The G20 – Towards a New Economic Model?

I spoke yesterday at a well-attended pre G20 conference in Toronto  organized by the Friedrich Ebert Foundation and the Munk Centre at the University of Toronto. My comments as part of a union researchers panel were based on a  short paper I wrote for the Foundation on the need for a new labour market model , posted below. The other papers in the collection bringing together Canadian perspectives on the G20 are well worth reading. My fellow panelist Damon Silvers from the AFL-CIO made a very strong intervention against the Harper/Merkel call for immediate “exit strategies” from fiscal stimulus which, he argued, are very much setting the stage for a double dip recession.

The highlight of the conference for me was a great lunchtime presentation by  the UN Deputy Secretary General for Economic Development who spoke to the need for a comprehensive reform of the Bretton Woods institutions based on the original vision of Keynes – unfortunately not available on line. He saw grudging acceptance of the G20 by smaller countries, but also called for a more legitimate Global Economic Co-ordination Council within the UN framework.

Paul Martin spoke with passion on the need for more balance between the market and regulatory frameworks in the global economy and a focus on the needs of Africa in particular -  but largely ducked  taking a clear position on the balance between exit strategies and maintaining the recovery.  Indeed he implied that UK style cuts may be stimulative if they keep down interest rates and establish market confidence. Sigh.

Global Economic Governance Must Build
a New Labour Market Model

The immediate causes of the global economic crisis lie in the deregulation of finance and speculative excesses, but it is also rooted in the deregulated or so-called flexible labour markets created by governments in thrall to the doctrines of the neo-liberal economic model. Global economic governance must promote a different labour market model if we are to have a durable recovery.

Before the crisis, the share of profits in national income rose to record levels in most advanced industrial countries, as did the incomes of the top 1% of the workforce, while the wages of the great majority of working families in Canada and most other advanced industrial countries stagnated and ceased to rise in line with productivity. In the context of widespread wage repression, the growth of mass consumption, especially in the U.S., became dangerously dependent upon unsustainable asset bubbles (the high-tech boom, housing), and a rapid and ultimately unsustainable growth of household debt. Perversely, capital flowed from the poor countries to the rich countries which most strongly embraced the neo-liberal model (the U.S., the U.K.) as the huge trade surpluses which arose from the relocation of new productive investment to the developing world were recycled into purchases of developed world financial assets to keep the expansion going. Wages in developing countries rose, but from very low levels, and not by enough to sustain growth led by domestic consumption as opposed to exports. Developed countries with large trade surpluses (Japan, Germany) also held down wages and domestic consumption to promote export competitiveness.

Liberalization of trade and investment flows has put severe downward pressures on the bargaining power of workers and of trade unions in trade sectors throughout the global economy, as have other key components of the neo-liberal growth model, such as privatization and deregulation of domestic markets, and the deliberate “flexiblization” of the labour market to maintain low inflation. Trade union bargaining rights, minimum wages and labour standards, and unemployment benefits have all been deliberately weakened. Private sector union density is in sharp decline almost everywhere in the advanced industrial world, and stands at very low levels in most rapidly industrializing developing countries. While labour rights and bargaining power are well entrenched in a few countries, the general trend is unmistakably clear.

Canada, the U.S., and many other countries generally pursuing neo-liberal policies have now entered a period of high unemployment with many more insecurely employed workers than in previous recessions, with a weakened labour movement and with a significantly reduced social safety net. The prospect is for the economic crisis to lead to a rapid increase in poverty and widespread economic insecurity, and for workers to be forced into more intense competition for the jobs which continue to exist, putting much more intense downward pressures on wages and working conditions.

There are economic and not just social dangers ahead. If and when wages start to fall, a country, and the world as a whole, can enter a deflationary spiral as happened in the Great Depression of the 1930s. The spiral came to a definitive end only when the labour market found a floor. The rise of mass industrial unions and a vastly strengthened social safety net set the stage for post-War prosperity. Ultimately, unions helped resolve the crisis and lay the groundwork for the post-War boom by helping create a virtuous circle, ensuring that wages would rise in line with productivity growth, driving consumer spending, and thus supporting new rounds of productivity enhancing business and public investment (financed, it needs to be said, by a closely regulated financial sector).
Unions and strong labour standards promote greater economic equality and fairness at work, and also make labour markets work better from the point of economic growth and efficiency. High union density and bargaining power sustain effective demand at the macroeconomic level, and also raise productivity at the firm level. Good labour/management relations underpin high levels of workplace cooperation which is enormously important to productivity because production is always a social process and not just a technical process.

The challenge today is to ensure that we recreate across the global economy the conditions of regulated national labour markets which underpinned prosperity in the post-War era. This is enormously difficult for two reasons. First, under current conditions of excessive productive capacity and intense competition based in significant part on wage repression, it is difficult for countries to promote higher labour rights and standards in isolation from one another. Second, any cooperative international impulse to raise the floor is made enormously difficult by the fact that key labour market institutions vary enormously by country, reflecting very different national trajectories and constellations of political forces. We need a new global labour market framework, but it will have to be woven from very disparate national strands.

The starting point has to be to make much more effective on the ground the core conventions and key labour standards developed of the International Labour Organization.1 These comprise something greater and more coherent than a lowest common denominator of actual national practices, and have practical relevance arising from the fact that the norms have been developed by a tripartite process assisted by experts. International labour standards create important floors, but are also drafted and applied to recognize very divergent national economic conditions. The key problems, of course, with ILO standards and conventions is that they are not of universal application (many countries have not ratified even the core conventions), and they are not effectively enforced. A good starting point would be to make much more effective the conventions on collective bargaining rights, on tripartism, and on minimum wages and employment standards to raise the floor of the global labour market. The ILO should, like the OECD and IMF, undertake a peer review process to determine if countries are in compliance with their obligations and to encourage wider recognition of standards.

A new moment of opportunity may have arisen. The G20 may not be the most legitimate international institution, but it is effective. It brings together almost all of the major economic powers across the developed/developing country divide. Coordination of macroeconomic policy helped stop the Great Recession from turning into another Great Depression (at least for now). The G20 may yet build some framework for effective regulation of the global financial system, and is at least being pushed by some governments to do so. On the labour side, G20 governments (or at least President Obama) invited the ILO into the process at the Pittsburgh Summit and asked their labour ministers to meet in Washington in April to provide input before the June Toronto Summit, making explicit reference to the 2009 ILO Global Jobs Pact. The labour ministers engaged in a process of consultation with labour and employer representatives before and at their meeting, and issued a statement which spoke to the importance of labour market institutions and social dialogue. In laying the basis for a recovery with quality jobs and decent work, they agreed that “it is critical that we undertake efforts to ensure that we meet our obligation as ILO members and implement policies consistent with ILO fundamental principles and rights at work.” Unfortunately, proposals to institutionalize G20 labour ministers’ meetings and to continue a tripartite consultation process did not find their way into the final communique.

What could and should come out of the G20 is a collective commitment to develop and then adhere to a core set of labour rights and standards backed up by an effective system of mutual surveillance under the auspices of the ILO. This would complement tentative commitments to macroeconomic coordination to redress trade imbalances and to financial re-regulation equally needed to maintain a very tenuous recovery. Labour and the progressive left must further develop the key elements of this policy package, and then persuade governments to adopt it. That is a daunting, but necessary, task.