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29 September 2010

ILO and IMF, UNCTAD converge on need to close global decent work deficit

To avoid the risk of a new economic crisis and address global imbalances, it is imperative to focus on a much more job-intensive recovery, stronger social protection and higher wages for average workers. This was one of the key conclusions of an international conference, entitled "The Challenges of Growth, Employment and Social Cohesion," organized by the International Labour Organization (ILO) and the International Monetary Fund (IMF), in collaboration with the Norwegian Government, held in Oslo on 13 September. A similar message was delivered by the United Nations Conference on Trade and Development (UNCTAD) in its Trade and Development Report 2010, which was discussed that same week at UNCTAD’s annual Trade and Development Board (TDB) in Geneva.

IMF Managing Director Dominique Strauss-Kahn, in explaining why he wanted to join forces with the ILO, said “As we venture into an uncertain post-crisis world, finding sources of strong, inclusive, growth and stable employment will be our key challenge. Everything is secondary to this over-riding objective.” Beyond economic considerations, failure to meet the challenge of unemployment and social protection could lead to a “lost generation” of discouraged youth who would have less faith in public institutions and democracy. In low-income countries, he added, it is “about life and death. We could witness instability, a breakdown of democracy, or even war.”

ILO Director-General Juan Somavia said the global financial crisis has led to highest level of unemployment ever recorded – 210 million people. “This has sharpened prior international concern about the failure of the global economy to generate enough decent work opportunities in all countries.” He said the purpose of the conference — which brought together a number of world leaders in government, international organizations, trade unions and civil society — was to think together on how to address problems of rising inequalities, a growing informal economy, job-weak growth patterns, stagnant wages, absence of social protection, and many other factors linked to the global decent work deficit, which he described as “the crisis before the crisis.”

One concrete outcome of the Oslo conference was a commitment of the two organizations to work together on (a) how to build a social protection floor “within a context of a medium- to long-term framework of sustainable macroeconomic policies and strategies for development;” and (b) “policies to promote employment-creating growth.” The two institutions also agreed on the central role of effective “social dialogue” in crises responses and will deepen their collaboration in support of the G20’s Mutual Assessment Process aimed at ensuring “strong, sustained and balanced global growth.”

The ILO and IMF will approach these issues from different angles and different tools, reflecting their respective constitutional mandates. Mr Strauss-Kahn defined this as a “historic moment” for the two bodies, which had never decided to work together in such a fashion in the past. “The IMF is concerned with jobs, like the ILO is concerned with macroeconomic sustainability,” he said. “We will of course disagree on plenty of issues, but that is the whole purpose of such discussion.”

The Oslo conference, like the UNCTAD TDB discussions focused on whether the rush to “fiscal consolidation” or “fiscal austerity” could undermine the recovery and on how closing the decent work deficit is a key macroeconomic objective, including to deal with the root causes of “global imbalances” between trade deficit and surplus countries, which if not corrected, could lead to new instability and crises.

Fiscal austerity or a job recovery?

Most participants in Oslo were concerned that the solid consensus displayed among the G20 leaders in 2009 in favour of strong counter-cyclical measures (expansionary fiscal and monetary measures to counter the collapse of private sector demand) was now crumbling. Many European countries were bending to the pressures of financial markets to “restore confidence” through drastic deficit cuts. A minister of a European country about to embark voluntarily in very significant spending cuts defended this position by arguing that “it is all very nice to call for more jobs, but the reality is that we need to bring down these deficits into line, even if it means cutting public sector jobs, which in any case are crowding out good private sector jobs, where growth will come from.”

In contrast to this view, which many described as ideological, the joint IMF-ILO paper for the Oslo conference warns that “premature fiscal retrenchment could damage growth and lead to even larger deficits and debts. Abrupt shifts in fiscal policy stances, in many countries at the same time, could destabilize recovery and weaken future growth.” The UNCTAD report goes further by saying that fiscal austerity spreading throughout Europe could lead to a “double-dip recession” or even a “deflationary spiral.”

One of the breakout sessions drew out the following conclusions on the fiscal consolidation issue:

1. Moving away from an ideologically driven approach to fiscal consolidation implies a new understanding of the role of fiscal policy in stimulation and sustaining growth and development. The relationship between growth and development is not a one-way street, but a mutually reinforcing cycle in which the proactive role of the State, notably through fiscal policy, is essential.
2. In the current conjecture, timing (a much longer term framework for balancing the budget) but also content (what needs to be cut) is of the essence. There are strategic spending areas that should be ring-fenced from future cuts and even strengthened to ensure a quicker and more job-rich recovery. These include social protection, education, active labour market policies and financial mechanisms to support entrepreneurship, especially among small- and medium-sized enterprises (SMEs) where the largest volume of jobs are being created.
3. Fiscal consolidation means looking not just at the spending but also at the revenue side of the equation. As the Greek Prime Minister indicated in an earlier session, collective efforts need to be stepped up to close tax havens and loopholes. New and fairer sources of tax revenue must be put in place. These would include green taxes and most importantly, a financial transaction tax (FTT), which some 60 Member States have been advocating for in the build-up to the September 2010 “MDG Summit.” It was noted that the leadership of one of the European countries promoting the most drastic self-imposed austerity measures is also among the most opposed to the idea of an FTT.
4. Giving in to the pressures of financial markets for strong austerity does not necessarily pay off even in the short term. Another European country that earlier undertook stark fiscal cuts in response to bond market pressure is still suffering from bad ratings — not least because the resulting poorer growth prospect seem to trump the so-called “confidence” argument for rapid fiscal consolidation. It is essential to develop new instruments to counter the vagaries of the current bond market, including through international insurance mechanisms funded from public sources.

