On the urgency of stopping global warming

Willi Semmler

Christian Schoder

Parts of the labour movement still have strong reservations towards measures aimed at reducing the carbon intensity of production in order to mitigate global warming. The public debate is dominated by fears that environmental policies harm the working population in the North as well as in the South by increasing unemployment. In line with this public opinion, governments are reluctant to implement mitigation policies on the national or international level. They impose market-based abatement regimes which are in line with orthodox economic theory but ineffective in practice. In this article, we want to rebut these concerns by pointing out that global warming may follow a self-enforcing pattern which is increasingly costly to reverse, thus harming the world's population more and more. Moreover, we argue that mitigation policies may have a positive impact on employment if done properly. After discussing different mitigation policies, we conclude with the policy recommendation of immediate and ambitious action.

Understanding the pattern of global warming

Despite many uncertainties, two stylised facts appear to have elicited consensus among geo-scientists. First, the extent of global warming observed since the age of industrialisation is not natural, but caused by humans. Hence, a reduction of the emission of greenhouse gases is likely to have a decelerating effect on climate change. Second, there are tipping points in the climate pattern. These can be understood as thresholds beyond which climate change turns into a self-enforcing process. Once reached, enormous efforts would be required to move below the threshold again. In order to minimise costs, one should mitigate global warming while it is “cheap”, i.e. before the dynamics of the system accelerate global warming. However, if we are already beyond the tipping point, ambitious mitigation policies are of the highest urgency.

The positive employment effects of abatement

Policy makers justify their reluctance to implement ambitious mitigation policies by referring to the danger of losing jobs to competitors and increasing unemployment. As argued by Mittnik et al. (2010), this fear is not justified. The analysis of a number of countries suggests that budget-neutral green policies which tax carbon-intensive sectors and subsidise carbon-saving sectors or fund research in “green” technology generally have positive net effects on employment. Reasonable mitigation policies may thus imply a “double dividend”: reducing carbon emission while increasing employment. Hence, from the labour movement's point of view, there is not necessarily a trade-off between ecological sustainability and high levels of employment.

The responsibility of the West for global warming

The US and the rest of the industrialised world should take a lead role in the struggle against climate change. As Posner and Weisbach (2010) report, in 2005, the US and China produced roughly the same amount of millions of tons of CO2 (7,219 for the US and 6,964 for China). Yet, if measured per capita, China produced only one quarter of US emissions (5.5 vs. 28.5 tons). This relation becomes even more disproportionate if one considers the cumulative CO2 emissions per capita that have been released into the atmosphere since the beginning of industrialisation (623.3 tons for the US vs. 82.9 tons for China). Even if the US does not take on a leading role, the rest of the world should still engage in ambitious mitigation policies. Europe's role is particularly important in this context. Tipping points exist for adopting climate policies. If there is a critical mass of countries adopting internationally coordinated mitigation policies, the incentive for the US to avoid such policies (competitiveness) will lessen. Moreover, it is not implausible that those countries investing most in green technology will be rewarded by high green economic growth in the future, even though they may not be as competitive in the short run.

How can carbon emissions be reduced?

To establish effective economic incentives, the producers/consumers of carbon intensive products must bear the costs of carbon emission. Two concepts to achieve this have been put forward: (a) cap-and-trade and (b) carbon tax. The former is a decentralised market system for carbon trading. It imposes limits on total allowable carbon emissions. These allowances are then distributed to emitters or other stakeholders and firms trade the allowances for pollution on a market. The carbon tax is a proportional tax on carbon emission.

Despite its flexibility, the cap-and-trade system is not advisable due to its deficiency in effectively reducing carbon emission. First, emission prices exhibit disproportionate volatility due to uncertainty regarding the overall quota and to financial speculation. According to an estimate by Nell et al. (2009), the carbon price is even ten times more volatile than stock prices. The high price volatility of emission rights increases uncertainty and triggers speculative booms and busts. Second, as has been demonstrated by Uzawa (2003), the global market-based system unfairly burdens developing countries. The dollar price of a carbon ton will mean a much bigger percentage penalty for low-income economies than for the industrialised world.

A carbon tax has some considerable advantages over the cap-and-trade system as has been argued by Nell et al. Because there would be one “metric” for all, it allows for a globalised standard. The carbon tax’s clear price trajectory would drive long-term investment. Other advantages include universal applicability, better efficacy, and lower set-up costs due to existing administrative institutions. Uzawa proposes a global carbon tax system under which the tax rate applied in a country is proportional to the country's per capita income. Moreover, he proposes to establish an International Fund for Atmospheric Stabilization funded by income from the carbon tax. The aim of the fund should be to enhance the development of green technology as well as to narrow the growing income gap between developed and developing countries. These aims could be achieved by redistributing tax revenues across countries according to a scheme that provides incentives to develop environmentally-friendly technology and takes per capita income into consideration.

