26 March 2014

Fair, inclusive and stable finance in Asia -- a trade union perspective I

This is the first section of a paper I wrote for the trade union group, UNI-APRO, on "Towards fair, inclusive and stable finance in Asia: Advancing a trade union agenda".

The World Bank’s poverty count figures paint a rosy picture of development in Asia. But when you scratch below the surface, the picture is much less rosy.

Access to services like health, education, sanitation, clean water and many others is not satisfactory. The gap between rich and poor is becoming wider and wider, with inequality now identified by the World Economic Forum as the number one global risk for business. The vast majority of workers are employed in the informal sector. And the environmental consequence of unregulated development are simply disastrous, especially on citizens’ health.

But finance is proving to one of the biggest villains in the piece, affecting the lives of working women and men. Financial crises are now part and parcel of today’s globalization, wreaking havoc on the lives of citizens.

And finance is failing to fulfil its most basic function of serving the economy. Some 50% of Asian citizens do not access to the formal financial institution. As is also the case for most of the region’s micro, small and medium enterprises.

When the Asian financial crisis struck in 1997-98, the region felt the full brunt of fickle global capital. Unregulated financial institutions flooded Asia and other emerging economies with a surge of short-term capital. And as soon as they got cold feet, the capital flows reversed back to Wall Street and elsewhere, leaving Asian borrowers high and dry.

True, the global financiers found willing accomplices in Asian banks and companies who were only too willing to take on this short-term hot money, without paying attention to foreign exchange risks. And the whole deal was facilitated by some Asian governments who liberalized their domestic financial sectors without putting in place the necessary financial regulations to stop things going off the rails.

Then the International Monetary Fund moved into the piece with its doctrinaire dictates, merely adding fuel to the fire, until it learnt the errors of its ways. One great source of frustration came from the fact that at the time the Asian region as a whole was running a savings surplus, which was mainly invested in US dollar denominated assets.

The working men and women of Asia experienced the real tragedy of the crisis. As countries descended into recession, unemployment skyrocketed, inflicting suffering which is still felt to this day.

The lesson of the Asian financial crisis was clear. Asia must prepare itself, and protect itself against the next and the next and the next financial crisis. Because in today’s system of casino capitalism, another financial crisis is just around the corner.

So banks and companies worked to get themselves in order, by reducing short-term debt. Governments have finally put more regulations on the books. More flexible exchange rate regimes have been implemented. Enormous foreign exchange reserves have been accumulated by some countries. And improvements have also been implemented to corporate governance and competition policies.

Following the mismanagement of the IMF, a movement has been underway to create a sort of Asian IMF, known as the “Chiang Mai Initiative”. And efforts have also been employed to diversify Asia’s bank dominated financial systems by developing local currency corporate bond markets through the Asian Bond Market Initiative and other efforts.

The most important lesson of the AFC was the need to develop strong social protection for workers, who are too often the innocent victims of financial crises. As Asian workers urbanize and take manufacturing sector jobs in global value chains, they are increasingly exposed to the volatility of global markets. But the initial enthusiasm to strengthen social protection in Asia has faded. Until adequate social protection is put in place, working men and women will be the first casualties of financial crisis.

Overall, Asia had made significant responses to the AFC. When the Lehman shock hit in September 2008, the region was better armed than before. But, as things turned out , Asia was still not sufficiently well armed.

Countries with sound economic and financial policies like Indonesia, Korea and Singapore suffered sudden US dollar liquidity shortages. Relying on the US dollar alone for international liquidity is becoming a risky proposition for too many Asian countries. They could not of course turn for help to the IMF, which still has a “stigma” dating back to its mismanagement of the AFC. The much-vaunted efforts to create the Chiang Mai Initiative seemed in vain, as this arrangement proved ineffective.

In the event, Korea and Singapore received support from the US Federal Reserve. But the Fed was unwilling to help out Indonesia, demonstrating the unreliability of this means of support. Fortunately, Indonesia was supported by a consortium of several other countries.

In short, Asian countries were still in a state of unacceptable vulnerability in the face of fickle and volatile international capital.

Asian financial sectors were not significantly affected by the global financial crisis. They had the good sense to avoid too many holdings of US toxic assets.

