6:41 AM Aug 5, 1994


Geneva 4 Aug (Chakravarthi Raghavan) -- Expansion of world trade which has linked more closely labour markets of the North and South has raised living standards in the North and accelerated development in the South, but has increased inequalities both in the North and South and has hurt unskilled workers in the North by reducing their wages and pushing them out of jobs.

In reaching this conclusion in his recently published book 'North-South Trade: Employment and Inequality' (Clarendon Press -Oxford), and basing it on a new methodology of calculation of trade effects on jobs which is admitted to be a "combination of calculation and guess-work" -- author Adrian Woods estimates that upto 1990 (mostly in the 1980s), changes in trade with the South had reduced the demand for unskilled relative to skilled labour in the North as a whole by about 25 percent.

A former senior economist at the World Bank and now at the Institute for Development Studies, Sussex, Woods says the solution with strong popular appeal, namely, protection and raising artificial barriers to imports from the South should be resisted since it would be a more costly way of helping unskilled labour in the North and would also hurt the poorer workers in the South.

But to resist the political pressures for protection, it is incumbent on governments in the North to help unskilled workers in better ways such as education and training to increase the pool of skilled workers and reduce that of the unskilled, infrastructure and community projects for employment of unskilled and taxation to offset the bias towards use of skilled labour over unskilled, he argues.

In the United States -- where wages are flexible and expansion of trade with the South has resulted in reduction of relative wages of unskilled labour to skilled and increase in poverty -- the solution would lie in education and training to expand supply of skilled labour, boosting demand for unskilled labour through projects to improve infrastructure or in maintenance or community work and supplementing earnings of low-wage workers in both public and private employment through tax relief and cash grants.

In Europe where income support for unemployed have reduced the poverty effect but with the enforced idleness and rejection causing social problems like vandalism, violence and social corrosion -- Woods says there is need to increase the relative demand for unskilled labour through public employment projects and a progressive payroll tax in both public and private sectors to correct the bias towards employing too law a rate of unskilled to skilled labour caused by narrow and inflexible wage differentials.

In the South, Woods says, his study has two policy implications. The first, improvement of human resources, is crucial for both growth and equity. The proportion of labour force in low-skill categories should be reduced through education, training and work experience. These will make unskilled labour relatively scarcer and shrink wage differentials.

The second policy implication of more neutral trade policy stance and removing the bias against manufactured exports to encourage expansion of labour-intensive exports, Woods says, has some important qualifications.

In some developing countries, neutrality of incentives would not cause expansion of labour-intensive manufactured exports and even when such a trade policy would tend to increase labour-intensive exports, the increase would not necessarily be large nor would income inequality necessarily decline.

Experience, or learning by doing, is essential for acquisition of skills, but the lessons on this for developing-country trade policy are not simple, he says.

Trade brings knowledge as well as goods, and to the extent countries limit their contacts with the rest of the world, they deny themselves opportunities to learn new skills.

At the same time, Woods says: "one must recognise that countries which have been most successful at catching up in skills -- France, Germany, and the USA in the 19th century, Japan, Korea and Taiwan more recently -- have not practised free trade. Especially in the East Asian countries, judicious selection and development of infant industries with temporary protection and subsidies appear to have made a major contribution."

Woods estimates the cumulative reduction in demand for unskilled labour for Northern manufacturing as a whole caused by trade expansion with the South, was between six to 12 million person-years. The central estimate, within this range, of 9 million person-years implies a five percent economy-wide reduction in demand for unskilled labour.

He then uses this figure, by what he calls combination of calculation and guesswork, to correct for the effects of defensive unskilled labour-saving innovation by enterprises in the North, and to the correct the 'under-statement' of these estimations for non-traded sectors from which traded sectors buy inputs, including the services sectors. He doubles twice the original 5% estimate for these corrections, and arrives at the 20 percent figure.

In conceding the possibilities of his estimations being wrong in over-estimating the reduction in relative demand for unskilled labour in the North, Woods says this would have some costs in lowering economic efficiency. But he argues the costs of under-estimation would probably be larger: aggravating social decay and conflict blighting most developed countries and increasing the unremitting demands for trade barriers and thus robbing many millions in the South of the chance to work their way out of more serious poverty.

His estimations might also have exaggerated contribution of trade with the South to reduction of relative demand for unskilled labour in the North and under-estimated the contribution of new technology. But this error in his view would make little difference to his policy suggestions since they did not involve interference or linkage with trade flows.

Woods notes that his estimations of reduction in demand for unskilled labour are far above that of numerous other studies which have estimated them to be in hundreds of thousands rather than millions, and thus having only a 'tiny impact'.

