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Global Crisis: Crisis of distibution
and the Distributional Effects
Özlem OnaranVienna University of Economics & Business
“Wage share, globalization, and crisis: The case of manufacturing
industry in Korea, Mexico, and Turkey,”
International Review of Applied Economics, 2009 23(2): 113-134“From the crisis of distribution to the distribution of the costs of the crisis: What can we learn from the previous crises about the effects of the financial crisis on
labor?”
Political Economy Research Institute, University of Massachusetts Working Paper 195,
2009, http://www.peri.umass.edu/fileadmin/pdf/working_papers/working_papers_151-200/WP195.pdf
Global crisis
2007-? =Crises
of the
neoliberal paradigm
=Crisis
of distribution•
Capitalism‘s
answer
to its
crisis
in the
1970s:
–
Deregulated
global capitalism, neoliberal macroparadigm•
labor
markets, finance, international trade, capital
flows
•
Policy
target: low
inflation
instead
of full
employment
•
Pro-capital
redistribution
of income
& power•
“race to the bottom”
in labor share in both developing &
developed countries
•
Credit and consumption-led
growth•
Global imbalances↑–
Current
account
deficit
in the
US
–
Low
domestic
demand
in Germany, Japan, current
account
surplus–
Developing
countries
accumulating
reserves
after
the
Asian
crisis,
China
Figure 1a: Adjusted wage share, total economy, EU & US (1960‐2008)(Compensation per employee/ GDP at factor cost per person employed, %)
50
55
60
65
70
75
801960
1963
1966
1969
1972
1975
1978
1981
1984
1987
1990
1993
1996
1999
2002
2005
2008
European Union (15 countries)
Germany
United Kingdom
United States
Structure of the presentation•
Different countries, different crises
•
Former crisis, unemployment
& distribution–
Developing
countries
•
Model & estimation
results–
Japan
•
Possible effects of the recent global crisis–
Developing
countries
–
Eastern Europe–
Developed
countries
Different countries, different crises•
Developed countries–
fiscal capacity to better weather the shock
–
policies that were denied to the developing countries!•
immediate decline in interest rates, credit lines to domestic banks , considering counter-cyclical fiscal policy
–
less severe at the beginning compared to former crises in the developing countries, but might persist & deteriorate
+long recession →deflation risk?•
L-crisis?
…Different countries, different crises•
Developing countries –
No more resilient to crisis, no more “safe”, not de-coupled
•
+ capital
is
flowing
back to US!–
Developing countries with a former crisis history
•
Fragile countries: Countries dependent on capital flows: –
Turkey, South Africa
•
Countries less dependent on capital flows: Korea, Mexico, Brazil, Argentina(?) suffering from a crisis, which they have not created
–
Eastern Europe: dependent on capital flows–
China, India…
•
Developing
countries, in the
1990s-2000s –
Capital outflows
/currency
crisis
(depreciation) + financial
crisis
/
credit
crunch–
Dependence
on capital
inflows
→ dramatic
recession
•
GDP↓
by
7-10% in the
past, unemployment
hikes+currency
crisis: heavier
distributional
effects
–
import dependency→ pass-through → dramatic inflation –
hard
for
the
workers
to
reflect
to
their
wages
Crisis
now
& then: Periphery•
A boom-bust
cycle
was unavoidable: It
did
happen
again…
•
Difference: a global vs. regional crisis–
Originate
from
the
core
& spread
to the
periphery
–
Global credit
crash!–
Export market
contraction
•
Depreciation
does
not
help, only
negative balance
sheet
effects•
Debt-led
consumption
growth –households
–
HU, Ro, Cr, also Po high household
debt
in FX•
when
& how
will the
recovery
come from?
•
But
slower
building
up of the
currency
crisis–
10-30% depreciation
–
Fixed
pegs
still holding
in the
Baltics
& Bulgaria–
Contagion
but
not
total breakdown
•
Lower pass through to inflation than in previous crises? –
Global deflation
–
Commodity prices–
But: is depreciation wave over?
