Transcript Decent Work and a Fair Globalization : the role of ILO standards

External Openness and Employment:
The Need for Coherent International
and National Policies
DESA Development Forum on Productive
Employment and Decent Work
New York, 8-9 May 2006
Rolph van der Hoeven and Malte Luebker
(ILO, Geneva)
Facets of external openness

External openness has two important facets:




Trade liberalization;
financial openness.
Trade liberalization has been on the political
agenda since the 1960s, financial openness
since the 1980s.
Both are part of Washington Consensus
policy prescriptions and structural adjustment
programmes.
2
Trade liberalization

Some signs of convergence in the debate on
the social impact of trade liberalization:


Proponents of trade liberalization see their initial
optimism disappointed and concede that trade
liberalization alone does not create growth and
employment.
Critics accept that integrating countries have not
entered a ‘race to the bottom’, but that nonintegrating countries have continued to have
serious problems.
3
Trade liberalization

However, trade liberalization can…



entail considerable adjustment costs and
job churning, and
can lead to greater wage inequality
(experience especially in Latin America).
Benefits of trade liberalization depend
on initial conditions and successful
management of process (Lall).
4
Financial openness and
employment
“The consequences of mistakes in
financial markets, where capital is
volatile and mobile globally, far exceeds
the consequences of mistakes in the
labour markets, where labour is largely
immobile across national lines.”
Richard Freeman (Harvard & LSE)
5
The rationale behind
financial liberalization

Assumption: Investment in developing
countries is constrained by the lack of
capital. Freeing up the international
movement of capital will give
developing countries access to capital,
and therefore increase investment,
raise growth, and create employment.
6
Financial liberalization since
the early 1990s: Capital account


Widespread
capital account
liberalization since
the early 1990s.
Many countries
have removed
all restrictions
on international
capital flows.
Countries with Capital Controls, 19802001 (in % of total IMF membership)
Source: IMF.
7
Trends in international
capital flows and investment
Gross Fixed Capital Formation
and FDI, 1977-2003 (World)
30
25
20
15
Gross fixed capital formation (% of GDP)
FDI, net inflows (% of GDP)
10
5
2003
2000
1997
1994
1991
1988
1985
1982
1979
1976
0
1973

Rapid expansion of
international capital
flows (both gross
private capital flows
and FDI).
Stagnation or
fall in worldwide
investments (GFCF).
1970

Source: World Bank.
8
Distribution of
private capital flows

Private capital
flows are skewed
towards highincome countries,
and some middleincome countries.
A similar trend can
be observed for
FDI (see graph).
FDI Inflows by Economic Grouping,
1980-2003 (in billion current US$)
1,400
1,200
1,000
Industrialized economies
Twelve top-tier developing economies*
Remaining developing economies
800
600
400
200
0
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003

Source: UNCTAD.
9
6
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
World GDP growth, 1961-2004
World GDP growth, 1961-2004 (annual change in per cent)
7
World GDP growth (annual %)
Mean per decade (arithmetic)
5
4
3
2
1
0
10
Direct growth effects of
financial liberalization



No solid relationship between capital
account liberalization and growth
performance can be established
(IMF and UNCTAD research).
Only some middle-income countries
appear to have small growth impact
through capital account liberalization.
Growth performance mainly depends on
other factors, such as good institutions
and an adequate policy framework.
11
Indirect growth effects though
increased reserve holdings
Reserve Holdings by Developing
Reserve Holdings by Developing countries, 1970-2004 (in % of GNI)
Countries,
1970-2004 (in % of GNI)
35
All developing countries
East Asia & Pacific
30
Latin America & Caribbean
Middle East & North Africa
25
South Asia
Sub-Saharan Africa
20
15
10
5
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
0
1982

Financial openness
makes larger foreign
reserve holdings
necessary.
Opportunity cost of
reserve holdings is
high: Funds cannot
be used for
investments with
higher returns.
1980

Source: World Bank.
12
Volatility and financial crises


Financial liberalization in developing countries is
associated with higher consumption volatility
and increased growth volatility compared to
developed countries (Prasad et al. 2004).
Financial openness has made countries more
vulnerable to crises, e.g.:





