Trade and Employment in Developing Countries, Volume 1: Individual Studies

by Anne O. Krueger, Hal B. Lary, Terry Monson, Narongchai Akrasanee

Overview

This first book of a three-volume study examines the way trade policies in developing countries affect the level and composition of employment. There is special emphasis on the effects of import substitution policies that attempt to make a country self-sufficient by producing local substitutes for imports, as compared with policies that further the expansion of imports.

Ten countries are studied: Brazil, Chile, Colombia, Indonesia, the Ivory Coast, Pakistan, South Korea, Thailand, Tunisia, and Uruguay. The contributors to the volume analyze the link between trade strategies and employment within a common framework, and the analyses of trade policy include the level and structure of protection, the relation of trade policy to labor demand, the labor intensiveness of trade, and the extent of distortions in factor markets and their effects on trade.

Product Details

ISBN-13:	9780226454924
Publisher:	University of Chicago Press
Publication date:	11/01/1980
Series:	National Bureau of Economic Research Monograph , #1
Pages:	558
Product dimensions:	6.00(w) x 9.00(h) x 1.40(d)

About the Author

Anne O. Krueger is the first deputy managing director of the International Monetary Fund.


Anne O. Krueger, director of this study, is professor of economics at the University of Minnesota and joint director of the NBER study Foreign Trade Regimes and Economic Development.


Anne O. Krueger, director of this study, is professor of economics at the University of Minnesota and joint director of the NBER study Foreign Trade Regimes and Economic Development.


Anne O. Krueger, director of this study, is professor of economics at the University of Minnesota and joint director of the NBER study Foreign Trade Regimes and Economic Development.

Read an Excerpt

Trade and Employment in Developing Countries

1 Individual Studies

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By Anne O. Krueger, Hal B. Lary, Terry Monson, Narongchai Akrasanee

The University of Chicago Press

Copyright © 1981 The National Bureau of Economic Research
All rights reserved.
ISBN: 978-0-226-45492-4

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CHAPTER 1

The Framework of the Country Studies

Anne O. Krueger

This is the first of three planned volumes from the National Bureau of Economic Research project on alternative trade strategies and employment. It presents the major results from ten studies of individual countries' experience with their trade and payments strategy — in particular, the degree of emphasis on export promotion relative to import substitution — and the implications alternative strategies have for employment.

The country studies were undertaken within a common framework. We hope that the comparability among them (though still imperfect owing to data limitations and differences in experience) will add a dimension of interest to the studies. Nonetheless, each country's experience is of interest in its own right. The country findings are designed to "stand alone" in the sense of being self-contained analyses of value for understanding the individual economy.

Two subsequent volumes will explore some of the findings that emerge from systematic evaluation of the experience of the individual countries. The second volume will contain a series of essays on particular aspects of the relationship between trade strategy and employment, while the third will provide an overall analysis of the relationship and of the results of the individual studies viewed all together. The reader interested in a full discussion of the underlying theory or in an interpretation of the comparative results across countries is referred to those volumes.

This chapter will provide background information about the common framework within which the country studies were undertaken, including a few particulars about the history of the project, a sketch of the underlying theory upon which empirical analysis was based, and a definition of the concepts used by all the country authors in carrying out their analyses. The purpose is not to provide an extensive review of the theory, but rather to enable this volume to be utilized independently, while avoiding the need for each author to repeat the underlying theory, definitions, and concepts necessary for a statement and interpretation of his results.

1.1 The Project

During the late 1960s and early 1970s, disillusionment with the import substitution strategy and its results was increasing. Contributing to this trend were both the results of research on the effects of the strategy and the remarkable increases in growth rates experienced by some of the countries that had shifted to an export promotion strategy. Simultaneously with that disillusionment, however, came a fundamental questioning of the adequacy of economic growth itself as an objective. Many observers began doubting the degree to which economic growth had resulted in increased employment opportunities and higher living standards for the majority within the developing countries.

