Globalization & Its Impact on the Labor Markets

Coming to the fore as one of the most talked-about issues of the late twentieth century and the new millennium, the phenomenon of globalization has captured world attention in various ways. From the information superhighway to the international trade in drugs and arms, to the free and easy movement of people and goods, the world has become global.

Globalization is the great economic event of our era. The International Monetary Fund (IMF) describes it as “the growing economic interdependence of countries worldwide through the increasing volume and variety of cross-border transactions in goods and services and of international capital flows, and also through the more rapid and widespread diffusion of technology.”

It has been very rightly said: “Technology makes globalization feasible. Liberalization makes it happen.”

In other words, globalization is the international integration of goods, technology, labor, and capital-that is everywhere to be seen. In any large city in any country, Japanese and Korean cars ply the streets, a telephone call can arrange the purchase of equities/shares from a stock exchange half a world away, most computers cannot function without Intel chips, and foreign nationals have taken over large segments of service industry. Over the past twenty years, foreign trade and the cross-border movement of technology, labor, and capital have been massive and often irresistible.

The extent of globalization is evident from the fact that between 1930 and 1990, average revenue per mile in air transport fell from 68% to 11 cents , in 1990 dollars; the cost of a three minute telephone call between New York and London fell very substantially; and between 1960 and 1990, the cost of a unit of computing power fell by more than 99%. Improved communications have led to an organizational innovation—the multinational company, a superb mechanism for transferring technology across frontiers.

For many advanced economies the most important decade for globalization since World War II was the 1970s, when the ratio of trade to output rose markedly in both advanced and developing economies in the wake of the two oil shocks. In the developing countries, exposure to international trade picked

up again in the late 1980s, coinciding with their movement toward trade liberalization.

Labor Market Developments

An important trend in labor markets in the advanced economies has been a steady shift in demand away from the less skilled toward the more skilled. There has also been dramatic rises in wage and income inequality between the more and the less skilled in some countries, as well as unemployment among the less skilled in other countries. Besides this, there has been a change in skill demands within industries.

  Another finding is that income gaps have widened in a number of developing countries as well as in the advanced economies, and evidence suggests that labor demand in developing countries has also shifted toward workers with high skill levels relative to the average.

  Economic Theory suggests that international trade affects the prices of products in both exporting and importing countries and this in turn affects the price of labor-that is, wages—within countries by influencing the demand for labor. Changes in product prices brought about by competition from imports alter the profit opportunities facing firms. Firms respond by shifting resources toward industries in which profitability has risen and away from those in which it has fallen. Trade flows thus give rise to shifts in the demand for labor, as more workers are needed in newly profitable sectors and fewer in unprofitable sectors. If the supply of labor is fixed, these demand changes lead to a rise in wages, since workers will demand a premium for switching into more profitable industries.

A Brief History of Globalization & The North South Divide

International trade in goods and services has grown rapidly ever since the Second World War in 1945. Trade has risen in each decade much faster than incomes have risen. Two important implications are, first, that consumers in

all countries have satisfied an increasing proportion of their needs by buying goods made in other countries and, second, that employment in all countries has moved increasingly to export industries and away from those satisfying home demand. In the first post war decade most of the new trade in manufactured goods and services took place between the advanced industrial countries, often referred to as the “North”, which may be taken to include mainly the countries of  the European Union, North America, Australia, New Zealand and Japan. At that time, the North exported manufactured goods to the developing world, often called the “South”, which can be taken to include the countries of South America, Asia (except Japan) and Africa. In return, the North imported raw materials, energy products, and semi-finished products from the South.

  As time went on, however, the South became a major exporter of manufactured goods to north. If we considered all the south non-fuel exports to the north, manufactured goods accounted for only 6% of the total in 1995, 23% in 1970, 45% in   1980 and 71% in 1989! The manufactured product exported by the south have been those made mainly with low skilled labor. In return, the north has progressively reduced its production of goods requiring mainly low skilled labor and increasingly concentrated on exporting to the south manufactured products (and a wide range of services) produced with high skilled labor. The average citizen in the North has benefited more than a citizen in a developing South.

