Fears that increased international trade and investment and greater reliance on market forces will hurt employment are mainly without basis. Workers have made great advances in many countries, especially those that have effectively engaged in international markets. Despite a doubling of the world's workforce over the past three decades, the productivity of the world's median worker has doubled.
This year's World Development Report makes four key points. First, building on earlier research---notably that of World Development Report 1990---it emphasizes the benefits to workers in all countries, and especially poor ones, of productivity-raising economic growth driven by sound investments in capital and in people's health and education.
Second, increased integration between countries, including through migration, can benefit workers in poor and rich countries at the same time. But governments have an important role in helping workers hurt by changes in trade patterns and capital flows. This can involve not just providing a social safety net, but also helping to equip workers for change.
Third, labor policies in many countries have been misguided in favoring those in good jobs at the expense of workers in the rural and informal sectors and the unemployed. Governments have a distinct role in setting the legal and regulatory frameworks within which trade unions and firms can operate and in ensuring that those frameworks encourage their positive contributions to development. Governments also need to define minimum standards and prevent exploitation and discrimination. Successful labor policies are those that work in harmony with the market and avoid providing special protections and privileges to particular labor groups at the expense of the poorest.
Fourth, workers eventually benefit from economic reform as states move from central planning to market systems and from protectionism to openness. The change can be wrenching, however, as employment and wages often decline temporarily and workers have to move from old to new jobs. There remains a need for governments to provide strong support to workers and their families in such times of transition.
The report concludes that problems of low incomes, poor working conditions, and insecurity affecting many of the world's workers can be effectively tackled in ways that reduce poverty and regional inequality. But to do so will require sound domestic policy and a supportive international environment. Imperatives for governments are to:
The share of manufactures in developing country exports rose from 20 percent to 60 percent between 1960 and 1990. Low- and middle-income countries already account for almost 80 percent of the world's industrial workforce.
International flows of goods, services, capital, and people bring new opportunities for most workers. Where exports have risen fast, so have real wages---by an average of 3 percent per year (figure 1). Foreign direct investment, which now accounts for 30 percent of capital flows to low- and middle-income economies, is creating many new jobs: 60 percent of worldwide growth in the payrolls of multinational corporations occurred in these countries between 1985 and 1992. International migration, although so far less of a force for change than either trade or investment, has usually brought income gains to those who move, higher remittances to those who stay, and increased production of goods and services in the host countries.
Many workers, especially in the farms, factories, and services sectors of Asia, have seen great gains from international engagement. But for some it feels as though international integration has increased their vulnerability to volatile international conditions; others---especially those living in Sub-Saharan Africa---remain largely disconnected from international market opportunities. And within industrial countries there is a small but vocal minority who fear that they will lose from the introduction of new technologies, the growth of international trade, and movements of capital and people across national boundaries.
Some workers will indeed be hurt if they are stuck in declining activities and lack the flexibility to change. However, international trade, immigration, and capital flows account for only a small part of the problem faced by laid-off workers in France, or by unskilled men in the United States who have seen their wages decline for decades, even as the wages of college graduates continue to rise.
More important, restricting trade or capital is not an effective way of dealing with this problem. A better strategy for any country is to improve the skills of its people or ease their transition to new jobs while staying engaged with the world economy. International migration, in contrast, is always controlled to some degree. To the extent this is done to reduce conflict while preserving the basic rights of migrants, it can actually help sustain moderate levels of international migration.
In any case, capital now crosses borders ever more rapidly despite the best efforts of some national governments to control it. But far from rendering national governments impotent, international capital movements intensify the impact of domestic policy on labor outcomes, richly rewarding policy when it is sound but penalizing policy when it is unsound. Faster and broader capital flows and greater openness in trade are making domestic policy more important for workers.
Success breeds success, because good macroeconomic and structural policies are key to attracting or keeping capital and achieving the productivity necessary to create competitive jobs at rising wages. But when policies fail, portfolio investment and local savings leave the scene, and labor suffers the consequences.
Although 90 percent of developing countries have some form of social security system, at best it covers only workers in the formal sector, who make up just 15 percent of the labor force in low-income countries, 45 percent in middle-income countries.
