It is truly a great honour for me to receive this award,
and I am especially deeply honoured to be part of the broader agenda
that the ILO has been pursuing, which I believe is especially critical
in the current fragile global economic environment. I believe that the
ILO can make an important contribution to a new direction, based on
the generation of decent work as the fundamental goal, which can even
become a game-changing approach to macroeconomic strategy.
Any formulation of economic strategy for our times must rest on some
increasingly evident current realities: periods of ''rapid growth''
have been based on unsustainable bubbles; such growth has contributed
little in terms of generating more decent work and has significantly
increased inequality; and popular sentiment is now against accepting
these outcomes as reflected in the waves of protest in many different
countries. This requires a completely different approach to macroeconomic
policy making, which will be more compatible with the increasingly more
vocally expressed aspirations and expectations of citizens.
Global uncertainties
The global economy is now in uncharted waters. The two largest economic
entities – the US and the European Union – are clearly in economic conditions
that will prevent their being positive engines for global growth for
some time. The continuing crisis in the eurozone is unfortunately unlikely
to be quickly resolved with any of the proposals that are currently
on the table. Meanwhile in the United States, there appears to be inadequate
political appetite for the policies that would ensure a more sustained
recovery. Expectations that China or developing Asia in general can
become an alternative growth pole immediately to take up the slack are
unwarranted, given the relative size of these economies and their continued
export dependence on the US and the EU.
Two major misreadings of economic policy requirements have combined
to intensify the ongoing global crisis. The first is the notion that
the immediate concern is the reduction of public debt and reduction
of fiscal deficits. In fact, worsening fiscal imbalances in most major
economies were a result of the 2008 financial crisis, not a cause of
it, as automatic stabilizers and fiscal stimulus packages came into
play. In the developed world (including now troubled economies like
Ireland and Spain) public bailouts accounted for a large part of the
deficit, as private bad debts were taken into public hands. The median
public debt to GDP ratio in developed countries almost doubled (to more
than 60 per cent of GDP) between 2007 and 2010.
It is already evident that fiscal tightening in stressed economies is
self-defeating. By reducing GDP growth and thereby fiscal revenues,
it makes economic recovery more difficult and is counterproductive in
terms of improving fiscal indicators. It is difficult if not impossible
to reduce debt to GDP ratios in a period when the rate of interest on
debt far exceeds the nominal growth rate. Further, the fact that surplus
countries show no willingness to reduce surpluses or enlarge deficit
bodes ill for global growth prospects. What will drive growth – globally
and nationally - when countries (even those with external surpluses)
persist in following austerity programmes that cut incomes and demand?
The second major misreading is an over-optimistic assessment of the
self-correcting powers of financial markets. It has meant that thus
far attempts to re-regulate of financial markets have been limited and
halting. Financial deregulation led to a large, opaque and undercapitalized
''shadow banking system''. It increased concentration in the traditional
banking segment in a few ''too big to fail'' institutions and increased
systemic risk. Post-crisis, governments’ lender-of-last-resort support
to the financial system has even extended to the shadow banking system,
creating massively increased moral hazard. Global commodity markets
have also been affected by financial speculation, causing food and fuel
prices to spiral with grave consequences for people across the world.
This context makes strong re-regulation of finance urgent and essential.
Controls have to be tighter on the ''too-big-to-fail'' institutions;
cover the ''shadow banking'' institutions so to avoid regulatory arbitrage;
and incorporate a macro-prudential dimension, with anti-cyclical capital
requirements and capital controls. But re-regulation alone will not
orient credit to real investment or make it accessible to small and
medium-sized firms. So there must be restructuring of the financial
system: giant institutions must be downsized; the activities of commercial
and investment banking should be clearly separated, in order to reduce
the risk of contagion; and the aim should be more diverse financial
systems, with a bigger role for public and cooperative institutions.
Commodity markets, which have been subject to wild price swings related
to speculative and herd behaviour, need to be made more transparent,
with controls on financial activity in these markets and direct intervention
when required to curb price bubbles and prevent sharp declines.
Limitations of the dominant economic strategy
However, it is not just the crisis that has emphasised the urgent need
for a shift in economic strategy. The need for a major reconsideration
of macroeconomic strategies is even evident in the experience of the
previous boom and of the performance of ''successful'' economies. Recent
economic growth has been associated with and even depended upon the
greater power of capital (both multinational and domestic), reflected
in rising shares of profit and interest in national income. Governments
have not seen higher wages, more employment and better conditions as
economic policy priorities, but rather as eventual by-products of the
growth process. Unfortunately, in many economies, income growth has
not necessarily been accompanied by more decent work. Also, this profit-led
growth is not sustainable beyond a point, as has become increasingly
evident in the past few years.
