Globalization and Decent Work

Byung You Cheon(Korea Labor Institute)

1. Introduction

The issue of globalization, which emerged in the late 20th century, is still at the forefront of many debates. Various definitions of globalization can be given, depending on the angle and standpoint from which the phenomenon is viewed. The most simple, economic and technical definition of globalization can be given as the process of expanding mobility in trade, production capital, financial capital, technology and human resources across national borders. Thus, globalization refers to the movement towards an integrated global economy through increased trade and mobility of elements. Under globalization, international trade expands at a greater rate than domestic production.1 Globalization, however, does not merely mean the increase of trade across national borders. Globalization is differentiated from the simple concept of internationalization in that not only does the volume of trade between countries increase, but the very characteristics of trade and exchange take on a global meaning. An international economy means that national economies compete in a global market, whereas a global economy means that the relationships and mechanisms of trade take on a global characteristic. For instance, multinational enterprises operate production, sales and services on a global level, adjusting to the changing trends of the global economy. Currently, about 65,000 MNEs and their 850,000 foreign affiliates take part in a global production system. The main factor that determines the characteristics of globalization is technological changes based on ICT. This is the differentiating factor between the globalization that began in the late 20th century and the globalization of the late 19th to early 20th century. If the globalization of the past was achieved through a revolution in transportation devices such as railways, steam boats and cars, the globalization of the late 20th century

1 Trade imports and exports in the % of GDP increased rapidly from 37% in 1986 to 57% in 2001, and FDI inflows in the % of GDP increased at an astounding rate in comparison to past performances, from 0.5% in 1986 to 2.2% in 2001(World Development Indicators 2003, online version).

1 is being advanced through a revolution in telecommunications technology, such as IT. The IT revolution is changing the characteristics of exchange between countries. Companies are no longer merely transferring their manufacturing facilities to low-cost regions, but are segmenting their manufacturing processes to be positioned in various locations around the globe, and integrating the segmented production chain through IT technology. Various financial transactions are also being integrated around the world through telecommunications technology. Such global activities are not only limited to businesses; governments and individuals also have more resources enabling them to think and act on a global scale. Thus, technology is providing cost-effective ways to achieve global communication, enhancing the feasibility of economic transaction across the globe by reducing the cost of transferring information, people, goods and capital across national borders, while facilitating mobility and transactions on a global level. While changes in technology promote the globalization process, the globalization also expands markets, which in turn promote and expand technological revolution. Therefore, globalization and technology should be understood as integrated concepts. Globalization and technological change can be seen as two sides of the same phenomenon. In particular, from the perspective of developing countries, it is difficult to separate technology from the effects of trade opening. Selling goods and services in a global market requires the use of new technologies, and this technology is incorporated into the capital goods when imported by advanced countries. It is difficult to separate the effect of expanded market opening and international mobility of capital from the effect of implementing new technologies. Therefore, it is important to assess the labor market impact of the overall globalization package, rather than to simply decompose the impacts through trade and technology. In addition to advanced technology, policy plans to reduce national barriers to international transactions are another driving force of globalization. As Chang(2004) pointed out, while technology determines the limit of globalization, the real range and extent of globalization are determined by the policy decisions of individual countries and the global community. These policy decisions are influenced by globalization as well. Liberalization of international trade, expansion of FDI and inter-border transfer of financial capital bring the pressure of global competition into individual countries, and add pressure to internal reform and restructuring. From a broad viewpoint, globalization encompasses the expansion of international exchange and the ensuing social and political changes from a socio-political and cultural perspective as well as an economic perspective. Thus, globalization can be seen as a comprehensive concept that includes changes in ideological landscape such as neo-

2 liberalism, as well as the restructuring that accompanies such changes. Because globalization pressures national governments to carry out internal reform in order to acquire a more competitive position in the global market, promoting national competition and privatizing state owned enterprises can also be seen as a part of globalization. Therefore, globalization should be understood as a 'package plan' that includes not only expansion of trade and international transfer of capital and labor, but also technological change and the ensuing restructuring and reform processes. To respond to globalization as understood in this broad definition, the ILO has proposed an agenda called 'decent work.' The concept of 'decent work' as proposed by the ILO implies a meaning as broad as the understanding and definition of globalization itself. The ILO has posed a question asking “Does the advancement of globalization mean advancement in the work and life of individuals?" and is attempting to answer this question within the concept of 'decent work.' Advocates of globalization assert that the growth-enhancing effects of market liberalization will bring about convergence in the development stages of individual nations, and enhance employment and welfare in all countries of the world. They believe that globalization is a source of wealth and welfare, and that it is a viable and sustainable process that must be protected from uninformed and ill-intentioned assertions that state otherwise. They argue that the benefits of free trade and free capital flows outweigh the hazards, and that only through export and market opening can developing countries achieve growth and escape from poverty. On the other hand, opponents of globalization assert that globalization will only undermine the labor sector and worsen labor conditions. Rather than a source of advancement, they see globalization as a menace to humanity that systematically destroys domestic factories and workers for the benefits of a few select multinational companies. Opponents of globalization tend to overlook the potential benefits and gains of globalization. The expansion of trade throughout the world does promote growth and create new opportunities for more people. Nevertheless, the process of globalization is both worrisome and stimulating. While globalization does provide new opportunities and greatly enhances income and employment for some nations and individuals, it does also bring forth issues associated with the broader definition of globalization, such as unemployment, inequality, economic crises, the expansion of informal sectors, and instability. The world may look like it's full of a vast array of opportunities due to globalization, but many times individuals are unaware of how to incorporate these opportunities into their own lives. This is because the benefits and gains of globalization are not handed out equally to everyone. While there are nations and individuals that

