Precarious work makes for a precarious recovery

Ronald Janssen

This week, trade unions in Europe will stage massive protests against the sharp turn economic policy in Europe has taken. After having saved the banking system from total collapse, governments throughout Europe are not only cutting public services and social benefits. On top of this harsh fiscal austerity, several member states also intend to inject an even greater dose of flexibility into their labour markets. These governments adhere to the conventional wisdom that, by allowing business to get rid of workers more easily, employers will advance in time the decision to (re)hire workers. In turn, the additional purchasing power coming from the frontloading of jobs would support aggregate demand and accelerate economic recovery.

Meanwhile, business is certainly more than ever interested in easy firing or flexible labour contracts and this for two reasons in particular. Having in mind the sudden and spectacular collapse of demand and activity that companies faced at the end of 2008, management is now reluctant to hire workers on the basis of open ended contracts. Another motive for business to turn to short term contracts is the credit squeeze that many companies have been or still are facing as a result of the financial crisis. To reduce dependency on bank lending, business is now keen to maximize profits as a source of new capital and one way to cut wages and increase profits is to hire temporary workers who tend to be cheaper than regular labour (see below).

By engaging in this flexibility crusade, policy makers are making a big mistake and are running the risk of accomplishing the opposite effect of stalling and weakening economic recovery. To understand this, one needs to understand the nature and extent of the damages temporary contracts inflict upon workers.

First of all, temporary contracts come with a high wage discount. A recent study by the IMF finds that, even when correcting for factors such as education and tenure of permanent contracts, temporary workers systematically receive lower wages than workers in open ended contracts (IMF 2010). For most European countries, the wage gap is around 15 to 25%, with one country (Sweden) recording a wage gap as high as 44%. While the size of the wage gap between temporary contracts and regular work contracts is casting doubts on whether the principle of ‘equal pay for equal work’ is being respected around Europe, the fact that there is such a wage gap is in itself not so surprising: temporary workers are vulnerable workers. Employers have the power not to prolong the temporary contract or, alternatively, employers become ‘invisible’ to their own work force by using agency work. This makes temporary workers willing to do the same job for lower wages. And with employers hiring workers on a temporary basis instead of on the basis of open ended contracts, the additional purchasing power that is injected into the economy is seriously reduced.

Second, not only do workers in temporary contracts gain lower wages, they also tend to consume less and save more. One reason is the insecurity that is inherent in the nature of these contracts and which drives workers to increase precautionary savings. There is also a ‘Ricardian’ effect at work here: with rates of transition into regular contracts sometimes as low as 12% even after a period of one year (IMF 2010), temporary contracts often work as a ‘bad job’ trap. When hiring, employers often discriminate against workers having a history of temporary contracts. Business also tends to provides temporary workers with less access to continuous training. Facing the possibility of remaining stuck in a chain of insecure and low paid fixed term contracts for years to come, these workers will discount the prospect of future depressed revenue flows into lower consumption at present.

Third, and in contrast to the widespread view that core workers are too protected to be affected by flexibility, there are spillover effects on the rest of the workforce. The sheer use of temporary contracts functions as a severe threat to workers under open ended contracts to be careful not to lose their job and find themselves in a situation in which they in turn would be forced into precarious contracts when re entering the labour market. This makes the work force to be more inclined to accept wage cuts, longer working hours and other degradations of their rights in order to preserve their present job situation.

In short, ‘flexibility’ all too often boils down to ‘flexploitation’. This raises a key question: can flexibility compensate for its negative impact on wages and aggregate demand by generating sufficient new jobs? The answer to this is negative. In fact, the illusion that flexibility improves an economy’s job performance has been shattered by the same institution which has been relentlessly pushing the case for flexible labour markets for more than a decade. In 2006, when examining the outcomes of its so-called ‘Jobs Strategy’, the OECD itself was forced to admit that the evidence to support the claim that flexible labour markets are good for jobs simply was not there (OECD 2006).

Moreover, the analysis should be taken a step further. Since the beginning of the 1990s, reforms of labour law in rich countries have systematically provided business with several alternatives to hiring workers under open ended contracts. As a result, the share of temporary contracts in dependant employment has seen a structural increase, from 12% in the mid-90s to 14% in 2008. The rising incidence of temporary work, combined with the OECD conclusion that flexibility does not create jobs, implies that there have been important substitution effects: Thanks to more flexible labour laws, ‘bad jobs’ have driven out ‘good jobs’. Business is now able to turn jobs which are basically stable and which would have been created anyway into short term labour contracts. The economic reality is often that the same worker has been doing the same job for the same company for many years whereas the legal reality is that this worker is caught in a chain of fixed-term contracts.

