Economic Highlights

New Delhi, 17 September 2010

Trajectory For Growth

HIGHER WAGES A MUST

By Shivaji Sarkar

Wage increases and low-interest rates are a prerequisite for maintaining the world growth trajectory by faster employment creation and expansion of domestic demand growth, says the Trade and Development report 2010 (TDR) of UN Conference on Trade and Development (UNCTAD).

It lambasts the obsession for export-led growth calling it impractical and a primary reason for ignoring the domestic demands by keeping wages low to have higher exports share. The TDR instead prescribes higher --- liveable -wages so that the workforce could become productive consumers --- with proper purchasing power to fuel domestic growth. It considers domestic growth a necessity for sustaining development by generating market demand.

Calling the US, the “former engine of growth”, it virtually asks countries like India not to depend on it or Europe for their growth. It does not see the US regaining its primacy in world economy as it is unwilling to raise demand and has not increased wages during the last two decades. The US and G20 face “the danger of a second dip to the recession”.

A slew of policy changes are required for countries like India to maintain the growth trajectory if it wants to avoid the projected decline in 2011 with the rest of the world. Labour is an integral part of development and poverty alleviation, a Million Development Goal (MDG), is possible by considering labour as input to capital and not perceiving it separately, the TDR states.

Importantly, this is the first time in many decades that another UN body, other than the International Labour Organisation (ILO), has focused on higher wages and employment. Whereby UNCTAD sees global recovery as fragile. The crisis of 2008 is not yet over. Oil prices are rising. Banks remain brittle despite stimulus in the West. There is slowdown in growth all over, even in Asia. There is small slowdown in India and South-east Asia.

In many cases there has not been a decline in output, but employment recovery has not taken place. Europe has seen insufficient domestic demand growth. Germany, now seen strong but may start slipping. Japan has got stuck in a low-growth syndrome as it is an US-oriented export-led economy. Germany and Russia, if there is no course correction, might become more like the US.

The recovery in exports and imports in terms of volumes is seen. However, the unit value has come down. To increase sales, prices are reduced by keeping wages low. Thus monetary growth is less and leads to a poverty syndrome.

In many cases, recovery in the developed world followed the pre-crisis pattern led by easy finance. While the TDR does not discourage easy finance, it avers this alone could not be the reason for growth. Some of it is happening in countries that are supposed to be the future engine of growth like India, China and Brazil.

The pitfall is that easy credit is seen as a replacement for higher wages. It leads to a small rise in consumption by a small section of the people classified as the middle class as is happening in India. But it does not lead to sustainable growth.

Another concern is that banks virtually have a blank cheque either through stimulus as in the West or through increasing interest rates repeatedly as in India. Banks earn high profits but high lending rates lead to contraction in the economy as it erodes the incomes of the workers and makes other services and products expensive.

It is not that jobs are not being generated in the US and Europe but they are through artificial measures and possibly not sustainable. Even in supposedly high growth countries like China and India “such a large increase has not resulted in rise of jobs”.

The fastest growing IT sector in India accounted for 0.2 per cent of the workforce. Other services sectors like finance, business, real estate and business activities employ just 1.7%. The organised manufacturing sector has seen a decline from 9.3% to 7.5% of total employment.

The view that employment protection and social-security institutions are responsible for higher employment is unfounded, UNCTAD says. An incomes policy should ensure that productivity gains are distributed in such a way that the wage share in total national income does not fall as it has in many countries over the past four decades. A policy aimed at sustained increase in wages in line with productivity growth raises consumption at the same rate as productivity, thereby generating employment opportunities.

Simultaneously, it serves as an instrument to control inflation. As labour costs are the most important determinant of the overall cost level in most economies, adjusting wages to productivity prevents both increases in production costs and demand growth in excess of the supply potential. It also widens the room for an investment-friendly monetary policy.

Incomes policies can be helped by institutional arrangements for collective bargaining among workers' and employers' associations, the report notes. Centralized negotiating mechanisms and prudent tripartite arrangements --- which may include Government recommendations for wage increases --- have in the past helped some countries to achieve steady expansions in domestic demand.

 In the absence of, or as a complement to, such institutional arrangements, a legal minimum wage and its augmentation over time, in line with productivity growth, may also contribute to ensuring that domestic demand and supply potential rise approximately in parallel.

In many developing countries, including the poorest, public employment schemes like NREGA, are potentially important instruments of fighting unemployment and poverty, the TDR states. 

In many countries where the share of informal employment and self-employment, especially in agriculture is high, such instruments of incomes policy need to be complemented by measures to raise the incomes of agricultural producers in line with overall productivity growth, as has been the practice in most developed countries for decades.

A re-focus on domestic demand for employment creation would also ensure a robust competition in international, export, market and ensure higher sustainable prices for the producers. The crisis, if it occurs, would be limited to pockets and easily addressable. ---- INFA

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