UNITED NLTIONS
t.FRICJ.N INSTITUTE FOR ECONmUC DflVELOPHCNT LND PLLNNING
DllK.AR
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5~d SEMINJIR OH
CS267~
1 .. INSTITUTE OF :oo'PELOPMmNT STUDIEl
UNIVERSITY OF SUSSEX
B R I G H T 0 N
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STRlTEGIES Ii'OR INCRE.I\SING PRODUCTIV~ EHPLOYHENT IN Ait,RICJIN COUNTRI:ES
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10NOVIDIDE~f2=DEC~~J2TI· . ~ . ~-r---THE ElVlPLOYMENT IMPLICl!TIOHS OF TRJ.DE HID EXCH!.NGE MTËPÛLICY
BY BEIDT!JRD HiiSOH
OCTOBER 197
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·' ïTHE EMPLOYMEl'.JT UiPLICLTIONS OF "TlirDE
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Mm EXCHLNGE 'Rf.TE..
~·;._...,__,~-~~~~ -POLICYForeign
tr.~ .d e
and oxche.nge rc:.t o policios are afton t oo complicP.ted for tl1o non-cconomist to unclorstancl 2nd avon soma oconomists fine'.. tho connoction b.otwoen thoso ,Policies 2ncl omploymont obscure. Yot trt..cl_o n.pcl exehc..nc;o rat epo l~ c i os
c0n be very important in cletor,.:inine thope..ttorn. of :i,ndustrializntion ,· and this pd torn ha.s profouncl imilliC<'..tions for. omploymont. . We will
ex.:~.ml.n o
how thoso fJOlicies~
influenceinclustrir..lization and employmont 1 bmv t·hoy
~ in p~a ctice
excrt thcirinf. uonco o..nd how they ought to be usee"'.. to · promo't c dovclopmont. Ho
·will thpn briofly considor the insti tutionc:l 1 poli ticc.l economie, bL'..sis of th9so polici
.
es •Lot us see how thcse policies n.ffoct employmont, on·a puroly
· forrn:ü lovol first. Employment is simply oqu2.l to tho omploymcnt pGr shilling of CD.pi tP.l
oquipme~t
•1In this frc..mework, chP.nges in ompJoymont (E) p1n come ossontüüly
i
from t\vO sources: oi thor the cî.pi t<.l stock clv:.ngcs (throw:;h invostmcnt) or tho om11loymont per unit of
c api t ~: l
(tho 11fé:.cto_r intonsi ty'i) cl12.ngos. In pr<e.ctice, of course1 both typos of chi::.ngo oqc.ur together. C2.,pi t2.l .::.ccumulP..t i::m tonds to incror:.se omploymont 1 while 11c2.pi tr l dooponing
11
(
incro c: si.':l~
cc pi tal por workor) t oncls to rotc:rcl this growth. Hi th rOgL'.rcl' to oxcl12.nge rnt e ancl trr>ÜO polici!'JS t \·J..J 0<'.11 2Sk how those r:.ffoct thorr~ to
of invostmont1 how they P..ffoct .tho typo of investmont and., theroforo1 how t hey affect employmcnt.
