From Financial Crisis to Stagnation: The Destruction of Shared Prosperity and the Role of Economics

Thomas L Palley

Marshall McLuhan, the famed philosopher of media, wrote “We shape our tools and they in turn shape us”. His insight also applies to the economy which is shaped by economic policy derived from economic ideas, and it is the theme of my recent book which argues the global economic crisis is the product of flawed policies derived from flawed ideas.

Broadly speaking, there exist three different perspectives on the crisis. Perspective 1 is the hard-core neoliberal position, which can be labelled the “government failure hypothesis”. In the U.S. it is identified with the Republican Party and the Chicago school of economics.

Trade Unions, Class Struggle and Development

Ben Selwyn

How do class relations contribute to processes of capitalist development? Can workers’ struggles generate more progressive forms of human development, in the form of improved working and non-working conditions, rising pay and active social movements that bring workers’ concerns to the fore? Within much thinking about development the principal debate over the past 30 years or so has been between advocates of state-led and market-led development. For these advocates either state allocation and generation of resources or market-efficiency generates a growing pot of social wealth which trickles down, at some indeterminate point in the future, to the labouring population.

International Framework Agreements: Possibilities for a new Instrument

Siglinde Hessler

A new instrument of international labour regulation

International Framework Agreements (IFA) are important in international labour regulation. As the globalization of production and markets is increasing, an international regulation of labour is strongly needed. Existing instruments such as the OECD Guidelines for Multinational Enterprises, the ILO Tripartite Declaration of Principles Concerning Multinational Enterprises and Social Policy and the great number of ILO conventions among others have set important marks in the debate, but still lack recognizable success as they lack the power of sanctions. Furthermore, the growing number of voluntary and unilateral declarations on social standards, which are part of the Corporate Social Responsibility strategy of companies, have not attained concrete results as they lack binding force.

Global Labour Online Campaigns: The next 10 Years

Eric Lee

In November 2011, the military dictatorship in Fiji jailed two of the country’s most prominent trade union leaders. Following the launch of an online campaign sponsored by the International Trade Union Confederation (ITUC) and run on the LabourStart website, some 4,000 messages of protest were sent in less than 24 hours. The government relented, the union leaders were freed, and the campaign suspended. A month earlier, Suzuki workers locked out in India waged a successful online campaign through the International Metalworkers Federation (IMF) and LabourStart. Almost 7,000 messages flooded the company’s inboxes, and after only a few days, a compromise was reached.

New Economy vs. Old Ways

Goran Lukić

New buzz-words are entering into the traditional economic landscape of industrial relations. Managers and politicians who want to be in touch with new economic trends are using terms such as 'green economy', 'renewable energy' and 'corporate social responsibility (CSR)'. Another concept that is being touted as a 'big idea; is 'fair-trade' or 'Creating Shared Value (CSV)'. It seems that these terms are being translated into real action. According to an HSBC Global report, 19% of anti-crisis measures in France were put into the renewable energy sector in 2009, while 13% of Germany's 2009 anti-crisis measures were put into green investment and green tax reform. Q-Cells, a manufacturer of photovoltaic cells, which has its headquarters in the German city Bitterfeld-Wolfen, began its operations in 1999 with 19 employees, and soon had more than 1 000 people on its payroll.[1]

The True Cost of Doing Business

Conor Cradden[1]

There is a belief widely shared among policymakers that if arguments for a proposal or decision are supported by numbers on a page then somehow this makes that choice less political. It permits the claim that what is being proposed is not really a choice at all but something that the ‘evidence’ demands. This emphasis on quantitative indicators has meant that much policy argument has been displaced into the design of the indicators themselves. Rather than being grounded on purely technical criteria, the design of statistical indicators is a highly politicized process in which different stakeholders struggle to ensure the numbers that emerge will be more compatible with arguments in favour of their policy predilections than those of the opposition.

The World Bank’s ‘Doing Business’ (DB) indicators are a shining example of statistics that come with this kind of built-in value judgment. The DB indicators claim to be a guide to the relative ease of establishing and running a business in different countries. This is ‘measured’ on a number of dimensions, including starting up, paying taxes, getting construction permits and enforcing contracts. The indicators allow the construction of rankings, including an overall global ranking that places Singapore at the top – making it the world’s easiest place to do business – and Chad at the bottom.

This might appear to be an innocent enough endeavour. While states obviously have the right to ensure that there is a proper measure of social and political oversight of economic activity, it is also obvious that oversight procedures can be more complicated and more expensive than necessary. However, although the Bank denies that the DB indicators encourage deregulation, the information the indicators provide gives no way of judging whether the cost of conforming with regulation is reasonable in the light of the social, economic and environmental benefits that it produces. They have nothing to say about whether a country might on the whole be better off because of regulation. Since the social costs associated with deregulation are invisible to the DB indicators, governments whose concern is to improve their position in the DB ranking – and in some cases this is even a condition of financial aid from the Bank – have no incentive to take the potentially negative effects of deregulation into account.

Nowhere is the assumption that regulation is only a cost clearer than in the case of the ‘employing workers’ (EW) sub-indicator. A country’s EW score depends on the cost of making employees redundant and a measure called ‘rigidity of employment’, which is a composite index where the highest possible score corresponds with a low minimum wage for beginning employees, easy availability of fixed-term rather than permanent contracts, minimal restrictions on night and weekend working, high maximum permitted weekly working time, a low number of days of paid holiday and minimal requirements for notice and consultation when making redundancies.

Not surprisingly, the EW indicator has attracted criticism from many directions, but most notably the global labour movement. The ICFTU criticised the DB indicators within weeks of their first publication in 2003. Since then the Confederation, and subsequently the ITUC, has set out objections on a number of occasions, both in direct communication with the Bank and in public papers. In 2007, the ILO joined the debate, producing an official paper[2] that criticised the EW indicator on technical grounds, but also because of what it called problems with ‘policy coherence’ – in other words, the EW indicators cut directly across the ILO’s own, arguably more legitimate policies. The ILO argued that the view that “reducing protection to a minimum and maximizing flexibility is always the best option” was badly mistaken and that the EW indicator was “a poor indicator of the investment climate and labour market performance”.

The paper sparked a series of exchanges between the ILO and the Bank that culminated in the establishment of a consultative group (CG) to serve as a ‘source of advice’ on revising the EW indicator. Around the same time – early in 2009 – pressure from the global unions led to the Bank agreeing that at least until the group reported, the EW indicator would not be included in the calculation of the overall DB ranking nor used as a basis for policy advice. The consultative group included senior Bank and ILO officials together with global union, employer and OECD representatives. There were also three independent members, a labour law expert, a social entrepreneur and a public servant.

The ILO’s decision to participate in the CG will not have been taken lightly – even though in principle all of the members were acting in their personal capacity. Not participating would have meant missing a rare opportunity to have an impact on an influential indicator, but participating was arguably a gamble. The risk was that the group would come up with conclusions that did not adequately respond to the ILO’s criticisms but that the Bank would put its recommendations into effect anyway. If the ILO wanted to object, it would be forced to get into a public argument with the Bank about the adequacy of an indicator in whose revision two of its senior officials had just participated.

