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The Catholic social teaching on labour emphasizes the concept of a “right to work” at a “just wage”, with work being such that it is consistent with “human dignity”, and contributes to “fulfillment as a human being”. Can this non-negotiable ethical teaching ever become an economic reality? This is the concern of this post wherein I liberally draw from the labour union political economist  Palley (1999 and 2002) who has argued in favour of labour standards and democracy associated with domestic demand-led growth.

The pursuit of export-led growth by developing countries on the consistent recommendation of the International Monetary Fund(IMF), cannot make the above Catholic social teaching on labour an economic reality. Unless you have ideological blinkers propped up by mainstream economic thinking, it is difficult for you to deny that export-led growth has contributed to job loss in the developed countries, and that it has enhanced the extent of global wage and systems competition resulting in race to the bottom. This needs some explanation and elaboration.

Export-led growth can work for one country or a few countries acting in isolation but cannot work when all pursue it. One country’s exports represent another’s imports, so that not all can run trade surpluses. If all try to grow on the basis of demand in other countries, none expand demand and the result is a global shortage of demand and recession or in other words, global excess supply and deflation. Full employment is therefore an impossibility anywhere. Are we not experiencing this now? And since long as well?

Under export-led growth, the developing countries encounter the problem of ‘export displacement’. They are rivals with each other and compete with each other to sell in the developed country markets. When one country manages to increase its exports, it often does so by crowding out the exports of another country. As regards the developed countries,  they face the problem of ‘demand poaching’, with one  country stealing demand from another.

Furthermore, export-led growth tilts firms’ strategic focus toward wage cutting to gain a competitive cost advantage, and this exacerbates “race to the bottomcompetition, whereby workplace standards, employee protections and environmental standards are compromised as they can raise costs, giving firms an incentive to lobby for their elimination on the grounds that they result in reduced international competitiveness. To gain competitive advantage in international markets, countries compete across every dimension, including work conditions and the natural environment. To the extent that working conditions  and a clean environment are seen as adding to costs, companies have an incentive to minimize requirements. The result is a dynamic that has companies lowering requirements or shifting production to countries in which requirements are lower. This is the race to the bottom that has been interpreted as not only a North-South phenomenon but also South-South phenomenon. An example of the latter is the Pakistani soccer ball industry agreeing to do away with child labour only to find that production then has moved to India which has no child labourrestrictions!

This is not all. Export-led growth, especially when associated with export-processing zones, leads to shallow development with weak linkages into the rest of the economy. Like in the plantation model of development, there is exploitation of workers and failure to generate widely shared rising incomes, which makes it difficult to develop domestic markets and autonomously sustainable growth. Instead, growth becomes dependent on growth of export demand, making developing countries vulnerable to slowdowns originating in their export markets. When growth of a large segment of the global economy (the developing country bloc) is dependent on growth in another small segment (the developed country bloc), all that is needed for a global slow-down is for the leader bloc to slow.  

Also, recognise that export-led growth operates via a hierarchical process, with less developed newcomers replacing maturing export economies in which unlimited surplus laboursupplies have been exhausted and wages rising. With China’s advent, this system may be unworkable. China has a huge hinterland and has huge supplies of labour at rock bottom wages, and population growth ensures that this will hold into the distant future. It is not clear that any developing country can now enter the system with production costs (based on cheap labour in conjunction with unbeatable large volumes of production) below those of China, making it impossible for newcomers to enter the hierarchy of export-led growth. If this is true, then the export-led growth paradigm will find itself checkmated. There will be insufficient demand, while new supplier countries will be unable to compete with China. The destructive Chinese competition worsens the race to the bottom(Bose, 2012).

Increased mobility of production in tandem with export-led growth has made the business arrogant and audacious by increasing the options available to business, and this has increased the bargaining power of firms vis-à-vis both labourand government everywhere. This increased bargaining power has in turn been used to win concessions from both labour and government. The result has been to shift the distribution of income in favour of profits over wages, and to shift the burden of taxes away from capital income onto wage income. The increased threat of job transfer lowers both the real wage and the wage share of income. This is not more than offset by the foreign price competition effect and the foreign competition production efficiency effect of globalization, both of which, as glorified by the ideologues of globalization, raise both the real wage and wage share. There is no evidence to this effect. (The foreign price competition effect gives workers as consumersadditional choice options in goods markets, thereby reducing domestic producers’ monopoly power and lowering prices. The foreign competition production efficiency effect enhances foreign competition prompting domestic firms to seek out more efficient techniques of production to eliminate shopfloorinefficiencies.)

