Are Developing Countries Really Defying the Embedded Liberalism Compact?

1. Are Developing Countries Really Defying the Embedded Liberalism Compact? Irfan Nooruddin Ohio State University Nooruddin.3@osu.edu Nita Rudra University of Pittsburgh rudra@pitt.edu

2. 1. Introduction: The Puzzle • Recent scholarship suggests that LDC governments are defying the principles of embedded liberalism (EL). (Mosley 2003, Rudra 2002, Segura 2007, Kaufman and Segura 2001, Garrett 2001, Wibbels 2006, Wibbels and Arce 2003) • But …EL = governments cannot and will not continue the path towards economic openness without taking some measures to ensure the political support of their populaces, particularly those members who are negatively impacted by trade. Empirical support for EL (Scheve and Slaughter 2001, O’Rourke and Sinnott 2001, Mayda and Rodrik 2001 Hays et al. 2005, Bates et al. 1991)

3. 1. Introduction: Research question Are developing countries really moving ahead with openness without protecting their citizens from the vagaries of the international market?

4. 1. Introduction: Argument in brief • No…LDCs are behaving similarly to their OECD counterparts in protecting ‘losers’ from the risks that accompany trade openness. • The differences: • LDCs are providing social protection through employment generation by the state, rather than income transfers. • This form of welfare protection is geared towards the politically powerful and wealthier groups in society, not the poor.

5. 1. Introduction:PreliminaryFindings • More open LDC economies are associated with larger levels of public employment • Only certain types of public employment, namely civil service and administration, expand with openness. • Employment in state-owned enterprises (SOEs) contracts with openness.

6. 2. Context: Why EL compact is likely in LDCs • LDC Governments have strong incentives to pursue EL… • Citizens feel insecure about trade: Recent World Value Survey reveals 77.1% respondents in developing countries are in favor of limiting imports. • Rising frequency and volume of protests against free trade throughout the developing world • Even nondemocracies have incentives to maintain a social compact alongside openness. (Wintrobe 1998, Rudra and Haggard 2005, Ames 1988)

7. 3. Argument: Groups adversely affected by trade Liberalization • Low-skilled workers • skill-biased technological change (Arbache, Dickerson, and Green 2004, Hanson and Harrison 1999, Feliciano 2004, Wood 1997) • economic and political legacy of ISI (infant industry protections during ISI were biased towards large enterprises in low-skilled sectors ) • Informal sector workers • confronted with greater competition for nonstandard jobs • Skilled workers • Many LDCs using infant industry protections supported firms in high- skilled sectors as well as low- skilled ones Fourth wave of WVS: 74% of the LDC respondents state that job security is their most important consideration

8. 3. Argument: Foundations for public employment in LDCs • Public employment has long been a key source of welfare protection in LDCs, and governments are maintaining this preferred form of compensation in response to economic openness. • This emerged as a social insurance strategy during import substitution industrialization (ISI). • slow expansion of the private sector • worsening macroeconomic situations • rapid population growth • Fueled by government and worker concerns about the consequences of mass unemployment. By the mid-eighties: India (72%) Burma(74%) Botswana (48%) Kenya (50%) Egypt (68%) In comparison: OECD (13%)

9. 3. Argument: Political motivations of LDC Governments • Business • More likely to support a ‘disguised’ redistributive policy to avoid the opposition that would occur in response to explicit tax-transfer schemes. • Policy-figures can claim that public projects are needed for growth, even when they are really intended for social insurance purposes (see Alesina et al 2000). • Politicians • Continued access to rents • Increase public trust • Skilled and low-skilled workers (with or without jobs in public sector) • public sector jobs represent viable options in difficult times and can thereby, reduce the overall perception of risk • Benefits of public sector jobs can spread throughout the economy by way of informal risk-sharing arrangements with extended families (Rodrik 2000) • Urban informal (unskilled)sector workers • Caveat: unlikely to receive compensation • Politically weak

10. 3. Hypotheses • H1: In contrast with OECD countries, public employment in LDCs will increase as trade expands. • H2: Employment in civil service and administration will increase as trade expands. • H3: Employment in SOE will decrease as trade expands. • H4: Public employment does not benefit the poor

11. 4. Empirical Analysis: Effects of openness on public N

12. 4. Empirical Analysis: Effects of openness on CS and admin

13. 4. Empirical Analysis: Effects of openness on SOE employ

14. 4. Empirical Analysis: Effects of Public N on Poverty

15. 4. Empirical Analysis: Summary of results

16. 6. Implications • Developing countries have sought to build support for globalization, and to pacify both its real and potential “losers”, by using other techniques more suited to the histories and situations of these countries. • Developing countries have sought to build support for globalization, and to pacify both its real and potential “losers”, by using other techniques more suited to the histories and situations of these countries. • Key concern(s): rising inequality and instability; support for trade will be short-lived