TWN Info Service on Finance and Development (Mar12/09)
22 March 2012
Third World Network

Dear friends and colleagues,

On 12-13 March the annual meeting of the UN Economic and Social Council, the World Bank, International Monetary Fund and World Trade Organisation attended by government representatives and observers took place in New York.

There were 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 second of 2 parts of the report on the first theme, on the interactive discussion following the presentations by Heiner Flassbeck, Director of the Division on Globalization and Development Strategies at the UN Conference on Trade and Development (UNCTAD) and Martin Rama, lead author of the World Bank’s 2013 World Development Report on the first theme (please see Part 1 for the presentations).

With best wishes,
Third World Network

UNCTAD and World Bank focus on employment in annual ECOSOC, Bretton Woods, WTO meeting (Part 2)

New York, 21 March (Bhumika Muchhala) – Following the presentations by UNCTAD and the World Bank on the “Promoting Sustained, Inclusive and Equitable Economic Growth, Job Creation, Productive Investment and Trade" at the annual high-level meeting of the UN ECOSOC on 12-13 March, the Bretton Woods Institutions and the WTO an interactive discussion took place.

The discussion addressed the following questions:
1. What type of coordinated policy actions sustain fragile global economic recovery and promote job creation?
2. What policy interventions and regulatory frameworks support public and private investment in job creation?
3. What are effective ways to facilitate long-term foreign investment to development countries?
4. What are the possibilities for setting in place a system of industrial relations promoting productivity and ensuring decent working conditions?
5. What policy measures could strengthen the availability of finance, especially to small and medium enterprises, and foster entrepreneurship?
6. How can international commitments enhance international corporations and global value chains in job creation?
7. What global technology plans could enhance the transfer of capacity building? What steps are needed to reform development architecture?
8. What measures can be taken to enhance debt sustainability? How can international commitments promote fair burden sharing on the debt crisis and debt sustainability?
9. Last, how can the international community ensure complementarity of efforts among the UN, BWIs, G20, and other multilateral stakeholders?

The Group of 77 and China stated that growth must be sustained in order to eliminate poverty and pursue a truly sustainable development architecture. This growth requires a continued increase in production, which in turn depends on the diversification of developing country economies away from agriculture and commodities to manufacturing and the production of services.

Sustainable growth needs to be broad-based in several sectors, not just the primary or commodities sector, but also the manufacturing, services and knowledge and R&D sectors. Thus, a crucial role is played by structural transformation and economic diversification, which many developing countries are unable to pursue, being effectively trapped in a cycle of commodities and raw materials exports with little or no value added. This trap does not generate adequate income levels that could be allocated to investing in the diversification of national economies.

The G77 and China clarified that “growth is not an end in itself but rather a necessary condition for broader development, and contributes significantly to the achievement of development objectives, including poverty alleviation, social services provision and resources for investing in social and physical infrastructures.” It is vital to support policy measures that ensure equitable growth, meaning that “the benefits of growth are enjoyed by all sections of society, particularly the poorest and most vulnerable.” Scholars and experts alike assert the strong correlation between high inequality and limited progress on the MDGs.

A situation which has created additional challenges for developing countries is that of maintaining, if not building on, the modest gains achieved in the decade prior to the crisis. The G77 and China underscores that the global economy faces systemic problems that have to be addressed, particularly through the reform of the global financial system.

The G77 and China highlighted that “the main prerequisite for sustainable growth in developing countries is a reliable mechanism for productive investment.” This is a challenge in many developing countries whose resources are barely or not sufficient to cover even the most basic human needs, and thus the dependence on external assistance.

Foreign direct investment (FDI) can contribute to the financing of economic growth over the long term, and can be a vehicle for technology transfer, knowledge, productivity increases and job creation. However, in addition to favorable domestic policies, FDI requires local economic opportunities that are often lacking in developing countries, particularly African countries. On the other hand, even when many developing countries have created attractive conditions, FDI has not followed, due mainly to the lack of economic opportunities.

In this context, international commitments in terms of ODA must be fulfilled, for at present aid delivery is still short of the target of 0.7% of GDP (at 0.15 to 0.20% of GDP to LDCs). Development partners are called upon to implement effective trade-related technical assistance and capacity building to developing countries, particularly the least developed among them. Adequate support for the Enhanced Integrated Framework is necessary to better address the supply-side and trade-related infrastructure and productive capacity constraints to assist those countries to increase their exports and their value-added, for the ultimate goal of sustaining growth and employment.

Th G77 and China is also very concerned about not only job creation, but also “job destruction,” with regard to the vast number of jobs that disappear every year in developing and middle-income countries due to the globalization of investment and finance.

The G77 and China invited the panelists to comment on green jobs, asking to help explain what it means, and whether it even exists.

China stated that the crisis has impacted development severely, as seen in the rapid contraction of economic growth rates and the serious sovereign debt problems of emerging markets.

Against this backdrop, China believes that countries should further strengthen their macroeconomic policies to ensure funds for production and employment. The establishment of a balanced, universally beneficial, win-win framework of the trade regime is key.

