Trade liberalization and victimization of LDCs’ workforce

March 16, 2017

trade-liberalization

Muhammad Saeed

In the era of globalization, international trade is the leading component of openness of the market. Which is considered as a vital sign of economic growth. In contemporary world, a brisk increment in integration of trade, finance, people, and ideas in world marketplace offer ascend to a world economy, in which costs, or supply and demand, influence and are influenced by worldwide incidents. While on the other hand, these emerging trends of ‘free’ trade harm the systems of closed and protectionist economies.

Tracing down the roots of Globalization, one can go back to mid-1940s, as after World War II. When, various international institutions established in the wake of World War II—including the World Bank, International Monetary Fund (IMF), and General Agreement on Trade and Tariffs (GATT), succeeded in 1995 by the World Trade Organization (WTO). These institutions have played very vital part in promoting free trade in place of protectionism.

But it has quickened significantly since the mid-1980s, driven by two primary variables. One includes technical advances that have brought down the expenses of transportation, communication, and computation to the degree that it is frequently financially plausible for a firm to find distinctive phases of production in different countries. The other component needs to do with the expanding liberalization of trade and capital markets: more and more governments are losing capacity to protect their economies from remote rivalry alternately impact through import duties and nontariff obstructions, for example, import quotas, export restraints , and legal disallowances.

When World Trade Organization was established, the prime agendas were to boost equal growth and development as well as expansion of industry and openness of markets. Basically, the concept of trade liberalization was initiated for less developed countries (LDCs) that they must become the part of development which has been on the side of developed countries. But result of these steps were totally opposing. Trade liberalization seems more beneficial for already developed world rather than developing countries. Only minority from developing world like Tiger club economies of Asia and China etc. get benefited from it but  majority of the LDCs are not only remained deprived of from its benefits but also faced negative impacts of that particular initiative.

Trade liberalization impacts various segments of society and economics including workforce of LDCs. There is no doubt that cheap labor along with raw material has great significance for industrialized world. In Developed Countries (DCs) labor casts are very high, by using trade liberalization DCs established industrial units in developing world and enjoyed cheap labor and cheap raw material.  Trade liberalization has brought technological change in developing countries affecting their labor market. It has changed the technology of production that has increased demand of skilled labor and widening in wage inequality between skilled & unskilled labor.

However there is wide variation in magnitude of these affects among developing countries. There are three main reasons for this disparity. First is the trade liberalization period of various developing countries is different. Countries that has experienced trade liberalization between 1960s/1970, had less wage inequality of labors compared to 1980s/1990 as world economy change in this period and openness of low income countries for world economy in later period provide cheap unskilled labor which affected the goods price in international markets.

Second reason is trade liberalization brings policies stressing on human capital endowment in terms of training and education of labor as its absence was considered barrier to industrial development in developing countries. This brings increasing demand of skilled labors and widened the gap in wages. It was noted that low human capital endowed countries have less wage inequality Third main reason is trade liberalization increase natural resource endowment. Third world countries with more economic endowment in natural resources, export goods that are relatively more primary in nature. Increasing endowment in natural resources increases wage inequality as processed industries require more skilled  labor and these are capital- intensive.

Trade liberalization initiative by WTO was taken in Uruguay round accord, which asserts on modern means of production i.e. unfinished goods to manufactured good. For this purpose skilled labor is very essential. But in developing countries labor is not skilled. There is huge gap between labor market of LDCs and DCs. In DCs labor is more skilled and demand high wages, while in LDCs labor is less skilled and gets low wages. MNCs which have been established their units of production in LDCs, only use unskilled labor as slaves and their own people are sitting on key posts of these firms. In this way developed countries are expanding their industries as well as creating huge opportunities for their own skilled labor or physical capital around the globe. And the situation is highly challenging for the LDCs who carries a huge number of unskilled workforce.

The author is an IR analyst and freelance columnist based in Islamabad and can be reached at mmsb1000@gmail.com

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