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    12 September 2011

    The euro crisis and the European trade union movement

    Vasco Pedrina
    After successfully bailing out banks and adopting a first wave of economic recovery measures, the authorities of the European Union (EU) and its member states began to impose draconian, anti-social austerity plans from the beginning of spring 2010. These plans stem from an increasingly coordinated policy at the EU level, which is entering a new phase with the “Euro-Plus Pact” and the “enlarged bailout plan”. Dressed up as part of a fight against “macroeconomic imbalances”, new mechanisms are to be put in place. These will provide EU authorities with the means to step up the pressure for general social dismantling. Concretely, this amounts to a “wages straitjacket” that calls into question the autonomy of social partners (one of the pillars of the “European social model”), raises the retirement age across European countries and introduces legislation to curb national debt. This policy is not only having dramatic social repercussions. It is also heading up an economic blind alley that is putting the euro at risk.
    At its Congress in Athens in May 2011, the European Trade Union Confederation (ETUC) reaffirmed its opposition to the currently prevailing neoliberal economic policies and once again demanded a change of course. The only conceivable way of pulling the eurozone out of crisis is a combination of measures aimed both at boosting economic growth and at a gradual reduction of debt levels and macroeconomic imbalances. The ETUC is calling for a “New Social and Green Deal” consisting of a large investment plan, the issuing of eurobonds, low-interest liquidity provision by the European Central Bank (ECB) and a low-carbon industrial policy underpinned by fiscal reforms, which should include a tax on financial transactions. As far as Greece is concerned, it is now clear that it will not be able to break out of the present vicious circle without a really substantial recovery plan financed by the EU within the framework of a sort of Marshall Plan for countries in distress. The ETUC is also demanding a thorough overhaul of the “Euro Pact” – particularly the part on wage and retirement measures.
    Mobilising against social suffocation
    To back this alternative economic programme, the ETUC has held four European action days in the past two years. Demonstrations and strikes spread across many European countries, but they did not build enough pressure to halt the neoliberal steamroller. Back in the days of the “social democratic compromise” under the presidency of Jacques Delors, protests of that size would have been seen as a good reason for getting down to negotiations. Today, that is no longer so. Neither the EU authorities nor those of the member states were swayed by the protest action. True, the European trade union movement has, in the meantime, managed to get the most reactionary legal provisions expunged from the Euro Pact, but its antisocial thrust remains, as do the national austerity plans. At the same time, some pillars of the “European social model” are under relentless attack. Symptomatic of this is the EU political authorities’ refusal to correct the precedent created by the European Court of Justice (ECJ) in the Laval, Viking, Rüffert and Luxembourg cases of 2007/08. Through these rulings, the ECJ called into question the basic principles of social Europe, such as the precedence of basic social rights over the economic freedoms of the internal market, the principle of “equal pay for equal work in the same place”, the right to strike in order to combat wage dumping, and the autonomy of the social partners.
    European trade unionism at a crossroads
    “Social Europe” is under pressure. Clearly, there will be no change of course unless pressure from strikes and political action coordinated at the European level builds up on a scale quite different to anything that has been achieved up to now. And yet, in the wake of the crisis, unions are falling back to defensive struggle positions within national frameworks. Evidently, the unions have put too little energy into European mobilising. Even 80,000 people on the march in Brussels no longer have such a great impact.
    The time has come to re-examine our strategy if we do not want to look on helplessly as the European trade union movement slides into irremediable decline. The current debate on this issue within the political left and the trade union movement is seeing the emergence of two currents of thought. One of them advocates a strategy of “renationalising policy”. Those supporting this “fallback strategy” argue that, as the EU is on the road to neoliberal damnation, the only realistic response would be to set up resistance networks to defend the social State within the national framework. The left-wing supporters of this position are, de facto, putting themselves in the same camp as the conservatives within the trade union movement who, like quite a lot of Nordic confederations, believe that the “lone road” is the best way of defending their “Nordic social model”, even though that model is more and more threatened by new developments within the EU.
    The other school of thought advocates an “offensive strategy” of Europeanising social struggles. Their argument is that the only positive alternative is a quantitative and qualitative leap forward in joint political action and mobilising across Europe. But the days in which such a leap might still be made successfully are numbered. There is a serious risk that the Euro Pact, together with the whole series of austerity plans, will cause such an increase in the imbalances between and within countries that the social and political tensions will become unbearable, due to the rise of populist forces. The already growing tensions among trade union confederations in Europe and among confederations within individual countries (such as Italy) give some idea of where such developments could lead, namely to a catastrophic paralysis of the labour movement.
    Levers for Europeanising social struggles
    The strikes and mobilisations over the past two years in various European countries have led to the emergence of new demands, new forms of action and new alliances from which useful lessons can be drawn for the Europeanisation of trade union resistance networks. At the same time, other routes may lead to the qualitative leap described above. At the ETUC congress, two proposals were discussed for campaigns with the potential to launch a real, coordinated counter-offensive.
    One of these proposals concerns the response to the currently prevailing neoliberal economic policies. It is based on the alternative ETUC economic programme mentioned above, on reinforced coordination of bargaining policy and on an offensive for a European minimum wage policy and against the precarisation of jobs. Workplace strike capacities in support of European demands need to be strengthened in order to achieve these objectives. Granted, the ETUC congress did adopt a proposal from the Spanish confederations CCOO and UGT, calling for serious examination of the feasibility of coordinated strikes or a European general strike, but it did so without conviction. Clearly, the political will is still lacking, but this state of mind could change if the pressure of suffering continues to mount, which it probably will.
    The second proposal, entitled “Equal Pay, Equal Rights”, aims to give new impetus to the struggle for workers’ rights, which are under attack almost everywhere, as well as the struggle against wage dumping. To support this campaign, the Swiss Federation of Trade Unions has proposed the launching of a European Citizens’ Initiative (ECI) entitled “For a Europe without wage dumping – Priority for basic social rights over economic freedoms”. Under the new Lisbon treaty, citizens can petition EU authorities on new policies and legislations with one million signatures. An ECI of this kind would be aimed at giving the EU a mandate for the legislative measures needed to ensure that precedence for basic social rights over economic freedoms becomes generally applicable throughout the European Union.
    Launching such an ECI would enable broad awareness-raising (and mobilisation) in workplaces and among the union rank-and-file right across Europe – something that has not been possible so far. Other social movements and political forces that share our concerns about the future of social Europe could be associated with the ECI. The ETUC congress accepted this second proposal, which a working group is to put into concrete form by the end of this year. But it did not give a clear green light to the decisive lever for such a campaign, namely the ECI. The reservations come from countries such as France, the UK and Italy, whose union confederations say they have no tradition of collecting signatures for this kind of instrument. They are underestimating the potential of a citizens’ initiative as an instrument of decentralised awareness-raising and political pressure for a common objective throughout Europe.
    The ETUC congress could have sent out a strong signal for a large-scale political and trade union European counter-offensive. The lack of energy to go down that road is probably due to the way that unions in quite a few countries have been hit and weakened. Nonetheless, it may well be that a response on a scale to match the current challenges will become possible once the pressure of suffering rises even further, and people will be forced to realise that a social and political turning-point cannot be reached without strengthened trade union policy coordination beyond national borders. This will require an alliance with all interested social movements and political forces. The future of social Europe and of the European integration process is at stake.