3 benefit from globalization, there are also countless 'losers' that are left out of the process. Globalization means different things to different people. For sure, many empirical studies are showing that there is no direct correlation between globalization and the vices of unemployment, inequality and lowering of labor standards. However, these studies often produce different results depending on the data used for the analysis, and the parameters that are used to analyze the concept and definition of globalization. In addition, these studies often overlook the fact that the movement of capital and the ensuing economic hazards, transfer of technology, the movement of labor(immigration) and other aspects of globalization have larger effect on the labor market than trade policies(Freeman,2003). Feenstra(2001) also points out that these studies are based on weak empirical evidence.

"Few economists would doubt the beneficial effects of trade, despite the adverse impact on some groups. Yet the hard evidence supporting such gains from trade - either in a dynamic or static sense - is surprisingly thin."(Feenstra, 2001)

While the debate on the social effects of globalization is mired with conflicts both theoretically and empirically, recent trends show that the excessive progression of globalization is leading to a weakening of its support base. Also, issues are being raised that while globalization is a trend that can not be run counter to, the bumps should be smoothed out before progressing further.2 The agenda of decent work by the ILO also originates from this recent trend. Globalization unchecked will bring about a decent work deficit. Despite the prospect that globalization will promote growth, create jobs and reduce poverty, 160 million people are still unemployed, 530 million people are still classified as 'working poor,' 1 billion people are underemployed, and 1.2 people are still sustaining their livelihood with an income that falls under the poverty line. Despite the progression of globalization, the low-income population is facing a threat to their income security, while the relatively high-income group is facing a threat to their workplace security. Worldwide, only 20% of the population is under social protection and no reduction is

2 The frequent economic crises of the 1990s, the economic fall of countries that attempted market opening policies such as Brazil and Argentina, and the failure of the Eastern Socialist countries in their attempt to shift to a market economy are shaking the foundations of those who unilaterally advocate globalization. The opinions of academic circles, such as Dani Rodrik's criticism of globalization, Jeffrey Sach's criticism of the IMF's policies and the internal criticism of the World Bank by Joseph Stiglitz and William Easterly are adding strength to such negative views

4 being seen in the number of labor rights infringements, and social dialogue is still limited. According to the ILO, decent work is broadly defined as 'productive labor that is carried out under the conditions of freedom, equality and human dignity. More specifically, the four dimensions of decent work are employment, social and economic stability, basic labor rights and standards, and social dialogue.3 Decent work is defined as productive labor that guarantees work that generates a suitable level of income, protects basic rights, and provides adequate social protection. Job creation is the most basic method of enhancing living standards and increasing access to income, and social protection is a method of providing income and working environment stability. Respect for basic rights and principles is a precondition for the formation of a socially legal labor market. Social dialogue is a method for workers, employers and representatives to exchanges ideas and discuss ways to achieve these goals. Decent work does not set unrealistic targets, but provides guidelines to social behavior and reflects aspirations. It is not a fixed, static concept, but changes with the evolution of society. According to the ILO, we are seeing a global decent work deficit with the progression of globalization. More specifically, the four dimensions of decent work are suffering from a employment gap(absence of sufficient employment opportunities), social protection gap(inadequate social protection), rights gap and social dialogue gap(denial of rights at work and shortcomings in social dialogue), and the gap between the world that we work in and the hopes that people have for a better life. In this study, previous analytical results regarding the impact of globalization on labor are revisited within the conceptual framework of decent work and the broader definition of globalization, and the policy implications of the relationship between globalization and decent work are presented. In particular, the major issues of employment, inequality and labor rights are examined in relation to the effect of globalization on the labor market.

2. Employment

In addition to being a core element for the creation of wealth, employment is also a

3 The core dimensions of decent work are the creation of employment and income opportunities, the promotion of fundamental principles and rights at work(freedom of associations and collective bargaining, elimination of forced labor, abolition of child labor and elimination of discrimination), the provision of social protection, and strengthening of social dialogue.

5 primary method of equally distributing wealth, and the most definite method of escaping from poverty and social exclusion.4 Therefore, job creation is the first priority factor in the four dimensions that define decent work. In the context of decent work, 'employment' means creating conditions in which all who wish to work are given work, and all who are working are given the resources to care for their families without falling into poverty. When combined with the conditions of enhancing work stability and improving the productivity of the working poor, it could be more desirable, sustainable concept. In addition, employment is the most important method of utilizing the benefits and opportunities offered by globalization. In order to widely distribute the benefits of globalization, unemployment must be reduced and good quality jobs created. Thus, the primary social justification of globalization lies in the ability to create jobs. From a macro-statistical viewpoint, the advancement of globalization has brought about a steady increase in employment, with countries that actively pursue openness policies enjoying the benefits of expanded employment at a faster rate. With expanded open trade, many countries accessing the global market have experienced job creation and wage increase. In particular, some developing countries pursuing trade-led economic growth have displayed a marked increase in employment and living standards. FDI has not only led to direct job creation, but also indirect job creation through technology transfer, enhanced skills and productivity, and attraction of domestic investment. The advancement of IT, the driving force behind globalization, also creates new employment opportunities. The IT sector in major advanced countries has been an engine for the creation of highly-skilled jobs, and the IT sector has also provided more employment opportunities in developing countries, as seen in China and India. However, the simple logic that trade expansion promotes growth and creates jobs does not explain the big picture. This is because the various dimensions of globalization such as expanded trade, increased FDI, spread of technology, and reform and restructuring have multiple meanings in relation to employment. The relationships between globalization and growth, growth and employment, and the quality and quantity of employment are not all positive. The global growth in GDP during the 1990s when globalization was at its most marked period of advancement actually fell in comparison to previous years (World Development Indicators 2003).

