Transcript The Global Crisis

Understanding
Global Economic Crisis:
Issues for Unions
Some banks & mortgage cos. in US advanced
housing loans to people who had no capacity
to pay back - Should this have caused global
economic crisis & affected workers in the rest
of the world?
Is the crisis due to bad loans? Or do the roots
of crisis lie deeper?
What triggered the crisis?
• Collapse of US housing market when home loan rates were
raised in 2007  led to collapse of banks & other financial
institutions in US & Europe that had invested in the housing
& credit card debt backed securities.
Why did this happen?
• lack of regulation of financial markets & institutions
(‘markets know the best’ philosophy)
• loose money policies of Federal Bank of US
• Greed & speculation in financial markets
• neo-liberal economic policies & agenda
Background of the crisis
• US Internet stocks crash in 2001-02 – losses in trillions of
$$$ - to counter threat of recession, prime interest rate
lowered to 1% in 2003
• Easy money availability set off housing market boom &
speculation
• Banks & mortgage companies lower lending standards &
encourage house owners to refinance their loans, including
to people who could not normally afford them (adjustable
mortgages, interest only mortgages, promotional low rates)
Background of the crisis
• mortgage cos. & banks had an interest in giving loans since
these loans could be ‘securitized’ and sold to other banks &
financial institutions as collateralized debt obligations
(CDOs), who in turn bundled these CDOs into giant
securities and sold it to others & so on – the value of these
securities now runs into trillions (no one has any exact idea)
• To cover risk of default on mortgages, the holders of CDOs
bought insurance (credit default swaps) – which generated
huge profits for insuring companies till defaults &
bankruptcies started
• CDS market is said to be as big as $45 trillion – both CDOs
& CDS market is not regulated by govt.
What happened?
In 2007 US housing interest rates were raised & that started
the crisis
millions of house loans expected to default
house prices drop & starts off housing market crash
consumption, building activity & cash flows reduce
which means banks, other financial investors are now
holding near worthless securities while having paid millions
Bank & insurance Cos. fail
liquidity crunch  real economy faces credit squeeze
US recession + globalization  global troubles
More financial institutions are likely to fall once they account
for their off-balance sheet holdings of these derivatives.
Costs of Rescuing Culprits
• $4.1 trillion committed by US & European Govts (in 2008) to
help banks & financial institutions - 45 times more than the
amount spent on development aid in 2007 ($90.7 billion)
For instance:
• Insurance Co. AIG: $152.5 billion (as of Nov’08)
• Mortgage lenders Fannie Mae & Freddy Mac: $200 billion
(US Govt aid to developing countries in 2007: $23.2billion)
• US FDIC has so far spent $13.2 billion to cover 19 failed
banks.
(Top 9 US Banks which will receive cash help paid their
CEOs a total of $289 million in 2007)
• UBS bank bailout by Swiss Govt: $60 billion
Impact on Asia
Source: FT.com - Asian Economic Forecast http://www.ft.com/cms/s/0/f80cd30ee88d-11dd-a4d0-0000779fd2ac.html
Impact on Developing Countries
• How does financial crisis & recession in US & European
markets affect Asia?
• Outflow of capital from Asia (>100 billion $$$ in 2008) 
stock markets crash & credit squeeze  rising costs of
borrowings  investments slow down  greater demand
for FOREX depreciates national currencies  increases the
costs of imports & foreign debt servicing
• Recession in Western markets  slow down of Asian
Exports  decline in foreign exchange earnings  current
account deficit  pressure on national currencies
Impact on Developing Countries
• Foreign investment declines
• Remittances by Migrant Workers – decline
• Foreign aid goes down
• Govt revenue goes down
 affects growth prospects, domestic investments,
infrastructure, employment & social welfare of
people
Impact on Workers
• Job losses in export & domestic industries – how many?
