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Global Labour Standards versus Freedom of Choice

by Kaushik Basu

by Kaushik Basu

The Conundrum

Most reasonable people agree that workers, wherever they happen to be, should have the guarantee of certain basic rights and minimal standards of wellbeing. But as soon as we try to convert this seemingly innocuous demand into concrete policies, we run into controversy.

Would one standard, no matter how low we set it, not do injustice across nations-demanding too little of the industrialized countries and too much of the poorest? If poor workers in one of the least developed nations feel that they are willing to expose themselves to large health hazards in order to be able to feed their families, should an international organization or government have the authority to disallow such work? Of course, we will all agree, that no one should be poor enough to have to do such work. But the question is: if they are so poor, do we have the right to stop such work?

Underlying these practical questions are deep philosophical and analytical issues and they form the focus of this lecture. Such analytical inquiry is important to ensure that our interventions do not go wrong, and hurt the very constituency they are meant to help.

In the city of Calcutta, an area called Salt Lake, which was originally a salt marsh, was developed by the local government to enable relatively worse-off people to own land and houses. So plots were sold off at a subsidized rate. But it then struck the government that these people to whom the plots were sold could lose their land to rich buyers. So a law was enacted to disallow the sale of these Salt Lake plots. This was meant to help the original buyers. When economists are told about this policy, they laugh. Surely a person who wishes to sell their land will be better off by being able to sell it.

"Since international labour standards are meant to help poor countries it is crucial that the details of the interventions be formulated by poor nations." © IFAD/Anwar Hossain
"Since international labour standards are meant to help poor countries it is crucial that the details of the interventions be formulated by poor nations." © IFAD/Anwar Hossain

​This is part of a larger principle in economics: a contract between two consenting adults, that has no obvious negative fall-out on others, is their business. Government has no reason to intervene; if anything, government should provide the machinery for enforcing such contracts. This 'principle of free contract' is, in turn, derived from a more fundamental principle, that of 'Pareto', which asserts that any change which leaves one person better off and no one worse off is a desirable change and ought not to be thwarted. 

While most economists subscribe to the principle of free contract, many - often unwittingly -support legislative interventions that seem to violate this principle. The same people, who laugh at the folly of the government that enacted the Salt Lake legislation, frequently support global conventions that disallow workers in poor countries to work at jobs that expose them to large health hazards.

Banning these contracts is often justified by making vague references to 'obnoxious markets'. I argue in this lecture that we need to be more circumspect in justifying bans on such market activity. The world has gone through a phase of over-vigilant government and over-regulated markets wittin nations. This has given rise to the chorus of demand for economic reform and liberalization. What we are risking now is the same mistake at a global level. Thanks to globalization, it is now easier to intervene in one another's nations and there is a genuine risk of over-doing this.

I am not arguing against intervention. Governments and international organizations have important roles to play in controlling and steering the market. But interventions have to be well-crafted and carefully justified, using normative economics, data and theory.

Let me here consider one controversial matter of international labour standards in which people are often tempted to intervene globally in local practices in developing countries, as an example. 

Labour Rights in EPZs

Many countries have done very well in the export market by creating special export processing zones (EPZs), where firms that produce exclusively or primarily for the international market are given special land and benefits by the government. Mexico's maquiladoras, China's 'Special Economic Zones' and Malaysia's numerous EPZs and 'licensed manufacturing warehouses' are examples of this. One of the things that multinationals working in these zones do not want is labour trouble and stoppage of work. To ensure this some countries have placed restrictions on collective bargaining and trade union activity and suspended the application of minimum wage laws (which are frequently the source of worker- management trouble) in these zones. That is, workers wanting to work in these zones have to relinquish some of the rights that other workers in other parts of the country can take for granted.

This has led to protests that export process- ing zones that indulge in such practices are immoral and anti-labour. I do not think that the labeling can be used quite as easily. This is because no one is compelled to work in an export processing zone. If a worker chooses to work in one then presum- ably both the worker and the employer like it that way and the principle of free contract seems to kick in. As the US judge, dismissing the case in which a person sued McDonald's for his obesity, pointed out: No one is forced to eat at McDonald's.

