Trade liberalization has little impact on wage inequality in the Philippines — ADB

Principal economist Rana Hasan and consultant Karl Robert L. Jandoc at the Asian Development Bank (ADB) saw a dearth in the study of the linkages between trade liberalization and wage inequalities in Southeast Asian countries so they zeroed in on efforts to produce a paper entitled: “Trade Liberalization and Wage Inequality in the Philippines.”

Studies about the relationship between trade liberalization and wage inequalities have “held that trade liberalization leads to declines in income inequality in developing countries,” apparently making that contention already conventional wisdom. Researches done in Latin American and some Asian countries “tend to show trade liberalization in these economies to be closely associated with increases in various measures of inequality.”

Trade liberalization, as defined in an article entitled: “Trade Liberalization and Economic Growth in Developing Countries,” is “any set of reforms that reduces the bias against the production of exportable.”

Reductions in protection, which came mostly in the form of tariffs and quotas, tend to have led to a shift of employment to more protected sectors.

But the Hasan-Jandoc tandem proved the reverse.

Serious efforts in liberalizing trade in the Philippines began in the 1980’s. However, the authors focused more on the 1994-2000 period. It was during that period that “trade policy was liberalized dramatically,” they said. Tariffs in almost all industries declined largely in 1994 to 2000.

“[T]rade liberalization, as opposed to large expansions in foreign direct investment (FDI) and/or outsourcing of services to the Philippines, represented the main channel through which the country experienced globalization during 1994-2000,” the paper read.

In studying the impact of trade liberalization on wage inequalities, the authors used the Ferreira, Leite and Wai-Poi approach, also known as FLW, which as opposed to other methods, involved not just the sectors involved in trade.

The approach “pertains to all workers and it allows to consider the effects of economywide (as opposed to industry-specific) returns to education on wage inequality,” the authors said.

Citing data from the country’s Labor Force Survey, the authors noted that wage inequality increased considerably from 35.5% to 40.8% between 1994 and 2000.

Despite a growing body of literature implying that trade liberalization affects inequalities, findings of the study showed “little evidence to suggest that trade liberalization had an important role to play in increasing inequality in the Philippines.”

“A much more important driver of wage inequality appears to be changes in economywide returns to education and changes in industry membership over and above those accounted for by our estimates of trade-induced employment reallocation effects,” the authors said.

“In order for trade liberalization to account for a relatively large portion of the increases in wage inequality, it would have to be a major determinant of the changes in economy-wide returns to education.”

Sources:

— “Trade Liberalization and Wage Inequality in the Philippines,” by Rana Hasan and Karl Robert L. Jandoc, Asian Development Bank (ADB) Economics Working Paper Series No. 195, March 2010

— Greenaway, D. & Morrissey, O. 1994. Trade Liberalisation and Economic Growth in Developing Countries. In S. M. Murshed & K. Raffer eds. Trade Transfers and Development, London: Edward Elgar, pp. 210-232. As cited in Trade liberalization and food security in developing countries