4 In order to halve unemployment and the number of working poor, the ILO estimates that per capital GDP must increase by 2% and growth in certain regions needs to be maintained between 3-6% yearly until 2010 (ILO, Global Employment Trends, 2003, 6). Also, the World Employment Report(2001) calculates that in order to absorb the number of people entering into the labor market within the next 10 years, 500 million new jobs have to be created.

6 World GDP growth fell from 3.6% in the 1960s to 2.1% in the 1970s, 1.2% in the 1980s, and 1.0% in the 1990s. In addition, globalization may in fact cause a distorted relationship between growth and employment. The following comment by a participant of the ILO World commission gives us much to think about, “There is no point to a globalization that reduces the price of a child's shoes, but costs the father his jobs.” In the case of developing countries, trade expansion in the 1980s before the marked progression of globalization did seem to contribute to economic growth, and the high rate of sustainable growth did seem to contribute to economic stability and poverty reduction by expanding opportunities for productive employment. Economic growth led to continued expansion in modern sectors and continued contraction in agricultural and informal sectors, providing a basic driving force for expanding 'good jobs' within the overall labor market. Since the 1980s, however, globalization is assessed to have changed the positive correlation between growth and employment. In other words, while globalization may have a long-term effect of enhancing employment, it also has a short-to-mid term effect of escalating uncertainty in employment. First of all, openness to trade and FDI is not directly translating into expanded employment in modern sectors. In the case of East Asian countries that greatly expanded their level of openness after the foreign exchange crisis, further employment expansion in modern sectors no longer seems possible. Globalization has stepped up the pressure for new production technologies and new forms of work organizations, posing a negative influence on employment by lessening labor intensity and utilizing a smaller number of unskilled workers. Therefore, the increase in employment is being witnessed less in modern, large enterprises and more in small and medium enterprises(SMEs). However, SMEs are in a difficult position to utilize the opportunities offered by globalization. The even poorer informal economy, which is in an even more difficult position to take hold of these opportunities, are not decreasing in number with the progression of globalization. Furthermore, there are sectors that are actually experiencing a decrease in jobs with the progression of globalization. With corporate and industry restructuring taking place as a result of global market competition, more people are faced with the worry of layoffs and worsening work conditions, and jobs are continually being lost in sectors that were once protected. This is because privatization of state owned enterprises(SOEs) and downsizing of civil service employment is causing job reduction after the economic liberalization. Workers laid off because of SOEs privatization or company restructuring have difficulty in regaining stable jobs, and often experience downward social mobility. While some may

7 argue that downsizing in the public sector is not directly connected to globalization, the two are surely not completely unrelated. While the public sector can remain untouched if the country is independent of the outside world, the pressures of competing in the global market force governments to privatize state operated sectors, dismantle legal monopolies, and lay off excessive civil service workers.5 Many people in even the advanced and mid-income countries believe that their jobs will be transferred to low-labor cost countries with the progression of globalization, and recent debates show that many believe even white-collar jobs will be diverted to developing countries. Mid-income countries such as Korea are expressing increasing worry that employment will be diverted to China(China Effect). Eventually, the hypothesis that high economic growth translates into a high increase rate in regular employment in modern sectors may no longer be valid in the globalization era. While macro-statistics show that employment is on the rise, many individuals are unable to feel the change in their own lives. Thus, the benefits of globalization reflected in macro-statistical numbers are not reflected in the lives of individuals and their families, leading to the feeling that the country is doing fine but I am very insecure." The quantity of employment, income levels and income distribution are not enough to explain the effect of globalization on individuals. The main reason is that the expansion of employment opportunities and enhanced standards offered by globalization are not always uniform, but are offered in differentiated forms according to industry and class. This phenomenon may originate from the 'churning effect' caused by globalization. When there is a simultaneous mass creation and termination of jobs, the churning effect can take place in a significantly large scale. Thus, while there may not be a large change in the overall employment rate, a large level of job churning may be taking place. Therefore, while particular groups may suffer great damages due to globalization, others may experience benefits. On the other hand, a definite correlation was not found between the globalization and long-term unemployment. According to Rama(2003), the level of trade openness and unemployment seemed to have very little relation. Even in the case of Latin American countries, openness to trade and foreign capital was expanded throughout the past 20 years, but the unemployment rate showed very little increase. Trade liberalization and economic reform may reduce unemployment by expanding long-term capacity for job

5 In the case of Latin American countries, employment in the public sector fell from 16% in the early 1980s to 13% in the 1990s. Also, in the case of Korea, which was hit by the foreign exchange crisis, jobs in large companies, public enterprises and the financial sector dropped from 1.5 million in 1997 to 1.2 million in 2002.