Hence, banning the practice of curtailed rights in EPZs is certainly not axiomatic. There may be arguments for this but such arguments need a great deal more sophistication than we have shown thus far.

When Can We Intervene?

In this lecture I develop three possible arguments that can be used as general principles for justifying interventions. Here they are in somewhat cryptic form.

A. Irrationality

Human beings are often irrational. We are frequently impatient and willing to make disproportionate sacrifices to make good things happen soon. We are atrocious at understanding interest rates where compounding is involved. We lack self-control. It is therefore welcome that modern behavioural economics has drawn our attention to these systematic irrationalities, even though it is a bit dismaying that economists needed behavioural economics to realize that not every- body is always rational.

When a villager regularly takes loans at interests rates of 10 percent or more per month (I encountered a lot of this during my field work in a village in Jharkhand, India), economists explain this in terms of the alleged fact of high default rate or monopoly pricing. What is not allowed for is the possibility that the borrower may not understand what 10 percent per month means in terms of the enormity of repayment burden.

Some interventions can be justified to protect people against systematic and established human irrationalities.

B. Multiple Equilibria

In my earlier research on child labour I have discussed how labour markets in poor nations may have multiple equilibria, with low wages and children working in one equilibrium and high wages and no child labour in another. If this happens, then in the vicinity of the low wage equilibrium, by allowing a child to work, we may achieve a Pareto improvement, true. But by banning all child labour, we may be able to deflect the whole economy to another equilibrium, which is not Pareto inferior to the first equilibrium. This does not mean that we should ban child labour wherever we see it, but that there are conditions under which a ban on child labour is compatible with adherence to the Pareto principle.

C. The Large Numbers Principle 

There are certain kinds of contracts which, when voluntarily accepted by both sides, lead to a Pareto improvement, but at the same time, if such contracts were to be generally allowed and used by large numbers of people, would cause changes in the market parameters which would leave some people worse off. That the normative status of certain actions or contracts, when performed in limited numbers, can be different from the normative status of the same actions or contracts performed in large numbers was argued by the philosopher Derek Parfit. I have argued elsewhere and will develop the analysis further in the lecture that the 'large numbers principle' can be formalized in economics and used by governments and international organizations to justify banning certain kinds of contracts.

Conclusion

International interventions have to be justified in terms of one of these principles. But we must guard against the risk of using these arguments as alibi to intervene wherever we wish, just as governments have done wantonly in the past by sighting imagined externalities. My reason for sketching these rules is in fact to urge discretion in intervention. We must make sure through theory and empirical work that a proposed intervention satisfies one of these criteria before we sanction its use.

And, turning to a more practical matter, since international labour standards are meant to help poor countries it is crucial that the details of the interventions be formulated by poor nations. We will have to work much more actively to give voice to poor nations in various international fora that are involved in crafting policy in their interest. Imagine if there was a colloquium in Karachi attended by a large number of representatives from sub-Saharan African governments and poor Asian and Latin American governments (with maybe a few representatives from industrialized countries) to discuss school violence and gun laws in developed countries and then the conference tried to initiate a policy of monitoring and controlling these practices in the US, Europe and other industrialized nations. This would be consdered outrageous. The way we are going about the legitimate task of worrying about global labour standards is equally outrageous. If we want to achieve our task effectively and in the interest of the poor, we need to involve governments and civil society of the Third World much more and think in terms of more democratic methods of formulating and implementing policy.

Kaushik Basu is Professor of Economics and the C. Marks Professor of International Studies at the Department of Economics, Cornell University, and the Director of the Programme on Comparative Economic Development at Cornell. He founded the Centre for Development Economics in Delhi and has held visiting positions at Princeton University, MIT, CORE, and LSE. He is Editor of Social Choice and Welfare, serves on the Editorial Board of other economics journals and has contributed popular articles to leading newspapers and magazines.

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