Beginning of the end for WTO

By Bharat Jhunhunwala

NEW DELHI (JP): The debate about global trade in the days following Seattle's WTO conference has continued with the assumption that globalization is fundamentally beneficial for the people of the world. The discussion too often neglects that globalization also implies the global equalization of wages.

Given the abundant supply of labor in the developing world, global wages level out with those prevailing in the poorest countries. As a result, the standard of living for workers in industrial countries will decline while those in developing countries may not increase much.

It is only through protectionism that industrial countries can provide higher wages to their workers. Since most industrial countries embrace democracy, they will find it increasingly difficult to persuade their voters to accept both free trade and lower wages. Globalization or democracy -- one will survive. The two are not compatible.

It is true that free trade would lead to an enhanced demand for products in countries with comparative advantages. Increased demand and investment would boost productivity and lead to an increased demand for labor which, in turn, would lead to increased wages.

This last step, however, is where the problem lies. Wages are determined not by demand alone but by supply as well. If the supply is elastic, an increase in demand will not result in an increase in wages. The number of jobs may increase but not the wages. The beneficial impact of globalization can be entirely nullified by an inexhaustible supply of labor.

Perhaps an historical example would make the point. Labor productivity increased manifold subsequent to the introduction of iron tools in ancient Greece. Those technological developments were no less exciting than those of the Internet today. It was also an era of globalization with Alexander's empire stretching widely across Asia.

But did increased productivity and technological developments lead to an increase in the wages of the common man? No. J.D. Bernal writes in his seminal work Science in History: "The beauties of the Greek cities, temples, statues and vases blind us to the fact that the way of life for most people in civilized countries at the fall of the Roman Empire was much what it had been 2,000 years before when the old bronze age civilization had collapsed." Alexander's globalization brought no improvement to the conditions of the Greek laborer. What then gives us the idea that present era will prove any different?

There is evidence that the same process is afoot today should we care to look at it. The Economic Report of the President, 1998, acknowledges that labor productivity in the United States increased at an average rate of 1.1 percent between 1988 and 1997, but wages declined by 0.3 percent every year. If the increase in productivity and demand was sufficient to secure an increase in wages, why should they then have declined?

Technological developments in transportation complicate the equation. The difference in the wages for an Indian and for a US steel worker are determined by the cost of transporting the steel. As the same is reduced, so also will the wage differential. No wonder US steel workers registered their protest in Seattle by dumping a bicycle made from Asian steel into the sea.

The woes of American software engineers can be attributed to satellite technology which enables Indian engineers to work for American corporations while living in India.

The US demand for the inclusion of labor standards emanates from the inability of US corporations to compete with cheap Asian imports. The reluctance of the European Union to dismantle farm subsidies emanates from their desire to prevent a reduction in incomes for their farmers.

It is only by heavily taxing cheap Asian steel imports that US steel makers will be able to pay the current high wages. Such protectionism, and free trade, enables the people of industrial countries to maintain their current high standards of living.

That, of course, does not hold up for businesses in industrial countries. They may indeed benefit from the investment opportunities that will open up across the globe. But higher profits for businesses will not translate into higher wages for workers, courtesy of the global equalization of wages.

Industrial countries have so far succeeded in persuading their people to vote for globalization by stressing that new jobs will be created in hi-tech industries. In our analogy, however, the ancient Greek industry of hi-tech iron tool and weapons was sustained, but only for a short while. This economy was eroded when other countries caught up with their iron technologies.

Human history tells us that technological advances occur in spurts followed by long periods of near stagnation. It took 2000 years to evolve from the ancient Greek iron industry to the invention of the steam engine. Within brief periods, it is indeed possible for industry pioneers to pay high wages. But as soon as other countries or competing industries catch up, the wages in the pioneer economies come crashing down to the global averages.

American software engineers and steel workers are realizing that while they are losing their jobs, not many other jobs are being created in the so-called frontier technologies. The pressure for protectionism therefore will mount. If democracy survives, people of the West will demand protectionism and not free trade. One would not be surprised if Seattle proves to be the beginning of the end of the World Trade Organization.

The writer obtained his PhD in economics from University of Florida. He taught at Indian Institute of Management. Presently he is a freelance columnist based at New Delhi.