in developed countries, would get some coverage from unfair competitive pressures and advantages; unfair... because essentially based on a human rights differential; but at the same time we would not penalize our brothers and sisters in the Third World, and instead would help those workers became stronger and fitter for .... a long, hard struggle".

Mr. Andrew Sapir, an advisor in the EC Commission's Directorate-General for Economic and Financial Affairs, in a paper analysing the European experience of trade liberalization and social harmonization and its lessons for world trade liberalisation, said that at the end of the day it appeared that the economic case in favour of a social clause was weak.

While poor social conditions were an important problem, on both ethical and economic grounds, "the root of the problem lies much less, if at all, with alleged artificial labour standards aimed at boosting competitiveness, the so-called 'social dumping', than with poverty itself.

"As a result, the introduction of 'social clauses' in trade agreements - if it means reduced trade opportunities for poor countries with low labour standards -- is more likely to reinforce the problem than solve it. As trade economists frequently proclaim, protectionist trade policy is rarely the best instrument to remedy economic problems.

"The ethical aspect of labour standards, such as child labour, is ultimately a problem of development which needs to be addressed by development policies. The economic aspect of labour standards is also a development problem as far as countries with low standards are concerned.

"If rich countries which enjoy high labour standards are serious about raising income and labour standards in poor countries, they should offer concrete support, including by selling less arms to governments which use them to repress union activities. In countries with high labour standards, the problem created by competition from low-standard countries, the so-called 'race-to-the-bottom' needs to be addressed by social policies, such as education and training, and regional policies when affected workers tend to be regionally concentrated."