8 creation. In the short-to-mid term, however, job destruction may outpace job creation, causing an increase in unemployment. FDI may also contribute to long-term job creation, but restructuring or factory relocation after share acquisition through FDI may cause short- term uncertainty in employment. In addition, globalization causes a surge in macroeconomic instability, causing booms and busts following turbulences in trade conditions and short-term speculative capital flows. This, in turn, may cause severe fluctuations in the short-term unemployment rate, showing that the extent of churning may be very large even though long-term unemployment may remain consistent. In this respect, globalization has the potential to generate anxiety in employment through factors that are not reflected in the statistics. Also, unemployment rates differ according to individual countries and regions, as does the ability of individual countries to adapt to globalization. Latin America and South Asia experienced an increase in unemployment since 1990 while the unemployment rate fell in East Asian countries following a rapid increase just after the foreign exchange crisis, the numbers still remain higher than pre-crisis levels. Globalization may possibly have a large negative impact on employment stability. This negative effect is known to operate mainly through two channels, deterioration of macroeconomic stability and pressure to add flexibility to employment. First, integration into the global market may harm employment stability by damaging the macroeconomic stability of a country'. Expanded openness and mobility of capital across national borders increases the risk of exposure to a macroeconomic crisis. Financial crises occur more frequently with increased force. Financial crises cause macroeconomic constriction, leading to mass unemployment problems. Such vulnerability to macroeconomic crises acts as a new strong factor in decreasing socio- economic stability. The second channel is the pressure from global market competition to add flexibility to employment. This is translated into the reduction of stable jobs and increase in irregular, unstable employment. With globalization, the production structure of individual countries must respond to increased openness and competition. This causes amplified turbulence in the labor market. Even amidst the job creation effects brought about by globalization, adjustments in the production structure force more workers to find new jobs. This causes traumatic personal adjustment, with lengthened unemployment periods, the hassle of acquiring new skills and finding a new job, and a downgrading to inferior jobs in informal sectors. The same competition pressures that cause downsizing in employment also force companies to seek higher flexibility and lower labor costs,

9 showing dependency on precarious employment contracts. Such changes not only impact those directly involved, but also have a spillover effect, translating into general fear and instability in other sectors as well. Trade expansion and economic growth may have an increasing effect on the quantity of jobs in the long term. Such long-term effects, however, may cause severe volatility in the short-to-mid term. This highly differentiated and unstable phenomenon which is not reflected in macroeconomic statistics may offset the positive effects on employment from the viewpoint of decent work.

3. Inequality

High levels of inequality have a long-term negative effect on economic growth and employment, and eventually make it difficult to achieve decent work for all. In addition, the spread of inequality may also negatively affect openness and globalization.6 Globalization has some aspects that aggravate inequality and others that alleviate inequality. Globalization may alleviate inequality by promoting growth and reducing poverty. On the other hand, the differing abilities to utilize the benefits of globalization between those with skills and wealth and without may actually foster inequality. In reality, inequality has been on the rise for the past 20-30 years during which globalization has been in progress. According to an analysis by Giovanni and Kiiski(2001) that observed 73 countries during the past 20 years, 48 countries(53%) experienced an increase in inequality, while 16 countries(36%) remained stable, and 9 countries(5%) saw a drop in inequality. In the case of advanced countries, inequality between skilled and unskilled workers has been worsening since the 1980s. The consequences have been displayed in the form of earnings gap between skilled and unskilled workers in the United States, and an increase in unemployment in Europe where minimum wage and labor market intervention is secured. The decrease in demand for unskilled workers causes problems in terms of reduction in decent work and increase in the working poor, in that fewer jobs are available to provide suitable compensation. Most developing countries excluding a few East Asian countries also showed an overall increase in inequality. When considering globalization as a trend emerging after the early 1980s, globalization

6 Jeffrey G. Williamson claims that the trend of inequality generated by globalization before World War I is at least partly responsible for the regression of post-war globalization.

10 is seen to have a close correlation to inequality. The degree of responsibility that should be placed on globalization for the spread of inequality, however, remains uncertain(ILO, 2003a). Numerous debates and empirical studies are being carried out in this area. Traditional trade theory tells us that trade accelerates inequality in advanced countries while alleviating inequality in developing countries. According to the Stolper- Samuelson Theorem(SST), trade expansion will increase the real income of a relatively abundant workforce, while reducing the real income of relatively scarce resources. Therefore, theory prospects that the value of unskilled workers will be enhanced in developing countries that have an abundance of unskilled labor. Adrian Wood also claims that inequality increased in wealthy countries and decreased in poor countries during the 19th century, and that a similar trend was seen emerging in the late 20th century as well. However, even in the case of developing countries including Latin American and Africa, trade liberalization did not bring forth the results predicted by traditional trade theory. The hypothesis that low income workers would be able to obtain more employment opportunities by selling their products in the global market proved wrong. Instead, the labor market became bi-polarized. Thus, contrary to traditional trade theory, the premium for skilled workers also rose in developing countries.7 The fact that inequality increased even in developing countries poses a problem to traditional trade theory. Taking trade as the major factor, the income gap between skilled and unskilled workers should narrow in a country that exports products from the unskilled labor intensive sectors. The effect of trade on inequality is displayed through the changes in the production structure of each sector. However, inequality was found to be more serious within industries than among different industries and sectors. This phenomenon was also observed in advanced countries. Many empirical studies in advanced countries also show that trade has an effect on employment and inequality, but that the effects are limited. Instead, analysis pinpoints technology, rather than trade, as the major factor that aggravates inequality in the labor market. The evidence frequently presented to back this assertion is the fact that inequality was more strongly noted within sectors than among sectors. Inequality was found to be more serious within industries, and particularly within companies, in developing countries as well (Hanson and Harrison, 1995). Thus, the main factor through which globalization impacts inequality is not merely trade

