Of Jobs Lost and Wages Depressed in the Philippines

By Melisa R. Serrano

The “jobs claims-higher wages” model is often used by supporters of free trade to argue for deeper integration and greater openness in trade and financial markets. In fact, neoliberal economists in cahoots with major organisations such as the World Trade Organization, the World Bank and the International Monetary Fund are inclined to push or impose a one-size-fits all deregulated export-led growth and development strategy. Developing countries often have to swallow the bitter pill of full liberalization in exchange for loans from the Word Bank and the IMF and for getting more market access in developed countries.

Trade liberalization is believed to lead to higher wages via price transmission. Free trade economists argue that a reduction of the after-tax or tariff price of imports lowers the prices of imported goods and import substitutes which in turn lead to increase in real incomes. And since a tariff reduction lowers the marginal cost of production (through a reduced cost of imported materials), this is expected to encourage and expand production. This purportedly increases the demand for labor.

But does a regime of free trade always create good jobs and increase wages in relative and real terms? The sad and sorry (and arguably continuing) state of stagnation in the Philippine economy in the heyday of liberalization – 1980 to 2000 – helps to debunk the causal link between trade and financial liberalization and job generating-high wages economic growth. For the Philippines’ dismal economic performance during the heyday of liberalization only brought stagnation, unemployment and declining real wages.

The lost decades in the heyday of liberalization

The period 1980-2000 has been alluded to as the era of rapid globalization when most of the developing world, including the Philippines, opened up further to world trade as part of structural adjustment efforts prescribed by the IMF-WB within the framework of the Washington Consensus. Total trade increase between 1980 and 1999 (49%) – touted as the more globalized decades - was higher than the period between 1960 and 1980 (31%). The dramatic rise of manufactured exports in the Philippines beginning 1981 also indicates the deepening of a free trade regime in the country.

From 1981 to 1985, a tariff reform program was adopted in the Philippines that narrowed down tariff rate structures. At the same time, an import liberalization program was launched which did away with non-tariff import measures. Beginning 1991, tariffs were gradually lowered over a five-year period until 1995. Overall, average tariff rates went down by a whooping 65% from 1994 to 2000.

Between 1993 and 1996, trade liberalization was vigorously pursued by locking in the country to international trade regulation and deeper integration through the ASEAN Free Trade Area (AFTA) in 1993, the World Trade Organization (WTO) in 1995, the Asia Pacific Economic Cooperation (APEC), and various bilateral trade agreements. A high degree of capital account liberalization was achieved in 1993 after being initiated in 1991 through the passage of the Foreign Investments Act. These reforms eased the entry and exit of foreign capital, largely in the form of short-term debts and portfolio investments (unhedged dollar borrowings or “hot money” used to finance real estate, construction, speculative and manufacturing activities), setting the stage for the country’s participation in the Asian financial crisis.

This regime of openness was marked by increasing frequency and depth of bust-recovery cycles pointing to a more volatile movement and a seemingly shorter cycle length compared to previous periods (Lim and Bautista, 2002). As a corollary, the country’s dependence on imports and unsustainable (private and short-term) foreign capital flows (or “hot money”) had been attributed to more frequent and shorter growth and recession cycles and the lack of macroeconomic development.

The result was devastating. It was only in the period 1980-2000 – the “lost decades”, a term coined by Bill Easterly in 2001 to refer to the growth performance of developing countries in the 80s and 90s - that the Philippines experienced negative growth. From a 66% rise of real per capita GDP (in 1985 US$) in the period 1960 to 1980, the country plummeted to -1% in the period 1980-2000 (Weisbrot et al 2001). The forgone increase in per capita GDP during the “lost decades” was estimated at 68%.

Does free trade create jobs? Challenging the “jobs claims” model

There is an abundance of economic literature pointing to the positive impact of trade liberalization on employment and wages. Neoliberal economists argue that although tariff reductions do have a negative impact on wages and levels of employment, any adverse effect can be wiped out by a tariff reduction’s effect on reducing domestic prices. However, as Akyuz (2005) points out, simulations done by the World Bank highlighting the benefits that developing countries could reap from further liberalization under the Doha Round are bereft of reality. These studies use “general equilibrium models” that assume automatic market clearing, rapid redeployment of resources and full or equal employment after liberalization. However, factors of production, including labor, capital and land are often sector or product specific and thus immobile. Expansion in sectors benefiting from liberalization requires investment in skills and equipment, rather than simply reshuffling and redeploying existing labor and equipment. Thus, like the case of the Philippines, the overall impact of rapid trade liberalization could be unemployment, deindustrialization and growing external deficits despite a significant increase in export growth.

