Project Leaders Present Results of Research on Global Trade and Investment

Participants in the Forum, on the theme “Globalization and Inclusive Growth”, included more than 100 CEOs and senior executives of major corporations in the Asia-Pacific region, members of the ICC Executive Board , Ministers and senior officials from the Government of India and leading academics.

Jean Rozwakowski, Secretary General of ICC introduced the three discussion panels based on these research projects. He reminded participants that the founders of ICC called themselves “merchants of peace” because they saw trade as the path to world peace. The economic crisis besetting the world today has stoked new fears about globalization and world trade. But it has also highlighted the reality that the world is once again undergoing a transition, marked by the rise of new economic and political powers.

This shift in the economic and political balance of power will require the cohesion provided by the multilateral system to avoid conflicts, and to address pressing global issues such as climate change, sustainable growth and international governance. In this new transition, ICC is once again called upon to provide leadership in the intellectual effort needed to better understand and manage the forces of this era, maintaining its constant objective of peace through trade.

The ICC Research Foundation was established, in February of this year, to reinforce ICC’s role of providing intellectual leadership on public policy issues. Its aim is to support ICC’s efforts to make a compelling case for world trade, in the context of today’s realities, based on objective research which is credible and accessible to all. The initial projects supported by the Foundation explore how the multilateral trading system and the process of globalization can be made to work towards global peace and prosperity.

Presentation: this session was addressed by Dr. Marc Bachetta, senior economist at the World Trade Organization. The complex process by which the expansion of trade in goods, services, intellectual property sustains and creates jobs in different economies needs to be better understood. The transfer of jobs between regions of the globe and the rise of new types of employment created by that process also need to be better understood.

The project identified the following long term trends for trade and employment:

• Globalization and trade, if properly harnessed can be powerful engines of growth and job creation
• But, country specific employment effects are diverse
• Higher perceived job insecurity in the North
• Persistent informal employment in the South
• Wage inequality has increased in many countries

The alarming free-fall in global trade experienced since the start of the economic crisis has begun to turn around. So has global GDP, with Asia leading the pack. The problem is that unemployment remains high in many countries.  In this content the WTO and ILO have examined the role that research can play in devising policies governments and business can implement to ensure globalization, trade and employment are compatible.

The following conclusions arise from an examination of current research in this area:

• There is evidence of a small effect of “good” offshoring on wage inequality in offshoring countries, not much of an effect for trade in  services,
• Firm-level data shows that firms which export are larger, more productive, pay higher wages than non-exporters,
• Wages for skilled workers are increasing, expecially in developing countries, as a result of both trade and use of new technologies,
• The influence of trade on the movement from informal to formal work is mixed: However, in countries where trade effects a movement from the informatl to the formal sector, both wages and working conditions improve,
• There is evidence that trade induces an upgrading of skills for workers, with a concurrent improvement in wages,
• Some evidence that the effect of trade opening on employment depends on labour regulations, and that the latter can be an obstacle to trade and therefore to improvement in workers skill upgrading and wages,
• Some evidence that trade has reduced the  bargaining power of workers

Presentation: this session was addressed by Dr. Victor K. Fung, Chairman ICC, who presented research results assembled by Professor Joseph Bower and colleagues at the  Harvard Business School (HBS). Professor Bower was unable to attend due to illness. Dr Fung is a former professor at HBS.

The sense that is abroad in the world of having come to a turn in the road for globalization,  includes serious questions about the market economy. There is a clear concern that the market system has failed in important ways, though there is less clarity about what needs to be done. The HBS research project asked business leaders around the world what they saw as the long term problems facing the global market system. Their most important concern was about growing inequality in the world and the effect this can have on political and economic stability. Other challenges mentioned by business leaders were:

• volatile energy prices,
• serious impact of climate change,
• water is increasingly scarce,
• the financial system remains vulnerable to major shocks,
• widespread corruption,
• migration,
• inadequate governments

The role of business in helping to deal with these concerns can range from advocacy with governments to proposing entrepreneurial approaches to dealing with these issues.  Examples include China Mobile’s Rural Strategy, which saw the firm provide mobile services to millions of rural inhabitants in circumstance which were considered to be unprofitable. The firm developed innovative services provided through mobile phone, such as basic banking functions, which enable it to develop a profitable business while providing an essential service to a population which had been excluded from the benefits of the market economy.

The Big Idea identified by the HBS project is that business strategies can be devised to bring those who are unskilled and unserved into the market system, while also developing a profitable business.

