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.

A Tide of Inequality: What can Taxes and Transfers achieve?

Malte Luebker [1]

Inequality is a top issue in the public agenda, partly as a result of the financial crisis that helped draw attention to this topic. As banks relied on the support of taxpayers and millions of workers had lost their jobs, people began to see the compensation of bank CEOs – with an average 2010 pay package of $9.7 million in Europe and the US[2] – as obscene.

Those at the top of society have long captured the gains from economic growth. From 1970 to 2008, the annual incomes of the top 1% of US taxpayers rose threefold in real terms from $380,000 to $1,140,000. By contrast, the incomes of the bottom 90% remained where they were in 1970 – at $31,500 per year (in real 2008 dollars).[3]

Minimum Wages in Europe: a Strategy against Wage-Dumping Policies?

Lars Vande Keybus

In numerous countries such as Ireland, Greece, Portugal, Hungary, and others, the European Commission (EC) - in cooperation with the International Monetary Fund (IMF) and European Central Bank (ECB) - has imposed a dramatic policy mix that consists of blind austerity, privatisation and wage cuts. Following the adoption of the notorious ‘six-pack’ in December 2011, it is clear that such policies will become a general rule all over Europe. The ‘six-pack’ sets up a structure in which the EC is granted a role as budgetary supervisor and punisher. The commission has the opportunity to almost automatically punish European Union (EU) members who do not follow recommendations to correct

The G20 and Jobs: Time for Plan B

John Evans

When the economic crisis broke following the collapse of Lehman Brothers in September 2008 and the global banking system seized up, workers began to be laid off, families saw their houses repossessed and banks teetered on the brink of collapse. Financial panic knew no frontiers. It was clear that a coordinated global response by governments and institutions was required to counter what the IMF termed the “Great Recession”. The major economies used the G20 as the forum to coordinate their responses, scaling it up from a low-key Finance Ministers’ Forum into a Heads of Government Summit process – effectively replacing the G8.

The international trade union movement responded rapidly[1], matching the “heat” of the street with the “light” of policy messages coming out of the G20 Summits. Trade union demands centred on stabilising employment, putting in place social protection for workers hit by the crisis, and effective and coordinated government intervention to support the global economy so as to prevent the “Great Recession” becoming a 1930s-style “Great Depression”.

Supporting Dissent versus Being Dissent

Steven Toff

Jamie McCallum

When the Occupy Wall Street movement (OWS) began on September 17th 2011, few could have predicted the wave of occupations that would soon sweep the rest of the country and indeed much of the world in what has been referred to as the American Fall. While it remains to be seen how this inchoate movement will mature, it has so far exceeded everyone’s calculations - it is the first time since the 1999 anti-WTO demonstrations in Seattle that tens of thousands in the US are taking to the street for economic reasons. Average Americans, many of whom have long understood the moral and economic turpitude at the root of Wall Street, are now expanding that stance to make a wholesale critique of neoliberalism and questioning some of the most foundational principles of capitalism.

A Plan B for the World Economy

Christian Kellermann

‘Capitalism’ is back on Main Street. Crashing, dismantling, reforming, repairing, restoring – all kinds of approaches to capitalism are discussed in the wake of the recent crisis. The debate has gained far more momentum today than it had during the past decade, though we had already witnessed a number of such crises. However, in practice, the gap between regulatory rhetoric and actual reform of our economies and the world economy as a whole is still considerable. Our systems remain at risk of on-going instability. Crises will continue to be the norm rather than the exception if we keep on working with the dysfunctions of current capitalism. Many of us will be unable to live a decent life under conditions of increased insecurity, inequalities and pressure in terms of wages, jobs, raising children and providing for old age. An excessive degree of unequal income distribution and personal insecurity is not only detrimental to a good life; it is also economically dangerous and inefficient. The reasons for economic crises and increasing inequality, which are symptom and root of personal and systemic insecurity and inefficiency alike, are manifold.