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~1en wc ask this question,. \vO shoulcl pc clcnr how p licios Cr'n affect tho vnrinblos in question. Tho most· importe.nt wr:y :i,n whicl1 t re.cle :o.nd
cxchc"'l.ngo r2..t o policies hn.ve tl10ir effcct is through cb .. :nging tho r<:t e of roturn to factors of production dovot ocl to various 2.ctivitios. For oXGmplo, if forcie;n compati tion is b2.nnoc.l th.:.n i t bccomos moro profi tC'.blo t o pro- duce a good domosticn.lly. Thus invostmont in procluctiém of thc:t good is stimuh:.tod. It is common in n.lmost ovory country of f.fricn, I bolievc1 to hnvc an importod commodity bocomo sc2..rco as import ro::Jtrictions <:.re clampod · down, and thon to soc the nppo.:-.rancc of· a locnlly producod version
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of the item. Tho policy :·Jf protection which ini t i? .. tos thiEJ sequence is usunlly justifiod as nocossnry for the survivP..l of tho "Inf.:::nt Industry"
(even if the 11inf2.nt" is p<:.rt oÎ
e :
multin.:.tio'rial gütnt). Thus it is implied thn.t invostment; foroit,;n invostmcmt ·in pc.rticulc:.r, is stimulated by industrinl protect ion. Such cl<>ims must be t ro.:.t ocl c.:.utiously howover for two roasons. First tho tot<:l cff..Co.t o.f· pol.icie.s ai mod nt. stimulating foreign• investmorit should include tho of(cct on local investmont as weB .•·'·
It ll'lc.'1.y be thn.t
a:
largo corporo.tion' partiql,l.larly a foreicn one' ostablishositself é1.t the expanse of locn.l' ,procluçors. Tho s.ucceE)s of n. multinc..tional shoo producor, for oxn.mplo, I1lc."1Y bo achievocl L\.t the oxponso of locr .. l crafts- mon or smEtll loc;o.l fL\.ctorio.s. ( It may bo th;::t tho no1,1 invost ment is f2.r
·more ca.pit2.l-intcnsivo th<:n tho ·h splacod industry) o Thus incrœ.so in s0mc i,nvostmonts brought n.bout by t r2.do policios must be b.::ln.nced n.gn.inst othor invostmcnts ~isplaccd by t l1C snmo poli ci cs. In n.ù.c~i t ion' increa.so in invostmont in one soctor m.:.y woll occur nt tho oxponso of invostmcnt in qui t c anothcr soct( or: . t extile invostmont , for o:x:t' .. mj_Üo, m:y gro'" whilo invostmont in food procossinc; str:gnr:.tes simply boc2.uso t r::.de policios have
t
manipulatod profit rato.
.
s to proviclc Ù10. ontivos for such LI. pn.ttorn. Thus tho fa.ct thc:.t 2. ccrt:ü n invostmcnt may have rosultbcl frnm L\. tr<~rlc policy docision is no proof that employmont , or indcod even invostmont ~s 2. wholo hns beon auGmentcd by tho ùocision. ..
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The soconc~ rcnson for t:rice.t.ing tho affect of tradc policy on the rc.t'c of invostmcrit -vJi th C&ut ion is tha:t tho sc cff oct s must be considorod
·in n lon.::; timo pcrspoct i vc. Typical of -tho very invm.rcl-looking import S'qbsti tuti::m .)oli.ci s pr::.ctîsed in rru::.ny r:k-:.tions of k-ttin Lmerica has beon
<>.. r:::.pid ·.burs;t of invostmcnt in protectccl ·industries · fo·llowocl by poriods
of st2.gné\.tion. Thcso OX2.mplos nrc import.:~.nt for !.fricu. boce.uso tho sm.">..ll economies of Lfricc::. cannat hope to sustain invcstmcnt unless clovolopment pr9coocls on a sc;: le v1hich tr.,nsconds nnt ionu.l borders. Inclustri,os ce..tor- ing oxc~usivcly for . intormü market s will not {5row cl~:·nnmically in most cas os boca,uso they will be uncompcti tivoly sm.-:.11. In nclcli ti on, .the multi-
~ationn.l .~orpo~dions · whi.ch to:kc n.dvr:nt2..gc of ~ho opportuni !ies crcnt od by prot cctionif?t policic~ ar~' otto~ moro intcrostocl in ~ocouping t'hoir invcstmonts through ropntri2.ting J_:Jrofi ts them they ~.re, in roinvos,ting th:i,s sur;plus
V.lhen wc turn t o tho cff oct of tr::.do poli ci es on factor intonsi ty,
wc ·should distin(;Uisl1 tt1o types of affects. ,Tho ovornll factor intcmsity
depends both u1=ion the fo.ctor Gnd on the itnport2.ncG ·of inchvid1.12.l soctors
"Ji thin tho t6'tn.l 'cconoli\Y• . Economists do not agree cntircly as to tho offcct's of inccntivos such as trado po licy on tho choicc of technique, Q.ncl honco on f0ctor int onsity1 within a givcn r-:cctor. Whothor t rado policy cr:n hn.vo sic;nific<:nt affects on t.h8 typo of oquipmorit usGd is 2.
moot question. HovJcvor 1 thore is li tt le disci-grocmont abcmt tho impact tre1clc po licy cc:n have on tho typo of industry wliich pros pors "Ji tin a country. If trr:.clo l~alicios incro0se tho profitC",bility of ce..pi t<:~l inten- sive sectors of tho c conoli\Y ( thoso which use much oquipmont per workoll') t then thoso 0rc likcly to at tract invostmont rnthor the .. n othor soctors.