7 The income premium for education increased in developing countries, proving a positive correlation between education premium and the level of openness (Beyer, Rojas, and Vergara, 1999).

11 expansion, but rather technology transfer and foreign investment, and export-orientation. For example, foreign invested companies and export companies have a higher demand for skilled workers and tend to pay higher wages to skilled workers. FDI and outsourcing by multinational companies raises the capital stock of developing countries, which increases the demand for skilled labor (Feenstra and Hanson, 1996). Foreign investment has a strong tendency to offer high education premiums, making it difficult for poor workers to reap the benefits of globalization, as long as their educational opportunities remain limited. On the other hand, Bhagwati and Dehejia(1994) assert that trade volatility promote inequality by increasing labor turnover. Trade liberalization creates fluctuation in the labor market, which leads to further inequality. Trade liberalization causes many industries to become footloose. Even a small shift in costs can transfer comparative advantages from one country to another. This causes an increase in the labor turnover rate, which in turn results in lengthened unemployment among unskilled workers, leading to an income gap. Mobile workers that frequently shift from job to job lose opportunities to accumulate skills, preventing them from increasing their income. This aggravates inequality between working classes, under the assumption that the less- educated are more seriously impacted. In addition to direct influences due to economic factors such as trade, export and FDI, inequality is more strongly influenced by liberalization policies and restructuring generated by globalization. Cornai and Kiiski(2001) analyzed that the spread of inequality was more deeply related to labor market deregulation, capital account liberalization and domestic financial liberalization than trade itself. Easterly(2001) also analyzed that the poor were unlikely to utilize the new opportunities created by restructuring and reform. Meanwhile, what is more fundamental than inequality among working classes is the inequality between capital and labor. Traditional theory (or the factor endowment perspective) shows us that trade expansion and opening of capital accounts will bring about an enhancement in the labor income distribution rate of poor countries, while dropping the rate in rich countries. However, throughout the past 20 years of the progression of globalization, the labor income distribution rate has continually dropped, especially in countries that suffered from the financial crisis(Diwan, 2001). The most serious threat to equality is probably international capital mobility and the ensuing financial crisis. This is because an economic crisis leaves a deep scar on labor income distribution, and takes on an un-equalizing effect over time. Diwan(2001) also presents analytical data showing that wages dropped rapidly during the foreign

12 exchange crisis, and recovered only partially during the economic rebound. The reason that the burden on labor becomes heavier is because capital becomes excessively mobile while labor does not (Rodrik 1997, Diwan, 2001). According to Diwan(2001), labor is not merely an observer of an economic crisis, but has a very important role in overcoming the crisis. He emphasizes that the connection between globalization and inequality does not appear monotonously over a long period of time, but operates during the short-term process of distributional conflicts between capital and labor. Financial crises are the periods during which these distributional conflicts are fought out and fierce bargaining is carried out over labor income distribution. Because the income distribution rate of labor drops rapidly over a short period of time during the financial crisis period, it is also called a 'bail out period,' where labor bails out capital in a short period of time. While it is difficult to adjust the compensation for capital during a crisis, the burden of overall adjustment is laid on labor. Rodrik(1998) also raised issue with flexibility and mobility. He claimed that the flexibility and mobility brought about by globalization strengthened inequality between capital and labor and among labor classes. If the 1st globalization that took place before World War I displayed a high level of mobility in both capital and labor, the globalization that we are experiencing today is displaying far more mobility in terms of capital than labor.8 The result is that the negative shocks of globalization had a greater impact on labor than capital. Even within working classes, the weakening of national barriers to trade and investment aggravates the asymmetry between groups that have the resources to move across national borders and those who do not. In the case of skilled workers, it is easy to move to another region where they are more valued. Unskilled or semi-skilled workers do not have the resources to do this. Globalization adds flexibility to the demand for individuals included in the latter group. In other words, labor services provided by a certain group of unskilled or semi-skilled laborers can easily be replaced with other laborers. It would be very limitative to assess the problem of globalization-induced inequality through a numerical analysis of the relative impact of trade expansion on skilled and unskilled laborers. The problem lies in the fact that it is difficult to differentiate between the effects of globalization and the effects of other economic shocks such as policy

8 The ILO(2003a) also points out that a major difference between the 1st and 2nd globalizations is that the 2nd globalization is seeing only limited levels of inter-country mass-movement in labor. International movement of labor in limited numbers is pointed out to be a very surprising inconsistency with the logic of globalization.