Finance has played a crucial role in most of the economic crises we have experienced since the 1990s. Financial markets are both gigantic amplifiers of imbalances within and between our economies and a root of imbalances themselves. Illuminating the cracks in finance is therefore the logical starting point for the Plan B of fixing our current capitalistic system. The excesses of finance are only one part of the fundamental problems economies and societies are facing and which have contributed to the recent crisis. There are at least three dimensions of instability which are related to finance but go beyond the narrow instabilities of the financial system. First, imbalances between different sectors within economies have escalated. One expression of this is highly indebted private households as well as governments, as a consequence of real-estate and other bubbles which were fuelled by the financial system. Second, international imbalances have never been as big as they are today. Third, together with financial deregulation the shareholder-value principle of corporate governance became dominant. This led to a short-term orientation of management and high bonus payment for management at the cost of long-term sustainable development of companies and firms.

Besides these developments, the radical market globalisation of the last decades led to a huge increase in wage dispersion and an ever-growing low-wage sector which had not been seen since the early times of capitalism before the First World War. Labour markets in almost all industrial countries became more deregulated while at the same time trade unions became weaker. In many cases economy-wide or sector level collective bargaining was eroded. Firm-based wage negotiations or individual working contracts without any collective agreements started to dominate.

Increasing inequality is a phenomenon which can be found in almost every country. High inequality does not only provoke a feeling of ‘unfairness’ in and between societies; it also hinders social mobility and has negative impacts on health and productivity. Hungry wolves do not hunt best – in fact, the very opposite is true for present day economies. The American dream of high social mobility within a society and the opportunity for anyone to become rich if they work hard enough is in fact little more than a mirage. Today, mobility within society is more of a reality in the Nordic countries of Scandinavia where equality is higher than in the Anglo-Saxon world of capitalism.

Capitalism has more problems: in the past, it led to a very special type of technology, production and consumption growth which is blind to ecological problems and the fact that natural resources are limited. Prices systematically fail to adequately incorporate ecological dimensions and the deterioration of nature. Prices also give the wrong signals for the direction of innovation as well as of production, consumption and the way we live. After experiencing a number of regional ecological disasters in the past century, the world is now heading for a global ecological disaster, unless fundamental changes take place very soon. This makes the search for solutions very complicated: the present crisis is not only a deep crisis of traditional capitalism, but it has emerged at a time when a deep ecological crisis is also evolving.

A global Plan B should therefore include three interrelated dimensions. First, the model should be ecologically sustainable: preventing global warming, changing to a renewable energy basis and preventing other problematic developments such as a reduction in biodiversity. Second, it should be formed in such a way that the growth process is not jeopardised by either asset-market bubbles or goods market inflation or deflation, and does not result in the excessive indebtedness of individual sectors or even whole economies, thereby leading inevitably to the next crisis. At the same time, such a model should promote innovation and, therefore, technological development necessary both for solving ecological problems and, in the medium and long term, increasing labour productivity and so holding out the possibility of growing prosperity for all. Third, it is critical that all population groups have a share in social progress. Inequality of income and wealth distribution must be at politically and socially acceptable limits.

At the core of Plan B is a more equitable income distribution. It is crucial to reverse the negative changes in income distribution and grant all population groups an adequate share in the wealth created in society. One secret of the success of regulated capitalism after the Second World War was the increasing mass purchasing power of workers, based on growing incomes and relatively equal income distribution. It is now becoming clear that the old model has to be regenerated.
Income distribution has three important components: functional distribution of income in wages and profits, distribution within the national wage sum and the national profit sum, and state redistribution policy. A fall in the wage share is the result of a higher profit mark-up. The latter was possible on the basis of deregulation, particularly due to the increasing power of the financial sector and its willingness to take risks in pursuit of higher returns. The shareholder-value approach and the increasing role of institutional investors drove enterprises to pursue higher profit mark-ups. Correspondingly, the structures and rules of the game in the financial sector must be changed in such a way that the profit mark-up falls again.

Recent decades have been characterised by significant wage dispersion. In almost all countries in the world the low-wage sector has increased. Precarious employment and informality have also increased, especially in the sector of non-tradable goods and services. Globalisation trends, therefore, cannot directly explain the emergence of these sectors. They are the result of labour market deregulation. These unjustified income inequalities among wage earners must be dismantled by means of labour market reforms. The collective bargaining system must be strengthened, backed up by other labour market institutions to achieve the decent work conditions stressed by the International Labour Organisation. Minimum wages and social security guaranteed by the state also play a crucial role in this. Such labour market regulations are not only important to reduce income inequality, they are also important to establish a nominal wage anchor against deflationary money wage cuts.