The bottom line is that labour market flexibility does not result in ‘job rich growth’ but in ‘job destructive stagnation’ instead. Any potentially positive effect that might arise because employers would hire workers in a somewhat earlier phase of the business cycle, simply pales against the negative effects on aggregate demand coming from the spread of temporary work practices (serious wage discount, rising precautionary savings, more acceptance of wage moderation by core workers and, last but not least, the transformation of regular jobs into precarious contracts). Flexibility therefore represents an important downwards risk for the present recovery: If the initial and fragile recovery of demand, which is now mainly coming from exports to the rest of the world, evaporates into the black hole of an increasingly flexible, insecure and underpaid work force, any hope of moving the economy into a process of strong and self-sustaining growth will disappear with it.

The irony is that by resorting to temporary work practices, business itself is shaping the hesitating and weak recovery companies are afraid of in the first place. So instead of once again giving in to the short sighted wishing list of European business, governments need to do the opposite and intervene to keep individual companies from imposing precarious labour relationships on their work force. To save the recovery, labour law in Europe needs to be strengthened instead of being weakened. A strict implementation of the new agency work directive and the principle of equal pay for equal work would be a first step forward. Another step would be to upgrade existing social directives and agreements by seeing to it that the principles of these directives are respected to the letter, with particular emphasis on the principle that atypical jobs should remain the exception and not become the rule.

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Ronald Janssen works as an economic adviser in Brussels.

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References
IMF (2010). World Economic Outlook April 2010 (chapter3), Washington DC.
OECD (2006) Employment Outlook. Paris.

Working for decent work for all everywhere

Juan Somavia

The global crisis has, once again, illustrated how central decent work is to the lives of women and men everywhere, to the stability of families and peace of communities. Encouragingly the crisis has also set off bold and decisive decisions to counter the downturn. Useful lessons can be drawn from the last 18 months during which the prevailing economic consensus was turned on its head. Rising to the challenge of the global jobs crisis requires a thorough rethink of the relationships between economic growth and employment. A high level of productive employment should be an objective of the same order as low and stable inflation and sound public finances.

A global employment challenge

Today, half of the world’s labour force of 3.2 billion is in various forms of vulnerable employment. Some 1.2 billion persons work and live in poverty. Out of every 10 persons, 2 have access to basic social protection. This crisis existed before the last global crisis.

During the Great Recession, employment dropped by approximately one per cent. Globally 212 million persons are unemployed and looking for work. Two unemployed persons in 5 are young women and men aged 15-24 years. In many countries the number of unemployed workers discouraged from active job search, and those working involuntarily in part time occupations, has risen dramatically. In emerging and developing countries lost wage employment is replaced by lower quality informal employment. In all countries the rate of growth of real wages has slowed considerably, or wages have stagnated or fallen.

The outlook for tomorrow: the world will require some 440 million new jobs over the next ten years just to keep up with the growth in the labour force.

Pulling these strands together, the world is facing a momentous employment challenge.

Encouraging initial responses to the crisis

Fiscal and monetary policies have been used decisively to counter the fall in economic activity as of late 2008. The recommendation of the IMF to invest 2 per cent of GDP in counter-cyclical fiscal spending has been by and large heeded by governments. This additional funding is tapering off in 2010.

In June 2009 the International Labour Conference adopted a Global Jobs Pact with strong backing from governments, employers and trade unions from ILO member States. The Pact is essentially a template for employment, labour and social policies, based on the Decent Work Agenda, to counter the crisis. It has inspired and continues to inspire many countries. The central purpose of the Pact is to shorten as much as possible the lag, observed in many previous crises, between economic recovery and recovery of employment.

The G20 has given strong impetus to international coordination. During 2009, in London and in Pittsburgh, G20 Leaders recognized the significant impact of the crisis on employment. Leaders committed to “restoring the global economy to full health” so that “hard-working families the world over can find decent jobs”. To that end they called for “an employment-oriented framework for future economic growth” pledging to put “quality jobs at the heart of the recovery”.

Crisis responses included extension of unemployment benefits, broader coverage of social protection programmes, additional spending on infrastructure, support for small enterprises, and a range of measures, from working time adjustments to employment subsidies, to cushion the impact of the downturn on employment.