–
Russia:persistently
high inflation, 14%
Labor’s share, %, 1970-2003 (Wage/Value added, Manufacturing Industry)
Past
Crisis
in the developing countries: not neutral with respect to classes
•higher
fall in wage share
than
in output•persistent
post-crises
fall in wage share
9
A Model of Distribution• Conflicting claims model, open economy (Arestis 86, Rowthorn 77) • Wage bargaining: Labor market, macro, expectations, indexation
e
t
e
tttt prodpmacrobnbebbw 2110 Price (p) setting by firms (Sylos-Labini, 79)
– imported inputs → pass through effect of depreciation (x) 121 tttt xixiwsmp
• Labor demand (e): function of output and labor costs(?) 1431210 ttttt wsewseyeyeee
• Productivity (prod): pro-cyclical function of output ttt eyprod )1(
• Effects of neoliberal globalization: intensified conflict? – Global: International trade & FDI (↑fall back option of capital) – Domestic: Government’s expenditures (↓fall back option of
labor) Reduced form for the wage share (ws) to be estimated
tttt prodpwws
10
Specification
of the
equationDependent
variable:
percentage
change
in the
wage share
in manufacturingExplanatory
variables:
Basic model
(wage bargaining
+ conflict
inflation)growth of manufacturing
value
added
t & t-1
+interaction
dummy=growth*recessionnominal depreciation
t & t-1
lagged
wage shareMacro
variables
d(export/value
added
in manufacturing) t-1 & t-2d(import/value
added
in manufacturing) t-1 & t-2
d(FDI/GDP) t-1 & t-2d(government
final consumption
expenditure/GDP) t
11
Econometric
methodologySeemingly Unrelated Regression (SUR)
•
cross-country heterogeneity•
correlation of the country specific residuals
across countries captures common shocks; e.g. the Asian crisis.
•
The data on distribution –
confidential secrets of states?
–
Manufacturing data only, OECD
Estimation results: change in the wage share
Distribution & the crisis: Developing Countries & the East?
•
Contraction of output–
labor demand
–
decline in the bargaining power of workers–
compulsory unpaid leaves to avoid job losses
•
Mex: always pro-cyclical•
Tur: pro-cyclical during a crisis, counter-cyclical during normal years
•
Nominal depreciation: currency crises–
Inflation?
–
Negative effect of 1% depreciation: ranging between -0.14 in Mexico to - 0.27 in Turkey
(Onaran, 2009)
–
Lower than in previous crises? •
is depreciation wave over?•
Persistence of the decline: hysteresis
effect
•
a radical restructuring, which could not be achieved via a democratic process under normal economic circumstances–
e.g. South Korea, Turkey
•
Government expenditures: +, but they do not increase during a crisis in the DCs
•
2009: As of now
no real wage deterioration
except
for
Baltics
due
to low
inflation; declining
productivity, counter-cyclical
wage share
–
Yet!
Japanese Slump•
Differences to the developing countries:–
Deflation, not inflation
–
the duration and the size of the shock: •
developing country crises: the recession is very deep, but often one year long
•
the Japanese slump: the initial shock to growth was moderate, however the recovery took more than a decade.
–
wages•
developing country crises: sharp decline
•
the deflationary crisis: moderate real wage declines or even some minor increases particularly in years of deflation.
•
However, the cumulative effect is in both cases a dramatic pro-capital redistribution
Figure 1b: Adjusted wage share, total economy, Japan (1960‐2008)(Compensation per employee/ GDP at factor cost per person employed, %)
60
65
70
75
80
85
1960
1963
1966
1969
1972
1975
1978
1981
1984
1987
1990
1993
1996
1999
2002
2005
2008
Japan
Japan
The
distributional
effects
of the
crisis
in the industrialised
countries, when
nothing
changes…
•
The
deflation
of the
asset
prices
→ „more
equal
distribution“?–
No: Concentration of ownership of capital↑
–
The power of the “wealthy”
is not affected –
policy measures in line with what the wealthy want; state as an economic partner; the bank
rescue
package
without
conditions.