Argentina 1995 and 2001-02
Brazil and Chile 1998-99
Indonesia, Rep. of Korea, Malaysia, Philippines and
Thailand 1997-98
Mexico 1994-95
Turkey 1994, 1998-99 and 2001
13
Impact of financial crises
on long-run growth



Financial crises have
a large, negative
impact on GDP.
Countries typically
do not return to
their old growth
path (IMF research).
GDP loss is largest
for poor countries.
Typical Growth Path after Financial
Crises in Rich and Poor Countries
Source: Cerra and Saxena (2005: 24)
14
Impact of financial crises
on employment

Labour market consequences are
evident from a number of indicators:




Higher unemployment;
increase in share of informal employment;
falling real wages and falling incomes;
higher poverty (e.g. in South-East Asia,
the number of working poor rose from
33.7 million before the crisis to 50.6 million
in 1998).
15
Impact of financial crises
on employment (examples)

Recovery of social indicators generally lags
the economic recovery by several years.
Thailand (Financial Crisis in 1997/98)
Chile (Financial Crisis in 1998/99)
125
10
125
5
GDP per capita (1997 = 100, left scale)
120
9
120
115
8
115
110
7
110
105
6
105
100
5
100
Unemployment rate (in %, right scale)
4
95
3
90
85
2
85
80
1
80
0
75
95
4
3
2
GDP per capita (1998 = 100, left scale)
90
Unemployment rate (in %, right scale)
75
1995
1996
1997
1998
1999
2000
2001
2002
1
0
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
16
Impact of financial crises
on the labour share

Financial crises, and exchange rate crises in
particular, lead to a decline in the share of
wages in national income:



On study reports an average drop in the wage
share of 5 percentage points per crisis.
There is only a modest recovery after a crisis
(three years later, the wage share is still 2.6
percentage points below the pre-crisis level).
The frequency of financial crises is one factor that
contributed to the accelerating decline in wage
shares since the early 1990s.
17
Building a stable int. financial
system for growth & employment
“Our goal should be to build a stable
financial system that stimulates global
growth, provides adequate financing
for enterprises, and responds to the
needs of working people for decent
employment.”
(World Commission on the Social Dimension of
Globalization, 2004, para. 404)
18
Three broad policy areas for
policy coherence
1. Policies in industrialized
countries
2. Multilateral rules
3. Policies in developing countries
19
1. Policies in industrialized
countries




Greater G3 exchange rate coordination.
Increased attention to stimulating growth in
Europe (e.g. IMF stance on Growth and
Stability Pact in EU)
Recognition of the importance of employment
in financial policies.
Increase of development aid and other
sources of innovative international finance.
20
2. Multilateral rules

Developing countries should be integrated into
the financial system:






They are not adequately involved in reforms
Progress is slow and limited
New codes may make financial market access more
difficult
Need for equitable mechanisms of debt resolution
Capital account liberalization should depend on a
country’s circumstances.
Reduce financial volatility and contagion in
emerging markets: Supply of emergency
financing should be speeded up.
21
3. Policies in developing
countries: The policy trilemma

Nationally policy space circumscribed by
so-called policy trilemma:



Open capital account
Stable exchange rates
Independent monetary policy
Something has to give?
Or can we avoid the corner solutions?
Or can we add more instruments?
22
Avoiding corner solutions:
Active RER regime

The positive effect of an active real exchange
rate regime on employment works through
three channels:



Higher capacity utilization in times of
unemployment (requires combination of
macroeconomic and fiscal policies).
Stimulate output growth (combination with
industrial policies).
Contribute to increased employment elasticity
(shift in sectors).
Rodrik (2003): Growth Strategies. NBER Working Paper No. 10050; Frenkel (2004): Real Exchange rate
and Employment in Argentina, Brazil, Chile and Mexico. Paper presented at the XIX G24 Technical
Group Meeting.
23
Adding ‘new’ instruments:
Social pacts


Social pacts can lead to a more
coherent economic and social policy,
foster stability and hold inflation down.
To reach consensus more attention
needs to be given to distributional
issues – the missing element of
the current development debate
(e.g. MDGs)
24