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Ukraine, Economy of Reading the Western media, one would think that Ukraine's main products are grotesquely corrupt politicians, grey hued, drab, and polluted cities, and mysteriously deceased investigative journalists. Another one was found dead in Odessa on New Year's Eve. Both the Prosecutor General and the Ukrainian Parliamentary Committee for Fighting Organized Crime and Corruption have accused the entire Ukrainian Cabinet of Ministers of collusion in shady dealings with Kazakhoil, the Kazakh national oil monopoly. The December 2001 Legsi (the Lehman Brothers Eurasia Group Stability Index) warned against a deterioration in Ukraine's social stability, owing to fiercely resisted austerity measures. Things are not auspicious on the international front as well. During the recent Balkan hostilities, Ukraine supplied Macedonia with attack helicopters and other weaponry over the strident objections of the State Department. Its strategy of ever closer union with Russia and China was in ruins following the sudden shift in Putin's geopolitical predilections after the September 11 attacks. And to spite the EU (which forced Poland to impose strict controls on its porous border with Ukraine) - "starting from 1 January 2002, Kyrgyz citizens, like the citizens of Azerbaijan, Armenia, Kazakhstan, Tajikistan and Uzbekistan, may enter, leave and pass through Ukraine without visas" as the Kyiv based UNIAN news agency jubilantly announced on January 4th. Its parliament having failed to pass a government sponsored law against the unlicensed production of CD ROM's (piracy) - the Ukraine was subjected on January 2 to much postponed US imposed stiff trade sanctions (estimated to cost it $500 million per year). The employees of Ukraine's largest CD maker, Rostock Records, demonstrated opposite the US embassy against the sanctions, denouncing them as "economic terrorism". The International Federation of Phonographic Industry (IFPI) countered by saying that "Ukraine is the largest exporter of pirated CDs to Europe, with tens of millions of high quality illegal copies shipped each year to markets throughout Europe and as far away as South America." At any rate, anti-American sentiments are running higher than usual. Ukrainian discontent is further exacerbated by the American threat to slap tariffs on steel imports despite a last minute agreement signed last year with the EU and other major steel manufacturing countries to curb worldwide production. Ukraine has agreed to cut its output by 11 million tons annually (out of a total reduction of 97.5 million tons). Depressed prices for gallium (used mainly in the recession-struck mobile phones industry) have gravely affected Ukraine's only alumina producer (Mykolaevsky Hlynozyomny Zavod) which has just quintupled its capacity to 10 tons. Ukraine is optimally located between Central Europe and Russia. It is the largest polity in East Europe and the second largest country is Europe (almost the size of Texas). It is rich in natural endowments, though hopelessly polluted (Chernobyl is in the Ukraine) and deforested. In the former USSR, it provided 25% of all agricultural produce. The Soviet mining and oil industries relied on Ukrainian heavy industry for their equipment. The literacy rate in Ukraine is 100% and many are polyglot. Yet, these Ukrainian riches were squandered in the decade following independence. Dependence on energy and a reform effort thwarted by entrenched Communist era stalwarts led to a 60% drop in GDP compared to 1991 (the year of its independence). Frenetic money printing resulted in hyperinflation in 1993. Inflation has still not been subdued and has topped 26% as late as 2000. More than 50% of the population are under the official, starvation level, poverty line. Though only 5.3% are registered as unemployed, both underemployment and hidden unemployment are rampant. Mercurial and default prone Russia is still Ukraine's main trade partner (c. 30% of its international trade). Each of Ukraine's 49 million citizens owes $200 to foreign creditors - the equivalent of 30% of GDP per capita. Public debt has doubled to c. 50% of GDP in the four years to 2000. Worse still, Ukraine is increasingly used as a drug smuggling route and drugs growing area for the CIS. Synthetic drugs are manufactured in the Ukraine and smuggled to the countries of Western Europe. Ukraine is a major target for Russian investors, especially from the energy sector. Putin appointed Victor Chernomyrdin, a political heavyweight - a former Prime Minister and, more importantly, a former