---------- Forwarded message ----------
Date: Sat, 5 Dec 1998 13:06:25 -0500
From: Robert Weissman <[EMAIL PROTECTED]>
To: Multiple recipients of list STOP-IMF <[EMAIL PROTECTED]>
Subject: ILO on Impact of Asian Crisis (fwd)
INTERNATIONAL LABOUR ORGANIZATION 1998 PRESS RELEASES
Asian Labour Market Woes Deepening
ILO Calls for more "Socially Oriented" Model of Development as Job Losses
Mount, including Establishment of Unemployment Insurance
Wednesday 2nd December 1998
Simultaneously released in Hong Kong and Geneva ( ILO/98/42 )
HONG KONG (ILO News) - The social fallout from the sudden unravelling of
economic fortunes in East- and South-East Asia is exceeding initial
forecasts and risks dramatically worsening, according to a new report *,
published by the International Labour Office (ILO) today.
The ILO report, entitled The Asian Financial Crisis: The challenge for
social policy warns that the deepening economic and social troubles in the
region are unlikely to be reversed in the near future and urges governments
and policy-makers to take unprecedented emergency and long-term measures,
especially establishing unemployment insurance for the mounting number of
newly unemployed.
In light of the severity of the crisis, solutions will require "an unusual
degree of flexibility in policy making on the part of domestic and
international actors, including increased social spending, which may prove
unavoidable if countries are to undertake credible efforts to reform and
alleviate the worst social aspects of the crisis," said the report's author,
ILO economist Eddy Lee.
"Just as the Depression in the 1930s forged a new social contract in
industrialized countries in the 1930s, so must the current Asia crisis serve
as an impetus to creating a more socially oriented model for development,"
said Mr. Lee.
Such a social contract must be founded on increased democracy and social
protection, including greater respect for the right of workers to form free
trade unions, are also essential ingredients to overcoming the effects of
the crisis. The ILO analysis insists that "there is no basis for arguing
that poor countries cannot afford to implement basic civil and political
rights," including freedom of association.
The report finds that one in every five formal-sector jobs in Indonesia has
been wiped out this year alone, shattering decades of progress made toward
modern, industrial employment in that country, along with the lives of 4 to
5 million Indonesian workers and their families. An additional 20 per cent
of the Indonesian population, approximately 40 million people, is expected
to fall into poverty this year.
In the Republic of Korea, one in twenty workers lost their jobs during the
nine month period from November 1997 to July 1998 and open unemployment in
the country is expected to increase threefold, from 2.3 per cent to 8.2 per
cent. An estimated 12 per cent of the Korean population is expected to sink
below that country's poverty line this year.
In Thailand open unemployment levels are forecast to triple from 2 to 6 per
cent this year, with partial information indicating a rapid acceleration in
the rate of job losses in the last three months. As access to jobs and
income dry up, it is estimated that 12 per cent of the Thai population will
sink into poverty this year, adding significantly to the nearly 16 per cent
of Thais already living in poverty.
In Hong Kong, China, unemployment rose from 2 per cent to over 5 per cent in
the first three quarters of 1998, an estimated net loss of some 75,000 jobs.
In Malaysia, unemployment levels are expected to double to 5.2 per cent by
year's end. However, both Hong Kong and Malaysia dipped into recession only
this year, indicating a relatively rapid rate of job losses in a
comparatively short period of time.
But the report finds that unemployment statistics tell only part of the
story, citing evidence that "the adverse impact on the labour markets of
these countries has been more widespread (...) apart from open unemployment,
the number of discouraged workers also seems to have increased."
In the Republic of Korea, for example, the labour force participation rate
fell from 63.1 per cent to 61.5 per cent between the second quarter 1997 to
1998: "This represents a decrease in labour force participation of 1.6
million workers compared to what it would have been had the pre-crisis trend
in labour force growth continued."
