TUAC COMMENTS
TO THE BUNDESTAG STUDY COMMISSION
ON "GLOBALISATION OF THE WORLD ECONOMY"
1. In TUAC's view, what consequences does the liberalisation of capital
movements have on efficiency and stability of the international financial
system, specially for workers and employees?
We have four concerns about the effects of the stability of the financial
system on workers. Firstly, sudden losses of confidence by private investors
leading to capital flight from countries have dramatic and immediate consequences
on working people and their families. This was clear in the Asian crisis
following the collapse of the Thai Baht in July 1997. According to ILO estimates, open unemployment in the Asian region rose from "full employment"
levels in the summer of 1997 to 5-10% by mid-1998. A wider impact was also
felt through the growth of insecure employment, the return of migrant workers
to rural areas and sending countries, and the re-appearance of poverty
after years of rapid growth. Wages in the affected Asian countries fell
by between a quarter and a third between 1997 and 1998. Although difficult
to measure, these negative social effects have been catalogued by the ILO
(1). Despite the recovery in industrial production in
1999, the level of insecure employment in Korea remains the highest in
all OECD countries. Looking at the effects of crises in other countries,
which have been hit by capital flight, it is clear that living standards
remain depressed for sustained periods. Eight years after the Peso
crisis in Mexico, real wages for Mexican workers are lower than they were
at the time of the crisis and poverty in Mexico has grown substantially.
Following the crisis, the consensus view amongst the international financial
institutions was that the crisis was due to "crony capitalism" in the countries
concerned rather than the liberalisation of capital movements. TUAC and
trade unions in the region would share the view that serious errors were
exposed in corporate governance by the crisis. Nevertheless, the countries,
which were hit by the crisis, were all regarded as economic "miracles"
prior to the crisis. In a country such as Korea the rapid growth in labour
productivity, the high rates of savings and capital accumulation and the
investment by households in education were all-important factors in the
growth of the economy after the Korean War. The unsustainable private debt
of corporations, which is now held to be responsible for the crisis, was
not highlighted at the time by financial commentators nor by the international
financial institutions.
Our conclusion would be that the fundamental cause of the crisis was
the encouragement of financial liberalisation and large inflows of mobile
capital into countries, which did not have institutions capable of handling
these inflows in a stable and sustainable way. It is important therefore
that countries in similar stages of development maintain the right to regulate
capital inflows and outflows.
Our second concern is that the second-round effects of capital flight
has been to give the countries concerned little alternative but to accept
the terms of emergency lending from the IMF. In the Asian crisis, these
led to excessive economic contraction through restrictive monetary and
economic policy, when the problem was not of a macro-economic nature. The
criticism of the stance of IMF policy was also made vocally by the former
chief economist of the World Bank, Joseph Stiglitz (2).
We would argue strongly for the need to shift the policy recommendations
of the IMF to more growth-orientated policy.
A third concern is the extent to which the liberalisation of capital
movements has shifted power over policy-making to operators in bond markets
who along with Central Banks have an institutional bias towards deflation
in the setting of monetary and fiscal policy resulting in higher than necessary
unemployment levels. In the United States, in the mid-1990's, it took clear
leadership and tacit co-operation between the Chairman of the Federal Reserve
and the Treasury Secretary to maintain growth-orientated stances of policy
and not heed the clamour for higher interest rates which was coming from
the bond markets and financial market analysts. The result was that a policy
of "testing the water" i.e. allowing growth to continue as long as inflation
was not apparent was successful in showing that unemployment rates could
be brought significantly below what were estimated at the time to be the
"non-accelerating inflation rates of unemployment" (NAIRU's).
Fourthly, the "herd instincts" of financial markets have led even in
non-crisis situations to shifts in exchange rates clearly out of line with
economic fundamentals. This makes it impossible for the collective bargaining
process to take account of competitivity questions. Agreements designed
to set wages in line with real productivity growth of 2 ½ - 3 %
per year are swamped by the unwarranted shifts between the Dollar, Yen
and Euro currencies that have been seen over the last two decades.
2. What are TUAC's views with regard to the discussion on a new international
financial architecture, particularly with regard to:-
- The proposal to levy a tax on foreign exchange
transactions (Tobin tax);
- Proposals to stabilise the currency regime
through target zones or other kinds of political management?
The TUAC has put forward over the last five years a range of measures
designed to establish better regulation of international financial markets.
These could be summarised as:
- Improved fiscal and monetary policy co-ordination between the main
reserve currency blocs of the Dollar, Yen and Euro
in order to generate more stable parities, along with the progressive removal
of large long-term current account deficits and surpluses;
- Recognition of the right of states to control short-term foreign
capital inflows and outflows in the interest of domestic macro-economic
stability;
- Binding international standards for the prudential regulation of
financial markets covering capital reserve standards, limits to short-term
foreign currency exposure, controls and certification on derivatives trading
and other forms of leveraged investment built-in credit;
- Ensuring that banking systems are transparent and bound by effective
disclosure criteria;
- Improved information on currency flows, private debts and reserves;
- Serious examination of the implementation of an international tax
on foreign exchange transactions.
As part of these measures a serious examination should be undertaken
of a Tobin tax. Professor Tobin put forward his arguments for such a tax
at a seminar organised by TUAC prior to the Halifax G7 Summit in 1995 (3).
An exchange rate tax would not be a panacea and would not act as a protection
against large-scale crises of the scale of the Asian crisis. However, it
is our judgement that an appropriately set tax could act as a disincentive
for short-term "round trip" speculative capital movements and so lead to
greater currency stability. As argued by Tobin, it could also increase
the discretion for more monetary policy autonomy within countries or currency
systems. The practical difficulties for introducing a Tobin tax have been
exaggerated by those who are opposed on ideological or theoretical grounds.
If a "critical mass" of financial centres were to apply the tax it would
increase the inconvenience of speculators operating outside these centres.
With regard to currency target zones, our view is also that better co-ordination
between the regional authorities in Europe, the United States and Asia
would be highly desirable to achieve exchange rates which better reflect
economic fundamentals and so generate greater currency stability. This
requires fundamental agreement between the regions on developments backed
up by concerted intervention when necessary. Half-hearted intervention
and conflicting messages from authorities may be worse than useless.
3. How do you rate TUAC's capability to influence the formulation
and implementation of policies with regard to a new international financial
architecture?
Up to now the debate over financial market reform has been held behind
closed doors by bankers and finance ministry officials. This has restricted
the chance of not only TUAC but the public in general to make its voice
heard. It is for this reason that TUAC and the international trade union
movement through the ICFTU have called for the establishment of a broad-based
Independent International Commission to report on the institutional policy
changes needed to establish an effective regulation of financial markets.
The response of governments to the crisis has been to establish more diffused
lines of responsibility for work on the international financial market
architecture, with the IMF handling the macro policy implications, the
Financial Stability Forum the regulatory issues, and the newly established
G20 the dialogue with developing countries. Each of these institutions
is closed to effective discussion with the labour movement or civil society,
despite some more tentatively positive signs from the new managing director
of the IMF. In sum, TUAC would agree with the conclusion of Stiglitz and
argue strongly that labour needs its "voice at the Table" in these debates.
(1) Eddy Lee - The Asian Financial Crisis: The Challenge
for Social Policy, ILO 1998
(2) Joseph Stiglitz in "The Social Dimension to Globalisation",
the trade union response to global economic and financial crises - Report
of DGB-FES-TUAC Workshop, May 1999
(3) International Financial Markets and Employment
and Social Policy, Report of a Round Table Discussion, Ottawa, 29 May 1995.