The main direct impact of the crisis was through trade, as Asia's exports to the US and then Europe took a big hit. Those countries most open to trade like China, Japan, Korea and Singapore were sharply affected. They suffered dramatic job losses in their export sectors, again highlighting the inadequacy of social protection in most Asian countries.

Governments responded to the crisis with substantial fiscal and monetary stimulus, especially in the case of China. Sound public finances and manageable public debt meant that they had sufficient "fiscal space" to do so.

This softened the impact of the crisis on the economy and jobs, with the result that Asia seems to have sailed through the crisis. But this is not true. Unemployment rates may not have increased very much. Poor people can’t afford to be unemployed. They must eke out a living one way or another.

What has happened is that the share of precarious, insecure employment in the informal sector has risen, as people who lost their jobs find a means to get by. Even in advanced countries like Japan and Korea, the share of “irregular employees” has risen. Thus, the crisis has compromised the search for decent work. And through the crisis period, income inequality has risen even faster than before.

Asian governments were widely commended for their rapid policy responses to the crisis. This helped their own economies, and with the growing share of Asia in the global economic pie, they also helped keep the global economy afloat.

But this has not been costless. Large stimulus resulted in inflationary pressures, real estate and asset bubbles, especially in China. And also in China, much of the stimulus package was financed through banking lending (using the savings of China’s citizens) to local governments and companies. But a lot of this was spent on projects of questionable value, with the result that low quality loans now threaten the very stability of China’s banking sector. Similarly, there are reports from other Asian countries, notably India of rising non-performing assets in both state-owned and private banks.

In other words, when the so-called advanced countries cause a global financial crisis, Asia cannot simply spend itself back to economic safety in a cost-free manner!

But the major lesson for Asia from the current global economic crisis is that the region's development strategy must change course. US and European markets will be weaker in the years ahead as they clean up their financial mess. Asia must now take hold of its own economic future by developing more its own markets, both domestically and regionally. The region cannot rely on US and European markets as in the past.

Rebalancing Asia’s development back home means many things. If adverse trends in income inequality can be reversed, if workers can get a fairer slice of the economic pie, higher incomes can boost domestic consumption.

But finance must also be rebalanced. In the old model, the main sources of finance were foreign direct investment for export facilities, and bank finance for big companies. The next phase of Asia's development must be supported by fair, inclusive and stable finance. To support domestic consumption, citizens require greater access to financial services. And to facilitate greater development of micro, small and medium enterprises, notably in the service sector, these enterprises must also have greater access too.

Indeed, increased regional integration is already becoming a new source of growth momentum among the ASEAN economies, through accelerated intra-regional trade and capital flows. In light of the growing intra-regional trade between the emerging economies in Asia, and as argued by the Asian Development Bank, there is a good case to establish regional payment and settlement systems in the financial architecture to minimize risks resulting from global liquidity shortages (as Indonesia, Korea and Singapore suffered following the Lehman shock) and interest and exchange rate volatilities for the region.

In tandem with growing regional integration, the finance industry is expanding in the region with many regional banks opening up branches in ASEAN countries. One consequence has been rapidly expanding informal labor markets, including through the use of a large pool of migrant labor. This serves to undermine the quality of financial services delivered, and compromise the necessary trust and confidence in the financial system. Fundamentally, it represents a threat and a challenge to organized labor’s ambition for decent work and inclusive growth in the region.

At the same time, Asia is exposed to new sources of financial volatility as advanced countries employ "quantitative easing" to stimulate their economies. Since Asia remains the strongest part of the global economy, the region finds itself once again exposed to large and volatile capital flows. The fear is that once again, these capital flows will reverse direction back home as the US and European economies progressively recover.

Capital flow management requires a multi-level framework, including structural policies, monetary and fiscal policies, and macroprudential policies—including capital controls where appropriate—and, hence, effective coordination among the different financial authorities within a country. It is critical for macroprudential authorities to have adequate tools, resources, and powers to pursue the objective of achieving financial stability.

It is against this background that the next sections of this paper tackle the following issues: regional initiatives to avert future financial crises; finance to serve Asia’s new economic future; and challenges for finance industry trade unions in organizing and advancing a trade union agenda.


John West
Executive Director
Asian Century Institute
Tags: asia, finance, trade unions, asian financial crisis, global financial crisis

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