In Thailand, the number of people of working age shown as being "not in the
labour force" increased by 600,000 in the 12 months between February 1997
and 1998. In Malaysia, the presence of a very large number of illegal
foreign workers in the country may well understate the true extent of job
losses. In Indonesia, where estimated unemployment figures range from 7 to
14 per cent, the low estimate assumes that approximately one-half of all
displaced workers will be absorbed into the country's large informal and
rural sector, a contingency that is remote in light of the widespread
poverty and even hunger afflicting both town and county in Indonesia.
Near Term Outlook is Discouraging
The report says that while the region's 1998 economic performance exceeded
even the most negative forecasts, prospects for an immediate bounce back are
poor. The most optimistic forecasts see the beginnings of a moderate
recovery in the second half of 1999, but few observers expect a return to
the heady growth rates of the pre-crisis era. Full employment, one of the
hallmarks of the last 30 years' Asian economic miracle, is also unlikely to
return any time soon.
Even in the event of an upturn in the wake of Japanese, United States and
Pacific Rim-sponsored recovery initiatives, the ILO says that Asian social
model needs to adapt to the new reality: "Since high and sustained growth
can clearly no longer be taken for granted, a significantly greater degree
of social protection must be aimed for", Mr. Lee said.
In particular, the ILO report says that unemployment insurance schemes for
affected workers are feasible, affordable and increasingly necessary as the
economic agenda shifts from crisis management and stabilization to embrace
far-reaching financial-sector reform and industrial restructuring. The
absence of unemployment benefits "has inflicted unnecessary suffering and
hardship."
Among the fore-mentioned countries, only the Republic of Korea provides
laid-off workers with any unemployment benefits at all, and these are
usually at a low level and of short duration.
While acknowledging that only success in the struggle to restore financial
stability and international confidence will rekindle economic growth, "the
ultimate basis for salving social wounds", the ILO insists that it would be
"foolhardy" to ignore the lessons for social policy that have been so
painfully driven home by the crisis: "A fundamental rethinking on the social
dimension of economic development is as important as the purely economic and
financial issues that currently occupy centre stage." Asia needs, the report
says, "a new and better social contract."
Did Cronies Cause the Crisis?
According to the ILO analysis, the Gross Domestic Product of Indonesia, the
worst-hit country, will decline by 15 per cent this year.. Thailand will
decline by 6.5 per cent and the Republic of Korea by 5 per cent. Malaysia
and Hong Kong, China are expected to decline by 3-4 per cent. Japan,
Singapore, the Philippines, Vietnam and China have all slipped into
recession or seen growth forecasts revised sharply downwards. The ripple
effect of the crisis is felt worldwide, in Russia and Latin America, as well
as on the stock exchanges of the US and Europe.
The report asks how, after decades of spectacular economic performance, so
many East and South-East Asian countries fell victim to an economic shock of
such unprecedented scope and severity. It examines four of the most
widely-touted causes of the collapse: "crony capitalism and the failure of
the Asian model; the role of international capital markets; financial
liberalization and fragility; and domestic policy failures."
While much post-crash analysis initially amounted to shifting of the onus of
responsibility from domestic to international actors and back again, with
blame being allocated to a diverse spectrum of agents, ranging from corrupt
and inept government officials to predatory investors who simply panicked
and fled, the ILO analysis rejects the "pat" notion that the financial
collapse resulted from a "panic" on the part of international investors and
heavily discounts the impact of "crony capitalism" as a primary cause.
The crisis was caused by many factors, including volatile international
financial markets, weak corporate governance and domestic policy failures,
but the ILO report says that the "the financial system proved itself to be
the real Achilles heel of the pre-crisis Asian economies."
The "crony capitalism" explanation suggests that in spite of their open
economic policies and sound macroeconomic management, Asian economies were
fatefully undermined by widespread political interference in the market via
corruption, sweetheart deals for relatives and cronies of the Government or
through directing finance to politically connected enterprises. "These types
of interference in the operation of markets are clearly likely to have
contributed to the problem of excessive and misallocated investment and a
consequent lowering of the rate of return on capital."