13 reform. In other words, disequalizing effects may also be caused by reforms in the domestic financial market, liberalization of accounts, or tax reform. As pointed out previously, when globalization is defined not only within the context of trade expansion but in terms of its relevance to the various changes caused by the phenomenon, the inequalities caused by globalization can also be generated through a wide array of channels.

4. Labor Standards

Are labor standards conflicting with or complementary to globalization? The argument that globalization is mutually conflicting with labor standards takes on two forms - that globalization lowers labor standards, and that the strengthening of labor standards promotes protectionist trade, limiting free trade and globalization. Those who advocate the necessity of international labor standards claim that globalization releases powers that pose a negative impact on basic labor rights and standards. Thus, globalization and free trade induce competition among countries to lower labor standards (a 'race to the bottom'), and the poor labor standards of a few countries undermines the standards of others. In a global competition environment, individual countries not only offer more tax breaks and weaker regulations, but also engage in outbidding that cheap and submissive labor without labor unions is promised in order to attract foreign investment, or seek deregulation of the labor market, reduction of social protection, lower wages and non-wage costs, and further flexibility in the market in order to obtain a comparative advantage. On the other hand, advocates of free trade claim that international labor standards are actually protectionism in disguise, constricting trade with LDCs. Some also claim that strengthening the labor standards of developing countries that hold a comparative advantage in cheap labor constitutes unfair competition. Freeman(2003) states that advocates and opponents of globalization alike overestimate the role of trade, claiming that poor labor standards do not cause a race to the bottom nor do global labor standards threaten the comparative advantage of developing countries. Thus, he states that globalization and labor standards are not in competition, but are rather complementary. Taking a synthetic look at previous studies, there is little empirical evidence that globalization and labor standards are mutually conflicting. Thus, it can be concluded that there is not enough objective and empirical evidence to prove that globalization

14 entrenches labor standards, labor standards infringe upon the competitiveness of developing countries, or that labor standards pose an impediment to globalization or free trade. The expansion of globalization and the strengthening of labor standards tend to move in the same direction even though they have causal relations. The increase in trade among advanced countries and between advanced and developing countries after World War II was accompanied by a continuous improvement in labor standards, and developing countries also increased their participation in ILO conventions.9 While concerns have been voiced regarding the connection between participation in the global market and the increase in child labor, an overall observation shows that there is very weak empirical evidence that sectors exposed to global competition utilize more child labor. According to ILO statistics, 70% of working children work without pay for their families in agricultural regions, and only 5% are employed in export industries (Ashagrie, 1997). Thus, child labor is a result of poverty found mostly in agricultural regions, and appears often in businesses unrelated to globalization. In addition, the fact that foreign-owned companies generally offer higher wages and better working conditions is evidence that globalization enhances, rather than worsens, labor standards (Drusilla Brown, Alan Deardorff and Robert Stern, 2003). On the other hand, there is also not enough empirical evidence to prove that strengthening labor standards weakens the international competitiveness of third-world countries. There is no objective backing to the conventional wisdom that foreign investment is more active in countries where representation of labor unions is low (Friedman, Gerlowski and Silberman, 1992), or that low labor standards offers an ideal environment for foreign investment (Rodrik, 1996, OECD 1996, 2000). Rather, it was found that FDI was larger in countries that adhered to stronger labor standards (Kucera 2002). Rodrik(1996) discovered that higher labor standards translated into higher labor costs, but were unrelated to export performance, and that US based FDI was larger in countries with better labor standards. Maskus(2003) also showed that labor standards and export performance in East Asian countries had a positive correlation. Labor standards may raise short-term labor costs, but tend to bring long-term economic growth by promoting social and political stability, which in turn attract foreign investment and foster the development and utilization of human resources. The OECD(1996, 2000) states in a report that countries that strengthened core labor

9 Even in the case of Vietnam, the jump in the price of rice after the trade embargo on Vietnam exports was lifted had a reducing effect on child labor in the 1990s, as households became wealthier (Edmonds and Pavcnik, 2002).

15 standards were able to raise the skill level of their labor force and promote innovation and productivity, enhancing economic growth and efficiency. The report also states that countries that took early steps to engage in free trade and develop democratic institutions were able to minimize the side effects of trade liberalization. For instance, the reduction of child labor leads to faster economic growth by fostering the development of human resources (Galli; 2001). Child labor laws force companies to pay higher short-term labor costs, but in turn encourage children to go to school, contributing to the development of human resources throughout economy. Health and safety regulations also bring compensation on a national level, if not on a corporate level. Also, gender discrimination poses a limitation to the utilization of human resources, leading to low economic growth, and a low-level development of human capital (the 'selection distortion factor,' Klasen(1999)). On the other hand, the protection of democratic rights leads to political and social stability, contributing to foreign investment and economic growth (Benabou; 1996). Kucera(2002) also argued that the rise in labor costs and the ensuing negative impact on FDI brought about by protecting the freedom of association and collective bargaining were adequately offset by positive non-labor effects. He also analyzed that there was no evidence that countries that practiced child labor and gender inequality had a comparative advantage in attracting FDI. In addition, Sengenberger and Campbell(1994) claim that 'labor market flexibility,' which has been emphasized amidst the global competition environment and rapid technological changes, can be achieved based on a shared commitment regarding labor standards (especially standards related to labor mobility). Labor standards are often considered one of the problems of a rigid labor market, but they can also provide a legal foundation for adding the labor market flexibility needed in an economy experiencing rapid change. This is because swift reform and restructuring calls for a high level of trust and cooperation within a company, between labor and management, and among labor, management and government(negotiated flexbility). There are also studies that show that labor standards do not actually pose a heavy burden on companies. These studies state that the excessive emphasis on the burden posed by labor standards is unfounded, as the weight of the burden can readily be absorbed by companies in global competition, and the economic mechanisms to do this are already in place. Once we understand the mechanisms of the market and competition, it is not difficult to see that a 'race to the bottom' is not so easily achieved, as it is deterred by the characteristics of the market itself. Simply speaking, if a certain company offers low wages, laborers will transfer to another company that offers higher