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    Vasco Pedrina is the National Secretary of the Swiss inter-professional trade union Unia and Vice-President of the Building and Wood Workers’ International (BWI). He represents the Swiss Federation of Trade Unions (SGB/USS) on the ETUC Executive Committee.

    5 September 2011

    7 Reasons why a Universal Income makes Sense in Middle-Income Countries




    Hein Marais
    Is job creation really the best way to seek wellbeing for all in countries with chronic, high unemployment? No – especially not in a wealthy middle-income country like South Africa, where very high unemployment combines with high poverty rates. Here are 7 reasons why a universal income grant makes more sense.
    1. EARNING A DECENT SECURE WAGE IS NOT A PROSPECT FOR MILLIONS OF SOUTH AFRICANS
    While the rewards of South Africa’s modest economic growth are cornered in small sections of society, close to half the population lives in poverty, and income inequality is wider than ever before.
    Job creation improved modestly as economic growth accelerated in the early 2000s. About 3 million ‘employment opportunities’ were created in 2002-08. The semantics are important. Very many of those ‘opportunities’ did not merit being called ‘jobs’. They divided roughly equally between the formal and informal sectors, and occurred mainly via public works programmes, business services, and the wholesale and retail trade sectors. A lot of them were crummy, insecure and poorly paid.
    The average unemployment rate for middle-income countries is in the 5-10% range; in South Africa, it is about 25%. Add workers who have given up looking for jobs, and the actual rate sits around the 35% mark. Since late 2008, the private sector has been shedding jobs, and the public sector’s been trying to add new ones. It’s an endless game of catch-up.
    2. HAVING A JOB DOES NOT AUTOMATICALLY SHIELD AGAINST POVERTY
    Having waged work is the single-most important factor deciding whether or not a household will be poor. But earning a wage does not guarantee that you won’t be poor.
    Vast numbers of workers earn wages so low and on such poor terms that their jobs don’t shield them against poverty. Increasingly that applies also to formal sector jobs. Almost one fifth (some 1.4 million) of formal sector workers earned less than R 1 000 (USD 125) a month in the mid-2000s, according to Statistics SA data.
    Two factors drive these trends: the shift towards the use of casual and outsourced labour, and the related decline in real wages for low-skilled workers.
    The average real wage is being propped up by the improved fortunes of comparatively small numbers of high-skilled, high-wage workers. Workers without tertiary qualifications lost about 20% of their average real wage. And women in the formal sector earned less in real and relative terms in 2005, compared with 1995.
    From the late-1970s into the 1990s, South African companies tried to compete and maintain profit levels by upgrading machinery and introducing new technologies to achieve higher productivity and reduce reliance on militant, organised workers.
    Eventually the dividends dwindled, and currency crashes since the mid-1990s inflated the cost of imported technology.
    The hunt for profit required another squeeze, and it was applied to the wages and terms of employment of workers who are not shielded sufficiently by labour laws and shopfloor organising.
    Company profits as a share of national income rose from 26% in 1993 to 31% in 2004, while workers’ wages fell from 57% to 52%.
    Companies now rely on a shrinking core of skilled, full-time workers and a larger stock of less-skilled and badly paid casual or out-sourced labour. By 2008, according to the Labour Ministry, about half the workforce was in casual and temporary jobs.
    Job creation is vital. But it’s not a match-winner anymore – not in the kind of economy and labour market that defines South Africa. The quest for more – and better jobs – has to occur as part of the wider realization of social rights.
    3. SOCIAL GRANTS SEPARATE MILLIONS FROM DESTITUTION BUT IT IS ILL-SUITED TO TODAY’S REALITIES
    The impact of the social grant system is beyond dispute. According to Statistics SA, the increase in incomes among the poorest 30% of South Africans after 2001 was mainly due to social grants (especially the child support grant). They’re the best poverty-alleviating tool South Africa has at the moment.
    Beneficiaries rose radically since 2000. The 2.6 million recipients of pensions and social grants increased to about 14 million in 2010. About 43% of households in 2007 received at least one social grant; in half of them, pensions or grants were the main sources of income.
    A large proportion of low-income households would probably be unviable without these grants.
    The current social protection system hinges on the fiction that every worker, sooner or later, will find a decent job. Thus the grants were designed to assist people who, due to age or disability, cannot reasonably be expected to fend for themselves by selling their labour. Meanwhile, the employed have access to employer- and worker-subsidised protection (all tied to employment status).
    But large numbers of vulnerable workers are not eligible for these state grants, and do not benefit from employment-based provisions.
    4. TARGETED AND MEANS-TESTED SOCIAL PROTECTION IS BURDENSOME, COSTLY AND HUMILIATING ADMINISTRATION
    Most states prefer to ration cash grants by targeting them and tying them to certain conditions. South Africa is no different (though only the child support grant is nominally conditional at this point).
