TWN Info Service on Finance and Development (Mar12/08)
22 March 2012
Third World Network

Dear friends and colleagues,

Each year the UN Economic and Social Council holds a high-level meeting with the World Bank, International Monetary Fund and World Trade Organisation attended by government representatives and observers.

On 12-13 March the annual meeting covered two themes: “Promoting Sustained, Inclusive and Equitable Economic Growth, Job Creation, Productive Investment and Trade" and “Coherence, Coordination and Cooperation in the Context of Financing for Development.”

We are pleased to share with you the first of 2 parts of the session on the first theme: a report on the presentations by UNCTAD and the Word Bank.

With best wishes,
Third World Network

UNCTAD and World Bank focus on employment in annual ECOSOC, Bretton Woods, WTO meeting (Part 1)

New York, 21 March (Bhumika Muchhala) – On 12-13 March, the Economic and Social Council of the United Nations in New York held its annual high-level meeting with the Bretton Woods Institutions (the World Bank, the International Monetary Fund) and the World Trade Organization.

The meeting was an open and free-flowing debate, focused on two themes, “Promoting Sustained, Inclusive and Equitable Economic Growth, Job Creation, Productive Investment and Trade" and “Coherence, Coordination and Cooperation in the Context of Financing for Development.”

On the first theme, the meeting underscored the urgent need to address the global jobs crisis and its multitude of linkages with the movement of wages, national income and demand and supply. Employment is also fundamentally interconnected to the strategies surrounding growth, equity, industrial transformation, labour rights and sustainability.

A key issue stressed by developing countries if the Group of 77 and China was the structural transformation of developing country economies away from agriculture and commodities to manufacturing and the production of services, and how this diversification of economic output, exports and human and technological skills is critical for scaling up employment opportunities in a consistent and stable manner.

UN Secretary-General Ban Ki-Moon addressed the meeting by stating that the world has changed dramatically since last year's ECOSOC-BWI meeting, particularly in the Arab Spring countries where women and youth continue to express a yearning for rights & dignity. “This yearning has reverberated around the world,” he said.

Ban said the meeting should address global stability in broadest sense, in light of the way in which poverty and violence feed on each other. Two themes are critical to help break this vicious cycle, that of promoting economic growth, jobs and trade and that of financing sustainable development beyond Rio+20.

He said further that the world economy needs policies to generate decent jobs, which then create consumers and drive up demand. This same set of policies should support small and medium-income companies that create the majority of global employment, and uphold the principles of responsible borrowing & lending. Ban stressed that Rio+20 is a “once-in-a-generation opportunity” presents itself for building sustainable solutions for the earth’s ecological and climate crises.

Global inattention to wage growth

The first theme of growth, jobs, investment and trade was kicked off by Heiner Flassbeck, Director of the Division on Globalization and Development Strategies at the UN Conference on Trade and Development (UNCTAD). He underscored that the acute unemployment crisis today exists despite the fact that the wage share of national income has been falling across the world over the last 20-30 years.

The unemployment crisis is marked by a paradox of where productivity rises consistently over time, but there is no concomitant rise in wages. “Many labour market analysts do not see or do not want to see this paradox,” he said, pointing out that around the world and over a long series of time, real economic growth is needed to fight unemployment is real economic growth.

Employment cycles are very closely associated with output growth cycles. The first round effect of cutting wages, such as Greece’s 22% cut in minimum wages, is a correlated fall in domestic demand. “And the domestic economy will collapse before positive effects of wage cuts on exports are realized. This implies a fallacy of composition, because not all countries in the world can cut wages and improve competition. As Paul Krugman said, we do not have another planet we can export to,” said Flassbeck.

Investment remains pro-cyclical, in that companies are investing in labour and capital simultaneously in the good times, and divesting from both in the bad times. If this is true, then unfortunately, the whole theory of the labour market as an isolated factor of supply and demand is no longer true. And if this is no longer true, the traditional recipes to fix high unemployment via the flexibilities of the labour market will not work but in fact get us into new trouble.

“This is justified by something important that has yet gone unmentioned, namely that there are strong indications that for labour as a whole, the supply and demand apparatus which assumes that supply and demand are independent of each other, cannot be applied alone. In the real world we live in, supply and demand are interdependent in complex ways, and therefore a simplistic demand and supply analysis collapses,” said Flassbeck.

He added that there is a strong correlation in both emerging and developing countries between unit labour costs (premium of nominal wages per unit productivity) and wages. Unit labour costs determine inflation rate. This has crucial implications. If you cut wages, you get falling demand. This relationship is extremely important because it questions the normal assumption that monetary policies are responsible for inflation but nominal wages are responsible for investment attraction. “It should be the other way around,” Flassbeck argued, “in that nominal wages ought to be responsible for inflation targeting, and monetary policy should be used to stimulate investment.”

