Volume 43 | Number 2 Spring 2008
Making Trade Liberalization Work for the Poor: Trade Law and the Informal Economy in Colombia
Response: Comments on Kevin Fandl’s Article: Making Trade Liberalization Work for the Poor: Trade Law and the Informal Economy in Colombia by Juan Pablo Calderón Meza
IV. Linkages Between Liberalization and Informality
A. Trade Liberalization and the Informal Sector
The expansion of trade liberalization in Colombia is associated with an increase in the size of the informal economy. “[I]ncreasing informal employment is inherent to the current global economic restructuring.”138 Table 3 (below) represents the scope of the informal economy in Colombia as a percentage of GDP between 1981 and 2006. Despite the gaps in data due to the only recent implementation of annual statistics of Colombia’s informal economy, it is evident that this sector was close to 50% during the 1980s and early 1990s, and that the sector has grown substantially, to above 60%, since that time. The expansion of the informal sector might readily be linked to the implementation of the trade-opening policies of the 1990s, including the Washington Consensus.
It should be noted that some authors have found weak linkages between the implementation of the Washington Consensus and slowed economic growth. Mauricio Cardenas, for instance, found that Colombian growth slowed in the 1980s, before the reforms of the Washington Consensus were instituted.139 Many of these authors do not consider, however, the effect of labor market and trade-oriented reforms on the informal economy, which substantially expanded in the 1990s and which is linked to growing inequality and poverty. Because more than half of the Colombian economy operates in an illegal, unregulated marketplace, reforms that open opportunities for foreign imports and increased competition in the formal sector also exert downward pressure on wages and curb formal employment opportunities. Thus, while the economy may have been on a downward swing when the Washington Consensus reforms were implemented, it was the reforms that opened the door to the expanding gap between rich and poor, causing more lasting damage than the economic downswing itself.
Table 3. Size of the Colombian Informal Economy (as a percentage of GDP)140
[for the table, download the .pdf]
The laws passed in Colombia in the early 1990s that liberalized trade also increased competition, lowered the cost of factor inputs, and improved technology. All of these secondary effects are consistent with a decline in formal employment and a growing informal sector due to a decrease in demand for labor.
The size of the informal economy can be linked both to the level of unemployment and to the pace of trade liberalization in Colombia, as seen in Tables 3 (above) and 4 (below). As reforms that opened the Colombian economy to foreign trade were implemented, primarily during the 1990s, unemployment increased sharply; the informal sector grew upwards of 60%; and poverty reduction, while on the decline prior to 1991, began climbing steadily until 1998, when it again began to decline.
Table 4. Unemployment in Colombia (1980–2004).141
[for the table, download the .pdf]
In their study, Goldberg and Pavcnik contend that there are no clear linkages between trade liberalization and the scope of the informal sector.142 They find that the Brazilian informal sector was reduced in size during the period of trade liberalization identified by Goldberg and Pavcnik, whereas that of Colombia remained stable.143 While their study is comprehensive and interesting, the results are ultimately unconvincing. Goldberg and Pavcnik base their definition of trade liberalization on tariff reduction alone rather than examining, as I have done here, the level of imports (which is the actual effect of tariff reductions).144 Yet even when considering tariff reductions, they find a growing informal sector in Colombia prior to the 1990 labor law reform that eased the firing of workers,145 and a smaller increase post-1990 reform.146 Thus, even using a measure that may not accurately reflect the amount of increased trade Colombia experienced in the survey period, Colombia’s informal sector was still found to have expanded between 1984 and 1994.
Despite the aggregate growth of the Colombian economy, poverty reduction has slowed, inequality has not improved, and the informal sector has grown. A recent issue of the Colombian weekly news periodical Semana featured several articles on the state of poverty in Colombia. One such article highlighted the fact that poverty had been steadily reduced between 1978 and 1995, when the Colombian economy was growing at a rate of 4% annually and unemployment remained below 10%. During this period, the number of Colombians in poverty dropped from 45% to 21% of the total population.147 As the economy slowed after 1998, poverty increased in Colombia, reaching 57.5%.148
Consider the linkage between trade liberalization and poverty the Semana article above suggests. World Bank statistics support this perspective, showing that while trade liberalization has expanded, the fight against poverty has weakened substantially (see Table 5 below).
Table 5. Trade as a percentage of GDP in Colombia; Colombians living on less than $2 per day.149
[for the table, download the .pdf]
It is also clear that aggregate economic growth in Colombia has been declining since its peak of over 8% in the late 1970s (see Table 6 below). Accordingly, while trade has expanded and GDP per capita has risen slightly, the Colombian economy’s growth has been slowing, and has even been negative for some periods over the last twenty years.
