Trade, Employment and Inclusive Growth in Asia Douglas H. Brooks Jakarta, Indonesia 10 December 2012
Relationship between trade and growth is wellestablished 6 Openness and Growth - Asia annual growth 3 yr moving ave average growth pre and post liberalization 5 4 3 2 1 0-1 -20-10 0 10 20 Notes: The data refer to 21 Asian economies: Armenia; Azerbaijan; Bangladesh; PRC; Georgia; Hong Kong, China; India; Indonesia; Japan; Korea; Malaysia; Nepal; Papua New Guinea; Philippines; Singapore; Sri Lanka; Taipei,China; Tajikistan; Thailand; Turkmenistan; and Uzbekistan. Source: Authors calculation based on the methodology of Wacziarg and Welch (2008) and data from Penn World Tables 7.0.
But a more complex relationship is observed between growth and its effects in the labor market Employment and unemployment - results are mostly context specific Wages and returns to labor Stolper-Samuelson predicts increasing returns to unskilled labor, and the reverse for skilled But empirical results vary (technology bias) Working conditions Flanagan and Khor (2012): more open economies tend to have better labor conditions
Labor market institutions as a key determinant on how trade affects labor markets Mainly through affecting the flexibility of Labor Markets Factor mobility or ability to adjust Speed of adjustment (adjustment costs) Availability of services that enhance adjustment (training, job search, access to credit)
Generally, Asia as a region has a relatively flexible labor market but still more rigid than North America 0.4 Labour flexibility index 0.3 0.2 0.1 0 North America Asia & Pacific Latin America & Caribbean Middle East & North Africa Europe Sub Saharan Africa Notes: (1) An attempt to include freedom of association and collective bargaining indicators based on the ratification of ILO Conventions 87 and 98 resulted in the same patterns. (2) The five broad categories received equal weights. (3) The index takes a value of 0 to 1, with lower values denoting more flexible labour markets. (4) Regional averages are un-weighted. Source: Authors calculations based on the Labor Annex of the Doing Business 2012, World Bank.
Opennes - Trade as percent of GDP In Asia, more open economies are correlated with more flexible labor markets 450 400 350 300 250 200 150 100 50 Labour flexibility and openness in Asia and the Pacific 0 0.00 0.10 0.20 0.30 0.40 0.50 Labor Flexibility Index Note: Openness is measured as the average share of trade to GDP for 2005 to 2009. Source: Authors calculations based on the Penn World Tables 7.0, and Doing Business 2012, World Bank.
But wide variations at the country level are observed Severance pay and notification requirements for worker dismissal Note: Average figures are not weighted Source: World Bank, Doing Business 2011. World Average Av. for Asia & Pacific Indonesia Sri Lanka Lao PDR Thailand Bangladesh Vietnam Vanuatu Philippines Korea, Rep. PRC Pakistan Nepal Taipei,China Afghanistan Malaysia Uzbekistan Kyrgyz Republic Azerbaijan India Cambodia Solomon Islands Papua New Guinea Tajikistan Fiji Armenia Mongolia Kazakhstan 0 10 20 30 40 50 60 Severance pay Notice period dismissal
Percent Another feature of the Asian labor market is the high rate of informality 100 80 60 1990 81.8 83.3 68.9 65.8 40 20 0 100 80 60 67.0 30.4 30.2 17.2 13.9 0.7 0.9 4.0 2.8 2008 82.9 86.5 62.4 40 29.8 33.4 20 0 Developing Asia Source: Key Indicators 2011, ADB 12.1 8.3 3.2 5.0 4.2 5.2 Developing Europe Latin America and the OECD Caribbean Informal Workers Employees Employers 8
Country (years) it also tends to be persistent for many countries Percentage of Informal Workers to Total Employment Bangladesh (1991-2005) India (1991-2008) Nepal (1991-2001) Indonesia (1992-2008) Pakistan (1990-2008) PRC (1995-2008) Thailand (1990-2008) Philippines (1990-2008) Korea, Rep. of (1990-2008) Malaysia (1990-2008) Hong Kong, China (1990-2008) Singapore (1991-2008) 10.2 10.7 8.1 10.0 21.9 24.8 32.6 31.4 43.5 88.3 85.9 80.1 81.9 74.3 71.6 68.5 67.9 74.2 63.1 64.3 58.9 70.3 54.2 53.1 Year Start End Source: Key Indicators 2011, ADB 0 25 50 75 100 9
Labor markets in Asia also operate in the context of some important changes 1. More educated work force 2. Shrinking agriculture sector 3. Changing demography
Average Years of Schooling 1. Better educated workforce 10 Average Years of Schooling in Asia and the Pacific 1965-2010 8 6 4 2 0 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 Central and West Asia East Asia Pacific South Asia Southeast Asia Note: Averages were weighted using size of labour force. Source: Authors calculations based on Barro and Lee (2010), World Development Indicators and Directorate General of Budget, Accounting and Statistics for population aged 15 and over.
Percent 2. Changing industry structure Employment Share of Agriculture, Industry and Services 1990 and 2008 70 66.3 60 50 43.5 40 30 20 17.4 23.7 32.9 10 6.3 0 1990 2008 agriculture industry services
Percent 3. Demographic transition 90 Dependency Ratios for Selected DMCs, 2000 to 2030 Pakistan Philippines 70 India Viet Nam Malaysia 50 Indonesia China, People's Rep. of Thailand 30 2000 2005 2010 2015 2020 2025 2030
Policy considerations 1. Flexibility making labor supply and demand more responsive to changes 2. Safety nets -such as unemployment insurance and social security Only fully available in a few economies such as Korea and Taipei,China Limited in depth for most developing Asian countries with some safety net coverage Mostly limited to the formal sector in the lower income developing countries of Asia What is a good design for developing countries (in terms of depth, burden sharing, incentive scheme)?
Policy considerations 3. Reducing information costs information and job search assistance 4. Human resources Education (skills towards continuous learning?), training 5. Service sector and trade in tasks potential for job creation 6. Infrastructure lowering transactions costs, expansion of extensive and intensive margins 7. Sequencing issues protect sensitive industry first?
Summary Well-established relationship between growth and trade But mixed results when it comes to trade and employment Reaping the benefits of trade while minimizing burden, especially on the poor entails improvement in market functions, provision of safety nets and other support services
Thank you dbrooks@adb.org