Don't Blame Trade Liberalization for Labor Market Chaos

Research finds little or no evidence of shuffling of workers in the five years after trade liberalization.

May 01, 2002

| by Helen K. Chang

Antiglobalization protests took a violent turn when the World Trade Organization met in Seattle in 1999. Impassioned activists blamed trade liberalization policies in developing countries for a variety of ills. Chief among them were the claims that such policies have an adverse impact on countries’ growth rate, and that increased trade leads to tectonic shifts in labor sectors—from agriculture to manufacturing, for example—that result in a multitude of problems such as the displacement of large numbers of workers, the abandonment of traditional ways of life, a deterioration of the environment, and massive unemployment.

“Trade economists have long known that a country opening up to trade will specialize in certain sectors, putting resources into producing goods and services that are more efficient, and abandoning those that are relatively inefficient,” says Romain Wacziarg, assistant professor of economics at Stanford GSB. “That’s called comparative advantage.” It is why some structural realignment can be expected in a country’s work force after liberalization of trade.

But to Wacziarg’s surprise, recent research he conducted found little or no evidence of shuffling of workers in the aftermath of trade liberalization. “I thought I would be able to quantify which sectors grew or diminished,” he says.

Wacziarg and co-author Jessica Seddon, a doctoral student at Stanford Business School, compared statistics—such as head count before and after liberalization—from 26 developing countries that had clear and discernible breaks in their trade policies. They did not include developed countries in their sample, because trade liberalization efforts cannot be isolated from other policies such as monetary policy, privatization of industries, or prior liberalization incidents. “For developing countries that go suddenly from being closed to trade to being open to trade overnight, or over a period of a year or so, we should see significant and unclouded results,” he says.

Using information consistent across countries from surveys by labor and industrial development organizations affiliated with the United Nations, Wacziarg and Seddon found very little change in the structure of labor sectors within five years of liberalization; what shifts did occur were either small or not statistically significant. “In general, countries like Poland that have very flexible labor markets where laborers are allowed to move around tend to have more movements. And countries like Spain that tend to use regulations to create safety nets, for example, that prevent workers from being fired, have less movement,” says Wacziarg.

Domestic policies enacted to offset potential shocks to the labor market are one explanation for the unexpected lack of labor migration. These measures also tended to actively counter the positive effects of liberalization.

“If a country removes a tariff on a good, for example, it’s going to start competing with goods from foreign countries because foreign goods can now enter the country at a competitive price,” Wacziarg says. “So to remedy this, governments enact domestic subsidies to the industry to restore the competitive advantage, which had been lost with tariffs.” He cites the Philippines in 1988 and Turkey in 1990 as examples.

“It’s clearly not the case that you have the post-liberalization sector-level upheaval that activists claim,” he says. “If it happens, the shuffling can take something like 20 years, and that’s much less of a problem and allows workers to be retrained.”

In a separate, related study, he found countries that adopted open trade policies did experience measurable gains in the form of economic growth. Examining the link between trade policy and economic growth in 57 countries from 1970 to 1989, Wacziarg developed an index for measuring trade policy openness and found that every 10 percentage point increase in the ratio of trade to gross domestic product resulting from changes in trade policy alone is associated with a 0.67 percentage point increase in a country’s annual growth rate.

“If you compound that over several years, the consequences for a country’s average per capita income can be far-reaching,” he says. “The implications of this for a country like China are enormous, just because of its sheer size. Add in India, another country with vast potential, and something like four-tenths of the world’s population could yet benefit from greater openness to international trade.”

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