Can poverty be a comparative advantage? : a study of export strategies based on low labour costs : the case of Zimbabwe

Can high levels of poverty be a competitive advantage for a country in the world economy? Or, put differently, can low labour costs provide a sustainable basis for a small country’s export strategy? In this study poverty is represented by low real wages that are at a physiological minimum subsistence level. Poor countries are frequently recommended to carry out export strategies based on their comparatively lower labour costs. But what is the merit of the lowwage strategy for competitiveness? Are the policies of trade liberalisation effective in terms of generating economic development and reducing poverty, in a small economy with natural comparative advantage in activities that intensively use cheap unskilled labour? The analysis arrives at two fundamental lessons for trade strategy: First, in order to attain international competitiveness without holding back living standards, trade strategies should aim for a development where real wages rise, but where productivity increase even more. Second, labour-cost advantage should be a temporary part of a conscious strategy for upgrading production into activities in which technological progress and productivity growth is still achievable. World Bank and IMF policy-documents promote ‘flexibility’ in wage-setting to allow ‘downward adjustment’ of wages. The two institutions argue that this policy is positive for national economic development and ‘pro-poor’, i.e. good for job-seeking individuals. However, this study argues that this policy advice may not be consistent with the aim of raising living standards as that will require rising real wages. Low production costs represented by cheap labour are attractive to entrepreneurs. Consequently, high levels of poverty may themselves encourage a specialisation in low labourcost advantages. The self-reinforcing dynamics of specialisation may perpetuate the dependence on supply of cheap labour. Such cumulative causation may aggravate the vicious circle of poverty, locking a small outward-oriented economy with an undiversified export structure into dependence on low costs and low wage levels. This situation may impede the possibilities to raise real wages and thereby standards of living for the majority of workers and their families. After adopting trade liberalisation policies in 1990, Zimbabwe has experienced a pattern of specialisation where export-oriented production has made increasingly intensive use of basic factors such as tobacco leaves, cereals, minerals, and cheap labour. As a result, the liberalisation has allowed the dictates of natural comparative advantage to reassert itself, resulting in a stronger orientation of export production towards primary goods, making more intensive use of abundant resources (basic factors). In these activities in which Zimbabwe has a natural comparative advantage, the vital productivity growth required for long-term development is not likely to be achievable