Wage Inequality in Developing Countries - Essay Example

?Has the increase in trade in developing countries increased wage inequality between skilled and unskilled workers in the developed countries? Introduction Developing countries are actively participating in the global trade since the 1960s, with their merchandise exports growing at a rate faster than that of the world average. In the span of the period between 1960 and 2002, the developing countries’ share in the world’s export goods grew from one-fourth to one-third; and between 1980 and 2000 their export volume sextupled as compared to the mere tripling of the developed countries export volume.1 The integration of world economy spurred by globalisation has increased trade in general, but developing countries benefited most compared to developed and highly industrialised countries experiencing growth rates as high as twice that of the latter, even whilst real export growth rates slowed down in the face of recession in the period between 1990 and 1991.2 Along with this development, an evident increase in wage inequality and unemployment can be observed in developed countries leading many to think that a connection between the two developments exists. The Increasing Trade in Developing Countries Table 1 shows a comparative illustration of the growth rates in export between developed and developing economies between the periods 1980 to 1990 and 1990 to 1999. Note that the start of the rise in world trade, especially in developing countries, is not shown and instead started two decades later. The growth rate in export rose by more than twice for developing countries and almost doubled that in import rate. On the other hand, the rates for both export and import decreased in the second period for the developed countries. There are two explanations of the current rapid trade growth: technological and political. Technocrats believed that advances in transportation and communication made the world smaller and trade and easier, whilst political scientists believed that political factors such as the GATT and efforts of developing countries at self-liberalisation in trade explain the growth. Krugman contends, however, that the current rise in global trade is simply a self-correction after it went down during the two world wars implying that the current level is comparable to that prior to said wars. 3 Table 1 Comparative Export/Import Growth, 1980-90, 1990-994 Growing Wage Inequality in Developing Countries Parallel to the rise in global trade particularly involving in developing countries is an observable growing wage inequality between skilled and unskilled workers in developed countries. In a data compiled by OECD, some highly industrialised countries showed a rising wage inequality from 1980 to 2005. Figure 1 shows the comparative rise of income inequality in the USA, the UK, Australia and Canada. The USA income data particularly shows a steep rise in income inequality. The UK, Canada and Australia also revealed a rising pattern but not as pronounced as that of the US. There are developed countries, however, that do not exhibit this phenomenon such as in the cases of Nordic countries like Norway, Sweden, Finland and Denmark and some continental countries such as France, Italy, Germany and Netherlands. Figure 1 Income Inequality in Continental and Anglo Countries5 Income Inequality as a Consequence of Trade Growth in Developing Countries Some quarter hold the view that the rising income inequality in developed countries is underpinned by the trade growth in developing countries. This is purportedly because the rapid movement of goods and capital in the global market favour those who are in a position to use such opportunity whilst undermined those who are not. The expanding global trade has presented high capital entrepreneurs a wider field with which to expand their business whilst low income group who cannot compete are left behind.6 Relative to this, two theories are used to explain the impact of trade liberalisation on wage inequality in the industrialised world. The Heckscher-Ohlin theory suggests that countries will export those that they have in abundance and therefore, developing countries are most likely to export unskilled-labor intensive products. A related theory, the Stopler-Samuelson hypothesis proposes that when a product’s relative price increases it will also cause an increase in the return of the factor that was intensively employed in its production and a parallel diminution in its counterpart.7 Taken together, the two theories would suggest that the unskilled labour that produced the exported product in the developing country stands to gain the most and the unskilled labour in the importing country a contrary impact. Professor Wood of the University of Sussex attempted to present proofs to prove the connection. First, he said, is that a deindustrialisation is taking place in some OECD countries that is linked to the extent that importation from developing countries have infiltrated them. Moreover, unskilled labourers of such countries suffered the worst comparatively and finally, unemployment is also found to be high in such countries.8 However, it is submitted by another author that net import penetration in the developed world around the time Wood made his arguments was only 1% of its total GDP and therefore, could have not likely made the effects he had argued about. Moreover, although it is submitted that increased trade with developing countries has some impact on the demand for unskilled labour, it cannot account for the entire rise in wage inequality or unemployment in developed countries.9 Krugman likewise discusses the coincidental occurrence of rapid growth of wage inequality, particularly in the US, and a similar rise of unemployment in Europe to the rapid growth of export market of the newly industrialised economies (NIEs), also raising suspicions of their connection. This connection is grounded on the supposed pressure that low-wage merchandise exports from such countries exert on unskilled labour in developed countries. Krugman dismisses this as an insignificant impact and lacking in pertinent supporting data. If at all, Krugman argued, the NIE trade can answer only to a fraction of the income inequality being experienced in the US since the 1970s.10 Conclusion The rise in trade in developing countries and the observed parallel increase in wage inequality and unemployment in developed countries have led many to suspect that the former causes the latter. Several notable authors have attempted to present a concrete link between the two using various models and studies. Nonetheless, a contrary opinion also exists and in this opinion, evidences using various models have also been used to explain why the former does not necessarily cause the latter. It is not disputed, however, that rise in trade in developing countries and their exportation of unskilled intensive products have caused, to a certain degree, the problems of wage inequality and unemployment in industrialised countries. What is disputed by these studies is the blanket claim that such rise in trade is the lone and the significant reason for such wage inequality and unemployment. References: Barry, Frank. Trade with Developing Countries: Does it Increase Income Inequality in the North? (Trocaire Development Review, Dublin 1996). Cherunilam, Francis. International Economics (5th Edition Tata New Delhi: McGraw-Hill Education, 2008). Demir, Firat and Ju, Jiandong and Yin Zhou, Income Inequality and Structures of International Trade (APJAE Symposium on International Trade and the Chinese Economy 2010). Kimani, Naheed and Nur Calika, International Trade Policies (International Monetary Fund 1994). Kenworthy, Lane. Sources of Equality and Inequality: Wages, Jobs, Households and Redistributions (Luxembourg Income Study, Working Paper 471 2008). Mahler, Vincent. Economic Globalization, Domestic Policies and Income Inequality in the Developed Countries: A Cross-National Analysis (Luxembourg Income Study, Working Paper No 273, 2001) Michalopoulos, Constantine. Developing Countries in the WTO (Palgrave Mcmillan 2001). Read More