The challenges of the global economic and social crisis – Ebrahim Patel.

Edited version of address at the Employment and Social Policy Committee, International Labour Organisation, 17 March 2009.

The crisis that all our economies and societies face is huge, and the past few months have seen that crisis deepen with much drama, human tragedy and disgrace.
The drama is captured by the loss of $50 trillion in asset value on global markets estimated by the Asian Development Bank and the billions lost on stock markets at the closing of the trade on many days.

The human tragedy is written in the lives of the 20 to 50 million people who are projected to lose their jobs as a result of the crisis, the hundreds of millions who will battle to feed their families, the retirees who face the sudden reality of pension provisions that have been drastically cut.

The disgrace is shown in the greed that flourishes even in the crisis with the latest manifestation being the payments of $165 million in bonuses by AIG to their traders, a company kept alive by taxpayers dollars, which prompted US President Obama  to react with outrage and reject the bonus payments, saying “This is a corporation that finds itself in financial distress due to recklessness and greed”. 
The effects of this crisis are brutal on workers and enterprises –its impact is reversing years of very modest economic gains and adding to the very large pool of poverty – it is the most substantial challenge to employment that we have seen in our lifetimes. And so when we approach the discussion about solutions, we will look for answers that are comparable in scope and ambition to the crisis.

Before we respond to the challenge of providing guidance going forward, we need to review of how we got into the mess that the world economy is in.

There are some fundamental elements of the crisis, – causes, triggers, structural reasons, roots – that must feature in the response actions and solutions by the global community. And while it is tempting to skirt over the roots of the crisis – with an impatient wave of the hand and a ‘lets not focus on the past, we are now all in this together” – it may lead to the wrong prescriptions.

The crisis is not unexpected – the warning signs have been there and the many attempts to draw attention to the weaknesses of this form of economic integration have been ignored or dismissed, including a number of attempts over the years in the ILO by the Workers Group itself.

There are five areas we point to:

One, the model of globalisation we have in place has been unbalanced, both socially and economically. Even at the most basic level, the systemic outcomes on trade and investment have resulted in large surpluses in some countries and deficits in other countries, founded on an obsessive export-orientation instead of a balanced growth model, with the demand deficit that has arisen made up through the growth of debt rather than incomes.

Two, we have seen a conscious effort to weaken the role of the state in markets and society with an ideological agenda of deregulation and a commercial agenda of maximising profit, with the result that after two decades of attacks on the state and on taxation and a romanticising of unregulated markets, we have weaker capacity and resources in, and legitimacy for, the public sector to carry out its vital role. As we will note, this had distorting effects in finance, trade and labour markets outcomes.

Three, wrong policies have so often been pursued on the labour market: there has been a retreat labour standards and from centralised bargaining that has weakened wage equity outcomes; a shift of work to un-unionised areas and enterprises; a sharp growth in precarious forms of work; a weakening of trade unions and collective bargaining itself; and of course a weakening of the regulatory role of the state; a declining share that wages constitute of national and global income, all with a profound impact on consumption and demand

Four, lack of regulation of financial markets that allowed unfettered greed and shifted finance from a vital resource for the economy to a parasite in the economy, and the price for which workers, enterprises, governments and tax-payers are paying now. But financial markets are not unregulated because someone forgot to regulate them. It was the active lobbying efforts of corporate interests that drove deregulation. The crisis that started in the finance sector has rapidly spread to the real economy, to factories, mines and offices, and to societies, to the homes of working people and to the growing number of unemployed.

Five, the custodians of global financial balances and supervision, namely the International Financial Institutions and the central banks of the large economies have not done a good job. Their prescriptions have often been ideologically motivated or based on  false economic reasoning, contrary to the goals of decent work outcomes and economically inappropriate. Some of the prescriptions imposed on countries after the East Asian crisis in fact have laid the basis for the current crisis. Even now the IMF, in the middle of this crisis, still continues to place lending conditionalities on developing and transition economies that are pro-cyclical, that reduces incomes and limits the policy space for government interventions.

What the current period has made very clear is that what happens on financial and other markets affect workers and enterprises and decent work and therefore need to be addressed by the ILO. Though so many of these problems were clear for so many years, and we and many others rang the warning bells, there can be no place for gloating because both the price of economic growth was paid for by workers, and now the costs of recession are also paid for by workers.

