Speech

Address by Michel Camdessus
to the 24th Congress of the World Confederation of Labor
Bangkok, Thailand, December 2, 1997

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Thank you, ladies and gentlemen. I am very pleased to have this opportunity to address the World Confederation of Labor and to participate in your discussions on globalization. We meet today in Bangkok in a city and a country that have demonstrated and will continue to demonstrate the successes of globalization, but have also shown the painful problems that can be associated with it.

I know that globalization is an issue on which many people disagree. Some believe that the opportunities that globalization can bring outweigh its risks; others see in globalization the undoing of all they are striving to achieve. But one thing is certain: we already live in a global economy, and it is becoming more closely integrated in terms of trade and financial flows every year. As the representatives of unions from all over the world, your task is to help your members understand and adapt successfully to the forces of globalization--to make globalization a positive development for them and, I hope, for all working people. On this, you and we in the international financial organizations have similar purposes and can add to the effectiveness of our activities by knowing each other well and maintaining a friendly dialogue. With this in mind, I would like to offer my perspective on globalization and address the concerns that so many of you have expressed.

What is globalization? To a great extent, it is simply the continuation of the trend toward greater international economic integration that has been under way for the last fifty years. The difference is that today markets are larger, more complex, and more closely integrated than ever before. And capital now moves at a speed and in volumes that would have been inconceivable a few decades ago. Last year, for example, private flows to developing and transition economies reached a record high of $235 billion--that is, two hundred thirty-five thousand million dollars--five times the level in 1990. This has meant that an ever larger number of developing countries have been able to accelerate investment and growth. Investors have been able to earn higher returns on saving and diversify their portfolios. And the world economy has benefited from a more efficient allocation of resources, and hence, faster growth.

That is all very well, but what does globalization mean for ordinary working people? Well, here in Asia, it has meant more jobs in the formal sector and rising standards of living. In Indonesia, for example, the percentage of the population living below the poverty line has declined from 60 percent in 1970 to 10 percent last year. In Korea, the literacy rate has increased from around 30 percent in the mid-1950s to over 95 percent today. Globalization has helped make such human progress possible.

For workers in advanced countries, globalization has created buoyant export markets for capital goods and advanced technology, and many new jobs in those sectors. Global financial markets have allowed their pension funds to earn higher returns. Moreover, the emergence of new economic powerhouses has, at times, provided a cushion against global recession. This was the case in 1991-93, when the dynamism of a number of emerging market economies helped sustain global economic activity despite successive downturns in industrial economies.

But for many people, these things are not what they think of--and what they see and suffer from--in connection with globalization. So let me turn to the concerns that many working people have about global markets. Let us take the advanced economies first, then the emerging market economies, then the poorest countries. Finally, I will say a few words about the role of the IMF.

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In the advanced economies, many people worry about growing income inequalities between skilled and less skilled workers. In Europe, in particular, people are concerned--and rightly so--about low growth and high unemployment. Moreover, the fact that many European economies have performed relatively poorly at a time when a number of developing and formerly developing economies, especially in Asia, performed spectacularly well makes some in Europe and elsewhere fear that the global trade competition is just "a race to the bottom."

Certainly, it is true that the share of industrial jobs in total employment is declining in advanced economies. But this is only very partially the result of globalization. For the most part, it is the natural consequence of technological progress and increased industrial productivity: it now takes less labor to satisfy the demand for industrial products, making more labor available to meet other needs. Earlier in this century, technological advances in agriculture encouraged excess agricultural labor to move to industry; today, a similar process is moving labor from industry to the service sector.

Overall, competition from countries with very low production costs has very little to do with this process of "deindustrialization." Developing countries have dramatically increased their shares of world exports of industrial goods, but advanced economies have retained their comparative advantage in high value-added products. Moreover, rising income in other parts of the world has helped sustain world demand for these products. Indeed, Europe has maintained its trade surplus in manufactured goods; in fact, this surplus was roughly the same magnitude in 1994 as it was in the late 1960s and early 1970s--about 2 1/2 percent of GDP.

