The latest Vi videoconference gathered 75 lecturers and graduate students from Russian affiliate members, St. Petersburg State University and St. Petersburg State University of Economics and Finance on November 15, to discuss the findings of the 2012 edition of the Trade and Development Report (TDR), written by the UNCTAD Division on Globalization and Development Strategies (GDS).
GDS Director, Heiner Flassbeck, analyzed the causes of the continuing economic crisis and the inability of current macroeconomic policy instruments to bring developed countries back to the growth conditions of the previous decade.
“Most developing countries have managed to regain the ground they had lost as a result of the crisis,” he said, crediting the adoption of expansionary demand-side policies for stimulating private consumption and wage growth, key elements of economic growth.
"There is a very important lesson to learn from the current situation, which relates to the effect of diminishing expectations from households about their future income," he added. As economies stagnate, high unemployment puts pressure on wages, which leads to lower consumption, which in turn negatively affects production, which again decreases economic growth.
“This is a vicious circle, since lower growth will increase unemployment even further,” Flassbeck said. “The most important part of any recovery has to target private consumption. Understanding this is crucial."
"The global outlook is gloomier than we had envisaged in September," he warned. “The current medicine -- restrictive fiscal policy measures -- is not working."
In some developed economies, particularly in Europe, politicians are pinning their hopes on “structural reforms.” “However, those reforms are all too often code for wage cuts and a weakening of workers’ bargaining power. Fiscal austerity, combined with wage restraint, not only causes an economy to contract, but also creates greater inequality in the distribution of income, he explained.
According to mainstream theory, the labor market is supposed to work as the goods market: unemployment can only occur if wages are too high, hence, the reduction of wages should stimulate employment.
But “(t)he labour market does not work in that way," Flassbeck said. “The ongoing increase in unemployment is not caused by high wages. It has been the result of a financial shock.
"This time is different and we have to face the "big paradox" of having high rates of unemployment at a period when wages are at historic lows."
According to Flassbeck, it was the simultaneous cutting of expenditure by the private sector (both households and firms) throughout the world that caused a slump in global revenues and growth.
“The world is unlikely to recover from this slump unless this negative trend of reducing spending is reversed. If the tide of spending cuts is not stemmed, it will end in a downward spiral of incomes and spending,” he predicted, calling for governments to counterbalance the negative impact of private retrenchment on income by exercising their ability to act countercyclically.
“Influencing the pattern of income distribution in a way that society as a whole shares in the overall progress of the economy has to be a leading policy objective,” he said. “A reorientation of wage and labour market policies is essential.”
Following Flassbeck’s presentation, GDS colleague, Alex Izurieta, engaged the students in a discussion that focused on the links between wages and growth in the global context and in Russia, austerity policies in developed countries and the role of the tax system in increasing government revenues, the potential of Russian WTO accession to attract investment in view of reducing inequality, and the possible impact of China's demographic situation on its economic growth.