We have the roots of the crisis in an economic model that is not people-centred but greed-inducing; we have a market that should serve all our interests that has instead become a place where some can loot with impunity; we have a moment now when those who created this crisis expect citizens and workers – the victims and casualties of the crisis – to pay the bill to clean up the damage.

From these observations, we identify some key responses that are required:

We need to address the weakening of aggregate demand, both the immediate collapse of demand and the long term or structural weakening of demand that wrong policies have produced; we need to address the impact of the crisis on the poor and vulnerable. But we need also to respond to the regulatory deficits and structural problems in the system.

Some of the measures that need to be taken are clear and have been the basis of a consensus among the social partners as set out in the Statement of the Officers of the Governing Body in November 2008, namely
• The use of fiscal and wage measures to stimulate domestic demand to rapid effect and ensure a flow of credit to consumption, trade and investment
• Extending social protection and unemployment benefits, including the extension of social security to all as well as a minimum living wage to all employed and in need of such protection
• Supporting productive, profitable and sustainable enterprises together with a strong social economy and a viable public sector to maximise employment and decent work
• Implementation of the fundamental principles and rights at work, including freedom of association and the right to collective bargaining
• Tripartism and social dialogue, within and across borders as very relevant for achieving solutions and building social cohesion
• Maintaining development aid and providing additional credit lines and support to low-income countries to cushion the crisis.

In addition to these consensus areas, there is a need to address other aspects of the crisis.  These include:

• Balanced economic policies that include expanding domestic consumption in particular in surplus countries  and inward industrialisation policies , satisfying basic needs as a key engine of economic growth, combining growth with social equity and seeing incomes as a source of growth, not simply a consequence of growth. We have heard calls for more enterprise development earlier in the discussion. It is not the fact of the existence of an enterprise that creates economic activity, but the fact that there is demand, that is that workers have decent wages which which they buy goods and services.

• Reorientating our economies to a low carbon and sustainable path of development, investing in green and decent jobs

• Recognising the valid, vital and legitimate role of the state in industrial and sectoral policies, as well as acknowledging the careful and balanced use of trade and industrial policy measures to build and support new industries and employment

• Investment in education, health and other public services and public infrastructure that satisfies basic needs and that create jobs and builds societies of equal opportunity.

• Restructuring of the financial sector to ensure that its public utility function of channelling saving into productive investment is done in a reliable and secure manner.

• Acknowledging the significant gaps in regulation, particularly in financial markets and addressing these to include limits on speculative investment activity, excessive incomes and bonus schemes that foster risky and reckless behaviour,

• Ensuring a new labour market framework that is rights-based with implementation of international labour standards, with coordinated collective bargaining and sectoral bargaining as key means to combine growth with social equitable outcomes, strengthening the role of minimum wages in providing a basic  floor for adequate living wages for workers in all countries and recognising the need to globalise the industrial relations system and collective bargaining in order to foster balanced development and address global inequities

• Ensuring that a new financial architecture is complemented by a strong social architecture, with a key role to the ILO in the promotion and design of this missing social component of open economies, and ensuring that the multilateral system as a whole promotes decent work outcomes through their areas of mandate.

We support the concept of a  Global Jobs Pact, developed with full involvement of trade unions and employer organisations, that have the following core components: 
o Public investment-based and employment-orientated stimulus packages
o Social and green investments in order to build a sustainable economy
o Active labour market policies to help workers find decent work opportunities
o Extend  and enhance of social security and social protection provisions
o Strengthening workers rights and applying  the relevant International Labour Standards, including the core labour standards, governance labour standards and economic crisis package of standards
o Avoid wage deflation and promote coordinated systems of collective bargaining
o Promote global policy coherence so that the international financial institutions (including the IMF and World Bank) and the trade regulatory system (the World Trade Organisation) promote decent work outcomes and this be a specific mandate to them 
o Establish a Global Jobs Fund managed by the ILO to allow counter  cyclical global employment policies but also to address the asymmetrical fiscal capacities between developing and developed countries

We believe that a basket of international labour standards that are relevant to the crisis should be a central element of the ILO and country-level response to the crisis. An immediate measure would be for countries to consider ratification of this full package. (See annex for a list of the instruments).

Many countries have called for non-protectionists responses. The danger of a generalised protectionism is real and the global crisis will not be resolved by all countries simply retreating into their national economies and putting up generalised trade barriers, yet it is important not to go the other extreme of denying that the state has a role to play to save jobs, using a combination of measures.

