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Finance & Development, December 1974
Article

The political economy of manufactured exports from developing countries: Manufactured exports from the LDCs can threaten workers’jobs in industrial countries: the author discusses some ways of avoiding conflict

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
December 1974
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Michael J. Sharpston

The export of some manufactured or semimanufactured products from developing countries depends essentially upon the availability of local raw materials and the lower transport costs of exporting in processed rather than unprocessed form. It is cheaper to send refined copper rather than ore, and meat rather than livestock. In certain cases, additional specific economic factors may be important—low-priced power from the Volta Dam attracted the processing of alumina to Ghana. In general, however, most exports of manufactures from developing countries depend for their economic viability upon the simple fact that labor is much cheaper in developing countries than in the developed world. This is as true for such newer exports from low-wage countries as electronics as it is for such traditional manufactures as clothing and shoes. With international subcontracting by multinational corporations, world-wide markets are made available to the smallest developing country, together with management skills and training for workers. If only one single stage in a production process is labor-intensive, it can often be transferred to a developing country—examples are polishing jewels for watches, assembling semiconductors, and sewing up baseballs. Usually the manufacturing process concerned uses mainly unskilled or semiskilled labor, but a few Asian countries are moving beyond this stage—Singapore now has a large export plant to produce high-quality photographic equipment.

At the simplest level of economic theory, no one in a developed country should object to this trend. International trade should be based upon comparative advantage, and the developing countries have a relative abundance of labor, particularly at the lower skill levels. Specialization along these lines increases the output of the world economy and should benefit both the developing and the developed countries. Even in economic theory, however, protectionism may be a second-best solution if, for some political reason, a developed importing country feels itself obliged to maintain an overvalued exchange rate or unable to end general unemployment (the first-best solution in the first case is to devalue, in the second case to stimulate the economy by budgetary policies).

Protectionism

Economic theory and political reality, however, diverge widely in a situation in which one developed country is more liberal in its import policies than most others. In economic theory the liberal policy is still fully justified on grounds of comparative advantage; and even “dumped” goods—goods sold below cost or normal market price, however defined—should be gratefully accepted if the supply will continue long term. In the real world, however, threatened domestic interests can and do point to their more protected counterparts in other developed countries, and ask why only their government should allow in this “flood” of goods. This dumping is routinely accepted as justification for countervailing import duties or quotas. The government may, however, refuse to bow before this pressure and reject the imposition of restrictions on trade, but it must then bear the consequences of the severe social and economic costs of structural readjustment in the threatened areas and sectors of the domestic economy.

Even aside from such special situations, it is in fact rather difficult for a developed country to keep to a liberal policy in regard to imports of manufactures from low-wage countries. At a strictly political level, this is easy to demonstrate. Those who stand to benefit from a liberal policy are consumers, generally ill-informed and ill-organized. Those who stand to lose are domestic producers, firms and their employees, and these groups will usually be well-informed and well-organized. In addition, the many consumers stand to gain only a little each, while the vested interests stand to lose heavily. This situation is, however, significantly changed if producer firms decide to subcontract out overseas: in that case, only domestic labor will remain a hostile political force. As the ease of communications increases, and as companies become more accustomed to think in terms of international production and marketing systems, international subcontracting grows in scope and importance, and the opposition of labor becomes more and more embittered.

But one cannot simply dismiss organized labor’s opposition as misguided. The importation of labor-intensive goods tends to lessen the labor scarcity of high-wage countries and, as a result, to depress labor’s share of national income. Under certain restrictive assumptions, one can even show that labor loses in absolute terms from such trade. In practice, of course, labor is not homogeneous: the more skilled workers may well benefit from the cheaper goods without having the market for their own services affected. In any case, what concerns organized labor most is almost certainly the effects on structural unemployment rather than the effects on wages or income distribution as such. And a progressive system of taxation and social services benefits could, at least in theory, easily overcome the wage effect alone.

Structural unemployment

The problem of structural unemployment in the developed world as a result of imports of manufactures from low-wage countries is a peculiarly intractable one. There is no doubt that it is the worst off who are the most affected. A list of U.S. industries with the lowest average earnings corresponds very closely to a list of industries threatened by manufactures from developing countries—such industries as electronic components, sporting goods, virtually all textiles, footwear, luggage, and handbags. A list of U.S. industries employing a high proportion of minority group workers—or of European industries with a high proportion of immigrant labor—would probably look rather similar.