The Philippines’ export participation in high-technology manufactures through international production networks (IPNs) involves mere assembly of components that adds little value and utilizes labor, the most abundant and least mobile factor. The bulk of Philipino exports are import-intensive, particularly electronics and garments. The high import intensity of these two sectors implies that they add very little value and have a moderate employment impact. In 2000, these sectors generated a meager 6.9% of total gross value added and 5.7% of total employment. A declining trend is similarly observed in employment growth rates between 1980 and 2000. Between 2000 and 2002, it is estimated that the annual layoff rate in the electronics sector was between five and 10 percent as a number of establishments have either closed down or reduced their workforce.

Does free trade lead to higher wages?

Between 1980 and 2000, increased frequency and depth of bust-recovery cycles brought about by the uncertainties of a trade and financial liberalization regime wreaked havoc on wage patterns, resulting in wage stagnation since the late 1980s. On average, the real wage rate in the Philippines in 2002 was around three quarters of what it was in the early 1980s. Felipe and Sipin (2004) note a clear downward trend of labor share at 0.6 percentage points per year during the period 1980-2002. The authors conclude that labor in the Philippines has lost at least 10 percentage points of its share in value-added during the last two decades. Although export performance was generally robust during the period, “strong increases in the manufacturing exports of developing countries – particularly those participating in IPNs – may have taken place without commensurate increases in incomes and value added” (UN 2006:75).

The argument that, in a deregulated export-led growth, job loss in the “restructuring” process results in greater efficiencies and new jobs with higher wages will replace old ones is flawed according to Ranney and Naiman (1997). This assumption is based on a situation of full employment. The market is seldom able to replace lost employment with comparable jobs. Even if new jobs were created, people who lose jobs often do not get the new ones. Moreover, many of the replacement jobs are of inferior quality. It should also be noted that higher wages in the export sector could be due to high unionization, labor shortages in specific occupations, or higher productivity. Moreover, imports can depress wages in certain industries and occupations.

The way forward

Clearly, the IMF-WB sponsored market liberalization prescriptions and the country’s obedience to such diktats, proved to be devastating as the Philippines went from being a poster girl of the WB-IMF to the basket case in the East Asian region. Unlike its more successful neighbors where liberalization took place gradually and cautiously over the past two decades after a period of successful industrialization and development, the Philippines pursued big bang liberalization as a way of getting out of its debt and development crisis without the necessary industrial or manufacturing base.

What is now certain is that the stagnation of developing countries during the “lost decades” was a major blow to the optimism surrounding the Washington Consensus. In fact, the IMF had already conceded in 2003 that, at least for many developing countries, capital market liberalization did not lead to more growth but to more instability. Unfortunately, this acknowledgment came after the dreadful effects of capital markets liberalization in many developing countries.

There are crucial factors for an economy to be able to reap economic benefits from external trade and financial liberalization. The major ones are: (1) producing export products with high technological content (high value added) located in growing global markets; (2) creating domestic linkages for these exports; (3) capacity to capture a share of value added in international production networks; (4) attracting greenfield FDI that is anchored in the domestic economy; (5) coherent industrial or production sector strategies that promote industrialization and/or support structural transformation of economies (macroeconomic policies, investments in physical infrastructure, incentives and support for innovation, protection of infant industries, selective policies targeting specific sectors or firms); and (6) timing and speed of liberalization (gradual integration is preferable to a big bang or premature approach). Unfortunately, these factors are still missing in the Philippines’ economic constellation.

Bibliography

Akyüz, Yilmaz. 2005. “Trade, Growth and Industrialization: Issues, Experience and Policy Challenges,” in www.twnside.org.sg/title2/t&d/tnd28.pdf

Felipe, Jesus and Grace C. Sipin. 2004. Competitiveness, Income Distribution, and Growth in the Philippines: What Does the Long-run Evidence Show? ERD Working Paper No. 53, Manila: Asian Development Bank, June.