The ILO has estimated that the extraordinary fiscal stimulus and automatic stabilizers have saved or generated 21 million jobs across G20 countries in 2009 and 2010, equivalent to one per cent of total employment in these countries.

Accelerating recovery in employment

Two years on from the collapse of Lehman Brothers, the world is gradually recovering from the recession, but at very different speeds across regions, and in the midst of heightened risks of an overall weak recovery in employment. Accelerating recovery in employment remains the overriding priority.

Emerging and developing countries are recovering more quickly, and employment growth is close to pre-crisis levels in the third quarter of 2010. These economies, and a few industrialized countries, are benefitting from strong growth in China. By and large they have avoided a financial crisis with bank lending being a key counter-cyclical instrument. Brazil, China and India are facing shortages of skilled labour, calling for better policies to link vocational education and training to the needs of enterprises. The key challenge for these countries, to sustain their growth, is the gradual raising of the quality of labour, the most direct route to expand domestic consumption. This requires a range of measures from labour market policies to broader social protection and better pass through of productivity gains to wages.

In the United States, Japan and Europe in 2010 and the next few years, growth is likely to be too weak for employment to recover rapidly. Although unemployment may have peaked, it is likely to remain high for some years. There is a real risk of long term unemployment leaving permanent scars on persons. Measures specifically targeted at employment can help, such as targeted subsidies, skills development and job search assistance. Even in countries with fiscal constraints, such measures are cost effective.

One of the reasons why the crisis was more short lived in emerging countries than in higher income countries is the functioning of credit markets, which expanded in the former and dried up in the latter. Still today bank credit to the real economy is well below pre-crisis levels in advanced countries, constraining job growth in small enterprises.

Thinking differently about economic growth and employment and decent work

The global employment challenge is with us. The ILO is playing its role, in close cooperation with employers ‘organisations and the trade union movement, and with other global institutions, such as the IMF, UNDP, WHO, and WTO, to alert and mobilize governments on the central role of balanced responses combining employment, investment, sustainable enterprises, labour market institutions, social dialogue and social protection.

For a number of objective reasons, linked to the severe social impact of this crisis, the unsustainable pattern of globalization, the changing geography of world output, the support for the Decent Work Agenda is being reinforced at the highest political levels, among global, regional and national institutions and across public opinion. This broad and encouraging acceptance is increasingly translated into tangible policy shifts. Much more is needed.

For the world to tackle the global employment challenge, it must think differently about how macroeconomic policy addresses employment. A high level of productive employment and decent work must become a national priority, and benefit from the same consensus, across all government policies (central bank included) as low inflation and sound public finances. Employment policies are cost effective as they tend to raise the potential output level, reduce compensatory social expenditure and maintain social stability.

Thinking differently is a responsibility of all, especially the readers of this column. Several critical and protracted issues need to be addressed in a different way if the world is not to return to the same unsustainable pattern of globalization as before the crisis.

Let me mention a few of these issues. In a world awash in liquidity, productive investment is far too low. Aggregate demand is deficient. The financialization of the economy is distorting the real economy. Investment and employment are suffering from these distortions. Rising inequality and weakened middle classes have been identified as one of the proximate causes of the crisis. The share of wages in total income is declining globally, with wages trailing productivity increases. Tax policies have become less progressive. Together these trends are weakening aggregate demand and hence future growth. Small enterprises are the engine of employment generation, but struggle to provide decent conditions of work. Institutions for social dialogue vary greatly in their contribution to decent work outcomes. A universal floor of basic social protection is an achievable objective. Holders of public purses must be convinced of the multiple benefits deriving from it, from lower poverty to less consumption volatility and empowerment of persons. Incentives and investments in green jobs and in a just transition to greater energy efficiency are the seeds of future sustainable growth.

At the ILO, a fair globalization providing opportunities for all is a better path to sustained global growth and stability. Recent discussions at the International Labour Conference are profiling the ILO as a major source of “thinking differently” whilst remaining true to our values balancing economic and social advancement. Let us deepen and broaden our analysis and discussions.

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Juan Somavia is Director-General of the International Labour Organisation (ILO).