The countries of the North have progressively reduced their trade restrictions that took the form of exchange controls and import tariffs. On the other hand, in the immediate post-war period, most developing countries sought to induce domestic growth by protecting the domestic industries that replaced imports. Various Western economists no longer regard “import substitution policy” as appropriate. There is also intense pressure from the developing countries to eliminate or reduce such restrictions and allow free trade. A comparison can be made between the countries of the North and South.

One of the notable achievements of the post-war era was the creation of the GATT (General Agreement on Trade and Tariffs). The principle of GATT is that each member country agrees not to make unilateral tariff increases. This prevents the outbreak of tariff in which countries raise tariffs to protect particular domestic industries and to retaliate against other countries’ tariff increases. Such wars harm all countries as mutually beneficial trade shrinks under the impact of escalating tariff barriers. The GATT countries, which numbered 125 in 1994, also met periodically to negotiate on matters affecting foreign trade and to agree on across the border tariff cuts.

  In the Uruguay round, completed in 1993, it was agreed to reduce world tariffs by 40%. The Uruguay round created a new body, the World Trade Organization (WTO), to replace GATT. It also created a new legal structure for multi national trading. Under this new structure, all members have equal mutual rights and obligations. Until the WTO was formed developing countries who were in the GATT enjoyed all the GATT rights but were exempted from most of its obligations to liberalize trade-obligations that applied only to the developed countries. However, all such special treatments are to be phased out by 2002.

The World Trade Organization (WTO)

Despite being a relatively young international organization - having come into existence only in 1994 - the World Trade Organization (WTO) has attracted considerable intellectual and media attention. Following the Seattle protests at the meeting of world trade ministers, no other organization has been more closely associated with the phenomenon of globalization. Central to the ethos and practice of WTO is a set of principles that have provided the basic foundation for most contemporary developments associated with globalization. Among those principles we can cite free trade, open markets and tariff reductions. At the same time, the creation of WTO represented a veritable revolution not only in the scope of issues that were given attention under the trade regime created after Marrakech, but also with regard to the ramifications of failure to conform to that regime through its binding dispute-settlement mechanisms. Today WTO has 140 members and 30 are on the waiting list including China and Russia. Surely, the WTO is the driving force behind globalization. The key objectives of WTO are:

1.     To set and enforce rules for international trade.

2.     To provide a forum to negotiate and monitor trade liberalization.

3.     To improve policy transparency.

4.     To resolve trade disputes.

Impact of Globalization on Developing Countries

Employment

There has been a transformation in the employment pattern in most parts of the world. The revolution in transport and communications, technology, beginning towards the end of the 20th century, is digital. Aided by the deregulation of telecom markets in many countries, it is lowering enormously long—distance communication costs and especially the cost of rapidly accessing and processing knowledge, information, and ideas from anywhere

in the world. Thus there has been a shift of labor towards the service sector.

  Globalization has brought with it, a rise in unemployment while a rise in employment in some economies. Those which were able to learn and adapt the new technologies have been successful in holding their competitive advantage in the increasingly global economy.

Impact on Wages

Economic theory suggests that international trade affects the prices of products in both exporting and importing countries and this in turn affects the price of labor—that is, wages– within countries by influencing the demand for labor. Changes in product prices brought about by competition from imports alters the profit opportunities facing firms. Firms respond by shifting resources towards industries in which profitability has risen and away from those in which it has fallen. Trade flows thus give rise to shifts in the demand for labor, as more workers are needed in newly profitable sectors and fewer in unprofitable sectors. If the supply of labor is fixed these demand changes lead to a rise in wages since workers will demand a premium for switching into more profitable industries.

  Theory also suggests that import competition lowers the price of products (such as apparel and footwear) made by low skilled labor relative to the price of products (such as office machines) made by skilled labor, so that domestic firms shift toward producing skill intensive goods.

Impact on Output, Exports & Imports

Globalization has lead to increased volume of imports and exports at the world level. More than one-fifth of global output is now exported, double the proportion in the 1950s. Also, annual outflows of foreign direct investment (FDI) grew more than 6 fold between 1983 and 1990, and continued togrow more than twice as fast as goods trade in the 1990s. Intra firm trade among Multi National Corporations (MNC’s) is estimated to account for one third of world trade.