Now that the CG has produced its final report[3] it is not obvious that the gamble paid off. The solution proposed to the principal problem – the fact that lower standards of labour protection receive a higher score – is hardly adequate. Three elements of the indicator – minimum weekly rest periods, paid holiday entitlement and the level and means of setting the minimum wage – have been changed from being in a simple inverse relationship with the indicator score (the lower the better) to a kind of ‘banding’ system in which the policy target is to have these protections fall within a lower and an upper limit. Not enough holiday and a country will not receive the maximum possible score, but the same is true for what is deemed to be too much holiday. A similar change is proposed for maximum weekly working time. The ranking on the minimum wage indicator for countries that have one remains inversely related to the ratio of the wage to the average value added per worker, but countries that have no minimum wage no longer receive the best possible score. This is reserved for systems in which the minimum wage is set by collective bargaining – as long as it applies to less than half the manufacturing sector, or does not apply to firms not party to it – and systems in which trainees or apprentices are excluded.

The report of the CG makes it clear that it was split on whether the changes to the EW indicator are adequate. ‘One view’ was that the modifications dealt with the substantial problems and that the EW indicator should be reintegrated into the overall DB indicators. A ‘second view’, on the other hand, “noted that EWI did not adequately reflect worker protections even after the amendments made, and that the Doing Business report should reflect labour regulations holistically, or not at all”. This second view also argued that if the EW indicator was to continue to be used, there should also be a separate, quantitative ‘worker protection measures’ indicator published alongside the DB indicators. However, although this idea was discussed by the CG[4], it failed to agree a recommendation on the issue.

The ILO now has to decide whether to carry on working with the Bank. If it does not, the Bank will probably put the modified indicator back into use, and may also go back to basing policy advice on the EW indicator. Certainly the ILO doesn’t have to endorse the revised indicator, but if it wants to avoid a public argument, the best it can do is maintain a studied neutrality on the issue. The fact remains, though, that the DB indicator is still a barrier to the improvement of working conditions and quietly accepting its existence would be cowardly at best. The obvious question is why the ILO does not try to take the collaboration implied in the consultative group one step further and to work to persuade the Bank that there ought indeed to be an official, jointly developed worker protection indicator. The stakes are not so high here since the ILO clearly has moral and technical authority on the issue that the Bank cannot claim.

So why the deafening silence from the ILO? There has been no comment on the report of the CG, still less any indication of whether the ILO wants to carry on working with the Bank. In fact, the problem for the ILO is less with the outside world than its own constituents. The possibility of producing a ‘decent work’ indicator has been floating around for more than 10 years. That such an indicator has not (yet) been developed is partly a reflection of the traditional reluctance of employers and governments to allow themselves to be ranked, and partly a reflection of disagreement about whether such an indicator should be focused on outcome measures – the extent to which decent work is a reality for workers on the ground – or regulation – the extent to which the formal rules conform with ILO policies. These are difficult questions, but making a determined effort to resolve them is likely to be less costly for the ILO than allowing the Bank to continue to use and promote its EW indicator.

[1] Disclosure: the author is married to an ILO official. The official in question has no input into ILO policy-making in the areas under discussion in this article.
[2] http://www.ilo.org/wcmsp5/groups/public/---ed_norm/---relconf/documents/meetingdocument/wcms_085125.pdf
[3] http://www.doingbusiness.org/methodology/~/media/FPDKM/Doing%0Business/Documents/Methodology/EWI/Final-EWICG-April-2011.doc
[4] http://www.doingbusiness.org/methodology/~/media/FPDKM/Doing%20Business/Documents/Methodology/EWI/Annexes-EWICG-April-2011.doc

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Conor Cradden is a research fellow in the Department of Sociology at the University of Geneva and a partner in Public World, a London-based research and policy consultancy.

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Brazil, India and South Africa: Low Spill-Over, High Resilience of Financial Sector

Martina Metzger

The course of the global financial crisis displayed widespread flaws in regulation and supervisory failure. The financial sectors of advanced countries piled up systemic risk comprising almost all financial institutions. In addition, high cross-border exposure between the financial institutions resulted in a core meltdown when the bubble burst in 2008. The financial sectors of many advanced countries risked collapse, meaning unprecedented monetary and fiscal intervention by policy authorities was necessary to stabilise the situation.

In contrast, many emerging market economies weathered the financial tsunami not only better than expected in terms of financial and macroeconomic stability given their previous performances during crises, but also better than G7 countries. Against this backdrop, we begin to question which factors account for the low impact of the global financial crisis and which features might explain the strong resilience of emerging markets’ financial sectors. The countries under consideration here are Brazil, India and South Africa. Apart from being heavy weights in their respective regions and continents, the financial sectors of these three countries showed a remarkable resilience to the global financial turmoil.

LOW SPILL-OVER TO BRAZIL, INDIA AND SOUTH AFRICA
With the default of Lehman Brothers, the US subprime crisis transformed into a global financial crisis, also affecting the financial markets of emerging market economies. Apart from a short period of stress in the second half of 2008 resulting in steep stock market corrections and a strong volatility of prices, in particular exchange rates, financial sectors in Brazil, India and South Africa proved to be robust.

First round effects or direct impacts of the global financial crisis on emerging market economies in general and on Brazil, India and South Africa in particular were low, as exposure of their domestic financial institutions to toxic assets had been small. There was only minimal investment in complex instruments and marginal exposure to risky financial products – marginal to such an extent that it was not necessary for regulatory authorities to fall back on counter-actions.

In addition, the share of foreign banks with majority ownership in the domestic financial system is negligible in India and South Africa, while in Brazil it is still low compared with more affected emerging market economies or transition countries; hence direct spill-over from banking headquarters in advanced countries to host countries was limited.

However, there had been considerable second-round effects with the financial sector and more importantly the trade sector as main transmission channels. The real economy had to bear the major burden: in the wake of declining exports, industrial production, investment and employment fell and real growth was depressed. All three countries slipped into a recession with a sharp slump of real growth in 2009.

POLICY RESPONSES
Despite some differences in the magnitude of the spill-over and severity of the transmission channels, policy responses by fiscal and monetary authorities of the three countries under consideration were quite similar. First, central banks increased liquidity by cutting policy rates; in a second step central banks reduced reserve requirements and compulsory deposits to provide additional liquidity to credit institutions; a third measure covered companies and banks which were affected by the restricted access to international and domestic finance, in particular trade finance. All in all, there was a sizeable monetary accommodation to cushion liquidity shortages and credit crunches in order to stabilise the domestic financial sector. Additional to the monetary policy measures fiscal policy initiated a package of measures with discretionary counter-cyclical instruments to dampen negative impacts of the global financial crisis on domestic growth and employment.

The fiscal stimulus packages focused on stabilising the level of domestic demand. Governments provided finance to mitigate the most severe impacts on vulnerable groups, in particular poor and low-income households as well as small-and-medium-sized enterprises. On the other hand, the governments of India and South Africa extended pre-crisis infrastructure programmes and initiated new ones in order to strengthen their economies’ potential to grow and at best to increase the economic inclusiveness.

In contrast to previous times of crisis in the 1980s and 1990s, this time central banks and governments of the three countries disposed over adequate policy space to use multiple instruments, including non-conventional monetary measures and counter-cyclical fiscal measures.