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Short-run stabilisation policies will not do: the case for a Keynesian New Deal at the European and global level

Eckhard Hein

The world economy is still struggling with its most severe crisis since the Great Depression of the late 1920s and 1930s. On the one hand, the present crisis began as a financial crisis which started with the collapse of the subprime mortgage market in the US in summer 2007, which then gained momentum with the breakdown of Lehman Brothers in September 2008 and reached another climax with the Euro crisis in early to mid 2010. On the other hand, the present crisis began as a real crisis well before the financial crisis, with an economic downswing in the US. The financial crisis and the real crisis reinforced each other, and the world economy was hit by a decline in real GDP in 2009 – something not seen for generations. Major regions in the world are only slowly recovering from this decline, in particular the Euro area, the UK and Japan. Furthermore, none of the economies which have been hit severely will have returned to the pre-crisis growth path by the end of 2010. Therefore, massive underutilisation of productive capacity, high unemployment and a downward pressure on wages will have to be tackled in the future.

Beyond inefficient regulation of financial markets, increasing inequalities in income distribution and rising current account imbalances at the global scale and within the Euro area are the main underlying causes for the severity of the global financial and economic crisis and for the recent euro crisis. The US and Germany are two important complementary examples of current account imbalances, the US being the major current account deficit country and Germany one of the important current account surplus countries.

The credit-financed consumption boom in the US prior to the crisis was highly fragile because it was set against a background of rising inequalities and a falling labour income share. Domestically the US had to rely on rising property prices in order to allow for increasing indebtedness to fuel steady increases in consumption demand. Regarding the relationship with the rest of the world, a sharp depreciation of the US-dollar, which would have been required in order to improve international price competitiveness of US producers and thus the current account, had to be avoided in order to guarantee steady capital imports without having to raise domestic interest rates. The erosion of such a constellation in the subprime mortgage crisis and the following downswing not only affected the US, but also the rest of the world, in particular the current account surplus countries. On the one hand, if their capital exports were into highly speculative US markets they were devalued by the financial crisis, and therefore the financial crisis quickly infected these surplus countries. On the other hand, the markets for exports collapsed and the current account surplus countries were thus infected by the real crisis as well.

While the dynamic consumption-driven model of the US had to rely on the willingness and the ability of private households to go into debt – and of the rest of the world to supply credit – the stagnating German neo-mercantilist model aiming at increasing net exports by means of wage moderation, in particular, had to rely on the willingness and the ability of the rest of the world to go into debt. This German model was thus as fragile as the US model. The moderate growth rates were dependent on the dynamic growth of export markets, while increasing capital exports carried the risk of contagion in the case of a financial crisis.

The German strategy was not only suboptimal for Germany; it has also been a major reason for the current account imbalances within the Euro area which are at the roots of the Euro crisis in 2010. Germany’s consistently weak domestic demand growth, as well as its rising international competitiveness due to extremely moderate wage developments, has been a drag for other Euro area economies which had to accept negative current account balances, in some countries (Spain, Ireland) mainly associated with private sector deficits, in others (Greece, Portugal) also with public sector deficits. In the course of the crisis, public sector deficits and debts in these countries increased because of fiscal stabilisation, making liberalised financial markets speculate about the sustainability of this process. Of course, the housing price bubbles, particularly in Ireland and Spain, as well as too expansive fiscal policies and wage developments in the deficit countries have also contributed to the current account imbalances within the Euro area.

The breakdown of the world economy in the financial and economic crisis could finally be halted by monetary policy interventions providing liquidity on a massive scale and, in particular, by massive fiscal expenditure programmes. A collapse of the Euro area could be prevented in the short run by the intervention of the IMF in cooperation with the other Euro area countries bailing out Greece. However, due to the underlying imbalances, the world economy is unlikely to return to its pre-crisis growth path. In particular, the US will not be able to act as the driver of world demand any longer. The European Union or the Euro area are far from replacing the US as a world demand engine and rather suffer from their internal contradictions, mainly caused by the German neo-mercantilist economic policy strategy. Therefore, major parts of the world economy are presently threatened by a period of deflationary stagnation, high unemployment and pressure on wages; in particular when fiscal expansion comes to an end and governments attempt to reduce public deficits and debt. For the Euro area this will be accompanied by the threat of disintegration.

What is required in the present constellation in order to turn towards a sustainable growth path with (close to) full employment and to rescue the Euro area is a Keynesian New Deal at the European and the global level. The policy package of a Keynesian New Deal should address the three main causes of the severe crisis: inefficient regulation, increasing inequality in income distribution and imbalances at the global and the European scale. It should thus consist of three pillars:

(i) Re-regulation of the financial (and the real) sector. This includes measures, which increase transparency and reduce asymmetric information and thus uncertainty in financial markets, generate incentives for long-run growth, and contain systemic instability.