A natural question, but one that was not addressed, was the extent to which the unfavorable results with respect to employment and income distribution had themselves originated from the policies adopted to encourage import substitution. Failure to investigate this possible linkage was all the more surprising in light of the implications of the fundamental Heckscher-Ohlin-Samuelson (HOS) model of international trade so widely used in international economics, and the questions that had earlier been raised by Wassily Leontief (1968) in his famous Leontief paradox. For, if the HOS model were valid, and if developing countries were labor-abundant, their failure to encourage export growth would naturally and directly affect the demand for labor. However, findings from empirical studies for a variety of countries following Leontief were not sufficiently uniform and comprehensive to permit any conclusions, and considerable doubt remained about the validity of the HOS predictions.

Moreover, early evidence from two countries — Brazil and Colombia — that had switched trade strategies suggested that emerging exports might be capital-intensive. Noteworthy in particular was Diaz's conclusion regarding Colombia that "it would be a mistake to assume that all these [nontraditional] exports are made up of labor-intensive commodities."

The NBER project on alternative trade strategies and employment was designed to analyze the implications for labor markets of alternative trade strategies and also to examine the effect of different institutional arrangements in labor markets on factor proportions in trade. It was felt that if studies were undertaken for a number of developing countries within a common framework, the results would provide considerable insight into the links between trade strategy choices and the development of employment opportunities.

1.1.1 Project Participants and Procedures

From the outset it was recognized that the project would necessarily entail several phases. The first phase was to provide a formal statement of the empirical implications of a multicountry, multicommodity model of international trade. This was done in Krueger (1977).

The next step was to identify economists knowledgeable about individual countries who would be interested and willing to undertake studies and to develop, in cooperation with those economists, a set of concepts, definitions, and research goals. This was done partly through correspondence, with the aid of a draft working paper, and was completed after a conference of project participants during which the various concepts and definitions discussed in the draft were amended and agreed upon.

The countries, country authors, and their affiliations are as follows.

Brazil: José L. Carvalho and Cláudio L. S. Haddad, Fundação Getúlio Vargas, Rio de Janeiro.

Chile: Vittorio Corbo, International Institute of Quantitative Economics, Montreal; and Patricio Meller, Corporacion de Investigaciones Economicas para Latinamerica, Santiago.

Colombia: Francisco E. Thoumi, Inter-American Development Bank.

Indonesia: Mark M. Pitt, University of Minnesota.

Ivory Coast: Terry Monson, Michigan Technological University.

Pakistan: Stephen Guisinger, University of Texas at Dallas.

South Korea: Wontack Hong, then of the Korean Development Institute, now of Seoul University.

Thailand: Narongchai Akrasanee, Thammasat University, Bangkok.

Tunisia: Mustapha K. Nabli, Faculté de Droit des Sciences Politiques et Economiques, Tunis.

Uruguay: Alberto Bension and Jorge Caumont, Universidad de la Republica, Montevideo.

The NBER was extremely fortunate in that a group of economists had been planning to undertake research on an almost identical topic under the auspices of the Center for Asian Manpower Studies. Three of them — Narongchai Akrasanee of Thammasat University, Wontack Hong, then of the Korean Development Institute, and Kuo-Shu Liang, deputy governor of the Bank of Taiwan — attended the first working party, and Akrasanee and Hong participated throughout the project and are contributors to this volume.

As arrangements were being made for the country studies, it was recognized that problems were likely to arise in particular fields — such as labor markets and the nature of substitution possibilities — while some research along cross-country lines would complement the work of the country authors. Jere Behrman, University of Pennsylvania, agreed to work on production functions and substitution possibilities; James M. Henderson, University of Minnesota, developed optimizing trade models for the individual countries; Robert Lipsey, Queens College and National Bureau of Economic Research, analyzed factor substitution by multinational corporations; and T. Paul Schultz, Yale University, focused on income distribution implications of the structure of effective protection and on labor markets. These individuals participated in the working parties and have been valuable consultants to some of the country authors when particular issues in their areas of competence have arisen. The results of their research, along with papers on special topics emanating from some of the country studies, will be found in the second volume of this series.

