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THIRD WORLD GROWTH Thea Lee Trade Economist Robert Scott Research Associate Economic Policy Institute Washington, D.C. Paul Krugman attacks tbose who argue that international-trade and investment flows, particularly with the Third World, have hurt employees in the industrialized nations ("Does Third World Growth Hurt First World Prosperity?" July-August I994|. Krugman implies that people who raise this issue are selfish, in that tbey begrudge economic growth to impoverished Third World nations, and, at the same time, not very smart, since Third World progress is at least as likely to help workers in the First World as it is to hurt them. Krugman's case falls short on several counts. First, the opponent he rails against is a straw man. Most critics of the free-trade agenda do not see Third World productivity growth or wage growth as a prohlem. The issue is, rather, that the form of competition between the First and tbe Third Worlds has in many cases driven down wages, working conditions, and environmental standards toward Third World levels. Second, Krugman inaccurately summarizes the theoretical models he presents to make his case. Tbird, his generalizations about empirical results do not reflect the consensus within the eeonomics profession. It is not even clear that Krugman's prescription of free trade is the best medicine for Third World growth. By many measures, in faet, developing nations grew more before they adopted free-trade policies. According to the World Bank, per capita gross domestic product in the Third World rose 4.3% annually from 1965
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to 1973. But during free trade's ascendaney, from 1980 to 1991, per capita GDP grew only .9% annually. Such figures should at least raise questions about the value of Krugman's growth prescriptions for the world's poor. In arguing that low-cost labor in tbe Third World poses no threat to workers in industrialized nations, Krugman presents four models, each with an added layer of complexity. It is worth noting that only in the first model-a world with no eapital, no markets, and no trade-is it clear that workers in the industrialized world are not hurt hy low-cost lahor in the Third World. In the seeond model, the result is ambiguous. In the two last and most realistic models, Krugman himself concludes that, in theory, workers in tbe industrialized world will he hurt. Yet he summarizes by saying, "The view that competition from the Third World is a major prohlem for advanced countries is questionahle in theory [emphasis added] and flatly rejected by the data." Krugman's third model presents a world where capital is mobile. Theoretically, it predicts that capital would flow from the industrialized world to the Third World, making workers in the industrialized world worse off. Model four presents a world with two types of labor and predicts that the relative wages of less educated workers in industrialized nations would fall as a result of competition with Third World workers. Krugman notes both tbese theoretical conclusions but claims that in practice, trade with, and capital fk)ws to, the Third World have been too small to be of any consequence in the industrialized world. There are several prohlems with this analysis. Krugman seems to believe that the quantity of capital is the only factor that affects domestic productivity. In fact, companies

have made large prt)ductivity gains through reorganizing their workplace in ways that allow the fuller utilization of employees' knowledge and skills. However, hecause this option requires a significant time commitment and some risk, many short-sighted managers prefer the alternatives: either hiring low-wage workers in the Third World or battering down wages through the threat to move. Xerox, which had been a leader in developing higb-performanee work systems, recently went the latter route when it coerced major concessions from workers at a plant in upstate New York by threatening to move overseas. The eoncessions will increase profits, at least temporarily, but will also end cooperation. Xerox's coerced concessions will mean lower wages for workers in the short run and lower productivity growth in tbe long run, even though no capital moved to the Third World. Since 1979, productivity growth has exceeded real hourly compensation hy more than 10%. Since compensation usually tracks productivity very closely, the increased

bargaining power of employers that has heen created hy the availability of cbeap Third World lahor has to he considered as a possible explanation for this divergence. Anotber set of empirical questions arises from Krugman's fourth model, which indicates that less edueated workers should he hurt hy increased trade with the Third World. Since wages of high school graduates have fallen by about 20% since 1979 relative to those of college graduates.
NdVL-mbcr-Dccemhcr 1994