“Green recovery” policies – an insufficient step in the right direction

Since economic wealth is empirically correlated with carbon emission, countries are reluctant to reduce emissions sufficiently. By adopting environmentally friendly technology, this relation could be weakened or reversed. To reduce the carbon intensity of GDP, government action is needed as market forces provide insufficient incentives for the development and diffusion of environmentally friendly technologies. Although the current economic crisis provides an opportunity for implementing ambitious environmental policies through deficit spending, so far it has been left out vastly. From September 2008 to December 2009, the US spent only 12% of its fiscal stimulus on a “green recovery”; on a global level, the corresponding number is less than 16% (Barbier 2010).

Where are we headed?

The 2009 United Nations Climate Change Conference in Copenhagen was a huge failure. The high expectations associated with the conference turned out to be inconsistent with the national interests of the participating countries. According to scientists, carbon emissions must be reduced by 2020 by 25 to 40% of their 1990 level to avoid the worst consequences of global warming. The Kyoto Protocol, agreed upon in 1997, committed the participating countries to reducing the emission of greenhouse gases on average by 5.2% of their 1990 level by 2012. In contrast, the planned reductions agreed by governments in Copenhagen are less ambitious and, most importantly, not binding: countries agreed to reduce carbon emissions by 13 to 19% of their 1990 level by 2020.(1) Given the experience with the Kyoto Protocol, which failed to reduce carbon emissions to the extent agreed upon, one can make an educated guess that the vague and non-binding outcome of Copenhagen is far from sufficient to prevent temperature increases beyond 2°C. Current fiscal stimulus packages do not take into consideration environmental goals sufficiently. Since the current public debate is dominated by misinformation and corporate interests, the future of our climate depends on the social movements, trade unions and critical academics around the world. The pressure put on policy makers has to be increased substantially in order to get them to implement ambitious mitigation policies.

(1) The EU promised to reduce its carbon emission by 20-30% of 1990 levels by 2020, the US by 4% of 1990 levels by 2020 and China by 40-45% until 2020, however of 2005 levels and measured per GDP (Source: Copenhagen Accord, http://unfccc.int/resource/docs/2009/cop15/eng/11a01.pdf).

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Willi Semmler is a Professor at the Department of Economics at the The New School, New York. He is member of the New York Academy of Sciences and has been a visitor at Columbia, Stanford and the Cepremap in Paris. The second edition of his book "Asset Prices, Booms and Recessions" (Springer Publishing House) was recently published.
Christian Schoder is a PhD candidate and research assistant at the Department of Economics at The New School. He holds MA degrees in Economics and Political Science from the University of Vienna.

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References

• Barbier, E. B. (2010), ‘Green Stimulus, Green Recovery and Global Imbalances’, World Economics, 11(2)
• Mittnik, S., Semmler, W., Kato, M., Samaan, D. (2010), ‘Climate Policies and Structural Change – Employment and Output Effects of Sustainable Growth’, CEM Working Paper, Comparative Empirical Macroeconomics, New York, available from: www.newschool.edu/nssr/cem
• Nell, E., Semmler, W., Rezai, A. (2009), ‘Economic Growth and Climate Change: Cap-and-Trade or Emission Tax?’, SCEPA Working Papers 2009-4, Schwartz Center of Economic Policy Analysis, New York: The New School
• Posner E. A., Weisbach, D. (2010), Climate Change Justice, Princeton: Princeton University Press
• Uzawa, H. (2003), Economic Theory and Global Warming, Cambridge: Cambridge University Press

Paying for Inequality: The Costs of NAIRU-based Macroeconomics

Servaas Storm

C.W.M. Naastepad

Mainstream macroeconomics is in a deep crisis in the wake of the financial collapse of mid-2007 and the ensuing Great Recession. What the crisis has revealed is that the remarkable macroeconomic performance of the US and the UK from 1995 to 2006 was just a façade. Hiding behind it, a mountain of unsecured credit and housing debt was accumulating, as a constantly expanding network of secondary markets seemed to be sharing the risk created by such debt, apparently diminishing the risk exposure of individual holders. How that debt mountain collapsed is well known. Mainstream economists did not in any way foresee the crisis, bringing out the failure of the orthodoxy of an entire era in economic thought, teaching, practice and policy advice. As Citigroup’s chief economist Willem Buiter writes (in the Financial Times): “the typical graduate macroeconomics and monetary economics training received at Anglo-American universities, during the past 30 years or so, may have set back by decades serious investigations of aggregate economic behaviour and economic policy-relevant understanding. It was a privately and socially costly waste of resources.” We believe that the theory of the non-accelerating-inflation rate of unemployment (NAIRU), which belongs to the core of graduate macroeconomics and monetary economics, is seriously implicated in creating the crisis. NAIRU theory helped shape the broader macroeconomic conditions within which the spectacular macroeconomic imbalances could build up and eventually lead to collapse. The NAIRU approach must be discarded to provide the space for “serious investigations of aggregate economic behaviour”.