FEATURES OF FINANCIAL SECTOR RESILIENCE
Conventional wisdom suggests that the capacity to manage a crisis mainly depends on what policy has realised during good times, e.g. the creation of sound financial institutions, the improvement of regulatory and institutional capacities, the deepening and broadening of domestic financial markets and the design of an adequate monetary and fiscal framework which allows the involved institutions to work out a consistent response to a crisis in a coordinated way. Even so, the low impact that the financial meltdown in advanced countries had on the financial sectors of Brazil, India and South Africa raises the question of whether and to what extent specific characteristics and features of their financial market architecture and regulatory approaches can explain such high resilience.

There are four outstanding factors which might claim to have insulated the financial sector of these three countries from the worst woes of the global financial crisis. First, one key problem of past crises has been high foreign debt and associated currency and maturity mismatches; balance sheet effects were a major factor which exposed developing countries and emerging market economies most to hazard with regards to macroeconomic stability and development. Accordingly, Brazil, India and South Africa reduced their outstanding foreign debt exposure over time and from the turn of the millennium also succeeded in increasing their foreign exchange reserves.

Second, the macro-prudential approach which is applied by the central banks of Brazil, India and South Africa is another distinguishing mark of their financial architecture. As experience has shown that financial sector-related crises are an important feature of market economies, their central bank policy takes into account financial stability considerations – a task which many central banks in advanced countries rejected due to a perceived conflict of interest with the objective of price stability.

Third, another aspect in the financial market regulation shared by the three countries is the rule-based rather than principle-based approach. A rule-based approach with universal standards entails less forbearance and enables less regulatory arbitrage; supervisors’ decisions are based on transparent and reliable indicators, e.g. equity capital, non-performing loans or credit ratios. Hence, regulation based on a rule-based approach is easier to impose and decisions can be taken quicker which is backing pre-emptive surveillance.

Fourth, Brazil, India and South Africa exhibit country-specific features in a narrow sense, which contributed to the resilience of their financial systems. With regard to Brazil, for instance, it is worth mentioning that the supervision covers all financial institutions, including hedge funds and OTC derivative markets; another particularity is the so-called Public Hearing Process for regulatory proposals concerning securities. India, on the other hand, developed a special framework for non-banking financial companies (NBFCs) with an explicit treatment and deliberate prudential norms of those entities. Furthermore, banks have to make provisions for a counter-cyclical Investment Fluctuation Reserve, which bears some resemblance to the currently debated liquidity buffers by the Financial Stability Board. In South Africa the regulation on collective investment schemes, including hedge funds, comprises a ban on leverage and short selling strategies. With the National Credit Act, South Africa also developed a broad spectrum of instruments to protect consumer rights. In case of complaints by consumers and disputes with credit providers, including banks, the National Consumer Tribunal enforces a hearing process at which end it can completely suspend the credit agreement to the disadvantage of the credit provider when proved reckless.

Taking these features into account it comes as no surprise that banks in the three countries are on average sound, and banking behaviour has adapted to legal restrictions and norms; they even hold reserves and liquidity in excess of regulatory requirements, something considered inefficient and non-innovative before the crisis. More importantly, at the time of writing, banks in Brazil, India and South Africa had not been infected by the notorious originate-and-distribute virus of granting loans, which was a major driver of the credit and securitisation bubble which finally resulted in the global financial crisis; instead, they still execute the original banking model with a buy-and-hold strategy based on thorough credit assessment and borrower supervision.

In sum, the combination of a reduction of foreign debt exposure, a macro-prudential approach in supervision and a rule-based approach in regulation, complemented by a variety of country-specific rules applied by these countries even before the crisis, together with non-orthodox monetary and fiscal policies during the crisis can be identified as the main features of economic success.

The high resilience of the financial sectors of Brazil, India and South Africa is a result of continuously strengthening financial sector institutions and adjusting the regulatory framework to the respective country’s needs and vulnerabilities. This is an ongoing process which started two decades ago. Crisis heritage has proven a major motivation for macroeconomic and financial sector improvements while at the same time Brazil, India and South Africa constructively turned the drastic experience into a cautious and thorough handling of financial sector-related issues. In the hostile environment of a global financial crisis, the specific art of supervision performed by Brazil, India and South Africa was put to test – and impressively passed it.

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Martina Metzger is the executive director of the Berlin Institute of Financial Market Research (BIF). Before joining BIF, she taught macroeconomics at several universities and worked with UNCTAD. Her areas of interest include financial market development in emerging market economies, macroeconomic stabilization and sustainable development.

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FURTHER READING:
Martina Metzger and Günther Taube (2010), ‘The Rise of Emerging Markets’ Financial Market Architecture: Constituting New Roles in the Global Financial Governance’, BIF Working Papers on Financial Markets

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Waiting for the “Follow-Up”? – “Guiding Principles for the Implementation of the United Nations ‘Protect, Respect and Remedy’ Framework”[1]

Sofia Massoud

Florian Rödl

Globalisation, business and human rights
Globalisation has turned transnational corporations into decisive and powerful global actors. Correspondingly, the legal and actual power of states to regulate corporate behaviour has declined. As a result, transnational corporations can profit from a general race to the bottom in social and labour standards. As is now widely perceived, the race does not stop short of international human rights guarantees, including ILO international labour standards.

The UN Mandate on “Business & Human Rights”
On 24 March 2011, the Special Representative of the UN Secretary General (SRSG), Prof John Ruggie, issued a report on “Guiding Principles on Business and Human Rights” (Principles). This report is the culmination of the SRSG’s work on the subject of “Business and Human Rights” for several years. His general task was to clarify the roles and responsibilities of states and corporations in the business and human rights sphere, and then to map the challenges and to recommend effective means to address them.

The project got started in 2005 with a mandate adopted by the then UN Commission on Human Rights (which was replaced by the Human Rights Council (HRC) in 2006, a subsidiary organ of the UN General Assembly). After three years of work, the SRSG delivered a report, usually referred to as “Protect, Respect, and Remedy” Framework. In 2008 the report was “welcomed” unanimously by the HRC.

The Principles are now meant to outline how governments and business “should implement” the Framework “in order to better manage business and human rights challenges” .The mandate has raised considerable attention. The SRSG was able to involve many stakeholders, such as governmental bodies, business enterprises and associations, trade unions, legal experts, law firms, human rights activists and international organisations[2], and to focus their attention on the outcome of Ruggie’s work.

The Principles were presented to the HRC on 30 May 2011. It was no surprise that the Principles received great support by most Member States of the HRC. Yet, some criticism was put forward by NGOs and few Member States. On 16 June 2011 the HRC endorsed the Principles. However, it is all but clear what will come next. The SRSG has proposed some “Follow-up” measures like establishing a Voluntary Fund for “capacity building”, a practise of “annual stocktaking” and a mandate for an expert group which might also think about international legal instruments – all this remains rather vague in substance and in process.

Background
For a better understanding of the mandate, some remarks on its background seem helpful. The mandate of the SRSG was preceded by a draft project, “Norms on Responsibilities of Transnational Corporations and Other Business Enterprises with Regard to Human Rights” (draft Norms), prepared in 2003 by the Working Group on Transnational Corporations of the Sub-Commission on the Promotion and Protection of Human Rights (a subsidiary body of the Commission on Human Rights). The project was buried by the Commission, partially due to fears spread in industrialised countries that the draft Norms might lead to obligations for transnational corporations binding under public international law.