Even with strict regulation, markets do not lead to a politically acceptable income distribution. In addition to that, not everyone has equal chances in the market. The disadvantaged – whether on the basis of gender, childcare responsibilities, handicap, age, race and so on – can drop out of the market and be deprived of an income, or at best obtain only an inadequate one. Ultimately, by no means are all incomes obtained on the basis of personal achievements; consider, for example, large inheritances, which are an intrinsically alien element with regard to capitalism. Tax law and social systems must be deployed in order to organise income distribution in a socially acceptable manner. Tax law should therefore include a clear redistributive component, and this need becomes more pronounced the more evident it is that market outcomes alone will lead to growing inequality. Against this background, not only is a markedly progressive tax system important, but above all, regulations which ensure that incomes from capital are adequately taxed.

This Plan B might sound good, but is it not completely unrealistic? Change the rules of the game and shift the roles of governments, society and the market at the local, national and global level – and the powerful few who have been benefiting greatly from the current brand of capitalism might actually lose out. However, the outlook for change is not that bleak. Economic history is full of deep shifts in opinion, followed by deep shifts in the structure of economic institutions. Crises allow us to call into question all doctrines and interests which have been disseminated virtually unquestioned.

One thing is very clear, however: a more ‘decent capitalism’ will not be created by the profiteers of the current system of non-regulation. Their profits are built too heavily on certain prerogatives, which they will not just hand over to public control. Quite the opposite is true: it is mostly mere placebos that have been rubber-stamped by the global financial elite so far. For deeper reform the underlying power relations of current finance capitalism will have to change, which means that the relationship between states and markets will have to be radically rebalanced.

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Christian Kellermann is the Director of the Nordic Office of the Friedrich Ebert Foundation (FES) in Stockholm. Before joining the FES, he worked as a financial market analyst in Frankfurt and New York.

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Further reading:
Decent Capitalism. A Blueprint for Reforming our Economies, by Sebastian Dullien, Hansjörg Herr, Christian Kellermann, Pluto Publishers, London, 2011
http://www.plutobooks.com/display.asp?K=9780745331096&

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Global Wage Trends: The great Convergence?

Patrick Belser

Average wages

The financial and economic crisis has cut global wage growth by roughly half in 2008 and 2009. Based on a sample that covers a large chunk of the world’s 1.4 billion wage-earners, the Global Wage Report 2010/11(i) finds that the global growth in real monthly wages slowed from 2.7 and 2.8 per cent in the two years before the crisis (2006 and 2007) to 1.5 and 1.6 per cent in 2008 and 2009. If China – where data coverage is limited to fast growing “urban units” – is excluded from the sample, the average wage growth drops from 2.1 and 2.2 per cent before the crisis to 0.8 and 0.7 per cent in 2008 and 2009. In 2010, preliminary results suggest that wages have started to recover, but not as fast as profits and not yet to pre-crisis levels. Generally, wages have taken a bigger hit in developed than in developing countries.

This short-term cost of the crisis to workers must be understood in the context of a longer-term trend towards wage convergence across regions. Table 1, taken from the Global Wage Report 2010/11, shows that while average wages more than doubled in Asia since 1999 and more than tripled in Eastern Europe and Central Asia (which partly reflects the depth of the wage decline in the 1990s), wages stagnated in advanced countries, increasing by just about 5.2 per cent in real terms over the full decade. This is less than the rate at which Chinese wages grow in one year. The base from which Chinese wages are growing remains, of course, much lower. The average American worker still earns in about one month what a Chinese worker in the private sector earns in one year. The point, however, is that the gap is closing and that the economic and financial crisis – as well as the slow recovery of wages in the West – has accelerated this convergence.

Table 1 Cumulative wage growth, by region since 1999 (1999 = 100)

* Provisional estimate / ** Tentative estimate / … No estimate available
Source: ILO Global Wage Database.

