Brazil, India and South Africa: Low Spill-Over, High Resilience of Financial Sector

Martina Metzger

The course of the global financial crisis displayed widespread flaws in regulation and supervisory failure. The financial sectors of advanced countries piled up systemic risk comprising almost all financial institutions. In addition, high cross-border exposure between the financial institutions resulted in a core meltdown when the bubble burst in 2008. The financial sectors of many advanced countries risked collapse, meaning unprecedented monetary and fiscal intervention by policy authorities was necessary to stabilise the situation.

In contrast, many emerging market economies weathered the financial tsunami not only better than expected in terms of financial and macroeconomic stability given their previous performances during crises, but also better than G7 countries. Against this backdrop, we begin to question which factors account for the low impact of the global financial crisis and which features might explain the strong resilience of emerging markets’ financial sectors. The countries under consideration here are Brazil, India and South Africa. Apart from being heavy weights in their respective regions and continents, the financial sectors of these three countries showed a remarkable resilience to the global financial turmoil.

LOW SPILL-OVER TO BRAZIL, INDIA AND SOUTH AFRICA
With the default of Lehman Brothers, the US subprime crisis transformed into a global financial crisis, also affecting the financial markets of emerging market economies. Apart from a short period of stress in the second half of 2008 resulting in steep stock market corrections and a strong volatility of prices, in particular exchange rates, financial sectors in Brazil, India and South Africa proved to be robust.

First round effects or direct impacts of the global financial crisis on emerging market economies in general and on Brazil, India and South Africa in particular were low, as exposure of their domestic financial institutions to toxic assets had been small. There was only minimal investment in complex instruments and marginal exposure to risky financial products – marginal to such an extent that it was not necessary for regulatory authorities to fall back on counter-actions.

In addition, the share of foreign banks with majority ownership in the domestic financial system is negligible in India and South Africa, while in Brazil it is still low compared with more affected emerging market economies or transition countries; hence direct spill-over from banking headquarters in advanced countries to host countries was limited.

However, there had been considerable second-round effects with the financial sector and more importantly the trade sector as main transmission channels. The real economy had to bear the major burden: in the wake of declining exports, industrial production, investment and employment fell and real growth was depressed. All three countries slipped into a recession with a sharp slump of real growth in 2009.

POLICY RESPONSES
Despite some differences in the magnitude of the spill-over and severity of the transmission channels, policy responses by fiscal and monetary authorities of the three countries under consideration were quite similar. First, central banks increased liquidity by cutting policy rates; in a second step central banks reduced reserve requirements and compulsory deposits to provide additional liquidity to credit institutions; a third measure covered companies and banks which were affected by the restricted access to international and domestic finance, in particular trade finance. All in all, there was a sizeable monetary accommodation to cushion liquidity shortages and credit crunches in order to stabilise the domestic financial sector. Additional to the monetary policy measures fiscal policy initiated a package of measures with discretionary counter-cyclical instruments to dampen negative impacts of the global financial crisis on domestic growth and employment.

The fiscal stimulus packages focused on stabilising the level of domestic demand. Governments provided finance to mitigate the most severe impacts on vulnerable groups, in particular poor and low-income households as well as small-and-medium-sized enterprises. On the other hand, the governments of India and South Africa extended pre-crisis infrastructure programmes and initiated new ones in order to strengthen their economies’ potential to grow and at best to increase the economic inclusiveness.

In contrast to previous times of crisis in the 1980s and 1990s, this time central banks and governments of the three countries disposed over adequate policy space to use multiple instruments, including non-conventional monetary measures and counter-cyclical fiscal measures.

FEATURES OF FINANCIAL SECTOR RESILIENCE
Conventional wisdom suggests that the capacity to manage a crisis mainly depends on what policy has realised during good times, e.g. the creation of sound financial institutions, the improvement of regulatory and institutional capacities, the deepening and broadening of domestic financial markets and the design of an adequate monetary and fiscal framework which allows the involved institutions to work out a consistent response to a crisis in a coordinated way. Even so, the low impact that the financial meltdown in advanced countries had on the financial sectors of Brazil, India and South Africa raises the question of whether and to what extent specific characteristics and features of their financial market architecture and regulatory approaches can explain such high resilience.

There are four outstanding factors which might claim to have insulated the financial sector of these three countries from the worst woes of the global financial crisis. First, one key problem of past crises has been high foreign debt and associated currency and maturity mismatches; balance sheet effects were a major factor which exposed developing countries and emerging market economies most to hazard with regards to macroeconomic stability and development. Accordingly, Brazil, India and South Africa reduced their outstanding foreign debt exposure over time and from the turn of the millennium also succeeded in increasing their foreign exchange reserves.

Second, the macro-prudential approach which is applied by the central banks of Brazil, India and South Africa is another distinguishing mark of their financial architecture. As experience has shown that financial sector-related crises are an important feature of market economies, their central bank policy takes into account financial stability considerations – a task which many central banks in advanced countries rejected due to a perceived conflict of interest with the objective of price stability.