The export-driven model of growth has come to be seen as the most successful
strategy, driven by the success of China and Germany in particular.
The model, sought to be emulated by almost all developing countries,
was associated with suppressing wage costs and domestic consumption
in the attempt to remain internationally competitive and increase shares
of global markets. Managing exchange rates to remain competitive, despite
either current account surpluses or capital inflows, was a central element
of this strategy. This was associated with the peculiar situation of
rising savings rates and falling investment rates in many developing
countries, and to the holding of international reserves that were then
sought to be placed in safe assets abroad. This is a classic dilemma
of a mercantilist strategy: such economies are forced to finance the
deficits of those countries that would buy their products, through capital
flows that sustain the demand for their own exports, even when those
countries have significantly higher per capita income than their own.
The strategy also generated fewer jobs than a more labour-intensive
pattern based on expanding domestic demand would have done, which meant
that employment increased relatively little despite often dramatic rises
in aggregate output. This is why globally the previous boom was associated
with the South subsidising the North: through cheaper exports of goods
and services, through net capital flows from developing countries to
the US in particular, through flows of cheap labour in the form of short-term
migration. Despite the current fragile recovery, such a strategy is
unsustainable beyond a point, especially when a number of relatively
large economies seek to use it at the same time. This strategy bred
and increased global inequality, and also sowed the seeds of its own
destruction for both external and internal reasons. Externally, deficit
countries will either choose or be forced to reduce their deficits through
various means, including protectionist responses. Internally, suppression
of wage incomes and domestic consumption will meet with political resistance.
In either case, the pressures to find more sustainable sources of economic
growth, particularly through domestic demand and wage-led alternatives,
are likely to increase. So countries must diversify their sources of
growth, looking for other export markets as well as for internal engines
of growth. This is what makes arguments for a shift in strategy towards
domestic wage- and employment-led growth so compelling.
The current crisis as opportunity for change in
economic strategy
This is a historic opportunity to move away from the single-minded obsession
with GDP growth delivered by large private corporate actors, towards
feasible economic development trajectories that are more just and democratic.
This is no doubt a challenging task, but it is now essential. The critical
shift required is most of all in terms of orientation. It is important
not to see the generation of decent work simply as a potential positive
by-product of income growth, but as a means to sustainable growth, as
well as an end in itself. This approach relies on strong positive multiplier
effects to create virtuous cycles of employment and productivity growth.
It allows for more stable economic growth that is based on expanding
the domestic market, but it does not need to conflict with increasing
exports. It encourages a greater emphasis on aggregate productivity
growth (rather than only through cutting-edge new technologies), thereby
generating a ''high road'' to industrialization from the bottom. Thus,
a focus on generating more decent work can actually become a competitive
advantage rather than allowing fear of global competition to generate
a race to the bottom in labour standards.
In developed countries with relatively strong institutions that can
affect the labour market, including collective wage bargaining, effective
minimum wage legislation and the like, it is probably easier to think
of wage-led growth and strategies to allow wages to keep pace (or at
least grow to some extent) along with labour productivity growth. But
what about most developing countries, where such institutions are relatively
poorly developed and where many of not most workers are in informal
activities, often self-employed? How are wage increases and better working
conditions to be ensured in such cases? And what does a macroeconomic
policy of wage-led growth entail in such a context?
In fact, such a strategy is also possible in economies with large informal
sectors, through policies that increase the availability of consumer
goods, basic services and various forms of social protection, and also
improve the viability of small-scale production. Employment diversification,
in terms of a long term sustained shift of workers away from low productivity
(largely primary sector) activities to activities with higher productivity
and value added, has long been seen as a central aspect of development.
The growth of good quality wage employment in both the public and private
sectors is central to the diversification process. In addition, the
conditions of self-employment have to be improved, made less insecure
and fragile and with excessive burdens of risk that are hard to bear
for small producers.
There are several important elements of such a wage- and employment-led
strategy in most developing countries. First of all, the focus of macroeconomic
policies must be on the generation of decent work and on improving conditions
of life, not on income growth per se. This is important because it makes
the provision of basic needs (employment as well as access to food,
sanitation, housing, health and education) and improving the quality
of life of all citizens the central guiding principles. Quantitative
GDP growth targets, that still tend to dominate the thinking of policy
makers, are not simply distracting from these more important goals,
but can even be counterproductive. For example, a chaotic, polluting
and unpleasant system of privatised urban transport involving many private
vehicles and over-congested roads actually generates more GDP than a
safe, efficient, affordable and ''green'' system of public transport
that reduces vehicular congestion and provides a pleasant living and
working environment.