After the first working party, held in December 1975, individual country analysts began carrying out their own research plans, amending the uniform procedures as necessary in light of their countries' particular circumstances and data availability. At the midpoint in the research a second working party was held, in September 1976, at which authors presented preliminary results, discussed common problems, and raised new questions. Finally, research on the country studies has been completed and the major findings are presented in this volume. Not all results from each study are given here, however, because of limitations of space. In many instances the research findings are sufficiently rich so that monographs have resulted that will be separately published.

Coverage of Country Studies

Among other differences between countries, the amount of prior research available has been a significant determinant of the emphasis of the research undertaken by individual authors. Some countries, such as Chile, have been subject to numerous earlier investigations, so that a data base, as well as an analysis of the trade regime itself, was already at hand. In those cases, the authors were able to delve extensively into particular aspects of the relation between trade strategy and employment, including such areas as substitution possibilities and the extent of factor market imperfections. For other countries, little prior research had been done on even the most basic of topics, and the authors had to concentrate their efforts there. Such was the case with Indonesia, where no prior estimates existed of effective rates of protection for different industries, and with Uruguay, where data had to be obtained from individual records.

In addition to differences in the amount of prior research and in data availability, countries have differed significantly both in their choice of trade strategy and in underlying factor market conditions. These factors, too, have influenced the focus of individual country authors' efforts in analyzing their countries' experience.

Although individual differences would significantly influence the thrust of research efforts, country authors nonetheless examined and analyzed a common range of questions. They were asked to identify a particular period for which the necessary data were available, to trace the major characteristics of the trade and payments regime for that period that were likely to influence the commodity composition of trade and the factor proportions in traded goods industries, and to gather data on employment per unit of value added in different industries. From these data, estimates were made of the net factor content of trade and of labor utilization for different commodity aggregates. Most authors were able to provide some indicators of the skill content, as well as the input of labor units, in traded goods industries. Some traced the evolution of the commodity composition of trade, and the change in factor proportions, over time, linking those changes to alterations in the trade and payments regime itself. Finally, when previous research enabled country authors to obtain these estimates without time-consuming data collection, they examined factor markets to estimate the degree to which incentives in those markets affected factor proportions utilized in traded goods industries.

That, then, is the background of the country studies in this volume. All country authors commented upon project working papers, which contained much the same substance as the content in the next two sections. Throughout this volume, all instances where concepts and definitions do not accord with those given in this chapter are explicitly noted.

1.2 The Trade Strategies-Employment Relationship

1.2.1 Import Substitution and Export Promotion

One of the early lessons emerging from developing countries' experience in trying to raise their growth rates and standards of living was that there is an extremely close interconnection between the domestic pattern of industrial development and the nature of the trade and payments regime. It is widely recognized that successful growth will inevitably be accompanied by a more rapid rate of increase of nonagricultural than of agricultural employment. Growth of the nonagricultural sector can come about in two ways: new industries can arise whose output is to be sold on the domestic market, replacing imports; and new industries can be developed whose output is expected in large part to sell on the international market.

The first of these alternatives, import substitution, basically relies upon the fact that an industry can achieve an above-average growth rate if, in addition to increasing output to satisfy the growth of demand associated with rising incomes, increases in domestic output can substitute for imports. The second alternative, export promotion, depends upon the international market to absorb higher rates of growth of output in particular sectors than could be sold domestically without depressing price unduly. The first inevitably entails trade interventions to protect the domestic market, while the second involves an open trade policy.

