Globalization, Increased FDI flows and Wage Inequality in a Small Petroleum Rich Economy

• Author: Bhoendradatt Tewari/Roger Hosein
• Pages: 121-146

Chapter 5

Globalization, Increased FDI flows and

Wage Inequality in a Small Petroleum Rich

Economy1

This chapter investigates the impact of FDI on wage inequality in a small

petroleum rich economy. The chapter argues that in Trinidad and

Tobago, Foreign Direct Investment (FDI) by being skills biased, leads to

an increase in demand for skills and hence an increase in the returns to

skilled labour relative to unskilled labour, the overall consequence of

which is an increase in sectoral wages in the FDI predominated sector.

The paper also shows that FDI in T&T has encouraged a dualistic wage

structure and that the petroleum sector has engaged a greater amount of

trade union activity than any other sector.

This chapter was first published as an article in the West Indian Journal

of Engineering, Vol. 27, No. 2, Jan 2005, pp. 27–44.

1 The authors would like to acknowledge the research assistance of Mr. Rishi Singh.

Trade, Investment & Development

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5.1 INTRODUCTION

It is well documented that FDI represents an important source of

complementary flows to facilitate the development process in developing

economies. A current controversial topic, however, remains whether FDI

can help to lower the levels of poverty prevalent in developing

economies. The answer to this type of question will depend upon the

extent of investment income that is remitted and how skilled workers are

deployed relative to unskilled workers.

This paper focuses on a subset of this type of problem – the implications

of increased FDI flows for wage inequality in Trinidad and Tobago. The

paper reviews the experience of the T&T economy, an oil blessed state,

and tries to assess the impact of one aspect of globalization – greater FDI

inflows, on wage inequality.

This paper advances the FDI wage inequality argument in the case of a

small petroleum rich economy in the following important ways: in the

first instance it extends the empirical research to the case of a small

hydrocarbon rich economy and in the second case, investigates the

degree of wage inequality between the petroleum and other important

sectors. This study also investigates the extent of FDI investment income

that is remitted to the foreign country by MNCs operating in T&T.

5.2 GLOBALIZATION AND FOREIGN DIRECT

INVESTMENT FLOWS

FDI can be defined as investment of a long-term duration from one

country to another that may take the form of a “composite bundle of

capital stocks, know-how and technology” (de Mello, 1997). The

implication of courting FDI is that there exists a long-term relationship

between the investor and the host country’s enterprise sometimes

involving a significant degree of influence by the investor in the

governance of the host country’s economy.2

Almost sixty years ago, Sir Arthur Lewis, wrote an essay entitled

‘Imperialism, the Highest Stage of Capitalism’. In this piece, Lewis

argued that capitalists in the Western World, in order to forestall the

likelihood of a worker’s revolt at home, would commence exporting their

capital so that they could extract profits from labour forces in the LDCs.

Many LDC governments have in the past taken heed of this type of

advice and have sought to restrict their inflows of FDI. However, by the

2 Direct investment comprises not only the initial amount of investment between the

investor and the enterprise but also all subsequent transactions (Kamara, 1988).