    This is administratively expensive, and it tends to be difficult, especially when it is tough to determine an individual’s income, and when that income is likely to fluctuate significantly.
    It runs the risk of creating arbitrary divides between those who benefit from social grants and those who do not. Which is why critics regard the approach as expensive, inefficient and ‘offensive to basic egalitarian principles’, as Guy Standing puts it.
    Most means-tested social grants involve burdensome and humiliating interactions with the state that basically involve ‘proving’ to a stranger that you’re poor and unable to fend for yourself and your family. This is why huge stigma and shame tend to attach to them.
    A universal income grant would be available to all adult citizens, and would be neither conditional, nor targeted or means-tested. The tax system would be used to retrieve (and help finance) the grants from individuals who don’t need them because their incomes are high enough. The grants would form a cornerstone of a broader social protection system.
    5. A UNIVERSAL INCOME IS DEVELOPMENTAL AND WOULD BOOST WELLBEING
    Cash transfers bring powerful anti-poverty, developmental and economic benefits. The observed effects include reduced stunting in children and better nutrition levels, and higher school enrolment of young children.
    In a localized, universal income pilot project in Namibia, child malnutrition declined and school attendance increased significantly within 6 months. Recipients also became more active in income-generating activities.
    Financial simulations have shown that a universal grant as small as R 100 per month could close South Africa’s poverty gap by 74%,[1] and lift about six million people above a poverty line of R 400 (USD 50) per month.
    Cash grants can also help drive more inclusive patterns of growth. Brazil’s expansion of social transfers (especially via the bolsa familia, a conditional grant) along with the extension of the minimum wage has boosted internal demand for local products and services, and aided the growth of formal jobs, as Janine Berg shows in a recent paper.[2]
    6. A UNIVERSAL INCOME CAN BE A POWERFUL EMANCIPATORY TOOL, ESPECIALLY FOR WORKERS
    Cash grants contain a radical, emancipating potential. The key is to uncouple them from the labour market, which a universal income grant can achieve.
    This is a potentially radical and subversive turn that confronts the ‘double separation’ that is typically imposed on workers – separation from the means of production and from the means of subsistence.
    The impact potentially reaches much farther than gains in social justice.
    A universal income has the potential to improve the wages and terms of employment for low-skilled workers. If the bare necessities of life can be secured elsewhere, demeaning and hyper-exploitative wage labour is no longer the ‘only option’.
    Its most subversive effect is to equip people with the freedom not to sell their labour and to withdraw, at least sporadically, from the ‘race to the bottom’ between low-skilled workers in high unemployment settings.
    Thus a universal income can endow the weakest with bargaining power. Linked with other efforts to strengthen wellbeing and expand the content of citizenship, it can contribute toward significant redistribution of power, time and liberty. It also challenges one of the anchoring principles of Anglo-capitalism, which binds employment and citizenship together.
    7. A UNIVERSAL INCOME TREATS WOMEN AS CITIZENS, NOT MERELY AS CAREGIVERS AND BEARERS OF CHILDREN
    Millions of women in SA have entered the labour market since 1980s, despite their exceptionally poor job and wage prospects. Three quarters (75%) of African women younger than 30 years are unemployed. Most who do find employment tend to work part-time, for low wages and in highly exploitative conditions.
    Yet women also bear the bulk of responsibility for social reproduction, and they head more than 40% of households, the majority of them single-parent, impoverished households.
    Overall, the sexual division of labour in both the domestic sphere and labour market remains structured in ways that enable men to monopolise full-time and better-paying jobs, while women perform most of the household labour. Men, whether employed or not, continue to ‘free ride’ on women’s work – paid or not.
    A guaranteed universal income challenges these arrangements, by helping provide currently inaccessible economic independence, and by strengthening the negotiating position of women who do enter the labour market.
    CONCLUSION
    More jobs are vital and feasible. However, the quest for more jobs has to occur as part of a wider realization of social rights. A universal income grant would be a powerful intervention for radically reducing the depth and scale of impoverishment, and for enhancing liberty.
    [1] The poverty gap refers to the total income shortfall of households living below the poverty line. A narrower poverty gap means more households would edge closer to, or above the poverty line.
    [2] Changes in labour market and social policies boosted consumption and economic growth in rural and poor areas, and created a steady demand for small retailers and service providers. That boost in demand also affected other parts of the value chain, including formal manufacturing and distribution (Berg, 2010). See Berg, J. (2010). “Laws or luck? Understanding rising formality in Brazil in the 2000s”. Working Paper no. 5. ILO Office in Brazil. ILO.