Economic theory, of course, suggests that both strategies should be pursued — each to the point where the last unit of domestic resources devoted to it yields the same return in terms of foreign exchange earned or saved. An optimal export promotion strategy would not imply that new industries would develop to sell exclusively abroad without any domestic sales, or that no import substitution industries would start up; nor does import substitution imply that no new products would be produced for export. It is the degree of emphasis on each that is in question. Further, there can be degrees of "bias" of either strategy: some countries, such as Chile, have relied almost exclusively upon import substitution, providing extreme incentives for producing and selling in the domestic market and failing to encourage — perhaps even implicitly taxing — development of exports. Others, such as Pakistan, have tended to encourage development of production for the domestic market, but incentives have been more moderate, some encouragement to exports has been given, and the result has been a less extreme orientation of new production to the domestic market. Likewise, some countries, most notably (among those included in the project) South Korea since 1960, have provided virtually no across-the-board incentives for import substituting industries, while heavily encouraging all lines of export activity; others, such as Colombia since 1967, have leaned somewhat in the direction of favoring export growth but have kept incentives sufficiently moderate so that the overall bias toward exports of the system has not been very great.

Nonetheless, policymakers have generally regarded import substitution and export promotion as alternatives. In addition, experience has indicated that there is a tendency for the choice between the two strategies to be self-reinforcing. Once import substitution is adopted as a development strategy, there are built-in tendencies discouraging the growth of exports and thereby leading to the adoption of policies to correct balance of payments deficits that further encourage import substitution and discourage exports. These include such phenomena as the higher price domestic firms must pay for inputs produced domestically, which reduces their international competitiveness; the lure of resources toward the lucrative and protected domestic market, which automatically reduces export growth; and the built-in requirements for capital goods, raw materials, and intermediate goods associated with many import substituting industries, which in turn lead to rapid growth of demand for imports and resulting quantitative restrictions upon imports, raising their price in the domestic market. These phenomena usually result in a tendency, once import substitution is adopted as a strategy, for increasing overvaluation of the exchange rate, which in turn intensifies the emphasis on import substitution as exports are further discouraged. An export promotion strategy also seems to entail tendencies that are self-reinforcing: rapid growth of exports leads to availability of foreign exchange, thereby mitigating the need for barriers to imports; exporters' needs for imported inputs prevent the erection of any elaborate structure to attempt to contain imports; an export promotion strategy mandates the maintenance of a realistic exchange rate, which itself encourages export performance and contains the demand for imports.

It is not the purpose here, or subsequently in the country chapters, to analyze the alternative trade strategies in all their ramifications. Rather, the central question is the relationship between those strategies and employment.

(Continues...)

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Excerpted from Trade and Employment in Developing Countries by Anne O. Krueger, Hal B. Lary, Terry Monson, Narongchai Akrasanee. Copyright © 1981 The National Bureau of Economic Research. Excerpted by permission of The University of Chicago Press.
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Table of Contents

Editors' Preface
1. The Framework of the Country Studies
Anne O. Krueger
2. Foreign Trade Strategies and Employment in Brazil
José L. Carvalho and Cláudio L. S. Haddad
3. Alternative Trade Strategies and Employment Implications: Chile
Vittorio Corbo and Patricio Meller
4. International Trade Strategies, Employment, and Income Distribution in Colombia
Francisco E. Thoumi
5. Alternative Trade Strategies and Employment in Indonesia
Mark M. Pitt
6. Trade Strategies and Employment in the Ivory Coast
Terry Monson
7. Trade Policies and Employment: The Case of Pakistan
Stephen Guisinger
8. Export Promotion and Employment Growth in South Korea
Wontack Hong
9. Trade Strategy for Employment Growth in Thailand
Narongchai Akrasanee
10. Alternative Trade Policies and Employment in Tunisia
Mustapha K. Nabli
11. Uruguay: Alternative Trade Strategies and Employment Implications
Alberto Benison and Jorge Caumont
List of Contributors
Author Index
Subject Index