The increased mobility of production also gives capital the option to exit, taking with it jobs. Capital can therefore use this threat to win tax concessions, and government is also given an incentive to pursue policies that lower taxes on capital with the hope of becoming relatively more sexy or attractive to business. In this milieu, business plays one government off against another, thereby engaging them in a tax relief bidding war. Countries can choose either to hold capital taxes at existing levels or to lower them. If one country lowers and the other holds, then it gains investment from the other country and is made better off, while the country that holds loses investment and made worse off. The optimal outcome is if both hold, as tax revenues are maintained and neither country loses investment. The sub-optimal outcome is when both lower, as both lose tax revenues and neither gains investment from the other. Unfortunately, the structure of incentives is such that each country has a private incentive to lower, thereby realizing the sub-optimal equilibrium.

The history of the industrialized countries shows that the key to unlocking domestic development is solving the problems of income distribution and imbalance of political power. Deep domestic development requires growing wages and an improved income distribution. Together, they provide the foundation for a virtuous circle of growth in which rising wages encourage internal market development, and this market expansionpromotes rising wages. Labour standards (prohibitions on discrimination, forced labour, exploitative child labour, and rights of freedom of association and collective bargaining) and democracy are both key to this new paradigm of domestic demand-led growth. Democracy matters because it promotes freedom of association, and freedom of association and collective bargaining then generate improved income distribution and higher wages. This kind of argumentation is antithetical to the mainstream economic thinking which maintains that unions are a market distortion, and that income distribution does not matter for development. But the truth is that unions are a private sector solution to market failure concerning the huge imbalance of power that exists between individual workers and business. There is evidence now to the effect that democracies pay higher wages, and that countriesinstituting changes giving workers the right of free association experience faster growth.

Labour standards also promote good governance and reduction of corruption which are required for development. Transparency, accountability, and good governance help prevent misallocation of resources and guard against kleptocratic or crony government. Freedom of association and unions can be viewed as creating the Galbraithian counterveiling powers that check such practices. Cronyism is politically sponsored and eliminating it requires political reform that puts in place counterveiling forces that can block it. Open markets cannot do this because every private agent has a private incentive to bribe to try to win business. Operationalising the no bribery idealrequires political action by way of legal prohibition of bribery and enforcement of anti-bribery measures. Labour standards can be viewed as fostering political conditions supportive of such measures. They also help in improving the quality of governance and the quality of developmental policy. Another argument in favour of labour standards is that by promoting good governance, these standards draw on all elements of civil society, which in turn facilitate economic crisis management.

To sum up, labour standards and democracy improve income distribution and increase the space for domestic consumption.  The growing productive capacity of developing countries will thereby be subtly tilted away from world markets. This shouldalso help mitigate the problem of declining terms of trade that has so afflicted the developing countries, both in their traditional role as primary commodity producers and in their newer role as producers of lower-end manufactured goods. The race to the bottom can also be blocked off by ruling out bad competition (that eats away at workplace safety, the environment, and income distribution) and letting in good competition (on productivity and quality) by blocking countries, developed and developing, from gaining competitive advantage by erodinglabour and environmental standards.

REFERENCES

Bose, Annavajhula J.C. 2012. Chinese Low Road and Global Race to the Bottom. Asian Journal of Research in Business Economics & Management. Vol.2. Issue 11. November.

Palley, Thomas I. 1999. The Economics of Globalization: Problems and Policy Responses. Pontifical Academy of Social Sciences, Acta 5, Vatican City. (Free download)

Palley, Thomas I. 2002. A New Development Paradigm Domestic Demand-Led Growth: Why It is Needed & How to Make It Happen. Discussion Paper. Foreign Policy in Focus.(Free download)

By Annavajhula J.C. Bose

Department of Economics, SRCC