Trade, Jobs and Growth: Why You Can't Have One Without the Others, Address by Anne O. Krueger, First Deputy Managing Director, IMF
IMF News, June 15, 2004
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- Published: June 15, 2004
Historical context and long-run patterns
- Globalization (the rapid integration of the world economy) links trade, jobs and growth in an interdependent way.
- Nineteenth century: technological advances in transport and communications dramatically reduced costs (examples below) and, coupled with tariff reductions, boosted trade.
- 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).
- Interwar period: unilateral protectionism (Smoot-Hawley Act of 1930, Imperial Preference) contributed to contraction in trade, capital flows, real wages and employment.
- Postwar settlement (Bretton Woods and GATT) deliberately linked financial stability and gradual trade liberalization to support jobs and growth; the IMF’s role was to provide international financial stability to enable countries to benefit from liberalization.
Postwar surge in growth — evidence and magnitudes
- Between 1946 and 1973 global growth rates exceeded nineteenth-century achievements.
- America: per capita GDP growth averaging 2.4% between 1950 and 1973.
- Germany: 5%.
- Japan: more than 8%.
- Rapid growth in newly industrializing and Asian economies (examples):
- Many Asian economies grew at annual rates of 7%, 8% or more between 1985 and 1994.
- China averaged GDP growth of more than 10% a year during that period, according to official Chinese figures.
- South Korea: per capita income rose almost sevenfold between 1962 and 1992.
- India: averaged GDP growth of about 6% a year in the 1990s after reforms.
- Technology and falling transport/communication costs:
- In 1930, a three minute phone call from New York to London cost $293 in 1998 prices; today the same call can be made for a few cents.
- Cost of air freight (average revenue per ton-kilometer) fell by 78% between 1955 and 1996.
- Trade expansion statistics:
- At the start of the new century, world trade was worth around $8 trillion—25% of global GDP (up from $1.5 trillion in 1970, 13% of world GDP).
- 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.
Trade: mechanisms and benefits
- Trade increases market size, spreads fixed costs, intensifies competition, lowers costs, and expands consumer choice (intra-industry trade is important in advanced economies).
- Historical and empirical evidence indicates trade liberalization fosters growth.
- Multilateral liberalization preferred, but unilateral liberalization also delivers significant domestic benefits.
- Example of broad empirical findings:
- Warcziarg and Welch study (133 countries, 1950–1988): countries that liberalized their trade regimes enjoyed annual growth rates about one half of one percent higher after liberalization.
- Removal of trade barriers during the 1990s raised growth rates by 2.5% a year.
Jobs: adjustment, protectionism costs, and policy implications
- Protectionist measures to save jobs are often extremely costly per job:
- Each of the 2,300 jobs saved in the American sugar industry through barriers to imports in the 1990s cost around $800,000 per year.
- The 216 jobs saved by protection for the US benzenoid chemical industry cost almost $1.4 million per year per job.
- Some jobs are lost because of trade, but many more job losses result from technological change, poor management, or other non-trade factors.
- Protection imposes indirect job costs:
- Higher prices for protected intermediate goods raise costs for domestic exporters and producers who use those inputs, disadvantaging export industries and potentially costing more and better-paid jobs.
- Policy responses:
- Expensive job protection is not the answer. Instead use social safety nets (financial assistance, job retraining) to help affected workers adjust.
- Governments should avoid picking industrial winners; their role is to create conditions conducive to job-rich investment rather than directly creating jobs.
Growth and low-income countries: job-rich growth and distributional considerations
- Greater openness to trade correlates with better growth rates and poverty reduction.
- Selected development indicators and improvements associated with growth:
- Infant mortality rates in East Asia and the Pacific dropped by nearly 60%, to 39 per 1,000 births, between the 1960s and the 1990s.
- Literacy rates worldwide: around 80% for men and 70% for women.
- India: proportion of the population living in poverty estimated to have dropped by about one third during the 1990s.
- Life expectancy in the developing world now averages 65 years, up from 40 years half a century ago.
- Gap in life expectancy between developed and developing world narrowed from 30 years in 1950 to around 10 years today.
- Need for job-rich growth in populous low-income countries:
- Example: India needs investment that generates large numbers of unskilled and semi-skilled jobs in addition to hi-tech and back-office gains.
- Policies to support this: continue reforms, further open the economy to trade, and create a climate that encourages foreign investment.
- Distribution vs. growth: sustainable poverty reduction requires growth (making the cake bigger), though accompanying redistribution policies matter.
Global negotiations and quantitative stakes
- Developing countries impose higher tariff barriers on each other than those imposed by rich countries on poor ones; successful Doha Round would mainly benefit developing countries.
- World Bank estimate: around two thirds of the benefits from a Doha agreement will accrue to developing countries.
- Estimated total gains from a Doha round agreement range from several hundred billion dollars to one trillion dollars over the next decade or so.
The IMF’s role and initiatives
- The IMF promotes trade liberalization by:
- Facilitating international financial stability so countries can take advantage of liberalization.
- Surveillance of member economic policies, provision of technical assistance, and short-term financial assistance.
- New initiative: Trade Integration Mechanism (TIM) designed to reassure countries concerned about short-term adjustment costs from trade liberalization.
- Institutional context and mandate:
- The Fund’s Articles of Agreement assign it 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.”
- Internal changes at the IMF:
- Greater attention to debt sustainability in surveillance.
- Expanded technical assistance (institutional, legal and tax reforms) to help deliver macroeconomic stability.
- IMF membership and reach:
- The Fund encourages sound macroeconomic policies among its 184 members.
Policy recommendations and conclusions
- Key prescriptions:
- Pursue trade liberalization to maximize growth and employment opportunities.
- Use social safety nets and retraining to ease short-term adjustment costs rather than resort to costly protection.
- Governments should create a stable macroeconomic environment, eliminate trade-distorting subsidies and protection, and encourage investment to support job-rich growth.
- Conclude a successful Doha round to deliver large gains (notably for developing countries); support mechanisms like the TIM to manage short-term adjustment concerns.
- Central conclusion:
- Trade, jobs and growth are mutually dependent—“you really can't have one without the others”—and together they offer the best prospect of rising living standards and poverty reduction.
Address delivered at the Reuters Trade, Globalization and Outsourcing Conference, New York City, June 15, 2004.