PP - Economic Crisis in Thailand in 1997.

8/3/2019 PP - Economic Crisis in Thailand in 1997.

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External Openness and Employment:The Need for Coherent Internationaland National Policies

DESA Development Forum on ProductiveEmployment and Decent Work

New York, 8-9 May 2006

Rolph van der Hoeven and Malte Luebker

(ILO, Geneva)


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Facets of external openness External openness has two important facets:

Trade liberalization;

financial openness.

Trade liberalization has been on the politicalagenda since the 1960s, financial opennesssince the 1980s.

Both are part of Washington Consensuspolicy prescriptions and structural adjustmentprogrammes.


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Trade liberalization Some signs of convergence in the debate on

the social impact of trade liberalization:

Proponents of trade liberalization see their initialoptimism disappointed and concede that tradeliberalization alone does not create growth andemployment.

Critics accept that integrating countries have notentered a race to the bottom, but that non-integrating countries have continued to haveserious problems.


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Trade liberalization However, trade liberalization can

entail considerable adjustment costs andjob churning, and

can lead to greater wage inequality(experience especially in Latin America).

Benefits of trade liberalization dependon initial conditions and successfulmanagement of process (Lall).


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Financial openness and

employment

The consequences of mistakes in

financial markets, where capital isvolatile and mobile globally, far exceedsthe consequences of mistakes in thelabour markets, where labour is largely

immobile across national lines.Richard Freeman (Harvard & LSE)


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The rationale behind

financial liberalization

Assumption: Investment in developingcountries is constrained by the lack ofcapital. Freeing up the internationalmovement of capital will givedeveloping countries access to capital,

and therefore increase investment,raise growth, and create employment.


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Financial liberalization since

the early 1990s: Capital account

Widespreadcapital accountliberalization sincethe early 1990s.

Many countries

have removedall restrictionson international

capital flows.

Countries with Capital Controls, 1980-2001 (in % of total IMF membership)

Source: IMF.


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Trends in international

capital flows and investment Rapid expansion of

international capital

flows (both grossprivate capital flowsand FDI).

Stagnation or

fall in worldwideinvestments (GFCF).

Gross Fixed Capital Formationand FDI, 1977-2003 (World)

Source: World Bank.

0

5

10

15

20

25

30

1970

1973

1976

1979

1982

1985

1988

1991

1994

1997

2000

2003

Gross fixed capital formation (% of GDP)

FDI, net inflows (% of GDP)


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Distribution of

private capital flows

0

200

400

600

800

1,000

1,200

1,400

1

9

8

0

1

9

8

1

1

9

8

2

1

9

8

3

1

9

8

4

1

9

8

5

1

9

8

6

1

9

8

7

1

9

8

8

1

9

8

9

1

9

9

0

1

9

9

1

1

9

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2

1

9

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3

1

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9

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1

9

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1

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1

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1

9

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1

9

9

9

2

0

0

0

2

0

0

1

2

0

0

2

2

0

0

3

Industrialized economies

Twelve top-tier developing economies*

Remaining developing economies

FDI Inflows by Economic Grouping,1980-2003 (in billion current US$)

Source: UNCTAD.

Private capitalflows are skewed

towards high-income countries,and some middle-income countries.

A similar trend canbe observed forFDI (see graph).


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World

GDPg

rowth,

1961

WorldGDP

growth,1961-20

04(annualchan

geinpe

0 1 2 3 4 5 6 7

1961

1962

1963

1964

1965

1966

1967

1968

1969

1970

19711972

1973

1974

1975

1976

1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

19941995

1996

1997

1998

WorldG

DPgrowth(a

Meanp

erdecade(ar


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Direct growth effects of

financial liberalization No solid relationship between capital

account liberalization and growth

performance can be established(IMF and UNCTAD research).

Only some middle-income countriesappear to have small growth impact

through capital account liberalization. Growth performance mainly depends on

other factors, such as good institutionsand an adequate policy framework.


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Indirect growth effects though

increased reserve holdings Financial openness

makes larger foreign

reserve holdingsnecessary.

Opportunity cost ofreserve holdings is

high: Funds cannotbe used forinvestments withhigher returns.

Reserve Holdings by Developing countries, 1970-2004 (in % of GNI)

0

5

10

15

20

25

30

35

1

9

8

0

1

9

8

2

1

9

8

4

1

9

8

6

1

9

8

8

1

9

9

0

1

9

9

2

1

9

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4

1

9

9

6

1

9

9

8

2

0

0

0

2

0

0

2

2

0

0

4

All developing countries

East Asia & Pacific

Latin America & Caribbean

Middle East & North Africa

South Asia

Sub-Saharan Africa

Reserve Holdings by DevelopingCountries, 1970-2004 (in % of GNI)

Source: World Bank.


