Trade, Jobs and Growth: Why You Can't Have One Without the Others, Address by Anne O. Krueger, First Deputy Managing Director, IMF
June 15, 2004Trade, Jobs and Growth: Why You Can't Have One Without the Others
Address by Anne O. Krueger
First Deputy Managing Director
International Monetary Fund
Reuters Trade, Globalization and Outsourcing Conference
New York City, June 15, 2004
Good morning, and thank you, Tom, for that kind introduction. I am very pleased to be here today: the issues you have chosen to focus on are important, even crucial, for the future growth prospects of the world economy.
I confess that I don't often allude to Frank Sinatra in my public statements. But when I was asked if I would talk about trade and jobs and growth, I thought immediately of that well-known song. That's not as eccentric as it first appears. Because the links between trade, jobs and growth are extremely close—just as close as love and marriage or, indeed, a horse and carriage. And it is not just that these three issues are closely linked, but that they are connected in an interdependent way that makes the parallel with the Sinatra song so apt.
I want this morning to examine how the relationship between trade, jobs and growth works; and say something about the importance that, taken together, these three variables have for future global prosperity. I take as given the objective that we want to extend the benefits of growth as widely as possible. Our aim in the twenty first century should be to build on the economic progress achieved in the twentieth century—to raise living standards for everyone and to reduce poverty.
The historical context
So let me begin by putting the discussion in an historical context.
What we're really talking about here is globalization—by which I mean the rapid integration of the world economy. It is, I think, the `G-word' that has made trade, jobs and growth so topical and, in recent years, so controversial. But there has been globalization, and positive interaction between these three variables, for thousands of years.
The early traders around the Mediterranean knew all about the benefits of trade, and the employment it creates, and the growth it brings. So did Marco Polo; and the founders of the East India and Hudson Bay companies that did so much to make the world seem a smaller place.
But it was in the nineteenth century that the global economy started to grow rapidly. The industrial revolution that had started in Britain in the eighteenth century—and that had ensured Britain's place as the pre-eminent trading power of the age—spread rapidly across Europe and America. International trade and economic growth seemed spectacular—and were by the then historical standards: fuelled by technological advances in transport, communications and productive capacity.
Technological progress brought dramatic falls in costs. Look at some of the figures. It cost 177.5 pence to ship a quarter (eight bushels) of wheat from Chicago to Liverpool in 1868; by 1902, that same shipment cost little more than one fourth of that (46.5 pence). Coupled with tariff reductions, falling transport costs brought a significant boost to trade.
The process of rapid globalization started in the nineteenth century ground to a sudden halt after the First World War. The upheavals of that war, and the political chaos in much of Europe undermined the international framework that had encouraged international trade and capital flows.
The depression of the thirties was accompanied by damaging unilateralist policies that reinforced the downward cycle and made recovery much more difficult. The Smoot-Hawley Act of 1930 ensured that American tariffs were among the highest in the world. Then there was Britan's Imperial Preference. The beggar-thy-neighbor approach to international economic relations gained a strong hold, and at the very least intensified the Great Depression.
Even then there were advocates of free trade who fought hard to reverse the unilateralist approach, just as the nineteenth century opponents of the Corn Laws had done. Foremost among these was Cordell Hull, who later became Franklin Roosevelt's Secretary of State. In the early 1930s, though, the protectionist momentum, and the consequent damage, was unstoppable. As tariffs rose, trade flows contracted, international capital flows shrank, and real wages and employment fell.
Protectionists, always masters of self-delusion, blamed these policies on the consequences of economic contraction. The truth is quite the opposite. Curbing the mobility of goods and capital hampered economic recovery and compounded the problems of collapsing investor confidence and mis-guided fiscal and monetary policies.
The postwar surge in growth
The architects of the postwar international economic system were absolutely determined to avoid a repetition of the interwar years. The founders of the Bretton Woods institutions wanted to establish a stable international financial order. But not as an end in itself. On the contrary, the authors of the Bretton Woods agreement—finalized sixty years ago next month by the way—had already realized that trade, jobs and growth were wholly interdependent. They also knew that economic prosperity needed a liberal expansionary trading system; and that this could not happen in the absence of a stable financial system.
Alongside international financial reform came reform of the trading system. The establishment of the General Agreement on Tariffs and Trade (GATT) was based on the principle of gradual liberalization of trade, through the elimination of non-tariff barriers and reductions in tariffs. The IMF's role in this was to provide international financial stability without which countries would not have been able to take full advantage of this liberalization.