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    Writer and journalist HEIN MARAIS is the author of the new book ‘South Africa Pushed to the Limit: The political economy change’, published by UCT Press and Zed Books. It is available online and at good bookstores.

    30 August 2011

    A Plan B for the World Economy




    Christian Kellermann
    ‘Capitalism’ is back on Main Street. Crashing, dismantling, reforming, repairing, restoring – all kinds of approaches to capitalism are discussed in the wake of the recent crisis. The debate has gained far more momentum today than it had during the past decade, though we had already witnessed a number of such crises. However, in practice, the gap between regulatory rhetoric and actual reform of our economies and the world economy as a whole is still considerable. Our systems remain at risk of on-going instability. Crises will continue to be the norm rather than the exception if we keep on working with the dysfunctions of current capitalism. Many of us will be unable to live a decent life under conditions of increased insecurity, inequalities and pressure in terms of wages, jobs, raising children and providing for old age. An excessive degree of unequal income distribution and personal insecurity is not only detrimental to a good life; it is also economically dangerous and inefficient. The reasons for economic crises and increasing inequality, which are symptom and root of personal and systemic insecurity and inefficiency alike, are manifold.
    Finance has played a crucial role in most of the economic crises we have experienced since the 1990s. Financial markets are both gigantic amplifiers of imbalances within and between our economies and a root of imbalances themselves. Illuminating the cracks in finance is therefore the logical starting point for the Plan B of fixing our current capitalistic system. The excesses of finance are only one part of the fundamental problems economies and societies are facing and which have contributed to the recent crisis. There are at least three dimensions of instability which are related to finance but go beyond the narrow instabilities of the financial system. First, imbalances between different sectors within economies have escalated. One expression of this is highly indebted private households as well as governments, as a consequence of real-estate and other bubbles which were fuelled by the financial system. Second, international imbalances have never been as big as they are today. Third, together with financial deregulation the shareholder-value principle of corporate governance became dominant. This led to a short-term orientation of management and high bonus payment for management at the cost of long-term sustainable development of companies and firms.
    Besides these developments, the radical market globalisation of the last decades led to a huge increase in wage dispersion and an ever-growing low-wage sector which had not been seen since the early times of capitalism before the First World War. Labour markets in almost all industrial countries became more deregulated while at the same time trade unions became weaker. In many cases economy-wide or sector level collective bargaining was eroded. Firm-based wage negotiations or individual working contracts without any collective agreements started to dominate.
    Increasing inequality is a phenomenon which can be found in almost every country. High inequality does not only provoke a feeling of ‘unfairness’ in and between societies; it also hinders social mobility and has negative impacts on health and productivity. Hungry wolves do not hunt best – in fact, the very opposite is true for present day economies. The American dream of high social mobility within a society and the opportunity for anyone to become rich if they work hard enough is in fact little more than a mirage. Today, mobility within society is more of a reality in the Nordic countries of Scandinavia where equality is higher than in the Anglo-Saxon world of capitalism.
    Capitalism has more problems: in the past, it led to a very special type of technology, production and consumption growth which is blind to ecological problems and the fact that natural resources are limited. Prices systematically fail to adequately incorporate ecological dimensions and the deterioration of nature. Prices also give the wrong signals for the direction of innovation as well as of production, consumption and the way we live. After experiencing a number of regional ecological disasters in the past century, the world is now heading for a global ecological disaster, unless fundamental changes take place very soon. This makes the search for solutions very complicated: the present crisis is not only a deep crisis of traditional capitalism, but it has emerged at a time when a deep ecological crisis is also evolving.