The NAIRU is the equilibrium unemployment rate; it bears a strong resemblance to Marx’s reserve army of (unemployed) labour. Equilibrium unemployment is the outcome of the conflict over income distribution between workers (unions) and firms. Workers negotiate money wages designed to give them a certain standard of living, while firms set prices as a profit mark-up on labour costs. Wage setting is assumed to depend on the expected price level and exogenous wage-push factors (including employment protection legislation, social security and minimum wages) and negatively on the unemployment rate. Competing claims by workers and firms are made consistent by means of variations in unemployment. If workers demand “excessive” wage increases (i.e. exceeding productivity growth), equilibrium unemployment will increase, forcing workers to reduce their wage claims. NAIRU theory holds lessons for both macroeconomic policy and labour market policy. Its key macro policy implication is that governments and central banks should not try to promote full employment, because efforts to push the unemployment rate permanently below the critical threshold (the NAIRU) will fail, as doing so will generate only accelerating inflation (not growth). Fiscal and monetary policies are ineffective as unemployment is regarded as structural or “voluntary”; workers supposedly either lack the required skills or prefer social transfers to employment. The key employment policy lesson of the NAIRU doctrine is that labour markets should be deregulated, welfare states trimmed down, and the institutional wage bargaining position of unions weakened, so as to reduce real wages (relative to productivity) and improve firms’ profitability. This would, according to the doctrine, lead to increased investment, reduced unemployment (especially of the lower-skilled) and improved overall macroeconomic performance. It follows that there exists a conflict, or trade-off, between growth and equity. In other words the price to pay for higher employment is a low-pay sector.

Why and how is the NAIRU model implicated in the current crisis? As Gabriel Palma (2009) compellingly argues, the process of financial deepening in the US (and globally) has been closely related to the huge sustained increase in income inequality after 1980, in a process of simultaneous causation. NAIRU-based economics has created the deregulated labour markets and scaled-down welfare states, within which the very sharp rise in inequality, especially in the US, has occurred, while at the same time legitimising high inequality as the unavoidable by-product of a low-unemployment economy enmeshed in global competition. These huge inequalities have in turn destabilised the system by making it more prone to financial instability. This last fact is easily explained.

One side of the increasing inequality in the US has been stagnant average real incomes for the bottom 90% of US households. This has led not only to a decline in personal savings but it has also created a “captive market” for bank loans and sharp increases in household indebtedness (to sustain the “American Dream” on credit). The flip side of the coin has been a dramatic rise in real income and wealth of the top 10% (and especially 1%) of households, which created superabundant liquidity in US financial markets, transforming them into unstable institutions incapable of self-correcting. High Net Worth Individuals (HNWIs) were the leading providers of finance to hedge funds, which in turn were the leading buyers of securitised mortgages. The HNWIs demanded above-average returns on their investments from the hedge funds, as they were also paying hedge fund managers above-average fees and bonuses.

Rising inequality is at the root of the (financial) crisis. On the one hand, increased inequality depressed aggregate demand and prompted monetary policy to react by maintaining low interest rates, which itself allowed private debt to increase beyond sustainable levels. On the other hand, the search for high-return investments by the HNWIs led to a process of “virtual wealth creation” on an unprecedented scale, based on financial innovations which could go on and on in effectively unregulated financial markets. Net wealth became overvalued and high asset (house) prices gave the false impression that high levels of debt were sustainable. The crisis revealed itself when the “financial weapons of mass destruction” exploded. Crucially, superabundant credit “was not used to finance new [technical] inventions” as in earlier boom periods; as Robert Skidelsky (2009) explains, “it was the invention. It was called securitized mortgages. It left no monuments to human invention, only piles of financial ruin.” Financial markets collapsed once inequality-driven imbalances and instability became too large. So although the crisis may have emerged in the financial sector, its roots are much deeper and lie in a structural change in income distribution that has been going on for almost 30 years.

