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CRISIS AND RECOVERY: PROSPECTS FOR JOBS AND DEVELOPMENT ILO Committee of the Whole on Crisis Response, 3 June 2009, Geneva YILMAZ AKYUZ Special Economic Advisor, South Centre, Geneva 1 Issues 1. Current developments, notably in DEEs, and international (G20) support 2. The day after: what kind of recovery? 3. How labour markets, crisis and global imbalances are linked and why robust growth of wages in both the US and China holds the key to sustained growth 2 Current Signals • Green shoots or yellow weeds? Positive signs in US, China, India and commodity pick-up; but more like an easing of the pace of decline rather than beginning of recovery. Property market correction incomplete and credit crunch far from over • Recessions driven by financial factors can have several dips; income unlikely to go through a steady path − first declining gradually, then rising • Uncertainty: projections are held with no more confidence now than a year ago; lack of clear understanding of nature and extent of financial difficulties, their link with real economy and the possible impact of policy interventions on the real economy. 3 DEEs: Impact, policy space and response • Falling exports, reversal of capital flows and declines in remittances. Reserve depletion despite benign neglect of currency declines • BOP constraint starting to bite harder outside Asia. Policy space limited. • DEEs facing BOP constraints should use legitimate trade measures (tariffs and BOP safeguards) to mitigate adverse impact on jobs and poverty. These should not be put in same pot as restrictions/subsidies in economies not facing BOP constraints. • DEEs should also use temporary capital account restrictions and debt standstills in order to stem large and sustained capital outflows. These should be encouraged by the IMF and supported through lending into arrears − applied so far only in Iceland. • Creation of FCL in IMF is a wrong step: IMF should finance trade not capital outflows. Should bail-in not bail-out private investors/creditors. Otherwise creates moral hazard, threatens its financial integrity and puts burden on DEEs 4 International support to DEEs • Additional $1.1 trillion by G20: – $250 billion for trade finance looks fictitious; – Of the additional $500 billion for IMF, $250 billion is not yet in sight. – Of $250b SDR, less than $100b will go to DEEs and some $20 billion to LICs • IMF access limits doubled but most BOP-constrained DCs are unwilling to go to IMF. Fund now works mostly with OECD and/or EU members. • Conditionality said to be “modernized” but still business as usual: pro-cyclical fiscal tightening (Pakistan, Hungary, Ukraine) and interest hikes (Latvia and Pakistan). Fiscal adjustment may be needed in some of these, but recessions are not best times for it • Additional financing needs estimated between $1 and $2 trillion (WB/UNCTAD). Should be unconditional, non-debt creating and/or at low-cost. Best achieved by SDR: – At least $100 billion no-cost SDRs for LICs and debt moratorium at no extra cost – $800 billion reversible SDRs for other DEEs 5 Medium-Term Prospects • Return to exceptional performance of 2002-07 driven by a global credit bubble (not by free trade, as often told)? Fed to sustain rates near zero and China/FEs to keep down long-term rates by continuing to peg to dollar and providing cheap financing to US consumers. • But repeat is unlikely and disastrous for global stability. • More likely scenario: sluggish global markets due to consumer retrenchment/external adjustment in US; tight financial conditions because of exit from fiscal stimuli and bailouts; focus on inflation control and fiscal consolidation. • Reduced growth and increased disparities among DEEs: – Those dependent on capital inflows are unlikely to see strong recovery (CEE, LA, SA, TR) – Surplus DEEs (China, SEA) can restore rapid growth if domestic markets expand vigorously – India unlikely to go back to 9 per cent growth • Recoveries after financial boom-bust cycles tend to be jobless and without a strong upturn in private investment. Likely to be the case in US and UK. 6 Jobless recovery: The record • US recovery from dot-com bust: – Weakest in terms of investment since 1949. – Took 38 months for employment to recover compared to 8 months in 1960-89 cycles – Increased resort to temporary and part-time employment and overtime. • Asian crisis: – In all four countries unemployment in 2007 was above pre-crisis levels – Investment rates in all four countries did not fully regain their pre-crisis levels • Why? – Crisis exposes over-indebtedness, forcing firms to focus on restoring balance sheets, using profits for restructuring or reducing debt rather than expansion/hiring – Uncertainties about the strength of recovery discourage firms from making long-term commitments to employment, promoting a wait-and-see attitude 7 Labour markets, crisis and imbalances • What happens to wages in US and China holds the key to reduction of global imbalances and to robust and sustained global growth: – US will need faster wage growth than in the past in order to reduce consumer indebtedness and raise savings without falling into stagnation/sluggish growth – China will need the same for a different reason: rapid expansion of domestic consumption and reduction of dependence on foreign markets 8 Stagnant wages/consumption boom in US • US boom driven by easy money (response to dot-com bust) and deregulation; rapid expansion of high-risk lending including property-linked loans. • Real wages stagnant/declining: middle classes seeking to maintain living standards and consumption by borrowing against their homes and equity portfolios. • First dot-com bubble then property bubble provided capital gain and collateral against such borrowing and helped increase consumption despite stagnant/declining wages. • The increase in US CA deficits during1990-2007 is fully accounted for by increased propensity to consume and reduced private savings. • With stronger wage growth savings would not have been depressed and indebtedness increased so much • Consumer retrenchment now will be deflationary for US unless accompanied by faster wage growth 9 China: Wage-profit imbalance and under-consumption • External adjustment in US also requires structural adjustment in China to reduce dependence of growth on foreign markets • C/GDP falling, I/GDP rising since 2000; now C/GDP=39%, I/GDP= 43% (Chart) • When investment grows faster than consumption, net exports should keep rising for capacity to be utilized. • Under-consumption is due to imbalance between wages and profits: real wages rising but wage share falling because wages lag productivity growth: W/GDP declined by 10 points since mid1990s. C/GDP mirrors W/GDP (Chart) • Retained/reinvested corporate profits exceed 20% of GDP. SOEs not pay dividends. • Also high precautionary savings from wages because of lack of adequate social safety nets in health, education, housing, unemployment benefits, pensions ... 10 11 • Source: WB Beijing 12 Policy response in China: Structural problems addressed? • China needs higher wages and consumption-linked public spending − direct income transfers to poor; subsidies for education, health, housing, higher pensions and unemployment benefits; can be financed with dividends from SOEs. • Aggressive monetary and fiscal response. But only a small portion of fiscal package is allocated to social welfare. Emphasis on infrastructure investment with weak impact on consumption. Consumption growth sluggish, based on pent-up demand and special (one-off) incentives rather than wage gains • Without wage and consumption growth there is risk of fiscal pump not priming (Japan) • Need to shift to the kind of export-led growth practiced in past in Korea and Japan − no cheap currency/cheap labour, wages keeping up with productivity; consumption keeping up with investment and domestic markets expanding rapidly. • Need for change is recognized. But can it make the transition orderly and successfully? The jury is still out. 13