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5.3 Harnessing the potential and sharing the stresses of economic integration: Working Out of Poverty

Guest post by: International Labour Organization

Article Overview: 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.

5.3 Harnessing the potential and sharing the stresses of economic integration: Working Out of Poverty

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.

Related Articles
  Regionalism, Trade and Development in Africa
  5.15 Conclusions: Working Out of Poverty
  1.17 Building partnerships: Working Out of Poverty
  HOW TO DELIVER A 1, 2 PUNCH WITH INTEGRATED MARKETING
  References: Enhancing Africa’s Trade: From Marginalization to an Export-Led Approach to Development

Article Tags: agriculture markets, commodity prices, communications infrastructure, developing countries, export businesses, exports and imports, fdi, foreign direct investment, fundamental condition, global markets, international markets, job creation, ldcs, least developed countries, low income countries, multilateral trade negotiations, poorest countries, poverty reduction, private capital, sub saharan africa



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