chairman of Gazprom, the Russian energy behemoth - as Russia's ambassador in Kyiv. Ukrainians are not against Russian investment - but they are averse to the political strings it comes attached to. They also resent the bargain basement prices at which their most valued assets are "privatized" to these old-new "foreign" investors. Inevitably, they ask themselves "cui bono" - who benefits personally from these questionable transactions. The answer is not too hard to guess - but guessing has proven to be a dangerous occupation. At least one muck-raking journalist has been (literally) beheaded and a senior politician jailed for trying to reform the energy sector. Inevitably, Ukraine is socially and politically strained. Its western parts are fiercely nationalistic and West oriented. Its eastern parts lean more towards Russia and are USSR-nostalgic. But this apparent schism is no bad thing. It provides Ukrainians with a secure foothold in both worlds - and no one seriously considers secession. Unnoticed by many, Ukraine is undergoing a seismic shift which may result in an economic revival of Chinese proportions. When Viktor Yushchenko, the popular Prime Minister and darling of the West was brutally ousted in May last year by the authoritarian President, Kuchma (himself hailed as a daring reformer by the IMF when elected in 1994), everyone predicted a calamity. Yet, Yushchenko moved since then to the centre in what appears to be an implicit reconciliation with the president. His replacement, Anatoly Kinakh, surprised everyone by proving to be an efficient and modernizing technocrat. Ukrainian bonds returned to investors more than 60% net this year, making them the best emerging markets investment by far. Its capital markets are gradually being internationalized. The much maligned Kuchma has just introduced a sweeping anti-money laundering decree (later to become law). Ukraine (since its 1998-2000 series of de facto defaults following the financial meltdown in Russia) is now a model debtor. In August 2000 it has even re-paid the IMF $100 million. Possibly emboldened by his re-election in 1999, Kuchma seems to be making real efforts to streamline the government (which anyhow consumes a mere 18% of GDP), cut red tape, consolidate the government's fiscal stance (Ukraine had small budget deficits, excluding privatization receipts, in 1999-2001), become a WTO member, and create a legal environment conducive to private enterprise and entrepreneurship. A new Land Code - passed by a surprising ad hoc parliamentary alliance and providing for the (limited) private ownership of land - took effect on January 2 this year. Payment discipline in the critical energy sector was enforced, the agriculture sector was revamped, non cash revenue offsets and cronyist tax exemptions were entirely eliminated, government arrears (including pensions) were substantially reduced (though new arrears have accumulated this year), a privatization law was finally introduced, and municipal finance was rationalized. The government's contractionary fiscal rectitude (a new Budget Code was enacted and tax collection improved) was balanced by the central bank's (NBU) expansionary monetary policy aimed at increasing its dangerously dilapidated foreign exchange reserves (c. $2.4 billion) and spurring growth in the real sector. Rising demand for money and the propitious existence of a thriving informal (cash) economy prevented the resurgence of inflationary pressures - though inflation has picked up in December 2001, forcing the central bank to tighten this year (it disputes the government's official figure of 6.1% inflation for 2001). In 2000 the economy grew for the first time (by 6%). Growth was export driven and industrial output increased by 13%. The global recession has hurt Ukraine's export prospects but even so, it is poised to have grown by 4-5% in 2001. It is forecast to continue to grow by 2-4% each year in 2002-2003. With a labour cost of 30 cents per hour, it attracts the interest of manufacturers in the US, in Central Europe, and even in Russia. Strong import growth may swing it back to a current account deficit (currently it is in a surplus of c. 5% of GDP, as it has been in the previous 2 years). Fiscal shenanigans ahead of the March 2002 elections (and the horse trading which will inevitably follow) may ratchet up the predicted inflation rate of 9-12% - but the appreciation of the hryvna is set to continue. The economy is surprisingly modern. Only 24% are employed in agriculture (and they produce a mere 12% of GDP). More than double that is produced by industry (26% of