• Pensions – (Globally pension funds lost over 5 trillion $
between 2007 & 2008) – in some countries where pensions
were privatised (ex in Latin America), they lost more
• Implications for collective agreements – expected - wage
cuts, wage freeze, rise in casual unprotected work, higher
work loads, forced unpaid leave (ex. in electronics industry
in Taiwan, S.Korea), default on social security contributions,
violations of FoA,
• Impact on Migrant workers
• Impact on families - education of children, nutrition, women,
rise in informal economy, rise in alcoholism
• Impact of decline in social welfare budgets of Govts
According to ILO
• Global jobs crisis - unemployment could increase by more
than 50 million in 2009
• About 200 million workers could be pushed into extreme
poverty, majority in developing countries
• Working poor (earning below US$2 per person, per day) can
go up to 1.4 billion (45% of the world’s employed)
• Self employed & workers in informal employment are likely
to see sharp decline in their incomes & prospects (these
workers are generally not covered by social safety nets)
Before talking of what should be
done, lets talk about the root
causes of the global economic crisis
The root causes
Crisis of over production/over capacity
• Capitalism has a tendency to build up production capacity
that goes beyond the population’s capacity to consume (due
to social inequalities that limit purchasing powers) and thus
leading to erosion of profitability
• Need for constantly increasing profits requires capital to
keep looking for new markets – for access to cheap labour,
cheap sources of agricultural & industrial raw materials, new
markets to invest & sell
lets look at post war economic history of the world!
1945 -1970s
• Period of post war reconstruction, rapid growth, Keynesian
State policies  state controls over markets, strong fiscal &
monetary policies to minimize inflation, recession, high real
wages to stimulate & maintain demand (+ strong unions)
• This golden period came to end in 1970s – period of
stagflation (low growth + inflation)
it happened due to  tremendous rise in productive
capacities (Germany, Japan, Taiwan, Korea, Brazil),
increased global competition, inequalities within & between
countries that limited the purchasing powers & demand,
reducing profitability – on top of this process came oil price
shocks
Policies Post 1970s
to meet the need for rising profits, the following
policy prescriptions were put forward in the name
of promoting economic growth:
• Neo-liberal restructuring of economies
• Globalization
• Financialization
Neo-liberal Restructuring
• In developed countries – Reaganism & Thatcherism & in
developing countries – structural adjustment (1980s)
• Aim:
- to remove capital from the control of state
- redistribute income towards the rich on the theory that
rich invest & that will promote economic growth
• Did it work?
 Incomes of the rich,  Incomes of the workers, BUT
investment by the rich did not . These policies restricted
demand & economic growth.
Global Economic Growth
Source: Wall Street Meltdown Primer – by Walden Bello,
published on Friday, Sept 26, 2008 by Foreign Policy in Focus
…then came Globalization
• integration of various economies/markets – via trade
liberalization & removing barriers to mobility of capital
• Integration of China, India, Brazil, Russia, South Africa &
many other emerging market economies – as production
centres, markets, sources of cheap labour, raw materials
• Almost 40-50% of the profits of US corporations come from
their operations & sales abroad now, especially in China.
• But - Globalization increases the problem of over-capacity,
which depresses prices & profits
Rise of Financialization
• Declining profits in industry & agriculture gave spurt
to financial sector investments
• Financial sector creates profits but it doesn’t create
new value
• In this system profits depend on taking advantage
of price deviation from the real value and selling
before the reality enforces ‘correction’.
