Making policies work

GREAT insights Magazine

Trade, Labour and Socio-Economic Dimensions

November 2013

Jansen, M. 2013. Trade, labour and socio-economic dimensions. GREAT Insights, Volume 2, Issue 8. November 2013. Maastricht: ECDPM.

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Increased availability of information and tools on how to seize opportunities while addressing the challenges arising from trade opening make it easier for developing countries to manage the socio-economic impacts of trade opening.

When economists are asked to describe the effects of trade liberalisation, they tend to argue in terms of ‘benefits’ and ‘costs’, with benefits reflecting, for instance, numbers of jobs created and costs reflecting numbers of jobs lost. Although such numbers are doubtlessly useful for making policy decisions, they only remotely reflect what policy makers, businesses and ordinary people experience on the ground when trade reforms are introduced. What they experience is change. 

They experience change in the environment surrounding them and this change brings about opportunities and challenges. Opportunities take the form of new business opportunities. Challenges can take the form of existing businesses getting under pressure and maybe shedding labour. Opportunities can take the form of the availability of new and better-paid jobs in companies that manage to export. Challenges can take the form of individuals having to migrate in order to get those jobs or of individuals going through periods of unemployment. Empirical evidence consistently indicates that, in the long run, this combination of opportunities and challenges will lead to benefits for the economy. Yet, how well a society handles the period of change is likely to determine how large the benefits of trade are, how they are distributed and how rapidly they materialise.

There are reasons to believe that in this latest wave of globalisation, the balance of opportunities and challenges is rather tilted towards the ‘opportunity’ side for developing countries. First, developing countries have more information about the opportunities than in the past and often that information is tailor-made. Second, we have a far better understanding nowadays of how the labour market challenges can be handled and again, solutions tailored for developing countries are increasingly available. Third, growth patterns and the nature of globalisation may allow for more opportunities than before. 

Many types of shocks to or changes in the economic environment trigger the type of opportunities and challenges mentioned above. One of the nice aspects of trade reform is that its design is in the hands of policy makers and that the changes in the competitive environment they trigger are to some extent predictable. Predictability is increased by the fact that most trade agreements build in implementation periods for policy reforms. It is therefore possible to get a sense of where opportunities and challenges lie before the reform is actually implemented. This gives policy makers a powerful tool to prepare societies for change and help them to make the best out of it. 

The multilateral trading system provides additional assistance in this context. Through initiatives like the Aid for Trade initiative and the Enhanced Integrated Framework, developing countries have access to advisory services that can help them to determine where opportunities for new business lie. Developing countries can also receive assistance to determine how to best prepare the workforce forthe upcoming change. In particular, policy makers can receive guidance on the type of skills that need to be emphasized in order for the workforce to be ready to take advantage of new trading opportunities (1). 

Developing countries also increasingly make use of policies that assist households in coping with some of the challenges triggered by trade reform. In industrialized countries, social protection systems have been around for a while and they assist households in getting through periods of unemployment and income loss. Increasingly such systems are also being introduced in the developing world, partly because the understanding of how to design, implement and fund such systems in developing countries has increased a lot in recent years. Programs tend to differ across countries in their components, scale and beneficiary selection. Their funding mechanisms also differ and can be adjusted to country specific circumstances. Exports can actually contribute to funding social protection systems as in the case of countries like Bolivia, Botswana and Brazil where mineral based taxation contributes to the financing of social protection (2). Strong social protection systems have many benefits and one of them is that they can facilitate transitions following trade reform and provide shelter to poor households in cases where the local economy is exposed to shocks transmitted through global markets.

With the amount of information available on how to help local business and families to reap opportunities from trade and with stronger tools available to protect against possible challenges of openness, developing countries are better equipped than before to reap the gains from trade. The external conditions they face also appear to be favourable for many. Growth remains strong in the emerging world and countries with large populations such as China, India and Nigeria are experiencing a middle class boom. This implies increased demand notably for commodities. Many least developed countries (LDCs), notably in Africa, are rich in oil, gas, minerals and arable land. These countries are already taking advantage of high commodity prices and can probably continue to do so in the near future. If some of the benefits from this boom are used to manage the socio-economic impacts of trade openness, this is likely to contribute to future sustainable growth and to stronger support for openness within the population.

Marion Jansen is Counsellor in the Economic Research and Statistics Division, World Trade Organization.

Footnotes

1. See for, instance, information on ILO, OECD, World Bank and WTO work on this theme available at: http://www.wto.org/english/tratop_e/devel_e/a4t_e/global_review13prog_e/sideevents14_e.htm.
2. Bachelet, Michelle: Social Protection Floor for a Fair and Inclusive Globalization, Report of the Advisory Group chaired by Michelle Bachelet and convened by ILO with the collaboration of WHO, Geneva: 2011.

This article was published in GREAT Insights Volume 2, Issue 8 (November 2013).

Economic Transformation and TradeTrade

External authors

Marion Jansen