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Policy Forum Industry and
trade policy: is it job-friendly?
Haroon Bhorat and Rashad Cassim CPS POLICY FORUM NO 4 Summary of a seminar held at the Centre for Policy Studies, with the support of the Friedrich Ebert Stiftung CPS and FES are staging a series of seminars designed to stimulate policy debate on the policy requirements for job creation. Key issues raised in the discussions are summarised in Policy Forum, to assist participants in the remaining seminars and to stimulate debate on this crucial subject. At the seminar covered in this issue, Haroon Bhorat and Rashad Cassim dealt with the issue of trade liberalisation and its effect on the labour market. Bhorat is a senior researcher at the Development Policy Research Unit, School of Economics, University of Cape Town; Cassim is director of the Trade and Industrial Policy Secretariat (TIPS). Haroon Bhorat delivered his paper first and said that employment has only grown by about 13,8 percent over the last 25 years (1970 - 1995) - indicating that the SA economy had a very low labour absorption rate. An analysis of the labour market by sector shows large losses in the primary sectors; employment opportunities in agriculture declined by about 50 percent and mining by about 34 percent - amounting to about 1,5 million job losses in total. So the distribution of the 13,8 percent job gains over the last 25 years has been uneven. The sector that has gained the most has been the financial/business and service sector where gains of more than 200 percent have been recorded. However, in absolute terms this 200 percent increase in workers is less than the 50 percent loss in employment that occurred in agriculture - simply because the latter sector is so much larger. It is apparent that a key structural shift has occurred in the SA economy over the last 25 years: the economy has moved away from a dependence on the primary sectors, which have been in decline, while simultaneously witnessing a rapid rise in the growth of the services sector. This trend is likely to continue and can have serious labour demand/employment consequences. Furthermore, an analysis of the SA labour market by profession shows the occupations that experienced the largest increases were professionals, followed by managers and then transport - accounting for an increase of close to 2 million jobs in the 25 year period. There was a simultaneous decline in lower skilled occupations, namely farming, production work and labourers. The most spectacular decrease was in farming occupations where the number of jobs halved over this period while demand for labourers went up marginally (less than 1 percent). The trend in occupational employment matches that in sectoral employment: sectors in decline were the primary sectors which were intensive in the use of unskilled labour. On the other hand the growth in the service sectors has resulted in an increase in skilled workers. So where jobs are being created, these are at the top end of the jobs market. Another key reason for the changes in employment patterns has been growing capital intensity: an employment preference in some sectors for machinery over labour. If we look at employment by race we see that the number of African workers has declined by 3,8 percent (about 200 000). This compares with an increase of 45,2 percent for Whites, 100,6 percent for Asians and 65,4 percent for Coloureds. This provides a powerful picture of how poorly the society has performed in providing jobs for the largest share of the workers in this country - African workers. This matches the decline in the primary sector - because the large job losses in these sectors essentially affected Africans; and the large drop in the demand for unskilled workers also essentially affected African workers. Conversely, the growth in the service industries and in the demand for skilled workers largely benefited the non-African workers. There, has, therefore, been a very strong match, over the last 25 years, between the structural decline in certain industries and secondly, the production method changes - rising capital:labour ratios. These two factors have strongly shaped employment patterns over the last 25 years. They have resulted in a massive increase in the demand for skilled workers and a massive decline in the demand for unskilled worker. And this trend is likely to continue to generate these demands: the demand for labour will be at the top end (highly skilled and skilled workers) matched by at best a constant demand for unskilled workers but more than likely a decline in demand for unskilled workers. The increase in the service industries will continue, while the decline of the primary industries will not be reversed on any large scale. This means that labour market policy will need to be careful about understanding which kinds of jobs will be created - if at all. So one is almost forced into short-term, social security measures to deal with this problem of high, unskilled unemployment. One of the factors driving this continuing change in employment patterns is the process of trade liberalisation. So what has been the impact of trade flows - exports and imports on employment levels? If we look at employment shifts from trade flows by occupation from 1970-1995, we see that trade flows increased the demand over all occupations in SA. However, the demand for unskilled workers went up marginally (eg. production workers 3% and farmworkers about 11 percent ) whereas there was a much larger increase in the demand for skilled workers (eg.122,7 percent for managerial staff and 110 percent for professionals). The trend here indicates that while all workers gained as a result of international trade, skilled workers gained disproportionately more than unskilled workers. The demand for African workers went up by below 2% as a result of