It can, of course, be argued that in a dynamic context the whole situation is different. Gainers should easily be able to compensate losers within the developed country, since the country as a whole is better off. A program of adjustment assistance (“investment in human capital”) can help train unskilled workers for skilled jobs offering more secure employment and higher wages. Furthermore, it might, in human as well as economic terms, be more appropriate to move factories to the workers than the other way around—since migration of workers from overseas can cause a variety of social problems in housing, health, education, and race relations. This could be a major consideration for some European countries with large numbers of immigrant workers.

Adjustment assistance

Unfortunately, there are serious obstacles at a political, administrative, and technical level to the adoption of an effective adjustment assistance approach. At the political level, funds for adjustment assistance usually have to be voted by legislative bodies and do appear in budgets: they are a very visible cost. Under a regime of protectionism, in contrast, the higher cost paid by the consumer is a hidden one. Furthermore, the degree of protection (as well as the cost) can be disguised by the use of quotas— a tiny quota is less embarrassing than an 80 per cent tariff. An added refinement here is categorization, where very restrictive quotas are placed upon precisely those items in which low-wage countries would be competitive. At this stage, industrialists in the developed country begin to concentrate much of their effort on political lobbying; any move to liberalization will be at immense political cost to a government and will be accompanied by accusations from the industry of bad faith if protection critical to a recent investment is withdrawn. In addition, it seems to be politically very difficult for any government to announce publicly which industries it expects to contract: an attempt to do so in Germany was dropped in the face of strong political opposition, and, at the time when the United Nations was discussing Development Decade goals, Britain specifically refused to plan for the contraction of any industries. Even the attempt to create lateral specialization—in which, for example, a developed nation produces high-fashion cotton goods, and a poorer nation standard cotton sheeting—encounters strong political resistance.

Retraining

At an administrative level, Scandinavian countries that have tried substantial adjustment assistance programs have had considerable difficulty in devising means to train workers for the right job in the right place. Very careful manpower planning is necessary if retrained workers are to find openings available by the time they finish their training, and in a location acceptable to them. U.S. retraining programs have sometimes trained workers merely to be unemployed and skilled instead of unemployed and unskilled. (In the United States, organized labor’s attitude to adjustment assistance was badly soured by the period 1962-69, when assistance was in theory provided for under the Trade Expansion Act, but in fact held up by a narrow legal interpretation of the necessary qualifications.)

These administrative difficulties are very closely related to the technical problems. It is no accident that, in the international context of free trade, the comparative advantage of developing countries overlaps heavily with the comparative advantage, within a protected national context, of the less developed regions of a rich country. Both have a relative abundance of low-wage, low-skill labor. Thus a liberal trade policy is all too likely to hit just the poorest regions of a developed country. The problem is rendered even worse by the fact that many of the threatened jobs (especially in clothing and electronic assembly) are done by women. It is no good telling the wife of a West Virginia miner to go and take a job in Baltimore, over a hundred miles away.

All these factors suggest that it will not be easy for developed countries to offer liberal market access for manufactures from low-wage countries. This can only be achieved if research and policy are carefully tailored to economic and political realities. So what specific measures may be taken?

The worst adjustment problems are likely to arise for those industries threatened by direct exports from developing countries. In this case, both management and labor will be opposed to imports. Furthermore, the fact that management has not itself taken the initiative of starting international subcontracting tends to indicate a declining industry and older, conservative management. In a new, innovative high-growth industry like electronics, even small firms have found it possible to subcontract out internationally. Conversely, many technological innovations in the clothing industry have come from firms outside the sector (e.g., the use of lasers for cutting cloth). Japan already has a program of assistance to help small businessmen relocate plants abroad when threatened by competition from low-wage countries. A specific program along these lines, or one to help older small companies to diversify and at the same time to improve their management skills, could well have beneficial economic and political results. Perhaps it might also be possible to provide educational courses to broaden the background of union leaders associated with declining industries, so that they too could diversify their activities.

Temporary levy

Another problem is the visible budgetary cost of adjustment assistance. There are arguments both in equity and in political terms in favor of those who benefit from cheap imports paying these costs in some identifiable form. One mechanism might be a temporary levy (not a permanent import duty, still less quotas) on imports of competing products. The proceeds of this levy would be paid into a special fund for adjustment assistance to firms and workers in the domestic industry directly threatened by the particular imports. Such assistance would help firms and workers out of the industry, or at least out of its most threatened sectors; it would not help them stay in, as some assistance programs have in fact done in the past. Separate accounts would be maintained for this fund, and the levy would be progressively diminished and then removed as the need for adjustment assistance dwindled.