16 wages. Also, a floating exchange rate system allows economies to adapt to differing labor standards between countries by utilizing changes in the exchange rate. For instance, if Brazil adopts a higher set of labor standards, the exchange rate can be dropped to absorb the costs of higher labor standards through higher-priced imports. Thus, individual countries can use the exchange rate as a medium to select the level of labor standards that they want. Therefore, the theory of a 'race to the bottom' does not take into consideration the various methods that a country can use to maintain labor standards in global competition. It should be emphasized that labor standards and labor market institutions have economic dividends. In other words, the denial of the laborer's basic rights cannot be considered a sound foundation for a nation's export strategy. The OECD stresses that core labor standards provide a basic framework for the realization of other labor standards, fostering the advancement of society in accordance to the economic growth anticipated through the mobility of trade and capital. Even though the empirical relationship between globalization and labor standards is not clear from a macroscopic perspective, there is a possibility that globalization may potentially cause the violation of labor standards from a microscopic point of view. For instance, while there is lack of evidence regarding the connection between globalization and child labor from a comprehensive view point, a more detailed observation shows us that cases of child labor exploitation in rug exports and the sexual tourism industry designed to satisfy the demands of customers from advanced countries are gaining notoriety. From an overall, long-term perspective, globalization does not deteriorate labor standards, but there are frequent instances where labor standards are not met or compromised in some microeconomic aspects of globalization. Also, while there is insufficient analytical evidence to prove the existence of 'bidding wars' to attract FDI, it is true that the danger of such wars does innately exist because of the 'prisoner's dilemma'(Oman; 2000). Therefore, establishing adequate labor standards and creating an atmosphere of global competition in which such standards are met is a basic precondition for the fulfillment of decent work.

5. Conclusion: the role of states and policies

Globalization has a tendency to create employment opportunities and expand the implementation of labor standards from a macroscopic point of view. But taking a

17 microscopic viewpoint, globalization brings with it discrimination according to sector, class and also seems to possess the potential danger of having a damaging effect on labor standards. It is also judged that globalization has an innate tendency to increase inequality and instability. Thus, globalization innately possesses certain characteristics that may conflict with the dimensions of decent work. In this respect, the policy intervention of individual countries as well as the efforts of international organizations such as the ILO will be needed to achieve a sustainable form of globalization with decent work. Decent work must be accepted as an integrating factor instead of a conflicting one with globalization in the following contexts. First, decent work ensures the social justification and sustainability of globalization by reducing the social ills brought about by the phenomenon. Second, globalization must go hand in hand with decent work in order to prevent regression into protectionism. Third, decent work guarantees the high road of globalization in terms of development and growth. First of all, the ILO asserts globalization can only be sustainable when decent work is ensured. Fundamentally, the future of globalization lies in how well it can fulfill the demands of the world's inhabitants. A global economy creates new opportunities on the one hand, but creates sectors that are excluded from these opportunities on the other. Many people are excluded from the gains and benefits of a global economy due to a lack of knowledge, opportunities and assets. Thus, a strategic method of ensuring social justification in a global economy is to accelerate the speed in which decent work is created. Decent work is the first step towards poverty reduction and an important step towards social integration. This also fits into the movements of the World Bank, which has recently been attempting to integrate the social dimensions of development into its program. The World Bank is also emphasizing the necessity of constructing a social safety net in order to alleviate the social consequences of free trade and restructuring. For instance, the organization has proposed a goal to halve the current 1.2 billion people living on less than 1 dollar a day by 2015. In order to reach this goal, the World Bank is establishing programs to improve health, education and physical infrastructure, and induce the participation of the poverty-stricken population in political and social decision making processes. Second, decent work is necessary in order to sustain openness and globalization and prevent regression into protectionism. Trade opening and the mobility of capital brings about rapid changes in a country's industrial structure, and increases the risk of spreading international financial crises. In order to provide a counter measure against

