Scope to free the workers, too

WHAT ABOUT the workers? An enormous amount of attention has been devoted to the economic and political implications of the market revolution, but rather less to the consequences for the world's 2.5 billion workers.

In 1978 only a third of the world's workforce lived in fully-functioning market economies. Another third in centrally-planned economies, principally the Soviet Union and its satellites and mainland China. The final third lived in countries where governments intervened forcibly in the economic process and where the economies were heavily protected from foreign competition: much of Africa, Latin America and the Indian subcontinent.

Such as been the force of the conversion to market economics that by the year 2000 less than 10 per cent of the world's workforce will live in these countries, disconnected from the world economy. It is an extraordinary triumph, but one with profound social consequences. For example, since even the most enthusiastic advocates of markets would acknowledge that the transition is bound to be painful, one should ask whether there might be ways of protecting workforces during transition. Even when market economies are established there are people in weak bargaining positions who do not fully benefit from them. Must the new recruits to the market economy face the conflict and tensions of the established members, or can they learn from them and cut out some of the pain?

These figures and issues are discussed in this year's World Development Report - Workers in an Integrating World, prepared by the World Bank and published last week by OUP. These are an enormously interesting issues in themselves but the report takes on a certain parochial significance in that its principal editor is Edward Balls, the ex-FT journalist who is currently advising Gordon Brown, the shadow Chancellor. It is a World Bank view, of course, but a view which will also be injected into the thinking of the Opposition.

The obvious starting point has to be the way in which the surge of growth in East Asia has helped raise the real wages of people working there. This has been the fastest-growing region of the world, particularly since the beginning of the 1980s, and so it is hardly surprising that it should show the fastest-growing wages too. Just how far industrial wages there have pulled away from those in other regions is shown in the chart. Note, too, that the region which has done second best in relative terms is south Asia, the Indian sub-continent, while the area which has done worst in the 1980s (though rather better in the '70s) is Latin America. A sad performance by sub-Saharan Africa is slightly tempered by the fact that at least things did not get much worse in the 1980s.

So put at its simplest, soundly based economic growth does feed through into wages, while growth which has to be supported by large borrowing (as was the case of Latin America during the 1970s) is ultimately self- defeating.

There are a couple of further general lesson demonstrated by the World Bank in the report. One is that real wages rose fastest in countries where exports accounted for an increasing proportion of GDP, and they actually fell in countries which shifted the balance of their economies away from exports. Put another way, countries which are able to benefit from the expansion of world trade get richer; those which are not, don't. Another lesson: while real wages do initially fall when countries make a shift from a controlled economy to a market one, if the reforms are credible, real wages do recovery quite quickly.

But to say that is to state the commonplace: exporting has long been recognised as the principal path to increased wealth, and not many people still believe that the best way of preserving the real wages of workers in protected economies is to persist with protection. The core of the World Bank paper seeks to answer some of the questions raised by this.

First, which development strategies are good for workers? The nub of the World Bank's argument here is that while accepting the market's dictates will increase real wages fastest, and may reduce inequalities, too, there is a problem in making sure that even the disadvantaged benefit. So policies should not be to interfere with the economic process but rather, by things like education, to make sure that as many people as possible benefit from it.

Next, is international integration an opportunity or a threat to workers? Unsurprisingly the conclusion is that it is both. What is perhaps more helpful is the bank's analysis of the way in which a global labour market is emerging. This is happening not so much through migration, but rather through falling transport and communication costs (see chart). The report does highlight the possibility of a new golden age, where developing countries have the opportunity to export services to the developed world, though it does not really explore some of the more interesting issues raised by falling communication costs, such as whether this means that countries which have suffered from peripheral geographic location can turn disadvantage to advantage.

The third question concerns government intervention in labour markets. Here an element of political correctness creeps into the analysis, for the World Bank cannot bring itself to attack policies like the minimum wage, to which many of its members (including the US) subscribe. On the other hand, because the bank does strive to be intellectually honest, it cannot pretend that setting minimum wages has actually done much for the poor. So it rather lamely concludes that this isn't much of a case for having one in low and middle-income countries, but provided it is set low enough it does not do much harm in rich ones.

More surprisingly, perhaps, it is quite supportive of trade unions: these it believes can improve the efficiency of a country's economy. The East Asian countries which have grown rapidly while restricting union rights are, it believes, exceptions, not the norm - but maybe here again there is a touch of political correctness. Free trade unions tend to go with democratic government and the World Bank could hardly argue against democracy.

The bank also asks how governments might protect workers during transition. The main conclusion it reaches is that they must try to help labour shift from one type of job to another: in the current jargon, active labour market policies (things like paying for retraining) rather than passive ones (paying people to stay at home).

The final part of the report is headed "the outlook for workers in the 21st century" and describes two scenarios in the years to 2010, one where wages of the world's workers drift apart, the other where they converge. Sadly, this is just a seven-page essay, rather than a developed analysis of the job outlook. Like the rest of the report, it ask a lot of perfectly sensible questions but does not really give much of an answer to them.

It seems to me that countries seeking to make the transition to developed status in the least painful way for their workforces have two real needs. One is a handbook of best labour practice in the developed world: it surely should be possible to soften the antagonistic clash of interests which has marred the development of western capitalism, to broker a better deal between workers and employers. These countries have learnt from our technological triumphs; they ought to be able to learn from our social mistakes.The other need is a vision of the way in which international trade in services, particularly "white collar" services, might develop. The expansion of screen-based jobs and the falling cost of telecommunications enables any country with skilled people to sell services across continents. This, more than sweat-shop factories, is going to bring opportunities for the workers of the less developed world.

It would be good to see more awareness in World Bank thinking of the fact that people do not need to live in the same countries in which they work. Oh yes, and it would be nice to see some of that in the Opposition's thinking here, too.