Many low-income countries are already closely connected to international markets, with exports and imports of goods and services constituting on average 43 per cent of GDP for the LDCs in 1997-98.However, most are heavily dependent on exports of non-oil commodities, which in 2001 registered prices averaging half of their level 20 years earlier. The low-income countries that have managed to start exporting some manufactures or services have grown faster, but in general all remain at the low value added end of global markets.
The current round of multilateral trade negotiations should revisit the issue of how to ensure a higher return to developing countries from their natural resources. Opening of industrial country agriculture markets, a reduction of high tariffs on processed commodities and the stabilization of commodity prices at more remunerative levels are essential to harnessing trade growth to poverty reduction.
Coupled with investment in the communications infrastructure and education and training, exports can be a powerful engine of growth helping the poorest countries to raise their level of productivity. A fundamental condition for unleashing the job creation potential of trade and investment in developing countries is a shift to manufactures and modern services, away from dependence on the export of primary commodities. Many developing countries, as well as stimulating domestic export businesses, have therefore attempted to encourage foreign direct investment (FDI) as a means of acquiring a manufacturing and services production base. However, the rapid growth in FDI annual flows from US$57 billion in 1982 to US$1,271 billion in 2000 has not benefited most developing countries. The top ten recipients of FDI accounted for 75 per cent of annual flows to developing countries in 2001, a degree of concentration that has not changed since 1985.
In contrast,the least developed countries attract very little private capital. FDI flows to sub-Saharan Africa, excluding South Africa, amounted to 7.5 per cent of companies’ investments in China and Hong Kong, China, in 2001.
The information technology revolutionhas had a major impact on investment flows and has enabled the growth of global production systems in which different stages of production are located in different countries. Increased and cheaper access to information on both input and product markets reduces transaction costs and makes management of a dispersed production network feasible. With the emergence of global production systems, generating cross-border shipments of inputs and components, an increasing share of total world trade is within firms and among their subcontractors. As a consequence, the link between investment and trade patterns is now significantly stronger.
National companies in developing countries are facing intensified competition that many small and medium-sized enterprises are ill-equipped to meet. Even if jobs created in foreign firms exceed those displaced in local businesses, this is small consolation to the workers and businesses that can no longer compete. Anticipating such problems and assisting domestic firms and their employees to adjust to the new competition help prevent unemployment and build a network of suppliers to firms competing on international markets. Employment policies thus have a significant impact on whether increased investment and trade contributes to an overall expansion of decent work opportunities and poverty reduction.
Embedding the local operations of multinational companies quickly and smoothly into the national development process can enable the transfer of managerial and technical expertise to local businesses. In order to benefit from these linkages it is essential that recipient countries invest in education and training to improve their capacity to absorb new technology and “knowhow”
and avoid shortages of skilled labour leading to a widening of wage gaps between skilled and unskilled workers.
An important tool for the building of partnerships with foreign investors is the ILO Tripartite Declaration of Principles concerning Multinational Enterprises and Social Policy. It provides an agenda for dialogue, involving governments, national employers’ organizations and union centres, and companies and unions representing their employees, on the key policy issues involved in maximizing the employment potential of FDI and dealing with the adjustment problems that cause concern in many countries.
Competition between developing countries – indeed among all countries – to attract and retain FDI is fierce. During the last two decades, many emerging economies have dramatically reduced barriers to FDI, and countries at all levels of development have offered incentives such as the extension of tax holidays, exemptions from import duties, and direct subsidies.
Since 1998, 103 countries have offered tax concessions to foreign corporations.
There is growing concern that an incentives war to attract highly mobile foreign investors able to switch production easily between countries could lead to a race to the bottom with respect to fiscal competition and environmental or labour standards.
While there is much evidence of specific cases of abusive labour practices, the lack of systematic data on the issue makes it difficult to gauge the true extent and severity of the problem and hence to identify the appropriate national or international policy responses. Despite continued controversy over the “sweated labour” issue, it is generally agreed that the available information on employment conditions in multinationals indicates that, overall, they pay higher wages than local firms and demand relatively skilled labour. The 100 largest transnational corporations in terms of employment accounted for 14 per cent of the 54 million jobs in the foreign affiliates of nearly 65,000 companies operating transnationally in 2000.Concern about poor working conditions is most acute, however, in relatively low-skilled assembly operations in which many smaller companies, often subcontractors to larger brand names or retailers, predominate.
Developing countries seeking to establish a manufacturing base often attempt to attract these smaller companies that are part of global value chains in which products and components are sourced from many locations.
Companies in this business can maintain competitiveness either by raising productivity in an established operation or by shifting production to a lower cost source. A key question for host countries is whether they can establish an environment in which respect for fundamental principles and rights at work forms the basis for foreign firms, governments, unions and employers’
organizations to work together to improve working conditions, product quality and labour productivity. Using the examples of export processing zones in Costa Rica, the Dominican Republic and the Philippines, a recent study shows that the movement from initially low-skilled to slightly higher skilled operations is a key to improving working conditions in the developing world. The study argues that this transition can be greatly facilitated by training and other inducements to attract higher productivity firms.
Increased analysis by the ILO, in collaboration with other international agencies, of the costs and benefits for developing countries of export processing zones, for example, could help identify the best strategies for maximizing the developmental benefits of FDI policies and how to ensure that they contribute to increasing decent work opportunities. Such an analysis might also reveal the scope for south-south cooperation to avoid situations where excessive incentives are offered to the detriment of all countries.
A major policy coherence objective of relevant international organizations must be to reduce and ultimately eliminate unnecessary tax and subsidy competition among developing countries, and the least developed in particular.
The concessions granted to foreign investors significantly reduce the already scarce resources available for national poverty reduction strategies.
To learn more about this author, visit International Labour Organization's Website.
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