The financial and economic crisis has created widespread mistrust of business. Rebuilding  confidence in the market system requires that business leaders act in ways which are credible, responsible,  and which demonstrably contribute to the overall well-being of society.

India has escaped the worst effects of the crisis, and the loss of confidence in business, because of its carefully calibrated process of market reform. Government has privatized and de-regulated the market through slow, methodical but irreversible measures. Indian and foreign firms are carrying out innovative business programs which improve the life of the majority. Examples include development of wireless services between village clinics and major hospitals to access medical expertise. In one project, 20 million solar-powered lanterns were distributed to replace kerosene-based lighting, which had been a major cause of household fires. Microfinancing has been used successfully by small and large banks to serve people at the bottom of the “financial pyramid”. The effectiveness of this profit-making activity was demonstrated with the advent of the financial crisis, when the reimbursement rate on microfinance loans remained at 100% at a time when defaults on conventional loans were soaring.

Global supply chains are using information technologies to enable small and medium enterprises (SMEs) to participate in the global market, creating local jobs and opportunities. The success of these examples is based on careful attention to balancing for-profit business models with the interests of the communities being served. ICC should help propagate business models where people at the bottom of the financial pyramid are included in the market system.

Short-termism in business outlooks and reporting have been highly damaging, forcing a focus on narrow, selfish gains rather than on business plans which encompass the longer term view with a consideration of public interests.

Presentation: this session was addressed by Jean-Pierre Lehmann, Professor of International Political Economy, IMD, Lausanne, Founding Director of the Evian Group. A number of forces are profoundly transforming the world, making it more critical than ever to address poverty and inequity. Governments have a central role to play in building the policy framework required to stimulate more inclusive forms of growth, including through

investment in public infrastructure and education.  But business is uniquely positioned to contribute its engine for innovation, as well as its expertise in marketing, distribution, supply chain and operations. Not only does it have the capability to contribute, it needs to do so to ensure its own survival. The current prevalent business model – excessively focused on shareholder value – is flawed. Its relentless pursuit will sow the seeds of destruction.

There is good cause for cautious hope, as we see a number of initiatives emerging from different spheres which promise to enable more equal access to economic opportunities. There are examples of innovative social programs which have decreased poverty and inequality.

One such example is a conditional cash transfer program in Brazil. For decades, the poorest 60% of the Brazilian population accounted for just 4% of national income and illiteracy rates were among the highest in the world.  In October 2003, the Brazilian government put into place the Bolsa Família Program – a conditional cash transfer (CCT) program. Poor families with children receive an average of R$70.00 (about US$35) per month, in return for a commitment to keep their children in school and take them for regular health checks. This has been a major contributor to the decline in income inequality (and illiteracy) in Brazil between 1995 and 2004, which fell by almost 4.6%.17 Its success has led to similar concepts being adopted in almost 20 countries.

The great  cause of the 21st century is the battle against poverty and extreme and iniquitous inequality. Inclusive growth can contribute  to reducing poverty and inequality. It also represents an enormous opportunity for business. The business leaders of tomorrow will be those who will have seized the opportunities in the face of the multiple difficulties with which the planet is challenged.

Rhetoric about inclusive growth sometimes resembles a familiar, often-repeated song. In the context of globalization the move of the majority of the world’s population from absolute poverty to at least relative prosperity is an imperative. Such a progression is a condition for moral credibility and for survival of the market system.

It is a basic fact that the poor want change, one way or another. They want to improve the chances for their children. In India, it is the poor who put away scarce rupees to send their children to private schools, because they believe the sacrifice is worthwhile. Governments and businesses which seize upon this fervent desire for change will lead the world; those who ignore it do so at their peril.

The environment is important for all of us but for the poor it is often all they have –  air to breathe, a small plot of land, water to drink. Denied any of these, they are denied life itself. The grand schemes to save the environment are important, but there must also  be a focus on short term improvements to the living environment of individuals. In India, for example, the replacement of inefficient cooking stoves by improved models is reducing indoor air pollution, contributing to an overall improvement in the health of poor families, including a decline in infant mortalities.

Inclusive growth is an imperative, not an option. When 50% of the world’s population has access to only 1% of its wealth, the cry of injustice will make itself heard. This path is a road to instability and destruction.  There is optimism that governments and business can be effective enablers of inclusive growth. The spread of new technologies, particularly in telecommunications, are an effective source of progress in this direction.