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Robert Pollin has identified the central challenge of economic policy today: how to sustain high employment levels and jobs with decent wages and conditions. This argument is relevant not only for the U.S. economy, but also for much of the developing world, including its “successful” countries in which large increases in GDP have not translated into high-quality employment.
Over the past two decades, most developing countries have relied on an economic strategy focused almost exclusively on exports to rich markets. This strategy delivered rapid growth in a few countries, such as China, but failed to do so in most others. Furthermore, countries that rely on exports for growth need to prioritize competitiveness in global markets, which means low wages and a currency kept cheap relative to the dollar, euro, yen, and British pound. This is why, even in the economies that showed great success as exporters, levels of consumption by the overwhelming majority of working people have largely remained stagnant.
The export strategy also generated fewer jobs than projected. The demand for efficient production drove large investments in capital and less in workers. As a result, in developing countries that are exporting manufactured goods, labor productivity in the export sectors has risen quickly, but job growth has not kept pace.
Even in China, total industrial employment decreased by more than 8 million workers between 1997 and 2002. Since 2004 it has since stagnated at 230 million, even though industrial production has more than doubled. In other export-oriented developing countries, manufacturing employment has remained stagnant or fallen slightly. There has not been a movement of jobs from North to South; rather, international competition has generated greater and greater use of labor-saving techniques that have caused manufacturing jobs everywhere to disappear.
The export model also had adverse effects on residents of developing countries working in small-scale agriculture and related traditional activities such as small industry and petty trade. In many countries, including India, a prolonged and widespread agrarian crisis has persisted regardless of global trade prices. Farmers have had to cope with constantly rising costs of fertilizer, seeds, pesticides, and other inputs, along with volatile markets for their products. They have also faced reduced access to credit, as the export model shifted subsidies away from small-scale producers in favor of exporters.
Nor has the export model generated discernable gains for perhaps the largest part of the workforce in most developing countries: informal workers, such as agricultural day laborers, urban street vendors, or home-based textile workers. Women are disproportionately represented in such jobs, which pay poverty-level wages or worse.
The current atmosphere of animosity between workers in developed and developing countries is both unnecessary and counterproductive.
So the export strategy generated greater inequality within the exporting countries. It also sowed the seeds of its own destruction by generating downward pressures on the prices these exports could fetch on global markets. The export model cannot be pursued much longer, especially in large developing countries. The global economy has reached the point where rebalancing must begin, as developing countries grow increasingly on the basis of their own expanding markets. The other side of this global rebalancing is that the large trade deficit in the United States will correspondingly diminish.
This process of global economic rebalancing was initiated by the financial crisis and is now likely to accelerate through the fragile and unstable recovery. It makes sense, then, as Pollin argues, to shift the U.S. economy toward a domestic wage-led growth model.
But can a wage-led growth model be successfully advanced in developing countries? In those with relatively strong institutions that can affect the labor market—including collective bargaining, effective minimum-wage legislation, and the like—it might. For the majority of developing countries, however, such institutions are poorly developed and have little impact on informally employed workers. Still, the wage-led model is feasible and desirable if the focus of policy shifts toward inclusive growth and job creation. This means directing resources to the sectors in which the poor work, areas in which they live, and goods that they consume.
Public employment schemes can play a direct and positive role in such efforts. For example, in India the Mahatma Gandhi National Rural Employment Guarantee Act of 2006 is designed to ensure 100 days of employment to every rural household in local public works planned and monitored by local bodies. In the recent crisis, this program became an important buffer against economic shocks and reduced distress migration. The Act has the potential to increase not only the living standards of rural workers, but also demand for local goods and services. Meanwhile rural infrastructure and land productivity will improve.
In addition to such schemes, India and countries in similar situations should focus more on the public delivery of essential goods and services including decent, affordable housing, transportation, food, education, and health care. These are usually seen as welfare measures, but they also can support a growth strategy, as shown by all of the successful Asian industrializers. In addition to enhancing living conditions, these programs allow residents to retain income to spend on other goods, thereby expanding the domestic market. And this in turn means that the economy has to rely less on exports as the basic engine of growth.
Whatever growth is achieved must be ecologically sustainable. That requires creating incentives for more ecologically sound forms of consumption and production.
Pollin’s proposal—that, even in the context of a globalized world economy, the United States should pursue a full-employment economy with decent working conditions—may be even more appropriate for developing countries. That such a plan may even be possible also suggests that the current atmosphere of animosity between workers in developed and developing countries is both unnecessary and counterproductive. A change of economic perspective is mainly what is needed as we work toward a better world for all.
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