By Jomo Kwame Sundaram
Public investment and basic social protection can turn around economies by creating millions of jobs
Recent political developments, including the defeat of incumbent governments in France and Greece, suggest that the public’s tolerance for economic policies that do not reduce unemployment has collapsed. Indeed, given the alarming economic and employment situation in many countries today, with no prospect of recovery on the horizon, further political turmoil is likely unless policymakers change course accordingly.
The economic crisis has wiped out more than 50 million jobs after years of weak, job-poor growth and increasing inequality in the world’s rich countries. Since 2007, employment rates have risen in only six of the 36 advanced economies, while youth unemployment has increased in a large majority of both established and emerging markets.
In the near term, the global crisis is likely to become worse as many governments, especially in advanced economies, prioritize fiscal austerity and tough labor-market reforms, even as such measures undermine livelihoods, incomes, and the social fabric.
Meanwhile, despite quantitative easing, many companies have limited access to credit, depressing investment and reducing job creation. Easy credit before the crisis encouraged over-investment in those sectors, such as housing, that were thought to be profitable. It is no surprise that the resulting excess capacity now discourages private investment in the real economy.
With inequality and unemployment higher, and incomes and domestic markets shrinking, everyone hopes to recover by exporting – an obviously impossible solution. Developing countries, long encouraged or even compelled to export and otherwise embrace globalisation, have been abruptly told to switch course: to produce for the domestic market and to import more. The irony is that this advice comes after much of their former productive capacity has disappeared.
But, having suffered currency and capital-account crises with greater openness, many emerging-market economies still feel compelled to accumulate huge reserves to protect themselves in the face of greater global financial volatility. While financial globalisation has not enhanced growth, it has exacerbated volatility and instability. Meanwhile, national “policy space” for economic recovery has shrunk since the crisis.
Public investment and basic social protection can help to turn this around, by creating millions of jobs. But, despite strong evidence to the contrary, the presumption that public investment crowds out private capital continues to discourage government-led economic-recovery efforts.
Historically, in fact, most advanced economies have lived with far higher fiscal deficits than they have today, and not only during wartime. Such deficits have financed strong, sustained, and inclusive growth not only in their own economies, but also abroad – as with the United States’ Marshall Plan, so central to European post-war reconstruction and recovery.
But now, because governments’ deployment of overwhelming financial resources to save selected private institutions deemed too big to fail caused sovereign debt to increase dramatically, officials have imposed fiscal austerity in deference to bond-market demands. Meanwhile, Eurozone countries are constrained not only by this fiscal fetish, but also by their lack of exchange-rate flexibility.
Moreover, multilateral cooperation for global recovery has been disappointing since 2009 – the year of the G-20’s London and Pittsburgh summits, including the Global Jobs Pact, on which there has been little meaningful progress since. As a result, the past three years have witnessed little movement toward developing and implementing a strategy for strong, sustained, and inclusive recovery. Instead, we have seen creeping protectionism, and not only on the trade front.
So, how can the world escape a cul-de-sac constructed by the short-term perspective of financial markets and electoral politics?
Although inclusive multilateralism has been battered by various challenges, including its seeming messiness and slow progress, it remains the best option for various reasons. The United Nations system must be bolder, but powerful interests must also allow it to play a bigger role.
In 2009, recognizing that market forces alone will not generate the investments needed for climate change mitigation as well as affordable nutrition for all, UN Secretary-General Ban Ki-moon proposed a Global Green New Deal, including proposed cross-border, public-private partnerships, especially to generate renewable energy and increase sustainable food production.
Under recent French leadership, the International Monetary Fund, after decades of promoting economic – especially financial – liberalization and globalization, has become more careful, if not skeptical, of its own previous policy analyses, prescriptions, and operations. Likewise, recent initiatives by the International Labor Organization – such as Fair Globalization, the Global Jobs Pact, and the Social Protection Floor – are all directly relevant to addressing the current stasis.
Unique among international organisations, the ILO’s inclusion of both workers and employers as social partners in its tripartite governance allows it to help lead the undoubtedly difficult processes needed to ensure strong, sustained, and inclusive recovery and growth. So, perhaps more than ever in recent decades, inclusive multilateral institutions are on the same page. Now their efforts need the support that they deserve.
Jomo Kwame Sundaram is UN Assistant Secretary-General for Economic Development and G-24 Research Coordinator.