Turning this assumption around implies that investment-conducive, pro-growth financing conditions would co-exist with nominal wages that help to target the inflation rate. Including this would mean that if you have nominal wages that are low, then real wages are not participatory.

“But if nominal wages follow the rate of productivity then on the demand side you get a growth stimulus and your monetary conditions are free to produce pro-growth investment. This is absolutely necessary to create real wage development, or wage productivity, which in the last 20-30 years have gone in only one direction, namely downward,” said Flassbeck.

“When do we reach a stage of the world economy where this is going to change? This is a question raised during each recovery, or about every 6-7 years in the past three decades. The Arab Spring is not just a question of jobs but of wages. The Arab Spring shows us that it’s important to focus on wages to understand what is really going on.”

Ultimately, the world needs a recovery, to fight unemployment, Flassbeck concluded. Growth is necessary to fight unemployment, as there is a high proven correlation between growth and employment, especially among developed countries. The huge pressure of high unemployment today, which is not the result of rising wages in the first round, has “no automatic way out, no automatic way back in to growth.”

Therefore, government intervention is critical. The world simply cannot rely solely on the market to overcome the trap of high unemployment and its downward pressure on wages, and low wages reducing domestic demand, he stressed.

Flassbeck also said that policymakers and international institutions need to explicitly question the traditional assignment of policies and asking whether it not worth thinking, given this evidence, about turning it around? Meaning that perhaps the world economy needs more investment-conducive pro-growth conditions for financing for investment, under the Financing for Development heading, while simultaneously ensuring that nominal wages help to target the inflation rate.

He added that nominal wages to target inflation does not mean that real wages would not be participatory, but rather the other way around. If nominal wages follow productivity increases plus the inflation target, an overall growth stimulus is generated which boosts domestic demand. As domestic demand rises, monetary policy is free to produce pro-growth conditions on the investment side. “It may be revolutionary, but it is also absolutely necessary to start aligning real wages to productivity.”

Martin Rama, lead author of the World Bank’s 2013 World Development Report (WDR) which will focus on employment, due in October 2012, said that the WDR will focus on jobs for only the second time in 33 years. The last time was in 1995, when the WTO’s Uruguay Round was being completed and the implications for the globalization of workers and links between trade and labour arrangements were urgent.

Rama said that jobs need to empower women; only then can social transformation occur. Contextualization needs to occur through urbanization, as people in cities make everyone else more productive by engendering knowledge spillovers, keeping young men out of gangs and rebel groups, and so on. Jobs go beyond the earnings they provide.

However, there is a need to differentiate between jobs with developmental spillovers versus jobs without. Those jobs with perks and benefits that are supported through monopoly power or connections may not be good jobs for development, whereas farming jobs spill over to nonfarm rural employment as well.

He said the WDR will need to address the question of why there aren’t more good jobs for development, and to identify the underlying constraints. The authoring team is engaging in a series of consultations with the International Labour Organisation, the International Trade Union Confederation, and many other public and non-public organisations.

The WDR on employment will look at agrarian economies, conflict-affected societies, urbanizing countries, resource-rich countries, countries with high youth unemployment and will reveal data from global worker surveys. The Advisory Panel of the WDR has expertise in living standards, social cohesion and productivity, and consists of policy makers from developing countries and representatives from think tanks and academia.

The expected outcomes of this analytical framework are not exclusively focused on wage employment and labour markets, but also on smallholder farmers, the self-employed and others. The WDR will provide a practical typology for employment challenges across the world, helping practitioners identify priorities with accessible tools.

The companion volume to the WDR will be assembled by teams from different countries, who will each define what “good jobs for development” mean for their respective regions. The data will build on household surveys, plant-level surveys and value surveys to produce a consistent database.

Some of the questions that will be asked in the WDR are:
- What job strategies are needed? When is it sensible to have a jobs strategy as opposed to a growth strategy?
- What sort of jobs are necessary to support an investment climate?
- How do people acquire the skills that would make good jobs for development viable? How should the short-term mismatch between skills and available jobs be addressed?
- How can entrepreneurship be fostered? How many self-employed jobs have the potential to develop?
- What obstacles stand in the way of job re-allocation?
- What stands in the way of relocating jobs from low- to high-productivity sectors? What are the barriers to labour mobility?
- What can be done to foster social cohesion? What can policy-making do?
- How can jobs and workers be better protected? What about a massive de-coupling, is it ever defensible to protect jobs over people?
- When does job creation morph into a competition for jobs internationally? There is a lot of anger in this world when some countries help other countries create jobs, at the expense of people in their own country. When should we worry versus not worry about this? How do we incorporate the issues of gender and human rights?

An interactive discussion followed the presentations (Please see Part 2).