The Secretary General’s report stated that according to the ILO’s estimate the world needs an additional 600 million jobs in the next decade. Small and medium enterprises do provide an important employment, but financial crises have very much damaged the chance of survival for most SMEs.

Brazil aligned themselves with the statement of the G77 and China, as presented by Algeria, and warned specifically against measures that produce distortions in international trade and investment flows. For example, exchange rate manipulation by excessively expansive monetary policy has negative impacts for developing country economies.

Banking system reform is necessary, and the goal should be to redirect financial markets to their original function of financing trade and economic consumption.

The importance of reform of multilateral institutions cannot be exaggerated. The participation of developing countries, which are responsible for greatest share of global economic growth, should be duly increased.

“A recovery must combine economic growth, job creation and social protection within the overall context of macroeconomic stability to restore confidence, achieve goals and to step up coordination among the UN, the G20 and the BWIs, including the WTO,” said Brazil.

Bangladesh stated that while the demand for employment is increasing, technology is also increasing, and it is rapidly replacing manpower employment. What are the implications of this technology?

Bangladesh further stated that trade policy focuses on specific skills rather than more generic skills. Every 5 or 6 years, there are significant changes in demand and production, and a switch over to new activities and sectors is needed. What kind of trade policies would be adequate and allow trainees to adapt to new circumstances?

It said (UNCTAD’s) Flassbeck’s contribution is very significant in the sense that it challenges the conventional view of a vertical employment line as investments gather steam. However, can wages and growth really go together? With regard to private investment and FDI, the attitude of foreign investors is that wages and interest should remain low; however, in reality, when wages go up, consumption demand also goes up.

Jordan supported greater policy coherence, financing for infrastructure, strengthening social safety nets and enhancing human capital development. Predictable development assistance, as well as innovative financing mechanisms are both important to funnel in necessary resources to developing countries.

An Executive Director for the World Bank said “I completely agree with Flassbeck’s presentation on the dilemma between wage depression and domestic demand reduction. However, the reality is that even if countries know that domestic demand will be decreased, they don’t have any option as they know the private capital markets will not allow them to borrow if their wages aren’t reduced.”

He also said that he believes labour is the most pressing issue globally, and it’s important that the informal sector is included and a multi-sectoral approach taken. In many countries, the problem is not with the labour market but elsewhere in the economy. The WDR needs to include these issues.

An Executive Director of the IMF said that, ultimately, the necessary condition for growth is financial and economic stability. However, “as has been internationally noticed, we in the IMF have done a lot of introspection. This has resulted in wide-ranging reviews of our surveillance practices and our internal culture to ensure we internalize the costs of these events and learn from them,” he said.

“On equitable growth and financial inclusion, we have been focusing on volatile capital flows, on which there is a lot of self-questioning and re-thinking of past dogmas. To achieve this external rebalancing and a hand-off from public to private demand has required assessing and evaluating progress made by G20 member countries.”

On the crucial role of labour, the IMF has been focusing on structural reforms with member countries and loan borrowers, in order to target inefficiencies in labour markets. On that note, the IMF welcomes the next WDR on labour and employment.

An Executive Director of the World Bank said that the fiscal stimulus programmes and monetary expansion in the US were critical elements of the crisis response strategy, but that now the world needs “structural policies toward long-term job creation.”

He said that “if the international community want to be serious of job creation, this goal needs to be prioritised among donors and development banks.”

Provided that SMEs comprise the bulk of productive employment in developing countries, the question is what kind of policies are most appropriate for SMEs? A regulatory overhaul is also required, in that “lower barriers to start and focus businesses are needed. Flassbeck highlighted a number of serious problems in increasing wage employment, and I would add that the stability and security of employment is also important.”

The European Union said that reforms aimed at improving the functioning of labour markets are very key. Young people are the most affected by unemployment and poverty, and employment prospects for youth will require a range of reforms, otherwise the youth worldwide will find it very difficult to succeed. “The EU has created a youth task force and supporting international programmes on social protection floors.”

Strengthening employment prospects for women requires a “gender action plan,” which the EU has embarked on. Furthermore, the EU said “human health is necessary in order to perform to find decent jobs,” and the EU continues to push for a minimum of 30% investment in health and education. The EU also stated its commitment to the Istanbul Programme of Action, where productive capacities are the key priority area for action. On this, bilateral and regional cooperation for LDCs is being strengthened.

A concern for the EU is that of protectionism and the impact this could have on growth. The EU also believes that “leveraging private funds for green investment and investment targets for green sectors will be crucial to transition toward green growth.” However, the EU is also aware that leveraging funds from the private sector involve multiple concerns of transparency, predictability and accountability.

The Office of the High Commissioner for Human Rights stressed that human rights sets minimum standards to encourage better-decision making and pro-poor outcomes of sustained, inclusive and equitable growth, investment and trade.

The human rights framework provides a criteria for measurement and for putting policy coherence into practice. It means supporting authorities that shape business practices, including those responsible for corporate law, insurance, trade, labour, investment and so on.

