From wigs to riches: trade, employment and growth

Click to go to the summit website

In the early 1960s when the OECD was created, you could buy a portable TV for 150 dollars in the US, around the same price as you’d pay for an entry-level LCD television today.

But 60 years ago, an average manufacturing worker would have had to work almost two weeks to pay for it, compared with less than a day at present.

For many other products we use all the time, a comparison like this is not even possible, since they didn’t exist.

Trade played a major role in boosting the growth that allowed the world economy to grow by so much in such a short time. Apart from providing cheaper goods for consumers or bigger markets for producers, it helped to spread innovation and technological progress. 

A paper submitted to the G20 meeting in Seoul today by the OECD along with the ILO, World Bank and WTO argues that: “Countries that have embraced openness have been more successful in sustaining growth and moving up the development ladder than those that have not”.

Korea, the summit’s host is a good example. In the 1950s, that country was less developed than Sudan, and its main export was wigs made of human hair. Trade helped it to integrate the world economy and move up the value chain to become a high tech powerhouse.

And yet, trade is often blamed for destroying jobs and driving down wages. Is that true?

The paper estimates the impact on growth and jobs of lower tariffs and a reduction of other, less visible kinds of protection applied “behind the border”, such as product standards and administrative procedures that put importers at a disadvantage compared to domestic producers.

Even though the case of Korea is extreme, similar outcomes can be seen to a lesser degree more generally. In the 1990s, per capita real income grew more than three times faster for those developing countries that lowered trade barriers (5.0% per year) than for other developing countries (1.4% per year).

In fact, more openness would benefit all countries. Full liberalisation of trade in goods and services would help increase average real incomes in developing countries by 1.3%, and by 0.76% in high-income countries. Developing economies would benefit most, and not just the stars such as Brazil. The second wave of emerging economies, including Egypt, Thailand and Nigeria, would gain 3% to 6% of GDP.

The idea that trade destroys jobs and drives down wages, especially for the less skilled, doesn’t match the data either. If the G20 economies reduced tariffs and non-tariff barriers (such as import quotas) by 50%, employment of lower-skilled workers would rise by 0.9% to 3.9% over the long run depending on the country, and employment of skilled workers by 0.1% to 4%.

Wages would rise too, by at least 4.5% in the OECD countries in the G20.

So, all we have to do is open borders to the free flow of goods and services and all will be well? US president Harry Truman once implored his staff to find him some one-armed economists, because every time the lot he had promised him some good news, they always continued, “But on the other hand…”.

There’s another hand to trade too. First, it exposes economies to shocks like the recent recession that increased unemployment by 30 million worldwide (210 million today versus 180 million in 2007). Second, the gains from more openness can take time to materialise, and be spread thinly among the population, or, worse still, benefit only an elite. The pain from jobs losses is immediate and visible.

The answer is not to cut the country off from the potential benefits of trade, such as cheaper goods for consumers or bigger markets for producers. Governments should apply measures that help those hardest hit, both financially and to find a new job. In the wake of a recession, this is difficult because revenues are falling at the same time as needs are growing.

Moreover, in order to attract foreign investment, governments may reduce taxes on capital and increase spending on R&D and infrastructures at the expense of other public programmes, including unemployment and other benefits.

This means that an open trade policy alone will not solve all the problems. It has to be part of a package that includes labour policies, education policies and social policies to give everybody, and every region, a chance to share the benefits of trade, and build up financial reserves for the next time they’re needed.

Useful links

OECD Insights on International Trade

OECD work on trade

Patrick Love

Has one comment to “From wigs to riches: trade, employment and growth”

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  1. Digby Geen - 03/12/2012 Reply

    Whilst I tend to agree with Free Trade, this article sees things through rose tinted glasses.

    Sure it does create employment in the developing countries, but it wipes out whole industries and good paying jobs in the developed countries.

    Sure people may have to re-train to take up other jobs, but why should they? and they are often lower paid jobs.

    And you have omitted the well known fact that it is essential to keep the research and design parts of a company next to the manufacturing part. Not separated by thousands of miles.

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