Third, another aspect in the financial market regulation shared by the three countries is the rule-based rather than principle-based approach. A rule-based approach with universal standards entails less forbearance and enables less regulatory arbitrage; supervisors’ decisions are based on transparent and reliable indicators, e.g. equity capital, non-performing loans or credit ratios. Hence, regulation based on a rule-based approach is easier to impose and decisions can be taken quicker which is backing pre-emptive surveillance.

Fourth, Brazil, India and South Africa exhibit country-specific features in a narrow sense, which contributed to the resilience of their financial systems. With regard to Brazil, for instance, it is worth mentioning that the supervision covers all financial institutions, including hedge funds and OTC derivative markets; another particularity is the so-called Public Hearing Process for regulatory proposals concerning securities. India, on the other hand, developed a special framework for non-banking financial companies (NBFCs) with an explicit treatment and deliberate prudential norms of those entities. Furthermore, banks have to make provisions for a counter-cyclical Investment Fluctuation Reserve, which bears some resemblance to the currently debated liquidity buffers by the Financial Stability Board. In South Africa the regulation on collective investment schemes, including hedge funds, comprises a ban on leverage and short selling strategies. With the National Credit Act, South Africa also developed a broad spectrum of instruments to protect consumer rights. In case of complaints by consumers and disputes with credit providers, including banks, the National Consumer Tribunal enforces a hearing process at which end it can completely suspend the credit agreement to the disadvantage of the credit provider when proved reckless.

Taking these features into account it comes as no surprise that banks in the three countries are on average sound, and banking behaviour has adapted to legal restrictions and norms; they even hold reserves and liquidity in excess of regulatory requirements, something considered inefficient and non-innovative before the crisis. More importantly, at the time of writing, banks in Brazil, India and South Africa had not been infected by the notorious originate-and-distribute virus of granting loans, which was a major driver of the credit and securitisation bubble which finally resulted in the global financial crisis; instead, they still execute the original banking model with a buy-and-hold strategy based on thorough credit assessment and borrower supervision.

In sum, the combination of a reduction of foreign debt exposure, a macro-prudential approach in supervision and a rule-based approach in regulation, complemented by a variety of country-specific rules applied by these countries even before the crisis, together with non-orthodox monetary and fiscal policies during the crisis can be identified as the main features of economic success.

The high resilience of the financial sectors of Brazil, India and South Africa is a result of continuously strengthening financial sector institutions and adjusting the regulatory framework to the respective country’s needs and vulnerabilities. This is an ongoing process which started two decades ago. Crisis heritage has proven a major motivation for macroeconomic and financial sector improvements while at the same time Brazil, India and South Africa constructively turned the drastic experience into a cautious and thorough handling of financial sector-related issues. In the hostile environment of a global financial crisis, the specific art of supervision performed by Brazil, India and South Africa was put to test – and impressively passed it.

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Martina Metzger is the executive director of the Berlin Institute of Financial Market Research (BIF). Before joining BIF, she taught macroeconomics at several universities and worked with UNCTAD. Her areas of interest include financial market development in emerging market economies, macroeconomic stabilization and sustainable development.

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FURTHER READING:
Martina Metzger and Günther Taube (2010), ‘The Rise of Emerging Markets’ Financial Market Architecture: Constituting New Roles in the Global Financial Governance’, BIF Working Papers on Financial Markets

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Waiting for the “Follow-Up”? – “Guiding Principles for the Implementation of the United Nations ‘Protect, Respect and Remedy’ Framework”[1]

Sofia Massoud

Florian Rödl

Globalisation, business and human rights
Globalisation has turned transnational corporations into decisive and powerful global actors. Correspondingly, the legal and actual power of states to regulate corporate behaviour has declined. As a result, transnational corporations can profit from a general race to the bottom in social and labour standards. As is now widely perceived, the race does not stop short of international human rights guarantees, including ILO international labour standards.

The UN Mandate on “Business & Human Rights”
On 24 March 2011, the Special Representative of the UN Secretary General (SRSG), Prof John Ruggie, issued a report on “Guiding Principles on Business and Human Rights” (Principles). This report is the culmination of the SRSG’s work on the subject of “Business and Human Rights” for several years. His general task was to clarify the roles and responsibilities of states and corporations in the business and human rights sphere, and then to map the challenges and to recommend effective means to address them.

The project got started in 2005 with a mandate adopted by the then UN Commission on Human Rights (which was replaced by the Human Rights Council (HRC) in 2006, a subsidiary organ of the UN General Assembly). After three years of work, the SRSG delivered a report, usually referred to as “Protect, Respect, and Remedy” Framework. In 2008 the report was “welcomed” unanimously by the HRC.

The Principles are now meant to outline how governments and business “should implement” the Framework “in order to better manage business and human rights challenges” .The mandate has raised considerable attention. The SRSG was able to involve many stakeholders, such as governmental bodies, business enterprises and associations, trade unions, legal experts, law firms, human rights activists and international organisations[2], and to focus their attention on the outcome of Ruggie’s work.