Impact on Labor Unions

The trade unionists’ assessment of the effect of globalization is less enthusiastic than that of other observers. The question is how to direct it in a way that serves the objectives of social justice for all. Workers are concerned that the potential for increased growth and living standards offered by globalization may not be realized. For many workers, globalization means greater job insecurity, downward pressure on working conditions, loss of control and influence over their working lives and greater inequality in and between societies. Globalization needs to be directed towards meeting the demands of global social justice. This involves setting ground rules for global economy in the way, workers’ groups have constantly advocated particularly in linking trade and labor standards, and by greater international cooperation, to promote world employment.

Role of Immigration in Globalization

There are many restrictions on the free flow of labor, particularly the migration of low skilled labor from poor countries. Yet the potential benefits to poor countries, and to the poorest people in poor countries, of a relaxation of immigration controls in rich countries are considerable. The migrants would benefit directly by an improved standard of living. Their kinfolk left behind would benefit from the remittances received. And the developing countries as a group would benefit when the migrants return with new useful skills and generally enhanced human development.

    A study of Egypt revealed that 64 per cent of the overseas migrants were peasant farmers or agricultural laborers with little or no education. Yet their remittances reduced the number of households living in poverty by 9.8 per cent and raised the per capita income of the migrants' households by 14.7 per cent. A large share of remittance income was devoted to investment.

    Evidence such as this lends support to the recommendation that restrictions on the free flow internationally of low skilled labor be reduced substantially. More liberal migration policies in rich countries can help to create greater equality of opportunity for people everywhere and can

contribute mightily to human development in developing countries.

Case Studies - Impacts of Globalization

The Indian Sub-Continent (Pakistan & India)

The Sub-Continent has classic examples of the developing countries. This region is coping hard and has lagged behind than a number of other developing countries in almost all respects. The effect of globalization has been multi faceted. On one hand it has in a way resulted in rising poverty, while on the other, new and advanced products from virtually all parts of the world are within the reach of the common man.

  It is argued that an outcome of globalization has been a huge increase in salaries of senior managers, executives, lawyers and public-relations personnel. Mostly this rise in salaries has come about due to the presence of  multi-national companies (MNCs) or their local competitors. In some places, the IT-literates have benefited from plentiful job opportunities, and there are also opportunities to live and earn abroad.

A particular section of the society namely the upper middle class, globalization has come as a delight. With greater access to disposable income, the seduction of consumerism becomes hard to resist, and the demand for unrestricted globalization inevitably follows the attraction for new and ever more advanced consumer goods. There is availability of the latest automobile models and consumer goods. This has been made possible through the policies of liberalization and decentralization. Foreign companies have set up car plants and factories in the region which is providing employment opportunities besides the availability of good quality products in the market.

Globalization has also imposed costs on the domestic producers. It has become hard for them to cope with this intense competition. It becomes difficult to match the standard and quality of  products produced by foreign firms who have centuries of knowledge and experience at their disposal.

These foreign firms are also free to some extent, to move their assets and wealth outside the country without any reinvestment of their profits of our developing countries. In addition, globalization may have hidden consequences that may negatively impact the quality of life even of those prospering through globalization.

The greatest danger posed by unrestricted globalization is that it may worsen the problems of uneven development and nagging poverty, and create grave infra structural mismatches. It is already evident from the facts that the Pakistani economy has become dependent on imports which has brought with it constant pressure on the value of the Rupee, leading to recursive bouts of high inflation. There is a huge trade deficit putting great strain on our meager foreign exchange reserves. There has never been any emphasis on developing a strong industrial base. For the industry to properly stand on its feet, enough time has to be given for it be technologically strong. The unemployment is on the rise as the growth rate specially in Pakistan is slow.