What about the widening income gaps in advanced economies? Again, technological change, not trade, is mainly responsible for the evolution of wages and employment. Technological change favors the employment of skilled over unskilled labor. In some countries, the higher demand for skilled labor is reflected in a widening gap between the wages paid to skilled and non-skilled labor; such is the case in the United States. In markets where wages are less flexible, increased demand for skilled labor translates into higher unemployment, especially among the unskilled. This is, indeed, what much of Europe has experienced in recent years. The blame here lies much more with deficient education and training systems than with globalization.

So, how can advanced economies, in Europe and elsewhere, cope with problems of deindustrialization and widening income gaps? The answer is not to try to resist globalization. The solution, of course, is to provide workers with opportunities to adapt to the fundamental change that is occurring in all advanced economies: the shift from an economy that relies heavily on manufacturing to one that is based increasingly on services. This development should not be greeted with a negative attitude but with attention to the opportunities to be seized. Contrary to popular misconceptions, many service sector jobs pay good salaries. But it does point to the need for more flexible labor markets so that workers can move easily from one job to another, carrying their pensions rights with them. It also calls for better education and technical training so that workers have the skills they need to fill better paying jobs. And it calls for a very proactive policy to be conceived and implemented in a tripartite context.

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In emerging market economies, there are other concerns and, at times, tragedies. In Asia, for example, despite rapid growth in many countries, there are still nearly one billion people living in poverty. And even in the best of times, working conditions and labor rights in many countries fall short of what human dignity and ILO conventions require. On the other hand, many workers in emerging market economies worry that protectionist pressures in advanced countries, often intensified by fears of globalization, could cause them to lose their jobs. And of course, the Mexican crisis in 1994-95 and the crisis in east Asia today illustrate how vulnerable economies can be when economic policy mistakes result in large capital outflows.

But without the continued expansion of foreign trade and investment, and the jobs thereby created, there would be many more people living in desperate situations. Moreover, protectionism does not have a good record of improving labor conditions. Rather, it is more likely to cause many workers to lose their jobs, and force them into more dangerous and precarious employment in the informal sector. So we must find better ways to combat the problems in these countries.

The best strategy is for countries to improve the domestic environment for productive long-term investment and accelerate the pace of social progress. These goals are mutually reinforcing. In fact, many of the reforms that would be most effective in expanding economic opportunities for the poorest are also those that would make these economies more competitive and more attractive for investment, domestic and foreign. Let me sketch out the elements of such a strategy.

The first requirement is to maintain sound macroeconomic policies, correct macroeconomic imbalances promptly when they arise, and continue with the structural changes needed to sustain macroeconomic stability and high quality growth. We see here in Thailand--and in Indonesia, Korea, and in many other countries--the high human cost of allowing such imbalances to persist or of delaying key structural reforms, especially steps to strengthen the domestic financial system. Does this emphasis on prudent macroeconomic policies and supporting structural reform sound like the constant refrain of the IMF? Of course! But it should also be the theme of all those who really care for the most vulnerable in society, because reasonably stable prices and steady growth are so important--not just to reassure the financial markets, but also to protect the poor. Indeed, it is the poor who are most likely to lose their livelihoods in economic downturns, and who are least able to protect the real value of their incomes and savings during periods of high inflation.

This also applies to many wrong headed policies--sometimes pompously characterized as "a national way to development"--that the IMF opposes because they in no way serve the interests of the majority of citizens. Let me mention only a few examples:

• monopolies and special protections for the benefit of the happy few, with high costs for the ordinary people;
• irresponsibly lax credit policies that risk building a financial house of cards whose inevitable collapse when market conditions tighten imposes catastrophic costs. For example, with all their indirect costs, the banking crisis in Chile exceeded 30 percent of GDP; the one in Venezuela, 20 percent. Can you imagine the cost of this in terms of schools, health centers, and training?
• financial institutions whose main purpose is to channel low-cost resources to cronies while their losses would be absorbed by the national budget, that is, the people!
• unproductive spending--be it unnecessary military spending or white elephants--for the glory of the political regimes and of no real benefit for the people.