NAIRUvian macro and labour market policies must take a large part of the blame for unleashing and at the same time legitimising an unequal, unstable and unsustainable profit-led growth process. To prevent financial fragility and crisis, the key issue for macro policy is to impose “compulsions” and “restrictions” on the capitalist system, to discipline firms, investors and financial markets. Labour market regulation could be one such systemic compulsion, in addition to stricter financial regulation and firm-level co-determination, aimed at discouraging non-productive, speculative activity. More egalitarian wage-led growth and low unemployment are crucial to avoid the build-up of excess liquidity which triggered the current crisis. This is why a serious rethinking of the NAIRU approach to macroeconomics is needed. The present crisis offers a historical opportunity for progressive change: given the loss of credibility of financial laissez-faire (Anglo-Saxon style), the legitimacy crisis of stock-market capitalism and the cynicism of Wall Street and the City, the global crisis could force a return of the democratic state, of regulation and of more egalitarian full-employment policies―provided there is a viable alternative to NAIRU macroeconomics. The urgent need is therefore a reconstruction of macroeconomics in which the various positive contributions which labour and labour market regulation make to macroeconomic performance are given their rightful place.

Wages, for instance, are not merely a cost to firms (as the NAIRU model assumes), but higher wages also provide macro benefits in terms of higher demand and faster productivity growth. Higher wages mean higher (consumption) demand, higher capacity utilisation for firms, and hence higher profits. Capital accumulation, in turn, will increase in response to the growth in demand and profit and this will result in higher productivity because investment in new equipment embodies the most advanced technologies and also due to more rapid learning-by-doing in firms. Higher wages and labour market regulation (offering strong legal protection to workers and giving them an effective say and stake in how they do their jobs and how firms are run) will motivate workers to commit to firms through higher productivity. Higher wages and pro-worker regulation will also motivate firms (and make it easier for them) to step up investment in labour-saving technological progress, thus raising productivity growth. And finally, central wage setting is good for overall productivity, as it rewards highly productive enterprises and forces the relatively unproductive ones out of business.

If these positive contributions by labour and labour market regulation are taken into account, it can be shown (Storm and Naastepad, 2011) that there is no conflict between growth and equality. The main reason is that more regulated and co-ordinated industrial relations systems are associated with higher labour productivity growth. Higher productivity growth and stronger technological dynamism in turn allow higher real wage growth (while maintaining firms’ profits and investment), thus creating the conditions for high and egalitarian growth with relatively low unemployment. The mainstream NAIRU approach rules out any possibility for egalitarian growth. Hence, the first step in creating progressive change is to expand the academic space and the public visibility of alternative macroeconomic approaches (beyond the NAIRU approach) that do address the deep economic problems of our time.

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Servaas Storm and C.W.M. Naastepad are both Senior Lecturers in Economics at the faculty of Technology, Policy and Management at Delft University of Technology, The Netherlands. Servaas works on macroeconomics, globalization, agricultural development and the economics of climate change. He is one of the editors of the journal Development and Change. C.W.M. works on macroeconomics, (un-)employment, and technological change.

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References

• Palma, Gabriel (2009), The revenge of the market on the rentiers, Why neo-liberal reports of the end of history turned out to be premature, Cambridge Journal of Economics Vol. 33, No. 5.


• Skidelsky, R. (2009), The myth of the business cycle, available at: http://www.realclearmarkets.com/articles/2009/01/the_myth_of_the_business_cycle.html


• Storm, Servaas and C.W.M. Naastepad (2011), Macroeconomics Without the NAIRU, forthcoming.

Corporate governance in a radically changed world - a fresh look at the Rhineland model

Richard Tudway

The collapse of the global financial system raises critical issues in corporate governance, particularly in Anglo American jurisdictions. The global financial crisis, triggered by events in the US and the UK, has destroyed global wealth and output on a huge scale. In spring 2010, world stock markets recorded an astounding $20tr loss in value from highs of some $61tr in December 2007 (World Federation of Exchanges, March 2010). OECD growth slumped in the immediate aftermath of the crisis but has since recovered, though very slowly as growth in advanced economies is expected to remain broadly unchanged at 2.5% in 2011 according to the IMFs World Economic Outlook. Recent data on the US and the UK may yet herald a slide back into recession. Indeed, according to the OECD September forecast, the annual rate of growth in the G7 countries will fall to around 1.5% in the second half of 2010, a full percentage point lower than its forecast in May 2010. In the case of the US, fears that weak employment numbers in September may foreshadow a double-dip recession have prompted further quantitative easing by the Federal Reserve. The Made in America financial crisis and the role of the Anglo American model of corporate governance urgently needs to be re-examined.

This model has indeed spectacularly failed to protect shareholder wealth, its professed primary intention since, under Anglo American corporate law, directors are portrayed as having a first duty to protect shareholder value. Workers’ capital (the pension funds of working people that are invested by institutional investors into stock markets) has been squandered also. The prospects for many millions of working people have also worsened. The sense of public outrage is understandable. Yet, despite the promises of politicians and policymakers that things will be changed, it seems that, far from changing, things are returning to business as usual. The bankers are back in the saddle. Generous bonuses are being paid. The boards of many bank and non bank corporations alike in Anglo American jurisdictions have learnt little from the damage that has been inflicted, and the reasons that explain it.

