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 – 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 e88d-11dd-a4d fd2ac.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!

s 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 Finland, Italy, UK, Sweden in Mexican financial crisis in Asian Financial Crisis in Russian Fin Crisis in Argentine Fin collapse in US technology stocks crash in

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 1/3 rd 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

Japan Japan has been hit hard - Economists expect overall contraction of 4% in 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 1/3 rd 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 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 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 export- oriented 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 ( 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 ( ILO Global Employment Trends Report 2009 IUF ( The G20 and After–Questions for Labour, 15 Dec 2008www.iuf.org Source: Financial Times, Asia and the crisis: Unlucky numbers By David Pilling, February a1f fd2ac.htmlhttp:// 8a1f fd2ac.html