(ii) Re-orientation of macroeconomic policies along (post-)Keynesian lines. Monetary policies by central banks should target low real interest rates and should care for stability of the financial sector. Wage and incomes policies should take over responsibility for stable inflation rates and stable income shares, which implies that nominal wages should rise at a rate given by the sum of economy wide productivity growth trend plus the inflation target. Fiscal policies should take care of real stabilisation in the short and the long run and of a more equal distribution of income and wealth. The latter implies active redistribution policies by means of tax and social policies. The former requires that governments run permanent deficits (surpluses) in order to maintain aggregate demand at a level consistent with full employment, stable inflation, and a roughly balanced current account in the long run, and that they actively fight short-run shocks by means of counter-cyclical fiscal policies.

(iii) Re-construction of international macroeconomic policy co-ordination – in particular on the European level – and a new world financial order. On the European level, the institutional setting of the ECB and its monetary policy strategy have to be modified such that the ECB is induced to pursue a long-run monetary policy of low real interest rates. The Stability and Growth Pact has to be replaced by a means of coordination of national fiscal policies which allows for the short- and long-run stabilising role of fiscal policies. External stability, i.e. sustainable external balances, should be a primary target, and member countries should be symmetrically induced to correct for current account surpluses and deficits. The orientation of labour market and social policies towards deregulation and flexibilisation will have to be abandoned in favour of re-organising labour markets, stabilising labour unions and employer associations, and Euro area-wide minimum wage legislation. On the global level, the return towards a world financial order with fixed but adjustable exchange rates, symmetric adjustment obligations for current account deficit and surplus countries, and regulated international capital markets, as suggested by Keynes’s (1942) proposal for an International Clearing Union, should be attempted in order to cope with the imbalances that have caused the present crisis.

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Eckhard Hein is a Professor of Economics at the Berlin School of Economics and Law.

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Further reading
Eckhard Hein and Achim Truger (2010): Finance-dominated capitalism in crisis – the case for a global Keynesian New Deal, Berlin School of Economics and Law, Institute for International Political Economy, Working Paper 6/2010:
http://www.ipe-berlin.org/fileadmin/downloads/working_paper/ipe_working_paper_06.pdf

The German economic model emerges reinforced from the crisis

Stefan Beck

Christoph Scherrer

For years, the business press has portrayed the German economic model as hopelessly atavistic in the face of dynamic Anglo-Saxon financial innovation and comparatively high growth rates. Recently, however, the economic historian Werner Abelshauser argued that the financial crisis would vindicate the German model of capitalism. In his view, the fading lustre of Anglo-Saxon capitalism, in particular its model of corporate governance and dominance of shareholder value, should again lead to the German or “Rhenish” model of diversified quality production and its institutions becoming more attractive.

We argue here that Germany’s response to the crisis has reinforced the central strategies and core institutions of the German economy. At the same time, the model has become more and more exclusive and has begun to foster European and international economic imbalances.

One of the German model’s most salient lines of continuity is the maintenance of a trade surplus. After the period of stagflation in the 1970s, the Bundesbank reacted with policies focusing on rigid monetary and currency stability, in which priority was given to price stability. As a result, domestic consumption was stifled while exports remained the main source of growth. The focus on exports was shared by the trade unions, including the most powerful among them, IG Metall which supported the drive for productivity through the institutions of co-determination, and ensured that unit labour costs would not be driven up by wage demands exceeding productivity gains. The success of this strategy led to the coinage of the term “Modell Deutschland” in the mid-1970s.

Socially and economically, the model became less inclusive long before the financial crisis hit. In particular, the reforms of the social democratic and green coalition government of Chancellor Schröder shifted the German model towards institutional deregulation and a price-competitive strategy that included moderate wage increases, tax cuts and fiscal consolidation.  Its core objective, however, remained the same: fostering growth through exports. During the present crisis, the focus on companies’ core workforces has been reinforced.

The impact of the Financial Crisis
Unlike the US and many European countries, Germany did not enjoy a debt-driven real estate boom before the crisis. The resulting slower growth in comparison to its neighbours made Germany the object of much ridicule in the business press. In the absence of a real estate bubble, however, one would have expected that Germany might have survived the crisis unscathed. In fact, the German government believed that because of a lack of exuberance, its economy would be rather immune; which explains why the government acted rather belatedly to the crisis that eventually hit Germany at the end of 2008. It reached the German economy via two channels, the first being finance. Many of its banks were overexposed to “toxic” speculative papers originating mainly in the US and Ireland. Some of the big private banks, especially Commerzbank and Hypo Real Estate, and top public banks (the Landesbanken) had to be rescued by public guarantees of gargantuan proportions, totalling €400 billion. The more important channel, however, was trade. The export industry, the heart of the German model suffered immensely through the collapse of international demand. The automobile industry, in particular, suffered because of the overlap of the financial crisis with the energy crisis. The capital goods industry lost sales because consumer industries postponed capital investments when faced with a drop in demand.