If politicians won’t act, then global trade unions must press resolutely for change. Bank and non-bank corporations alike have to be properly, effectively, independently and transparently supervised. Drawing strength from the excellent co-determination habits of Rhineland democracies (Germany and other democracies that border the Rhine) and others (notably Sweden and other Nordic countries), the autocratic, non-inclusive style of Anglo American unitary board governance arrangements has to be challenged. To drive home the argument, trade unions need to be able to prove that independently supervised corporations are better at protecting both worker prosperity and shareholder value.

The voice of working people has to be taken into account in the supervision of the world’s largest corporations. Democratic self-determination at the work place demands no less. This is the only way that the wrecking instincts of personal greed can be controlled. The well rehearsed argument that independent supervision will stifle innovation (because decisions would never get taken and business opportunities would be lost) is self-serving propaganda. Commercial risks are, of course, unavoidable - they can never be eliminated. The role of supervision is to ensure that significant risks are thoroughly and objectively assessed (while there is evidence that bank failures in the US and Britain occurred because the advice of risk managers was suppressed) before workers’ capital and their livelihoods are endangered by reckless, unsupervised and unaccountable decisions. Here it is important to remember that all information provided by corporations in Anglo American jurisdictions is ex post – after the event.

To get the debate moving, the OECD has to challenge the ‘hidden agenda’ which still stifles the debate on corporate governance; the OECD Framework of Corporate Governance and Roundtable discussions have ignored warnings in the past. There is an urgent need to look openly and objectively at alternatives to the now discredited Anglo American model. In doing so, it is crucial to ensure that the interests of workers and all legitimate stakeholders are properly represented. The GLU and its associates need to focus research on how different governance structures rank in terms of protecting corporate wealth. The Anglo American shareholder value model has been extensively researched. In contrast, the stakeholder model has not (Allen and Gale, 2002). The research needs to develop appropriate methods for assessing short and medium term performance in the largest publicly traded corporations, according to the governance model in use.

The Anglo American model relies critically on the neoclassical Arrow-Debreu theorem and efficient markets hypothesis. In the first instance this demonstrates that if(1) the objective of the corporation is to maximise the value of its shareholders, and this is achieved, then it is said to be Pareto optimal (i.e. its behaviour is beneficial to all, even outside the corporation). The issue of income distribution in society is otherwise settled by progressive taxation. This leaves company directors with the clear duty to maximise shareholder value(2) . The pursuit of that objective, it is argued, will in turn promote efficient resource allocation, as posited in the efficient markets hypothesis. In contrast, corporation law in Rhineland jurisdictions is clear in stating that the objective of larger corporations is to promote interests that are wider than simply those of the shareholder. Stakeholder concerns thus become a central feature of board behaviour, decision making and investment. Research should examine the consequences if the objective of the corporation is not exclusively to promote shareholder value. According to Allen and Gale (op. cit.), over 80% of managers surveyed in Germany, France and Japan agreed that stakeholder interests are more important than shareholder interests. In contrast, more than 80% of British and American managers surveyed saw shareholder interests as being the most important interest.

Whilst the stakeholder model has been politely dismissed by a generation of Anglo American corporate financiers, corporate legal theorists and financial analysts, the tide is now turning. There is an increasing awareness that the Anglo American model of corporate governance fails to meet its single declared objective – maximisation of shareholder value. At the same time, it compromises the longer term investment of other stakeholders, most notably working people. Time has now come to change corporate governance for the benefit of all. The debate has to be opened up and the evidence independently evaluated.

(1) The significance of the if is that if the proposition can be effectively contested then the force of much of the argument is lost. The truth of the matter in law is that in Anglo American jurisdictions the fiduciary duty is to the company, a separate legal entity, and not to the shareholders, which radically changes the justification for its particular portrayal.

(2) The unclear distribution and supervision of power between directors and managers in Anglo American jurisdictions is a natural consequence of the evolution of the doctrine of separation of ownership from control, over which there is no effective countervailing influence by absentee landlord institutional investors who have no long term interest in the corporation in which they are invested.

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Richard Tudway is a director of the Centre for International Economics in London. He is a researcher in corporate governance and a visiting professor of management, economics and finance at several international business schools.