The report says that "there can be little doubt that elements of crony
capitalism played a role in provoking the crisis, even though not the
predominant one some have ascribed to it." The ILO analysis sees crony
capitalism as just one in a long list of "inadequacies" that led to a series
of domestic policy lapses, which eventually, and suddenly, coalesced in a
catastrophic loss of market confidence following the Thai currency crisis of
1996. These policy lapses differed widely from country to country, but in
general they fuelled the dramatic loss of investor confidence that engulfed
the entire region with surprising rapidity. These inadequacies include:
Excessive government interference in the market, especially by
influencing such factors as the allocation of credit and capital and the
creation of monopolies;
Poor economic policies, notably by building up an excessive reliance on
foreign borrowing, which generated excessively high levels of investment and
growth and unsustainable current account imbalances;
Shortcomings in mitigating the impact of the huge surge in capital
inflows, leading to exchange rate and interest rate instability;
Failure to ensure that financial liberalization was accompanied by a
sound financial system, which led, notably, to a proliferation of
over-leveraged, unhedged, short-term borrowing;
Inadequate regulation of the banking system combined with a lack of
transparency in the operations and soundness of banks.
The ILO report reserves judgement on whether originality or orthodoxy should
prevail in monetary and fiscal policy, arguing only that "in situations
where professional opinion is seriously divided and where there is a high
degree of uncertainty, a greater than usual degree of flexibility in policy
implementation would be in order."
It cites the Malaysian decision at the beginning of September to cut loose
from IMF orthodoxy on high interest rates as being "of considerable
interest" in the effort to halt the economic contraction which took hold of
that country's economy at the beginning of the year. But the ILO says that
it is still too early to tell what effect this move will have.
What is happening in Malaysia and elsewhere as "a real-world experiment with
an alternative set of policies to those, which, so far, do not seem to have
succeeded in stemming the crisis." In order to avoid the possible immobility
of a policy stalemate, the ILO urges pragmatism and "close monitoring of the
unfolding effects of current policies and a willingness to change course
when warranted."
Can Prescribed Remedies Cure the Ills?
What is certain is that while the social dimensions of the Asian crisis have
been receiving increased attention, "socially provided relief still falls
far short of requirements."
While the emphasis has been on stabilization, there has none the less been a
significant loosening of fiscal policy, "accompanied by substantial
increases in expenditures on mitigating the negative social effects of the
crisis", large parts of which take the form of increased foreign aid that is
earmarked for social relief. In particular, large social sector loans have
been granted to Indonesia and Thailand.
The ILO report says that "not all of the increased expenditure made possible
by the larger fiscal deficits has gone into social relief." In Thailand,
"social expenditures amount to only half of the projected fiscal deficit of
3 per cent of GDP while in the Republic of Korea the corresponding
proportion is 62.5 per cent. It is only in Indonesia that an amount equal to
almost 90 per cent of the increased deficit spending will be devoted to
social relief."
The report examines what proportion of Asia's needy will be helped by such
efforts, concluding that "only a small proportion of the unemployed can
expect relief through public employment-creation schemes." In Thailand "only
7 per cent and in Indonesia (at best) only 10 per cent of the unemployed can
expect to obtain a job in these schemes." In contrast, "this figure is much
higher in the Republic of Korea where approximately 24 per cent of the
unemployed are able to count on this form of employment."
The ILO questions whether such schemes and other forms of direct relief on
offer "can properly be called social safety nets." The resources deployed
thus far "provide relief to only a small fraction of those in need."
The Feasibility of Unemployment Insurance
The ILO report says that in light of current circumstances and prospects,
major policy initiatives will be needed, chief among them is the
establishment of a meaningful and affordable system of unemployment
insurance.
According to the ILO analysis, the potentially constructive role of
unemployment insurance in the current reform process is so strong that it is
a "puzzle" why no country, apart from the Republic of Korea has introduced
any form of employment insurance, and "it is all the more puzzling in the
case of Singapore and Hong Kong, China, where per capita GDP is higher than
in many OECD countries."
Part of the traditional, pre-crisis objections to unemployment benefits
dismissed their utility because open unemployment was so low, a condition
that clearly no longer pertains. A second objection, applying mainly to
countries with large agricultural and informal sectors such as Indonesia and
Thailand, maintained that these sectors could absorb retrenched workers.
