Commentary / World

Working hard but staying poor

by Gary Fields

The last 25 years of economic growth in the developing countries have produced a spectacular reduction in the percentage of the world’s people living in extreme poverty. Fifty-two percent of people in developing countries were in extreme poverty at the start of the 1980s; the rate has fallen to 22 percent today.

In China alone, rapid economic growth resulted in a drop in poverty of 500 million people.

Despite this welcome progress, much more needs to be done. What at the core is the real challenge for these countries?

Many people in the Western world assume that solving the problem of poverty in the developing world primarily requires the creation of more jobs. That is not the case — or at least not the main issue. The developing world has plenty of jobs. The world’s working poor need better jobs.

The reason for this is straightforward. In the absence of any meaningful social welfare systems, workers in the poorer countries simply must work. If no one else will hire them, of necessity they create their own earning opportunities, typically in very low-paying self-employment. For this reason, the unemployment rates in developing countries are lower than those in the developed countries. In the world’s developing countries, the number of unemployed is over 150 million — accounting for about four of every five unemployed workers worldwide.

Meanwhile, the advanced economies account for only about 15 percent of the world population, but have 22 percent of global joblessness. The richer countries thus have a much greater share of unemployment globally than their share of population would suggest.

For workers in developing countries, there are three big issues to tackle: First and foremost, the poor work long hours, but earn so little per hour that they are unable to move above the poverty line.

Second, women face particular disadvantages in the labor market.

And third, all too many workers are forced into what can only be regarded as indecent work, such as modern-day slavery, indentured servitude, and child prostitution.

What is to be done? At first blush, it seems very encouraging that nine of every 10 workers in the developing countries work in the private sector. While some of these are wage and salaried workers who have regular contracts and enjoy social protections, most are not.

In India, for example, 57 percent of private-sector workers are self-employed — and another 28 percent earn their wages as casual workers (as day laborers in construction or agriculture, for example). The large majority of these workers do not benefit from any kind of job protection or social programs.

In a global context, it is therefore important to de-mystify the role and character of the private sector. Private companies in particular are first and foremost profit-seeking institutions.

In any given country, private companies will make their decisions based on one key factor — what is in their profit-maximizing interest to do. It is on that basis that they decide whether or not to invest in a given country, hire more workers there or not, pay them well or not, train them or not, adopt “high road” human resource practices or not.

If this is right, then improved labor market outcomes may be a by-product of profit seeking on the part of firms, but it is not realistic for improved labor market outcomes to be seen as a goal of private sector employers — at least not yet. Public policies on the part of national governments and international organizations as well as nongovernmental organizations (NGOs) and consumer movements, need to be formulated in view of this reality.

Developing countries need resources to create and sustain new social programs (or expand existing ones), as well as to prepare people for better employment. Since most employment in developing economies is self-employment, their governments and these governments’ international partners must see to it that they give workers the tools to raise their productivity.

This means, first and foremost, more skills and education, but also includes other programs such as providing farmers with cheap but effective irrigation equipment so that they can raise their crop yields.

More open trade, if carefully managed, can also bring about better employment outcomes and thereby reduce poverty. China is the best example here — with rapid export-led growth, rapidly rising real wages, and unprecedented reductions in poverty.

However, given private companies’ presumed profit orientation, they cannot be expected to stand up for workers’ best interests. That is why, in the context of the current debate over trade agreements such as the Trans-Pacific Partnership, the codification of worker protections in international agreements is a critical factor.

How to get there? The involvement of governments, NGOs, unions, and concerned global citizens are critical. Public pressure will remain one of the most potent forces to induce private companies to undertake pro-worker actions and reforms.

Gary Fields is a professor of international and comparative labor, a professor of economics at Cornell University and the 2014 recipient of the IZA Prize in Labor Economics awarded by the Bonn, Germany-based Institute for the Study of Labor (IZA) (http://newsroom.iza.org/en/)