One factor that contributes to the convergence is the faster growth in labour productivity in developing regions. Another factor is the apparent decoupling between productivity and wage growth in advanced countries. According to one calculation, while average wages in advanced countries grew by 5.2 per cent over the last decade, labour productivity increased by 10.3 per cent (see Figure 1). In other words, wages grew only half as fast as labour productivity. One simulation indicates that if wages had grown as rapidly as productivity, average wages in advanced countries could have gone up from roughly US$ 2,864 per month in 1999 to $3,158 in 2009 instead of only $3,012 (figures are expressed in 2009 PPP dollars). Distributed over all paid employees, this decoupling may thus have cost workers in advanced countries hundreds of billion dollars in forgone wages over the full decade. These resources have not exactly been lost to everyone – since they went into profits and investment. But this redistribution has certainly limited non-credit based household consumption, and at least partially explains the low interest rates that were needed in some countries before the crisis to keep consumption going.

Figure 1

Note: Since the indices refer to a weighted average, developments in the three largest advanced economies (United States, Japan and Germany) have a particular impact on this outcome.

The low pay crisis

The long-term losses to labour have not been equally distributed between all workers. Those who have suffered most from the decoupling are the workers at the middle and the bottom of the wage distribution. Those at the top have fared better, as indicated by the increasing gap between mean and median wages in many countries and epitomized by the ongoing bonus-bonanza among the world’s CEOs. While the highly educated elite has transformed into global “superstars”, workers with average skills have become the victims of the global compression in labour costs.

It is at the bottom of the wage distribution that things have deteriorated the most. This is revealed by the steady increase in the share of workers on “low pay”, defined as the proportion of workers whose hourly wages are less than two thirds of the median wage across all jobs. The latest figures show that since the second half of the 1990s, relative low pay has increased in about two thirds of countries (25 out of 37 countries). In advanced countries, low pay now afflicts about one in every five workers, or about 80 million people. At the country level, the incidence of low-wage employment still shows considerable variation. When full-time workers are considered, the incidence of low-wage employment varies from less than 10 per cent in Sweden and Finland to about 25 per cent in the United States and the Republic of Korea.

But low pay is not just a problem in developed economies. Case studies show that in recent years low-paid wage work has also increased in a number of developing countries, for example China, Indonesia or the Philippines. What differs, of course, is the context, which is much more dynamic in emerging economies. While low pay in advanced countries is often the outcome of stagnating or decreasing incomes at the bottom, low pay in rapidly growing developing countries has more to do with the rapid progress of the middle class. This, however, does not mean that low pay is not a policy issue in emerging economies. The labour unrest in Chinese factories in 2010 showed that low paid workers expect their conditions to improve in line with overall social and economic progress.

Policy options

Wage trends seem to point towards the complex process of global integration, where average wages converge towards the (stagnating) levels of advanced countries and where inequality between top and median, and median and bottom wage-earners increase almost everywhere. There are exceptions, of course. This trend nonetheless points towards the importance of international coordination on wage-related matters. The collective action problem is particularly acute in the Eurozone, where any country’s attempt to link wages more closely to productivity growth immediately leads to a decline in external competitiveness relative to Germany – the star-performer where average wages actually declined by 4.5 per cent over the last 10 years despite a (modest) increase in labour productivity. Outside of the Eurozone, wage compression in China similarly limits the room for wage increases in other emerging economies.

At the national level, countries should be encouraged to support low-paid workers through a combination of minimum wages and income transfers. Minimum wages have the potential to make a major contribution to social justice. In the United Kingdom, for example, the minimum wage was identified in 2010 as the most successful government policy of the past 30 years in a survey of British political experts. In this survey(ii) , a successful policy is defined as one which is successfully implemented, has a positive social and economic impact, and can be sustained over time. Perhaps most importantly, the much-feared negative impact on UK jobs failed to materialize. The positive effect of the minimum wage has been compounded by the working tax credit, a system of so-called “in-work benefits” that reduces taxes for the low-paid who work for a minimum of 16 hours per week. Both minimum wages and “in-work benefits” are complementary, for without the former, companies may feel that they may quite simply shift some labour costs onto tax credits.

