November 10, 2010 / 2:30 AM / 9 years ago

Income-led demand holds key to G20 imbalances-ILO

SEOUL, Nov 10 (Reuters) - The G20 is missing the point. Leaders are focusing on the wrong economic imbalances and ignoring the root cause of the global crisis — a lack of demand linked to low wages and a dearth of jobs.

That’s the view not of one of the thousands of protesters at this week’s Group of 20 summit but of one of the participants — Juan Somavia, director-general of the International Labour Organization (ILO).

In an interview with Reuters, Somavia readily acknowledged the need to tackle current account surpluses and deficits.

But the ILO’s analysis of the global financial crisis traces those imbalances to unemployment and labour market trends, including low or no wage growth, which saps aggregate demand.

“Why don’t we take a look at all the imbalances?” Somavia said. “Our point of view is that we’re not going to get out of the crisis with the same policies that led to the crisis. We can only have sustainable growth with income-led demand.”

The trends, though, are going in the wrong direction. Fiscal stimulus in the West and prompt efforts to protect jobs in emerging economies like China cushioned the blow of the crisis.

But 30 million more people in G20 economies are without a job now than in 2007 and inflation-adjusted wages are 4 percent below their pre-crisis level, according to a report by the Geneva-based ILO prepared for Thursday’s Seoul summit. [ID:nLDE6A71V8]

Under the ILO’s income-led policy prescription, real wages should rise in line with productivity and governments should act to reverse a widening gap between high-earners and low-earners.

Somavia, a Chilean who has headed the ILO since 1998, has a powerful ally in Dominique Strauss-Kahn, his counterpart at the International Monetary Fund, who also believes that inequality has fed global economic instability.

On the eve of the crisis, inequality in the United States was back at its pre-Great Depression levels, Strauss-Kahn, who is also attending the G20 talks, said in a recent speech in Morocco.

“In too many countries, inequality increased and real wages stagnated — failing to keep up with productivity — over the past few decades,” the IMF chief said.

Somavia said more and more policymakers were coming round to that view.

China has pledged to increase labour’s share of national income during the period 2011-2016 as part of a drive to boost consumption and reduce reliance on export-led growth.

“It’s very difficult to say intellectually ‘Oh come on, what are you talking about? That’s an ideological view!’. That was the defence 20 years ago,” Somavia said.

Concretely, the ILO wants banks to revert to serving the real economy and increase lending to small firms — a rich source of job creation — at reasonable interest rates.

As such, Somavia welcomed financial re-regulation aimed at curbing banks’ risk-taking. “We feel that the genie has to be put back into the bottle because it wasn’t a bad bottle,” he said. (Editing by Nick Macfie)

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