Let me end this sad list here. It is long enough for you to understand why we press governments to adopt a wide range of reforms--a "second generation" reform--to ensure that the benefits of growth are more widely shared. This is a vast subject, but let me mention four important areas for reform:

• one, ensuring the rule of law, and making the judicial system independent, professional, and accessible to all.
• two, dismantling monopolies and working energetically to establish simpler, more transparent regulatory systems that are equitably enforced, provide equal access to markets, and thus, promote equality of economic opportunity. This is an important element of the program in Indonesia and the one we are negotiating with Korea.
• three, increasing transparency more generally. This is essential with regard to banking systems--so frequently misused with a cynical disregard for their normal mission of promoting sound investment.Let me add that when governments are in the habit of providing the public with full information about their policies and the country's economic performance, policymakers have more incentive to pursue responsible policies, and costly policy mistakes and disruptive financial crises are less likely to occur. Moreover, when the financial markets have reliable economic and financial data, they are better able to distinguish between countries that have sound policies and those that do not, and the risk that a crisis will spill over from one country to another is reduced. Transparency also contributes to a more responsible use of public resources for the public good, reduces the opportunities for corruption, and facilitates the tripartite dialogue.
• four, improving the quality of public expenditure. By this, I mean reducing outlays for unproductive purposes, such as military build-ups and large projects that only benefit a few, to make room in the national budget for spending on health, education, vocational training, and basic infrastructure; ensuring that essential public services are provided at reasonable cost, that they reach the intended beneficiaries, and that access to these services is equitable. Likewise, it means prioritizing spending programs and increasing their cost effectiveness.
• five, labor market reform. This is an area in which there has been relatively less progress in some countries in Latin America and Asia, which, I believe, has had a dampening effect on social progress. Reducing poverty depends on expanding employment, particularly among the less skilled. And this, in turn, requires an adaptable labor market that encourages mobility and keeps labor costs in line with labor productivity, as well as sustained efforts to improve workers' skills.

But, ladies and gentlemen, as you suspect, such reforms run counter to many vested interests, who will use all their means to discredit them, and, of course, with them, the IMF for daring to challenge these interests. Moreover, such reforms require governments to face the hard fact that not everything has been perfect so far. Thus, they meet with formidable resistance. But they cannot prevail unless governments give them their active support and explain them to workers. Needless to say, we would greatly welcome the active contribution of unions to these "second generation" reforms, which are so crucial for the lasting generation of high quality jobs. Indeed, I could say that this will not happen without your support.

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Finally, let me turn to the concerns in the poorest countries, especially in Africa. Countries that are unable to participate in the expansion of world trade or attract significant amounts of foreign capital risk falling farther behind the rest of the world in terms of growth and human development. For them, globalization poses the very real threat of marginalization. Moreover, much of the employment in the formal sector in these countries consists of public sector jobs. And when governments say they have to adjust so that their economies will become more competitive in the global economy, their plans often include laying off public employees. This adds to concerns about globalization. The world community must not only fight marginalization with all of its energy, we must also join forces in the poorest countries--even more than elsewhere--to turn the risks of globalization into real opportunities.

The key to overcoming problems of the poorest countries is to help them attain stronger, higher quality growth. This can only be achieved, of course, at their initiative and with the ultimate commitment of their governments and people; and in this, democracy, tripartism, and participation are essential ingredients. As in other countries, the strategy in the poorest countries must also begin with reestablishing basic macroeconomic equilibria and completing the structural reforms needed to improve resource allocation and spur growth.

In recent years, we have seen more and more countries adopt comprehensive adjustment and growth programs--many of them with IMF advice and support. And indeed, the strategy works. In sub-Saharan Africa, for example, average annual growth reached 4 1/2 percent last year and is expected to remain close to that level over the medium term. Heavily indebted poor countries (HIPCs) and the least developed countries performed still better; each group recorded average growth of 5 1/2 percent last year--levels they, too, are expected to maintain over the medium term. So countries must maintain this emphasis on macroeconomic stabilization, as well as the trade liberalization, price reform, privatization, and other reforms that allow stabilization to take hold. Advanced countries must support these efforts by opening their markets to agricultural products and other goods from developing countries and by making room in their budgets for larger amounts of official development assistance.

