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Social Unrest Paves the Way: A Fresh Start for Economic Growth with Social Equity

Policy brief by UNCTAD, 2011

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UN Secretary General Ban Ki-Moon has emphasised that the wave of popular revolt that has erupted in the North Africa and West Asia region constitutes a “situation which calls for bold reforms”. Indeed, these momentous events also reflect massive social discontent and crises. The push for political change has been mirrored by equally vocal calls for alleviation of poverty, more and better jobs, better wages and social security, access to basic commodities at affordable prices and equitable distribution of national income. In its economic dimensions the upheaval represents a day of reckoning for the trade and economic policy choices made in the region over past decades. But for policy makers in countries facing similar pressures this is an opportune moment to rebuild neglected public institutions so they can lead the process of reshaping economic and labour governance. This can provide a platform for a re-assignment of macroeconomic policies for sustained growth in ways that trigger a virtuous circle of investment, productivity growth, income growth and employment creation so that the income gains from productivity growth are distributed equitably between labour and capital.

N° 21, February 2011


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Social unrest paves the way: A fresh
start for economic growth with social equity
UN Secretary General Ban Ki-Moon has emphasised that the wave of popular revolt that has erupted in
the North Africa and West Asia region constitutes a “situation which calls for bold reforms”. Indeed, these
momentous events also reflect massive social discontent and crises. The push for political change has
been mirrored by equally vocal calls for alleviation of poverty, more and better jobs, better wages and
social security, access to basic commodities at affordable prices and equitable distribution of national
income. In its economic dimensions the upheaval represents a day of reckoning for the trade and economic
policy choices made in the region over past decades. But for policy makers in countries facing similar
pressures this is an opportune moment to rebuild neglected public institutions so they can lead the
process of reshaping economic and labour governance. This can provide a platform for a re-assignment
of macroeconomic policies for sustained growth in ways that trigger a virtuous circle of investment,
productivity growth, income growth and employment creation so that the income gains from productivity
growth are distributed equitably between labour and capital.


The socio-economic fallout from
globalization
The downside of rapid and poorly sequenced
liberalization, sweeping privatization programmes,
restrictive macroeconomic policies and export led
growth strategies has manifested itself vividly in the first
weeks of the second decade of this third millennium.
Vulnerable countries in North Africa and West Asia,
especially non-oil exporters, face significant social and
political pressures though the economic policy space
necessary for appropriate response has been shrinking
over the last decades. More often than not, liberalization
has not been able to prevent income concentration and
the emergence of legions of educated, unemployed
urban youth whose job prospects are dim. One of the
defining features of the globalization process in the last
three decades has been to create growth in economies
ill-prepared to absorb burgeoning urban and rural labour
forces in productive and decent employment. While
policy “reforms” proceeded apace, and even generated
GDP growth, this was accompanied by bubbles of wealth
and skewed, unsustainable income distribution, which
has improved only marginally in many such countries.
For today’s developed countries, the creation of strong
labour market and social security institutions was an
important element in the structural transformation that
accompanied their industrialization. The participation
of labour in productivity gains was a necessary
condition for the advancement of this process. But in
developing countries the link between growth and
formal employment is weaker than in developed
countries partly due to the fact that changes in informal
employment and self-employment dampen cyclical
growth effects. Having pursued export-growth strategies
to their limits, at best many developing countries have
witnessed jobless growth episodes whereby workers
laid off in the formal sector in bad times often tend to
move into the informal economy because of the lack of
social safety nets.
In more open economies strengthening a country’s
international competitiveness has often resulted in
downward pressure on wages, a dynamic strengthened
by the move of surplus rural labour into the urban or


formal sectors. However, wage competition can only
be sustained for a limited period of time in some,
but not all, countries; the lack of adequate domestic
demand generation would eventually affect economic
and employment growth and could fuel social unrest.
Moreover, in such a situation, it becomes more difficult
to achieve the right balance between external and
domestic sources of growth and foster resilience to
cope with external demand shocks. This is the new
policy challenge facing developing countries whose
export markets have been hit by global recession and
exchange rate fluctuations and where tolerance to wage
compression has been stretched to the limit.


Labour pays the price of the structural
adjustment
Policy reforms in developing countries since the 1980s
involved reorientation of macroeconomic policies, with
priority given to combating inflation, attracting foreign
direct investment, and greater openness to trade and
capital flows. With market liberalization, the economic
role of governments was reduced, and the goals of
full employment and equitable income distribution lost
their former pre-eminence. According to the structural
adjustment paradigm that has since been widely
advocated, the leading role in development hitherto
accorded to industrialization was deemphasized and
prominence was accorded to whichever sector was
seen as reflecting a country’s comparative advantage.
In this view of what best promotes development,
liberalization was expected to permit a reallocation
of productive resources from protected, inefficient
industries to export-oriented competitive sectors that
were supposedly more employment-intensive.
As shown in the Trade and Development Report (TDR
2010), more than 20 years of policy reform have had
a limited impact on strengthening the potential for
rapid and sustainable growth in Africa. Indeed, they
may even have reduced that potential by hindering
crucial investments in physical and social infrastructure.
Financial liberalization since the 1990s altered growth
trajectories in ways that were inimical to employment
generation by preoccupying central bankers with