    A global Plan B should therefore include three interrelated dimensions. First, the model should be ecologically sustainable: preventing global warming, changing to a renewable energy basis and preventing other problematic developments such as a reduction in biodiversity. Second, it should be formed in such a way that the growth process is not jeopardised by either asset-market bubbles or goods market inflation or deflation, and does not result in the excessive indebtedness of individual sectors or even whole economies, thereby leading inevitably to the next crisis. At the same time, such a model should promote innovation and, therefore, technological development necessary both for solving ecological problems and, in the medium and long term, increasing labour productivity and so holding out the possibility of growing prosperity for all. Third, it is critical that all population groups have a share in social progress. Inequality of income and wealth distribution must be at politically and socially acceptable limits.
    At the core of Plan B is a more equitable income distribution. It is crucial to reverse the negative changes in income distribution and grant all population groups an adequate share in the wealth created in society. One secret of the success of regulated capitalism after the Second World War was the increasing mass purchasing power of workers, based on growing incomes and relatively equal income distribution. It is now becoming clear that the old model has to be regenerated.
    Income distribution has three important components: functional distribution of income in wages and profits, distribution within the national wage sum and the national profit sum, and state redistribution policy. A fall in the wage share is the result of a higher profit mark-up. The latter was possible on the basis of deregulation, particularly due to the increasing power of the financial sector and its willingness to take risks in pursuit of higher returns. The shareholder-value approach and the increasing role of institutional investors drove enterprises to pursue higher profit mark-ups. Correspondingly, the structures and rules of the game in the financial sector must be changed in such a way that the profit mark-up falls again.
    Recent decades have been characterised by significant wage dispersion. In almost all countries in the world the low-wage sector has increased. Precarious employment and informality have also increased, especially in the sector of non-tradable goods and services. Globalisation trends, therefore, cannot directly explain the emergence of these sectors. They are the result of labour market deregulation. These unjustified income inequalities among wage earners must be dismantled by means of labour market reforms. The collective bargaining system must be strengthened, backed up by other labour market institutions to achieve the decent work conditions stressed by the International Labour Organisation. Minimum wages and social security guaranteed by the state also play a crucial role in this. Such labour market regulations are not only important to reduce income inequality, they are also important to establish a nominal wage anchor against deflationary money wage cuts.
    Even with strict regulation, markets do not lead to a politically acceptable income distribution. In addition to that, not everyone has equal chances in the market. The disadvantaged – whether on the basis of gender, childcare responsibilities, handicap, age, race and so on – can drop out of the market and be deprived of an income, or at best obtain only an inadequate one. Ultimately, by no means are all incomes obtained on the basis of personal achievements; consider, for example, large inheritances, which are an intrinsically alien element with regard to capitalism. Tax law and social systems must be deployed in order to organise income distribution in a socially acceptable manner. Tax law should therefore include a clear redistributive component, and this need becomes more pronounced the more evident it is that market outcomes alone will lead to growing inequality. Against this background, not only is a markedly progressive tax system important, but above all, regulations which ensure that incomes from capital are adequately taxed.
    This Plan B might sound good, but is it not completely unrealistic? Change the rules of the game and shift the roles of governments, society and the market at the local, national and global level – and the powerful few who have been benefiting greatly from the current brand of capitalism might actually lose out. However, the outlook for change is not that bleak. Economic history is full of deep shifts in opinion, followed by deep shifts in the structure of economic institutions. Crises allow us to call into question all doctrines and interests which have been disseminated virtually unquestioned.
    One thing is very clear, however: a more ‘decent capitalism’ will not be created by the profiteers of the current system of non-regulation. Their profits are built too heavily on certain prerogatives, which they will not just hand over to public control. Quite the opposite is true: it is mostly mere placebos that have been rubber-stamped by the global financial elite so far. For deeper reform the underlying power relations of current finance capitalism will have to change, which means that the relationship between states and markets will have to be radically rebalanced.