The Principles were presented to the HRC on 30 May 2011. It was no surprise that the Principles received great support by most Member States of the HRC. Yet, some criticism was put forward by NGOs and few Member States. On 16 June 2011 the HRC endorsed the Principles. However, it is all but clear what will come next. The SRSG has proposed some “Follow-up” measures like establishing a Voluntary Fund for “capacity building”, a practise of “annual stocktaking” and a mandate for an expert group which might also think about international legal instruments – all this remains rather vague in substance and in process.

Background
For a better understanding of the mandate, some remarks on its background seem helpful. The mandate of the SRSG was preceded by a draft project, “Norms on Responsibilities of Transnational Corporations and Other Business Enterprises with Regard to Human Rights” (draft Norms), prepared in 2003 by the Working Group on Transnational Corporations of the Sub-Commission on the Promotion and Protection of Human Rights (a subsidiary body of the Commission on Human Rights). The project was buried by the Commission, partially due to fears spread in industrialised countries that the draft Norms might lead to obligations for transnational corporations binding under public international law.

As compensation, the Commission on Human Rights requested the Secretary General in 2004 to appoint a SRSG with the mandate to provide the Commission with “views and recommendations” on “the issue of human rights and transnational corporations and other business enterprises”. Against this backdrop, it is clear that the whole process was neither meant to end up with legally binding acts on the subject nor with a non-binding resolution by the General Assembly.

The Principles in substance
What could one then have expected from the SRSG’s work? It is suggested that:

• The SRSG could have taken progressive views in public international law with regard to state obligations to act against corporate human rights violations;
• He could have lobbied for new international legal instruments clarifying corporate accountability;
• He could have provided a clear political reference point for measures to be taken by business to fulfil their “responsibility to respect” human rights.

Assessed against these standards, it is doubtful whether the recommendations promoted in the Principles are appropriate and sufficient in the context of international law in the 21st century and the current global economic system. In general the recommendations put forward are too cautious and imprecise. The Principles remain weak as they retreat to a position of mere encouragement. This is unfortunate as a core issue in the debate on human rights and business is the lack of clear obligations of both States and corporations and (where obligations exist) a lack of effective enforcement. On the whole, the Principles do not sufficiently address how to hold corporations accountable.

(1) The State duty to protect
Even though the Principles stress that “States must protect against human rights abuse within their territory and/or jurisdiction” (Principle 1) they fail to put forward a more progressive attitude towards State obligations.

While the Principles are supposed to be grounded in “recognition of States’ existing obligations to respect, protect and fulfil human rights and fundamental freedoms” (General principles), promising approaches concerning extraterritorial jurisdiction and transnational litigation are, in great parts, not fully developed. E.g. home State legislation regulating the parent corporation to respect and protect human rights within the group or even the supply chain could have been a starting point. The same is true for mandatory corporate reporting obligations.

The obstacles faced by host States are also not adequately addressed: The Principles do not deal with the causes of State’s incapacity nor do they provide suggestions how to effectively overcome this incapacity and how to empower the host State to govern in the public interest.

(2) The corporate responsibility to respect
The Principles avoid suggesting any binding corporate human rights obligations, e.g. to require corporations to ensure the freedom of association and the protection of the right to organise, although there is an emerging trend in international law to assign direct obligations to corporations. This is probably due to the rejection of the draft Norms in 2004. The Principles also do not recommend the incorporation of human rights into international trade and investment agreements. Being limited to corporate responsibility the Principles do not significantly improve corporate accountability. Instead, the Principles reiterate that corporate responsibility to respect human rights is distinct from issues of legal liability and enforcement (Principle 12 commentary). The Principles stress that corporations have a responsibility to undertake due diligence. However, even the low standard to undertake “due diligence” (i.e. a standard of care to be used throughout corporate activities) is devoid of content. Due to the view that “one size does not fit all” (Introduction to the Principles) the Principles remain silent on how to implement the process of due diligence, e.g. neither do they characterize or specify these responsibilities nor do they insist on external monitoring.

(3) Access to remedy
The Principles do not put forward effective recommendations on adequate sanctioning and reparation. Even though States must take appropriate steps to ensure access to effective remedy through judicial, administrative, legislative or other appropriate means (Principle 25), it remains unanswered how to make States take steps in this direction as well as what “appropriate steps“ and “effective remedies” are meant to be. Host States will face difficulties such as the incapacity to regulate or the necessity to attract investment, and therefore they are less willing to provide access to remedy. Even though the Principles point to a number of “legal, practical and other relevant barriers” (Principle 26), the suggestions on how to overcome these barriers are missing.

Conclusions
It is submitted that the SRSG failed in all three aspects outlined above: The Principles lack progressive views in public international law concerning state obligations, they avoid suggesting new legal instruments setting up corporate accountability, and they do not provide for clear blueprints for corporate behaviour with regard to human rights, which could have been used by trade unions and human rights activists.

It remains unclear why actors who have been passive so far should now change their behaviour. The SRSG avoids opening a general debate on the drawbacks of the global capitalist economy even though it is a crucial obstacle to human rights implementation and enforcement. In this way the Principles fail to provide a framework for avoiding a race to the bottom and creating conditions to strengthen international labour standards. While corporate interests are still pushed through by legally binding instruments provided by regimes like GATT, regional FTAs or BITs, the enforcement of social and labour standards is subject to the states’ and corporate goodwill.