'Trnde policics é\.ffoct tho structure of inclus-~ry in :a moro subtle. ·
wn;)f. ns wal l . Insofé:.r as trG.do .'1)olicios can hclp crc0.tc a olass of WC.:é:.lthy loc<Ü middle men nncl ontrepronours 1 they v·Jill n.ffcct tho éListri but ion of clomostic incomc. /..nd the distribution of incomo, in :turn, hülps dot er- mine tho pnttorn of c1cm.'1.nd ancl production. Thus 1 tho structure of tho
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clomostio ooonomy cn.n rofloct tho distribution of inoomo whioh itself rosult,s in pn.rt from trndo j_;oliqy. It. l'k"'..s beon nrg-uocl 1 for exemple 1 t l'k'Ct one o:ffect of tho Phillippinos protection policy h;:-,d boen to cro2-to many industries 1.vhich procluoe goods for tho O\vnors of othcr industries. l):olc:vision 1 nir. concli t içmer <:.nd o.utomobilo 2-ssombly 1 for OXD.mplo, 2-ro industries whlch prÇ)viclo. commoc:i tics <tnü c;oner::to i:rcome prinnril;y for tho oh to. ·
Befor o
wo turn to tho discussion of how· tru.de nnd oxck ngo rnt o polic'ics ,nro in fnct us cd 1 lot' us oonsidor o..nothor impàrto.nt pro po si ti on. Tt is1 I bclicvo, from 2. miSundcrstrndinG of this proposition th<:.t _ ronny polïoy orrors ~.ris'c. ' It is e.lmost nover l?ossiblo to holp one ss_<j;or~inci:ùstry ~i,h_o_~t h11rtin~~~thor soctors_, This icloo. iS quito obvious -
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one inclustry hiros ·r. top cxocutivo1 othcr industries nre c~cprived of his so·rvioos; if one crbp grows on o. piocc of land sorne othcr crops will ho..vc loos lc:.i.1cl on which to grow. Y ct in spi to of tho simple Yk"-tùro of thi$ ~clor-:.7 •. covornmonts very ofton procoocl ::.s if they coulcl 2..icl 02.chs9çtor of· the .coonomy1 one e1:ftor tho othor 1 vJithout ha.vinc 2.ny wiclor affects • . L IJ<"l.rtioulC'.-rly ironie ex0mplc of this prublom lias in the govornmcnt
scotor itsolf : Tho Civil Service is frccru:ontly clisndvnntC'.-ged whon skillod, nb le. personnel loéWO i t for tho privr:.to scctor . Tho ir()n;Y li os in tho
f.~ct th2.t GOVo,r;nmont trr:.D..o ')Olioios v,ory ofton cro::.to they vory incarne which priv::.te firms thon uss to hire awn.y skillccl Civil Sorw~.nt. lhny of the foroi[;n · fir1i1S (and loc.::.l -firms) VJhic~1 om.:_:Jloy ski llccl locc.l nnnpowcr , nt othor om:ü oyors 1 exponso 1 C<è.n e..fford to llo so -::mly boo0usc thoir pro- . fi ts h2.vo boen :c:;rcn.tly oxpt\.nclcd by protection •
. How, tnon1 clo tr2.do n.nd cxc;hc .. ngo r2:to policics op r<>..te ·in pr.::.cticc and hoov ·clocs this n.ffoct cmployfllont? I t is not unfnirl I think, t o
oharc.ctori,sc tlwso poltcios as oporc:.tin~ L~Stl2.lly on the following implioit principlcs:
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Protection is nogotü~.toct. commoclity by commodity. (Gonoro.l tll.riff c;x:nt.;os a.rc usu2..lly ... introclucocl for revenue purposos and pll.y ·li'ttlo hood to tho affects on rosourco alloce>tion) • Concumor GOoc.:s c:r e likely to rocoivo hich levcls intormocli~.to(jOOdS lowcr lovols ~.ncl CC..jJi tc:l (jOOclS very li tt le protection.