But all too often, people are disappointed by the results of their countries' initial stabilization and reform efforts. The balance of payments is stronger and inflation has declined, but they don't see that their own economic opportunities have increased significantly. And often, they are right! The problem is that many of the obstacles to private sector initiative, job creation, and foreign investment have been left in place. The solution is not to abandon reform, but to broaden and deepen it. Many of the "second generation" reforms I mentioned earlier are also needed in the poorest countries. Civil service reform is one element in this broader effort. The goal is to secure a smaller, but better paid and more efficient cadre of public servants and to free public resources for investments in health, education, retraining of those who would lose their jobs, and basic infrastructure that will allow many others to lead more productive lives. But these reforms must be accompanied by a wide range of other measures that will lead to greater private investment and job creation.

A number of these other reforms have to do with improving the role of the state. Although many countries have reduced the negative aspects of state intervention in their economies--such as price controls and state monopolies--they have yet to develop their public institutions into a positive force for growth and development. That process begins by increasing the transparency of government operations, so as to limit opportunities for corruption and enhance public accountability. At the same time, the activities of the state must be refocused on fulfilling the tasks that are so essential to the confidence of private savers and investors and to the smooth functioning of the economy--tasks such as providing reliable public services; simplifying the regulatory framework; guaranteeing the professionalism and independence of the judicial system; and enforcing property rights.

These are all aspects of "good governance," which is essential for countries at all stages of development--in the poorer countries that are still in the process of building up institutions and implementing reforms to promote economic growth; in emerging market economies, where access to private capital flows may be affected by governance issues; and in the advanced countries, both as regards their own internal governance and their dealings with developing countries. In this connection, I welcome the commitment of OECD countries to criminalize the bribery of foreign officials and end the tax deductibility of foreign bribes.

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What about the role of the IMF?

Some people mistakenly believe that the IMF does not take the needs of workers into account in the design of its programs. On the contrary, the IMF strives to get its member governments to put people at the center of their economic policies and adjustment efforts and to make human development their number one priority. Forexample, in recent years, the IMF has increasingly focused on education and health spending inits surveillance, technical assistance, and lending. In the sample of 27 countries with SAF- and ESAF-supported programs most recently analyzed, average spending on education increased by 5 percent per year in real terms, or by more than 2 percent on a per capita basis, over the life of these programs. Likewise, real expenditure on health increased by 7 1/2 percent per year on average, or by over 4 1/2 percent on a per capita basis. You see the positive snowball effect this can have.

Social indicators also improved during the course of these programs. On average, illiteracy rates declined by 3 percent per year; primary and secondary school enrollments increased by over 1percent per year; infant mortality declined by 2 percent per year; and life expectancy increased by 1/2 percent per year, while access to health care and safe water improved by nearly 10 percent per year and over 5 percent per year, respectively. But within these averages, some countries have been more successful than others in increasing social expenditure; we must help spread this success more widely. Moreover, in many countries, a lack of data on social spending--especially on its impact on social conditions, such as access to education and health services--hampers policymaking; this is another area where Fund staff willbe working more intensively with member governments, as well as with the World Bank.

To cite another example, in the formerly centrally planned economies, we are helping to untie that Gordian knot of bankrupt state enterprises, inter-enterprise arrears, the scandal of non-payment of taxes, wages and salaries, and inadequate public services. Overcoming the legacy of 70 years of state rule of the economy is not an easy task. Suffice it to say that countries such as Poland and others that took early action to restructure enterprises and accelerate the transformation of their economies along the lines of IMF advice have been much more successful in meeting the needs of their citizens than those that have chosen a more gradual adjustment path.

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In our dialogue with each of our member countries, we emphasize that the stakes facing policymakers are much higher in this day and age of global markets. Good policies are rewarded with greater access to international capital markets, higher investment, more jobs, and stronger growth--all of which will benefit workers if the other supporting policies we advocate are also in place. Poor policies, on the other hand, risk financial crisis or marginalization, with all their negative consequences.

The role of the IMF is to help countries make the right policy choices--choices that will enable all of their citizens to benefit from globalization and protect them from its risks. But ultimately, these choices are up to governments, labor unions, and your fellow citizens. I am certain that you will help them realize that all countries must adapt to the challenges of globalization and that, in so doing, they can transform globalization into an opportunity to improve the living standards of all their citizens and into a source of new opportunities for their children.