However the extent of both unemployment in cities and rural poverty as well
as the need to modernize agriculture should "sweep away any notions about
the adequacy of traditional safety nets."
A related series of objection held that the fiscal costs of unemployment
insurance and its administration were too high for developing countries;
that benefits risked eroding the work ethic and fomenting social pathologies
so inimical to "Asian values; and that unemployment benefits would distort
the free market, for example by raising labour costs and reducing the
incentive for employers to invest and hire or by raising the costs of
much-needed industrial restructuring.
The ILO confronts these arguments, insisting that "one of the side-benefits
of an unemployment benefit system is that it facilitates the process of
industrial restructuring, since the added economic security it provides
reduces the resistance of workers to change."
As to the prohibitive cost, the ILO argues that "an unemployment insurance
scheme is, as the name implies, typically self financing" on the basis of
contributions from workers, employers or a combination of both. The question
of a fiscal cost to governments need not arise "unless the government
chooses to subsidize the scheme." Governments would clearly need to
intervene to establish a system of benefits and that could make coverage as
broad as possible and compensate for the near total absence of private
insurance.
"Without state intervention, there would be inadequate provision against the
contingency of unemployment; individuals do not provide enough cover on
their own and, because private provision is not viable, they cannot surmount
this by buying insurance." Government sponsored scheme could be
self-financing, with minimal burdens on enterprises and the market.
"In practice, all the evidence points to the fact that the required
contribution rate is very low, ranging from 1 to 4 per cent of payroll."
Assessments made by the ILO reveal that if the Republic of Korea, Thailand
and Indonesia had introduced unemployment insurance in 1991, that is, six
years before the onset of the crisis, "the striking result is that an
average required contribution rate of between 0.3 to 0.4 per cent of payroll
from 1991 to 2000 would have been sufficient to provide all insured job
losers over this period, including during the current crisis, with 12 months
of benefits."
The basis point of the ILO proposal is that "at very modest levels of
required contributions (...) the effects of unemployment insurance on labour
costs and hence on the demand for labour would be negligible."
An imaginative response to the new social agenda need not detract attention
or resources from other aspects of dealing with the Asia crisis. The ILO
report insists that strengthening the financial system is of key importance
and "indispensable for ensuring a return to high and stable growth in the
post-crisis period."
The ILO report says that "freedom of association and the right to organize
are key components of international action to promote democracy and full
respect of basic human rights." It rejects the argument that there are
distinct "Asian values" (which place communitarian values and social harmony
above individual rights) which stand in sharp contradistinction to
universally accepted civil and political rights. "There is no evidence that
Asian thought and tradition have historically given less importance to civil
and political freedoms." It says that the claims for the existence of
distinct "Asian values" are difficult if not impossible to make given the
size and diversity of cultures in the region and that the case for such
values have most often been "articulated by authoritarian regimes" and do
not "represent an expression of popular will."* * * * *
* The Asian Financial Crisis: The challenge for social policy by Eddy Lee.
International Labour Office, Geneva, 1998. ISBN 92-2-110850-3. Price: 20
Swiss francs.
Increase in Unemployment Rates (%)
Pre-crisis Latest
Indonesia 4.9 (Aug. '97) 15.0*
Thailand 2.2 (Feb. '97) 6.0*
Korea, Rep. of 2.3 (Oct. '97) 8.4 (Sept. '98)
Malaysia 2.6 (end '97) 5.2*
Hong Kong 2.4 (end '97) 5.0 (3rd quarter '98)
Singapore 1.8 (end '97) 4.5 (Sept. '98)
* Estimate.
Government sources.For further information, please contact Bureau of Public
Information (PRESSE) at: Tel: +41.22.799.7940 or Fax: +
: : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : :
"It goes on one at a time,
it starts when you care to act,
it starts when you do it again after they said no,
it starts when you say We and know who you mean,
and each day you mean one more." --Marge Piercy