Table 6. GDP Growth Rate in Colombia (1971–2005) (in 1990 U.S. dollars).150
[for the table, download the .pdf]
V. Recommendations
What is most urgently needed to address rising informality, inequality, and poverty in Colombia, and likely in other developing countries as well, is a strategy that permits the equitable distribution of income from trade, as well as a program that reduces the reasons for informal employment and strengthens the opportunities available in the formal sector. The first prong of this strategy requires more direct links between the Ministry of Trade, Commerce, and Tourism and the domestic agencies responsible for poverty reduction and sustainable economic development. Through a carefully designed system of taxation, a portion of all incoming proceeds from trade, including foreign direct investment, capital transfers, and imports and exports, should be dedicated to low-income loans, small business development grants, poverty eradication programs, low-income healthcare, education, property titling, and judicial reform. An example of an organization that could be funded via these trade taxes is the Banca de las Oportunidades (Bank of Opportunities),151 a new Colombian government organization that provides loans for starting small businesses. Organizations such as this have the knowledge and ability to bring the economic gains from trade liberalization to the majority of the population, making the process not only more productive, but also more equitable.
The second part of this strategy involves working to eliminate the causes of informality. “Specific laws, policies and programmes to deal with the factors responsible for informality, to extend protection to all workers and to remove the barriers to entry into the mainstream economy will vary by country and circumstance.”152 High unemployment in the formal sector caused by increasing competition and technology has reduced labor demand and pushed more workers into informal work. In addition, rigid Colombian labor laws have discouraged employers from seeking long-term formal workers for fear of losing the ability to hire and fire workers in times of economic volatility. The labor law reform passed in 1990 has eased this concern to some extent. However, it is still costly to fire workers in Colombian businesses.153
[T]o promote decent work, it is necessary to eliminate the negative aspects of informality while at the same time ensuring that opportunities for livelihood and entrepreneurship are not destroyed, and promoting the protection and incorporation of workers and economic units in the informal economy into the mainstream economy.154
Part-time and at-will employment are uncommon in Colombia, yet these two solutions offer employers the ability to engage more formal workers with less fear of long-term contractual obligations, such as unemployment payments and health benefits. Rather than relying upon a small staff of full-time employees and a number of day laborers, employers would be able to adjust workers’ hours based on current economic conditions. This solution offers employees greater access to the benefits of a formal economy, including documentability of income, potentially more reliability in their income, and more ability to seek loans and make purchases backed by a regular job. As an incentive, the state could offer employers tax benefits if they maintain workers previously employed outside the formal sector for a minimum of twenty hours per week.
These avenues for improving the economic condition of the majority of the Colombian population are only two of many potential solutions to the growing inequality and dismay caused by the distribution of benefits from liberalization. Yet they are both aimed at two general goals—reallocating the income obtained through foreign trade, and creating laws and incentives to slow, and hopefully reverse, the growing informal sector. With these goals in mind, trade liberalization can work as a productive tool for development and yield the much-praised results seen in the developed world.
VI. Conclusions
From the data presented in this Article, it is apparent that trade liberalization occurred at roughly the same time as an expansion of the informal sector and growth in unemployment and poverty. This does not mean that it was the liberalization policies and laws that directly caused these negative residual effects on the population. However, it does lead to the conclusions that the economic growth and development that arguably coincide with liberalization, at least in the case of Colombia, have been inequitably allocated, and that liberalization is associated with some negative economic effects on the majority of the population.
It must be noted that this Article is not intended to encourage the blind rejection of trade liberalization. Expanding markets and increasing competition can also have positive effects, such as the creation of new opportunities for self-employed workers and small, informal businesses to manufacture products in demand on global markets.155 For example, many informal workers occupy sectors such as the textile and garment industries, where global demand is high and the potential for income growth is undeniable. Put simply, this Article suggests that the mechanisms to facilitate this potential growth are not currently in place, and should include legal and regulatory structures that would permit informal enterprises to negotiate fair wages, social benefits such as health care and unemployment insurance, and training and education programs. With proper protective structures in place, some informal workers could yield significant benefits from trade liberalization efforts.
Unlike the developed world, it is improbable that a day will pass in Colombia, or most other developing countries, without interacting in some way with the informal economy. Whether it is buying a pack of gum or cigarettes on the street corner, bagging your groceries at the local supermarket, or purchasing a handmade garment at a street market, you are briefly departing from the ordered formal market that we in the developed world take for granted. Yet it is these informal workers who sustain much of the labor power in the world economy, keeping costs down for our clothes, food, and nearly every good that we purchase. Appreciating how this market functions and how the push for trade liberalization affects these workers is critical to understanding how poverty persists, how inequality expands, and how these hardships can be avoided.
Response: Comments on Kevin Fandl’s Article: Making Trade Liberalization Work for the Poor: Trade Law and the Informal Economy in Colombia by Juan Pablo Calderón Meza
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Footnotes
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