The results of this new framework exceeded expectations—the postwar period was truly a golden age for much of the world economy. Between 1946 and 1973 we saw growth rates worldwide that made the achievements of the nineteenth century seem modest. America saw per capita GDP growth averaging 2.4% between 1950 and 1973, Germany 5%, and Japan more than 8%. Inflation was a little higher than we've recently grown used to—but only a little—while unemployment was much lower than even America has recently managed. Jobs, and job creation, came to be seen as an important area of government activity. And developing countries achieved rising per capita incomes at rates far in excess of those realized historically.
Golden age it may have been, but the benefits of globalization had only begun by 1973. Impressive though most countries' growth performance had seemed at the time, and in historical perspective, this turned out to be no more than a foretaste of what was to come for the newly-industrializing countries. Following the success of Korea and the other original `tigers', most of the Asian economies grew at annual rates of 7%, 8% or more between 1985 and 1994, for example. China averaged GDP growth of more than 10% a year during that period, according to official Chinese figures.
Some economies have been transformed in the post war period. We're all familiar with the rapid growth of China as a force in the global economy, based on large part in opening up the economy to international trade. But look, too, at South Korea: its per capita income rose almost sevenfold between 1962 and 1992. In growth terms, Korea achieved in a decade what Britain had managed in the whole of the nineteenth century. The third poorest country in Asia became one of the region's richest.
Even India, slow at first to engage with the world economy, has recently enjoyed very good economic performance: in the 1990s, following the first significant wave of economic reforms, it averaged GDP growth of about 6% a year, making it one of the rapidly-growing of all developing economies in that period.
Just as in the nineteenth century, technology is part of the explanation for the postwar surge in growth. So is the rapidly falling cost of transport and communications. In 1930, a three minute phone call from New York to London cost $293 in 1998 prices. It's now possible to make the same call for a few cents. And of course, many of the latest communications technologies—the internet, for instance—have no clear historical parallel. Transportation costs have plummeted too. The cost of air freight (as measured by average revenue per ton-kilometer) fell by 78% between 1955 and 1996.
The rapid growth of world trade after 1945 was partly a response to these falling costs. But it was also the result of the reduction of tariff and non-tariff barriers: average tariffs on manufactured imports were over 40 percent in l947 and less than 5 percent by the late l990s in the European Union, the United States, and Japan. They had also fallen dramatically in many other countries. And the quantitative restrictions that both Japan and the countries that became the EEC had gone.
At the start of this new century, world trade was worth around $8 trillion—25% of global GDP. That's up from $1.5 trillion, in comparable dollar terms, in 1970, 13% of world GDP. For most of the postwar period, trade in manufactured goods grew more rapidly than industrial production; and world trade in total grew more rapidly than world GDP.
Trade was thus a major engine of world economic growth; even those countries that did not significantly liberalize their trade regimes experienced more rapid growth than they would have had the world economy not been liberalizing.
This brief overview conveys two things. First, that globalization—the interaction, if you like, of our three variables—has delivered some impressive results. And second, that the relationship between trade, jobs and growth is very close indeed. You really cannot have one without the others.
Take trade. I've already noted that trading activity—and its benefits—can be traced almost as far back as human civilization. In more primitive times, trade was largely a matter of buying and selling food. As economies developed, basic manufacturing activity generated trade as well. Adam Smith's maxim explains the benefits to be had from trade: "if a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it of them with some part of the produce of our own industry, employed in a way in which we have some advantage."
But with modern industrial economies, more complex factors are at work as well. Much of the trade among advanced industrial economies is intra-industry trade: countries often import and export the same group of products. One motivation for this is that producers of manufactured goods have some fixed and some variable costs. The larger the market, the more producers can drive down their total costs, and so become more competitive. The consumer gains from this because competition also helps drive down costs; and it provides access to greater choice.
Trade brings economic growth. The experience of the postwar period offers convincing evidence of this. And we can see for ourselves that the multilateral trading system established alongside the Bretton Woods institutions has been critical both for the expansion of trade that took place after 1945 and for the growth that most of us take for granted.
Just look at the example of the European Union, which started life as the European Economic Community (EEC). The impressive economic performance of the founding members of the EEC enjoyed in the first few decades of its existence partly reflected the increase in intra-EEC trade—a direct result of the creation of a free trade area. But these countries also experienced rapid growth because the EEC's external tariff barriers were progressively lowered, leading to an increase in trade with the rest of the world as well.
The evidence that trade liberalization brings great benefits is overwhelming. Yes, it is far better to have multilateral trade liberalization: that was the clear intention of the postwar economic settlement. But even unilateral trade liberalization brings significant benefits for the country undertaking the liberalization. In the nineteenth century debate on the Corn Laws, Richard Cobden talked about free trade being theoretically right and right in the abstract: he urged his fellow-parliamentarians to apply this truth. But we in the twenty-first century have ample evidence to support the theory.
