International Wage Equality: Concrete Facts Accompany Vague Optimism
BY PANKAJ UPADHYAY, PROGRESS THROUGH BUSINESS
Some might argue that greater convergence of international wages is essential for the achievement of a more just and balanced world economy. The perceived injustice of a system in which 0.00000004 percent of the world's population has as much wealth as the poorest 42 percent of the world's people is a cause for alarm. True sustainability of both the people and the planet invariably depends on improving the quality of life more equitably.
It seems that the belief that free trade will equalize the wages of workers and the profits earned on capital throughout the world has not so far been truly realized. This was premised on the argument that when the prices of goods are equalized between countries as they move to free trade, then the prices of capital and labor will also be equalized. The overarching ideal of equalization of wages, where market wages are set by profession and productivity rather than nationality or geographical coordinates, is still an elusive dream.
In fact, economic integration often leads to a skewed industry concentration and structure in weaker countries, often effectively transforming local firms from producers for their domestic markets to product assemblers for foreign-owned firms from developed countries. This situation makes for an unequal equation. For example, the benefits of closer economic integration on wage equality are yet to be fully realized in Mexico. Workers in the manufacturing sector in Mexico earn $6.48 per hour versus $23.42 per hour earned by U.S. counterparts.
This is not to suggest that things are not changing. In a recent wage rate gap comparison for manufacturing workers in selected economies, seven out of the 12 countries in this assessment are better off than they were in 1996. As would be suspected, East Asian economies recorded the greatest gains in their wage-rate position. JPMorgan Chase & Co. and Mizuho Securities Asia Ltd. estimates predict 10 percent to 15 percent increases in wages in China. China's leadership is pushing for pay increases as it seeks a structural transformation of the economy from polluting and capital intensive manufacturing to a more services-driven economy. This will accelerate the trend of shifting low-end manufacturing bases to Southeast Asia and undoubtedly make economic growth more dispersed.
However, supply chains shape East Asian trade in what has been called the "flying geese" pattern of development. Nearly 80 to 90 percent of East Asian South exports is absorbed in the region itself for reprocessing and only 22 percent are related to final products. Clearly, this integration into regional production chains where the net exports are ultimately destined to the advanced economies that capture most of the value does not promise a very rapid equalization of economic fortunes, although it might be necessary as a bridge toward more sustainable economic systems.
Undoubtedly, some benefits will accrue to developing countries. But, the process is painfully slow. It is sobering to bear in mind that economic change based substantially on cheap labor is not wholly conducive to substantive economic transformation and global equity.
The flying geese analogy is led by Japan. The second tier of nations proposed as these nations fly wing to wing are the newly industrializing economies of South Korea, Taiwan, Singapore, and Hong Kong. After these come the main third-tier countries: Indonesia, Thailand and Malaysia. Finally the supposedly least-developed major nations in the region: China, Vietnam and the Philippines make up the rear guard in the formation.
The fact that this theory, developed in 2005, missed China's continued growth so dramatically brings some pause. Perhaps the people who believed that wages would equalize quickly have not predicted accurately.
Upadhyay is a director of Progress Through Business.