18 these social effects and increase the world's capacity to accommodate economic globalization, active protection of employment and income is needed, in addition to qualitative, quantitative adjustment and reform of production and demand structures. Thus, social protection can be a positive alternative to protectionism. For instance, the 1st globalization was cut short because individual governments knew how to protect themselves through the use of protectionism methods, which are partly responsible for the global economic crisis in the 1930s. This shows that trade and the mobility of capital are not achieved without effort; socio-political measures must be put into place before they are achieved. The economic benefits of open markets must be used to support proactive measures to adapt to changes, such as the construction of social infrastructure and job training. The necessity of such measures is proven through the fact that in general, countries with high wage levels and long-term social protection policies tend to be more open and less protective(Sengenberg, 2001). Third, decent work can be a core factor in quantitative growth and development strategies. Decent work also makes good economic sense because it is the foundation of long-term sustainable growth. There are analyses and assertions that social protection and labor standards can pose an impediment to development and growth, especially because it undermines the comparative advantage that developing countries have in cheap and abundant labor, stagnating growth and spreading poverty in developing countries. Sengenberg(2001) from the ILO points out that such assertions advocate the low road of cost-minimization rather than the high road of increased productivity through worker participation and social dialogue. Thus, Sengenberg(2001) criticizes that advocates of this view support the selection of the low road of remaining immobile in a traditional economic structure, rather than the high road of enhancing real income and working conditions. Contrary to popular belief, companies with a high level of social labor standards generally tend to generate more profits, and countries with higher social labor standards tend to record higher levels of economic growth. Low cost labor on its own will not attract investment, and the development of human resources can be a positive method of inducing development. Thus, when the quality and qualifications of labor, the cooperative capabilities of labor unions and the willingness of workers to participate in innovation become the determining factors of investment, strong labor unions and employer groups replace low cost and low representation of labor as core driving forces for the economy, instead of becoming a cartel which limits growth and innovation. Resolving the shortage of decent work is the quality road towards poverty reduction. Such efforts will also add further justification to the global economy, as well as provide

19 an important element for growth and development. The integration of decent work into globalization requires not only the efforts of international organizations, but the policy efforts of individual countries as well. Generally, it is accepted as conventional wisdom that globalization constricts the roles of individual countries. Thus, globalization will dismantle the social bargaining between free trade and social safety nets that have been established since World War II. The social legislation that has been developed throughout the past 100 years in post-war advanced countries laid the burden of providing these costs internally on the company, in exchange for allowing them to function within the society. Under the globalization, however, employers are reluctant to provide workers with the benefits of employment security. This is due not only to the increased competition in the global market, but also increased international mobility, which enables companies to eliminate their dependency on the labor force provided within their own regions. This eventually causes a downward spiraling of inter-government competition, where governments opt to reduce the social burden once shouldered by companies. However, this theory of reduced welfare spending in individual countries is not translating into reality. The ratio of GDP to social safety and welfare expenditure increased in most countries excluding the US. The numbers increased in Japan from 3% in 1970 to 8% in 1980, from 16% to 18% in Germany, and 9% to 10% in England.10 Globalization has increased the level of integration among national economies, changing the role of individual countries. However, individual economies are still controlled by their own people and their governments, who design their own social policies, and still possess the liberty of maintaining policies different from their trading partners. Therefore, globalization actually calls for the strengthening of government roles (more trade more government). Globalization creates positive opportunities for decent work, and at the same time causes negative consequences. Active intervention in the part of the government is needed in order to maximize opportunities in individual countries while minimizing negative consequences. Sengenberger points out that policies enabling globalization to become a sustainable process by minimizing the negative effects to the labor market need to be established. In order to respond effectively to globalization, countries need to be able to develop national capacities, regulate economic activity, promote equity and fairness, provide essential public services, and participate effectively in international

10 It is noted that welfare expenditure has been redistributed, shifting focus from patients, the disabled and pension recipients to workers that have been laid off in the corporate restructuring process.

20 negotiations(ILO 2003a). He can also show that it is not true that good benefits, like good unemployment insurance scheme, would hamper employment or reduce growth" Economic growth through globalization by itself does not lead directly to decent work. An ILO research showed that while the indexes for decent work and per capital GDP were found to be closely related, large differences existed in the indexes for decent work among countries in similar income brackets. This shows that decent work can be promoted regardless of the level of economic development. This is thought to be related to the characteristics or roles of the country, as well as the design of various policies and institutions. In other words, the type of growth determines just how employment- intensive the growth is, and who benefits from such growth. Domestic policies and institutions may be the main factor that determines the type of growth achieved by a country. This is because countries with weak internal economies and institutional systems find it difficult to attain sustainable success in global trade and technology transfer, and often fail to connect any success into decent work. Ultimately, the policy decisions made by individual countries have a very important role in strengthening the connection between globalization and decent work. This pertains not only to suitable development strategies and macroeconomic strategies, but to employment strategies and social policies as well. In order to utilize the employment opportunities created in new economic sectors and respond to the termination of existing jobs, individual countries must not only establish policies and incentives to continuously create new jobs, but must also establish short-term and long- term policies to respond to the termination of jobs. Public policies must be able to help leverage the direct and indirect positive employment effects of integration into the global economy. Domestic industrial policies can have an indirect job creation effect by strengthening the connection between FDI and domestic companies. Of course, many factors outside of the labor market must be taken into consideration in order to offset the negative effects of globalization. For instance, if openness and FDI increase skill premium, first priority must be placed on providing equal educational opportunities for everyone. And if the financial crises caused by the international mobility of capital undermine labor income distribution, a strong management of macroeconomic policy and sound financial regulations must be put in place. Globalization can bring benefits to most workers under the precondition that appropriate domestic policies are put in place.

21 Reference

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