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References:

Allen, F. and Gale, D. (2002), A Comparative Theory of Corporate Governance, Wharton Business School

Further Reading:
Tudway, R. (2009), Evidence to the OECD’s Corporate Governance Steering Group Roundtable
Tudway, R. (2002), The Juridical Paradox of the Corporation, International Corporate Law Annual, Vol 2

FIFA 2010 World Cup: fair play on the pitch but foul play for workers

Crispen Chinguno

South Africa hosted the 2010 FIFA World Cup behind unprecedented fanfare and rituals. Nearly a billion viewers watched this showcase worldwide. However, few would ever be privy to the dark side behind this façade. Debate on the event was largely dominated by questions related to the capacity of South Africa to host such a mega event, as well as discussions on business profits, or socio-political and symbolic benefits. FIFA reported that it was the most commercially successful World Cup ever. The event was ironically hosted in the world’s poorest continent and hence brought to fore the contradictions of opulence and poverty. It raised questions on who really benefited from the event and what it represented. Did it make any contributions in alleviating the plight of the workers and the poor? This column is a ‘snap-shot’ of some of the debates and contradictions.

Construction

The sector by nature is highly cyclical and hence a majority of workers are in precarious employment. It is one of the most exploitative sectors, characterised by flexible forms of employment and migrant labour. Trade unions in the sector are weak (density below 10%) and fragmented. This was one of the first sectors to ‘feel’ the impact of this mega event. It was propelled out of a decline which had persisted for almost three decades by the World Cup construction projects and massive government infrastructure development in energy and transport. Employment in the sector increased from just over 200,000 in 1998 to over a million in 2008, at the peak of the boom.

The unions organised workers strategically through an initiative by the global federation Building and Woodworkers International (BWI)’s decent work campaign. This brought together three of the main unions in the sector and achieved marginal gains for the unions. At the end of the campaign, unions reported a 10% growth in membership. However, many of the workers were retrenched soon after completion of the projects. In addition, its sustainability is questionable as it was not initiated nor driven locally. The campaign, however, afforded a rare opportunity for a ‘united’ labour movement in the sector, though unions remained divided and fragmented.

Constructing stadiums for a world tournament instilled high expectations in ordinary workers, in contradiction to the ‘business as usual’ stance adopted by contractors and government. Conflict was inevitable and the 2010 World Cup construction projects have perhaps recorded the highest levels of industrial conflict in the event’s history. At least 26 strikes were reported from all the projects and most were not sanctioned by the unions. According to research by Eddie Cottle (2010), workers received an average of 12% wage increase which amounted to R2933 (€293) per month by the time the projects were completed, against an average increase in profit of 218% in 2007 for the contractors.

Security

South Africa has one of the highest crime rates in the world. Hence security was a major issue for the tournament. The security sector in South Africa is one of the largest and fastest growing in the world, with an average annual growth rate of 13% since 1994. There are at least 6400 accredited security companies and South Africa has one of the highest ratios of security guards to policemen with over 385,000 security guards to 180,000 police officers.

The World Cup brought windfall gains for security companies. Some reported increasing revenue and profit threefold. For personal bodyguards, for example, companies charged between R2000 (€200) and R40,000 (€2000) per day. This translated to the equivalent of over two year’s salary for some of the workers. The security sector is designated as a ‘vulnerable sector’ as it is characterised by precarious employment, low pay and long hours (60% of workers earns less than R1700 [€170] per month). There is no bargaining council, very little social and health protection and over 93% of workers are not unionized. This predicament was highlighted during the 2006 strike, the most violent strike in post-apartheid South Africa, in which over 60 security guards were killed. The situation of this sector reflects some of the contradictions of South African society, notably the relationship between the demand for security and levels of crime and inequality.

Accommodation and catering

Many of the 2010 World Cup guests in hotels and restaurants may never be privy to the fact that the workers who served them were ‘freemen de jure but slaves de facto’. Most are paid on commission or only depend on tips as a source of income. Such practices are prevalent even in up market hotels and restaurants.

The monthly minimum wage, for the few privileged to have a wage, is about R1800 (€180), but is often ignored. Unions are poorly organised and mostly confined to big hotels and restaurants. The sector is very complex to penetrate and density is low (below 20%). Interviews with union officials revealed that here is a very high prevalence of migrant workers, most of whom do not have documentation to work in South Africa.  In large urban centres, it is estimated that 80% of the workers in restaurants are foreign. This makes it risky for them to seek redress where they face unfair labour practices. According to the interviews conducted, the unions in this sector did not see any opportunities arising from the tournament. They argued that their problems were perennial and could not be tied to a once-off event. Most hotels and restaurants outsource services such as catering, cleaning and security; hence most workers are employed by third parties. Over 60% are in precarious employment without social benefits such as medical cover and pension. The conditions of work in this sector are very complex, exploitative and characterised by a very high decent work deficit.