trade flows but demand for non-Africans went up by as high as 75%. Interestingly, among non-Africans, Whites gained the least from trade flows (17,92 percent) while Indians gained the most (75,3 percent). A breakdown by education levels shows a positive growth in jobs for all education levels as a result of trade flows (No education - 6.26 percent; Sub A-Std 5 - 6.63 percent; Std 6-9 - 10.42 percent; Matric - 57.82 percent; and Tertiary - 141.93 percent). The significant gains from trade arise when individuals attain a matriculation certificate; having matric increases employment opportunities from international trade by about 58%, more than five times that for those who did not complete secondary schooling. Workers with a degree experienced a 142% increase in the demand for their services. This data suggests international trade favoured all workers, but that preferences magnified as one moved to higher education levels. As with the race and occupation data, import and export flows while favouring all groups of workers, did not favour them equally. Higher skilled workers, or in this case, higher educated workers, gained substantially more from international trade. The debate at present is about the negative consequences for current and future employees of liberalisation. Part of the reason we get only positive results in this study is that part of the trade liberalization period in SA is excluded - we look only at 1970 - 1995. But also, during this period SA was still highly protected and tariffs were still fairly high. Our imports were used to complement domestic production, but at present imports are substituting domestic consumption. For example we used to import machinery to make garments; we now import far less machinery but are now importing a lot of cheap garments that compete with locally produced garments. Below is a table containing more recent data - from 1970 - 1997 but only on manufacturing. Relative Employment Shifts from Trade Flows within Manufacturing, 1970-1997
The table illustrates that in the initial period, 1970-82, all workers across all skill groups gained but that unskilled workers gained more from trade flows than skilled or highly skilled workers in manufacturing. This suggests that protectionist days benefited unskilled workers more than it benefited skilled workers. So while trade flows increased employment levels this increase was unevenly distributed with the primary winners being those at the bottom-end of the job ladder. But during the period of liberalisation - the late 1980s through to 1997 - we see that in the late 1980's the impact of trade flows on employment becomes negative. In the period 1988-1992 the demand for all skill levels dropped but the demand for unskilled workers dropped by much more than that for skilled workers. This does not mean that employment went down in absolute numbers. In the final liberalisation period we began to see patterns changing and this is the trendsetter for future patterns. Overall demand for workers dropped by 50% as a result of trade flows, and unskilled workers bore the brunt of this while the demand for highly skilled workers went up. Part of these arguments around liberalisation are intended to refute the notion that liberalisation alone will lead to the creation of employment. In the long term, liberalisation will stimulate growth to increase the job opportunities for highly skilled and skilled workers. Policy initiatives therefore, need to be designed to increase the supply of workers in those two categories. Welfare policies will have to be considered for workers at the bottom as it is apparent that they will not be able to find jobs as the demand is at the top end. The next speaker, Rashad Cassim, said that he was going to raise more questions than provide answers. He added that it was difficult to make synergies between job creation and trade policies and flows. It was obvious that trade liberalisation has caused unemployment so why has the new government adopted this strategy in a country where we are particularly sensitive to employment loss. SA's trade policy of liberalisation of the SA economy began in the National Party period and was continued in a sustained and co-ordinated way by DTI. The debate, even in the labour movement, has been with the pace and sequencing of liberalisation and remains unresolved. Part of the problem with making the link between trade and industry policy and job creation is that one is dealing with such a complex range of issues from the role of allied departments to who is really responsible for job creation? Is it a trade policy issue, is it a labour policy issue, or is it a macro issue? Liberalisation is necessary because of the fundamental inefficiencies in the economy and one of the most immediate ways that these inefficiencies is expressed are disparities in prices: cars, for instance can be imported for considerably less than they retail for in SA. One needs to ask what the mechanisms are through which trade liberalisation induces inefficiencies? What did government have in mind when it decided to liberalise? How did this take place and what impact was it intended to have on the SA economy? Has it had that impact? All of these are key questions. Trade liberalisation is expected to change the economy by introducing more efficiencies. One way of doing this is to open up the borders so that inefficient firms are forced to become more efficient. This is what is happening. We are finding that in some sectors such as clothing there is pressure for firms to become more competitive and efficient. The second factor about trade liberalisation, is getting access to inputs. Firms do not have an incentive to become competitive if their input costs are above international prices. Some may argue that the East Asian case illustrates that one does not have to liberalise to get access to cheaper