Like other attempts such as the UN Global Compact and the inclusion of human rights standards in international trade law, the Principles represent another failure to meet the global pressure in social and labour standards. The only difference is that the SRSG has succeeded in engaging a number of stakeholders with a politics of persuasion which might minimise chances for progressive approaches to develop. All the more: Debates about how to improve the implementation of ILO labour standards remain essential[3].

[1] Available at http://www.business-humanrights.org/SpecialRepPortal/Home.
[2] As such the Organisation for Economic Co-operation and Development (OCED), for instance, updated their (non-binding) OECD Guidelines for Multinational Enterprises, introducing a Human Rights chapter, see Chapter IV of the OECD Guidelines for Multinational Enterprises.
[3] For an innovative approach, see Frank Hoffer, International Labour Standards: an old instrument revisited, Global Labour Column.

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Florian Rödl is director of the research group on ‘Changes in Transnational Labour and Economic Law’ at Goethe University in Frankfurt am Main, Germany. His fields of expertise include post-national constitutional theory with a special focus on labour rights.
Sofia Massoud is a PhD candidate and junior researcher in the same research group. She works on the influence of economic actors on society, in particular the violation of human rights by transnational corporate groups.

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Bringing Politics Back In

Nicolas Pons-Vignon

Many progressive economists and trade unionists have sought to engage in dialogue and negotiations with capital and governments during the global financial crisis, hoping they could achieve the adoption of reasonable and balanced policies. They may have done so because such an approach used to work in the past, especially in social-democratic contexts, or because, in the early days of the crisis, they were listened to as respectfully as during the high time of the “Keynesian compromise” in economics. They may be convinced that governments should “see” what is happening and want to adopt more inclusive policies. But as the General Secretary of the International Trade Union Confederation (ITUC) Sharan Burrow puts it in a Global Labour Column, “If during the crisis workers’ organizations could have anticipated that a new era of dialogue had begun, the moment has clearly passed”. Governments are indeed not seeing anything; in fact, the way in which they have responded to the crisis indicates that relying on strong arguments is insufficient. Are neoliberal policies, and the huge increases in inequality they have caused, responsible for the crisis? Well, the policies adopted in the wake of the crisis amount to more of the same – from the absence of any meaningful regulation (or rather, curtailment) of financial “innovation”, to the public bailing out of banks by states who then in turn reduce their spending, thus passing the costs of the crisis on to ordinary workers and unemployed people. Trade unions have been using their organizational and institutional power to resist relentless attacks on social and labour rights. Nevertheless, after decades of retreat, the financial crisis is rapidly weakening further their traditional pillars of power and influence. What is to be done?

Labour faces the urgent need to overcome the dilemma that it cannot let its influence slip further, while a more oppositional strategy carries the risk of further marginalization if it fails. This may be what will happen in France, even if, despite its failure to thwart the pension reform, the strength of the movement which took place in autumn 2010 breeds optimism. Trade unions have recognized the need to fight precarious employment, to build new alliances (for instance to defend the rights of domestic workers), to make efforts to organize workers, and to regain democratic control over markets. But achieving a meaningful reduction in inequality (and in the power of finance) will require both the formulation of convincing policy alternatives and a determination to fight for them. This requires more than good ideas and determined cadres, however, it demands imagination, will and the confidence of people in the possibility of change.

While it is important to recognise the positive dimensions of recent mobilizations, it is also apparent that on balance they lack political inspiration and momentum. There are four areas where the fight against neoliberalism must be waged in order to be successful – and to allow a coherent project to emerge. These four areas are, in increasing order of importance, academia, ideology, policy and politics.

On the academic front, the dominance of neoclassical economics ought to be contested vigorously – at least as vigorously as it has contested the right to exist of any so-called “heterodoxy” in its heart while “colonizing” other social sciences (Fine and Milonakis, 2009). It can hardly be doubted that today’s policy-makers’ inability to take decisive action to leverage state power in order to protect workers is linked to the hegemonic neoclassical discourse of the last decades. If one sees labour as a mere cost and unemployment as voluntary, it would be hard to believe that higher wages would improve a derelict situation. The struggle for plurality in economics will first have to be national – and initiatives such as the newly formed French association of political economy (AFEP, see www.assoeconomiepolitique.org) are to be commended – but will also have to draw its strength from international alliances. Indeed, only a concerted international initiative will succeed in affecting the self-reproducing hierarchy of economics journals – none of which, in most classifications, include a single non-exclusively neoclassical review in the highest category!