As compensation, the Commission on Human Rights requested the Secretary General in 2004 to appoint a SRSG with the mandate to provide the Commission with “views and recommendations” on “the issue of human rights and transnational corporations and other business enterprises”. Against this backdrop, it is clear that the whole process was neither meant to end up with legally binding acts on the subject nor with a non-binding resolution by the General Assembly.

The Principles in substance
What could one then have expected from the SRSG’s work? It is suggested that:

• The SRSG could have taken progressive views in public international law with regard to state obligations to act against corporate human rights violations;
• He could have lobbied for new international legal instruments clarifying corporate accountability;
• He could have provided a clear political reference point for measures to be taken by business to fulfil their “responsibility to respect” human rights.

Assessed against these standards, it is doubtful whether the recommendations promoted in the Principles are appropriate and sufficient in the context of international law in the 21st century and the current global economic system. In general the recommendations put forward are too cautious and imprecise. The Principles remain weak as they retreat to a position of mere encouragement. This is unfortunate as a core issue in the debate on human rights and business is the lack of clear obligations of both States and corporations and (where obligations exist) a lack of effective enforcement. On the whole, the Principles do not sufficiently address how to hold corporations accountable.

(1) The State duty to protect
Even though the Principles stress that “States must protect against human rights abuse within their territory and/or jurisdiction” (Principle 1) they fail to put forward a more progressive attitude towards State obligations.

While the Principles are supposed to be grounded in “recognition of States’ existing obligations to respect, protect and fulfil human rights and fundamental freedoms” (General principles), promising approaches concerning extraterritorial jurisdiction and transnational litigation are, in great parts, not fully developed. E.g. home State legislation regulating the parent corporation to respect and protect human rights within the group or even the supply chain could have been a starting point. The same is true for mandatory corporate reporting obligations.

The obstacles faced by host States are also not adequately addressed: The Principles do not deal with the causes of State’s incapacity nor do they provide suggestions how to effectively overcome this incapacity and how to empower the host State to govern in the public interest.

(2) The corporate responsibility to respect
The Principles avoid suggesting any binding corporate human rights obligations, e.g. to require corporations to ensure the freedom of association and the protection of the right to organise, although there is an emerging trend in international law to assign direct obligations to corporations. This is probably due to the rejection of the draft Norms in 2004. The Principles also do not recommend the incorporation of human rights into international trade and investment agreements. Being limited to corporate responsibility the Principles do not significantly improve corporate accountability. Instead, the Principles reiterate that corporate responsibility to respect human rights is distinct from issues of legal liability and enforcement (Principle 12 commentary). The Principles stress that corporations have a responsibility to undertake due diligence. However, even the low standard to undertake “due diligence” (i.e. a standard of care to be used throughout corporate activities) is devoid of content. Due to the view that “one size does not fit all” (Introduction to the Principles) the Principles remain silent on how to implement the process of due diligence, e.g. neither do they characterize or specify these responsibilities nor do they insist on external monitoring.

(3) Access to remedy
The Principles do not put forward effective recommendations on adequate sanctioning and reparation. Even though States must take appropriate steps to ensure access to effective remedy through judicial, administrative, legislative or other appropriate means (Principle 25), it remains unanswered how to make States take steps in this direction as well as what “appropriate steps“ and “effective remedies” are meant to be. Host States will face difficulties such as the incapacity to regulate or the necessity to attract investment, and therefore they are less willing to provide access to remedy. Even though the Principles point to a number of “legal, practical and other relevant barriers” (Principle 26), the suggestions on how to overcome these barriers are missing.

Conclusions
It is submitted that the SRSG failed in all three aspects outlined above: The Principles lack progressive views in public international law concerning state obligations, they avoid suggesting new legal instruments setting up corporate accountability, and they do not provide for clear blueprints for corporate behaviour with regard to human rights, which could have been used by trade unions and human rights activists.

It remains unclear why actors who have been passive so far should now change their behaviour. The SRSG avoids opening a general debate on the drawbacks of the global capitalist economy even though it is a crucial obstacle to human rights implementation and enforcement. In this way the Principles fail to provide a framework for avoiding a race to the bottom and creating conditions to strengthen international labour standards. While corporate interests are still pushed through by legally binding instruments provided by regimes like GATT, regional FTAs or BITs, the enforcement of social and labour standards is subject to the states’ and corporate goodwill.

Like other attempts such as the UN Global Compact and the inclusion of human rights standards in international trade law, the Principles represent another failure to meet the global pressure in social and labour standards. The only difference is that the SRSG has succeeded in engaging a number of stakeholders with a politics of persuasion which might minimise chances for progressive approaches to develop. All the more: Debates about how to improve the implementation of ILO labour standards remain essential[3].

[1] Available at http://www.business-humanrights.org/SpecialRepPortal/Home.
[2] As such the Organisation for Economic Co-operation and Development (OCED), for instance, updated their (non-binding) OECD Guidelines for Multinational Enterprises, introducing a Human Rights chapter, see Chapter IV of the OECD Guidelines for Multinational Enterprises.
[3] For an innovative approach, see Frank Hoffer, International Labour Standards: an old instrument revisited, Global Labour Column.

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Florian Rödl is director of the research group on ‘Changes in Transnational Labour and Economic Law’ at Goethe University in Frankfurt am Main, Germany. His fields of expertise include post-national constitutional theory with a special focus on labour rights.
Sofia Massoud is a PhD candidate and junior researcher in the same research group. She works on the influence of economic actors on society, in particular the violation of human rights by transnational corporate groups.

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A modern Italian Story

Alessandra Mecozzi

The 28th of January 2011 was a beautiful day for Italian metalworkers: 70% participated in the national strike and in 17 demonstrations called by FIOM (the metalworkers union affiliated to CGIL, Italy’s largest union confederation). This was a response to the aggressive strategy adopted by Fiat in several of its factories.
Only a few years ago, Sergio Marchionne, Fiat’s CEO, declared that as labour cost accounted only for 7% of the company’s total costs, there should be no reason to squeeze workers and put pressure on working conditions (interview in La Repubblica, 21/9/2006). He used the context of the global crisis to launch a direct attack on workers’ rights and conditions, with the aim of dismantling the Italian labour relations system.

From Pomigliano to Mirafiori: fear as the strategy of choice for Fiat

In April 2010, Fiat presented its strategic plan for 2010-2014, Fabbrica Italia (“Factory Italy”), which aimed to increase vehicle production in Italy from 650,000 units in 2010 to 1.4 million by 2014. During the following summer, Marchionne announced that in order to implement the plan, he would consider investing €700 million in the Pomigliano plant (where 4600 workers are employed) and relocating the production of the Panda, currently manufactured in Poland. All trade unions had to sign an agreement entailing worsened working conditions and limiting the (constitutional) right to strike. FIOM declared itself open to negotiating on labour flexibility, but “negotiation” was not the flavour of the day. The agreement was designed unilaterally by Fiat and the unions were given no choice, meaning that if the agreement was not accepted, the investment would not take place.

However, this so-called agreement was signed by the other unions (Fim, Uilm and Fismic) and presented to the workers for a referendum. FIOM declared the referendum illegal because it was taking place under blackmail. Fiat’s management and media commentators expected the referendum result to be an overwhelming YES; however, 37% of workers, overcoming their fear of jeopardizing a key investment that could save the factory, refused to sacrifice their rights for the promised investment. A young and educated new generation of workers said NO to blackmail, thus asserting their dignity and political consciousness.