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

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

    15 August 2011

    The True Cost of Doing Business




    Conor Cradden[1]
    There is a belief widely shared among policymakers that if arguments for a proposal or decision are supported by numbers on a page then somehow this makes that choice less political. It permits the claim that what is being proposed is not really a choice at all but something that the ‘evidence’ demands. This emphasis on quantitative indicators has meant that much policy argument has been displaced into the design of the indicators themselves. Rather than being grounded on purely technical criteria, the design of statistical indicators is a highly politicized process in which different stakeholders struggle to ensure the numbers that emerge will be more compatible with arguments in favour of their policy predilections than those of the opposition.
    The World Bank’s ‘Doing Business’ (DB) indicators are a shining example of statistics that come with this kind of built-in value judgment. The DB indicators claim to be a guide to the relative ease of establishing and running a business in different countries. This is ‘measured’ on a number of dimensions, including starting up, paying taxes, getting construction permits and enforcing contracts. The indicators allow the construction of rankings, including an overall global ranking that places Singapore at the top – making it the world’s easiest place to do business – and Chad at the bottom.
    This might appear to be an innocent enough endeavour. While states obviously have the right to ensure that there is a proper measure of social and political oversight of economic activity, it is also obvious that oversight procedures can be more complicated and more expensive than necessary. However, although the Bank denies that the DB indicators encourage deregulation, the information the indicators provide gives no way of judging whether the cost of conforming with regulation is reasonable in the light of the social, economic and environmental benefits that it produces. They have nothing to say about whether a country might on the whole be better off because of regulation. Since the social costs associated with deregulation are invisible to the DB indicators, governments whose concern is to improve their position in the DB ranking – and in some cases this is even a condition of financial aid from the Bank – have no incentive to take the potentially negative effects of deregulation into account.
    Nowhere is the assumption that regulation is only a cost clearer than in the case of the ‘employing workers’ (EW) sub-indicator. A country’s EW score depends on the cost of making employees redundant and a measure called ‘rigidity of employment’, which is a composite index where the highest possible score corresponds with a low minimum wage for beginning employees, easy availability of fixed-term rather than permanent contracts, minimal restrictions on night and weekend working, high maximum permitted weekly working time, a low number of days of paid holiday and minimal requirements for notice and consultation when making redundancies.
    Not surprisingly, the EW indicator has attracted criticism from many directions, but most notably the global labour movement. The ICFTU criticised the DB indicators within weeks of their first publication in 2003. Since then the Confederation, and subsequently the ITUC, has set out objections on a number of occasions, both in direct communication with the Bank and in public papers. In 2007, the ILO joined the debate, producing an official paper[2] that criticised the EW indicator on technical grounds, but also because of what it called problems with ‘policy coherence’ – in other words, the EW indicators cut directly across the ILO’s own, arguably more legitimate policies. The ILO argued that the view that “reducing protection to a minimum and maximizing flexibility is always the best option” was badly mistaken and that the EW indicator was “a poor indicator of the investment climate and labour market performance”.
    The paper sparked a series of exchanges between the ILO and the Bank that culminated in the establishment of a consultative group (CG) to serve as a ‘source of advice’ on revising the EW indicator. Around the same time – early in 2009 – pressure from the global unions led to the Bank agreeing that at least until the group reported, the EW indicator would not be included in the calculation of the overall DB ranking nor used as a basis for policy advice. The consultative group included senior Bank and ILO officials together with global union, employer and OECD representatives. There were also three independent members, a labour law expert, a social entrepreneur and a public servant.
    The ILO’s decision to participate in the CG will not have been taken lightly – even though in principle all of the members were acting in their personal capacity. Not participating would have meant missing a rare opportunity to have an impact on an influential indicator, but participating was arguably a gamble. The risk was that the group would come up with conclusions that did not adequately respond to the ILO’s criticisms but that the Bank would put its recommendations into effect anyway. If the ILO wanted to object, it would be forced to get into a public argument with the Bank about the adequacy of an indicator in whose revision two of its senior officials had just participated.
    Now that the CG has produced its final report[3] it is not obvious that the gamble paid off. The solution proposed to the principal problem – the fact that lower standards of labour protection receive a higher score – is hardly adequate. Three elements of the indicator – minimum weekly rest periods, paid holiday entitlement and the level and means of setting the minimum wage – have been changed from being in a simple inverse relationship with the indicator score (the lower the better) to a kind of ‘banding’ system in which the policy target is to have these protections fall within a lower and an upper limit. Not enough holiday and a country will not receive the maximum possible score, but the same is true for what is deemed to be too much holiday. A similar change is proposed for maximum weekly working time. The ranking on the minimum wage indicator for countries that have one remains inversely related to the ratio of the wage to the average value added per worker, but countries that have no minimum wage no longer receive the best possible score. This is reserved for systems in which the minimum wage is set by collective bargaining – as long as it applies to less than half the manufacturing sector, or does not apply to firms not party to it – and systems in which trainees or apprentices are excluded.
    The report of the CG makes it clear that it was split on whether the changes to the EW indicator are adequate. ‘One view’ was that the modifications dealt with the substantial problems and that the EW indicator should be reintegrated into the overall DB indicators. A ‘second view’, on the other hand, “noted that EWI did not adequately reflect worker protections even after the amendments made, and that the Doing Business report should reflect labour regulations holistically, or not at all”. This second view also argued that if the EW indicator was to continue to be used, there should also be a separate, quantitative ‘worker protection measures’ indicator published alongside the DB indicators. However, although this idea was discussed by the CG[4], it failed to agree a recommendation on the issue.
    The ILO now has to decide whether to carry on working with the Bank. If it does not, the Bank will probably put the modified indicator back into use, and may also go back to basing policy advice on the EW indicator. Certainly the ILO doesn’t have to endorse the revised indicator, but if it wants to avoid a public argument, the best it can do is maintain a studied neutrality on the issue. The fact remains, though, that the DB indicator is still a barrier to the improvement of working conditions and quietly accepting its existence would be cowardly at best. The obvious question is why the ILO does not try to take the collaboration implied in the consultative group one step further and to work to persuade the Bank that there ought indeed to be an official, jointly developed worker protection indicator. The stakes are not so high here since the ILO clearly has moral and technical authority on the issue that the Bank cannot claim.
    So why the deafening silence from the ILO? There has been no comment on the report of the CG, still less any indication of whether the ILO wants to carry on working with the Bank. In fact, the problem for the ILO is less with the outside world than its own constituents. The possibility of producing a ‘decent work’ indicator has been floating around for more than 10 years. That such an indicator has not (yet) been developed is partly a reflection of the traditional reluctance of employers and governments to allow themselves to be ranked, and partly a reflection of disagreement about whether such an indicator should be focused on outcome measures – the extent to which decent work is a reality for workers on the ground – or regulation – the extent to which the formal rules conform with ILO policies. These are difficult questions, but making a determined effort to resolve them is likely to be less costly for the ILO than allowing the Bank to continue to use and promote its EW indicator.
    [1] Disclosure: the author is married to an ILO official. The official in question has no input into ILO policy-making in the areas under discussion in this article.
    [2] http://www.ilo.org/wcmsp5/groups/public/---ed_norm/---relconf/documents/meetingdocument/wcms_085125.pdf