Labor policies in low- and middle-income countries do not affect the majority of workers who work in the rural or the urban informal sector. These are the poorest workers---often earning less than half what a formal sector employee earns---and therefore the most in need of protection. Moreover, labor regulations are often not enforced in many firms that are normally considered part of the modern sector.
Does this mean that governments in low- and middle-income countries should not bother to intervene in the labor market, because their policies will not reach those who most need help and their regulations will not be enforced? The answer is no. Public action can complement community arrangements and enhance the welfare of informal workers by improving the environment in which they operate. In the formal sector public action is sometimes needed to improve market outcomes, enhance equity, and protect vulnerable workers.
Informal and rural workers often must work under more hazardous and insecure conditions than their formal sector counterparts. Improved working conditions are best achieved not by legislation but by direct public action affecting the working environment and the health of workers, in areas such as provision of water and sanitation, roads and drainage in and near cities, and environmental health. The eradication of onchocerciasis (river blindness) in large parts of West Africa brought immense reductions in human suffering and large increases in labor supply. Informal income security arrangements can be complemented by public transfer programs: public works are usually the best transfer method for able-bodied men and women. In India's Maharashtra State for many years, rural workers were guaranteed work in public works schemes at the local wage rate.
For the formal sector, collective bargaining between firms and independent unions is an effective way to determine wages and working conditions. Yet governments have often repressed unions, as in the Republic of Korea until the 1980s, or politicized the bargaining process, as in Bangladesh today. Sometimes, as in Indonesia, they have responded to pressures for independent unions by directly raising standards, such as minimum wages, potentially at the cost of employment.
Governments do need to establish the rules for labor-management negotiations, spelling out the rights of workers and firms, establishing dispute resolution mechanisms, and promulgating basic health and safety regulations, which unions can monitor. Where unions cover only a small proportion of the workforce, as they do in most low- and middle-income countries, decentralized bargaining under conditions of competitive output markets produces the best results. This precept has long applied in Japan and Hong Kong and applies now in Chile and Korea.
Direct government intervention makes sense in dealing with child labor and in other cases where the market may produce adverse outcomes, such as discrimination against women. But legislation alone has been ineffective. It needs to be complemented by other policies, such as low-cost education and better access for women to formal sector jobs. India has sound child labor laws, yet millions of children are working, often in hazardous conditions.
Child labor is partly a reflection of poverty. But it is not necessary to wait for a reduction in the poverty rate to tackle the most life-threatening and demeaning aspects of child labor. In the town of Pagsanjan in the Philippines civic action dramatically reduced child prostitution. In Brazil, India, and the Philippines local action, with public support, is improving the health status of working children and giving them greater educational opportunities.
Governments also have to set policy for public employment. Many public sector workers work hard and productively. But in many low- and middle-income countries, notably in Sub-Saharan Africa and the Middle East, the quality of public service has suffered as its ethos has been destroyed by a combination of overstaffing, inadequate pay, and weak governance.
Restoring levels of pay and reducing the number of public workers are often essential reforms, to be combined with improvements in the recruitment, promotion, and accountability of civil servants, teachers, nurses, and policymakers. The redefinition of the role of the state makes it all the more important that governments be effective in those areas where they do stay involved.
If support for the rights of workers to form unions and to bargain collectively and support for the reduction of child labor make sense in a national context, should these principles be linked to international trade agreements, with sanctions for their violation? Advocates of linkage make a distinction between core standards, which for many would be akin to basic rights and do not directly raise labor costs, and other standards, such as minimum wages, that are a direct function of the level of development.
Such a division is sound, and there is a case for international concern over core standards. However, it is best to keep multilateral trade agreements confined to directly trade-related issues, to prevent protectionist interests from misusing such links to reduce the trade that workers in low- and middle-income countries need if their incomes are to rise. As the history of trade reform illustrates, even well-intentioned and rationally designed discretionary trade measures can be captured by protectionist interests.
Of the world's 2.5 billion workers, 1.4 billion live in countries struggling with transitions from state interventionism, high degrees of trade protection, or central planning.