The minimum wage can have a positive impact in developing countries too. In Brazil, a country with a large informal economy, the two policies that are most frequently credited for the sharp reduction in poverty and inequality over the last decade are the Bolsa familia – a programme of cash transfers conditional upon children attending schools – and the national minimum wage that has been revived since 1995. Even The Economist now recognizes that “by boosting domestic demand, these policies have also contributed to economic growth”.(iii) In countries such as India, minimum wages are being implemented along with employment guarantee schemes that set the floor for wages. One simulation shows that if the coverage of minimum wages were extended to all wage-earners in India instead of a select group, it could lift the incomes of 76 million low-paid salaried and casual workers.(iv)

(i) International Labour Office (ILO). 2010. Global Wage Report 2010/11. Available at:
http://www.ilo.org/travail/areasofwork/lang--en/WCMS_DOC_TRA_ARE_WAGE_EN/index.htm
(ii) See http://www.instituteforgovernment.org.uk/pdfs/PSA_survey_results.pdf
(iii) “Lula’s legacy”, 30 September 2010.
(iv) Belser, P.; Rani, U. 2010. Extending the coverage of minimum wages in India: Simulations
from household data, ILO Conditions of Work and Employment Series No. 26, 2010 (Geneva, ILO).

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Patrick Belser is the principal editor of the ILO Global Wage Report. Before working on wages, he spent 5 years with the ILO programme on fundamental principles and rights at work and co-edited a book called Forced Labor: Coercion and Exploitation in the Private Economy, published in 2009 by Lynne Rienner.

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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/

Maturing Contradictions: the 2010 Public Sector Strike in South Africa

Claire Ceruti

The huge strike in August by South African public sector workers brought the number of strike days in 2010 to the highest ever. Teachers and hospital staff struck for three weeks despite police harassment of picket lines and a series of court interdicts to prevent police, soldiers and nurses from striking(1). The strike started after members forced their leaders to reject government’s ‘final offer’ of 7% and R700 (€70) housing allowance. After seeing the government’s lavish expenditure on the 2010 soccer world cup, strikers found it difficult to believe that government could not meet their demands. The public servants were asking for an 8.5% wage increase and R1000 (€100) a month housing subsidy. However, the strike was much more than a wage strike: three years ago, public sector workers struck during the dying days of the regime of previous president, Thabo Mbeki, while the 2010 strike was a major test of his successor, Jacob Zuma and thus of the unions’ strategy for social change.

The political implications of the strike were reflected in a striker’s placard: ‘Comrades are like buttocks. When they part 7% (shit) comes out.’ This is a direct reference to the alliance between the ruling African National Congress (ANC), the South African Communist Party (SACP), and the biggest trade union federation, Congress of South African Trade Unions (Cosatu), whose affiliates comprise a majority in the public sector. Cosatu’s strategy for change since the end of apartheid has been to influence government policy through this alliance. The strategy foundered under Mbeki, who was the architect of a home-grown neo-liberal program for South Africa before he was president. Under Mbeki, corporate tax was cut, more than a million jobs were lost and homelessness grew quicker than provision of low-cost government housing, leaving 15% of the country’s population living in self-built iron shacks today.

The revolt against Mbeki was a long time maturing. It finally exploded on several fronts. From 2005, some of the poorest townships in South Africa took to the streets before municipal elections. The service delivery protests demanded not only the ‘better life’ promised in ANC election campaigns but also more accountable government. There was also a revival of wage strikes. These developed in tandem with a revolt inside the ANC and crisis in Cosatu’s strategy. Union leaders were increasingly embarrassed that Mbeki used the alliance to assert his authority over the unions, while dismissing their policy suggestions. Rather than concluding that Cosatu should become more independent, its leaders looked for friendlier faces within the alliance. A variety of forces, including Cosatu’s general secretary Zwelinzima Vavi, sided with Zuma after Mbeki expelled him from the cabinet. Zuma did not take the strikers’ side in 2007, but argued for both parties to return to negotiations. However, the December 2007 conference of the ANC (now simply known as ‘Polokwane’ after its location), which voted for Zuma as ANC president, also promised better conditions for public sector workers.

