Inequalities in the Age of Financial Globalization

New study by ILO research

Despite strong economic growth that produced millions of new jobs since the early 1990s, income inequality grew dramatically in most regions of the world and is expected to increase due to the current global financial crisis, according to a new study published by the research arm of the International Labour Organization (ILO). A WDEV summary

The new report, entitled World of Work Report 2008: Income inequalities in the age of financial globalization (see reference), produced by the ILO’s International Institute for Labour Studies also notes that a major share of the cost of the financial and economic crisis will be borne by hundreds of millions of people who haven’t shared in the benefits of recent growth. “This report shows conclusively that the gap between richer and poorer households widened since the 1990s”, said Raymond Torres, Director of the Institute responsible for the report. “This reflects the impact of financial globalization and a weaker ability of domestic policies to enhance the income position of the middle class and low-income groups. The present global financial crisis is bound to make matters worse unless long-term structural reforms are adopted.”

The report notes that while a certain degree of income inequality is useful in rewarding effort, talent and innovation, huge differences can be counter-productive and damaging for most economies, adding that “rising income inequality represents a danger to the social fabric as well as economic efficiency when it becomes excessive”.

The report marks the most comprehensive study to date of global income inequalities by the Institute, and examined wages and growth in more than 70 developed and developing countries. It calls for longer term action to put the global economy on a more balanced track, including promotion of the ILO’s Decent Work Agenda to link economic, labour and social policies to boost employment and improve incomes and income distribution.

The report says that as global employment rose by 30% between the early 1990s and 2007, the income gap between richer and poorer households widened significantly at the same time. What’s more, compared with earlier expansionary periods, workers obtained a smaller share of the fruits of economic growth as the share of wages in national income declined in the vast majority of countries for which data was available.

Executive pay versus average wages in US, 2003-07

“The ongoing global economic slowdown is affecting low-income groups disproportionately”, the report says. “This development comes after a long expansionary phase where income inequality was already on the rise in the majority of countries.”

Among its other conclusions, the report says:

* Employment growth has also occurred alongside a redistribution of income away from labour. In 51 out of 73 countries for which data are available, the share of wages in total income declined over the past two decades. The largest decline in the share of wages in GDP took place in Latin America and the Caribbean (-13%), followed by Asia and the Pacific (-10%) and the Advanced Economies (-9%).
* In countries with unregulated financial innovation, workers and their families became increasingly indebted in order to fund housing investment and consumption. With stagnant wages, this was key to sustain domestic demand. However the crisis has underlined the limits to this growth model.
* Between 1990 and 2005, approximately two thirds of the countries experienced an increase in income inequality. The incomes of richer households have increased relative to those of the middle class and poorer households.
* Likewise, during the same period, the income gap between the top and bottom 10% of wage earners increased in 70% of the countries for which data are available.
* The gap in income inequality is also widening – at an increasing pace – between top executives and the average employee. For example, in the United States in 2007, the chief executive officers (CEOs) of the 15 largest companies earned 520 times more than the average worker. This is up from 360 times more in 2003. Similar patterns, though from lower levels of executive pay, have been registered in Australia, Germany, Hong Kong (China), the Netherlands and South Africa.

ILO: Financial crisis to increase global unemployment up to 210 million

The global financial crisis could increase world unemployment by an estimated 20 million women and men, the Director-General of the International Labour Office (ILO) said on 20 October 2008. "We need prompt and coordinated government actions to avert a social crisis that could be severe, long-lasting and global", he added. Based on revised global growth estimates by the International Monetary Fund (IMF), the UN and early reports suggesting rising job losses for most countries where data was available, ILO Director-General Juan Somavia said the ILO's preliminary estimates indicated that the "number of unemployed could rise from 190 million in 2007 to 210 million in late 2009."

Mr. Somavia added that "the number of working poor living on less than a dollar a day could rise by some 40 million - and those at 2 dollars a day by more than 100 million". Mr. Somavia also said that the current crisis would hit hardest such sectors as construction, automotive, tourism, finance, services and real estate. He also noted that the new projections "could prove to be underestimates if the effects of the current economic contraction and looming recession are not quickly confronted".

* A crisis on all streets

"This is not simply a crisis on Wall Street, this is a crisis on all streets. We need an economic rescue plan for working families and the real economy, with rules and policies that deliver decent jobs. We must link better productivity to salaries and growth to employment", Mr. Somavia said. "Protecting and promoting sustainable enterprises and decent work opportunities must be at the heart of the Summit on the Financial Crisis recently announced by Presidents Bush and Sarkozy", he added. "We must return to the basic function of finance, which is to promote the real economy. To lend so that entrepreneurs can invest, innovate, produce jobs and goods and services."

Mr. Somavia said his concerns included restoring credit flows; maintaining and enhancing social protection, including pensions, unemployment benefits, child support and health care schemes; ensuring enterprise access to credit to avoid layoffs, wage cuts, bankruptcy and permit recovery, respect for workers' rights and deepening social dialogue to deal with the impact on enterprises; ensuring ODA flows; rebuilding a regulatory regime for global finance; and moving quickly from recovery to sustainable development through investment and growth. "We welcome the current calls for better financial regulation and a global surveillance system of checks and balances, but we must reach beyond the financial system", the ILO Director-General said.

"Long before the current financial crisis, we were already in a crisis of massive global poverty and growing social inequality, rising informality and precarious work - a process of globalization that had brought many benefits but had become unbalanced, unfair, and unsustainable", he said. "We need to get the balance right and concentrate on rescuing people and production. It's about saving the real economy." "In order to keep open economies and open societies going, we must begin working together among relevant international organizations to develop a new multilateral framework for a fair and sustainable globalization. Trade talks are stalled; financial markets are on the brink, climate change continues; any reconstruction will have to find ways to integrate financial and economic, social and labour and environmental policies in a common sustainable development approach", he said.

"This is the time to think and act in bold and innovative ways to confront the huge challenges before us, particularly for the United Nations", Mr. Somavia said, referring to the forthcoming meeting next weekend of the United Nations Chief Executives Board (CEB) chaired by the Secretary-General Ban Ki-Moon.

Source: ILO

Noting that prospects are for a continuing increase in income inequality in the course of the present economic situation, the report also added that excessive income inequalities could be associated with higher crime rates, lower life-expectancy, and in the case of the poor countries malnutrition and an increased likelihood of children being taken out of school in order to work.

“Already now, there are widespread perceptions in many countries that globalization does not work to the advantage of the majority of the population”, the report says. “The policy challenge is therefore to ensure adequate incentives to work, learn and invest, while also avoiding socially-harmful and economically-inefficient income inequalities.”

Posted: 20 October 2008

Reference:
* International Institute for Labour Studies, World of Work Report 2008: Income inequalities in the age of financial globalization, 178 pp, International Labour Office: Geneva 2008. Available at: www.ilo.org

Recommended citation: WDEV summary (2008) 'Inequalities in the Age of Financial Globalization', World Economy & Development In Brief, Luxembourg, 20 October (www.wdev.eu)

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