Lim, Joseph Y. and Carlos C. Bautista. 2002. “External Liberalization, Growth and Distribution in the Philippines,” Paper presented for the international conference on “External Liberalization, Growth, Development and Social Policy,” January 18-20, 2002, Melia Hotel, Hanoi, Vietnam.

Ranney, David C. and Robert R. Naiman. 1997. Does `Free Trade’ Create Good Jobs? A Rebuttal to the Clinton Administration’s Claims. Chicago: The Great Cities Institute, January.

United Nations. (2006). World Economic and Social Survey 2006 – Diverging Growth and Development. Geneva: United Nations Economic and Social Affairs.

Weisbrot, Mark, Dean Baker, Egor Kraev and Judy Chen. 2001. “The Scorecard on Globalization 1980-2000: Twenty Years of Diminished Progress,” Center for Economy and Policy Research (CEPR), July 11, in www.cepr.net/publications/globalization_2001_07.htm.

Melisa R. Serrano is University Extension Specialist/Researcher in the School of Labor and Industrial Relations, University of the Philippines (U.P. SOLAIR). The article is part of a paper she presented at the International Conference on “Labour and the Challenges of Development”, 1-3 April 2007, University of the Witwatersrand, Johannesburg, South Africa, convened by the Global Labour University. Melisa holds two Masters degrees, one in Labour Policies and Globalization (from the Global Labour University, University of Kassel and Berlin School of Economics) and another in Industrial Relations (from U.P. SOLAIR). Melisa’s present research is on agrarian reform and labor and alternative development.

Putting Short Term Stability Before Long Term Growth: Fifty Years Is Enough

by Ben Fine

This article has been published as a Policy Brief (No. 12) by the Intergovernmental Group of Twenty-Four on International Monetary Affairs and Development (G24). Blog authors are grateful to the G24 for allowing it to reproduce it; copyright remains with the G24.

It is fifty years since Jean-Jacques Polak published his classic article “Monetary Analysis of Income Formation and Payments Problems” in the IMF Staff Papers. This paper provided the theoretical basis for the IMF’s financial programming, and continues to do so today. This is remarkable in and of itself. The world economy has gone through major changes over this period, as have corresponding fashions within economic theory as triumphant Keynesianism gave way to varieties of monetarism in the wake of the collapse of the post-war boom.

We also have had fifty years of development economics, during which there have also been shifting and competing perspectives from modernization through the Washington consensus and beyond, to notions of the developmental state, as attempts have been made to understand why the success of East Asian NICs should contrast so much with achievement elsewhere. Is it credible that across this material and intellectual ferment, the “Polak Model” should remain sacrosanct?

To his credit, Polak’s initial contribution was extraordinarily modest and qualified in its aims. He made it crystal clear that the main problem addressed is a temporary balance of payments deficit in a developing country, this gap usually the result of excessive domestic credit to fill the gap arising out of a fiscal deficit. He presumed that the only reliable data available are those concerning monetary variables, and that the only corresponding policy variable is control of the domestic money supply.

The model only seeks to determine the level of nominal income, with its distribution between the output level and the price level to be determined by some other means. In this respect, in principle, the model is not monetarist since it must violate one or other of the assumptions that prices are fixed (at the world level) or that output is fixed (at full employment). In practice, not without justification, financial programming is heavily associated with the ideology of monetarism because of the pessimistic stance taken on productive potential.

It has targeted balance of payments and/or fiscal deficits with shifting instruments across countries and over time as fixed exchange rates have given way to floating exchange rates, and control of inflation and liberalization of money markets have been emphasized more or less to suit. Today, for example, the IMF is more likely to advise appreciation of the exchange rate to bring down inflation in middle-income countries than to address foreign or fiscal deficits, although these remain a priority for low-income countries, especially in Africa.

One criticism of Polak is his making virtue out of necessity. Even if monetary variables are the only ones that can be measured and controlled, they are not necessarily best for remedial action. A patient with a broken leg is not best treated with a thermometer to take temperature and aspirin to bring it down, even if these are all that is available in the hospital. This apart, Polak can be judged to have appropriately sought, but failed, to constrain the use of his model for purposes for which it was not designed.