On the ideological front, the time has come to contest the hegemony of the market. Simplistic notions such as “the private sector is more efficient” must be boldly challenged in the public debate, along with calls for the systematic inclusion of the private sector in public investment, as in public-private partnerships, or for the commercialization of the operation of state functions, whether utilities or other areas such as healthcare. The arguments used to support such claims are often grounded in lies (as in the case for pension reform in France), or in collections of one-sided anecdotes, such as the article on industrial policy published by The Economist in August 2010[1] which lists the failures of publically supported companies – as if all private companies were successful! Biased use of words is also at the heart of neoliberal ideology, as for example in the case of “liberalization”: it is not “liberty” which is at stake here, but increased involvement of (and profits for) private capital. At the heart of this agenda lie institutions such as the European Commission, which is persistently pushing for the “opening to competition” of sometimes very well-run public entities. In countries such as the United Kingdom, and in many of the transition countries subjected to “shock therapy”, the drawbacks of privatization and liberalization are crystal-clear. As for the workers and unions, the defence of their rights (except when it is narrowly defined) should make them proud rather than ashamed. I remember seeing a Trades Union Congress (TUC) leader almost apologizing to a BBC journalist for contesting the massive public sector cuts the Government was proposing. The journalist was scornfully saying that “Irish workers are proving much more responsible (sic) and willing to share the costs”. Workers’ rights are not at odds with economic growth, or with a country’s national interests, despite Fiat CEO Sergio Marchionne’s relentless claims to the contrary in Italy. At the heart of the ideological fight back, a decisive policy to curb the influence of corporate-funded lobbies is necessary.

On the policy front, the one where most Global Labour Column discussions have focused, it is time to call for bold policies which will thoroughly break with the financial and privatizing frenzy of the last 30 years. Macroeconomic policies should be refocused to support employment creation, to play a counter-cyclical role and to support real stability – an objective hardly compatible, for many countries, with full-blown liberalization. Microeconomic policies, in particular industrial and competition policies, should be rehabilitated, as they are the key instrument that governments can use to stimulate and orient growth. In developing countries in particular, the possibility of using trade policy to support development objectives is absolutely essential. In a world where climate change is becoming an ever-more looming threat, strong policies aimed at processing minerals (creating local employment and reducing transport costs), developing alternative energy sources and ensuring minimal consumption in industry, transport networks and private and commercial dwellings would be hardly possible without state intervention. Competition policies aimed at regulating the private sector are, in a world of increasing corporate power, one of the tools most necessary for countering the influence of companies on consumers and workers alike. Likewise, the governance of corporations cannot be conceived narrowly as the accountability of managers to shareholders; workers and their representatives must be at the heart of our understanding of corporate governance.

But none of the above fields of struggle is as important as the political one – which is itself highly dependent on the previous three. The most impressive achievement of neoliberalism has undoubtedly been its dramatic weakening of the political power of workers, unions and the parties aligned with them. In many cases, the politics of the latter have been dramatically altered, with many “labour” parties now having programmes that could hardly be distinguished from their right-wing counterparts. Unions have lost many workers, especially outside the public sector, and the growing “precariat” described by Guy Standing (2011) is often either disillusioned with unions or afraid to join them because of explicit or implicit threats by employers. Restoring the power of workers and unions, starting with the workplace, is more than ever a priority: a strong and mobilized base is the necessary blood of any successful political movement. It is very encouraging to see strikes in the public (for instance in South Africa) as well as in the private sector that are increasingly articulating broader political demands. In the United States, the recent movement against the curtailment of public sector workers’ collective bargaining rights in Wisconsin (and the threat of similar campaigns in other US states) may signal both the political awakening of unions and the end of “Reagan’s spell”, under which many working- and middle-class Americans supported policies that harmed them[2]. Linking workplace and other progressive movements in order to promote a new political project, however, will require overcoming the “third way” impasse which so many parties have embraced in order to secure electoral success.

The Global Labour Column has established itself as a forum of debate on the nature of the crisis and on the policies which should be adopted to defend the interests of workers worldwide. In so doing, it serves as an intellectual and policy toolbox which does not shy away from asking tough questions, such as: Why did a policy change not happen despite the failure of the current economic regime? How should unions change, and what must they change in order to weigh in more strongly on the policy choices that confront the working class? After issuing a (largely unheeded) call not to “waste the crisis” in the first Global Labour Column anthology, the second yearbook, There Is An Alternative: Economic Policies and Labour Strategies Beyond the Mainstream (Geneva: ILO, 2011), confronts the policies that have been implemented in the wake of this great depression – as well the resistance they have met. As one of the continents hit hardest by the crisis, Europe is extensively discussed, with an unambiguous call to reinvent it to avoid its collapse. The neoliberal Europe, focused on defending the interests of large corporations, must give way to a progressive entity that seeks to reduce inequality between and within its Member States. The impact of neoliberal globalization on development policy is also discussed, together with possible alternatives. The increased openness and fiscal “discipline” imposed on developing countries following the debt crisis of the 1980s contrasts with the readiness to extend new borrowing facilities to the banks and financial operators that brought the global economy to the brink of collapse[3]. The massive drop in demand by rich countries has shown the crucial importance of building domestic demand (isn’t development about this?) rather than focusing solely on cutting labour and other costs in the hope of being competitive in export markets. The book also addresses the central issue of inequality, which was at the root of the current crisis and serves to reveal the class interests which have been the engine of neoliberalism. Finally, the defence of workers’ rights and wages is shown to be absolutely necessary to ensure sustainable growth in the world, with ILO Director-General Juan Somavia calling for “decent work for all everywhere”. It is an ambitious programme, as it will imply reversing deep trends such as the exclusion of many workers from wage negotiations or growing casualization and wage inequality. But such ambition is necessary if we want to believe that there is an alternative; it will require a broad and vigorous mobilization to succeed. It is high time to bring politics back in.