The 2010 strike unfolded against the post-Polokwane reconstitution of the alliance, and exposed some of the contradictions between members’ interests and the broad strategy of the union leaders. The 2007 strike was initiated by union leaders kicking against their marginalization in the alliance, and enthusiastically supported by the members. The 2010 strike, by contrast, was forced on reluctant leaders by the righteous expectations of the members.

On the one hand, union negotiators were confident that their new comrades in government, beholden to the unions for helping them to power, would make a satisfactory offer. On the other, government negotiators hoped their comrades in the unions would sell a deal to the members. They were under pressure to rein in wage demands both because of the fiscal hangover from the world cup and also to reassert authority amidst the new confidence of various alliance members to critique ‘their’ government publically. However, members were expecting nothing less from Zuma than to meet their demands. Any early misconceptions that government negotiators were acting against Zuma’s real intentions and against ANC policy were quickly dashed when Zuma appeared on national television, just days into the strike, asserting the government’s right to dismiss ‘essential workers’ who continued to strike.

Government came down hard on the strikers. Police used rubber bullets and water cannon on pickets at several hospitals on the second day of the strike, and fired on teachers who walked onto a highway near Soweto. The mainstream media conducted a vitriolic campaign, blaming strikers for deaths of babies and disrupting education. Months before, six babies had died in a hospital under ‘normal’ conditions because of a shortage of basic disinfectants. Two months earlier, schooling was suspended for the world cup, while in Nelspruit learners are still without a school after their high school was converted into stadium offices. Without a strike support committee bringing affected communities into direct contact with the strikers, this moralistic pressure proved key in isolating strikers as the strike dragged on.

However political considerations were also important to understand why the strike was concluded as it was on September 6 with an agreement that most strikers feel was imposed from above. Cosatu was about to announce its proposals for economic policy, ahead of the ANC’s national general council and therefore could not afford an all out defeat of the strike but neither could they afford to reach a breaking point with Zuma’s camp if they wanted their policies to get a hearing. On August 27 a government spokesperson, Themba Maseko, was quoted in the Business Day newspaper saying: ‘We are beginning to see and hear too many statements that are taking the strike beyond labour relations. It worries us’..

Vavi therefore played a very contradictory role throughout the strike. His role followed the logic of collective bargaining with a political edge: a negotiator influenced by strategic considerations related to the alliance. At a march in Johannesburg 12 days into the strike, on 26 August, Vavi echoed strikers’ anger, declaring that ‘the alliance is once again dysfunctional’. He also lambasted ‘predatory elites’ in the ANC and – crucial to the strikers’ confidence – announced that the federation had filed notice for a one day general strike in solidarity with the public workers. However behind the scenes, he was working hard first to avert a strike and then to settle the strike. Vavi describes this role in a remarkably unselfconscious letter after the strike, responding to the teachers’ union’s accusations that they had been sold out. The letter encapsulates the contortions of a union leader caught between his comrades in government and the fledgling force pushing up below. Vavi writes that the negotiators were ‘acutely aware how difficult it was for government to move’ and describes a number of attempts to reach a compromise on figures suggested by the public sector union officials, but apparently not caucused with their members.

Shortly after the 26 August march, Zuma ordered the parties back to negotiations. Many strikers took this as a signal that they were wining. The announcement of the new offer – 7.5 percent – was a major blow to their morale. Most were also furious that Vavi announced this deal on national radio before it was put to the members, urging strikers to accept it because it was ‘impossible’ to win anything more. Vavi’s reading is that government negotiators felt betrayed by their union comrades who had twice promised they could sell a deal to members, only to be told the members had rejected it.

Despite Vavi’s recommendation, most hospitals and most regions of the Cosatu teachers’ union rejected the offer, often unanimously. However after three weeks of no-work-no-pay, combined with worries about patients and learners, and demoralized, shrinking picket lines, the strikers lacked inspiration to continue the strike. After some days of uncertainty the strike was ‘suspended’.