»
Profits were
private, losses
are
socialized!•
Unemployment↑: Pressure
on wages
–
First unskilled, temporary
workers, but
later
also skilled–
May be
not
soon
in early
2009, but
later
pressure
on the
wage share
–
An extention
of income
inequality–
Some
firms
will use
the
crisis
to legitimize
their
LR strategy
•
Export-oriented
countries‘
(e.g. Germany, Austria) curse: Export dependency
and low
wage strategy
–
Time to stimulate
domestic
demand
via higher
wages•
The finance of the package : future cuts in social expenditure, education, health, childcare, elderly care, manucipal
servies, infrastructure
Conclusion
•
The
unequal
distribution
of income
and power
is
an important
reason
behind
the
crisis•
When
nothing
changes, the
costs
of
adjustment
after
the
crisis
may
lead
to further
deterioration
in labor
share
in both
the
developed
and developing
countries.
Figure 1 d: Wage Share in Manufacturing Industry, Indonesia, Malaysia, Phillippines (1970‐2003, %)
0
5
10
15
20
25
30
35
40
45
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
INDONESIA
MALAYSIA
PHILIPPINES
THAILAND
Figure 1 e: Wage Share in Manufacturing Industry, Argentina, Brazil (1970‐2003, %)
0
5
10
15
20
25
30
35
40
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
ARGENTINA
BRAZIL
Figure 2a: Unemployment rate, Selected Countries in South‐East Asia (1980‐2007)
Figure 2b: Unemployment rate, Selected Countries in Latin America and Turkey (1980‐2007)
Source: ILO online database on he Key Indicators of the Labour Market (KILM)
0
2
4
6
8
10
12
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
Indonesia
Korea, Republic of
Malaysia
Philippines
Thailand
0
5
10
15
20
25
Argentina
Turkey
Alternatives•
Stimulus Plan•
Public employment
–
Prevent firing
•
Tax reform •
Wealth tax, heritage tax, higher corporate tax, progressive income tax, taxation of financial transactions
•
Cuts in taxes & social security contributions for the low wage groups
•
A large non-profit
oriented
public
banking
system+ participation
of the
workers, stakeholders, and transparency
•
A new
socio-economic
paradigm: –
full employment
& productivity-led
wages
•
Capital controls•
A new global monetary regime
–
fixed exchange rates without currency hegemony •
Trade & industrial policy consistent with development
•
International lender of last resort; Bail in! Not bail out!
Alternatives: Stimulus Plan•
Public employment
•
Labor intensive public services, Infrastructure•
Green investments
•
Prevent firing•
No firing in firms that can pay high dividends and managerial wages
–
Campaign, legal change?•
Credit as condition for banks that receive money from the rescue
package–
Condition for the firm: no firing
•
Automative
industry etc: –
Bofinger, Germany: short run nationalization
–
Then restructure, social-ecological reconstruction
•
Tax reform: •
Wealth tax, heritage tax, higher corporate tax, taxation of financial transactions
•
Cuts in taxes and social security contributions for the low wage groups
Alternatives: Finance•
No banks
that
are
„too
big
to fail“
–
break
into
small
banks–
Strong
and extensive regulation
•
No finance
from
the
capital
market•
A large non-profit
oriented
public
banking
system
–
Historically
regional banks, development
banks, Genossenschaftsbanken
–
European Investment Bank+ participation
of the
workers, stakeholders, and
transparency
Alternatives:
Global Policy
Coordination•
Beyond just a new “Bretton
Woods”
•
A new
socio-economic
& political
paradigm: –
full employment
& productivity-led
wages
–
Redistribution of income
& power•
National: an increase
in labor‘s
share
•
International: progressive global tax & investment•
Capital controls–
Tobin tax
–
Tax on all financial
transactions–
Shut-down
off-shore
tax heavens
•
a new global monetary regime with fixed exchange rates but without currency hegemony
•
Trade & industrial policy consistent with development•
International lender of last resort; Bail in! Not bail out!
