Financial Crisis Unions’ Watch

by Stefan Beck and Christoph Scherrer

Recently, however, the economic historian Werner Abelshauser argued that the financial crisis would vindicate the German model of capitalism. In his view, the fading lustre of Anglo-Saxon capitalism, in particular its model of corporate governance and dominance of shareholder value, should again lead to the German or “Rhenish” model of diversified quality production and its institutions becoming more attractive.

We argue here that Germany’s response to the crisis has reinforced the central strategies and core institutions of the German economy. At the same time, the model has become more and more exclusive and has begun to foster European and international economic imbalances.

One of the German model’s most salient lines of continuity is the maintenance of a trade surplus. After the period of stagflation in the 1970s, the Bundesbank reacted with policies focusing on rigid monetary and currency stability, in which priority was given to price stability. As a result, domestic consumption was stifled while exports remained the main source of growth. The focus on exports was shared by the trade unions, including the most powerful among them, IG Metall which supported the drive for productivity through the institutions of co-determination, and ensured that unit labour costs would not be driven up by wage demands exceeding productivity gains. The success of this strategy led to the coinage of the term “Modell Deutschland” in the mid-1970s. Socially and economically, the model became less inclusive long before the financial crisis hit. In particular, the reforms of the social democratic and green coalition government of Chancellor Schröder shifted the German model towards institutional deregulation and a price-competitive strategy that included moderate wage increases, tax cuts and fiscal consolidation. Its core objective, however, remained the same: fostering growth through exports. During the present crisis, the focus on companies’ core workforces has been reinforced.

The impact of the Financial Crisis
Unlike the US and many European countries, Germany did not enjoy a debt-driven real estate boom before the crisis. The resulting slower growth in comparison to its neighbours made Germany the object of much ridicule in the business press. In the absence of a real estate bubble, however, one would have expected that Germany might have survived the crisis unscathed. In fact, the German government believed that because of a lack of exuberance, its economy would be rather immune; which explains why the government acted rather belatedly to the crisis that eventually hit Germany at the end of 2008. It reached the German economy via two channels, the first being finance. Many of its banks were overexposed to “toxic” speculative papers originating mainly in the US and Ireland. Some of the big private banks, especially Commerzbank and Hypo Real Estate, and top public banks (the Landesbanken) had to be rescued by public guarantees of gargantuan proportions, totalling €400 billion. The more important channel, however, was trade. The export industry, the heart of the German model suffered immensely through the collapse of international demand. The automobile industry, in particular, suffered because of the overlap of the financial crisis with the energy crisis. The capital goods industry lost sales because consumer industries postponed capital investments when faced with a drop in demand.

The most visible outcome of the German model, its export success, proved to be the Achilles heel of its economy. However, the German model of close cooperation proved its worth. Despite the significant decline in GDP of 5%, job losses were miniscule (about 80.000 or 0.3 %). Some elements of the German model contributed to this “miracle”. General stabilizers of the welfare state made intentional deficit spending less necessary. Whereas discretionary measures to re-inflate the economy (Konjunkturpakete I & II) accounted only for €78 billion for the years 2009 and 2010, i.e. around 3.3 % of government expenditure per year, overall government expenditure increased in 2009 by 5%. These stabilizers were enhanced by the willingness of the government to fund part-time support for workers. In 2009 the duration of part-time support was extended up to 24 months and its use reached a maximum of 1.5 million workers in May 2009 (compared to 70.000 in 2007) and then dropped again to around 900.000 workers in the first quarter of 2010. Expenditures of the Federal Employment Agency for short-term work totalled more than €5 billion in 2009.

Industry-wide collective bargaining brought about noticeable real wage losses. According to the ILO Global Wage Report, in 2008 and 2009, German workers had to accept a decline in monthly real wages of more than 0.5% (ILO 2009). Decentralisation and co-management bore fruit: In about 30% of all firms, overtime accounts have been reduced – some even going negative (“Zeitschulden”), one out of four firms reduced the use of subcontracted work, and nearly every third used other measures to increase internal flexibility. In sum, about 1.2 million jobs were preserved by reductions of working time. Lay-offs predominantly hit workers with temporary contracts.

Co-determination was also defended in another arena. The attempt to rid VW, Europe’s largest car manufacturer, of state and trade union influence, failed. Under Chancellor Merkel, the federal government successfully retained the stake of the German State of Niedersachsen in VW, despite attacks from the European Commission. Because of this state’s stake in VW, the Porsche’s strategy to finance a takeover of VW, with cash from VW, was muted. Instead, VW took over Porsche, allowing the work council of VW to retain a strong voice. At the end of 2009, exports had picked up again and seemed to justify the current strategy.

