Addressing wage inequality and trade reforms

RIGHT STRATEGY: With the inevitable advent of globalisation, boosting productivity is vital.

AS the world economy shifts into a more globalised era,  every developing nation is harnessing its resources in an effort to take part in a more free trade regime.

Globalisation promotes the practice of free trade and it is believed to promote a more level playing field in the world market, as tariff rates are driven down to near zero per cent.

In other words, protectionism policy is at the brink of extinction with the rise of trade reforms. Trade reforms in the long run reward efficient producers with the competitive advantage that ensures its position in the global market.

Free trade was promoted by the celebrated Adam Smith in the 18th century who highlighted the idea in his book titled, The Wealth of Nations. Here was how he put it at that time: “It is the maxim of every prudent master of a family, never to attempt to make at home what it will cost him more to make than to buy. If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it from them with some part of the produce of our own industry, employed in a way in which we have some advantage.”

It is with that notion that nations undertake free trade in the many different shapes and forms such as regionalism and bilateral trade pacts. As globalisation brings these nations together through intensified trade activities after trade reforms are implemented, households will surely benefit.

When trade is carried out, households are able to choose from a wide variety of products in the market at significantly lower prices. These products, which are now available locally, may be manufactured within the country or abroad. Producers then are motivated to increase their productivity and quality of products to compete at a global level.

In his book Making Globalisation Work, American economist Joseph Stiglitz emphasised that with globalisation, “everyone was supposed to be a winner — those in both developed and the developing world. Globalisation was to bring unprecedented prosperity to all.”

Even with all of the advantages of free trade in the long run, there are some groups who are concerned about the downside of globalisation in the short run. Their concerns are real and not without basis.

Labour economists have found a trend in many developing countries whereby as trade reform episodes take place, wage inequality between skilled and unskilled workers is observed to be increasing drastically in the short run.

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