[1] ”The global revival of industrial policy. Picking winners, saving losers”, The Economist, 5 August 2010, http://www.economist.com/node/16741043. Interestingly, the online debate on The Economist’s website yielded an  overwhelmingly “pro” industrial policy result, with 72 per cent of voters disagreeing with the motion that “industrial policy always fails”.
[2] On Wisconsin, see C. Feingold, ”The march to protect workers’ rights and the  middle class”, Global Labour Column, 28 March 2011, as well as R. Fantasia, ”Could Wisconsin break Reagan’s spell?”, Le Monde diplomatique, April 2011.
[3] On financialization, see as Frédéric Lordon’s brilliant essay (in French) on the financial crisis (2008), as well as the publications of the London-based ‘Research on Money and Finance’ group – www.researchonmoneyandfinance.org/.

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Nicolas Pons-Vignon is the editor of the Global Labour Column and a Senior Research Fellow with the Corporate Strategy and Industrial Development (CSID) research programme, University of the Witwatersrand, South Africa. He is also the founder and director of the African Programme for Rethinking Development Economics (APORDE).

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References:

Fine, B.; Milonakis, D. (2009), From Economics Imperialism to Freakonomics: The Shifting Boundaries Between Economics and Other Social Sciences, London and New York: Routledge.

Lordon, F. (2008), Jusqu'à quand ? Pour en finir avec les crises financières, Paris: Raisons d’agir.

Standing, G. (2011), The Precariat: The New Dangerous Class, London and New York: Bloomsbury Academic.

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Firing at Will – the Employers’ Response to the Crisis

Klaus Lörcher

The ILO convened a tripartite expert meeting in April 2011 to discuss obstacles to the ratification of Convention No. 158 on termination of employment. This is the most important international treaty on basic principles for the protection of workers against unjustified dismissal and on basic rights in the case of the termination of employment. At the end of the meeting, the employers suggested a simple but totally unacceptable and even unpredictable ‘solution’: abrogating the Convention. 

This incredible demand has to be put into context. It should in particular be clarified whether it reflects the general opinion of employers. An analysis shows that they display a remarkable inconsistency in their approach to this Convention. At the time of adoption, in 1982, the employers’ spokesperson had thrown his weight behind the Convention: “[S]ome employers will abstain or vote against the adoption of the instruments, in particular of the Convention [...]; I nevertheless hope that a great majority will come out in favour of adopting the proposed Convention and Recommendation.” (ILC 68th Session, 1982, Record of Proceedings p. 35/3).
In 1987 they had agreed that it should be promoted as a priority convention. However, after the fall of the Berlin Wall, employers started to change their attitude. Indeed, in 1995 they refused to recognise the Convention as “up to date”. Conversely, in 2009 they confirmed its relevance in the ILO’s Global Jobs Pact and in 2010 they fully supported the ILO HIV and Aids Recommendation No. 200 that refers to Convention No. 158 as the relevant provision to protect workers suffering from HIV/Aids against unjustified dismissal. This year, they changed their attitude once again and opposed the promotion of the Convention and have even called for its abrogation. These glaring inconsistencies are obvious and cannot be considered as a ‘good faith’ approach.

This is even more striking when looking at the substance of what employers are opposing. Convention No. 158 edicts a number of very basic principles concerning the termination of employment which can be considered as fairly modest and which are often supplemented by further flexibility clauses:

• The employer has to give a valid reason for termination of employment. Trade union activity, race, sex, marital status, family responsibilities, pregnancy, religion, political opinion, national extraction or social origin are explicitly defined as not being valid reasons. The burden of proof for the existence of a valid reason for the termination shall not rest on the worker alone.
• A worker whose employment is to be terminated shall be entitled to a reasonable period of notice or compensation in lieu thereof.
• A worker who considers that his or her employment has been unjustifiably terminated shall be entitled to appeal to a court or another impartial body.
• A worker whose employment has been terminated shall be entitled, in accordance with national law and practice, to a severance allowance or other separation benefits or benefits from social security provisions or a combination of both.
• When the employer contemplates layoffs for reasons of economic, technological, structural or similar nature, the employer shall provide the concerned workers' representatives with the relevant information in good time and consult on measures to be taken to avert or to minimise the layoffs. The employer shall also provide measures to mitigate the adverse effects, such as help to find alternative employment.

While these principles shall in general apply to all workers in states party to the Convention, they can exclude certain groups of workers; enterprises of a certain size; those working under contract; or those who are temporarily or casually employed. However, they shall provide adequate safeguards against recourse to contracts of employment for a specified period of time. The aim of this measure is to deprive workers of the protection afforded by the Convention. Furthermore, when submitting their first report after ratification to the ILO, governments have to declare which other specified groups they exclude (but they cannot exclude anymore groups after this point in time).

