Regional Economic Integration and Job creation in the EAC

Section 3 explores the first of the helpdesk queries: What is the link between regional economic integration and job creation in the EAC? This question is looked at by exploring the evidence:

1. That regional economic integration leads to job creation (from beyond the EAC);

2. As to why underemployment and unemployment exists in the EAC; and, 3. Of the positive and negative role a common market in the EAC will have on job creation and the reduction of underemployment and unemployment.

These three areas are discussed in sections 3.1, 3.2 and 3.3. A mini conclusion on each area is drawn with overall findings given on the overarching helpdesk query in section 3.4.

4.1 Wider Evidence That Regional Economic Integration Leads To Job Creation This section explores the evidence on that regional economic integration leads to job creation from beyond the EAC. This is the first of three steps to addressing the first of the two helpdesk queries.

Evidence on trade and job creation A recent paper by the OECD, ILO, World Bank, WTO24 summarises that available evidence highlights that trade openness will contribute to growth and employment, provided that it is complemented by appropriate policies. Key findings regarding job creation include:

 That the links between trade liberalisation and employment are complex, as jobs are both created and destroyed as economic development takes place. Complementary policies are often needed to ensure that firms and workers can benefit from the new opportunities generated by the creative side of this process while adjusting to the disruptions caused by its destructive side.

 Workers displaced from declining industries or firms are not necessarily well positioned to move into newly created jobs that may require different qualifications, or they may be located in different regions. This requires a reallocation of resources.

 Employment protection may reduce the ability of firms’ to reallocate resources and take advantage of the opportunities offered by new technologies and access to new markets.

 An increasing share of the labour force may provide reasons to view trade as a potential threat to job security. Empirical links between liberalisation and employment creation however are complex and the body of evidence is conflicting. McMillan and Verduzco (2011)25 fail to find a correlation between trade liberalisation and industrial employment over the period 1980 to 2006, in a dataset including many developing countries. Hoekman and Winters (2007)26 conclude in their literature overview that “the direct effects of trade reform on aggregate employment are muted”. The OECD, ILO, WORLD BANK, WTO paper concludes that the evidence does point towards a positive correlation between trade and employment creation as do several chapters in the OECD 2012 publication27. There are additional challenges due to the gaps in evidence regarding the impact of trade liberalisation on informal employment and underemployment, a lack of data on the impact of trade liberalisation on net jobs created and limited evidence on economic integration and job creation in the EAC.

4.1.1 Evidence on increased returns and competition and employment Standard economic theory predicts greater efficient resource allocation and higher growth as a result of the utilisation of existing comparative advantage. In practice trade can increase competition and entrepreneurship in traditional and new sectors (and hence jobs) or, can lead to growth primarily in capital-intensive sectors resulting in jobless growth. The United Nations Development Programme (UNDP, 2011)29 explores regional economic integration and its potential impacts on human development, with a focus on Africa. The report finds that whilst regional economic integration will always affect employment, the employment effects, both positive and negative, will not be uniform across geographical areas, sectors or types of workers. Labour may also be displaced through the use of new technologies. The structure of the labour market is subsequently important in determining the impact of regional economic integration on employment.

4.1.2 Evidence on investment and employment As summarised by Draper et al (2011)30 FDI has direct employment effects and also indirect effects, through job creation among suppliers and service providers and through increasing incomes (Lee and Vivarelli, 2004)31. The same applies to trade. Such positive employment effects of greenfield FDI have to be compared with the crowding-out of non-competitive domestic firms and with the possible reduction in employment associated with FDI operating through mergers and acquisitions. According to Spiezia (2004)32, FDI is more labour-intensive than domestic investments in only a minority of countries. Moreover, estimates suggest that the impact of FDI on employment is increasing with per capita income of the host country (Santarelli and Figini, 2004)33. Based on research conducted into the effects of FDI on wages in five East Asian countries and the effects of foreign ownership in five African countries, Te Velde and Morrissey (2002)34 find that, although FDI contributes to growth in developing countries, there is evidence that the benefits are not distributed equally. Foreign firms tend to pay higher wages in developing countries, but skilled workers tend to benefit more than less-skilled workers. This is in part because FDI brings a bundle for technological change, skills and innovation. Te Velde (2004) argues that the effects of FDI on equity and poverty reduction is greatest when complementary domestic policies are put in place, such as promotion of domestic suppliers and domestic skills.

4.1.3 Evidence from other Regional Economic Communities (RECs) in Africa In order to look beyond the EAC two further RECs were looked at. Both provide further insights into the evidence on regional economic integration and job creation in Africa. This overview is predominantly drawn from publications by AfBD, OECD, and working papers. Regarding the search into evidence on COMESA, no robust body of evidence was found on COMESA and resulting job creation. Numerous reports by donor and implementing agencies exist citing the need to create jobs and strategies for doing so. However a significant gap exists on how regional economic integration in COMESA has led to effects on job creation. Most studies focus on the effects of RTAs on trade (or FDI) but not on the real economy effects such as growth, investment or employment. Issam (2011)35 concludes that Sudanese jobs were lost in the industrial and agricultural sector due to the intense competition faced by domestic industries from others COMESA countries and China especially in textile sector. As trade barriers were lowered, many small-scale farmers become unable to compete with cheaper imports so left their land and migrated to urban areas. There is more evidence on SADC. Chapter 1336 in the OECD (2012), Policy Priorities for International Trade and Jobs examines regional integration and employment effects in SADC. The authors assess the impact of actual and potential further liberalisation since 2008 using the Global Trade Analysis Project model and a global Computable General Equilibrium (CGE) model. The modelling is based on inputoutput tables, derived from national accounts that specify the use of labour, capital, land and intermediate inputs in the production of final goods. The key findings are that:

 While trade and tariff data are readily available, there is relatively little information on non-tariff barriers and employment in each sector;

 Trade is beneficial for employment, but the effects are uneven;

 Further regional integration is expected to increase real wages and/or employment, but to varying degrees across countries. Some countries have high tariffs on textiles, some manufactured goods and wood and paper products and would face substantial structural adjustment if these tariffs were eliminated. They state that this is desirable if displaced workers are able to gain employment in more productive sectors, but less desirable if it leads to an extended period of unemployment, or employment in a less productive sector; and,

 Employment effects from the elimination of intra-SADC tariffs are positive but small in all SADC member countries. The CGE results suggest that where high tariffs are removed, substantial changes in production and employment in a specific sector may occur. These changes bring benefits, but will inevitably result in temporary dislocation and some adjustment costs.

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