The most visible outcome of the German model, its export success, proved to be the Achilles heel of its economy. However, the German model of close cooperation proved its worth. Despite the significant decline in GDP of 5%, job losses were miniscule (about 80.000 or 0.3 %). Some elements of the German model contributed to this “miracle”. General stabilizers of the welfare state made intentional deficit spending less necessary. Whereas discretionary measures to re-inflate the economy (Konjunkturpakete I & II) accounted only for €78 billion for the years 2009 and 2010, i.e. around 3.3 % of government expenditure per year, overall government expenditure increased in 2009 by 5%. These stabilizers were enhanced by the willingness of the government to fund part-time support for workers. In 2009 the duration of part-time support was extended up to 24 months and its use reached a maximum of 1.5 million workers in May 2009 (compared to 70.000 in 2007) and then dropped again to around 900.000 workers in the first quarter of 2010. Expenditures of the Federal Employment Agency for short-term work totalled more than €5 billion in 2009.

Industry-wide collective bargaining brought about noticeable real wage losses. According to the ILO Global Wage Report, in 2008 and 2009, German workers had to accept a decline in monthly real wages of more than 0.5% (ILO 2009). Decentralisation and co-management bore fruit: In about 30% of all firms, overtime accounts have been reduced – some even going negative (“Zeitschulden”), one out of four firms reduced the use of subcontracted work, and nearly every third used other measures to increase internal flexibility. In sum, about 1.2 million jobs were preserved by reductions of working time. Lay-offs predominantly hit workers with temporary contracts.

Co-determination was also defended in another arena. The attempt to rid VW, Europe’s largest car manufacturer, of state and trade union influence, failed. Under Chancellor Merkel, the federal government successfully retained the stake of the German State of Niedersachsen in VW, despite attacks from the European Commission. Because of this state’s stake in VW, the Porsche’s strategy to finance a takeover of VW, with cash from VW, was muted. Instead, VW took over Porsche, allowing the work council of VW to retain a strong voice. At the end of 2009, exports had picked up again and seemed to justify the current strategy.

The core of the German model, close cooperation of capital, labour and the state in pursuit of export surpluses, has actually been strengthened in the crisis. Success of the corporatist crisis management, however, may bring about the German model’s own demise, with export success perhaps squeezing out neighbours who cannot shield themselves via currency depreciations - e.g. southern EU members.

International consequences of Germany’s trade surplus and macroeconomic restraint strategy of growth
The Greek and Euro crises in 2009 and 2010 were portrayed by the German government and by most of the media as the result of a weak, spent-thrift government. In contrast, the German objective of budgetary parsimony was praised as virtuous and, accordingly, strict loan conditions for Greece were seen as wholly justified.

Surely, in the case of Greece it is easy to identify homemade causes of the crisis. However, there are also systemic reasons for the Greek crisis, which are related to Germany’s export success. Since 1999 German unit labour costs remained nearly constant, whereas the average of the European Currency Union rose about 15% and those of Greece, Portugal or Spain between 20 and 30%. Additionally, trade and current account deficits of these latter countries have increased in parallel to comparative unit labour costs, and disproportionally since the introduction of the Euro.

From a Post-Keynesian perspective this mercantilist strategy of perpetual trade or current account surpluses is a kind of beggar-thy-neighbour-policy. It aims at fostering the growth of one’s own economy and rate of employment at the expense of other countries. And given the fact that countries cannot sustain permanent deficits without rising indebtedness vis-à-vis foreign countries, such mercantilist strategies can force countries into insolvency. Moreover, such developments have internationally contractive effects on growth and can provoke economic and political instabilities. In the end, deflationary tendencies stemming from Germany and balance of payment and/or budgetary problems of deficit countries are two sides of the same coin.