The core of the German model, close cooperation of capital, labour and the state in pursuit of export surpluses, has actually been strengthened in the crisis. Success of the corporatist crisis management, however, may bring about the German model’s own demise, with export success perhaps squeezing out neighbours who cannot shield themselves via currency depreciations - e.g. southern EU members.

International consequences of Germany’s trade surplus and macroeconomic restraint strategy of growth
The Greek and Euro crises in 2009 and 2010 were portrayed by the German government and by most of the media as the result of a weak, spent-thrift government. In contrast, the German objective of budgetary parsimony was praised as virtuous and, accordingly, strict loan conditions for Greece were seen as wholly justified.

Surely, in the case of Greece it is easy to identify homemade causes of the crisis. However, there are also systemic reasons for the Greek crisis, which are related to Germany’s export success. Since 1999 German unit labour costs remained nearly constant, whereas the average of the European Currency Union rose about 15% and those of Greece, Portugal or Spain between 20 and 30%. Additionally, trade and current account deficits of these latter countries have increased in parallel to comparative unit labour costs, and disproportionally since the introduction of the Euro.

From a Post-Keynesian perspective this mercantilist strategy of perpetual trade or current account surpluses is a kind of beggar-thy-neighbour-policy. It aims at fostering the growth of one’s own economy and rate of employment at the expense of other countries. And given the fact that countries cannot sustain permanent deficits without rising indebtedness vis-à-vis foreign countries, such mercantilist strategies can force countries into insolvency. Moreover, such developments have internationally contractive effects on growth and can provoke economic and political instabilities. In the end, deflationary tendencies stemming from Germany and balance of payment and/or budgetary problems of deficit countries are two sides of the same coin.

The German model after the financial crisis
In sum, the German economic model was hit hard by the crisis but proved surprisingly resilient. Actually, its core, the willingness of all major stakeholders to work together in securing the export prowess of German industry, emerged from the test of the crisis stronger than ever. With the help of state subsidies, employers kept their long-term commitments to core workers, and in return, organisations representing skilled workers, i.e. work councils and trade unions, were willing to make concessions in terms of pay and working conditions. But whereas now some of those core workers (e.g. BMW) are receiving extra or ‘compensatory’ payments in return for their loyalty, temp workers and workers outside the export industry are bearing the brunt of the crisis as new levels of public indebtedness are leading to budgetary constraints whose first victims are again those on welfare. While voices within and outside of Germany call for strengthening domestic consumption, the recent resurgence of exports seems to vindicate the export coalition. Therefore, it does not look very likely that the German economic model will be restructured in favour of less dependence on trade surpluses and further tensions within the euro zone are therefore highly likely.

Stefan Beck worked as a research assistant at the University of Kassel. He is currently preparing his dissertation about mercantilism and the German economic model.

Christoph Scherrer is Professor for Globalization and Politics at University of Kassel, Germany. He is also executive director of the International Center for Development and Decent Work and a member of the steering committee of the Global Labour University.

LA INDEXACIÓN A LOS COMBUSTIBLES ES UN IMPUESTO INFLACIONARIO

Como era lógico suponer, los empresarios se limitaron a defender que la Ley 392-07 de Competitividad e Innovación Industrial, no se modificara debido a que con la modificación Aduana cobraría el itebis y no la Dirección de Impuestos Internos, para de ese modo los empresarios que son evasores mantener sus altos márgenes de beneficio.

El tema referido a la indexación de combustibles a los empresarios no le interesó porque saben que en definitiva ese impuesto lo paga la población. Tenemos suficiente experiencia como para que todos sepamos que el impuesto a los combustibles tal y como lo acaba de aprobar el Ministerio de Hacienda son impuestos de efecto inmediato que afectan sensiblemente a cada una de las cadenas productivas.

Creemos que como siempre ha sido en este país, se decidió cortar por lo más fácil sin tener en cuenta que con esto se afecta la maltrecha economía de la mayoría que en este caso, aunque sean trabajadores, por los bajos salarios que devengan están incluidos dentro de los renglones pobres de la sociedad.