Many developing and transition economies are struggling with one or both of two major changes in their development strategies: from protection to greater integration with international markets, and from massive state intervention to a market economy in which the state plays a smaller role in allocating resources.
These changes can have a powerful labor market dimension. Their key characteristic is an acceleration in the destruction of unviable jobs and the creation of new ones. The process is often accompanied by macroeconomic decline and by a sharp drop in the demand for labor nationwide. In the short term workers often feel the pain as real wages fall, unemployment rises, and employment shifts into informal activities. In Argentina, Bolivia, Chile, and Mexico real wages fell by a third or more before recovering. In Bulgaria, the Czech Republic, Poland, Romania, and Russia real wages fell between 18 and 40 percent in the first year of transition; in some countries, including Bulgaria and Poland, unemployment rose from negligible levels to 15 percent or more. But in China and Ghana wages rose during the adjustment process, and unemployment remained low.
Economic reform can create opportunities for some workers but have wrenching effects on others. Even the best-designed reforms produce gainers and losers in the short term. Moving the economy as quickly as possible to the new growth path is key to minimizing the pain and social costs of adjustment; macroeconomic stability and credibility of the overall reform package are therefore critical. Countries such as Chile and Estonia have done relatively well on these scores and have brought about---or are bringing about---recoveries in wages and employment. In contrast, Belarus and Venezuela have faltered and suffered declines or stagnation in wages and employment.
Is a strategy of gradual transition better for workers? Where initial conditions allow gradual job destruction without jeopardizing the reform that is needed to generate new jobs, gradualism makes sense. China exemplifies the truth of this proposition, but that country enjoyed a large margin for job expansion, first in agriculture and then in quasi-private industry, which could help finance the cost of the relatively inefficient state sector. In most other countries either macroeconomic imbalance or the costs of inefficient sectors make gradualism a nonstarter.
Microeconomic policies that affect the mobility and incomes of workers can play a major role both in influencing the overall pace of change and in safeguarding the welfare of workers over the transition period. Good policy will generally involve action in three areas: enhancing mobility, reducing income insecurity, and equipping workers for change.
These are highly complementary. Increased mobility will often involve measures to allow job destruction, including large layoffs from the public sector, to run its course. In many countries measures to separate entitlement to social services from employment and to liberalize housing markets are required. But it is also important to consider the needs of those at risk of steep income declines. Income transfers can play an important role here. Retraining can help certain groups of workers but is unlikely to provide a panacea.
About 99 percent of the 1 billion or so workers projected to join the world's labor force over the next 30 years will live in what are today's low- and middle-income countries. Some groups of relatively poor workers have experienced large gains in the past 30 years---especially in Asia. But there is no worldwide trend toward convergence between rich and poor workers. Indeed, there are risks that workers in poorer countries will fall further behind, as lower investment and educational attainment widen disparities. Some workers, especially in Sub-Saharan Africa, could become increasingly marginalized. And those left out of the general prosperity in countries that are enjoying growth could suffer permanent losses, setting in motion intergenerational cycles of neglect.
There is a substantial risk that inequality between rich and poor will grow over the coming decades, while poverty deepens. But it need not be so if countries choose the right international and domestic policies. Preserving open trading relations, preventing rich country fiscal deficits from crowding out investment elsewhere, and delivering high and stable growth in the high-income countries will maintain global demand and help head off any protectionist measures in rich countries that might result from persistently high unemployment. Of even greater importance are domestic policies that promote labor-demanding growth and sound labor policy.
Governments and workers are adjusting to a changing world. The legacy of the past can make change difficult or frightening. Yet realization of a new world of work, in which all groups of workers are included in a dynamic of rising incomes, better working conditions, and enhanced job security, is fundamentally a question of sound choices in the international and the domestic realm.
The right choices involve using markets to create opportunities, taking care of those who are vulnerable or left out, and providing workers with the conditions to make their job choices freely, bargain over their conditions of work, and take advantage of better educational opportunities for their children. Millions of workers have a powerful interest in good policy. They and their families have to live with the consequences.
