Does global trade lead to more jobs or just more inequality?

The sudden economic slowdown resulting from the pandemic and lockdowns has confirmed the importance of global integration and of having a more digitally developed infrastructure. Covid-19 has also highlighted existing weaknesses in global integration in the production of goods and interdependence across borders.

Recent studies confirm that the benefits of global value chains (GVCs) still outweigh the costs. Yet, reforms are needed. Trade experts caution that the absence of critical goods during the pandemic was not only due to production (supply side) disruptions but rather to the drastic increase in the demand for such goods.

In fact, the evidence arguing for higher global integration and more trade openness remains positive, especially for developing countries as they benefit from increased job creation, higher technological transfers, foreign direct investment (FDI), and skills upgrading.

It is worth noting that not all global value chain linkages are the same; in less sophisticated countries – for example, countries with low levels of digital integration and human capital – with high restrictive regulatory policies, integration into global value chains tend to be shallower and to focus on commodities rather than manufacturing goods. This means that less sophisticated GVCs or global production sharing agreements can have lower impacts on the creation of more and better jobs.

As the crisis subsides, reduction in poverty and inequality through more and better formal employment is at the center of most economic recovery strategies worldwide . Given the potential for globally integrated firms to grow and create jobs, especially when they focus on more sophisticated products, policy-makers want to know if more trade openness can be part of their recovery strategy.

They also wonder whether deeper integration into global value chains can spring forward and/or leapfrog from a lackluster inclusive growth performance in the pre-pandemic years. This is the case in Colombia, and many countries around the world, where policymakers are evaluating a variety of market reforms as part of their recovery strategy.

New research estimates the potential effects of reforms to promote deeper participation of Colombian firms into global value chains and proposed investments in digital infrastructure. The study estimates sectoral and geographic impact factors of distinct reforms to identify the potential winners and losers of such reforms.

Like many developing countries, Colombia is a country characterized for its high inequality levels, before the onset of the pandemic, and where the most vulnerable households – especially workers on the wrong side of the digital divide and/or engaged in informal jobs – saw their labor opportunities and incomes decline dramatically.

The post-pandemic world will create a window of opportunity for newcomers to latch into existing global production sharing agreements by becoming reliable providers of intermediate inputs and services, as well as key components of final products assembled elsewhere. This is especially important for countries in the Americas, geographically closer to the U.S and European markets.

But to help Colombian firms to integrate better into global production markets, the country needs improvements to the regulatory frameworks for infrastructure and customs service expansion , as well as lowering tariff and non-tariff barriers to imports, and making tariffs more homogenous and schedules more stable.

Colombian policy-makers also recognize the need to reduce costs of logistics and freight transport through infrastructure modernization of maritime ports and airports, and through the removal of barriers to entry for ancillary services provision. There is also a clear understanding of the importance of streamlining FDI to stabilize net inflows, the need to set forth reductions in non-tariff impediments for multinationals and to set limits on profit repatriation.

Consistent with recent studies, the Colombia case shows that while the combination of reforms yields formal job creation, the jobs created do not benefit the most vulnerable and poor. A key reason is that most workers at the bottom of the wage distribution lack the skills to access the types of jobs that firms engaged in global production agreements offer.

Patterns across countries show that as upgrades stemming from joining global agreement come about, wages rise but net employment tends to fall, and gains are concentrated among more skilled workers . Female workers for instance, take a large share of labor-intensive jobs in countries with those industries, thus benefiting, but lose out with technology upgrading.

The overall impact of digital infrastructure development on economic growth through formal employment generation created a discernible effect of lowering poverty . But inequality rises due to a rise in the skill premium associated with digital infrastructure development, as more jobs become amenable to telework and distance learning becomes more feasible.

The results in this and other studies recently conducted provide a clear lesson for countries contemplating similar approaches. For reforms aimed to deepen participation of global production agreements and investments in digital infrastructure to generate inclusive growth, it is imperative to have a parallel set of reforms and investments whereby poorer households can accumulate the human capital needed to access higher quality formal jobs created by the reforms.

A reduction of inequality can come about through a combination of policies and reforms that not only create more jobs through better integration into the global production process but also introduce strategies and platforms that enable a broader set of people to train (upskill) and work remotely.

Such an approach, could in principle, create formal jobs for workers in the mid-range of the human capital distribution, as they will be trained to operate more sophisticated technologies while also creating jobs for workers in the lower end of the skill distribution. The latter could happen if firms linked to GVCs generate backward linkages by demanding, from local suppliers, intermediate inputs, and services, effectively forming domestic value chains, supplied upstream by labor intensive producers.