En virtud de esto nuestra Centrales Sindicales CNTD, CASC y CNUS hemos decidido hacer contacto con legisladores de diferentes bloques partidarios, para que estos aprueben un proyecto de Ley de Indexación Salarial, de manera que los trabajadores del Sector Privado, Empleados Públicos y los Pensionados y Jubilados, también sean indexados en sus salarios, sueldos y pensiones.

Consideramos que seria un acto de justicia, el que se pueda compensar a estos sectores de trabajadores que actualmente tienen serias limitaciones para hacerle frente a una canasta familiar de RD$30,000.00 (Treinta mil pesos), con sueldos, salarios y pensiones en el 78% están por debajo de los RD$15,000.00 (Quince mil pesos).

En nuestro país no hay limitaciones en las ganancias, lo que fijan los precios de los alimentos, las medicinas, transporte y otros servicios indispensables para la vida cotidiana de la gente no tienen ningún tipo de control y cuando deciden traspasar un precio siempre lo hacen doblando o triplicando sus beneficios.

¿Cuáles son los únicos que no le pueden transferir sus costos a nadie?, los trabajadores del Sector Privado, Empleados Públicos y los Pensionados y Jubilados, que por años mantienen estáticos sus ingresos y como modo de subsistir o agonizan buscando desesperadamente otro tipo de ingresos o acuden a lo más fácil, pero altamente doloroso y es a la reducción de su calidad de vida.

En consecuencia esperamos encontrar en el Congreso oídos receptivos y que no nos escuche sólo una minoría de congresistas, como ha sucedido cada vez que se han tratado temas de este tipo, que apenas el senador de Elías Piña Adriano Sánchez Roa ha asumido nuestra propuesta, sino que los congresistas como primer poder del estado tomen en cuenta la situación de sus electores mayoritarios que son trabajadores y pueblos quienes les garantizan su permanencia en las dos cámaras legislativas con que cuenta el país.

Santo Domingo, D.N.
06 de agosto, 21010

Gabriel del Río Doñé
Secretario General CASC

Jacobo Ramos
Secretario General CNTD

Rafael Abreu
Presidente CNUS

By Esther Busser

This was largely due to a reduced demand for goods in industrialised economies as well as to a lack of access to credit for the financing of exports. At the international level, calls against protectionism (that is, increasing barriers to trade) have been manifold. These calls have been made in the International Labour Organisation (ILO) Global Jobs Pact, G-20 Declarations and government declarations in organisations such as the World Trade Organisation (WTO) and the Organisation for Economic Co-operation and Development (OECD). Despite these calls and the common understanding that closing off markets would have negative effects and risk a further deepening of the crisis, several countries have resorted to protectionist measures. Discussions around trade and the crisis have mainly focused on whether countries have resorted to protectionist measures, the nature of these measures as well as their impacts. However, this discussion only reflects a part of the overall picture on the role of trade in the crisis. It does not touch on its role in promoting a sustainable recovery and in addressing the underlying imbalances in world trade. Two important questions, therefore, need to be raised. The first is whether the pre-crisis model of export-led growth in some countries and debt-fuelled consumption in others is sustainable. The second is whether the outcomes of export-led growth have indeed been beneficial for the long-term employment and development perspectives of developing countries. The crisis has shown that the push for trade liberalisation and open markets over the past couple of decades, as promoted by the WTO, the major economies and Transnational Corporations (TNCs), has resulted in an export or “market access” focused trade model, which in turn has created a situation where many countries became dependent on export markets for their growth. Such a situation makes them vulnerable in cases of shocks, like in the current crisis, particularly when demand drops simultaneously in all markets, resulting in job losses. This constitutes a crucial difference with the Asian financial crisis, which limited itself to Asian countries and allowed them to export themselves out of their crisis, an option not available currently.

Several voices have been calling for a rebalancing of trade, not only to reduce vulnerability to trade shocks but, more importantly, to rebalance global demand. Such voices have been expressed in several fora, including in the G-20, the International Monetary Fund (IMF), ILO and other United Nations (UN) organisations. Such a rebalancing would require less dependence on export markets and more emphasis on creating diversified domestic markets in all countries, that are based on consumption and wage led growth as well as a re-establishment of wage-productivity linkages.