In retaliation against FIOM, Fiat showed an iron fist in other plants: on the 14th of July, three FIOM delegates were dismissed in Melfi (Basilicata) because they were on strike; in the same week, a white collar employee in Mirafiori (in Turin, the largest Fiat plant in Italy) was suspended and accused of spreading propaganda because he was using a computer at the office to inform his colleagues about Fiat’s strategy against workers.

Signatory trade unions, editorialists, right-wing politicians and even part of the left and some CGIL officials misread the consequences of what was happening in Pomigliano. Many considered, with a hint of racism, that Pomigliano was a manifestation of the “southern illness”, characterized by laziness, high absenteeism, and so on. They accepted that Marchionne would “correct” this exception.

A large-scale response took place on the 16th of October 2010, when a national demonstration of metalworkers (organised by FIOM) and other social actors, including students, precarious workers, and civic associations, brought together hundreds of thousands of people in the centre of Rome.

On the side of capital, Marchionne's initiative encouraged Federmeccanica, the metal sector employers’ association, to inflict a direct blow to the national employment contract. The employers’ association signed, with the unions who had endorsed the Pomigliano agreement, a national agreement allowing for derogations to the national contract.

Fiat’s onslaught on workers’ rights quickly moved north, to Mirafiori, its historical plant. Fiat announced that some of its production would be transferred to Serbia, thanks to financial assistance the company had been offered by the Serbian government. Uncertainty and fear were spreading among workers. What would their future be? What was Fiat’s industrial plan? Where and how would the trumpeted €20 billions of “Fabbrica Italia” be invested? Marchionne always refused to give details about his projects while the government remained silent, openly leaving the market to decide on the future of the workers.

On December 23rd, a new agreement was requested by Fiat from the Mirafiori workforce (5500 workers) as a condition for the allocation of a €1 billion investment for the production of jeeps destined mostly to the American market. Again, no real negotiation took place, and the same terms as in Pomigliano were proposed: worsened working conditions and increased working time, as well as an attack on freedom of association. Workers would thus lose the right to elect their shop stewards, who would instead be appointed by the union leadership. Moreover, any union refusing to sign the agreement would be excluded from the plant. The agreement trampled on FIOM’s right to represent its members.

The result of the referendum was positive, but by a very tight margin - 47% of workers voted NO. The majority of blue-collar workers voted NO, particularly those on the assembly lines where the impact of the agreement would be stronger. The YES of the 400 supervisors and white-collar workers was decisive for the lean 53% majority.

It was a surprising victory for the union, considering the referendum, once more, took place under blackmail. The substance of the referendum was: “either you accept to curtail and/or give up your rights, or you will lose your job”. In the meantime, Marchionne was applauded across the political spectrum.

On the ground, different segments of civil society were expressing their support to FIOM. Students, precarious workers, researchers, school teachers, and progressive economists stood beside FIOM at the strike on January 28 2011, which was accompanied by demonstrations in many different cities.

The new points of the Mirafiori agreement (like the exclusion of FIOM from union representation in the plant) were added to the Pomigliano one and a new Fiat contract was designed as an alternative to the national contract. This demonstrates that Pomigliano was not an exception but the start of a strategy aiming at the destruction of the three pillars of the Italian labour relations system: labour law, the Constitution and the national collective contract.

US influence

Marchionne's strategy, which emulates the US labour relations system, is very popular among Italian commentators. His supporters should however know that the US never ratified the ILO Conventions on freedom of association and collective bargaining. Labour relations are largely dependent on the US Administration – as opposed to the Italian or European ones, which are based on laws and national collective contracts. In the US, the unionisation rate is at its lowest ever. On the whole, the lack of a real collective bargaining system has produced lower wages and longer working times.

United Auto Workers (UAW) had one and half million members during the 1970s; it has barely 400,000 today. UAW is launching a strong unionisation campaign and its president, Bob King, recently stressed that “no democracy on earth can thrive and prosper without democratic unions” (speech to the Center for Automotive Research Conference, “A UAW for the 21st century”, 2 Aug. 2010).

The powerful International Brotherhood of Teamsters (IBT, which has 1.4 million members among truck drivers) has fully understood what is at stake in Italy. The car haulers (part of IBT), one of the few sectors in which a national contract was signed in the US, have been fighting Marchionne’s restructuring plan for Fiat/Chrysler, which would terminate the collective contract and destroy thousands of jobs. FIOM supported their struggle and received their support for the January strike.

Fiat’s case is unique in Europe and even the European metalworkers federation is worried about the possible extension of this “model”.[1] It represents a dramatic attack on workers, union rights and on the entire labour relations system, which is an important part of the European social model. This leads FIOM to the conclusion that, unless we are able to build strong European and international unions, the race to the bottom is likely to continue. We have to confront it with all of our energy if we want to save worker unions and avoid the rise of market oriented company unions!

Accusations against FIOM

• “FIOM does not behave as a labour union but as a political actor”, Minister of Labour Sacconi told the media to discredit FIOM’s dedication to the struggle of workers. The reality is that Italy is facing a growing political and cultural regression that starts with the prime minister himself, and the cultural and moral model that he spreads through his media. This is exacerbated by the weakness and division of the political opposition to the government, which is unable to formulate any coherent economic or industrial policy. FIOM’s determination to stand up in defence of worker and union rights has become a point of reference for a large part of civil society. In so doing, FIOM occupies a political vacuum, as there is no political force in Parliament which represents workers.
• “FIOM’s positions lead to isolation,” say many on the political left and also some from CGIL. Is it so? Worker assemblies were in fact overcrowded, while the streets on the day of the strike were filled with metalworkers and other social actors! What does ‘isolation’ mean, then? The establishment tried to isolate FIOM. But, in the end, even the mainstream media had to cover the conflict in Mirafiori, and to show the solidarity coming from different segments of civil society. We could rather say that the political opposition is isolated because it stands so far from the people that it is supposed to represent!
• “FIOM is old-fashioned and does not understand the modernity of globalisation”. Yet, in a time of deep financial and economic crisis when the failure of neoliberal globalisation has become obvious, the modern and just attitude towards globalisation may well be the one of those standing up for their rights.

[1] See for instance the press release of the Fiat trade union coordination group, 4th of February 2011:
http://www.emf-fem.org/Areas-of-work/Company-Policy/News/Declaration-of-the-Fiat-trade-union-coordination-group

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Alessandra Mecozzi has been the International Director of FIOM (the Italian Federation of Metalworkers) since 1996. She graduated from Rome's La Sapienza University with a thesis on the history of CGIL, the largest Italian union confederation. Alessandra has been working for FIOM since 1971.

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Fiat is at War, says Sergio Marchionne

Francesco Garibaldo

Pomigliano, situated in the economically depressed region of Campania, is the second largest Fiat plant in Italy. An experiment aimed at redefining the Italian system of industrial relations is taking place at this plant. It started with an agreement designed out of the Italian labour relations law. According to Sergio Marchionne, Fiat’s CEO, this is a necessary step to fight the war posed by global competition.