b) Export promotion is usue.lly gi'von much less.concreto policy ll.icl tht~.n is im~1ort substitution.
c) Exchn.nljo r;:.to revision is consülorocl a policy of very lu.Gt rosort. !1lmost any clogree of impîrt control is consic.lorocl 11roforr:.blo to clov.::luation for clo2..ling vJi th bnl0nco of pnymonts probloms.
'lhoso throo tonots r..ro conclucivo to a pc:.ttorn of industrin.lisc.- tion which is fc..;r from wh~t ought to bo ,-,.chiovocl. Inw.ird-looking import substi tuting Ctmsumor GOO<.~s industries crovJ r.::.pidly whil<b mt'..nu- fr.cturccl exports, intormodic..to good ttncl c.--~Jitc:l goods industries grow slowly. Such c;rovJth i.s limitod1 howovor, Whon tho clomostic rrc.rkot is satisfi ocl1 fL~rtl1-:;r Growth b-.;co.mcs very difficult. Exports, nlromly di ffi cult whon c~imocl at tho rich
_c c:
pi ti: list countrios bocr:.uso of thoir protoctionist po_licios 1 t're .ovon moro. di ffi cult v.rhcn é.Ümod .-,t most othor Thircl Horlcl cuuntri·os which prr:.ctifJo even moro cxtromo protcc- tionist :tJOlicios. The overvn.luation of tho oxchc:ngo rc:.to ( which often rosults from 1)oint (c) ~bave) tTJLkos export prospects aeems still moror
limitocl. ::;oc-Gors which noocl "-
50%
or100 /b
priee bonus to ce>inpot o in. ' j
tho clomostic m~Tkot c:.ro givon such tnriff prot ection. Othor soctors which coLüd export wi th a
20%
priee bonus cc.nnot oxploi t thoir poton- tié}l bcc;:uso tr<\.clo policy fai ls to niel thom n.t n.ll. Thus import controls 1 ox_;:Jort pe__ssimism c..nd ovor-v<:lU<.t,tion of tho curroncy tend t o form 2.. systol!l ":'hich i s solf-roinfJrcine•Tho system wo closcribod nbovo is no·;; likoly to promoto re.picl csro'l.-vtll of omploymcmt. BOCQ.USG protection i~? afton. noeotintocl t o r;ivo one firm or.-c:. fo1.v control of tho loc;ü r."k-::rkot , lc:.rge cxporiencocl firms
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wi th much c<:pi trü t\.rO li.'"'.blo to ·bo succossful in vJi:rming such fc.vours. Thcso firms arc likol3r to b.o fo~oign-bc.socl ,J.;1d more c.~.pi tc.l-intonsivo than potonti;:~.l locill proclucors. In ncl::lition, th6sc firms which C<'n produco profitnbly uGine; tho local rosourco bé:.sc •:t prcv:<.iling priees et.ro less likoly to push for protection. Honco rr:pic.l, short-term growth of rcln.tivoly cc.pi t.::l-intonsivc oritorprisos ownocl by mul tinr:tional firms is likoly. This pd torn is unlikoly t6 procluco sustr:.inocl high invostment ovor tho'long runi it is nlso likoly to fnvour c0pit:::.l intensive firms. Thoso firms will prosper .~t tho c xpcnsc of losG l1o"'.vily protcctod firms.