    [3] http://www.doingbusiness.org/methodology/~/media/FPDKM/Doing%0Business/Documents/Methodology/EWI/Final-EWICG-April-2011.doc
    [4] http://www.doingbusiness.org/methodology/~/media/FPDKM/Doing%20Business/Documents/Methodology/EWI/Annexes-EWICG-April-2011.doc


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

    1 August 2011

    Is the Eurozone doomed to fail?

    Jacques Sapir
    The eurozone is currently undergoing a crisis of historic importance, which results in the accumulation of sovereign debt in eurozone countries and reveals the internal defects of the eurozone.
    Since the beginning of 2010, the crisis in several EU countries has resulted in a faster growth of interest rates compared to those of Germany. This is known as interest rate “spreads” and has challenged the single real accomplishment of the eurozone: the relative convergence between countries on the debt market that began in 2000. This has been fuelled by the huge growth of sovereign debts in the wake of the 2007 crisis. But even this development could be linked to the euro as prior to the crisis it allowed a downturn of interest rates, which then facilitated the build-up of the large debt, both private and public, in most eurozone countries.
    Table 1: Situation at the beginning of the crisis (December 31 2009) 
    Source: C Lapavitsas et alii, “The Eurozone Between Austerity and Default”, RMF-Research on Money and Finance, occasional report, September 2010, available at www.researchonmoneyandfinance.org
    When the difference between the interest rates of one country and those of Germany exceeded 300 points (the Irish debt reached its peak at 399 points[1]), it was clear that the eurozone had entered troubled waters. The homogenization process had been suspended, and the rates in Greece remained very high. The growth of the rate spread was actually caused by the deterioration of the debt situation in Greece followed by Spain, Portugal and Ireland[2].
    Beyond the “at risk” countries, we can see the process of interest rates divergence going one step further. For example, Italy resumed issuing futures on government bonds in September 2009 (a practice that was suspended in 1999 when the euro was introduced). This shows operators are seeking to prevent new problems in this segment of the government securities market[3]. The fact that Italy reverted to this type of emission indicates that the euro is fast losing its protective role. The same can be said about worries now openly voiced on Belgium.
    Yet, advocates of the euro stressed this role during the crisis. They argued that the euro helped member countries to avoid the consequences of their currencies fluctuating violently against one another. Nevertheless, these fluctuations have been possible because of the long standing decision to move to complete convertibility (capital-account convertibility). Note also that the speculation on exchange rates has been replaced by speculation on interest rates. One wonders what would have been the outcome had capital controls been introduced. But capital controls have been strictly prohibited under the provision of Article 63 of the Lisbon Treaty.
    However, it is important to note that the introduction of capital controls is recommended by the IMF[4] to fight speculation. They could have helped avoid currency swings while giving eurozone countries the possibility to adapt their exchange rate to the massive divergence in the real cost of labour experienced in Europe since 2002.
    This openness has made countries totally dependent on the eurozone. The adoption of a single exchange rate and the overvaluation that has characterised the euro since 2003 has also increased the economic pressure on certain members.
    The rigid pressure of the single currency “noose” forces some eurozone countries to resort to ongoing growth of their budget deficits[5], which raises questions on the competitive deflationary policy of the Stability and Growth Pact within the Treaty of Maastricht (1992) and might have serious recessionary consequences for Europe. We cannot exclude the possibility that some countries may leave the eurozone[6]. Even the withdrawal of one country would cause a strong speculative movement, which would make the participation of others ever more expensive and eventually impossible.
    When the euro crisis broke in April 2010[7], it had two dimensions: momentary dimension (the debt crisis in Greece, Portugal, Spain and Italy) and a more important structural dimension. The crisis was triggered by the growing lack of confidence among financial markets that countries with large debts were going to be able to repay them. The crisis began in Greece and then attacked Ireland, Portugal and Spain. It is now obvious that Italy will be next, as it was already the target of speculative attacks in July.