However, these calls for rebalancing are made amidst the dominance of a free trade paradigm. The “no protectionism” slogan is regularly accompanied by a call for “further trade liberalisation”. Mixing the two is problematic, especially when it comes to rebalancing efforts that do require a substantial rethinking of the role of trade and trade liberalisation in sustainable recovery and development. The recent G-20 Toronto statement that calls upon “the OECD, the ILO, World Bank and the WTO to report on the benefits of trade liberalisation for employment and growth at the Seoul Summit” clearly shows how the current drive for trade liberalisation continues to reign. Moreover, this rebalancing exercise questions the long-term growth perspectives to be achieved in developing countries by free trade and the current specialisation pattern. The vulnerabilities of developing countries are unfortunately not only limited to their dependence on export markets, but also to specialisation in low value added activities in highly competitive markets. Despite some diversification and industrialisation successes, particularly in Asia and in a few Latin American countries, many developing countries have witnessed a specialisation in limited numbers of low value-added economic activities. This strategy has not only increased the dependency of these countries on export markets, but it has also failed to bring about diversification and to substantially raise income levels and decent work opportunities. Trade liberalisation has played a major role in this process. An exclusive focus on trade liberalisation has forced countries to specialise in products in which they have a so-called natural comparative advantage, either in agriculture and natural resources or in low value added and labour intensive manufacturing. This is problematic because commodities and low value added manufacturing (such as textiles and clothing) are characterised by highly competitive markets, low prices, low productivity gains, low wages, poor working conditions and powerful supply chains that have reinforced competition and a race to the bottom. In other words, specialising in production in which developing countries have a natural comparative advantage only allows for limited productivity and wage improvements. In such a context, creating decent employment and higher levels of income remains difficult and rather challenging. Strategies that only focus on entering and stagnating in the lower ends of global supply chains are therefore problematic and limit prospects for a diversified economy. A rebalancing approach should thus aim at creating decent and productive employment through diversification of economies. This would entail increasing productivity in sectors such as agriculture while at the same time building comparative advantage and productive capacity in higher value added activities characterised by increasing returns to investment and a higher potential for productivity gains. Such a strategy for development is not only the key to more productive employment, higher wages and decent working conditions, but also instrumental in increasing aggregate demand and stimulating the growth of domestic markets.

What is important to understand, though, is that such a development and rebalancing strategy is only possible if governments reinvigorate their developmental role, build the relevant institutions, diversify their economies and adopt pro-active and strategic trade and industrial policies. The challenge is to recognise again the importance of these policy instruments aimed at putting diversification, productivity increases in agriculture, industrial development and structural transformation at the top of the agenda if decent and productive employment is to be delivered. This can only be done if trade agreements and trade liberalisation are looked at in a different way and assessed on the basis of their impacts on development and decent work. Unfortunately, over the last two to three decades, countries have been set on a path of trade liberalisation that has largely eliminated such instruments and policy space through commitments in trade and investment agreements. Such policy space is crucial if countries currently confined to low value added activities want to move up the value chain, diversify their economies and rely more on domestic and wage led growth. Experiences in industrialised countries and successful emerging economies have shown that trade liberalisation has to be gradual to allow economies to build up their productive capacity and specialise in the right activities. There is an important role for the state in channeling investment, protecting domestic markets, providing access to finance and attracting new technology. A variety of policy instruments will be necessary to ensure industrial development. Such instruments do include the strategic and flexible use of tariffs (low for inputs and higher on products in which competitiveness is being developed), subsidies, reverse engineering, local content and other investment requirements, export taxes and so on. Many of these instruments have either been prohibited or strongly limited by current trade agreements.

Although the Doha round seems stalled, the demands to revive it are frequent and the aggressive bilateral trade liberalisation led by the US and the EU continues more than ever, reducing much of the remaining policy space for developing countries. In a similar way policy space is being reduced in developing countries that are in the process of accession to the WTO, slashing their tariffs, opening up their services and reducing their policy space far beyond that of WTO members with comparable levels of development, thus having a strong impact on their long term development perspectives. A much more viable strategy would be to promote regional integration, diversification and development. Unfortunately the current drive for liberalisation hinders such regional strategies.

Governments will have to shift from a laissez-faire approach in trade to a more active role whose core objective is the creation of decent and productive employment through industrialisation and structural transformation. To put industrial policies high on the agenda again requires a serious reconsideration of the current free trade paradigm. Instead of eliminating vital policy space, a new trade regime should actively promote the use of it, as some protection will be needed to enable industrialisation and create decent work. A new trade regime such as this is imperative if a sustainable recovery is to become a reality.

Esther Busser is the Assistant Director in the Geneva Office of the International Trade Union Confederation (ITUC) since February 2009. She previously worked as trade policy advisor for the ITUC from 2003-2009.