Janine Berg ILO-Brasilia Understanding and Responding to the Labour Impact of Globalization RIAL Workshop “Labour Dimension of Globalization” Santo Domingo, Dominican Republic 27 July, 2010

Guiding Questions for the Panel 1.What has been the impact of globalization on employment and wages in the region? 2.What are the key characteristics of a country that determine or can anticipate these impacts? 3.How can labour market institutions help in meeting the challenges of globalization?

How is globalization manifested? Foreign Investment MigrationTrade Each one is affected by both internal and external factors and each has an impact on the other.

World trade opening (mean tarrifs %) Change (p.p.) East Asia and the Pacific East Europe and Central Asia Latin Am. & the Caribbean Middle East & N. Africa South Asia Sub-Saharan Africa Total, Developing Countries Developing Countries Source: McMillan & Verduzco, 2009.

Latin America: Index of Volume Traded, 2001 – 2009 (Index 2000=100) Source: ILO, based on information from IMF, April 2010 and ECLAC. Information on Latin America based on 18 countries Note: a/ ECLAC forecast.

Trade and employment: What does the theory tell us?  Neoclassical theory tells us that free trade will lead to a shift in production towards the more abundant factor.  For developing countries, this factor is low-skilled labour (or natural resources).  The demand for the factor increases, and as a result, its price.  In the case of low-skilled workers, the increase in demand will lead to a reduction in the wage gap between high-skilled and low-skilled workers.

But theory isn’t a good guide… “There is no area of economics where there is a greater gap between orthodox theory and actual problems than in the theory of international trade.” -- Joan Robinson, 1971

Why? Because it depends on…  The structure of the world economy (trade in tasks, trade agreements, multinational policies, commodity prices)  Conditions specific to the country (the exchange rate, economic conditions, the cost of credit, the availability and quality of infrastructure, tax laws, labour market institutions, access to other markets)

What does the data tell us? Evolution of industrial employment Employment (1,000 workers) East Asia & the Pacific 26,83432,63559,52764,74755,25469,356 China24,39029,74353,04058,25544,92759,353 Eastern Europe & Central Asia 6,0675,67811,12524,20521,00617,646 Latin America and the Caribbean 9,60510,3748,2977,5258,5989,438 Middle East & North Africa 2,3632,5262,7493,2732,2502,125 South Asia7,8667,6719,23610,9868,9288,180 Sub-Saharan Africa2,6532,4272,5392,9151,7641,531 Total, Developing Countries 55,38861,31093,472113,65197,799108,275 Developed Countries 61,21456,42059,21260,90962,61653,975 Source: McMillan & Verduzco, 2009.

And within Latin America? Some stylized facts In Mexico, Central America and the Caribbean, trade opening has increased output and employment of labour-intensive goods, but traditional manufacturing that had existed prior to liberalization suffered. Although there has been an increase in manufacturing jobs, the new jobs pay less than the jobs in traditional manufacturing. (Other sectors such as agriculture have suffered strong job losses resulting in an increase in informality and international migration). In South America, exports have concentrated in natural-resource-intensive goods, whose production is typically capital intensive. The manufacturing sector was negatively affected by import competition, causing a net loss in jobs and an increase in informality. During , the increase in commodity prices and a competitive exchange rate helped to strengthen the internal market and develop national industries. There was an increase in formality rates in Argentina and Brazil, buoyed by policies that increased the value of the minimum wage and strengthened the internal market.

Increase in Informality in Latin America Informality (%) (PREALC definition) Source: ILO, Labour Overview, several years.

Urban unemployment, Latin America Latina and the Caribbean, Source: ILO, Labour Overview, 2009.

Responding to the impacts of globalization

Different areas to address  Monetary and exchange rate policy  Industrial policy  Labour market policies and institutions  Tax and redistribution policies

There is a need to protect workers, but how should it be done? Public policies specifically designed for workers affected by trade –US: “Trade Adjustment Assistance” Programme (TAA) –Wage subsidies for displaced workers above the age of 50 (France, Germany) Traditional labour market policies, both passive as well as active

Spending on Labour Market Policies (% GDP): The Americas compared with Europe Source: OECD, IDB.

Active Labour Market Policies as an Automatic Stabilizer TrainingSubsidies for hiring Direct employment creation programmes Source: Based on Quiggin (2001). Job shedding Job creation

But there is also a need for unemployment insurance Source: Berg and Salerno (2008).

The importance of the State To benefit from globalization, a stronger State is needed.  Investing in physical infrastructure, improving the educational system, professional training, and social protection systems (unemployment insurance, pensions, health care), requires the collection of taxes. The tax systems should be made progressive. The importance of tax policy  With the exception of Brasil, tax collection on the part of Latin American governments is very low.