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Volatility and financial crises Financial liberalization in developing countries is

associated with higher consumption volatilityand increased growth volatility compared todeveloped countries (Prasad et al. 2004).

Financial openness has made countries morevulnerable to crises, e.g.: Argentina 1995 and 2001-02

Brazil and Chile 1998-99

Indonesia, Rep. of Korea, Malaysia, Philippines andThailand 1997-98

Mexico 1994-95

Turkey 1994, 1998-99 and 2001


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Impact of financial crises

on long-run growth

Financial crises havea large, negativeimpact on GDP.

Countries typicallydo not return totheir old growth

path (IMF research). GDP loss is largest

for poor countries.

Typical Growth Path after FinancialCrises in Rich and Poor Countries

Source: Cerra and Saxena (2005: 24)


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on employment Labour market consequences are

evident from a number of indicators: Higher unemployment; increase in share of informal employment;

falling real wages and falling incomes;

higher poverty (e.g. in South-East Asia,the number of working poor rose from33.7 million before the crisis to 50.6 millionin 1998).


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on employment (examples) Recovery of social indicators generally lags

the economic recovery by several years.

Thailand (Financial Crisis in 1997/98)

75

80

85

90

95

100

105

110

115

120

125

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

0

1

2

3

4

5

GDP per capita (1997 = 100, left scale)

Unemployment rate (in %, right scale)

Chile (Financial Crisis in 1998/99)

75

80

85

90

95

100

105

110

115

120

125

1995 1996 1997 1998 1999 2000 2001 2002

0

1

2

3

4

5

6

7

8

9

10

GDP per capita (1998 = 100, left scale)

Unemployment rate (in %, right scale)


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on the labour share Financial crises, and exchange rate crises in

particular, lead to a decline in the share of

wages in national income: On study reports an average drop in the wage

share of5 percentage points per crisis.

There is only a modest recovery after a crisis(three years later, the wage share is still 2.6

percentage points below the pre-crisis level). The frequency of financial crises is one factor that

contributed to the accelerating decline in wageshares since the early 1990s.


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Building a stable int. financial

system for growth & employment

Our goal should be to build a stablefinancial system that stimulates globalgrowth, provides adequate financingfor enterprises, and responds to theneeds of working people for decent

employment.(World Commission on the Social Dimension of

Globalization, 2004, para. 404)


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Three broad policy areas for

policy coherence

1. Policies in industrializedcountries

2. Multilateral rules

3. Policies in developing countries


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1. Policies in industrialized

countries Greater G3 exchange rate coordination.

Increased attention to stimulating growth in

Europe (e.g. IMF stance on Growth andStability Pact in EU)

Recognition of the importance of employmentin financial policies.

Increase of development aid and othersources of innovative international finance.


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2. Multilateral rules Developing countries should be integrated into

the financial system: They are not adequately involved in reforms

Progress is slow and limited

New codes may make financial market access moredifficult

Need for equitable mechanisms of debt resolution

Capital account liberalization should depend on acountrys circumstances.

Reduce financial volatility and contagion inemerging markets: Supply of emergencyfinancing should be speeded up.


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3. Policies in developing

countries: The policy trilemma Nationally policy space circumscribed by

so-called policy trilemma:

Open capital account Stable exchange rates

Independent monetary policy

Something has to give?Or can we avoid the corner solutions?

Or can we add more instruments?


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Avoiding corner solutions:

Active RER regime The positive effect of an active real exchange

rate regime on employment works through

three channels: Higher capacity utilization in times of

unemployment (requires combination ofmacroeconomic and fiscal policies).

Stimulate output growth (combination with

industrial policies). Contribute to increased employment elasticity

(shift in sectors).

Rodrik (2003): Growth Strategies. NBER Working Paper No. 10050; Frenkel (2004): Real Exchange rateand Employment in Argentina, Brazil, Chile and Mexico. Paper presented at the XIX G24 Technical

Group Meeting.


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Adding new instruments:

Social pacts

Social pacts can lead to a morecoherent economic and social policy,foster stability and hold inflation down.

To reach consensus more attentionneeds to be given to distributional

issues the missing element ofthe current development debate(e.g. MDGs)

PP - Economic Crisis in Thailand in 1997.

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