Foreign Ownership and Wages in British Establishments

This paper uses the 1990-1998 Workplace Employee Relations Survey (WERS) panel data set to show that foreign establishments in Britain pay 13 per cent higher wages than domestic establishments. However, the differential disappears when we control for the skill structure within establishments.

Spatial Inequality for Manufacturing Wages in Five African Countries

wage inequality, earnings function, location, Africa

Spatial inequality for manufacturing wages in five African countries

This paper uses data on individual earnings in manufacturing industry for five African countries in the early 1990s to test whether firms located in the capital city pay higher wages than firms located elsewhere, and whether such benefits accrue to all or only certain types of workers. Earnings equations are estimated that take into account worker characteristics (education and tenure) and relevant firm characteristics (notably size and whether foreign owned). Any location effect identified is therefore additional to appropriate control variables. There are two main findings. First, we find evidence of a ‘pure capital city premium’ equivalent to between 12 per cent and 28 per cent of nominal average earnings in the five countries. In some countries this location premium exceeds plausible consumer price differentials, between the capital and other urban areas. This does suggest that real (purchasing power) manufacturing wages are higher in the capital city (although this real premium is no more than ten per cent). Second, we find that skilled workers earn a higher wage premium in the capital city than those less skilled

State-business relations as drivers of economic performance

Effective state-business relations (SBRs) have been lacking in industrial policy thinking despite the strong theoretical case for SBRs. The empirical study of state-business relations in developing countries has emerged only recently, with notable contributions starting in the mid-1990s, developing further in the 2000s and gaining more general acceptance in the 2010s. The evidence suggests that effective SBRs can matter for economic performance. The case studies suggest that SBRs can be effective (Mauritius) but also ineffective (Malawi). The quantitative evidence further suggests that high scores on SBRs measures are related to higher economic growth and firm level productivity

Spatial inequality for manufacturing wages in five African countries

This paper uses data on individual earnings in manufacturing industry for five African countries in the early 1990s to test whether firms located in the capital city pay higher earnings than do firms located elsewhere, and whether such benefits accrue to all or only certain types of workers. Earnings equations are estimated that take into account worker characteristics (education and tenure) and relevant firm characteristics (notably size and whether owned by a foreigner). Any location effect identified is therefore additional to appropriate control variables. There are two main findings. First, we find evidence of a 'capital city premium' that varies between 12% and 28% in the five countries. This location premium does not always exceed plausible consumer price differentials, between the capital and other areas, and therefore does not demonstrate that real (purchasing power) manufacturing wages are higher in the capital city. This suggests that spatial inequality in real earnings is unlikely to be significant for manufacturing employees. Secondly, while we find that skilled workers earn a higher wage premium in the capital city than less skilled workers, this is not because of location effects on earnings per se, but rather because of other firm characteristics of firms located in the capital city such as size and foreign ownership. This suggests that spatial inequality in itself does not directly contribute to skilled/less-skilled wage differentials in manufacturing

Trade, FDI, Growth and Poverty in Bolivia

After several decades of “state-capitalism” characterized by import substitution policies, Bolivia implemented in 1985 a New Economic Policy (NEP) following neo-liberal ideas of free trade, privatization, and liberalization of capital flows. It was hoped that the opening up of the economy would attract foreign direct investment (FDI) which in turn would help modernize Bolivian industry, improve productivity, increase exports, stimulate growth, and reduce poverty. This paper investigates to what extent this actually happenedTrade, Foreign Direct Investment, Poverty, Inequality, Bolivia

Foreign direct investment and income inequality in Latin America: Experiences and policy implications

There is a heated debate on the effects of Foreign Direct Investment on development. Proponents argue that FDI is good for development, and hence the rapid expansion of FDI in Latin America in the past decade and a half is manna from heaven. In some cases, it is indeed difficult to imagine whether the same development level could have been achieved without FDI. Critics, however, contend that FDI leads to more poverty, isolation and a neglect of local capabilities. Recent difficulties with privatization in Latin America, which involved FDI, appear to tell us that not all share in the benefits. The paper positions Foreign Direct Investment (FDI) in the debate on income inequality in Latin America. It argues that: • Income inequality is persistently and relatively high in almost all Latin American countries. Labor income inequality plays an important role in total income inequality. It is therefore instructive to examine developments in labor income inequality, both by occupation and education. We review different data sources. All support the conclusion that in most countries the relative position of skilled workers has improved over much of the late 1980s and early 1990s. In many, but not all, countries this has manifested itself in an increase in relative wages. Most countries have also experienced an increase in the relative employment of skilled workers (which should have caused a drop in relative wages) (Section 2). • Many researchers have examined the causes of income inequality in Latin America. Income inequality can be determined by at least three factors: the distribution of factors of production, the demand for those factors, and the supply. Labor or human capital, i.e., the distribution of education and the returns to skill, are the factors of production that are driving income inequality (Section 3). • While FDI may have been good for development (e.g. we find positive correlations between FDI and GDP, or productivity, or wages) this masks the fact that different countries with different policies and economic factors tend to derive different benefits and costs of FDI. In addition, not all types of workers necessarily gain from FDI to the same extent. The reasons for this include: FDI induces skill-specific technological change; it can be associated with skill-specific wage bargaining; it may locate in skill-intensive sectors; and it provides more training to skilled than unskilled workers. A review of micro and macro evidence shows that, at a minimum, FDI is likely to perpetuate inequalities. This is in contrast to what traditional trade and FDI theories would predict. Nevertheless, because there are so many opposing effects, empirical research is required (Section 4). • When FDI is measured as stock as a share of GDP, almost all countries experienced substantial growth in FDI over the past decade and a half (with the exception of the last two years). However, growth rates and sector distribution vary markedly by country. New preliminary empirical evidence shows that FDI did not have an inequality-reducing effect in Latin America. There are possible exceptions, such as Colombia, but even here FDI may still have played a relatively minor role in reducing inequality. On the contrary, there are indications that in countries such as Bolivia and Chile FDI may have increased wage inequality. While this does not imply that FDI was or was not good for development and poverty reduction in these countries, it does imply that most of the gains of FDI have benefited skilled and educated workers. FDI tends to raise wages of both types of labor, although for Bolivia the results suggested that FDI lowered wages of less-skilled workers more than wages of skilled workers (Section 5). • Government and business policies affect the link between FDI and income inequality. A government may use education, training, infrastructure, trade and investment promotion policies to improve the developmental impact of FDI. Similarly, businesses can use pay, training, industrial relations and supplier development. There are areas in which both a business and development case can be made for improving the social impact of FDI, and hence where co-ordination is required to realize win-win situations. These include: training, health, supplier development, infrastructure and transparency, security and reputation (Section 6). The main conclusion of the paper is that while FDI may have been good for development, more can be done to improve its impact on income distribution and the poor in Latin America, either through appropriate government policies in the area of education, training and infrastructure (i.e. a general development policy), or through working directly with TNCs through incentives or partnerships. Determining which policies are most appropriate and relevant will depend on country characteristics as well as FDI characteristics, and hence will require further discussion and in-depth studies