Financialization of Economy
• Value of the outstanding credit derivatives is estimated at
more than 8 times the global GDP
• Many Mfg industries are today owned by (unregulated)
private equity capital/hedge funds - profits are made by
selling-off assets of companies, downsizing, reducing
investment in plant & equipment, shutting down mfg
operations, outsourcing production, share buy backs – all
in the name of maximizing share-holder value
• Even mfg companies find investing in money markets
more profitable than investing in mfg & service operations
(Ex GE, GM, Porsche) – even social security funds
Volatility of financial sector
• Profitability depends on speculation that drives the
financial sector & speculation causes over investment,
bubbles & financial crises
• No. of financial crises since capital markets were
deregulated & liberalized in the 1980s
- Japan in 1989-91
- Finland, Italy, UK, Sweden in 1992
- Mexican financial crisis in 1994-95
- Asian Financial Crisis in 1997-98
- Russian Fin Crisis in 1998
- Argentine Fin collapse in 2001-02
- US technology stocks crash in 2000-01
Outline of 1997 Asian Financial Crisis
First - capital account & financial sector liberalization

Then came - foreign funds (seeking quick & high returns)

over investment in real estate & stock markets - prices fall

About 100 billion flees out of the East Asian countries within
few weeks

economic collapse  recession in the real economy
IMF bails out FIIs BUT opposed the national govts when they
wanted to impose controls & implement measures that US,
Europe & other countries are doing today.
So, what needs to be done?
Main concerns ?
• Main concern of Capital:
- Ensure the health of financial markets, banks &
financial institutions
- Protect the value of countries’ FOREX reserves
- ensure credit to industries
• What is the main concern of Unions?
- provide social protection to those most affected
- more fairness, transparency & regulation of
international finance & financial markets
- respect for workers rights
- maintain price stability & employment levels
- Increase domestic investment – public & private
What is Capital saying?
• Create of Global Financial Regulatory Coordinating Council
(comprised of private banks, IMF, WB) to direct the
international financial system, with IMF as the enforcer
• Greater representation rights for some important developing
countries within IMF & other multilateral organizations.
• Emergency action should not provide the basis for a
permanent larger role for the public in the international
financial system
 in times of crisis bail out the financial sector but then
retreat to the traditional, limited role of facilitating private
finance while guaranteeing public debt
- Institute of International Finance (financial sector’s global lobby organization)
Regulating Financial Markets
• International financial markets & Institutions need reforms &
re-regulation - what should be the objectives of this?
- to help the casino to expand & operate in more orderly
fashion OR to regulate the financial sector so as to channel
the resources into real economy for productive capacities
and jobs?
• Policies to eliminate tax havens, tax evasion & transfer
pricing
• Currency transaction tax that could raise significant
resources as well as play a regulatory role.
ILO’s policy prescriptions
• Promote employment, social protection, fundamental rights
at work and social dialogue to address the problems
• Credit for consumption, trade & investment
• Stimulate dom. demand thru public & private exp & invst.
• Special emp. & soc. protection measures for workers out of
jobs
• Support productive small enterprises & cooperatives as also
promote green jobs
• Maintain development aid & provide additional credit lines to
developing countries
• Regulate finance capital
ILO Approach
ILO’s Decent Work Agenda is a suitable policy
framework to deal with the crisis.
Tripartite dialogue with employers & workers
organizations - should play a key role in addressing
the economic crisis, and in developing policy
responses at national level.
Pre-condition for effective social dialogue:
Respect for Freedom of Association & Right to
Collective Bargaining
Export dependence of Asia
• Exports account for about 47% of developing Asia’s output
• Most Asian countries have become dependent on external
demand. For instance - exports, net of their import content,
account for as much as 2/3rds of GDP in Hong Kong &
Singapore, almost 50% of the output of Malaysia & Thailand
and 1/3rd for South Korea & Taiwan.
• Despite intra-regional trade, almost 60% of final demand for
Asian goods comes from developed countries.
Other effects of slump in OECD
• Slows down in lot of intra-Asian trade – market for much of it
components, inputs & capital equipment declines.
• Economies that rely on tourism get affected as visitor
numbers fall. Tourism makes up 5-7% of GDP in Hong
Kong, Malaysia, Singapore & Thailand.
• If employment of foreign workers in the Gulf & elsewhere
falls as is expected, then remittance-dependent countries
from the Philippines to parts of India are also in for a shock.
At least one lesson for Asia
• The export-led model has it limitations
• If economic & social stability at home is to be
ensured then Asian countries cannot depend solely
on western markets. Asian countries (like China &
others) will have to re-orient their economies
towards domestic-led growth.