He did, for example, refine the model, in a joint article in 1971, by adding extra variables and equations. But, as was explicitly recognized within this contribution, this was nothing more than an elaboration of the Hicksian IS-LM-BP model, standard across every undergraduate textbook.

This prompts three observations. First and foremost, such a model was constructed in the context of developed countries, raising doubts over applicability to developing countries. Second, as has remained the case throughout the life of financial programming, the model cannot address issues of development as its scope is confined to the so-called short run, over which everything to do with development is taken as fixed. Third, it is ironic that the Polak model began to embrace Keynesianism explicitly just as the approach was falling into disrepute with the stagflation of the 1970s.

Significantly, in the second half of the 1980s, the IMF did seek theoretically to reconcile growth or development objectives with short-run macroeconomic adjustment in proposing a marriage between its Polak model and the World Bank’s growth model. Three further observations follow.

First, the model was fundamentally flawed, bound by export pessimism (as if the world economy did not grow) and leading to declining levels of productivity increase over time. In other words, it remained heavily bound to the short run, and essentially to zero per capita growth in the long run. Second, ironically, this was when new growth theory had begun to flourish, suggesting how productivity increase could be generated over time, but the marriage model was bound to old growth theory in which productivity increase is exogenously determined. And, third, Polak reacted strongly against any attempt to forge a marriage between financial programming (confined and only appropriate to the short run) and growth theory. Indeed, in a personal communication commenting on the marriage model, Polak suggests:

My view is that it is not a worthwhile project, and each subject should be approached on its own, provided the practitioners are fully aware of any recommended policies on the other objective (which to be sure has not always been the case between the Fund and the Bank). A possible simile, somewhat limping of course: the jobs of a schoolteacher and a paediatrician are both to do good to a child, and each should be aware of the other … but the professions should remain specialised for greatest efficiency in each field.

This is well and good as far as it goes, but it neatly sidesteps what has been a major criticism of the stabilization policies of the IMF and the structural adjustment policies of the World Bank, the negative impact of what is adopted in the short run on longer run performance. The latter is better seen as attached to an evolving economy over time, rather than as some given equilibrium around which appropriate policies are targeted. Polak, and his model, simply do not address this issue as he is only too aware.

The recent turn to poverty reduction has intensified the failure to observe the reservations that Polak has expressed over the use of his model. The first, and, for some time, the only model underpinning PRSPs uses financial programming as its organizing framework. It does so while assuming that there is a single labour market and full employment, thereby, for the convenience of the model, abolishing the major sources of poverty – unemployment and low wages -- in one stroke. This is even justified on the grounds that the model is universally and conveniently applicable across all countries.

It is certainly not the case that the Polak model for financial programming determines IMF policy. Indeed, it allows for considerable discretion. But it does set a framework within which policy is discussed, one which prioritizes the short term over the long run, and financial functioning and targets over the traditional concerns of development. It is time for a fundamental rethink and a new framework – one both recognizing, rather than subordinating itself to, increasing financial volatility, and genuinely engaging adjustment with developmental goals, with poverty alleviation and growth as starting points, rather than add-ons.

For a fuller discussion, see Ben Fine, "Financial Programming and the IMF", in B. Fine and K.S. Jomo (eds), The New Development Economics: After the Washington Consensus, Dehli: Tulika and London: Zed Press

Ben Fine is Professor of Economics at the School of Oriental and African Studies, University of London, and Director of the Centre for Economic Policy for Southern Africa at SOAS. Recent books include “Social Capital versus Social Theory: Political Economy and Social Science at the Turn of the Millennium” (2001); “Development Policy in the Twenty-First Century: Beyond the Post-Washington Consensus” (2001); “The World of Consumption: The Material and Cultural Revisited” (2002); “Marx's Capital” fourth edition (2004); and “The New Development Economics: A Critical Introduction” (2006). His research interests include "economic imperialism" or the relationship between economics and other social sciences, especially social capital; the material and cultural determinants of consumption, particularly food; privatisation and industrial policy; and development theory and policy.