Against this background, employers are arguing that in the 21st century it is too much of a burden on them to tell workers why they are being fired. Giving workers advance notice about dismissal could also create unsustainable costs. Furthermore, there should be no possibility for workers to appeal against a dismissal as this would imply inappropriate third party interference in the employment relationship and more generally in entrepreneurial freedom. Moreover, governments should have the right to exclude new groups of workers from the scope of the convention at any time after ratification. This would mean at the end of the day that governments could ratify without the necessary transparency and legal certainty. Finally, employers oppose the Convention because the ILO supervisory bodies, in particular the Committee of Experts for interpreting the Convention, are allegedly not taking into account the employers’ needs. However, the Convention is about protection of workers and does not mention employers’ needs. Thus, they ask the Committee to deviate from the Convention itself which is against the very substance of its mission.

This is not an isolated attack on the ILO’s standard setting and supervisory mechanism. It is well known that employers are vigorously opposing the right to strike. Particularly in times of crisis, these two elements obviously play a key role in their overall strategy against international standards.

For those who think that collective bargaining, labour law in general and the protection against unfair dismissal in particular are essential for ensuring that workers in modern societies are not proletarians but citizens, this hostile attitude against Convention No. 158 is an attack on a key pillar of social peace and human dignity.

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Klaus Lörcher is former legal adviser of the European Trade Union Confederation (ETUC)[, former head of the International and European Law Department of the United Serives Union (ver.di),] Germany, and former Legal secretary of the Civil Service Tribunal of the European Union.

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Where is the Trade Union Reform and Labour Legislation in China heading to?

An interview with two labour and trade union activists

A wave of workers’ resistance swept China in 2010, with suicides by some Foxconn workers, and a large workers’ strike at Honda drawing immense social attention, local and global alike. This has compelled the Chinese government to come up with some new policy initiatives to contain the labour unrest, including trade union reform and collective bargaining legislation. Given these labour reforms a few questions arise:

• Where is this labour reform heading to?
• What are the crucial factors that can make workers benefit from this reform?
• Can the party-led state trade unions be transformed to serve workers’ interest?

In an interview conducted on 10th March 2011, Monina Wong, the Director of the International Trade Union Confederation/Global Union Federation Hong Liaison Office[1] (IHLO) and Mr. Parry Leung, the Chairperson of Students and Scholars Against Corporate Misbehavior[2] (SACOM), shared their viewpoint on these issues.

Elaine Sio-ieng Hui [E]: What kinds of labour issues have been raised by the series of workers’ suicides in Foxconn in 2010?

Parry Leung [P]: Although it hardly violates any laws, Foxconn, a supplier to many global electronic brands, has a highly oppressive production regime under which workers have no means at all to voice out their discontent. They felt so desperate that they resorted to suicide as a silent demonstration of their defiance. My observation is that no matter how much internal migrant workers from the rural areas have been exploited in urban factories, in general they still have room, however little it is, to show their resistance, for example, by means of strikes, road blockades and so forth. But in Foxconn this is not possible. It does not only strictly control the production process in factories, but also the private life of workers. For instance, all workers must stay in the dormitory provided by the company, but those coming from the same home province or working in the same production line are not allowed to share a dormitory room; this is a tactic to prevent the building up of rapport and support among workers. Another example of Foxconn’s infringements on workers’ private lives is that all calls from the dormitory to the police hotline in the city will be automatically diverted to the security station in the dormitory; Foxconn has formed a small kingdom of its own which is basically not subjected to outside interference.

E: The Honda workers’ strike in 2010, which lasted for 17 days and involved over 1800 workers to demand a wage increase, is seen as starting on a new stage of labour resistance in China. What are its implications for labour relations in China?

Monina Wong [M]: This strike ended with a 32.4% wage increase for the Honda workers, who have demonstrated a high level of consciousness concerning their positions in production and are aware of the serious impact of their strike on the overall production of the enterprise. They have also manifested a clear consciousness regarding the proper function of trade unions; they were exasperated when they found that the enterprise trade union was on the side of the management, instead of supporting the strikers. In the past decades, we used to treat Chinese migrant workers as exploited objects that needed outside help to protect them. But now we see that they are active agents who have the labour consciousness needed for advancing their interests with collective means. And so far, the Honda workers’ strike is the most effective and powerful strike launched by migrant workers that is capable of upsetting the regional production of a transnational company.

The physical confrontation between trade union officials (who leaned towards management) and workers during the strike has triggered immense social discussion on the proper role of the Chinese trade unions. After the strike, the official party-led All China Federation of Trade Unions (ACFTU) and the government tried to alleviate labour discontent by speeding up the pace of trade union reform and by introducing collective bargaining legislation. It is good that these two issues have become the agenda of the ACFTU. However, at present most trade union education, if there is any, is solely conducted by the ACFTU while other relatively independent agents (e.g. international trade unions, labour NGOs) have no role to play in the process. The degree of democracy and accountability available to members inside trade unions and the ACFTU at the moment is still at a low level. Therefore, we need relatively independent trade union education among trade union officers so as to ensure the effective and genuine implementation of trade union reform and the collective bargaining mechanism.