inputs. Firms had access to international inputs under a protected regime. This is a topic for further debate. But there was something specific about the East Asian case which demanded efficient institutions to carry out industrial policy. The question is whether we can do that in SA? By and large the discipline of import liberalisation is, as an institution, easier for government to induce efficiencies than creating an industrial policy where you protect your sectors but give them access to international markets. Can we attribute the job losses that have occurred in SA to trade liberalisation? How does one unravel the role of trade liberalisation as opposed to many other factors that have influenced employment in the manufacturing sector, for instance? Is trade liberalisation, contracting domestic demands, or a reduction in exports due to the East Asian crisis, responsible for the reduction in employment? This is difficult to unravel; it is unclear which factors caused this. If we look at the ILO report and the IMF report, both say that the loss of employment in the SA economy has not really occurred in sectors that have liberalised the most; although there are some exceptions. But these losses have been in sectors that are competing in export markets. What that has meant is that firms who want to export have restructured and have shed jobs and perhaps become more capital intensive. So it has not been so much international competition per se but rather than the restructuring of the firm that has impacted on employment loss. In the short term liberalisation will result in job losses, because one is opening up highly protected sectors. But a key issue will be how the adjustment is managed because in most economies the anticipated reaction in the short term is employment loss. But can labour be redeployed in sectors that are supposed/expected to grow? The classical text book scenario is that when economies are liberalised, some sectors contract and some grow. And the issue is what the adjustment should be between those sectors. It is, in some senses, a political asymmetry that government has to deal with because the employment loss is much quicker than the employment gain - a longer term process. An important issue is whether the parameters of trade and industry policy in SA have been conducive to employment. There are a number of ways to answer this. The first is to say that investment can drive employment and that the lack of investment is, therefore, the basic constraint in the economy. But we also need to examine whether trade and industry policy in SA makes a difference to investment incentives. Has government changed the economic climate so that it makes the prospects for investment much better than it had been in the absence of a trade and industry policy? We have a mixed story here. This is because the parameters of trade and industry policy do not fall entirely in the department of Trade and Industry but also in several other department such as the labour department, the finance department, the foreign affairs department and several others. Common wisdom has it that one of the constraints to investment in SA is high factor costs - labour and capital. Interest rates, for instance, may be high. So this is where the industrial policy set by DTI has limitations because it cannot control interest rates and this influences decisions by industrial firms on investing. SMME policies may not mean much if they cannot get access to finance. Also, the inability of small firms to enter the market has less to do with trade policy and more to do with competition policy: there are high levels of dominance of some firms in some sectors. So competition policy will impact on trade policy. The exchange rate is another important factor, particularly for the export market, because no matter how competitive firms are, an increased exchange rate does frustrate export gains. And the setting of exchange rates lies outside of DTI's competence. Finally, de-industrialisation may not be such a bad thing if alternative jobs can be created in the services sector. If one looks at the role of trade and industry policy in SA and its impact on growth then the question one needs to ask is: what role can it play in growth. Whether we accelerate or decelerate trade liberalisation in the SA economy, the effect is not going to be fundamental on economic growth. But what will be an important stranglehold on the SA economy is a services economy that is closed and has to be liberalised in some areas. It is time for the government to talk about trade and industry policy at a serious technical level, beyond the over-arching objectives of Gear and to go into the 'nitty gritty' and ask whether trade and industry policy is really a problem or is it just trade policy, for instance, that is the problem? Questions and answers In reply to a question about whether SA could replicate the regime that Korea had which was more protectionist than SA is today, Rashad said that he thought SA could not, as there were so many factors that would undermine that kind of protection. For instance, it did not matter how high or low the tariffs were made on electronic goods, it would remain impossible for customs to control their entry resulting in large quantities of illegal goods entering the country. He said that it was easy to be an export-oriented country in the sixties and seventies when markets were relatively easy to penetrate. SA does not have access to such easy markets. In retrospect, people are now saying that export was not as critical to the Asian economies as many have made it out to be. What made the difference was a climate that was conducive to an increase in capital. Investment took place because the capital factor costs made it viable to invest. The basis for our growth will not be blind export promotion, but will also depend upon our ability to