The Pomigliano agreement, signed by three of the four metalworkers’ unions (FIM, UILM and FISMIC), with the exclusion of the most representative (FIOM), gave a strong impetus to the process, started in 2009, of the deconstruction of the social pact set up in July 1993.[1] The pact, similar to the European tripartite incomes negotiation system, was based on a dual system of bargaining: on one hand, a national contract for each sector with an upper limit to wage increases, defined by the government and dependent on national macroeconomic conditions; and on the other, the possibility of the bargaining company’s agreements to redistribute the firm’s specific productivity gain. The core of the system was the national collective agreement regulating the main features of the employment relation. The company-level bargaining was only designed to fine-tune secondary aspects, not to allow local actors to depart from the national contract’s clauses. The system was ineffective in defending wages from inflation; as a result, in the past 10 years, there has been a shift of five points in the ratio of wages to profits in GDP.

Another negotiating system, replacing the 1993 system, was implemented in April 2009. Signed by three of the four union federations and Confindustria (the Italian employers’ federation), it paved the way to a separate collective agreement in the metalworking sector, which signed in October 2009. The new sectoral agreement increased the role of company-level bargaining, at the expenses of the national sector contract. Moreover it introduced a three-year term for all aspects of sectoral collective agreement, whereas previously pay terms applied for two years and non-pay terms for four years.

In between, the government launched a white paper introducing a new concept for social policies. The new metal sector agreement and the white paper framed a general shift in the Italian system of industrial relations and of the welfare state from a two-level system centred on the national contract to a new system centred at the company level, allowing concessions bargaining through derogation on specific features. Alongside this, a new welfare system emerged, based on the devolution of many public prerogatives to the private sector.

Cgil, the main Italian trade union, did not sign the April 2009 agreement and continued to support the centrality of the national contract, particularly relevant in Italy where almost 90 per cent of employees work in companies with fewer than 20 employees (and where bargaining at the company level would therefore produce uneven and unpredictable consequences). FIOM-CGIL, the metalworkers’ union, did not sign the sectoral agreement of October 2009. Instead, FIOM asked for a referendum to ratify the new agreement, but FIM and UILM refused to do so. As a result, employees could not express their opinions on the new contract, signed by two of the three main unions – but not the biggest one.

From class conflict to workplace cohesion?

In the midst of a very difficult situation for most European car producers, mainly due to overcapacity of the automotive industry, Mr. Marchionne depicted the new fierce global competition in the sector as a “war” between people working in the same company and those working in other areas of the world. From this perspective, the difference of interests between workers and managers/capitalists, not to mention the class conflict, is irrelevant. Capitalists, managers and employees of a specific company have to fight, side by side, against all the other companies to survive. Of course, during “war”, some rights cannot be guaranteed and multinationals must try to standardize employment relations. When a system such as the Italian one is less prepared for the war because it is too rigid and protective, it must be changed.

The problem is, therefore, not only to reach agreements with trade unions on flexibility and cost control, but also to change the nature of industrial relations; managers must be allowed to reshape the employment relation. Marchionne asked the workers to undergo a dramatic worsening of working conditions: the increase of the working week to 48 hours; the reduction of the breaks from two 20-minute to three 10-minute breaks; and the lunch break moved to the end of the shift. On top of these new conditions, aimed at increasing productivity, Marchionne has also requested a collective and individual liability clause over all contract terms; virtually every employee and union must accept all contract terms under penalty of exclusion from the company. This particular clause firstly seeks an ultimate disciplining of the workforce and secondly the ousting of the most representative and combative metalworkers union from the plant and ostensibly from the whole sector: if FIOM were to refuse the new conditions of the contract, it would be automatically deprived of trade union rights. Moreover, from an individual point of view, the agreement forbids any strike against the new regulations. This new approach to industrial relations represented a shock for the Italian system for many reasons.

Labour rights under attack

The main formal issue raised against Marchionne’s new approach is that, according to the Italian constitution, the right to strike is not a trade union right but an individual right. For instance, a group of employees, even if they are a minority, can strike against an agreement signed by the trade union. A union, on the other hand, must be legitimated by the employees it claims to represent, meaning they cannot impose a dramatic worsening of workers’ rights without consulting them. The right to strike can be limited by the law for the sake of the public interest, as happens in certain areas of the public sector (e.g. hospitals and transport), but this discipline does not change the constitutional nature of the right: trade unions cannot sign an agreement limiting the right to strike without the explicit consent of members.

A second issue is the nature of the national contract and its relation with company-level bargaining. In its original form, the contract used to allow minor derogation at the company level. The possibilities for derogation increase in the revised form of the contract; nevertheless, what is reached in a specific company cannot be applied to the sector as a whole. To achieve such a sector-wide derogation is clearly what Fiat seeks to do.

The third issue is that the separate contract for the metalworkers did not legally replace the previous contract, which included FIOM, and will be formally valid until the end of 2011. It follows from the fact that the FIOM has not agreed to replace the old contract. This is important for all social actors, as in Italy contracts have a continuation clause, so if a new contract is not signed by all the signatories, the old one remains in force.

However, Fiat decided to press ahead with the new contract for the Pomigliano plant. Commenting on the possible result of the referendum among the workers, Fiat’s CEO stated openly that in case of a negative vote, the investment of Fiat to relaunch the plant would be cancelled.

The Pomigliano agreement was signed against the background of this threat, and the workers were asked to ratify it in a referendum. FIOM did not refuse to bargain on flexibility but it refused to sign the agreement and to endorse the use of a referendum in this case because the agreement altered the conditions under which an individual right – the right to strike – could be exercised. Such an alteration cannot be decided by trade unions, let alone employers, because this right is not theirs. The positive vote in the referendum was, however, fully endorsed by the other unions because they feared that employees would be made redundant by Fiat. While all the unions and the press were convinced that the referendum would be a landslide victory for Marchionne, nearly 40 per cent of employees – and the majority on the assembly lines – refused the agreement. Marchionne reacted very angrily because, although Fiat technically won the referendum, it found itself in the uneasy situation of having to operate a factory facing serious opposition and collective action from a large part of its workforce.

It was because of this result that Marchionne decided to “up the stakes” and to condition further investment in Pomigliano to an alignment of the national branch contract for metalworkers to the one adopted in Pomigliano. This would require changing the national branch contract with the agreement of Confindustria (the employers association) as well as FIM and UILM. Only if this condition were fulfilled would Fiat implement its commitment to invest. This would extend some of the most shocking concessions made in Pomigliano to all Italian metalworkers, starting with the curtailment of the right to strike, with the threat of monetary and disciplinary retaliations for each employee and for trade unions should a strike nonetheless take place.

This goal was achieved in September 2010 with an alteration of the separate collective agreement in the metalworking sector signed in October 2009, extending the clauses valid for Pomigliano to the sector as a whole. To add insult to injury, Fiat decided to shift the production of higher value added products from Pomigliano to Tychy in Poland, while transferring a product with lower added value from Tychy to Pomigliano (namely the new Panda). However, should the management not feel certain that it can exercise strict control over the plant, Fiat decided to create a new company from scratch, firing all the employees and rehiring only those who fully accept the new collective agreement.

The result is that investment in Pomigliano is still uncertain, but metalworkers have surely seen their rights shrinking dramatically and their solidarity becoming fragmented.

[1] See http://www.eurofound.europa.eu/eiro/1998/03/feature/it9803223f.htm

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Francesco Garibaldo is an industrial sociologist and the former director of the Institute for Labour (IPL) and of the Institute for Economic and Social Research (IRES-CGIL) at CGIL, Italy’s largest trade union confederation.