Globalization and Technology Transfers

“Globalization brings in new technology”

Proponents of globalization argue that it brings in new technology. It does bring in new technology and this ever growing integration of the world is worth appreciating. But there is a need to assess the extent and the type of technology transfer from the “North” towards the “South”. KFC and Mc Donald's were welcomed into Pakistan, but how much technology transfer is involved here. It is true that some employment was created through this but then why is there rising poverty even with this open economy. The problem simply is that the industrial base is not strong and sectors where labor force could be employed are not being opened up. There simply isn’t a clear vision of our country. A common man feels happy to know that foreign automobile manufacturers are now making cars in Pakistan. But little attention is paid to the fact that they are mostly being assembled here. The parts are imported from their home countries. The picture of an assembly line may very easily lure a person into thinking that there has been industrial advancement. There

has been little technology transfer. Only export oriented industries which have a global reach can be successful in providing large scale employment opportunities to the people in developing countries such as Pakistan.

  Another biggest danger of a totally liberalized economy would be the anarchic development of select geographical areas and the neglect of others within a country. Such things can surely create regional disparities in the labor market besides the social issues. Another aspect of non-selective globalization is that foreign companies do not take into consideration national priorities, and so we can see that in India, consumer goods, automobiles, and software sectors have attracted almost 90% of all foreign investment, thus neglecting other important sectors such as health, education, and housing.

  In the absence of any sound industrial base, there hardly remains any need for highly qualified scientists and engineers who for search for better jobs leave for other technologically advanced countries. This brain drain is costing the developing countries a lot. 

According to an Indian author: “Advocates of globalization have often made the claim that globalization rather than destroy Indian industry would instead accelerate the growth of new industry and cause India's economy to grow faster. But a detailed analysis of Foreign Direct Investment (FDI) in the last few years indicates that a sizeable portion of this investment has not gone into the creation of new productive capacities. Much of the investment has simply gone into takeovers of existing Indian enterprises or towards speculative investments in the Indian stock market. Moreover, other than India's "hot" IT companies and select MNCs - the vast majority of Indian stocks have not benefited from such highly volatile FDI flows. In addition, several MNCs have deliberately launched new 100% owned ventures that consciously undercut already existing partnerships with Indian manufacturers. Ironically many of these predatory ventures are funded by Indian banks and financial institutions!”

It has been very rightly said that:

  “That the world's former colonial powers should wish India to globalize should not be surprising. Prior to 1947, India's assets and resources were

looted to the hilt by the British rulers, and Britain was not the sole beneficiary. The benefits of unfair trade and colonial loot went as much to Britain's allies such as the US, Australia and Canada, and even to rival imperial powers such as Germany and Japan.”

Sub-Saharan Africa (Benin, Mali, Nigeria, Ghana, etc.)

The share of primary commodities in the exports of developing countries has been declining at an accelerating rate for over four decades. For some developing countries they account for 15% of merchandise export earnings as compared to 50% in the 70s. But there are wide variations in this regard. Even today, many of the world’s poorest countries are mainly dependent on  the exports of primary commodities. These commodities related to agriculture are mostly low priced and their supply too is unpredictable. For instance, coffee accounts for over half of the export earnings of Uganda and Tanzania, as does copper for Zambia and tea for Malawi. It follows that, for many of the poorest countries, trade prospects are dictated in large measure by trends in international commodity markets.

  For several decades, price trends in commodity markets have been unfavourable to exporters, and catastrophically so since the early 1980s. The cumulative losses suffered by developing countries amounted to $290 billion between 1980 and 1991. For Sub-Saharan Africa, the most seriously affected region, the loss was equal to five percent of GDP. In a region where around half of the population lives on or below the poverty line, the human costs were enormous. Adverse trends in commodity markets contributed to the evolution of Africa’s debt crisis, the disintegration of social and economic infra-structure and the collapse in investment—all of which have in turn contributed to the widening gap between that region and other parts of the developing world. (Singer H. and Edstron J. 1995)

  The domination of global markets by powerful—and largely unaccountable trading houses compounds the problems facing developing countries. In early 1996, international prices for copper were around $2600 per ton. Evidence that an individual trader in the Sumimoto Corporation, one of Japan’s big five industrial giants, had been attempting to drive up prices

through futures trading on the London Metal exchange led to a spate of panic selling which drove prices down to $2000 per ton in less than one month (The Economist 1996). For Sumimoto the episode translated into a loss of $1.8 billion. That sum is equivalent to over half of GDP of Zambia, which derives more than 80% of its export earnings from copper. For Zambia, the collapse of copper prices translated into foreign exchange losses of around $ 150 million (more than the level of government spending on health and education combined), a widening of the current account deficit and reduced import—capacity (The Economist 1996).