The political residues of the strike have not washed away easily, however. The Zuma regime is nervous about the ability of its alliance partner to control its members. They took it as a full frontal attack when Cosatu called a ‘civil society conference’ to which the ANC was not invited. Government’s New Growth Path makes many promises to Cosatu and few concessions to its economic suggestions, while making a social pact – a new means of binding the unions - central. Less visible, but no less important, is the political residue in the minds of strikers. It is firstly evident that strikers have begun to generalize beyond their own sectoral issues. Strikers in 2010 sympathised with service delivery protests much more readily than in 2007. Secondly, strikers learned a hard lesson in the logic of the alliance and of collective bargaining. At least one striker felt that the strike became a lever for Vavi’s own political ambitions. Finally, strikers in 2010 moved quickly to directly criticizing Zuma. The strike demonstrated that the contradictions are likely to unfold much more quickly for Zuma than for Mbeki.

(1) Government and the unions have failed to reach agreement on who is an essential worker.

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Claire Ceruti is a researcher attached to the South African Research Chair in Social Change at the University of Johannesburg. She has been doing research about class and strikes.

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Trade, employment and development: Back on track?

Richard Kozul-Wright

In today’s world of increased economic and political interdependence achieving a broad-based, rapid and sustained growth in incomes and employment involves even more complex policy challenges than in the past. This was the case before the recent crisis, but it is even more so as policy makers in both developed and developing countries look for ways to mitigate the damage from that crisis and build a more sustainable recovery.

The International Labour Organisation (ILO) worries that the kind of integrated policy framework and the accompanying degree of policy coherence required to respond effectively to the crisis within and across countries is still not in place. In particular, the kind of mutually supporting links between macroeconomic policies, social protection systems and active labour market measures are still not established to ensure both an inclusive (job-rich) recovery and to realize the Millennium Development Goals (MDGs) within an acceptable time frame.

This worry is very much shared by United Nations Conference on Trade and Development (UNCTAD). Indeed, when the development agenda is expanded beyond the MDGs to include the traditional issues of catch-up productivity growth, economic diversification and technological upgrading, then our worries tend to be amplified.

At the G20 and other meetings, like the recent one in Oslo co-hosted by the ILO and the International Monetary Fund (IMF), there have been signs that the stranglehold on policy design by the financial institutions has begun to loosen. There have been some important steps away from policy orthodoxy, particularly by the IMF, on issues such as inflation targeting, capital controls and countercyclical policy measures.

These are welcome developments but at the end of the day actions speak louder than words. The kind of programmes put together by the Washington institutions since the crisis have continued to carry much of the damaging policy baggage of the recent past, particularly with respect to procyclical adjustments and targets and squeezing public investment programmes, including in Least Developed Countries (LDCs).

Despite the recognition that the growth in global interdependence poses greater problems today, the mechanisms and institutions put in place over the past three decades have not only fallen short on surveillance and the policy coordination challenge but have in many respects contributed to the dissonance and tensions that eventually culminated in the financial crisis that hit in 2008. The failure to make reforms now runs the very serious risk of retuning to “business as usual” and the danger of repeating the boom bust cycles of the recent past.

The kind of institutional changes needed for financial stability - and the “global public good” which the IMF promises to deliver - have made little headway in recent discussions. These include larger, more predictable and less conditioned flows of development finance; adequate international liquidity to support countercyclical macroeconomic policymaking at the domestic level; the management, through some kind of orderly workout mechanism, of sovereign debt crises; a stable exchange rate system; and more representative form of international governance (though small steps have recently been agreed on this).

The problem in achieving progress on these fronts has in one sense not been too little coherence but too much; namely an almost blind faith, particularly at the international level, in freely functioning markets to generate prosperity and stability at the national, regional and global levels.

That is a debate which has not closed though there is a good deal more realism than a few years ago). But what seems not open to question is the fact that by focusing exclusively on a narrow definition of fundamentals (efficient markets, rational expectations, balanced budgets, price stability, and so on) the Washington institutions have consistently missed every single one of the major economic crises that have occurred over the past 25 years, from the savings and loans collapse in the US in the late 1980s, through the Asian financial crisis of 1997, to the sub-prime meltdown and the collapse of the Icelandic economy in 2008.