Opposition to free trade is therefore difficult to understand. I am not just talking about the anti-globalization protesters here, though their arguments clearly underline the extent to which we need to work harder to persuade them of the merits of the free trade case.
We also need to work harder to convince those policymakers who so often pay lip service to the principle of free trade, but continue to pursue protectionist policies. There continues to be an unwelcome gap between what some policymakers say and what governments do.
Protectionists fret about jobs lost to foreign competition. They urge governments to impose barriers—either tariffs or other forms of protection. We know that when such barriers are imposed, the costs of protecting jobs can be absurdly large. It has been estimated, for example, that each one of the 2,300 jobs saved in the American sugar industry through barriers to imports in the 1990s cost around $800,000 per year. Similar results would come from calculating the impact of European Union or Japanese—or Swiss—trade barriers. Or take the 216 jobs saved by protection for the US benzenoid chemical industry—almost $1.4 million per year per job.
Of course, some jobs will be lost through trade, just as some firms lose out because they are not sufficiently competitive. That this is so is not a new development, of course. Some skills inevitably become obsolete. That is where social safety nets come in, to help those affected get financial assistance, job retraining, and so on. Expensive job protection is not the answer.
Protection itself costs jobs. One important reason why protectionist pressure so often succeeds is that it is easy to see where a job, or jobs, might be lost because of change, but virtually impossible to see where new jobs might have been created because of the new opportunities that technology or trade might bring.
But protection imposes costs on producers, specifically those geared to export production. Protection for one industry, by raising the price of that industry's output, will raise the costs of producers that consume that good as part of their production process. Higher steel prices affect automakers, and producers of domestic appliances; higher textile prices raise the cost of clothing production.
Thus, by raising the cost of some (protected) intermediate products, protection enables producers in other countries to compete more effectively and so disadvantages exporters in the country providing protection for one or more of its import-competing industries. And in this way, it penalizes a worker who might otherwise find more highly-paid employment in an export industry that would expand in the absence of trade-distorting policies.
One of the most puzzling aspects of the debate on free trade is why trade is singled out as an agent of change that has to be fought against. Far more jobs are lost through technological change, for instance. Many of these job losses are hidden, in the sense that it is easier for an industrialist to argue that this or that factory has been closed, or its workforce reduced, because of the pressure of international trade—or "unfair foreign competition"—rather than acknowledge that the change was in response to technological advances, poor management, or other factors.
I know outsourcing is on the agenda for later to day. I don't want to anticipate that discussion. But I would like to make on point in the context of the current debate over the alleged cost that outsourcing has imposed on the US economy. Many pages of newsprint have been devoted to the job losses suffered because American companies are, for example, switching their back-office operations overseas. But outsourcing works both ways. Recent research at the IMF suggests that the US is a net exporter of outsourcing services, because of American strengths in fields such as law and banking.
Growth and low income countries
The more open an economy is to trade with the outside world, the better are the growth rates that will result. There is clear evidence for this. Just to take one example, cited in the latest Economic Report of the President, issued in Washington earlier this year. This is the study by Warcziarg and Welch of 133 countries between 1950 and 1988. Countries that liberalized their trade regimes enjoyed annual growth rates about one half of one percent higher after liberalization. And opening up to international trade has become increasingly important: removal of trade barriers during the 1990s raised growth rates by 2.5% a year.
A liberal trade regime is a vital element of the macroeconomic framework needed for sustained rapid economic growth. There is a tendency among those opposed to free trade or globalization to play down the benefits that economic growth can bring. Yet without economic growth we will not achieve the objectives that most of think as desirable—rising living standards for all, and falling poverty rates, especially in poor countries.
Just look at the benefits of the postwar surge in growth. I mentioned the pace at which many economies grew after 1945. But it isn't just a question of macroeconomic statistics. Economic growth has a direct—and beneficial—impact on people's daily lives. Look at some of the improvements we can see in the quality of life around the world.
Infant mortality rates have declined sharply. In East Asia and the Pacific, for example, they dropped by nearly 60%, to 39 per 1,000 births, between the 1960s and the 1990s. Literacy rates have risen worldwide,to around 80% for men and 70% for women. In India, the proportion of the population living in poverty is estimated to have dropped by about one third during the 1990s alone.
Perhaps most striking of all is the improvement in life expectancy in the developing world. It now averages 65 years, up from 40 years half a century ago. And the gap between life expectancy in the developed and developing world has narrowed, from 30 years in 1950 to around 10 years today, because life expectancy has increased more in most poor countries.