  In Sub-Saharan Africa, facilitating access to new technologies, enhancing technological capability, investment in education, and support for diversification are among the areas in which support is most urgently needed. The Final Act of the Uruguay Round acknowledged the need for increased technical and financial assistance to the poorest countries but it is silent on the question of how that assistance is to be generated.

The Formation of Regional Economic Blocs

Globalization, has been associated with an unprecedented expansion of world trade and world output. The causal links between trade and development are subject to dispute, but theory suggests that sustained and rapid expansion of international commerce creates a favorable environment for economic and human betterment. Despite the advantages of an open economy, regional trading arrangements have always had a number of intellectual attractions and practical schemes for regional integration have been created from time to time. 

    Many regional economic blocs have been formed as a reaction to actual or perceived unfavorable prospects for world trade. The decline in primary commodity prices in the 1920s followed by the Great Depression of the 1930s led to competitive devaluations, the construction of high tariff barriers to trade and the formation of regional currency and trading blocs. The results were a contraction of world trade, aggravation of the depression, a decline in living standards especially in the poorest regions of the world, and in the

developed countries, the rise of authoritarian regimes.

There are today approximately sixteen different regional trading schemes in the developing world. The point to be underlined is that the majority of the regional trading arrangements among developing countries were formed as a defensive reaction to real or imagined obstacles to an expansion of trade. 

        There has recently been a great revival of interest in regional groupings among developing countries, particularly in Latin America. This revival is taking place in a context of generally reduced tariff barriers and the construction of more open economy strategies of development. ASEAN is a very good example of a successful regional economic grouping. It has allowed a reduction tariffs and free movement among member states.

  Regional groupings clearly prove the willingness of the developing countries to remove barriers but not at the cost of their own industrial output and employment. In regional blocks there is a greater level of understanding among states as well as almost same economic conditions.    

Tackling The Negative Effects of Globalization

The integration of world economies is an irreversible process. Therefore there would be intense pressure in adapting policies of deregulation and liberalization. For the developing countries, which are facing serious crises in tackling unemployment, an effort must be made to enable the local industry to expand. This may even require adapting protectionist policies for some years.

  The importance of good governance cannot be ignored. There will need to be a system of checks and balances to ensure that firms are performing up to their maximum potential. Labor working in these industries will need to be trained where needed to increase efficiency and in this way prepare to meet the challenges of an open economy. Only an efficient industry producing at low cost will be able to survive. This survival is important as an efficient local industry could  stand up against the competition from a multi national.

The main thing lacking is a proper direction and the continuity of policies. Emphasis will have to be laid on acquiring new technological skills to ensure a sound industrial base. Otherwise if liberalization polices are followed blindly, than high rates of unemployment are inevitable.

Conclusion

Globalization has increased the pressure of competition between economies. The role of education and training was seen to be essential for economies to compete and participate actively in the global market. The level of skills that an economy possesses and the quality of these skills are critical if the economy is to take advantage of the opportunities and minimize social costs and negative implication of globalization.

  The objective of globalization at world level should not merely be to make the markets wider. Instead the objective should be to improve quality of life for everyone, particularly for those who are less prosperous and not benefiting from the developments that took place during the 20th century. More and freely accessible markets may lead to economic growth but not necessarily more human development and improved quality of life for everyone.

M. Laeeq-ur-Rehman Khan

References

1.        Why this hatred of the Market?      By Martin Wolf

2.       Does Globalization Lower Wages and Export Jobs?     By Matthew J. Slaughter and Phillip Swagel.

3.        Bhagwati, Jagdish (1998), "Trade and Wages: A Malign Relationship?," in Imports, Exports, and the American Worker, S. Collins, ed., Brookings Institution

4.        Bhagwati, Jagdish and Vivek Dehejia (1994), "Freer Trade and Wages of the Unskilled--Is Marx

5.        Globalization boom or a hazard.

6.        Striking Again?" in Trade and Wages: Leveling Wages Down?, Jagdish Bhagwati and Marvin Kosters,

7.        World of Work : The Magazine of The ILO

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