Transport

South Africa has a very poor public transport system. The ‘minibus sector’, one of the legacies of apartheid, is dominant, accounting for over 60% of public transport, but is predominately informal. Ironically, despite heavy investment in modern train and bus systems, it represented one of the prime modes of transport for the 2010 World Cup. It employs over 185,000 workers who work under deplorable conditions. Most have no formal contracts, leave or health protection and earn very low pay. They work excessive hours (with an average as high as 16-18 hours) and have a limited collective voice at work as fewer than 20% are unionised.

A new rapid bus service was unveiled just before the tournament to ease the urban transport during and after the event. A number of minibus drivers were recruited for the rapid bus service. Most had been previously retrenched and were hired as casual workers with no prospect for secure employment. As they had been organised as minibus drivers, they immediately approached the union for protection from exploitation. They organised a strike against poor conditions of work which exposed the contradictions of the tournament.

Textile and footwear

The textile and footwear sectors in South Africa have been overwhelmed by cheap imports, especially from China. The unions attempted to minimise imports and support local brands, but were not very successful. However, one of the major unions in the sector collaborated with Adidas and identified local factories for production of soccer regalia for the local market at affordable prices. Three factories complying with the bargaining council agreements were identified. The initiative created about 2500 jobs for three months. Adidas was apparently protecting itself from the global unions’ Clean Clothes Campaign which targets major sports events. In interviews, however, the unions did not view the tournament as an opportunity for organising and claimed it was unsustainable as it created temporary jobs. A significant proportion of the South African production takes place in sweatshops and homes where there are no standards of work (Shane Godfrey et al., 2005). Hence the sectors are largely characterised by a very high decent work deficit.

Street traders

This was perhaps the first time that the FIFA World Cup was to come ‘face to face’ with the informal economy. South African street vendors, like any business persons, had big dreams. However, they were shattered by FIFA’s ban on trading on all venues and surrounding vicinity to protect big global capital. For many, this was a nightmare as informal trading in and outside stadiums is part of the African football ‘culture’. Some inhabitants of informal settlements, who naturally are mainly confined to the informal sector, were forcibly evicted in the name of cleaning up the cities before the event.

Conclusion

The 2010 FIFA World Cup deceived and shattered the dreams of many workers and poor people. Initially, it obscured class differences and its underlying ideological agenda as it was associated with a rhetorical sense of national identity, self-esteem and pride. However, this was deceptive as it did not represent or advance such values. The super exploitation of workers and the economic exclusion of street traders to protect and advance the interests of global capital (McDonald’s, Coca Cola, etc) epitomise the meaning of the FIFA World Cup. It is a phenomenon of neoliberal globalisation designed to represent, reinforce and advance the ideology and hegemony of global capital at the expense of workers and poor people. There may have been fair play in the soccer field at the World Cup, but foul play was the rule for workers.

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Crispen Chinguno is an alumnus of the Global Labour University Masters programme at Wits (South Africa) and currently an International Center for Development and Decent Work (ICDD) PhD fellow at SWOP, Wits.

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References:

Cottle, E. (2010), ‘A Preliminary Evaluation of the Impact of the 2010 FIFA World Cup™: South Africa’, Available at: http://www.sah.ch/data/D23807E0/ImpactassessmentFinalSeptember2010EddieCottle.pdf

Godfrey, S., Clarke, M., Theron, J. and Greenburg, J. (2005) ‘On the Outskirts but Still in Fashion: Homeworking in the South African Clothing Industry – The Challenge to Organisation and Regulation’, Labour and Enterprise Project, University of Cape Town, Available at:
http://blogs.uct.ac.za/gallery/679/Homeworking%20in%20the%20South%20African%20clothing%20industry%202-2005%2004-03-08%20SW.pdf

What does wage-led growth mean in developing countries with large informal employment?

Jayati Ghosh

The past decade has been one in which export-led economic strategies have come to be seen as the most successful, driven by the apparent success of two countries in particular - China and Germany. In fact, the export-driven model of growth has much wider prevalence as it was adopted by almost all developing countries.

This was associated with suppressing wage costs and domestic consumption in order to remain internationally competitive and to achieve growing shares of world markets as far as possible. Managing exchange rates to remain competitive, despite either current account surpluses or capital inflows, became one of the major elements of this strategy. This was associated with the peculiar situation of rising savings rates and falling investment rates in many developing countries, and to the holding of international reserves that were then sought to be placed in safe assets abroad.

This is related to a classic dilemma of mercantilist strategy, which is evident in exaggerated form for the aggressively export-oriented economies of today: they are forced to finance the deficits of those countries that would buy their products, through capital flows that sustain the demand for their own exports, even when these countries have significantly higher per capita income than their own. The flows of capital from China and other countries of developing Asia is an egregious example of this.