Resc<:rch I hnvc concluctod wi th M. Phclps confirr.)s much of this pnt.tern of Kpnyn. Scctors such ,....,s p::ünts, t extiles 2.YJ.cl tyros nrc highly protoctocl and qui tc uncompcti tivc internC'..tione.lly ( t;oxtilcs mtw bo
improving) • . Pn.int is c.. {;'OOcl ex:o.mplo of 2.. sec tor cro2.t ccl 1)y. protection 1•Jhich a_::.Jpot'.rs to con~ribute 2.lmost nothine to the cconomy. Because of snrll sco.lc7• tho chcmicé:ls importocl into Kcnyn c.r~ h:ë.rç:lly less cxpensivc thnn imports of 1;c..int v.Jould be. Y ct t2riffs on p0.int, ccmplcd wi th almost free entry for chemicals have croated profits for the process of mixing and tinning pa:hnts.. All the major pa.int 1)roclucers are foreign owned; emp].oyment has increased very litt le ove.r the la.st five yea.rs.
In contra.st, sectors such as leather tanning and tvorLinfS, vegetable dehydra.tion, and lorry/ bus body building, which a.ppea.r to. be much more
competi~ive interna.tiona.lly, receive almost no help through trade and excha.nge rate policy. These sect.Çl.rs have much greater potential for sustained grov1th1 and they are linked much more intima.tely to the dornes- tic economy (and hence c~n create more jobs indirectly). They have much more potential :for attra.cting long-tcrm increa.ses in investment and for genera.ting sustaincd growth in employment. Yet the pattern of trade and. ex change rate po licy
able sectors and, on tho potentially corapetitive
is such as t o other si de of sectors of the
encourage the coin, econom;yr.
production in the unvi- to retard grOl'llth in the
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}l'rom our discussion,- severa.l desir;:.:blo policy revisions emerce.
1. Et'.:forts must be fJBde to ey_ualize .protectiort among sector::; to prevcnt sorne sec-tors f~rom benefiting crc;.r..tly é~t tl~·c expcnoo of others.
Interniediate· goods and capital goods should à.lso recoivo such protec- tion. Ta.rge and powerful firms should not be given spech?:l protco=hon.
2• :Export promotion should include active and uniform priee nuboidiz:ition
(of manufactures a.t least) to ma.ke exporting attractive. I believe that special bonuses for experts to Africa. should al so be considcred to promote inter-Africa.n tra.de. (Such policies for Africa shoulcl be negotia.tœd-cooperativoly to a.void rnisun
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dorsta.ndings. . , such as charges of dumping). Strong effort s shoulcl also bo made to form associations to control tho supply of exports, to lwop priees up, and to eain con- cessions from tho rich capitalistic countrics. ·3.
Devaluation should usually be used when balance of paymcnts problems bocome chronic.Is i t Possible?
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Let us 1 j_n conclusion 1 considor tho political economy of t ra.dc and e.x:cha.ngo rcto policy. · This is, in a sense, a discussion of tho foa.sibility of tho abovo policy recommencla.tions. Ttn.üle i t is certa.inly truc that
powerful nmlti-na.tional corporations have tho moans t o turn decisions in their favour 1 I be lieve tha.t tho failure of trade po licy adequat ely to promote dovclopment and employmont is not duo to this fact alono. Even investmonts_ in Tanzania. have often follov.rcc.l sub-optima.l patterns (as ln the cases of the tyrc plant a.nd the fcrtilizor plant). The povJOrful intorest s have an oasy job in tJinning concessions boca.use policy ma.kers ina.doquatoly pcrccivc tho costs of thü concescions they ma.ke, and boca.uso
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the very system of granting concesr.ü ons givcs too li ttlo guic. . . lanco to :·
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·~.' , '· dcoisioq inalœrs. If ..s..s~.ual protection oi industrial onterprises (,üth,
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say, a müfC>rm "adjustmënt pori o·d" conco:::sîon) ~e:re the rule, thon i t
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would not be so easy for big firms to vJin special faveurs for thcmsclves • Onoe a big firm is establishod in a small Africa.n oconom,y i t croat• es
ma.ny vestcd intorosts which preserve its privileged positi01'1• But at
thc.timc at whioh terms arc boing.ncsotia.tcd, .I believc, théft it uould
indccd bc possibl13 to achieve torms more favourablo to tho prospects of long-run sustainod invcstmcn~ in sectors 14ith real employment growth potential and less favourablc to the foreign firm'··bcnt onl;r on cxploi ting the domcstic market.
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