Brazil's Development Conundrum

by Paulo Gala Currently in Brazil heterodox economists form the majority in President Lula's government. This is a very different situation compared to Lula's first term. Brazilian Keynesians and development economists are now in key positions in the Brazilian Development Bank (BNDES), Finance Ministry, research institutes, at the World Bank and even the IMF. To name a few, Guido Mantega has been historically connected to developmentalism and so have economists in his team such as Nelson Barbosa. BNDES' president: Luciano Coutinho is one of the country's leading industrial policy specialists. Marcio Pochman, Joao Sicsu and a number of others are now the leading thinkers at IPEA: one of the most important government institutes for long term planning and research in the country. The Brazilian representative at the IMF, Paulo Nogueira Batista, is a long time critic of the Central Bank and neoliberal policies in Brazil. The President's small circle of influential advisors are also composed of hetorodox economists. Delfim Netto is a former USP (University of Sao Paulo) professor and was "czar" of the economy during the Brazilian miracle in the seventies. Luiz Gonzaga Belluzo is a former UNICAMP's (Universirty of Campinas) professor and long time critic of neoliberalism in Brazil. Conceicao Tavares is a former UFRJ's (Federal University of Rio) professor and has been advising the President since his first term. But the overwhelming presence of heterodox economists in these influential positions does not mean that developmentalist policies are comprehensively adopted. This is particularly because the central bank remains orthodox with total control over monetary and exchange rate policies. Though quantitatively in the minority these economists remain very powerful because of their close connection to the President and the fears of inflation that still haunt him. As some say, the Central Bank is the bunker of orthodox economists in Brazil today, the ones that survived from Lula's first term. Backed by the Bank's President Henrique Meirelles, these economists have been dictating key pillars of economic policy for a long time now. One cannot find a single economist close to a developmentalist viewpoint on the board of directors of the Central Bank. With a fully orthodox team, the central bank's main objective is to keep inflation under control. The result of this ambiguous composition of government is a twofold economic policy, as some have observed. Dialogue between the Finance Ministry and the Central Bank is harsh, to the extent that it exists at all. Policies adopted by the Ministry usually run in the opposite direction to what economists in Bank are doing. This has reached the stage where in a recent interview Guido Mantega mentioned that for every basis point of interest rate increase by the Bank, the Ministry levies taxes of the same amount on capital inflows to avoid exchange rate appreciation. This tax (the IOF) has been raised to 1,5% this year. It goes without saying that the economists in the Bank couldn't disagree more with these measures. The same phenomenon can be observed with respcet to fiscal policy. Through the new "Plano de Aceleração do Crescimento" (PAC) the central government has been increasing public investment in infrastructure, thus stimulating demand and growth. The Central Bank fears overheating of the economy and has been arguing for budget cuts, particularly with respect to government consumption. Actually, this is where most Brazilian economists seem to be in agreement. A cut in government consumption expenditure (as opposed to investment expenditure) would help manage aggregate demand. It would avoid the negative consequences of further interest rate hikes in the form of exchange rate appreciation and disincentives to investment in tradable sectors of the economy. President Lula doesn't seem to like this kind of reasoning, though. On April 16th, the Brazilian Central Bank decided again on the level of interest rates. There is a wide consensus among economists in the financial sector that the rate should be raised by at least 0.25 bps. According to some, inflation might be going out of control again. There is a chance that the target of 4.5% per year imposed by our inflation targeting system will not be met. According to the economists in the Finance Ministry there is no need to increase short term rates now because capital accumulation is growing strongly in the country (15% per annum). Installed capacity will increase in the near future which is the main guarantee for keeping inflation rates under control in the long term. But once again, the Central Bank and development economists don't agree on this. In conclusion, it seems fair to say that economic policy in Brazil has been split by the president into two often contradictory parts. The developmentalists in the Finance Ministry manage fiscal policy and the orthodox economists in the Central Bank manage monetary and exchange rate policies. The outcome of this arrangement will be neither developmentalist nor monetarist. Rather it will result in moderate growth and moderate inflation.

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Paulo Gala received Master and PhD degrees in Economics from the Sao Paulo School of Economics, Getulio Vargas Foundation. He is the author of several papers, articles and book chapters on the following subjects: Macroeconomics, Development Economics and Economic Methodology. Currently, he is a professor at the Sao Paulo School of Economics, Getulio Vargas Foundation.pgala3@gmail.com