•
Even EU could do a lot!
Figure 3: Labour productivity and real compensation rate, total economy, JapanAnnual % change (1971‐2008)
Source: OECD Economic Outlook
‐2
0
2
4
6
8
101971
1974
1977
1980
1983
1986
1989
1992
1995
1998
2001
2004
2007
Labour productivity of the total economy
Real Compensation rate ‐total economy
•real wage declined moderately (1992-93, 1997-99), slight recoveries in 1994-96. •mostly %Δwage< %Δproductivity. •nominal declines in the wages (1998-99, 2002-04, 2007) & wage freezes (2000, 2005-06, 2008) •The firing of many workers in the first half of the 2000s •the institutionalized wage co-ordination mechanism was almost broken down (Uemura, 2008). •against labor hording, the number of non-regular workers increased dramatically; •a shift towards unstable services jobs •bargaining position of unions weakened
Japan
•Long term unemployment ↑: 0.3% in 1992; 1.7% in 2003 •the incidence of long term unemployment unemployment
↑
: 33.7% in 2004 (persons
unemployed
for
1
year
or
beyond/total
unemployed)
the discouraging effect of the crisis
JapanFigure 4a: Employment, Japan (in thousands, 1980‐2007) Figure 4b: Unemployment, Japan (%, 1980‐2007)
Figure 4c: Labor force participation rate, Japan (%, 1980‐2007)
Source: ILO online database on he Key Indicators of the Labour Market (KILM)
54000
56000
58000
60000
62000
64000
66000
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006
0
2
4
6
8
10
12
14
elderly male
youth‐male
total
57
58
59
60
61
62
63
64
65
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
drastic increases in unemployment radically changed the industrial relations & wage bargaining process
Eastern Europe•
From soft to hard landing?
•
the slow down in global demand, the decline in FDI inflows, the contraction in remittances, credit crash, capital outflows
•
possible currency crisis + banking crisis. –
Correction of major imbalances: current account deficits & appreciated currency, pegs, housing bubble, credit boom
•
private indebtedness, in particular in foreign currency •
Reliance on mature market parent banks:
–
Market vs. parent bank finance?–
Parents cut lending–
Advantage or too small or too big to save?•
Hungary: Can IMF & ECB now make a difference?
–
Bail out (Asian) or stabilize & just postpone the problem –IMF policy: cut budget; in the meantime unemployment…
•
Pegs: Baltic Countries, Bulgaria•
Romania until now more exposed
•
Serbia, Croatia, Ukraine: non-member states? Bail out? Asian experience•
Poland, Czech Republic, Slovenia, Slovakia (auto) might suffer from the contagion effects as well as slow down in global demand
•
Russia: high exposure despite high reserves; share↓, collaterals ↓
•
Appendix
Figure 1f: Adjusted wage share, total economy, Eastern Europe (1990‐2008)(Compensation per employee/ GDP at factor cost per person employed, %)
0
10
20
30
40
50
60
70
80
90
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
Czech Republic
Hungary
Poland
Slovenia
Slovakia
Figure 1g: Adjusted wage share, total economy, South‐Eastern Europe and Baltic Countries (1990‐2008, Compensation per employee/ GDP at factor cost per person employed, %)
0
10
20
30
40
50
60
70
80
90
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
Estonia
Latvia
Lithuania
Bulgaria
Romania
OECD 07
Developed countries: Labor share↓
Ratio of wages
of the
10% highest
paid
over 50% lowest
paid
workers
OECD 07
21%↑
Wage share
in the
East↓
(adjusted)
Onaran, AMECO