BEARING the BURDEN

BEARING the BURDEN The Impact of Global Financial Crisis on Workers and Alternative Agendas for the IMF and Other Institutions By Sarah Anderson and John Cavanagh — April 2000 — Institute for Policy Studies 733 15th St. NW, #1020, Washington, DC 20005 tel 202/234-9382, fax 202/387-7915 www.ips-dc.org CONTENTS Introduction........................................................................................................................................1 I. The Overall Impact of the Global Financial Crisis on Workers.....................................2 A. The Crisis 2 B. The Impact on Workers in Crisis Countries 2 C. What Types of Workers are Hardest Hit? 3 D. Boomerang Effect on U.S. Workers 4 II. Impacts on Workers by Country............................................................................................ 5 A. Asia Region 5 1. Korea 5 2. Indonesia 7 3. Thailand 8 4. Philippines 10 B. The Contagion Effect: Impact on Workers Outside the Asia Region 11 1. Brazil 12 2. Argentina 13 3. Ecuador 13 4. Russia 14 5. United States 15 III. Alternative Agendas.............................................................................................................. 16 A. Evolution of the Elite Debate on the Global Financial Architecture 16 1. The Shift Toward Capital Controls 16 2. The Meltzer Commission Report 16 3. Other Cracks in the Consensus 3 B. Alternative Agendas with a Labor Perspective 19 Conclusion........................................................................................................................................ 26 Notes About this Report: This paper is a contribution to the Workers in the Global Economy Project, a collaborative effort involving the Institute for Policy Studies, International Labor Rights Fund, Economic Policy Institute, and Cornell University and funded by the Ford Foundation. We are grateful to the international labor experts, including Fernando Leiva, Kjeld Jakobsen, Lisa McGowan, Young-mo Yoon and others, who provided useful comments on a first draft at a conference at the AFL-CIO’s George Meaney Center in October 1999. Special thanks as well to IPS intern Katrin Jordan for research support. About the Authors: John Cavanagh is the Director of the Institute for Policy Studies and Sarah Anderson is the Director of the Institute’s Global Economy Program. They are the co-authors (with Thea Lee) of a new book entitled Field Guide to the Global Economy (New Press, 2000). For a quarter century, IPS has been a leader in strengthening citizen responses to the global economy through research, writing, education, film, and coalition building. Introduction In the aftermath of the global financial crisis ing effects of the financial crises of the last half that exploded in July 1997, tens of millions of decade is the fact that little has been done to workers lost their jobs around the world. Hun- prevent such tragedies in the future. Although dreds of millions watched their real wages fall. the crisis did provoke a vigorous debate Millions of immigrant workers were sent home. around a “new global financial architecture,” no The ripple effects were felt by workers in every clear and comprehensive vision has emerged country. Meanwhile, those most responsible from official policymakers. Moreover, even for causing the crisis suffered little of the pain. though workers bore the brunt of the last As former World Bank Chief Economist Joseph crises, their representatives are not among Stiglitz, put it, those at most tables where the new financial architecture is being debated and drawn. “in East Asia, it was reckless lending by Hence, it should come as little surprise that international banks and other financial official proposals for change either ignore institutions combined with reckless borrow- workers’ interests or undermine them. ing by domestic financial institutions— combined with fickle investor expecta- This said, there are well-developed proposals tions—which may have precipitated the for new rules and institutions that would serve crises; but the costs—in terms of soaring workers’ interests.3 In addition, it is widely unemployment and plummeting wages— recognized that the massive demonstrations were borne by workers. Workers were against the World Trade Organization by the asked to listen to sermons about “bearing international labor movement and others in pain” just a short while after hearing, from Seattle in December 1999 have opened up the same preachers, sermons about how new opportunities for promoting a labor and globalization and opening up capital mar- social agenda within all the international finan- kets would bring them unprecedented cial institutions. There remains, however, a growth.”1 major challenge to educate and mobilize people on this issue in order to raise the profile By the end of 1999, most of the crisis countries of workers’ concerns in both the public and the were showing signs of recovery in terms of official debates. their economic growth rates. But while international investors celebrated, working families in This paper attempts to bring alive the impact of these countries saw little improvement in their the financial crisis on working people. It out- own lives. A World Bank study released in lines the mechanisms by which the crisis has January 2000 reveals that incomes of the low hurt workers. It then offers an analysis of the and middle class in East Asia have not been impact of the crisis on workers in eight coun- restored. Urban poverty has risen, as laid-off tries: Korea, Indonesia, Thailand, the Philip- industrial workers struggle to survive with little pines, Russia, Brazil, Ecuador, and, finally, the or no social safety nets. In many countries, United States. A final section outlines the displaced workers have returned to rural official debate on resolving the crisis as well as villages, where they try to eke out a living on components of an emerging North-South small family plots.2 citizens agenda on the global financial crisis that advances the interests of workers. Perhaps even more disturbing than the linger- 1 I. The Overall Impact of the Global Financial Crisis on Workers A. The Crisis sia, and several other countries, there has been widespread pain, dislocation, death, and Today international financial markets resemble environmental ruin. According to U.S. Presi- a global casino where traders gamble in split- dent Bill Clinton, “the world faces perhaps its second trades on market fluctuations. In 1980, most serious financial crisis in half a century.” the daily average of foreign exchange trading was $80 billion; today, more than $1.5 trillion B. The Impact on Workers in Crisis flows daily across international borders. Over Countries nine-tenths of capital flows are speculative, rather than productive in nature. The impact of the financial crisis on workers is often swift and direct. In crisis countries, the The global financial casino is the conscious chain reaction of economic events typically has creation of public policy. Over this past de- started with a plunge in the currency and stock cade, the World Bank, the IMF, and the U.S. market as investors flee. Desperate to regain Treasury expanded their focus on free trade to investor confidence and to get emergency press governments around the globe to open funds, countries turn to the International Mon- their stock markets and financial markets to etary Fund or the World Bank or both to get a short-term international investments.4 The “seal of approval” and a quick loan. Before resulting quick injections of capital from mutual new funds are disbursed, the Bank and Fund funds, pension funds, and other sources demand certain “structural adjustment” re- propelled short-term growth in the 1990s, but forms. These invariably hurt workers through they also encouraged bad lending and bad any of seven effects:5 investing. According to the World Bank, the amount of private financial flows entering 1. Hiking Interest Rates poorer nations skyrocketed from $44 billion in 1990 to $256 billion in 1997. Roughly half of Countries are encouraged to raise interest this was long-term direct investment, but most rates to strengthen the currency and to attract of the rest—as recipient countries were soon to back the foreign investment. Yet higher inter- discover—was footloose, moving from country est rates cripple domestic business, which to country at the tap of a computer keyboard. must repay debts at higher rates, as well as workers who have borrowed funds. In Mexico, When international investors got spooked in Brazil, and elsewhere, thousands of small Thailand, Indonesia, and several other coun- enterprises have gone bankrupt, adding mil- tries in mid-1997, the “hot money” panicked lions to the ranks of the unemployed. Further- and left much faster than it had arrived. Big- more, sky-high interest rates discourage new time currency speculators like George Soros borrowing, which reduces investment and deepened the crisis by betting against the makes an economic downturn even more currencies of the crisis nations. IMF policy severe. advice seemed only to quicken the exodus. Currencies and stock markets from Korea to 2. Massive Public Sector Layoffs Brazil nose-dived, and as these nations slashed purchases of everything from oil to Bank and Fund policies in poor countries can wheat, prices of these products likewise plum- be summed up in four words: “Spend less, meted. As the financial crises have spread to export more.” As governments cut expendi- the productive economies of Indonesia, Rus-

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