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. 

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