These institutions have also missed (or worse neglected) one of the most persistent trends in the global economy over the past three decades, namely the massive increase in income inequality which has occurred, albeit to varying degrees, in almost all countries. This trend is closely linked to the rise of unregulated financial markets and institutions, a trend strongly promoted by these same institutions, and which is the characteristic feature of globalization in our era. This is certainly one of the reasons why rising inequality has been accompanied by such a volatile mixture of shocks, imbalances, asset cycles and generally sub-standard economic performance.

The key imbalances in this regard are, on the one hand, the falling wage share and the rising level of household indebtedness and, on the other, the rising profit share and the declining (or stagnant) levels of productive investment. Failure to address these imbalances has made for a weak and uneven recovery and a persistent state of labour market distress even when growth has picked up.

These are trends which UNCTAD also identified in its latest Trade and Development Report as lying behind the jobs crisis in many developing countries even prior to the recent crisis.

Unsatisfactory labour market outcomes, in developing countries as much as developed countries, are also due to unfavourable macroeconomic conditions that inhibit investment and productivity growth, along with inadequate wage growth which continues to repress domestic demand. External demand can compensate up to a point but there are dangers with this strategy which can reinforce wage repression and limit capital formation.

The ILO argues that the rebalancing of labour market conditions will require improving wage determination mechanisms; measures to promote productivity growth; and the narrowing of income inequalities. This is very much supported by UNCTAD’s analysis. We would also put a very strong emphasis on strategies to enhance domestic demand as an engine of employment creation. The mixture of employment friendly monetary, financial and fiscal policies will have to be tailored to particular local conditions and constraints. Industrial policies will also need to be added to the policy mix; this is already happening in a number of middle-income developing countries

A critical role in moving to a jobs-rich development path must be ceded to a developmental state which aims to create and manage rents in line with the objectives of inclusive growth.

A key question for us is whether we have global arrangements capable of providing the financial and monetary stability to help these states pursue development strategies that sustain the expansion of employment and output and encourage the structural diversification that are necessary for their own long-term success and their effective insertion into the international trading system?

It should be clear to all by now that the question of stability and appropriate alignment of exchange rates (particularly among the G-3 currencies) remains unresolved, and large swings have posed a persistent threat to global financial stability, the international trading system, and to exchange-rate policy and other aspects of external financial management in developing countries. The daily volatility in these rates can often offset annual gains in domestic productivity and drastically alter international competitiveness. This problem has been recognized in recent discussions (though the language of "currency wars" is unhelpful and misleading) but ignored in current global arrangements which are based on a false dichotomy between trade and finance.

Moreover, the international division of labour is still greatly influenced by commercial policies which favour products and markets in which more advanced countries have a dominant position and a competitive edge. High tariffs, tariff escalation, and subsidies in agriculture and fisheries are applied extensively to products that offer the greatest potential for export diversification in developing countries. The panorama of protectionism is no better for industrial products including footwear, clothing and textiles where many developing countries have competitive advantages. The abuse of anti-dumping procedures and product standards against successful developing-country exporters creates further obstacles. Given the adjustment that developed countries will be required to take in the coming years, it is not difficult to imagine a worsening of this situation, unless these countries can make the appropriate expansionary responses which allow their citizens to adjust as living standards rise.

It is also widely believed that the existing arrangements do not allow sufficient policy space to developing countries to overcome their longer-term payments constraint by pursuing targeted trade, industrial and technology policies and thus increasing their export capacity in more dynamic sectors. There are increasing concerns that persistent policy orthodoxy and global arrangements have the result of kicking away the ladder by which today’s advanced countries attained their present levels of economic development, denying developing countries many of the policy instruments that were widely and successfully used in the past.

The need for a more effective multilateral trade and financial system cannot be ignored; indeed developing countries continue to have a stake in building such a system. Controlling finance remains the place to begin this task as it was back in the 1945. As Keynes noted at that time: “It is very difficult while you have monetary chaos to have order of any kind in other directions… “

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Richard Kozul-Wright is a senior UN economist heading the unit on Economic Integration and Cooperation Among Developing Countries in UNCTAD. He was previously in charge of the World Economic and Social Survey in UNDESA, New York. He holds a Ph.D in economics from the University of Cambridge, UK, and has published papers on economic history and development issues.

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