We should note that developed countries have resorted to fiscal support for particular sectors and companies, a form of financial protection. Some developing countries, unable to finance an equivalent package, may need to use the trade tools available under the rules of the WTO. Provided it is targeted and temporary and consistent with international obligations, it is and should continue to be permitted. The capacity of countries to find global solutions to their employment and social challenges is tied to the availability of global tools and means, from the proposed Global Jobs Fund to a new global framework for collective bargaining.

There have been calls for wages to grow in line with productivity, measured as growth in the GDP of countries. Had this call been made and followed in the past, worker real wages would be substantially higher than it currently is.

But we cannot ignore the history of wages that have grown at a lower rate than productivity growth in the boom years. These have been well documented in the Global Wages Report.

We can expect productivity growth to be zero or negative in many countries during a recession, and thus a call for wages to grow in line with productivity would mean that real wages would be cut, with damaging social and economic outcomes.

Even where they are not cut, the formula proposed would have the result that labour’s declining share of national and global incomes would simply be entrenched at these lower and unjust levels. These would have pernicious effects, continue to negatively impact on aggregate demand, and maintain the structural roots of the crisis.

The work of the ILO needs to address the challenge how to reduce the clearly unsustainable levels of inequality and increase the real income of workers and their families.

A group of twenty countries, the “G20”, was convened in Washington in 2008 to discuss responses to the economic crisis. The G20 has its second Summit in London in April 2009.

The ILO need to play an important role going forward – it is more representative than the G20 in the number of government members; it is the only UN agency with direct representation from the real economy through its worker and employer constituents; it has a special mandate on employment, on social justice, on decent work and it has a unique set of tools in the form of international labour standards.

We therefore propose the following

1. Recognition of a three-fold dimension to the crisis and the need to respond all three areas simultaneously, with them being:
• financial
• economic and
• employment and social.

2. Responses should address both the short term issues as well as the structural (by which I refer to the long term and systemic) roots of the crisis.

3. The Social Justice Declaration  should be used as the policy basis for ILO responses to the crisis and the Global Employment Agenda  as the toolkit, with special reference to its macro economic policy components (which deals with the importance of rising demand as the basis to create employment; the need to address debt of developing countries; the important role of financial market regulation, including consideration of measures such as tax on financial flows), as well as its components on trade and infrastructure development.

4. The Governing Body of the ILO should issue a statement for the G20 meeting in London, setting out the employment and social dimensions to the crisis together with elements of the response required, with a view to these forming part of the Summit outcomes, and covering
a. Use of fiscal and wage measures to stimulate demand
b. Social protection
c. Support for public and private enterprises
d. Observance of core labour standards
e. Social dialogue and tripartism
f. Maintaining development aid

5. Call on member-states of the G20 to invite the ILO to the Summit as a full participant together with the other multilateral bodies

6. Call on all member-states to recognise the importance of the employment dimension and to involve Ministries of Labour and social partners centrally in the design of stimulus and regulatory measures

7. Call on the ILO to ensure that its Programme & Budget gives expression to the priorities for ILO action on the crisis and that ILO action is across a wide front, that its remit covers the different aspects of the crisis, both macro as well as the micro

8. Support a large bold intervention, in the form of the proposed comprehensive Global Jobs Pact founded on decent work and that includes ratification and full implementation of international labour standards and that avoids efforts to find a solution through wage deflation.

The role of a strengthened ILO is vital and we want to back the ILO Headquarters and regional Offices in their response to the crisis. We must ensure in doing so that the ILO ensures that the crisis response is not simply the repackage of existing work and tools, because that would not be an adequate response.

It is not the lack of a ‘Know your Business’ programme; or a lack of vocational training schemes; or regulatory constraints on SMEs; or limited productivity in a particular enterprise; or gaps in entrepreneurship, that is the cause of this crisis, and so if we limit our interventions to these kinds of areas only, as our response to the crisis, we will not make a difference. The proposed list of ILO interventions need to be made more compatible with proposals that go to the heart of the crisis, they need to have a wider remit than purely the technical tools of different ILO departments, they need to addresses the different dimensions of the crisis and be faithful to the ILO mandate to examine and consider “all international economic and financial policies in the light of the fundamental objective of social justice.”

The ILO’s Programme & Budget for the next two years should reflect these priorities and this sense of urgency and refocus the work of the ILO.

The consensus built by ILO constituents in June last year with the Social Justice Declaration and again in November 2008 with the Officer’s of the Governing Body Statement, shows that we can develop practical and pragmatic solutions.