Monday, October 3, 2016

Developing world needs jobs and entrepreneurship, but much more of the former

More on the globalisation theme. Does free trade and globalisation, with its accompanying sweatshops, increase incomes and welfare? Is globalisation good or bad for the poor? One would have thought that the rise of China was proof enough to settle the debate.

Chris Blattman and Stephan Dercon may have re-ginited the debate with their results from a randomised control trial (RCT) from Ethiopia. Their six year study presents inconclusive evidence on the beneficial effects of trade and investments on host developing country populations, 
As low-income countries industrialize, workers choose between informal self-employment and low-skill manufacturing. What do workers trade off, and what are the long run impacts of this occupational choice? Self-employment is thought to be volatile and risky, but to provide autonomy and flexibility. Industrial firms are criticized for poor wages and working conditions, but they could offer steady hours among other advantages. We worked with five Ethiopian industrial firms to randomize entry-level applicants to one of three treatment arms: an industrial job offer; a control group; or an “entrepreneurship” program of $300 plus business training. We followed the sample over a year. Industrial jobs offered more hours than the control group’s informal opportunities, but had little impact on incomes due to lower wages. Most applicants quit the sector quickly, finding industrial jobs unpleasant and risky. Indeed, serious health problems rose one percentage point for every month of industrial work. Applicants seem to understand the risks, but took the industrial work temporarily while searching for better work. Meanwhile, the entrepreneurship program stimulated self-employment, raised earnings by 33%, provided steady work hours, and halved the likelihood of taking an industrial job in future. Overall, when the barriers to self-employment were relieved, applicants appear to have preferred entrepreneurial to industrial labor.
There are three observations

1. This should not be mistaken to posit the debate on development as a choice between "productive wage employment" and "entrepreneurship". We need both, though more of the former than the latter. After all, there are only so many entrepreneurs that an economy can support. 

2. This is a very partial equilibrium finding. More specifically, it only tells that in the initial stages of industrialisation, as Ethiopia undoubtedly is at, labor markets can be very exploitative. Further, in such conditions, the private returns on investment may be higher from entrepreneurship than wage employment. 

3. However, with time, based on historical experiences of development trajectories in recent decades, a different dynamic emerges. On the one hand, competition, broadening of industrial base, better regulations, and so on contribute to making sweatshops far less exploitative and raises the general income levels. On the other, small entrepreneurship tends to spawn a large and unproductive informal sector. 


Paul Harvey said...

You argue that historical experience suggests that conditions improve over time. I'd agree but also argue that historical experience suggests that this isn't automatic - improvements in working conditions have had to be fought for by trade unions, labour movements and other collective action. So a key question is how the struggle for better working conditions will develop in Africa, Asia and Latin America. And indeed how successfully new forms of exploitation and abuse will be challenged in North America and Europe. And a intriguing policy question that arises from the Blattman paper is whether aid actors should focus less on promoting entrepreneurs and more on supporting collective action on decent work.

Gulzar Natarajan said...

Thanks for the comments. I agree with you that improvements in labor conditions is not automatic. And it would require collective action, at some level. Unfortunately, the prevailing narrative on deregulating labor markets (the debate is especially strong in countries like India, where labor market restraints are seen as critical growth inhibitors), may come in the way of promoting collective action.

But the point about exploitative labor conditions as countries develop and the need to mobilise effective response to it is well known and did not need a paper to validate. This is an agenda that Aid agencies already have in their ESG due diligence etc, though more could be doe.

But an explicit labor standards focused initiative could be counter-productive. The issue may have to be viewed with all its nuances - standards that promote basic dignity (relative to that country's society) without taking away the country's labor arbitrage and thereby eroding its competitiveness.