58600 World Bank Employment Policy Primer December 2009 No. 15 GloBalizatioN, WaGEs aND thE Quality of JoBs Lessons for Policy Makers* the problem: Creating good jobs with ing countries and producing for export. The interna- good wages tional attention on sweatshops in developing countries has been significant and calls into question whether or Policy makers in developing countries have to deal not globalization (again, defined as international trade with serious challenges in domestic labor markets. In and foreign investment) creates "good" jobs. particular, they face a chronic lack of formal jobs, high Successfully embracing globalization presents many rates of unemployment and underemployment, low challenges and translating it into the creation of good productivity, and low wages. At the same time, global- jobs is one of them. As a result, there is still considerable ization, as measured by international trade and foreign debate about the effects of liberalization, especially in direct investment, has expanded significantly. Interna- terms of the effects on workers. This note summarizes tional trade as a share of global GDP increased from the results and describes the policy implications of the 40% in 1990 to over 50% in 2004.1 Over the same period recently published book Globalization, Wages, and the developing countries' trade grew 11.5% per year and the Quality of Jobs that evaluates some of the effects of trade absolute level of Foreign Direct Investment received by and foreign investment on workers. This book contains developing countries increased by a factor of ten. a framework for analysis, a literature review, and five Despite the misgivings associated with trade liberal- country studies that provide the foundation for three ization and more generally the opening of borders, glo- main lessons for policy makers that are described at the balization (openness) has become a dominant paradigm end of this note. for economic growth (World Bank 1993, Frankel and Romer 1999). Alternative closed-economy development a summary of approach and results paradigms, such as the Import Substitution Industrial- ization were rejected for being perceived as less success- One of the main goals of the book Globalization, ful in bringing economic growth than policies that have Wages, and the Quality of Jobs is to evaluate how the favored openness. For example, the comparatively closed latest wave of globalization in developing countries has economies of Latin America have fared worse than their affected workers in developing countries. One of the more open counterparts in East Asia. key contributions of the book is the use of datasets that Liberalization, however, has not turned out to be the panacea that many hoped it would be. One of the main 1 Thisand the rest of the statistics in this paragraph are from World concerns about globalization revolves around "sweat- Development Indicators 2006. http://devdata.worldbank.org/ shops", defined as jobs in poor working conditions that wdi2006/contents/Section6_1.htm See Jae-Kap Lee (2005) for a have been associated with companies entering develop- typology. *Prepared by Raymond Robertson (Macalester College), Drusilla Brown (Tufts University), Gaelle Pierre (World Bank), and Maria Laura Sanchez-Puerta (World Bank). Globalization, Wages and the Quality of Jobs: lessons for Policy Makers include detailed information on individual workers. The fourth and final main result is that there is sub- These microdata are analyzed in the context of five case stantial qualitative evidence suggesting that the relatively studies: Cambodia, Indonesia, El Salvador, Honduras, good working conditions are at least in part the result of and Madagascar. Each case study defines globalization significant international attention. Since working con- according to the country-specific experience. It then ditions in these countries and industries has received moves to a detailed analysis of the microdata to provide significant international attention, governments have a quantitative understanding of the link between global- increased resources dedicated towards monitoring and ization and the quality of jobs. enforcing working conditions. Cambodia, the country Another contribution is a broadened definition of in which improving conditions was specifically tied to the quality of jobs. The case studies focus not just on market access, had the highest wage premiums for the wages, but also on many different dimensions of job apparel sector of any country studied in the book. quality, such as risk of injury, availability of benefits, and Of course, there are caveats to the research in the several others. By looking at working conditions and book. Perhaps the most important of these is the lack wages together the book generates a much more com- of accurate data. While the data for El Salvador and, to prehensive portrait of the quality of jobs that might be a somewhat lesser extent, Indonesia had very detailed associated with globalization. The key question that the information about working conditions at the micro book asks is essentially the same one that policy makers level, the data for Cambodia, Honduras, and Madagas- in developing countries have been asking for nearly one car were more limited. Therefore, the research highlights hundred years: what kinds of economic policies foster the need for more detailed firm-level data on working good jobs at good wages? conditions. Another caveat is that the worker-level data The analysis leads to four main results. First, the five do not allow researchers to either identify workers with countries have a very similar experience with "globaliza- their firm (foreign or domestic) or to track workers as tion". Broadly speaking, globalization in these countries they move between firms. As a result, the estimates of has meant a clear increase in foreign direct investment wage premiums at the industry level only capture the coming into the country to produce for export, and total effect of exports and foreign investment across these exports have been heavily concentrated in the sectors. apparel sector. The second main result is that, compared to the rest lessons for Policy Makers in Developing of the economy, apparel workers in these countries earn Countries a significant wage premium--even after controlling for worker characteristics. This means that the industry There is still considerable debate over the wisdom of most characterized by foreign investment and exports is opening borders to foreign investment and promoting also a "high wage" industry. exports, and even less consensus over policies that might The third main result is that wages are positive- facilitate successful outcomes for workers. Such policies ly correlated with better working conditions. This is have to be designed in the specific national context of important because there has been substantial debate the countries. To help inform decisions regarding those, about working conditions associated with foreign the authors of Globalization, Wages, and the Quality of investment and exporting in developing countries. The Jobs suggest three key lessons for policy makers in devel- book does not make the case that working conditions oping countries. in these industries are "good" from the standpoint of developed countries. Instead, the book makes the point Actively promote foreign investment and that the conditions in these industries are "good" rela- exports in manufacturing tive to the other options for workers within each coun- One debate