Authorities should be informed and act in a manner compatible with government human rights obligations. Why are businesses and investments now more keen on human rights? Because there are large risks and financial costs of ignoring human rights, such as reputation and risks of disinvestment.

Furthermore, human rights are good for business. The economic rates of return for investments in water and sanitation range from 9-25% per year in Africa and 12-55% per annum in Asia. The call for HR is growing across the globe. The world cannot keep allowing the greatest burden of the financial crisis to continue to fall on the poorest, most marginalized communities, which further inhibits the realization of their human rights.

Governments must be legally bound by the ethical lens of human rights standards that they have agreed upon. The response of the UN family on economic and social challenges must be both credible & coherence, with human rights principles serving as both baseline and yardstick.

A civil society representative from the Third World Network said that the world employment crisis is a structural crisis, particularly in LDCs where a development model of sectoral diversification and gains in the value-added of production and output is necessary. There is also a misalignment of macroeconomic policies with the goals of employment and decent work creation.

According to the ILO, the share of wage and salary workers in the total population in LDCs increased by only 4%, from 14% in 2000 to 18% in 2008, but the large majority of workers remain trapped in vulnerable forms of employment that cannot lift them above the poverty line. Young workers and women are particularly affected by unemployment, in particular women who do the vast share of unpaid care work and labour in the informal sector where benefits and security are inaccessible.

Attention needs to be raised in key policy areas that would engender a structural economic transformation, with respect to the Istanbul Plan of Action and recommendations of the civil society declaration prepared for next months UNCTAD XIII conference in Doha.

First, the macroeconomic framework in LDCs should be aligned to the goals of job-creation and poverty reduction. This entails monetary policies that go beyond inflation targeting and focus on financial inclusion through making the cost of money affordable; and a fiscal policy that prioritises creating fiscal space for long-term public investment in social and infrastructure capital, which includes health and education sectors and technology transfer.

The current policy advice of the IMF, which includes fiscal and monetary policy tightening, is not aligned with the consistent push in public investments, over the medium-term, that is required to generate employment and decent work.

Resources for public investment can be mobilized through the four areas of the “fiscal diamond,” namely: (i) expenditure reprioritization and efficiency, (ii) deficit financing, (iii) domestic tax revenue and (iv) debt cancellation and official development assistance.

Capital controls are an important tool, as has been acknowledged by the IMF, to prevent sudden outflows which leave LDCs with devalued currencies or surges of inflows which trigger currency appreciation, asset bubbles and inflation. As such they are key to developing country policy space, and free trade agreements and the financial services chapter of the General Agreement on Trade should modify their provisions barring capital controls.

Second, specific policies to support and accelerate the transition from the informal to the formal economy, support micro, small and medium enterprises and protect the incomes of the vulnerable are needed. Employment guarantee schemes can provide minimum employment floors, while accounting for improved local infrastructure and adaptation to climate change.

Third, minimum wage legislation and trade union rights for collective bargaining and freedom of association need to be respected, protected and implemented nationally. Trade union rights are often only accessible to those in the formal economy, whereas in developing countries the vast majority of people work in the informal sectors.

The ILO has reported that its surveys and data demonstrate that labour market regulation is not a major constraint to enterprise development in LDCs. Minimum wage legislation is a proven means to ensure that all workers receive a minimum salary allowing a decent life for their families. Collective bargaining and the freedom of association are essential for the fair representation of workers and employers. The strengthening of cooperatives and community organizations are critical for social development and livelihood security, as well as for cultivating a strong sense of shared and national consensus.

And fourth, a gradual introduction of a basic set of essential social transfers and services is important. In particular, a basic floor of social protection through labour market interventions protects the vulnerable. This can be financed from incremental national resources complemented by international support, cash transfer schemes and public employment programmes targeting vulnerable groups of women and youth.

The NGO Committee on Financing for Development stated that job-centered approaches to inclusive growth is urgent at this specific historical moment, characterized by the ILO 2010 as the third stage of the global economic and financial crisis.

With global GDP growth decreasing, there is an alarming downward revision of 1.4% growth for advanced economies this year. An approach to inclusive growth must take account of these realities, which includes global unemployment at 6% through 2016, 12.7% of them youth.

Today’s political economy context is one defined by the challenges of social exclusion and instability. The world has seen the Arab Spring and Occupy Wall Street movement give way to a winter of discontent. The mismatch between the financial sector and the productive economy needs to be addressed through financial sector regulation, a re-capture of the various mechanisms by which revenue for development is lost and productive investments for creating decent jobs, particularly in domestic centers of tax evasion and transfer pricing.

Sovereign debt crises, particularly in Europe, require a mechanism of orderly debt resolution. A new round of stimulus packages should be much better targeted to the real economy through active and passive labour policy. For example, public services, public works, minimum wages, extension of unemployment benefits and incentives for entrepreneurial activities, job creation and decent work are all fundamental components of investing in the real economy. Furthermore, social cohesion is maintained by integrating people-centered and gender-sensitive human rights frameworks.