    The plan adopted on May 9–10 2010 was supposed to put an end to the crisis. However, the market response shows that the lack of confidence has increased. The plan has been revamped several times, but each modification has only served to push back problems for one or two months. Market speculation reveals the following:
    (1) This plan does not announce a clear commitment by donor countries as a large part of the funds are just a credit guarantee.
    (2) The total sum is not enough to cover the estimated financial needs of 900–1000 billion euro for the three countries already targeted by the plan (Greece, Ireland, and Portugal). This amount is clearly short of what would be needed if Spain were to be rescued too. The default rate on bank credit has already reached 6.2% of the credit amount. With the planned end of the unemployment benefit package by December 2011, the default rate is likely to surge even higher, maybe to 10%.
    (3) Some countries, such as Germany, are not ready to commit to obligations.
    This plan has clearly been designed as an attempt to gain time. The only relevant action has been the ECB’s decision to buy out government and private debt, but even this is not completely satisfactory: only monetization of some part of the debt could give real breathing space. In early May Greece asked for more money, and Portugal and Ireland are asking for a renegotiation of their interest rates.
    What options are left?
    Fiscal austerity plans are pushing some countries to their limits. The fiscal adjustment needed to stabilize the sovereign debt is too great to be swallowed by different countries. What is more, the deflationary spill over effect has not been computed nor introduced in various forecasts presented by governments or independent research centres.
    The cumulative effect of these different fiscal adjustment plans is likely to plunge the eurozone into a previously unknown depression.
    The only possible solution would be a default on the sovereign debt for some countries (Greece and Portugal and maybe Ireland). But the economic competitiveness of these countries cannot be rebuilt without a strong devaluation. On the other hand, the Russian experience of 1998 is showing that long-term benefits can outweigh short-term pain. 
    Table 2: Fiscal adjustment needed to keep the sovereign debt at its 2010 level
    Source: Author’s computations and CEMI-EHESS database
    However, such devaluation could not be obtained within the eurozone: these countries are then bound to leave it, maybe momentarily.
    Problems will not stop with Greece and Portugal. While some of the eurozone countries would not benefit from a possible devaluation (Germany, Netherlands, Finland), others would, such as Ireland, France or Italy. Large budget transfers have not backed the single currency system adopted for the euro. Germany continues strongly opposing the very principle of turning the single currency into a transfer zone. But, as the single currency has prevented adjustments of the exchange rate, this left fiscal adjustment as the only way open. Fiscal adjustments will not be sustainable.
    The coming crisis could mean the beginning of the end for the euro.

    [1] G.J. Neuger and S Kennedy (2009), “Crisis Spawns Drive to Fixe the Euro with More Rules, ties (Update 1)”, Bloomberg, Feb 17
    [2] E. Ross Thomas (2009), “Spain Downgraded by S&P as Slump swell Budget Gap”, Bloomberg, Jan 19
    [3] A. Worrachate (2009), “Italian Bond Futures offer Proxy to Hedge Greek, Irish Debt”, Bloomberg, Sep 11
    [4] J. Ostry et al. (2010), Capital Inflows: The Role of Controls, International Monetary Fund Staff Position Note, Washington D.C.: IMF
    [5] On the depressive effects of the euro, see J. Bibow (2007), “Global Imbalances, Bretton Woods II and Euroland’s Role in All This” in J. Bibow and A. Terzi (eds.), Euroland and the World Economy: Global Player or Global Drag?, New York: Palgrave Macmillan
    [6] S. Keendy and T.R. Keebe (2010), “Feldstein says Greece will Default and Portugal May Be Next”, Business Week, June 30
    [7] A. Moses and D.S. Harrington (2010), “Bank Swaps, Libor Show Doubt on Euro Bailout”, Bloomberg, May 11

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    Jacques Sapir is Professor of economics and Director of the CEMI Research Centre at EHESS (Paris), which focuses on Russia and CIS countries and on international development. He is the author of several books on the Russian economy, international finance and economic theory, notably (2000) “Les trous noirs de la science économique. Essai sur l'impossibilité de penser le temps et l'argent”, Paris: Albin Michel and (2011) “La Démondialisation”, Paris: Le Seuil.

    Further references
    P. Dobson (2010), “European Yield Spreads Widen on Concern Debt Crisis Deepening”, Business Week, June 30
    F. Cachia (2008), Les effets de l’appréciation de l’Euro sur l’économie française, Note de Synthèse de l’INSEE, Paris: INSEE

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