The German model after the financial crisis
In sum, the German economic model was hit hard by the crisis but proved surprisingly resilient. Actually, its core, the willingness of all major stakeholders to work together in securing the export prowess of German industry, emerged from the test of the crisis stronger than ever. With the help of state subsidies, employers kept their long-term commitments to core workers, and in return, organisations representing skilled workers, i.e. work councils and trade unions, were willing to make concessions in terms of pay and working conditions. But whereas now some of those core workers (e.g. BMW) are receiving extra or ‘compensatory’ payments in return for their loyalty, temp workers and workers outside the export industry are bearing the brunt of the crisis as new levels of public indebtedness are leading to budgetary constraints whose first victims are again those on welfare.

While voices within and outside of Germany call for strengthening domestic consumption, the recent resurgence of exports seems to vindicate the export coalition. Therefore, it does not look very likely that the German economic model will be restructured in favour of less dependence on trade surpluses and further tensions within the euro zone are therefore highly likely.

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Stefan Beck worked as a research assistant at the University of Kassel. He is currently preparing his dissertation about mercantilism and the German economic model.

Christoph Scherrer is Professor for Globalization and Politics at University of Kassel, Germany. He is also executive director of the International Center for Development and Decent Work and a member of the steering committee of the Global Labour University.

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References

• Abelshauser, W. (2009): Der Kulturkampf geht weiter; in: WSI Mitteilungen 12/2009: 692-694.
• Bogedan, C. et al. (2009): Betriebliche Beschäftigungssicherung in der Krise; Kurzauswertung der WSI-Betriebsrätebefragung 2009; Hans-Böckler-Stiftung.
• Herr, H. (2009): Vom regulierten Kapitalismus zur Instabilität; in: WSI Mitteilungen 12/2009: 635-642.
• Müller, K./Schmidt, R. (2010): Von der griechischen zur europäischen Krise; in: Prokla 159: 277-300.

Trade, labour and the crisis: Time to rethink trade!

Esther Busser

Trade has been one of the main transmission channels of the financial and economic crisis to developing countries where many jobs were lost in export sectors. This was largely due to a reduced demand for goods in industrialised economies as well as to a lack of access to credit for the financing of exports.

At the international level, calls against protectionism (that is, increasing barriers to trade) have been manifold. These calls have been made in the International Labour Organisation (ILO) Global Jobs Pact, G-20 Declarations and government declarations in organisations such as the World Trade Organisation (WTO) and the Organisation for Economic Co-operation and Development (OECD). Despite these calls and the common understanding that closing off markets would have negative effects and risk a further deepening of the crisis, several countries have resorted to protectionist measures.

Discussions around trade and the crisis have mainly focused on whether countries have resorted to protectionist measures, the nature of these measures as well as their impacts. However, this discussion only reflects a part of the overall picture on the role of trade in the crisis. It does not touch on its role in promoting a sustainable recovery and in addressing the underlying imbalances in world trade. Two important questions, therefore, need to be raised. The first is whether the pre-crisis model of export-led growth in some countries and debt-fuelled consumption in others is sustainable. The second is whether the outcomes of export-led growth have indeed been beneficial for the long-term employment and development perspectives of developing countries.

The crisis has shown that the push for trade liberalisation and open markets over the past couple of decades, as promoted by the WTO, the major economies and Transnational Corporations (TNCs), has resulted in an export or “market access” focused trade model, which in turn has created a situation where many countries became dependent on export markets for their growth. Such a situation makes them vulnerable in cases of shocks, like in the current crisis, particularly when demand drops simultaneously in all markets, resulting in job losses. This constitutes a crucial difference with the Asian financial crisis, which limited itself to Asian countries and allowed them to export themselves out of their crisis, an option not available currently.

Several voices have been calling for a rebalancing of trade, not only to reduce vulnerability to trade shocks but, more importantly, to rebalance global demand. Such voices have been expressed in several fora, including in the G-20, the International Monetary Fund (IMF), ILO and other United Nations (UN) organisations. Such a rebalancing would require less dependence on export markets and more emphasis on creating diversified domestic markets in all countries, that are based on consumption and wage led growth as well as a re-establishment of wage-productivity linkages.

However, these calls for rebalancing are made amidst the dominance of a free trade paradigm. The “no protectionism” slogan is regularly accompanied by a call for “further trade liberalisation”. Mixing the two is problematic, especially when it comes to rebalancing efforts that do require a substantial rethinking of the role of trade and trade liberalisation in sustainable recovery and development. The recent G-20 Toronto statement that calls upon “the OECD, the ILO, World Bank and the WTO to report on the benefits of trade liberalisation for employment and growth at the Seoul Summit” clearly shows how the current drive for trade liberalisation continues to reign.

Moreover, this rebalancing exercise questions the long-term growth perspectives to be achieved in developing countries by free trade and the current specialisation pattern. The vulnerabilities of developing countries are unfortunately not only limited to their dependence on export markets, but also to specialisation in low value added activities in highly competitive markets.

Despite some diversification and industrialisation successes, particularly in Asia and in a few Latin American countries, many developing countries have witnessed a specialisation in limited numbers of low value-added economic activities. This strategy has not only increased the dependency of these countries on export markets, but it has also failed to bring about diversification and to substantially raise income levels and decent work opportunities. Trade liberalisation has played a major role in this process. An exclusive focus on trade liberalisation has forced countries to specialise in products in which they have a so-called natural comparative advantage, either in agriculture and natural resources or in low value added and labour intensive manufacturing. This is problematic because commodities and low value added manufacturing (such as textiles and clothing) are characterised by highly competitive markets, low prices, low productivity gains, low wages, poor working conditions and powerful supply chains that have reinforced competition and a race to the bottom. In other words, specialising in production in which developing countries have a natural comparative advantage only allows for limited productivity and wage improvements. In such a context, creating decent employment and higher levels of income remains difficult and rather challenging. Strategies that only focus on entering and stagnating in the lower ends of global supply chains are therefore problematic and limit prospects for a diversified economy.

A rebalancing approach should thus aim at creating decent and productive employment through diversification of economies. This would entail increasing productivity in sectors such as agriculture while at the same time building comparative advantage and productive capacity in higher value added activities characterised by increasing returns to investment and a higher potential for productivity gains. Such a strategy for development is not only the key to more productive employment, higher wages and decent working conditions, but also instrumental in increasing aggregate demand and stimulating the growth of domestic markets.

What is important to understand, though, is that such a development and rebalancing strategy is only possible if governments reinvigorate their developmental role, build the relevant institutions, diversify their economies and adopt pro-active and strategic trade and industrial policies. The challenge is to recognise again the importance of these policy instruments aimed at putting diversification, productivity increases in agriculture, industrial development and structural transformation at the top of the agenda if decent and productive employment is to be delivered. This can only be done if trade agreements and trade liberalisation are looked at in a different way and assessed on the basis of their impacts on development and decent work. Unfortunately, over the last two to three decades, countries have been set on a path of trade liberalisation that has largely eliminated such instruments and policy space through commitments in trade and investment agreements.

Such policy space is crucial if countries currently confined to low value added activities want to move up the value chain, diversify their economies and rely more on domestic and wage led growth. Experiences in industrialised countries and successful emerging economies have shown that trade liberalisation has to be gradual to allow economies to build up their productive capacity and specialise in the right activities. There is an important role for the state in channeling investment, protecting domestic markets, providing access to finance and attracting new technology. A variety of policy instruments will be necessary to ensure industrial development. Such instruments do include the strategic and flexible use of tariffs (low for inputs and higher on products in which competitiveness is being developed), subsidies, reverse engineering, local content and other investment requirements, export taxes and so on. Many of these instruments have either been prohibited or strongly limited by current trade agreements.

Although the Doha round seems stalled, the demands to revive it are frequent and the aggressive bilateral trade liberalisation led by the US and the EU continues more than ever, reducing much of the remaining policy space for developing countries. In a similar way policy space is being reduced in developing countries that are in the process of accession to the WTO, slashing their tariffs, opening up their services and reducing their policy space far beyond that of WTO members with comparable levels of development, thus having a strong impact on their long term development perspectives. A much more viable strategy would be to promote regional integration, diversification and development. Unfortunately the current drive for liberalisation hinders such regional strategies.

Governments will have to shift from a laissez-faire approach in trade to a more active role whose core objective is the creation of decent and productive employment through industrialisation and structural transformation. To put industrial policies high on the agenda again requires a serious reconsideration of the current free trade paradigm. Instead of eliminating vital policy space, a new trade regime should actively promote the use of it, as some protection will be needed to enable industrialisation and create decent work. A new trade regime such as this is imperative if a sustainable recovery is to become a reality.

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Esther Busser is the Assistant Director in the Geneva Office of the International Trade Union Confederation (ITUC) since February 2009. She previously worked as trade policy advisor for the ITUC from 2003-2009.

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(1) G-20 Toronto summit declaration : http://g20.gc.ca/toronto-summit/summit-documents/the-g-20-toronto-summit-declaration/