A partnership with academia

Building knowledge for trade and development


Twenty-four lecturers/researchers and Master’s students of economics from the University of Campinas (Brazil), joined by the counselor of the Mission of Brazil for the WTO, Marcelo Della Nina, participated in a Vi videoconference on to discuss UNCTAD's Trade and Development Report 2012  November 12.

The lecture was delivered by the Director of the Division on Globalization and Development Strategies, Heiner Flassbeck (pictured, center). 
"The global economy is in a dangerous situation, heading for a Japanese-like scenario of depression, or stagnation at best," Flassbeck warned.
The world economy, which continues to suffer from the fallout of the financial crisis that began in late 2007 and the meltdown in September 2008, has not been able to bounce back to the growth conditions of the preceding decade. This time, the immediate problem is the inability of developed countries to return to a normal growth pattern.
"Austerity enthusiasm has spread among developed economies and policy makers are not realizing that this medicine is not working," Flassbeck said. “There is also an equally serious problem of contagion -- with financial sector and macroeconomic policies in developed countries that are timid at best, and counterproductive at worst, developing countries will find it difficult to sustain their own growth dynamic.

"Austerity policies are more likely to further weaken growth dynamics and increase unemployment instead of stimulating investment and job creation. To understand the vicious circle in which the global economy is, it is important to revise labor market theory in general, and the role of wages in particular," he said.
Although in the 70s, an increase in wages went hand-in-hand with an increase in unemployment, the most important part of the rise in wages was due to nominal wages, which led to high inflation and a subsequent restrictive monetary policy that caused investment to fall and unemployment to rise. A misinterpretation of the wages-employment link formed the basis of the neoclassical labour market approach in which economic policy should not pursue the aim of full employment, because of its presumed effect on wages and the expected increase in unemployment.
"But nowadays, we are facing high unemployment at a time when wages are at the lowest level - an unthinkable situation under the neoclassical approach," Flassbeck argued. 
Under the circumstances, even full-gear monetary policy will only deliver baby steps at best, he explained. The atypical and finance-induced rise in unemployment puts pressure on wages.
"With disposable income not rising, even a zero interest rate cannot stimulate spending because households will not increase consumption if they aren't expecting their income to rise," Flassbeck said. “In this framework, a real recovery cannot be expected.”
This analysis has important implications for the treatment of inequality. The labour market should not be analyzed in isolation, but in relation to overall growth. This is because the creation of new employment is a positive function of output growth rather than a function of falling wages and a deteriorating share of wages in GDP.
Higher wages and lower inequality can stimulate demand and output growth which in turn can provide incentives for increased investment in productive capacity, with attendant effects on employment creation and productivity gains, Flassbeck concluded.