Countering structural disruptions

By Michael Spences

Trade and technology development policies almost always have distributional consequences. There may be a few exceptions for which the implementation of a policy produces either gains or no loss for nearly everyone, what economists would call a Pareto improvement. But these instances are relatively rare. You could argue that for early-stage developing countries, the export-driven growth model that draws surplus labor into the modernizing manufacturing and urban sectors comes close to meeting this standard. But even there, the gains are not spread evenly, and income inequality normally increases.

Distributional impacts are the norm, within countries and across national boundaries. Successful developing countries experience structural change as part of the growth process. The long-term bene ts of exposure to global markets and investment are very large, driving both growth and signi cant structural adjustments in terms of jobs, skills, and human capital. But some sectors are inevitably adversely a ected.

To ensure that new economic opportunities and pressures do not overwhelm the ability of developing countries – particularly the labor force – to adapt, policymakers should manage the pace and sequencing of the opening process in trade, investment, and the capital account. For example, if net employment creation – jobs created minus jobs lost – turns negative, opening may be happening too fast.

E orts to calibrate the pace of opening should be complemented by some redistribution toward adversely a ected people or sectors, but not at the expense of investment. Most important, to support the creation of an inclusive pattern of structural adjustment, government must invest heavily in high-quality, a ordable (either low-cost or free) education for young people and training for older workers.

All of this is vital to ensure that the policies that underpin the growth model retain popular support; otherwise, political opposition will likely disrupt or even abort the growth strategy.

These challenges are not limited to developing economies. Trade, investment, and technology have signi cant e ects on economic structure, relative prices, and income and wealth distribution pretty much everywhere. One recent paper argues that trade with China not only has direct negative e ects on employment and wages in the US manufacturing sector, but also produces negative upstream e ects on suppliers of intermediate products.

To be sure, the paper’s authors conclude that, for the United States, trade with China yields net bene ts, because the positive downstream e ect – a wide range of industries gaining access to cheaper intermediate products –is larger than the combined direct and upstream negative e ects. Nevertheless, US-China trade still has important distributional implications because the negative ef-