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The 2008 Crisis in Turkey and the Unions’ Response

Yasemin Özgün

Özgür Müftüoğlu

The insertion of the Turkish economy into global capitalism has mostly occurred during times of economic crisis. During the present crisis as in the crises of 1979, 1994 and 2001, the Turkish government took many steps according to the policy frameworks determined by global actors to integrate further into global capitalism. Such steps did yield some positive results for those sections of capital that could adjust to the rules of global competition and integrate with global capital. Nevertheless, Turkey’s survival strategy, which rested on cheap labour, has caused increased pressure on workers as well as high unemployment, poverty and job insecurity. Unfortunately, due to the prohibitions on union activities following the 1980 coup, combined with new work regulations deriving from changing production systems, the working class and unions did not have sufficient strength to resist this process.

In Turkey, the rules of the market economy, institutionalised in 1980, have attained their target thanks – to a large extent – to the policies implemented until the 2008 crisis. However, the process is not complete. The IMF and World Bank lending agreements, the reports prepared by the OECD, and the conditions imposed by the EU in the process of assessing Turkey’s membership have warned Turkey that it must complete its process of integration into the market economy.

Turkey achieved high growth rates until 2008, but workers did not benefit from a fair share of this growth. Furthermore, the policies supporting growth led to the loss of job security and social guarantees for workers, as well as to a decline in real wages and a further increase in unemployment and poverty.

Figure 1: Annual average real wage evolution in selected European countries, 2003-2008

Source: Turkish Statistical Institute

Figure 2: GDP growth in Turkey, 1982-2008

Source: Turkish Statistical Institute

The global crisis in September 2008 took place during the period when capital increased its accumulation through more intensive worker exploitation. In Turkey, the government responded to the global crisis in line with the policies determined at the global level. The policies implemented as a requirement of the market economy have been publicly raised by the rhetoric of “solving the unemployment problem”.

The unions stepped into the crisis with considerable weakness due to the oppressive legislation and their own structural problems. The different ideologies held by the unions were also reflected in the policies they adopted in the face of the crisis. DİSK and KESK, which proclaim to be relatively closer to the left and oppose the AKP government, were perhaps the most actively engaged against the crisis.

“Birleşik Metal-İş” (a union representing workers employed in the metal industries), which is affiliated with DISK, published a declaration on 3 November 2008, which emphasised that the crisis actually arose out of the capitalist system and that this was therefore a crisis of capital. The declaration also advocated that workers must not be forced to pay for this crisis, and further called for reducing working hours in order to protect employment, banning dismissals and flexible employment, and cancelling the interest on credit card debts as well as indirect taxes. The most important difference of this declaration is that it called on all pro-labour organisations as well unorganised sectors of society to collaborate in order to achieve these demands.

A report issued by Türk İş, the largest nationwide confederation of unions, highlights the importance of protection of employment and defends the idea that the state must support capital through incentives on condition that the latter would protect employment as a way out of the crisis.

Mass layoffs of unionised workers led labour unions to focus on the protection of employment. However, with the exception of a number of combative unions under the KESK and DISK confederations which managed to organise powerful struggles, it is generally understood from the initial reactions by the confederations that the crisis is perceived as a “natural” phenomenon which affected the whole world, and not as a structural consequence of the capitalist system. The government has responded to the crisis through incentives for capital in the form of taxes, loans and investment promotion, giving them the following major titles: tax exemptions and exclusions, tax amnesty for undeclared wealth, debt rescheduling and instalments. Moreover, temporary reduction was implemented via indirect taxes on consumption for a limited period in order to revive the domestic market. With this in mind, the demands of capitalists and unions overlapped on many issues, such as support for companies, partial absorption of labour costs by the state, and demands for changes in tax policies.

A one-day strike, which was staged by KESK and Türk Kamu Sen on 25 November 2009, was the most effective protest carried out by the unions against the effects of the crisis on workers. A short time after this very well-attended action, workers who used to be employed by TEKEL - the recently privatised public enterprise producing cigarettes, tobacco and alcohol - took action in Ankara to protest against the privatisation of TEKEL and their re-employment in other factories as per Article 4/C of Civil Service Law No 657. This law was introduced by the AKP government to veto the workers’ existing contracts and force them to accept part-time conditions with significant loss of pay and social rights following the closure of their workplace. The TEKEL action, which turned into one of the most important in the history of the Turkish working class, was carried out despite government disapproval and threats. The action lasted 78 days. The TEKEL workers' resistance was supported by very different sections of the working class. In addition, many unions in Turkey and across Europe made material and moral contributions to the protesting workers. Although six labour confederations operating in Turkey declared their support for the resistance, it could not be turned into a common cause. However, although the demands of the workers were not met, the wages and employment benefits of about 20000 workers under 4/C status saw nominal improvements. In addition, certain regulations regarding severance pay and private employment offices that had been on the agenda for a long time and that were to be introduced by the government could not be raised due to the influence of the working class struggles, which gained momentum following the TEKEL resistance. Unfortunately, despite the stability of workers and strong public support to sustain the resistance to abolish 4/C status completely, Tek Gıda İş Union disclosed in a statement made on August 9 2010 that all the actions scheduled to raise the demands of the TEKEL workers had been cancelled and they called on the workers to agree to the 4/C position they had been resisting for 78 days.

One could argue that, beyond the oppressive and restrictive setting in which unions have been forced to operate since the 1980 coup, the “compromising” approach of international union organisations has also influenced the union movement in Turkey. The World Bank, OECD and EU all supported this “compromising” approach of the international unions, which has finally been institutionalized in the industrial relations systems of central and peripheral countries through a number of programmes developed under the title “social dialogue”. Due to their compromising attitudes for many years, union structures throughout the world are neither so combative to challenge capital nor willing to develop political agendas and alternative approaches in the face of crisis. However, as in many other countries, labour struggles have continued despite the unions and, as a result, public protests for which the unions had to claim responsibility have been carried out.

Regardless of whether capitalism has overcome its crisis, the crisis for workers continues to deepen. Whether the workers will finally be able to overcome their crisis by getting out of the vicious cycle of unemployment and poverty depends on the power they are able to generate through class struggle. The decisive issue will be whether the unions keep seeking compromise, or head for class struggle.

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Yasemin Özgün is Assistant Professor in political science at Anadolu University - Eskisehir, where she researches politics, the media and poltical communication. She has published widely on Turkish politics, labour studies, education and feminist politics.
Özgür Müftüoğlu is Assistant Professor in the Department of Labour Economics and Industrial Relations at Istanbul’s Marmara University. He has published widely on labour studies and political economy and has produced and presented a weekly TV programme ‘Emek- Forum’ (Labour-Forum) for the last 2 years. He is also a columnist for the daily newspaper Evrensel.

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Europe’s Hidden Inequality

Michael Dauderstädt

The European Union (EU), in its founding treaties, set itself the aim of economic, social and territorial cohesion. This aim is generally interpreted to mean that the EU will strive to reduce income inequality within its area of integration. Reducing inequality is, as recent studies continue to show, an important and just goal since inequality blights the lives and prospects of those affected.