Second, it is necessary to ensure the greater viability of informal
and small-scale production, through better access to institutional credit
to farmers and other small producers (including through directed credit,
subsidies etc.), greater integration into supply chains and marketing
that improves their returns, focus on co-operative arrangements that
can provide the benefits of scale economies to small producers and technology
improvements that increase labour productivity in such activities. It
is particularly important to be aware of the specific needs of women
producers and workers in informal activities when designing policies.
Such a strategy is critical for both agriculture and non-agriculture,
and the revival of small holder cultivation is an essential aspect of
this.
Third, the strategy must emphasise the expansion of and better delivery
systems in the provision of public services, especially in nutrition,
sanitation, health and education. This allows for improved material
and social conditions and has positive employment effects directly and
through the multiplier process. This in turn requires increases in public
employment, which incidentally also sets the floors for wages and improves
the bargaining power of workers. This often not recognised as a crucial
element of a possible wage-led strategy, but it can be extremely significant,
and can be used effectively even in export-oriented economies, as long
as surpluses from industrialisation and exports can be mobilised to
provide wage goods publicly. Indeed, this has been an important and
unrecognised feature of successful Asian industrialisation from Japan
to the East Asian NICs to (most recently) China. In these countries,
the public provision of affordable and reasonably good quality housing,
transport facilities, basic food, school education and basic health
care all operated to improve the conditions of life of workers and (indirectly)
therefore to reduce the money wages that individual employers need to
pay workers. This not only reduced overall labour costs for private
employers, but also provided greater flexibility for producers competing
in external markets, since a significant part of fixed costs was effectively
reduced. It also provided important multiplier effects that generated
employment expansion in other activities.
Fourth, a related aspect is the need to provide much better social protection,
with more funding, wider coverage and consolidation, more health spending
and more robust and extensive social insurance programmes including
pensions and unemployment insurance. This is important in itself, particularly
for reducing human insecurity and gender gaps in living conditions.
It also has great macroeconomic significance because it increases the
presence of countercyclical buffers that reduce the negative effects
of periods of economic downswing.
Obviously, such a strategy requires overall a significant increase in
government spending, which seems to be almost an unrealistic demand
in the current global economic context. The usual concern is that of
finding the resources for it. In a context in which fiscal deficits
are seen as anathema, increasing public expenditure appears to be an
idealistic and impractical proposal. There are two reasons why this
is not true. The first reason is that the multiplier effects of public
expenditure in economies with significant unemployment and excess capacity
involve increases in income and therefore also public revenues, which
means that the increases in spending will not be matched by equivalent
increases in deficit. The second reason (that tax revenues raised from
the rich can pay for this increased spending) is potentially even more
significant in the current socio-political climate, because it provides
an opportunity to redress the dramatically increasing inequality in
assets and incomes that has come to dominate the global economy. It
is increasingly evident that across the world there have to be conscious
attempts to reduce economic inequalities, both between countries and
within countries. We have clearly crossed the limits of what is ''acceptable''
inequality in most societies, and future policies will have to reverse
this trend. Paradoxically, the extreme inequality that is now evident
actually makes it potentially easier to raise resources through taxation,
by imposing reasonable taxes on ''the 1 per cent'' of the population
that is now increasingly the target of the public protests by ''the
99 per cent''. Far from disrupting economic activity, as is threatened
whenever such taxes are talked of, the use of such revenues in the directions
mentioned here is more likely to generate more broad-based and sustainable
economic expansion and improved quality of life overall.
Finally, such increased public spending must also be associated with
some additional critical features. Greater state involvement must be
associated with efforts to make such involvement more democratic and
accountable to the people, especially those who have been marginalised
or dislocated by the economic growth process. Also, it is not enough
to talk about ''cleaner, greener technologies'' to produce goods that
are based on older and increasingly unviable patterns of consumption.
Instead, we need to think creatively about such consumption itself,
and work out which goods and services are more necessary and desirable
for our societies.
As I mentioned at the start, the ILO is uniquely positioned to champion
and carry forward such an agenda, because of its tripartite nature and
its commitment to the core values summarized in the concept of decent
work. I am proud to be even a small part of this broad and extremely
significant agenda.
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