exchange rate stabilization instead of investment promotion and
promoting full employment. Furthermore, when governments in the
region opened up to foreign capital, the investment they attracted was
concentrated in capital intensive sectors (telecom, energy, etc), which
is the opposite of what neoclassical trade theory and comparative
advantage predict. Typically, recessionary episodes with high
unemployment weakened the bargaining power of organized workers
and lowered their share in national income. This also encouraged
greater labour market flexibility and aggravated wage compression.
What has taken place recently in Tunisia, Egypt and other countries
in the region is thus symptomatic of a wider policy malaise that has
inspired a rapidly evolving social transformation agenda. Even though
acceleration of GDP growth in the 2000s has been accompanied
by higher labour productivity and declining incidence of vulnerable
employment and of the working poor, labour market characteristics
in North Africa have remained largely unchanged since the 1990s.
Participation rates increased marginally, and in the late 2000s were at
about 44 per cent of the labour force. Registered unemployment has
shrunk from around 15 per cent in the late 1990s, although, at close
to 10 per cent during the past decade for Africa and at between 10-13
per cent in countries of North Africa, it remains high relative to other
developing regions.
The limited available data on the evolution of the share of wages in
national income suggests that it has been, with some exceptions,
on a declining trend over the past three decades in both developed
and developing countries. For the group of three North African non-
oil producing countries for which data is available (Egypt, Tunisia and
Morocco), despite sustained GDP growth and labour productivity
gains, the wage share has not tracked that path. Rather, the share of
wages for this group of countries hovered around 33 per cent of national
income since the mid-1990s, with some short-lived improvement until
2005, after which it has declined (see Chart). In Egypt, the wage share
has fallen recently below a quarter of national income.
This trend is explained partly by greater labour market flexibility and
export orientation, which tended to limit increases in wages to boost
international competitiveness. But the decline in real wages and in
the wage share in most developing countries in the 1980s and the
1990s was mostly due to wage compression, with workers bearing
the burden of export-oriented industries losing competitiveness
in international markets. At the root of the problem was restrictive
monetary policy involving high interest rates to attract foreign capital,
which led to weakened competitiveness by fostering real exchange rate
appreciation and at the same time discouraged domestic investment
by raising the cost of credit to producers.


Starting anew: policy action is within reach
for socially vulnerable developing countries
TDR 2010 emphasised that employment growth critically depends on
the expansion of aggregate demand, and much less – if at all – on
the price of labour relative to that of capital. The conventional wisdom
about “export-led growth” has focused policy makers’ attention on
lowering unit labour costs to improve a country’s global competitive
position, sometimes to the detriment of economic growth prerequisites
and social justice goals.
But there are still alternatives that policy makers can consider even in
a period of crisis and institutional transformation. To begin with, a more
sustainable macroeconomic strategy would rely more on investment
and new capacity creation for absorbing surplus labour and on
domestic demand expansion based on wage increases in line with
aggregate labour productivity increases. For all countries, the ability
to achieve sustained growth of income and employment on the basis
of productivity growth depends critically on how the resulting gains
are distributed within the economy, in particular how much goes to
consumption of domestically produced goods and services and for


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investment in activities that create more employment. For countries
facing severe social pressures, such strategic criteria are central to a
successful recovery and reconstruction strategy and to maintaining
the “social contract” between the state and labour.
Sustainable growth can be enhanced based on seeking synergies
between employment and wage growth in line with productivity and
output growth. For a virtuous circle of investment, productivity growth,
income growth and employment creation to occur, policies need to
be oriented towards ensuring that the income gains from productivity
growth are distributed appropriately between labour and capital. This
means that over time there should not be a decline in the share of
wages in national income; for developing countries, this includes
incomes from self-employment in agriculture and non-agricultural
informal activities. This is not enough, however; an improving share
of wages in national income does not in itself imply improved income
distribution. This social equity goal calls for complementary policies to
avoid declines in relative and absolute real incomes of the vast majority
of the population, and to empower public institutions to lead the private
sector along a new national development path.
From this perspective it is not greater wage flexibility that leads to
faster employment growth, but rather the orientation of changes in the
general wage level along the path of average productivity growth in
the economy. This will not only create additional jobs that produce
additional value added, but also allow for the emergence of profit
differentials and an incentive structure that strengthens innovation, the
dynamic forces in the economy and, thus, investment in productive
capacity. Moreover, linking wage increases to productivity growth
would tame cost push inflationary pressures and thus free central
banks to pursue pro growth and employment-friendly monetary policy.
UNCTAD has proposed in TDR 2010 several labour policy instruments
that could be considered in the context of such a broad macroeconomic
reorientation, especially:
- Encouraging collective bargaining involving revitalised labour and


employer organizations in support of an incomes policy;
- Considering legal minimum wages, especially where responsible


tripartite institutions, including labour unions, employers and the
government, remain to be created or restructured;


- Funding public employment schemes to establish a floor by
improving both earnings and conditions of work in all sectors;


- Improving incomes of small rural producers through mechanisms
that link agricultural producer prices to the overall productivity growth
in the economy; and


- Finding the right balance in taxation for establishing important
linkages between export industries – be they traditional extractive or
modern manufacturing industries – and the rest of the economy.


For a more detailed discussion, see UNCTAD, Trade and Development
Report 2010.




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