Perhaps most critical of all, it is economically and politically essential to give the poorer regions of developed countries a viable alternative to those products in which developing countries have a comparative advantage. Naturally, it has been found politically impossible to insist on the contraction of certain major employment-generating industries in such areas without the offer of a quid pro quo. This is both a research and a policy issue. The right products and services first need to be identified. Subsequently, government policy needs to be geared to relocating the activities of the public sector and to steering the private sector in the same direction (through providing special regional investment incentives to private firms willing to produce these goods and services, subsidized worker training, and the necessary physical infrastructure).

Location of industry

Since this is as yet a very under-researched field, it is difficult to be sure what the appropriate products and services are. Rapid technological progress in the field of communications is certainly causing major changes. However, one can suggest some clues. Some processes and services are labor-intensive, at a low-skill level, and by that criterion tend to be appropriate to low-wage regions. Conversely, there is often a high premium on geographical proximity to avoid freight and other distance costs (shipping delays, executive travel time, risk of supply interruptions, delays at national frontiers, language barriers, and educational and cultural differences). One can thus envisage a continuum with the optimum location for a particular process somewhere along it. For some labor-intensive processes, the level of specialized skill or the external economies of propinquity are so high that location in the high-rent, high-wage area of a major city is inevitable. The financial activities of Wall Street or the City of London might be examples of this. At the other extreme, some processes utilize low-wage labor at a rather low-skill level—for example, assembly of standard design computer memory planes—and there is no insuperable obstacle to distance from the market and long-range freighting. Here the correct location would probably be a low-wage Asian country. In between these two extremes come the more advanced developing countries (such as Singapore and Hong Kong) and those situated near the developed countries (such as Mexico and the United States, or Yugoslavia and Western Europe). So also at higher levels of geographical proximity come the poorer regions of developed countries themselves. What follows are only tentative possibilities for these regions.

In heavy industry, where most jobs are traditionally male, employment opportunities could probably be found in welding and foundry work, with government help in poor regions of a developed country through policies to improve freight systems and establish training institutions for welding and casting skills. For traditionally female work (and, as we have seen, women in poor regions are among the worst affected), very high-fashion clothing items could be a possibility—designers’ originals produced in very small numbers. Policy implications would include the establishment of training institutions for industrial garment-making for all skill levels from seamstress to dress designer, and the subsidization of regional fashion shows.

Office jobs

Perhaps the most extensive possibilities are in the clerical and bureaucratic fields, at a variety of skill levels. For standardized office work, the developing countries may have a comparative advantage: Jamaica, for example, already does computer card-punching. However, where time delays are more critical, or cultural similarity is essential, the poorer regions of the developed country itself would seem the ideal location. Cultural similarity is important for a wide range of clerical tasks where some discretionary action may be necessary in, say, one case out of ten. Monthly billings, credit control and credit applications, advertisement mailing, internal accounting, and administration of local or central government taxation are all suitable activities for such areas.

Already there has in fact been some move in this direction: in Britain, many insurance companies moved the bulk of their staff out of the City of London to Croydon, and the Inland Revenue has a large part of its operations based in Wales; and in the United States, the Internal Revenue Service has its central computing facility in Martinsburg, West Virginia. Recent technological developments have greatly increased the scope for such activities—telephone direct dialing, nation-wide computer access facilities, electronic telecommunication of graphs and designs, and other electronic visual display equipment. It is now possible to centralize much word-processing activity and to organize it on an industrial basis with substantial economies of scale. With suitable governmental incentives to create the necessary external economies, much semiroutine office work could now be moved to the poorer regions of a developed country, as could some higher-level information retrieval and research work. Supporting government policies would include the promotion of easy electronic communications of all kinds and the establishment of institutions in the poorer regions to teach computer and data-processing skills at all levels—punch card operator, programmer, and systems analyst.

Although the approach suggested here does seem to offer real possibilities, it is not without its own problems. For example, in some developed countries an institutional problem is that legal minimum wages or union pressures effectively enforce wage uniformity between rich and poor areas for certain jobs. This deprives the poorer areas of the basis for their comparative advantage and leaves them only with the disadvantage of distance. Despite such difficulties, however, the way to avoid protectionism in a developed country is a substantial program of adjustment assistance, made available promptly and if possible planned in advance. This program should largely be funded by those who benefit from liberal trade policies, and in any event be carefully tailored to the economic, social, and political realities involved. This would imply the deliberate fostering of those industries for which the poorer regions of a developed country could naturally have a comparative advantage, even without protection, over the developing countries.

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