HARVARD BUSINESS REVTEW

formerly the Agile Manufacturing Enterprise Forum. 9.8% of GDP. the world trading system discriminates against workers. It is not implausible that imports of this volume would bave contributed to the growth in the ' wage gap between college and noncollege educated workers. was murdered after leading her coworkers in a protest against the failure of her watch-factory owner to follow Indonesia's own labor laws.. in a strong statement that differs from the Malaysian government line. hut I don't think he ean look in my mind and read my motives. hecause as it is now constituted. While the data are not conclusive. PA 180151582. In South Asia. among others. Representatives from service industries as well as manufacturing should attend. 8. children as young as 10 or 11 are working six and seven days a week in sweatshops producing garments mostly for U. and some have the courage tu do so publicly. 2. production supervisors. 4. such as Sri Lanka. metrics and pilots for keeping American enterprise competitive in a global marketplace. Novemher-Deccmher . that if some minimal standards were adopted and enforced. strategists. has come out in favor of GATT standards. contact Kathleen Dillon at 200 W. Across the world.9% of manufacturing value added. But preventing that abuse is precisely the raisnn d'etre of GATT. change agents. GNP and GDP figures hide the widening gaps hetween the rich and the poor. customers. But. fax (610) 694-0542. and over 10. For example. imports from developing countries were 3. engineers. to democratic countries with more humane work conditions. Packer Ave. Kenneth P.S.S. the most outspoken being authoritarian governments in Asia. the opposition he cites is from the governments of Third World countries. both local and foreign elites arc getting richer from the exploitation of the most vulnerable. Georgia LEARN HOW to transform your organization into an Agile enterprise. Jobs now in developing countries will stay there. phone 1-800-9BE-AGILE. 1995 Stouffer Waverly Hotel Atlanta. In 1992. Bethlehem. especially those in the Third World. and [effrey Sachs. Richard Freeman." As a matter of fact. Krugman errs in believing that proposals for GATT rules on workers' rights are nothing but devious devices for "protectionism. however. U. it is the U. Metrics and Pilots March 7.trade seems to have had its predicted effect. 3. such as Ghina. the Malaysian Trades Union Gongrcss. all will leam how Agile thinking impacts the bottom line. For registration and hotel information. Krugman erroneously attributes the opposition to standards to devel(tping countries. America's leading Agility experts will be presenting the most current models. Paul Krugman is an economist of considerable vision. In Indonesia last year. Krtigman is correct in hailing the enormous potential benefits from economie growth. Yet that is the mystical power he assumes when he aceuses people hke me of promoting "protectionism in the guise of humanitarian eoneern. Hutchison Executive Director Asian-American Eree Labor Institute Washington. there might be some job shifts from countries with repressive regimes. It is true. Who should attend? CEO's.G. Even in those countries. have pointed in this direction. but he mistakenly assumes that economic growth and economic development are the same thing. D." He objects to the renewed effort to make the global trading system-as safeguarded by the General Agreement on Tariffs and Trade [GATT) and the new World Trade Organization (WTO)-take into account workers' rights instead of only businesspeople's. There is no way that international labor standards ean take away the competitive advantage that poor countries gain from their low-wage levels. The Fourth Annual Conference on Agility is hosted by the industryled Agility Forum. The new GATT agreement goes to AGILITY FORUM Surviving and Thriving in the 21st Century at the Fourth Annual Agility Forum Conference CREATING THE AGILE ENTERPRISE: Models. In reality. a 23-year-old woman. since the United States alone has seen the development of the large wage gap. Recent studies by Lawrence Katz. Krugtnati dismisses this possibility by noting that the Organization for Economic Cooperation and Development's trade with the Third World amounts to approximately 1 % of its GDP. almost imy one of the 28 sets of eomplex new rules included in GATT can he used as instruments for blocking imports. trade figures that matter. CFO's. Marsinah. no responsible economist could dismiss the possibility that eompetition with low-wage labor has contributed to the growth of wage inequality in the United States. But his argument for low-wage competition and against international standards on wages and working conditions are wrong on the following counts: 1. howHARVARD BUSINESS REVIEW ever.S. people concerned about freedom and human rights often disagree with their government's position. It's no wonder.

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