The two different methods of analysis -- whether calculations based on factor content of trade or accounting decomposition of sources of changes of employment -- used in such studies, he suggests, both have severe downward biases.

A fundamental premise of the book is that trade, based in the Ricardian framework of uneven international differences in labour productivity among sectors, arises not from differences in technology but differences among sectors in skill intensity and differences among countries in relative availability of skilled and unskilled labour.

US 1980 data, at 3-digit manufacturing industries, show a correlation between skill-intensity and capital-intensity -- textiles, furniture, leather, footwear and clothing generally exported by the South show low-intensity both for capital and skill, while petroleum, paper and industrial chemicals need high-intensity of both capital and skill.

These data could be consistent with three hypotheses: the first, Woods hypothesis is that North-South trade is based only in differences in skill availability and the association with capital intensity is only a coincidence. The second is that trade is based solely on differences in capital availability, and only coincidentally linked with skill. The third would be both skill and capital availability are influential.

Woods rejects the second hypothesis as untenable because "there is strong evidence of large North-South differences in skill availability". The third hypothesis that both skill and capital are influential is not "persuasive" for Woods, since there is no evidence that capital is generally scarcer or more expensive in the South than in the North.

In explaining why there is a North-South trade in manufactures, Woods says that the North has a relatively large supply of skilled labour while the South has a relatively large supply of unskilled labour and it makes economic sense for the North to specialise in producing skill-intensive items and exporting them to the South in exchange for unskilled or labour-intensive items produced by the South relatively more cheaply.

While in line with the conventional Heckscher-Ohlin (H-O) theory of trade, it leaves out the role of Capital, usually viewed as one of the main bases of North-South trade in manufactures.

But Woods argues that H-O theory-based interpretation of role of capital is theoretically unsound and empirically untrue.

In his view since financial capital is mobile, interest rates and profit rates are much the same in the South as in the North, and most capital goods (machinery) can move freely around the world or constructed anywhere in 2-3 years (buildings). Hence there is no reason for the North to have a comparative advantage in capital-intensive production -- infrastructure being the only exception.

Besides skills, the difference in availability and quality of infrastructure capital is the second most economic difference, after skill supplies, determining manufactured trade between developed and developing countries. "This large and enduring gap" in availability of infrastructure, Woods says, is the basic element of truth in the H-O proposition that North is relatively well-endowed with capital and the South poorly endowed.

With trade based on availability of skills, rather than capital, in Woods view expansion of trade with the South does not drive down average real wages in the North nor pull up share of profits at the expense of labour nor push workers in general into unemployment. But it widens the economic gap between skilled and unskilled workers.

But the Woods assertion about equal availability of capital for the South and the North is open to question and arguments. Anecdotal experience of the South clearly suggests that the price to be paid to attract capital -- whether in the form of interest rates or profitability -- is higher. Risk premiums governing profit or interest rates among countries and real, as different from nominal, interest rates might be valid explanations, but whether they in fact prove equal availability of capital is arguable, at the minimum.

Woods says that the H-O theory assumption that greater scarcity of capital causes the interest rate -- and profit-rate on machines, factories and inventories -- to be higher in the South than in the North is "apparently incorrect" in that the rate of interest or profit is not governed by size or scarcity of some exogenously given aggregate of capital but the outcome of inter-temporal optimization decisions, and that profit rate is simply the interest rate plus a risk premium.

The most striking feature of interest and profit rates in the North and the South, Woods says, is their similarity -- which though is different from same.

The most persuasive justification for assuming equal and exogenous profit or interest rates, he argues, is international mobility of financial (debt and equity) capital...There is now a global capital market, into which the countries of the North and many (though not all) countries in the South are integrated. The actual extent of capital mobility continues to be debated, but most people would agree that it is now sufficient to impose a tight limit on differences in national interest rates.

There is also an assumption about equal availability of identical technology with technology defined as knowledge embodied in material means of production. Since most machines and intermediate goods are assumed to be freely traded internationally, there is equal access and availability of technology, he argues even while recognizing exceptions: goods kept for exclusive use of patent-holders or its use by others being restricted by terms of licensing agreements or by prohibiting sale to particular countries.

But in his view these conditions apply only to a 'tiny' proportion of all producer goods. Many other goods, he concedes, are expensive because of patents, licensing fees, and royalty payments, but in his view these do not matter since "equal access to technology requires only that producer goods be available at the same ex-factory price to any firm in any country which can pay for them." There are many producer goods that firms in developing countries want but can't get. But the obstacle is usually that they cannot afford them.

This view about equal availability of technology is also pre-Uruguay Round agreement on TRIPs which creates global monopolies and rentier incomes for owners, and whose effect would be seen over the next decade.