make it viable to raise investment in the economy. A participant asked who the government listened to regarding policy-making and whether the process was completely separated from society. In response Rashad said that there were limitations to how far one could go in consultation on these issues. One questions that needed to be asked was how macro-economic policy lent itself to democratic consultation? In Chile, trade liberalisation was driven by the exporters' association, while in SA bureaucrats may have driven it. Haroon said that there was a social crisis in society so one was forced to ask whether the growth path through liberalisation that the country had chosen was going to mean anything to lives of the poor and unemployed. Haroon argued that in the main it was not going to make a big difference. And if it did, it would at best affect 10 to 20 percent of the unemployed. There had to be a greater recognition that there was a social crisis; that was why there were calls for an increase in the social security provisions. In response to a questioner, Haroon said that the increase in demand for managers was absolute. Furthermore, he said that the growth in the services sector mimicked the global market; it was a growth area, created jobs and contributed to GDP. Growth in the services sector, he predicted, would be a long-term trend and SA would be able to compete with the best in this regard. To a question on whether strike action has an effect on investment, Haroon replied that if one looked at Standard and Poor's ratings one saw that crime, strike action and wages were very important determinants of these ratings and therefore did impact on potential investment. Rashad, however, said that he thought investors did not think so much about labour legislation as much as they considered union power - the ability to enforce the legislation. Union power, and not labour legislation was the factor which imparted a negative perception to investors. In answer to whether he thought there was need for a central economic advisory service that harmonised labour, trade and employment policies, Rashad said that some countries, such as Tunisia, had a ministry for economic planning that dealt with government co-ordination and that that ministry had a very senior minister with the requisite economic credentials heading it. The thinking behind Mbeki's policy unit seems to be to bring together DGs. Harron added that what often happened was that strategies became department-driven instead of being driven by what was best for society. The president's office tried to eradicate this by centralising the co-ordination of these strategies in a high-level forum. Haroon said that he did not think that this was working and believed that a centralised body with more clout was needed. He thought that the DG's forum might be a step in this direction. In reply to a question about whether there was a chance for some vocational training for those who did not make matric, Haroon said that if the level of incomplete secondary education provided enough of a grounding then education could be provided that would put these people in areas where there was a need. In the Western Cape economy, for instance, the entertainment, tourism and financial industries were growing and these people could, therefore, be matched to these industries. The fact was that SA's skills development strategy had thus far not quite matched these need. Rashad was asked when, how and in which sectors, the long-term benefits of trade liberalisation would occur. He replied that trade liberalisation policies would not be the only determinant of these long term benefits and that one needed to ensure that there was an alignment of all sorts of policies. Competitive advantage was created by a range of factors such as, institutional policy, good human capital, and good infrastructure. For instance, Chile had to take a decision about continuing its ailing car industry because cars in Chile cost four times more than cars in the US. It decided to cut its losses and in the process developed one of the world's most important Kiwi fruit exporters. Chile found that one needed to get rid of the sectors where one was inefficient and concentrate instead on those in which one was efficient. So SA may also need to analyse each sector to ascertain which ones would do well under certain scenarios and then concentrate on these instead of trying to do well in all sectors. On the question of clustering, Rashad said that this would be important as improving exports and attracting investment was not only about getting the economic fundamentals right but also about institutional questions such as getting firms to co-operate in clusters and share knowledge. Another person pointed out that while clustering might be good for exports it might not really be relevant for job creation. Rashad said that it could well be relevant to job creation in the area of exports if clustering improves these exports. Another participant pointed out that clusters did not seem to be increasing the efficiency of small companies as it was often difficult to find small companies prepared to work together. The big companies, which were already quite efficient, seemed to be the ones benefiting from clustering. A participant said that industry wanted a domestic investment strategy and asked what this would mean for SA. Rashad said that one needed to ask what the determinants of investment behaviour were in SA. One problem that SA has was that investment behaviour in SA was low yet some sectors were growing. Rashad said that we needed to look at those sectors that were growing. A number of factors influenced domestic investment - one was government policy. In other words a government that was credible and could be relied upon when it decided, for instance, to reverse tariffs, would be more likely to encourage investment. |