2 1702 DEVELOPMENMT BRIEF Number 61 The World Bank November 1995 market-based and internationially Will wages converge? integrated patterns of development succeed in this move without large Perhaps. The main determinant of the outlook for or permanent costs for labor. workers is domestic investment-in capital, education, Two global scenarios infrastructure, and technology Two global scenarios illustrate the extent of what is possible and the he most prosperous group of the dislocations that changing trade magnitude of the dangers ahead for workers in the world-the patterns bring. workers in each of the world's prin- * skilled workers of the indus- * Whether governments succeed cipal regions (figure 1). The first trial countries-now earn on average in putting in place a framework for scenario is one of muddling some 60 times more than the poorest labor policy that complements in- through and is largely based on group-the farmers of Sub-Saharan formal and rural labor markets, persistence of past trends. Because Africa. Can the 21st century usher in supports an effective system of in- there is the distinct possibility that an era of converging incomes? The dustrial relations in the formal sec- this path would lead to widening stakes are high. There is the potential tor, provides safeguards for the differences between some regions for great advances on all fronts: ro- vulnerable, and avoids biases that and widening inequality in labor bust job creation, rising productivity, favor relatively well-off insiders. income in some countries, this is and improvements in job quality. But * Whether the countries strug- called a scenario of slow growth there is also the risk that progress will gling with the transition to more and divergence-the "divergent" leave some out, from unemployed workers in the industrial countries Figure 1 Actual and projected wages and employment shares to much of the population in Sub- by region and skill level Saharan Africa, and will fail to reduce severe inequalhties in Latin Wages (U.S. dollars) America and elsewhere.* 100,000 _ Actual 1992 OECD skiled Conditions both in individual do- Convergent scenario, 2010 mestic economies and in the inter- OECD unskilled national economic environment Transition skilled matter to the outcome. Probably of Chinese skilled Latin American unskilled greatest importance are the condi- South Asian skilled tions prevailing in developing and 10,000 Transition unskille Southi Asian unskilled ._ transition economies: Chinese unskilled * Whether countries succeed in South Asian farrs getting onto market-based growth paths that both generate rapid de- Afncan=amr mand for labor and raise the pro- ductivity of the workforce. 1,000 * Whether they succeed in taking advantage of changes at the inter- national level, be it in reacting to 0 10 20 30 40 50 60 70 80 90 100 new market opportunities or in Share of global workforce in 1992 (percent) attracting capital-or in managing Note: Wages are in 1992 international prices, scaled logarithmically. Each group's share of the global workforce is indicated by the length of its horzontal line segment. Unlabeled line segments represent groups accounting individually for less than 2.5% of the global workforce (10% in total). The scenarios as depicted use 1992 'For more details, see World Bank, World Development Report workforce shares, not those projected for 2010. Transition refers to the formerly centrally planned economies 1995: Workers In an Integrating World, New York: Oxford of Europe and Central Asia. Unniersity Press, 1995. Source: World Bank, World Development Report 1995, New York: Oxford University Press, 1995. scenario. The second scenario ex- ism of another sort. In the conver- takeoff, but those in Sub-Saharan plores the potential implications of gent scenario the Uruguay Round is Africa did not. Under the divergent strong policy action at the domestic fully implemented and there is fur- scenario things could actually get level in all parts of the world, ther progress in trade liberaliza- worse-the ratio of labor incomes combined with deeper international tion-including in agriculture-at between these two groups could integration. This is termed a both the regional and the multilat- rise to about 70 to 1. scenario of inclusion and conver- eral levels. gence-the "convergent" scenario. How does labor fare? In both Slow growth or inclusion? Both scenarios are only illustra- scenarios the technological bias Governments have to work with tive-the numbers are projections favoring skilled workers that char- the legacies of past policies and de- based on many assumptions, and acterized the past two decades con- velopment structures. Workers certainly not a forecast. But they are tinues. Under the divergent have to live with the opportunities a plausible guide to the conse- scenario this bias interacts with at hand. These are molded by the quences of success and failure and slow capital accumulation and stag- structure of the economies and so- take into account likely future nating world trade. The result is cieties in which they live and by trends in both economywide effects slow GDP growth in most regions the capabilities formed by their and international integration. and rising inequality among and personal histories-what they have The divergent scenario assumes within regions. In contrast, the con- received from their parents and that recent trends in investments vergent scenario finds incomes ris- from their schooling. But for both continue or deteriorate, that a siz- ing and inequality falling across governments and workers, that is able share of those already enrolled most countries and in most regions. just the starting point. Both are in schools drop out prematurely, In poorer developing countries the agents of change. and that the overall productivity of rise of globalization helps by in- Good choices by governments, in labor does not rise rapidly. The creasing the demand for low-skilled the domestic and the international convergent scenario assumes that workers. In the middle-income and realms, can lead to advances in the investment rates pick up, that en- wealthier countries the negative ef- living standards of all groups of rollment rates stabilize at current fects of globalization are swamped workers in the world and help levels and dropout rates decline, by the effects of skill improvement, bring back into the fold those who and that investments in infrastruc- which reduces the pool of unskilled are unable to keep up or adjust on ture, technological transfers, and workers and so increases the rela- their own. If international condi- improvements in the quality of tive demand for their services. tions are favorable and govern- governance contribute to rising la- International inequality will ments do their part to create the bor productivity. The convergent change only slowly under any real- right environment, workers will be scenario must be supported by at istic scenario. But the scenario of able to make the job choices, nego- least slight rises in savings rates, convergence and inclusion could tiate the conditions of work, and lower fiscal deficits in the rich start to reduce the immense differ- make the schooling decisions for countries, and reasonable amounts ences that now exist. The ratio be- their children that will improve the of international capital flows, in- tween the wages of the richest and welfare of all groups of workers. cluding development assistance. the poorest groups in the interna- That could begin to reverse the The effort in Sub-Saharan Africa tional wage hierarchy-skilled in- long-run trend of widening inter- must be especially strong. dustrial country workers and national inequality between work- The international scene also mat- African farmers-could fall from an ers that has been so marked a ters greatly. In the divergent sce- estimated 60 to 1 in 1992 to 50 to 1 feature of the past century, and nario protectionism does not go by 2010. This would begin to re- bring new hope and opportunities away, and countries either drag verse the large gap that has to millions currently trapped in their feet in implementing the Uru- emerged over the past century, as poverty. And that would set the guay Round agreement or offset workers in industrial countries stage for a truly global golden age gains in one area with protection- reaped the benefits of economic in the 21st century. Development Briefs are issued by the World Bank to inform the media, business, academic, and government policy communities about development policy analyses and results from the Bank's research activities. They are drawn from the work of individual Bank researchers and do not necessarily represent the views of the World Bank and its member countries-and should not therefore be attributed to the World Bank or its affiliates. Briefs are issued periodically by the Research Advisory Staff, Development Economics Vice Presidency, The World Bank, 1818 H Street, NW, Washington, DC 20433. Tel: (202)473-3984, Fax: (202)477-0955. Briefs are not copyrighted and may be reproduced with the appropriate attribution.