E: Recently the Chinese government and the ACFTU were promoting legislation on collective bargaining. In your opinion, what are the driving forces for that?

M: In 2004, the government attempted to build up a workplace collective bargaining mechanism by means of ministerial regulations issued by the Labour and Social Security Bureau, but it was not very effective as not many enterprises followed the instructions. In 2005, the ACFTU started to unionize the Fortune 500 corporations in China. Subsequently, trade unions were established in Wal-Mart and many other foreign enterprises, but many people know that they are paper unions only and that the collective contracts they signed with the enterprises remain a formality.

After the world economic crisis broke out in 2008, many enterprises in the Pearl River Delta have been shut down. The central government and many local governments realized that the country’s economy could no longer depend entirely on export-oriented industries and that it had to develop a consumption-based economy. It is in this context that the ACFTU and the government have again picked up momentum to push forward collective bargaining legislation, which they hope will lead to better wages, and thus to higher consumption by workers. It is also hoped that such measures can help reduce labour unrest and maintain political stability.

P: The legislation on collective bargaining is related to the waves of labour resistance occurring in the country, especially in South China, in the past decades. The government is aware of the increasingly intense labour discontent, which it has been trying to alleviate with an individualized legal approach; this explains why the Labour Contract Law and the Labour Dispute Mediation and Arbitration Law focusing on individual legal rights were passed in 2008. However, after the breaking out of the world economic crisis in 2008, it is evident that this individualized legal approach no longer works. On the one hand, the number of labour disputes increased dramatically at the time, and the fact that so many workers went for arbitration led to the overburdening of courts; workers had to wait, on average, for 9 months to have their claims dealt with. On the other hand, many of the labour disputes are beyond the scope of existing laws, and thus could not be effectively settled by the court. Since the individualized legal approach cannot properly handle workers’ grievances, many workers resort to collective means, such as strikes and road blockades, to defend their interests. In order to pre-empt labour unrest and prevent it from erupting into social rebellion, the government is trying to absorb workers’ discontent through the use of collective bargaining.

Although the proposed collective bargaining legislation has given some room for the collective organizations of workers, it remains constraining in some areas. For example, the proposed legislation only allows workers to negotiate certain items (such as wages, working hours, welfare etc.) with employers. Besides, collective bargaining can only be carried out by the trade unions, despite the fact that many trade union officers are appointed by the enterprises or by higher-level trade unions; workers are not allowed to elect their own representatives for bargaining. The government is trying to eradicate factors that can cause social unrest through developing collective bargaining legislation; it tries to divert aggrieved workers from open resistance to the bargaining procedures. And, most importantly, it has delegated the party-led trade unions to take charge of the bargaining so as to ensure everything is within its control.

E: What is the role of party-led trade unions in promoting the collective bargaining mechanism?

M: A genuine collective bargaining system should include the process of consulting their members before trade unions negotiate with employers. However, in China, a top-down approach has been used by the ACFTU. It is a common practice for it to send invitations for collective negotiations to employers and to reach agreements without informing or consulting its members. Democratic participation is a process to educate workers about true unionism. But “negotiation” in China is usually ends- oriented and the ends (e.g. the wage increment) should not contradict the conditions of the “larger context”. Priority to the “larger context”, according to the Party and the government’s definition, results in “negotiations” led by the administration, not workers. In view of this, in order to build up a genuine collective bargaining system in China, trade unions should initiate a proper reform first, enabling democratic and grassroots participation, so that they could truly represent workers’ interests. At the moment, there are many “fake” trade unions at the enterprise level; to tackle this problem, it is very crucial that workers’ trade union consciousness be cultivated properly, so that they understand the importance of having their trade union representatives being able to represent their interests and accountable to them. A very critical foundation for achieving this is to make trade unions financially independent from the companies or the government. In the past, most enterprise trade union officials are paid by the enterprises, while the current trend is that the government is paying their salaries. Neither of these practices is ideal; they will either make the enterprise trade unions a management-union or a party-union.

[1] The IHLO is the Hong Kong Liaison Office of the international trade union move ment, which has a mandate to support and represent the international trade  union movement in Hong Kong and to monitor trade union and workers' rights  and political and social developments in China. Readers can learn more about it  from its website http://www.ihlo.org/
[2]  SACOM aims at bringing concerned students, scholars, labor activists, and con sumers together to monitor corporate behavior and to advocate for workers’  rights. It teams up with labor NGOs to provide in-factory training to workers in South China. Readers can learn more about it from its website http://sacom.hk/mission

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Elaine Sio-ieng Hui is a PhD candidate at Kassel University, Germany, and she also works as a research assistant in the City University of Hong Kong.
Monina Won is currently the Director of the International Trade Union Confederation/Global Union Federation, Hong Kong Liaison Office.
Parry Leung is the Chairperson of Students and Scholars Against Corporate Misbehavior and a researcher on labour issues in China.

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