Unequal Income Distribution in Europe
As a result of a number of enlargement rounds since 1972 the EU consists of member states at widely varying stages of development and divergent income levels: besides small, rich countries, such as Luxembourg (annual per capita income: around 60,000 euros), there are also large, poor countries, such as Romania (annual per capita income: around 2,900 euros). A comparison of Europe’s regions reveals even more egregious differences between the richest region (Luxembourg) and the poorest: annual per capita income in the poorest regions of Bulgaria and Romania is even lower than the national average.

With a few exceptions, functional income distribution between wages and profits has long been deteriorating in the EU. The wage share has fallen, for example, in the countries of the Eurozone, from 68% in the 1970s to 57% in 2006. This deterioration in functional distribution, as well as more marked wage dispersion, also partly explains the deterioration in personal income distribution in most member states. Official Eurostat data confirm this trend showing increasing intra-country inequality, which is estimated through the S80/S20 ratio, i.e. the total income of the richest 20% divided by that of the poorest 20% of the respective population (a value of 4 meaning that the former earn four times more than the latter). By calculating the inequality within the EU as a whole as a weighted average of these intra-country values they give it a value of about 4.9, which has been rising over the past decade.

As far as the EU27 (the present EU with 27 member states) and the EU25 (minus Bulgaria and Romania) are concerned, the Eurostat figures – ranging between 4.5 and 5 – underestimate real inequality considerably. This is mainly because they present the (weighted) averages of the member states. These averages, however, abstract from the enormous differences in per capita income between the countries. Eurostat has not compared the incomes of what is really the richest quintile in the EU with those of the poorest, but erroneously assumes that the richest (or poorest) quintile is the sum of the richest (or poorest) quintiles of all member states.

In fact, the richest quintile consists predominantly of households in the richer member states, and includes even the second and third richest quintiles in those states, whose average income is still higher than that of the richest quintile in the poorer member states. The poorest EU quintile consists of the richer quintiles of the poorer member states (in Bulgaria and Romania, for example, from all quintiles). To ensure precision the 100 million (that is, about the size of one EU27 quintile) richest (or poorest) individuals in the EU would have to be identified and aggregated.

Realistic Estimate of Income Distribution: The EU Is More Unequal than India
If one makes the effort to construct realistic EU quintiles on the basis of the available EU data, an entirely different picture of the relationship between the richest and the poorest EU quintiles emerges (cf. Table 1). The first such estimate for 2004, based on World Bank data, yielded relatively low values(1); however, a methodologically more precise estimate(2) using EU data yields somewhat higher values. It makes a big difference whether incomes in the various member states are compared in terms of purchasing power or exchange rates. Since purchasing power in the poorer countries is higher (primarily because of lower rents and services), the differences are correspondingly lower.

Table 1: Income Distribution in the EU25 and EU27 by international comparison (total income of the richest 20% divided by that of the poorest 20% of the respective population.

* PPS: Purchasing Power Standard

Source: For the EU 2004: World Bank, Eurostat and author’s own calculations (Dauderstädt 2008); for the EU 2005–2008 Eurostat and author’s own calculations (Dauderstädt and Keltek); non-EU: World Bank.

Table 1 presents comparative figures based on World Bank data for China, India, Russia and the USA. World Bank data may be based on other measurement methods, but a comparison seems justified to the extent that the Bank’s data on inequality in individual EU member states comes very close to those of the EU. If one measures EU inequality in euros it comes out significantly higher for the EU27 than for all four large countries of comparison. The picture is rosier for the EU25, coming out at around the same level. Measured in purchasing power terms things look rosier still. However, as inequality within countries is measured in the respective national currency without taking into account regional purchasing power, a comparison with euro figures seems obvious.

The new estimates also make possible a more realistic view of the dynamics of inequality. While the official EU statistics report rising inequality, actual inequality between 2005 and 2008 was on a downward trend. This was due to the fall in inequality between countries which more than compensated for the increased inequality within EU states. It remains to be seen whether this trend will survive the recent crisis, which has severely reined in or even put into reverse the catch-up processes of some poorer member states. The final outcome will depend on how much growth has fallen in the richer countries in comparison.

From Inequality to Social Cohesion
The high inequality between states is increasing – mediated by the integration of the markets for goods, services, capital and labour in the EU – inequality within states. This effect was to be expected in the richer member states since wages there have come under pressure due to cheap imports, immigration and relocation of production. The same mechanisms should have improved distribution in the poorer countries. However, to the extent that it was visible at all, this effect could be observed only very late in the wake of strong – and apparently not sustainable, unfortunately – periods of growth from 2004.

The reduction of inequality, therefore, requires a dual approach in the form of measures to reduce inequality between and within member states. Domestically, wages should rise with productivity (plus the target inflation rate) in order to give workers a decent share in economic growth, which would also ensure more stable domestic demand and impede harmful competitive devaluations in real terms. Besides primary distribution, however, state redistribution also affects the extent of inequality. Transfers which substitute market incomes where they are lacking (for example pensions, social security, unemployment benefit, sick benefit) should increase in step with average per capita income.

The EU should monitor wage policy and issue clear warnings with regard to divergence in either direction (unrealistic wage increases or severe wage restraint). There should be a minimum wage policy to underpin this goal and to prevent a race to the bottom by paying immigrants and service providers at the wage level of the relevant host country. These problems will be assuaged to the extent that income and wage levels rise in the countries of origin. The reduction of inequality between states, therefore, makes a twofold contribution to social cohesion in Europe. As already mentioned, this has also been responsible for the progress made in recent years. However, if these catch-up and convergence processes were to slow down or even go into reverse, these successes would be put in jeopardy. Against the background of the crisis, therefore, the following policies are appropriate:

• Investment in poorer member states should be less dependent on the herd instinct of the capital markets and be funded to a greater extent through public financing channels, such as the European structural funds or the European Investment Bank. To that end, the EU’s own resources should be increased, with the raising of European taxes. Stricter regulation of the financial markets should avert the emergence of debt-driven bubbles.
• Admission to the Monetary Union or the adoption of the euro should no longer depend on attaining narrow inflationary and exchange rate goals since this forces countries to restrain appreciation of the national currency in real terms, which is a key element in catch-up processes.
• Enlargement policy should demand of candidate countries, besides the fulfilment of the Copenhagen criteria, a minimum level with regard to income and income distribution, since the accession of poor and unequal countries hinders and even jeopardises social cohesion in the EU.

Finally, the EU should make available better and clearer statistical information on inequality in Europe. Eurostat should regularly publish data not only on relations between quintiles, but also on average per capita incomes for all quintiles in all member states, if possible going back to 1995 in order to make possible a realistic assessment of the evolution of income distribution.

(1) M. Dauderstädt (2007), Ungleichheit und sozialer Ausgleich in der erweiterten Europäischen Union, Wirtschaftsdienst, Vol. 88, 4, April, 261–269.
(2) Dauderstädt and Keltek (2011) ‘Immeasurable Inequality in the European Union’ Intereconomics Vol. 46/1 pp.44-51.

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Michael Dauderstädt is the director of the division for Economic and Social Policy at the Friedrich-Ebert-Stiftung.

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Further reading:
Michael Dauderstädt and Cem Keltek (2011) Immeasurable Inequality in the European Union, Intereconomics Vol. 46/1 pp.44-51. Available online at: http://www.intereconomics.eu/