Annexes
Asia is expected to grow by just 2.7%, a
fraction of the 9% regional growth in 2007 –
IMF.
... a look at some important Asian economies
Source: Financial Times, Asia and the crisis: Unlucky numbers By David Pilling, February 9 2009
http://www.ft.com/cms/s/0/65599c38-f6e1-11dd-8a1f-0000779fd2ac.html
Japan
• Japan has been hit hard - Economists expect overall
contraction of 4% in 2009 - the worst performance since
1945 – mainly due to collapse of exports, which fell 35 per
cent in December & by 46% in January
• With Japan’s industrial output plunging, part-time & temp.
workers are being fired first. The Govt says about 125,000
irregular employees in manufacturing will lose their jobs in
the six months to March. Others say almost 400,000 will be
out of jobs. non-permanent staff makes up 1/3rd of the
workforce. The plight of these unemployed & homeless
“dispatch workers’ has shocked many & is now one of
Japan’s hottest political topics.
Plight of other Asian Tigers
• Financial crisis has hit S. Korea, Singapore & Taiwan –
Singapore with its open economy, regional trade hub, could
contract by up to 5% this year – its deepest recession since
its birth in 1965.
• Taiwan – a major supplier of microchips & flat screens as
part of the global supply chain – is in serious troubles.
Economy shrank by more than 8 per cent between Oct-Dec
2008, an annual contraction of more than one-fifth. Hazards
of being part of supply chain when the end user is broke!
China
• China expects to grow at 6 - 8% this year as the
government invests billions ($585bn) into domestic
economy – still, it is a slow down compared to 13% growth
in 2007. However, China’s economic slowdown spells big
trouble for the rest of Asian countries which rely heavily on
demand from China –
• Government estimates that about 20m rural migrant
workers, 15% of the total, had lost their jobs as exportoriented factories shut their gates - more job losses &
industrial unrest is expected.
Impact on Developing Asia
• Bangladesh: garment industry that employs about 2.5
million workers & earns about 60% of country’s export
incomes – orders were down in 2008
• Philippines: garments & electronic exports to US down,
decline in remittances, depreciation of peso, capital
outflows,
• India: capital outflows, stock markets down by over 50%, fall
in rupee value, credit squeeze, real estate, construction,
financial sector affected, IT services exports down, textiles &
garment exports down, officially ½ million workers out of
jobs between Oct-Dec 2008 – in reality much more.
Impact on Developing Asia
• Sri Lanka: export incomes from rubber, tea, coconut down;
garment exports fall, slow down in investment, increase in
foreign debt burden
• Thailand: textile & apparel industry slows down, in
agriculture sector rubber, cassava, rice & corn prices are
down, pension funds affected,
• Vietnam: exports to US & EU are down, capital inflows
reduced (remittances, FDI, commercial loans), rising food
prices, declining business incomes & investment may turn
many bank loans into non-performing assets
• Pakistan: falling value of Pak Rupee, rising food, electricity
& fuel prices, power cuts, lack of trust in government
abilities in the midst of political and insurgency instability.
Sources & further readings
• Wall Street Meltdown Primer – by Walden Bello, published on Friday,
Sept 26, 2008 by Foreign Policy in Focus
• Talking Points: Economic Meltdown – by Chuck Collins, Oct 27, 2008,
Institute for Policy Studies (www.ips-dc.org)
• How bailouts Dwarf other global crisis spending – by Andersen,
Cavanagh & Redman, Institute of Policy Studies, Nov 24, 2008
• Voices from the South – Impact of the financial crisis on developing
countries – Institute of Development Studies, Nov 2008
(www.ids.ac.uk/go/financial-crisis-impact)
• ILO Global Employment Trends Report 2009
• IUF (www.iuf.org): The G20 and After–Questions for Labour, 15 Dec
2008
• Source: Financial Times, Asia and the crisis: Unlucky numbers By David
Pilling, February 9 2009 http://www.ft.com/cms/s/0/65599c38-f6e1-11dd8a1f-0000779fd2ac.html