that motivated this study was whether try, and that, at a minimum, there is no evidence that or not trade and foreign investment helps create "good" the higher wages in these industries are compensating jobs for workers. The evidence in this book suggests workers for otherwise poor conditions. In short, jobs that trade and foreign investment do contribute to the in the FDI/Export industries seem to be comparatively creation of "good" jobs (at least relative to the rest of "good" jobs. the domestic economy). Foreign direct investment and 2 Globalization, Wages and the Quality of Jobs: lessons for Policy Makers exports seem to increase labor demand, causing wages to increase. These wages do not come at the expense About Better Factories Cambodia of lower working conditions (relative to the rest of the Better Factories Cambodia, originally also known as ILO Garment Sector Project, was established in 2001 after Cambodia signed a deal with the US to improve working condi- country), suggesting that workers that move into these tions in the exchange for increased access to the US apparel market. This program aims to industries are better off. In addition, to the extent that oversee the labor compliance to ensure a "sweat shop free" industry in the country. the expansion of manufacturing exports draws workers Since then the project has become known as Better Work and is a joint project between the ILO, the International Finance Corporation (IFC) of the World Bank Group, buyers, and local from agriculture, the potential gains overall to work- governments. The change in title was necessary because the program was expanding into ers are quite significant. In fact, since the movement other countries, including Vietnam, Jordan, Haiti, and others. The core of the project remains the same: bringing together stakeholders to work together to raise working conditions of workers from agriculture to industry is often a key while maintaining competitiveness for exporting firms. The process is based in monitoring element of what is now considered to be "development," by the ILO, evaluation of the monitors' reports, and constructive feedback for the factories. foreign investment and export promotion help move the The monitors cover more than 100 specific aspects of working conditions in the factories and return to evaluate progress over time. country in that direction. As specified below, however, The Cambodia chapter finds the largest wage premiums of all countries included in this simply inviting foreign investment may not maximize volume. The results suggest that monitoring, carried out through the Better Factories benefits for workers. Governments need to be engaged Program, played a critical role in improving conditions of work. Subsequent program evalu- ation research has suggested that improvements in working conditions did not seem to and active with foreign firms. come at the expense of wages, and several improvements were positively correlated with Many of the countries included in the book fostered firm survival during the 2008-2009 economic crisis. Together, these results bode well for the trade and foreign investment through Export Process- argument that improving working conditions do not have to come at the expense of firm competitiveness. ing Zones (EPZs). There are several advantages towards fostering these zones. For example, geographic concen- tration lowers monitoring costs. Another advantage is that EPZs are increasingly common and therefore may create a relatively familiar environment for new foreign International Labour Organization, the IFC, and sev- firms. This is not to say, of course, that EPZs are the eral international NGOs advocate and support monitor- only approach that might help nations capture benefits ing efforts. Working with these organizations can help to workers, or that EPZs are free from complications. maintain high working conditions and save government To the extent that they are effective in attracting foreign resources. One very successful example of this kind firms to produce for export, however, they are a poten- of partnership is Better Factories Cambodia (see box). tially effective option to pursue. While saving government resources is always attractive, the results of this book suggest that directing govern- Monitor and enforce working conditions ment money that would have otherwise gone into moni- through partnerships toring exporters or foreign firms into monitoring work- Unfortunately, it seems that it is too idealistic to ing conditions in the rest of the economy--especially assume that market forces alone might generate the particularly problematic sectors--could significantly greatest benefits for workers. Improvements in working improve working conditions nationwide. conditions seem to be most significant where monitor- ing is effective. One problem with monitoring, however, Promote diversification across export sectors is that it is expensive. The book recognizes that govern- "Globalization" in most of the countries studied in ment resources are limited and therefore monitoring is the book was primarily characterized by foreign firms difficult. One potentially adverse result identified in the entering and producing apparel for export. Therefore, book is that, given limited resources, governments may the end of the Mutifibre Agreement (MFA) at the end have to make a choice between monitoring the interna- of 2004 was a significant event in these countries. While tional firms or monitoring elsewhere in the economy. If the book just begins to touch on the effects of the end working conditions are worse elsewhere in the economy, of the MFA and the global economic crisis, preliminary diverting resources towards monitoring international evidence suggests that globalization can remove benefits firms may result in relatively worse conditions persisting just as it can bring them. The outflow of FDI is cor- elsewhere. related with a loss in the benefits described above. The At the same time, however, there is significant inter- end of the MFA reveals that countries that "put their national interest in monitoring working conditions. The eggs in one basket" were especially hard-hit. In response 3 Globalization, Wages and the Quality of Jobs: lessons for Policy Makers to this, the Central American countries have been work- be in a better position to protect the very real gains that ing to diversify their exports along product and quality come from participating in the global economy. dimensions, focusing, for example, on time-sensitive products to take advantage of their proximity to the U.S. References market. Asian countries have been pursuing regional trade agreements to diversify their export markets to Frankel, Jeffrey A. and Romer, David "Does Trade Cause mitigate risk. Growth?" American Economic Review 89(3) June The current crisis will end (international trade 1999, pp. 379­399. reversed its fall and has been rising since January 2009) World Bank, "The East Asian Miracle: Economic Growth and new opportunities will arise in the recovery. Govern- and Public Policy" A World Bank Policy Research ments that are especially attuned to global demand should Report; (September 30, 1993). The findings, interpretations, and conclusions expressed herein are those of the author(s), and do not necessarily reflect the views of the International Bank for Reconstruction and Development / The World Bank and its affiliated organizations, or those of the Executive Directors of The World Bank or the governments they represent. 4