The strategy also generated fewer jobs than a more labour-intensive pattern based on expanding domestic demand would have done, which meant that employment increased relatively little, despite often dramatic rises in aggregate output. This is why, globally, the previous boom was associated with the South subsidising the North: through cheaper exports of goods and services, through net capital flows from developing countries to the US in particular, through flows of cheap labour in the form of short-term migration.

The recent collapse in export markets halted that process for a while. Although there has been a recovery, it is very evident that such a strategy is unsustainable beyond a point. This is particularly true when a number of relatively large economies seek to use it at the same time. So, not only was this a strategy that bred and increased global inequality, it also sowed the seeds of its own destruction by generating downward pressures on price because of increasing competition as well as protectionist responses in the North.

So there are both external and internal reasons why it is hard to sustain such a strategy beyond a point. Externally, deficit countries will either choose or be forced to reduce their deficits through various means, and protectionist responses. Internally, the potential for suppression of wage incomes and domestic consumption will meet with political resistance. In either case, the pressures to find more sustainable sources of economic growth, particularly through domestic demand and wage-led alternatives, are likely to increase.

The process of global economic rebalancing was initiated by the financial crisis and is now likely to get accentuated through the current fragile recovery and potential instability of the near future. One important result is developing countries (and the surplus countries like China in particular) can no longer depend on exports to US as their primary engine of growth. The US trade deficit is set to shrink, and at a fundamental level it really does not matter whether this occurs through exchange rate changes, changes in domestic savings and investment behavior or increased trade protectionism.

So countries must diversify their sources of growth, looking for other export markets as well as for internal engines of growth. This is what makes arguments for a shift in strategy towards domestic wage-led growth so compelling.

In developed countries with relatively strong institutions that can affect the labour market, including collective wage bargaining, effective minimum wage legislation and the like, it is probably easier to think of wage-led growth and strategies to allow wages to keep pace or at least grow to some extent) along with labour productivity growth. But what about most developing countries, where such institutions are relatively poorly developed and where many if not most workers are in informal activities, often self-employed? How are wage increases and better working conditions to be ensured in such cases? And what does a macroeconomic policy of wage-led growth entail in such a context?

In fact, it is still both possible and desirable to get wage-led growth in such contexts. There are five important elements of such a strategy in developing countries with large informal sectors:

• Make the economic growth process more inclusive and employment intensive: direct resources to the sectors in which the poor work (such as agriculture and informal activities), areas in which they live (relatively backward regions), factors of production which they possess (unskilled labour) and outputs which they consume (such as food).


• Ensure the greater viability of informal production, through better access to institutional credit to farmers and other small producers, greater integration into supply chains and marketing that improves their returns, and technology improvements that increase labour productivity in such activities.


• Provide increases in public employment that set the floor for wages (for example, in schemes such as that enabled by the National Rural Employment Guarantee Act in India) and improve the bargaining power of workers.


• Provide much better social protection, with more funding, wider coverage and consolidation, more health spending and more robust and extensive social insurance programmes, including pensions and unemployment insurance.


• Increase and focus on the public delivery of wage goods (housing, other infrastructure, health, education, even nutrition) financed by taxing surpluses.

The last point is often not recognised as a crucial element of a possible wage-led strategy, but it can be extremely significant. Furthermore, such a strategy can be used effectively even in otherwise capitalist export-oriented economies, as long as surpluses from industrialisation and exports can be mobilised to provide wage goods publicly. Indeed, this has been an important and unrecognised feature of successful Asian industrialisation from Japan to the East Asian NICs to (most recently) China. The public provision of affordable and reasonably good quality housing, transport facilities, basic food, school education and basic healthcare all operated to improve the conditions of life of workers and (indirectly) therefore to reduce the money wages that individual employers need to pay workers. This not only reduced overall labour costs for private employers, but also provided greater flexibility for producers competing in external markets, since a significant part of fixed costs was effectively reduced.

What are the macroeconomic advantages of such a strategy? Quite apart from the obvious benefits in terms of reducing poverty, improving income distribution and the conditions of informal workers, there are positive implications for the growth process. It allows for more stable economic expansion based on increasing the home market, and need not conflict with more exports either. It encourages more emphasis on productivity growth, thereby generating a “high road” to industrialisation.

Clearly, if countries in which the majority of the world’s population are concentrated are actually to achieve their development project in a sustainable way, new and more creative economic strategies have to be pursued. Wage-led growth, including through measures such as those outlined here, is likely to be an essential element of such strategies.

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Jayati Ghosh is Professor of Economics at Jawaharlal Nehru University, New Delhi, and Executive Secretary of International Development Economics Associates (http://www.networkideas.org/). She has consulted with many international organisations and governments, and works actively with progressive organisations in India and elsewhere.

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