This last point was also emphasized by Heiner Flassbeck, lead author of the UNCTAD report, in his presentation to the UNCTAD TDB. He said countries facing balance of payments problems may face difficulties in sustaining counter-cyclical measures without external support, which should take the form of a “international lender of last resort.”

A great concern expressed in both meetings is that the premature exit from demand-stimulating macroeconomic policies in an effort to reduce budget deficits and regain market confidence means that these countries have to rely on “exporting their way out of the crisis,” which in other terms means “exporting their unemployment to the rest of the world.” If all countries try to do this, it causes a race to the bottom in wage competitivity and labour flexibility — a key feature in the build up to the current crisis — which ultimately is self-defeating as all exports minus imports have to add up to zero.

Aligning macroeconomic and social policies with the decent work imperative

As explained by both ILO and UNCTAD, a major mistake of conventional economic theory and practice is to treat labour as only a cost of production, where unemployment is due to “labour market rigidities.” This idea that job creation requires lower wages is erroneous because wages and livelihood incomes are also the main source of mass purchasing power, the main source of aggregate demand. Evidence suggests that it is precisely expectations of rising aggregate demand and favourable financing conditions that drives investments in productive capacities (which condition the scope for more quality employment creation) rather than reductions in unit labour costs, the UNCTAD report says.

Treating labour only as a production cost has led many countries to pursue export-led growth strategies based on wage compression, which according to UNCTAD did not generally overcome persistent unemployment problems for two reasons: (1) exports did not grow as expected; and (2) productivity gains were used to lower export prices rather than to increase wages and therefore domestic demand.

The widespread phenomenon of stagnant or declining real wages (expressed also in terms of a growing share of national income going from labour to capital but not reinvested in productive employment but in speculation) is a key source of growing inequalities worldwide. The joint ILO-IMF paper notes that: “In the wake of the current crisis there is an emerging view about the importance of growing inequality as one of the causes of global crises past and present.” These “internal imbalances” due to inequality and extreme concentrations of wealth have led to a deficiency in global aggregate demand, which was sustained for a while by increased indebtedness by average consumers in the United States whose wages had been stagnating, and more recently declining in real terms. The housing bubble was one expression of this phenomenon which when it burst triggered the current global crisis.

Looking forward, unless “internal balances” are dealt with — real wages in all countries should begin rising again in line with productivity growth to rely more on internal demand — there is a real risk that the “global imbalances” will be dealt with through a further recessionary spiral. More austerity to cut demand in net importing countries would be matched by cutting output (and jobs) in net surplus countries. French finance Minister Christine Lagarde expressed grave concern about this possible scenario at the Oslo meeting.

The IMF section of the Oslo conference paper suggests that: “What is needed is for emerging markets with large external surpluses to adopt policies that nurture domestic demand so as to offset the loss of demand from fiscal policy actions in advanced countries.” This echoes the call in the UNCTAD report for developing countries to become less reliant on exports and strengthen domestic demand for growth and employment creation (although sustaining enough export earnings to continue financing required imports, especially capital goods).

For countries like the United States, the IMF argues that “wage moderation” (often advocated as a means to limit unemployment losses) would “either add to deflationary pressures or lower aggregate demand, neither of which is desirable at present.” Many regard this as a significant departure from the Fund’s usual stance. Where UNCTAD and IMF clearly diverge, as Heiner Flassbeck emphasized at the TDB, is IMF’s position on wage moderation for more export-oriented economies which, according to the IMF, could “impart a boost to competitiveness and thus spur greater external demand,” which is “particularly appealing for countries that are part of a currency area [such as the Eurozone].” This goes the opposite direction of an employment-centred way of dealing with the Eurozone’s “internal imbalances,” where wage moderation in one successful exporting country in practice pressures others to do the same, which in turn just contributes to more stagnant growth and employment creation.

Rebalancing growth patterns in favour of more and better jobs requires a combination of economic and social policies that mutually reinforce each other and coordination among countries around these policies. According to UNCTAD, these include a range of policies, many of which are also advocated by ILO:
• Counter-cyclical fiscal policies to stabilize demand, but not only in times of crisis;
• Providing infrastructure and State services to enable profitable investments in productive capacity;
• Employment-friendly monetary policies to keep credit costs for job-creating productive investments low;
• Exchange rate policies that maintain the ability of domestic firms to compete against imports by avoiding currency over-appreciation;
• Institutional arrangements for collective bargaining among workers’ and employers’ associations;
• A legal minimum wage and its augmentation over time in line with productivity growth;
• Public employment schemes; and
• Measures to raise incomes of agricultural producers in line with overall productivity growth.

Among others, the ILO would add the construction of a “social protection floor” (which could include public employment schemes, but also cash transfers and a basic health package) as a key dimension, not only to protect individuals and families against external shocks, but also to stabilize aggregate demand.

Finally, many participants at the Oslo meeting emphasized that reforms of the international financial system should not stop at measures to prevent or limit future crises and instability. The present financial system has created a culture of high short-term rewards for investors through financial arbitrage and intermediation that does not produce value-added and productive employment in the real economy. Reforms must now begin to seriously explore ways to direct finance to long-term productive investments capable of generating sustained decent employment.

More information on the Oslo conference is available online.

To access the Joint ILO-IMF conference paper "The Challenges of Growth, Employment and Social Cohesion," click here.

For UNCTAD’s Trade and Development Report 2010, click here.

See also:
Decent Work and Fair Globalization: A Guide to Policy Dialogue, United Nations Non-Governmental Service (NGLS), 2010: