New challenges for labour as growth prospects fade away

Cédric Durand

With the current crisis, economies and societies are entering a period of institutional shake up which occurs in initial conditions that are much more disadvantageous to labour than during the crisis of the 1970s. At the same time, a paradigm shift is emerging as growth prospects are fading away in advanced economies. The onset of this dispensation poses serious challenges to the labour movement and progressive political economists; this article attempts to address them and to stimulate debate.

The great contemporary crisis takes place in an environment which is radically different from the great profitability crisis of the 1970s. On the one hand, the post-world war period had allowed labour to build a strong bargaining power position. On the contrary, since the 1980s, neoliberal policies have successfully weakened its position. The combined disciplinary effects of a growing reserve army of labour, new managerial principles of controlled autonomy reinforced by IT, increasingly heterogeneous employment norms, spatial splintering of production and an increased exposure to multidimensional competitive pressures have sapped labour combativeness. Rising inequalities in favour of a thin layer of super rich and the dramatic decrease in the number of strikes are symptomatic of the retreat of labour in rich countries.

On the other hand, the post-war boom appears in retrospect to have been a golden age for capitalist accumulation when, contrastingly the past thirty years represent an age of decline. The average annual growth in high-income economies has fallen from 5.5% in the sixties to merely 1.64% during the first decade of the new century (figure) when the investment rate is also slowing, from 25.1% in the seventies down to 20.5% in the 2000s.

« high income OECD » WDI-WB and, for 2009, « Advanced economies » WEO -IMF

The parallel trends of labour retreat and capital decline in advanced economies suggest that what is at stake beyond the crisis is not only the conditions of the recovery, but the shaping of a new socioeconomic path where the promises of unlimited progress in wellbeing through growing mass consumption would not be pertinent anymore. Of course, the dynamics at play in developing countries are different; processes associated with ‘catching-up’ still allow some important margin for growth. However, focusing on the advanced economies is important to capture this paradigm shift which takes place at two different levels.

First, the world economy is locked in a neoliberal institutional configuration that hinders accumulation. The rise of new industrial countries and liberalization of trade led to structural excess capacity and cut-throat global competition in core industries which is exemplified by the emblematic case of the automotive industry. In addition, the short-term financial returns required by market investors deprive firms from the financial resources required to invest. Finally, depleted labour income and recurrent financial crises tend to depress demand and increase uncertainty, both of which also weaken the incentives to invest. In short, the competition regime, corporate governance structures and demand dynamics together produce a sluggish accumulation regime. Theoretically, significant changes in economic policies allowing a more coordinated and stronger growth path are perfectly feasible. Politically, things are far more complicated: such changes would require a significant shift in the balance of power to the detriment of financial interests and a coordination of government policies at the regional and global levels in order to adjust accumulation paths and limit structural excess capacity.

However, even a significant restructuring of global governance will probably not be sufficient to initiate a new economic boom in advanced countries. First, an ageing population, rising environmental costs and the increasing scarcity of key natural resources are triggering an appreciation of input prices that will constrain growth through reduced profits and/or wages. Second, these economies have not been able to find a successor to the techno-economic paradigm of the ‘golden age’ that would be compatible with the pursuit of a rapid expansion of capitalism. On the one hand, the promised wave of expansion associated with innovations in IT collapsed in 2001 and has not since found a way to take off again. This stalling has to do with the specific characteristics of knowledge: there is a deep contradiction between, on the one side, the defence of intellectual property rights in the name of profit which hinders the diffusion of knowledge and, on the other side, the fact that societies need and want to take advantage from the highly beneficial dynamics of knowledge diffusion whose cost is close to zero. On the other hand, the demand associated with social needs is more and more oriented towards services such as healthcare; education and leisure where the prospects for productivity gains are scarce, unlike in manufacturing.

Growth prospects in advanced industrial countries are seriously fading because, on the one hand, of the contradictions of neoliberalism and, on the other hand, of rising inputs costs, the inconsistency of the IT techno-paradigm and the evolution of social needs (and associated demand). Such a diagnosis has tremendous implications for labour, in particular the likely intensification of its antagonism with capital. During the post-war era, many factors contributed to the diffusion of social benefits, from regular wages increases to the reduction of inequalities typical of Fordism. But rapid growth was the necessary condition for – as well as a result of – this configuration, which was relatively favourable to workers. On the contrary, in an era characterised by low growth and by dull prospects as far as the employment rate is concerned, the distributional conflict between wages and profits is getting tougher while the bargaining power of labour has deteriorated. Moreover, in order to escape exhaustion tendencies, over-accumulated capital is exploring further forms of ‘accumulation by dispossession’, cutting or limiting the public’s access to resources, spaces, public services while socializing losses through recurrent bail-outs.

The labour movement needs to reposition itself in order to face these serious challenges. Assessing the possible trajectories out of growth is a new frontier for political economy, appealing for a progressive revival of the issue of the stationary state – i.e. the end of capital accumulation – discussed by the classical economists. In this context, union claims also need to evolve. A massive rollback of inequalities and a broadened access to common goods have to be achieved in order to render fair and acceptable a renouncement to the permanent objective of rising wages combined with a large-scale transformation of employment (destruction of non-sustainable jobs, new jobs in care sectors, reduction of working-time, etc.). Finally, unions, social movements, political parties and NGOs need to enter a phase of substantive re-articulation. Because of the dramatic retreat of shop-floor labour bargaining power, the centrality of class conflict « à la Marx », namely located in the production site, is likely to be further challenged and will not be sufficient to obtain a post-growth economic settlement favourable to labour. But a greater importance of class conflicts « à la Polanyi », i.e. broader forms of resistance against the macro and social forms of capitalist domination, may help to achieve such a desirable outcome. At the local as well as at the global level, unions need then to engage more systematically in broader alliances with social and political actors to promote effectively labour interests throughout the emergent post-growth paradigm.

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Cédric Durand is currently Associate Professor at Paris 13 University and a member of the Centre d'Économie Paris-Nord (CEPN) and of the Centre d'Études des Modes d'Industrialisation (CEMI-EHESS). He participates in the editorial board of the critical review Contretemps (www.contretemps.eu). Cedric wrote his Phd on the trajectory of the metallurgical sector during post-soviet transformation in Russia; he has published several articles on post-soviet capitalism and on the internationalisation of the retail industry.

Global Financial Crisis 2.0

Raymond Torres

Recovery prospects are being seriously hampered as a result of risk of a return to pre-crisis policy settings. By the end of 2009, the world economy was slowly recovering, aided by stimulus measures implemented by governments since the onset of the crisis. However, recent pressures for a return to orthodox policies in the context of an unreformed financial system threaten these fragile achievements.

Fiscal stimulus measures helped put a floor on the global crisis…

The crisis led to a significant policy response by governments and monetary authorities. In advanced countries, interest rates were drastically reduced and have been maintained at a low level. Massive rescue packages to avoid a collapse of financial institutions were implemented – mainly in developed countries. And most countries that had a budget space implemented fiscal stimulus measures in the form of discretionary tax cuts, higher government spending or a combination of both. These fiscal measures were crucial to revive the economy given the weakness of monetary policy tools in a context of “deleveraging” in the private sector and among financial institutions. According to ILO estimates, the fiscal stimulus measures amounted to around 1.7% of world GDP.(1)

Overall, the measures have succeeded not only in supporting the economy but also in avoiding further significant job losses. Estimates are for an increase in world unemployment by over 20 million workers between the fall of 2008 and the third quarter of 2009, for the 51 countries for which data are available.(2) This is less than what had been feared at the start of the crisis.(3) For instance, in EU countries, the employment effects of falling GDP have been much less than was the case in earlier recessions.

This relatively favourable outcome reflects, first, the rapidity of the policy response. Research shows that, by adopting stimulus measures soon after the start of the crisis, countries could expect a significant positive impact on employment by mid-2010 (ILO, 2009). By contrast, a postponement of the measures by 3 months would delay employment recovery by 6 months –illustrating the disproportionate costs of inaction for employment.

Second, the fall in employment has been cushioned by the nature of the policy response itself, consistent with the ILO’s Global Jobs Pact(4) :

• In the majority of cases, crisis responses have focused on stimulating aggregate demand. In particular, an effort has been made to enhance social protection (Brazil, India), extend unemployment benefits (Japan, US), avoid cuts in minimum wages and adopt other measures for low-income groups. These interventions, by sustaining the purchasing power of low-income groups, have effectively boosted aggregate demand while alleviating somewhat the social costs of the crisis.
• In countries like France, Germany and the Netherlands, short-time working arrangements have been aided by government subsidies. In other countries like Australia and the US, part-time employment has surged. These policies have helped reduce job losses. In the face of growing credit constraints, an effort has been made to support otherwise sustainable enterprises (e.g. in the Republic of Korea). 
• Finally, in the face of growing long-term unemployment, an effort has been made to enhance active labour market policies.

Recourse to inward-looking solutions has been limited so far. A generalised use of protectionist measures has been avoided, thereby reducing the risk of a collapse of international trade and investment, which could have a detrimental impact on developing countries. Importantly, there was a risk that countries would engage in a spiral of wage cuts and worker rights curtailing in order to improve competitiveness. This would have been a self-defeating and indeed counter-productive policy, given the global nature of the crisis and the need for greater aggregate demand. In addition, attempts to make workers pay for a crisis which originated in the financial system and was preceded by a significant increase in income inequalities and falling wage shares would have been reduced public support for recovery packages.

In short, the global policy response has succeeded in kick-starting an economic rebound and the policy response had also succeeded in attenuating job losses.

… but a policy mistake was made by leaving financial systems unreformed, carrying the threat of a return to fiscal restraint and policy orthodoxy

Unfortunately, the policy response did not tackle the key factor behind the crisis, namely a dysfunctional financial system. The result is, first, that the practices that developed before the crisis will inevitably re-emerge, unless action is taken. In particular, a large share of the increase in profits has accrued to the financial sector – the financial sector’s share of total corporate profit reached 42% before the crisis, up from about 25% in the early 1980s. And the profits of non-financial firms serve to pay dividends rather than invest in the real economy. During the 2000s, less than 40% of profits of non-financial firms in developed countries were used to invest in physical capacity, which is 8 percentage points lower than during the early 1980s. Ever growing pressures for more and better returns have adversely affected wages and job stability in the real economy.

Second, the lack of financial reform is reducing the room for pursuing the job-centred stimulus measures. Indeed, insufficiently regulated financial systems make it more difficult to channel credit to the real economy –so, other things equal, the amount of fiscal stimulus needed to achieve economic recovery is greater than in the presence of a well-functioning financial system.

At the same time, insufficiently regulated financial systems tend to penalize governments that run larger fiscal deficits. As a result, there is a growing risk that governments prematurely remove the fiscal stimulus measures that helped avoid a deeper recession. Governments may feel they have to reduce quickly fiscal deficits in order to appear as credible as possible in the eyes of financial markets and reduce the risk of speculative attacks. This is illustrated by recent events in the Euro area: even countries with much lower public debts than Greece have had to adopt in haste fiscal packages that reassure markets. Importantly, an unpublished study by Reinhart and Rogoff on “growth in a time of debt” suggests that such moves lack economic foundation in countries where public debt is significantly lower than 90 per cent of GDP.

In addition, the type of fiscal restriction measures which are presently considered tend to focus on spending cuts, in particular in the area of social policy, rather than higher government revenues (including through vigorous fight against tax competition and tax fraud, and consideration of new revenue sources like green taxes). The risk is that welfare benefits, which proved so essential to ensure adequate income support to the innocent victims of the crisis, be cut. This would erode political support for the crisis response strategy, possibly leading to social unrest. In addition, by scaling back certain programmes, many jobseekers will be pushed out of the labour market, depriving the economy from valuable resources. Keeping well-designed programmes is in fact cheaper over the long term, given the favourable effects of these programmes on participation and skills.

Fiscal measures are still needed because the real economy is too weak to have gained an autonomous growth momentum, at least in developed countries where the process of “deleveraging” is far from finished.

In addition, countries also tend to move quickly to export-oriented strategies in order to improve the current account balance and build up foreign exchange reserves, thus reducing perceived risks for financial operators. The problem is that some countries have to import in order for others to export – and the US cannot remain the importer of last resort. Therefore, a quick return to export strategies would end up reducing the prospects for world trade and economic growth.

Altogether, we may be entering a new stage of the crisis where financial markets are adding pressure for an early exit from fiscal stimulus measures and for cuts in social protection and wages. This would strongly affect the world economy given the weak autonomous growth capacity of the private sector –partly due to continuously tight access to bank credit. It would also further prolong the employment recovery and erode social support for governments’ crisis strategies.

It is urgent to move ahead with the reform of the financial system while ensuring job-centred fiscal stimulus.

Rescue packages to financial institutions have reached unprecedented levels in countries where the crisis originated. The bill will be expensive for taxpayers and job losers. It is therefore essential to ensure that an end is put to those financial practices and irresponsible risk-taking that preceded the crisis. As noted by the BIS in its 2009 annual report, “a healthy financial system is a precondition for sustained recovery. Delaying financial repair risks hampering the efforts on other policy fronts”.

True, the financial industry has undertaken steps to modify its practices through the adoption of codes of conduct and other non-binding initiatives. But there is concern that new regulations will push the financial industry to other locations. The overall impression is that, unless action is taken soon, business-as-usual will prevail. In such an unreformed context, the practices that provoked the financial crisis will resume soon after economic recovery starts. The pressures would aggravate the situation in a deteriorated world of work, while raising the risk of later crises.

There are various options that can be considered in this respect. What is important is to address the root problems, in particular i) inadequate and incomplete regulation, and ii) inappropriate incentives for risk-taking and pay of bank executives and traders.

For the reasons outlined above, the approach should be as coordinated as possible –at least at the level of the G20. Otherwise free riding problems will inevitably arise. This, together with proper implementation of the Global Jobs Pact, will support economic recovery in the short run, while paving the way for a more sustainable world economy.

(1)ILO (2009), The financial and economic crisis: a decent work response, Geneva
(2)International Institute for Labour Studies (2009), World of Work Report 2009: The Global Jobs Crisis and Beyond, Geneva
(3)ILO (2010), Global Employment Trends, Geneva
(4)ILO (2009), Recovering from the crisis: A Global Jobs Pact, Geneva.

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Raymond Torres is the Director for the International Institute for Labour Studies at the International Labour Organization. He recently launched the World of Work Report, the new annual flagship publication from the Institute.

Putting employment security first will diminish demand - a warning from Germany

Heiner Flassbeck

The current global recession and fear of increasing redundancies has shifted the emphasis of the German labour movement from one concerning pay claims to employment security. Employment security has become the name of the game. Even the metalworker’s union IG Metall is openly putting employment security before pay claims in their demands. So wage rises and hour cuts can be foregone, so long as not too many heads roll in the workplace.

I would like to argue that this emphasis is a serious mistake and that employment security achieved through wage restraint is likely to have negative effects across the economy and retard Germany’s exit from the recession. While wage restraint may preserve jobs within a firm, this has knock-on effects that will only serve to deepen the recession through their impact on demand. The current crisis brings into stark relief the failure of unions in Germany to examine seriously the impact of working-time reduction and the associated wage reduction, or lesser wage increases, on demand in the economy as a whole.

Take, for example, what has become a classic case. The Daimler company goes into the red. So, in agreement with the unions, it makes a 10 per cent uncompensated cut in the hours of those employees who are not already on short-time working arrangements. The positive trade-off is that there are no redundancies. In effect, Daimler’s wage bill for the 90,000 employees affected is reduced by 10 per cent. At an average monthly wage of €4000, that means the firm saves more than €400m. This represents a very significant reduction in Daimler’s expected losses!

But for the economy as a whole, the sums look rather different. Assuming that Daimler workers maintain relatively stable purchasing patterns, the 400 million saved by Daimler will reduce demand for other firms’ products by the same amount, as Daimler employees tighten their belts. In effect, the expected losses of other firms will increase by the same amount as the reduction in Daimler’s expected losses. This simple example shows how the savings measure taken by one company and its unions will not spell out improvements at all, even at the outset. Further, if other firms who bear an increased burden from falling demand associated with Daimler’s cut backs follow suit, this could have a disastrous and far reaching impact across the economy. Suppose the wages of the ten million employees in all of Germany’s industrial workplaces werereduced by 10 per cent over the course of the next year. Once again assuming that the employees’ saving habits remained unaltered, this measure alone would cut demand across the economy by about €50 billion.

What are firms in general going to do when they notice that their loss predictions are systematically wrong, because demand is continually weaker than anticipated? Go back to the unions again in hopes of negotiating a 20 per cent reduction? Firms may also try to maintain their market share at a time of falling demand by passing on the cost reductions as price reductions. If only one firm does this, the situation of all the others will get even worse. If they all do it, prices may fall by so much that the workers regain their previous purchasing power. So in real terms, they will be pocketing as much as before for working less. The outcome will then be not a cost reduction, but deflation. This is turn will lead to sluggish consumption, as people expect prices to drop even further in the near future.

So what are the unions to do? It has become a common perception that unions cannot go on making the same demands as they had prior to the crisis. I disagree and would argue that they can. In fact, campaigning for and winning wage increases in line with productivity gains can lead workers to act together to overcome this crisis quickly. The great majority of consumers in Germany are workers or pensioners. Only if they can expect their incomes to rise at the normal rate despite the crisis, i.e. in line with the medium-term productivity growth trend of around 1½ per cent plus the European Central Bank’s target inflation rate of 2 per cent, only then can Germany pull out of the crisis under its own steam.

Such a campaign is likely to be met with great objection as firms face shrinking profits and find themslves at overcapacity. It should however be remembered that many firms’ profits skyrocketed in the years just before the crisis, particularly as regards foreign trade. Nonetheless, the logic of macroeconomic theory informs us of no alternative solution to the one outlined above if Germany wishes to exit the crisis and get on to a stable growth path in the not too distant future.

In contrast to previous experiences, hopes of export-led growth prompted by falling costs ring hollow this time around. The euro has already risen strongly. It would appreciate even further if the biggest national economy in the Eurozone staked everything on a foreign trade surplus, as it did from 2005 to 2008, thus relying on the other countries shouldering new foreign debt. Also, both consumption and investment are very weak in Europe and the US, Eastern Europe is still in deep financial crisis, and the countries of Asia are themselves going all-out for export surpluses.

It follows that there is only one reliable way out of the crisis. The state must once again, by contracting even greater debts than already planned, give the economy a boost that will enable firms to do the right thing in terms of wage setting for the economy as a whole. This would be the most effective way of boosting demand and accelerating economic recovery. Tax cuts, as planned by the German government, are not an appropriate way of achieving this. 15 to 20 per cent of the money will simply vanish into savings accounts, and the much-hymned “performance incentives” are simply a liberal pipedream.

In contrast to debates in Germany, the issue of wage-induced consumption effects has been recognised in the United States. This is evident in the agressive deficit policy currently pursued by the American government. In order to sidestep the wage reduction trap, into which a market economy will automatically fall without state involvement, the American deficit this year will be proportionately around three times bigger than the German one – about 12 per cent of GDP. Over there, they have learned from the experience of Japan, which for almost 20 years now has been unsuccessfully striving to escape from the deflationary wage policy that came into being after a great speculative bubble burst at the end of the 1980s. For Germany, the choices ahead are clear: Either it will learn the Japanese lesson now, or it will have to learn it in face of stagnation and deflation later.

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Heiner Flassbeck is currently the Director of the Division on Globalization and Development Strategies of the United Nations Conference on Trade and Development (UNCTAD). He is the principal author and the leader of the team preparing UNCTAD's Trade and Development Report.

Greece-bashing is hiding the obvious: monetary union urgently needs economic union

Ronald Janssen
“Bashing the Greeks” has become a very popular sport these days. The main thought on the minds of the financial markets as well as a lot of politicians in Europe is that Greece has only itself to blame for the trouble it is in. After entering monetary union by rigging the statistics, it is argued, Greece went on a huge “spending binge”, making public finances unsustainable. This is now even threatening to undermine the financial stability of European monetary union as such. The more “moderate” version of this sort of thinking suggests that Greece should take its medicine and drastically cut all government expenditure and all wages (in both the public and the private sector). The less “moderate” version simply says that Greece should never have been allowed to join the monetary union in the first place and should now be thrown out of it.

Undoubtedly, Greece does have some “demons” that it needs to tackle, such as the functioning of its statistical office and the transparency of public sector pay. However, the sort of thinking now being developed in Europe is overly simplistic and is a recipe for disaster, not only for Greece but also for workers throughout Europe. Let us examine some of the inconsistencies and contradictions surrounding the case of Greece.

Don’t blame the speculators, blame the Greek “fundamentals”

The financial markets’ attacks on Greece have not come out of the blue. After all, if Greece is under attack because of its deficit running at 12% of GDP, there are others with a comparably high deficit, such as the UK or the US. And even if the Greek deficit has doubled over the past year, almost all other countries in Europe have done the same to prevent a new Great Depression. So why Greece and why right now? The answer is that, since the beginning of November last year, central bankers and finance ministers have been spreading negative rumours, with the ECB no longer providing liquidity in return for Greek government bonds and the finance ministers of the Euro Group writing a letter which was leaked to press, urging emergency consolidation measures. This “megaphone diplomacy” focussed the financial markets’ attention on Greece. In return, central bankers and finance ministers gained a powerful ally (including the same Wall Street agencies that previously gave triple A’s to “toxic assets”) in pushing through their policy agenda: enormous pressure from financial markets to cut deficits, expenditure and wages, not only in Greece but also in other countries.

Governments saving banks, not saving themselves.

There is a major double standard at work here. Governments, realizing that banks were caught in a vicious circle of their own making, massively bailed out the banking sector. In Europe alone, the stunning amount of 3 trillion (3000 billion) euro in state support was mobilized, and this without much in the way of conditions, such as keeping the credit flow to the economy going. In fact, and thanks to central banks pumping liquidity into the banking sector at zero interest rates, banking profits (and bonuses!) are as high as they were before the crisis! Greece - and others are likely to follow - now finds itself in a similar situation: financial markets, fearing a default, are bidding up interest rates, thereby actually increasing the risk of a default. As was the case for the banks, this vicious circle can only be broken by a powerful and convincing European intervention. Europe, however, seems to prefer to leave Greece out on a limb or, alternatively, is only willing to promise help if Greece (which has a socialist government!) implements a standard liberal programme of cutting wages and reducing the size and the role of the state.

Rewarding the speculators.

By showing such reluctance to close ranks with Greece against financial market herd behaviour, Europe is actually rewarding the speculators and boosting their profits. With the price of credit default swaps on Greek sovereign debt soaring, hedge funds are making big bucks on their credit default positions, even or especially if these are “naked” credit default positions (in other words, without hedge funds actually holding Greek sovereign debt). And the same goes for operations on futures markets, where banks and funds are selling Greek sovereign debt, hoping to pick the papers back up again later when prices have collapsed further. Hidden behind the dogmatic “no bail-out” attitude of financial Europe is the very pragmatic policy of continuing to redistribute income and profits to those who caused the crisis in the first place. This, by the way, is not only true in a general sense. Indeed, there are more and more reports that Goldman Sachs - after setting up, for a big fee, a structure that enabled Greece to hide part of its debt - is now heavily involved in betting against Greece.

Greece not doing enough?

Greece has already announced a tough consolidation programme, promising to cut the deficit this year alone by 4% of GDP. Even Germany, a traditional champion of fiscal consolidation, never went that far in so short period of time. Moreover, Greece is also detailing the measures taken to back up this consolidation effort. These do concern public jobs and wage freezes (for the higher incomes), but also measures to tax the rich (reintroduction of a tax on high fortunes, raising tax revenue on business profits). Nevertheless, this is not enough to appease European politicians and finance ministers. (A related issue is that they may not like a progressive consolidation programme targeting the rich and wealthy). Instead, Greece in their view needs to gush “blood, sweat and tears”. Again, a cynic might observe that if Greece did what it was told and cut everything (much as the American minister Andrew Mellon advised in the Great Depression that all businesses, farmers and workers should be allowed to go bankrupt), it would in any case be plunged into an economic depression. As a consequence, relative debt would still remain high, since what was being gained on the side of the nominator (lower deficit) would be lost on the side of the denominator (falling GDP).

In short, Europe is on a collision course with itself. Europe already seems to have forgotten the important lesson from the financial crisis that casino capitalism urgently needs to be tamed. Instead, some policy circles inside Europe are actually using financial market herd behaviour to push through a neoliberal model that otherwise would be hard to achieve in European democracies. Europe is also completely losing sight of the fact that the internal market is an integrated and mutually dependent economy. The debt of Greece and some other countries, such as Spain, is held to a large extent by German, French and British banks, implying that any default would be costly for these banks. And if orthodox economists succeed in inflicting a long depression on the South of the monetary union, who will be buying the export goods from those countries forming the European core?

So instead of this simplistic and populist “Greece-bashing”, Europe should urgently develop instruments promoting solidarity between member states against the global casino. We need a common Euro bond limiting speculation on sovereign debt and breaking this cycle of self-fulfilling prophecy organized by the financial markets. We need major European investment programmes, making it possible to offset the contractionary impact of fiscal consolidation plans in Greece and other countries. We need a bigger European budget so that differences in business cycles between member states can be smoothed out without wages having to play the role of the “single variable for adjustment”. We need a European ratings agency to break the monopoly of Wall Street agencies which are too often biased in favour of free markets and against labour. We need a European Central Bank (ECB) that respects the European Treaty and supports member states’ finances in the same way as it supports the banking sector. If the ECB continues to relieve the banking sector by buying and holding their “toxic assets”, then the ECB should also announce that it will continue to take in BBB rated sovereign bonds from countries such as Greece. Finally, we need a European Central Bank which raises its inflation target from “less than 2%” to a range of “at least 3% and maximum 4%”, thereby increasing the potential impact of wage adaptability on the economy without having to resort to deflationary wage cuts.

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Ronald Janssen works as an economic adviser in Brussels.

The international economic crisis and development strategy: A view from South Africa

Neva Makgetla

South Africa has been harshly affected by the international economic crisis, which led to a fall in the GDP and an even sharper contraction in employment. While job losses levelled out in the last quarter of 2009, the crisis will continue to shape long-run development. In particular, it points to the need for a development strategy that builds more on domestic and regional demand and that focuses explicitly on employment creation as central to a cohesive and equitable society.

South Africa’s GDP declined by approximately 3% between the last quarter of 2008 and the second quarter of 2009, and then increased in the third quarter of 2009. In comparison, the fall in employment proved steeper and more prolonged. The economy lost around a million jobs, or 6%, between the fourth quarter of 2008 and the third quarter of 2009, and gained only 90 000 back in the last quarter of 2009.

The loss of employment took place in a context of extremely high joblessness. South Africa has long ranked as one of the ten countries with the lowest employment levels in the world. Less than half of all working-age adults earn an income, and the unemployment rate has been over 20% since the government began measuring it with the transition to democracy 15 years ago.

The employment losses following from the global crisis aggravated the deep inequalities that have long characterised the South African economy. They had the heaviest impact on low-income workers, especially in marginalised sectors like informal, domestic and agricultural work. In addition, very high levels of job loss amongst young workers had particularly negative implications for social cohesion and long-term development.

Government’s short-run response included a counter-cyclical fiscal policy and substantial infrastructure investment. This response moderated the drop in investment and growth and presumably the loss of jobs. Still, the employment loss remained very large, and the government’s response did not provide direct support to the self-employed informal and domestic workers who lost their incomes. Nor did it address the rapid recovery in capital inflows, which as discussed below led to a stronger rand, making the economy as a whole less competitive.

The international crisis was associated with far-reaching structural changes in the global economy. That, in turn, has implications for South Africa’s longer term development strategy. In particular, profound shifts in international markets make it seem even less likely that South Africa can in future grow on the basis of manufactured exports – the traditional approach to industrial policy that has been at the centre of government’s economic strategy since the end of apartheid in 1994.

The emphasis on exporting manufactured goods has largely shaped the discourse on industrial policy worldwide as well as in South Africa. It reflects the belief that the rapid economic growth in East Asia from the 1960s was rooted in vigorous industrial policies to support manufacturing for markets mostly in Europe and the US.

Even before the crisis, this analysis of East Asian industrialisation neglected three factors that enabled effective industrial policy there – and that were noticeably absent for South Africa:

1. East Asian countries generally enjoyed relative equality and social cohesion , which meant both capital and workers were more likely to agree on economic growth as a social panacea. In particular, measures to raise productivity prove more acceptable in economies with high levels of low-wage employment than in economies with low employment, where growth through rising productivity in export sectors may be associated with very limited employment creation.

2. The United States provided extraordinary levels of support to the East Asian countries, which it saw at least until the 1990s as a bulwark against communism.

3. Over the past half century East Asia as a whole gradually developed logistics and market systems that vastly reduced the cost of exporting to and communicating with the global North.

The international economic crisis laid bare a fourth obstacle to a growth strategy based on manufactured exports. That strategy explicitly assumed virtually unlimited demand in the global North, and particularly in the United States. It required that if countries could produce competitively, their sales would be assured.

Yet the downturn of the late ‘00s could be understood as a crisis of inadequate demand. On the one hand, it resulted from deepening inequalities in much of the global North, offset in part by excessive household borrowing. On the other, it reflected the suppression of wages to support continued exports in much of East Asia, including China, as well as some European countries.

The growing global imbalance in demand that underpinned the boom of the ‘00s was reflected in the huge balance of payments surpluses enjoyed by the rapidly growing economies of East Asia. The recycling of those surpluses laid the basis for the credit bubble that led to the financial crisis of late 2008. Once the credit bubble burst, demand for imports by the global North contracted sharply.

The prospects for resuming export-led growth remained unclear at the end of 2009. While economic expansion resumed in China and other Asian economies, exports remained far below the levels of 2008. To replace foreign demand, these countries embarked on extensive programmes to stimulate domestic sales, including subsidies for purchasers of consumer durables as well as massive investments in infrastructure.

These developments had significant implications for the prospects of South Africa and other resource-based economies in the global South. South Africa participated in the boom of the mid-‘00s essentially by exporting mining products to world markets. The relatively strong rand of this period, based primarily on huge short-run capital inflows, largely blocked manufactured exports. While the economy continued to depend mostly on mining-based exports, employment growth occurred mostly in the services and construction, essentially to meet the needs of the small high-income group and state infrastructure and redistributive programmes.

The international economic downturn meant that South African efforts to expand exports of consumer and capital goods faced even steeper obstacles than during the boom. To start with, demand was suppressed in the global North. But the inflow of short-term capital resumed nonetheless, apparently largely due to measures to enhance liquidity in industrialised economies. South Africa saw an inflow of almost USD6 billion in the third quarter of 2009 alone. As a result, in real terms the rand strengthened to values last seen in 2004.

This situation called into question the basic thrust of South Africa’s industrialisation policy. For most of the period from 1994, whether implicitly or explicitly, the government’s industrial policy centred on supporting manufactured exports. It contained virtually no projects to meet domestic or regional demand or to create employment while raising living standards. The auto industry enjoyed by far the largest subsidies of any industry, with tax relief used mostly to encourage exports. In contrast, the more broad-based Reconstruction and Development Programme (RDP) adopted by the ANC before coming into power expected housing construction and provision of government services to prove central to driving economic growth as well as improved welfare.

In the event, the conventional industrial policy pursued from the mid-1990s proved singularly ineffective. In part, that reflected inadequate resourcing and inconsistent implementation. The share of total government spending going explicitly to support agriculture, mining, manufacturing and construction fell from 4% in the mid-1990s to 3% in the mid-2000s. Moreover, the failure to limit short-run capital inflows and the consequent appreciation in the rand outweighed the limited policy support to manufacturing outside of autos. In these circumstances, exports from the mining value chain, including refined but not fabricated base metals, continued to contribute over half of all South African exports.

The global structural problems laid bare by the economic crisis point to the need for more innovative approaches to development. For South Africa, a viable growth strategy should focus on meeting needs in the domestic and regional market, including basic consumer goods and infrastructure effectively funded through the state. In addition, it would need stronger measures to enhance the overall efficiency and inclusiveness of the economy by continuing to improve core economic infrastructure; addressing the serious problems with general education systems serving most black communities; and reducing the cost of living for working people, especially for food, public transport and healthcare. Finally, it should include institutional changes to mobilise domestic resources to fund priority investments while reducing dependence on short-run inflows of financing through the stock and bond markets.

This relatively modest growth strategy might seem second-best to establishing a world-class modern industrial economy. Given the emerging constraints on global demand, however, it is more likely to succeed in laying the basis for sustained growth than a classical export-oriented industrial strategy. Moreover, it would do more to generate opportunities for the majority of southern Africans in the short to medium term, helping to overcome the employment backlogs that the international economic crisis aggravated.

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Neva Makgetla is lead economist at the Development Bank of Southern Africa (DBSA). She has previously worked for COSATU and the South African government.