Why would we want to hinder the process by which this came about? One of the problems in the current debate about globalization is the confusion between redistribution and growth. Poverty reduction can only be achieved and sustained over a long period by growth—by making the cake bigger. Arguing about how to cut the cake in a different way will not, in the end, help a large number of people very much.
We also need more focus on job-rich economic growth. By that I mean that in some populous countries in particular, we need to do more to encourage the growth in demand for unskilled jobs. Take India, for example. Here is an economy that has performed well in the area of hi-tech software and back-office operations for companies around the world. Such success is welcome, and it has made an important contribution to the improvement of Indian economic performance.
But India also needs the sort of investment that will provide large numbers of unskilled and semi-skilled jobs, in order to provide employment for a larger portion of its workforce. Pressing on with the reforms started in the 1990s, taking further steps to open up the Indian economy to trade with the rest of the world, and creating a climate that encourages foreign investment will help deliver that jobs-rich growth.
This is not to argue that governments in general should take an active role in creating jobs and directing the economy. There is no evidence that they can do this better than the private sector; just look at the history of governments that, for example, have tried to preserve or create jobs by picking industrial winners. This has simply increased the burden on taxpayers—more often that not in both the short-term and the long-term.
What governments can do, though, is create the right conditions for job-rich investment to take place. That means sound macroeconomic policies. It means the elimination of trade-distorting subsidies and protection. It means trade liberalization.
This is even more important for developing countries than it is for the industrial economies. Developing countries impose much higher tariff barriers on each other than those imposed by the rich countries on poor ones. It is developing countries that will be the principal beneficiaries of a successful conclusion to the Doha round: the World Bank estimates that around two thirds of the benefits from an agreement will accrue to developing countries.
And these benefits are clearly worth having. Estimates of the total gains from a Doha round agreement range from several hundred billion dollars to one trillion dollars over the next decade or so. There is a great deal at stake, and the recent, more encouraging signs from those involved in the WTO negotiations are warmly to be welcomed.
The IMF's role
At the IMF, we have been doing all we can to encourage the process of trade liberalization, and to support it. We recently launched a new initiative, the Trade Integration Mechanism (TIM), that we hope will help reassure those countries afraid of the short-term costs of trade liberalization. The benefits of further liberalization will be overwhelmingly positive, of that we have no doubt. But some countries might need time, and assistance to adjust, and we don't want a successful outcome put at risk because of their anxieties.
The TIM is an example of how the Fund can act as a facilitator of globalization. By promoting international financial stability, and by encouraging our 184 members to pursue sound macroeconomic policies, we aim to enable everybody to enjoy the benefits that globalization brings. It is perhaps worth reminding you of the Fund's Articles of Agreement; and in particular, that part of Article One that encapsulates why we do what we do; and that is relevant to the discussion here today.
It is the Fund's task, the article says, to:
facilitate the expansion and balanced growth of international trade, and to contribute thereby to the promotion and maintenance of high levels of employment and real income...as primary objectives of economic policy.
We carry out our duties in a number of ways: through our regular surveillance of member country economic policies; through the provision of technical assistance on a wide range of matters; and through the provision of short-term financial assistance. Promoting sound policies, and helping our member to pursue them, is all part of our work on crisis prevention: we aim to reduce the risk and incidence of financial crises.
We will never prevent every crisis, of course, and we cannot know with any certainty where trouble will strike. But although our aims remain the same, the way we seek to fulfill those objectives are under constant review. The global economy is evolving, and we must change too. Thus, for example, we now pay far more attention to debt sustainability in our surveillance exercises. We provide technical assistance on a much wider range of issues—encompassing institutional, legal and tax reforms, for instance—than we did even a few years ago. We have learned that such issues have a vital role in helping deliver the macroeconomic stability that is a perquisite for rapid and sustainable growth.
In the short-term, economic growth is possible without full trade liberalization. But the outcome will be slower growth than would be possible in a more open trading regime. And there will be longer-term consequences. Firms will believe they are in an unfair situation in seeking to compete (and they will be partly right because of the market-distortions that protection involves). And those firms will, in turn, seek protection for themselves—it is easier, if they succeed, than cutting costs to make themselves more competitive.
To maximize employment opportunities, an economy needs both growth and open trade. To maximize growth opportunities, trade liberalization is vital. That is why it is so important both that progress is made in the Doha round and why it is essential to persuade the skeptics of the economic benefits that free trade can unlock—for everyone.
Taken together, trade, jobs and growth really are a winning combination, offering the best prospect of rising living standards and poverty reduction. But you really can't have one without the others.