GDP) and a whopping 62% of GDP is generated in services (in which only 44% of the labour force are employed). On December 2001, S&P upgraded Ukraine's currency risk rating (both foreign and domestic) to "B" with a "Stable" long term outlook. On the pro side, S&P cited financial stability, partly the result of a rationalized and rescheduled foreign debt structure. On the con side, it cited the usual litany of corruption, weak legislature, problems with privatization and with structural reform and malignant oligarchs. These flaws being noted, it did upgrade Ukraine's rating - as did Fitch, Moody's and Japan's Rating and Investment Information Agency. The price of Ukraine's (mainly dollar denominated) Eurobonds appreciated dramatically on institutional buying immediately following the announcement. Ukraine's image as bereft of Foreign Direct Investment is false. Moreover, c. 80% of all FDI in Ukraine is Western - not Russian. USA investors compete with Russian (cum "Cypriot") investors - each holding 17% of the total stock of FDI (c. $4.5 billion). Moreover, Ukraine is now in good standing with the IMF (after a difficult year in which the IMF virtually suspended all communication with Ukraine due to falsified data provided by the NBU). It has signed in 1998 a $2.6 billion arrangement (of which $1.6 billion are used). Another tranche of c. $380 million was approved this past September. The IMF singled out the banking, energy, and agriculture sectors as in need of continued, pervasive, reforms. The World Bank has committed close to $3 billion (and disbursed $2.2 billion) to projects in Ukraine (mostly in the energy, mining, agriculture, finance, and private sectors) since 1992. The new Country Assistance Strategy for Ukraine (2001-2003) is unusual in that it seeks to circumvent the hopelessly venal and discredited administration and work directly with the public, business, and NGO's towards building a civil society and its attendant institutions. "The strategy seeks to move Ukraine closer to the European Union standards, fostering environmentally-sustainable development" - says the Bank. though it hastens to emphasize the success the government had in implementing its reforms. As of June 2001, the EBRD (which has a mixed track record in Ukraine) has approved 45 projects in Ukraine (34 of which in the private sector) worth 1.2 billion euro. This excludes the construction of a highly controversial and politically inspired nuclear power plant. Ukraine has gone so low in the world that its fortunes can only improve. It is poised for a modest economic comeback as its mediating geographic position between centre and east comes into play with EU enlargement. Kuchma is likely to be eased out by the very oligarchs he nurtured. They now constitute an element in a broad based coalition for reform. Having sated their appetite for loot they now seek respectability and access to capital markets and credits in the West. They want a functioning country and a larger cake. Kuchma is a figurehead of a disfigured past. A Putin style robotic reformer is likely to succeed him. When it happens, Ukraine may yet become the region's first economic tiger. Ukraine's long-predicted economic revival is at hand. After a long hiatus, both the International Monetary Fund and the World Bank are expected to make new commitments in their forthcoming visits in June or July. Finance Minister Mykola Azarov is hoping for $600 to 800 million in fresh funds. Debt repayments amount to $1.6 billion this year and the next. Ukraine is even considering a bond issue. Concurrently, NATO will be holding in the country a massive one week long military exercise under the aegis of the "Partnership for Peace" - its collaborative program with the countries of East and Southeast Europe. It will involve army units from Armenia, Austria, Azerbaijan, Bulgaria, Germany, Georgia, Italy, Canada, Kyrgyzstan, Lithuania, Moldova, Norway, Poland, Romania, France, Ukraine, Uzbekistan and the United States. The USA just cancelled financial sanctions it had earlier imposed on Ukraine on the recommendation of the Financial Action Task Force. Ukraine is no longer a center of money laundering, said the international watchdog. It may be removed from the agency's blacklist by yearend and is planning to join the EGMONT group of the financial intelligence units of 69 countries. There are other signs of thawing. A 16-month ban on $11 million in U.S. poultry imports was terminated last week with the signing of a revised veterinary certificate protocol. Ukrainian officials are holding talks with their European Union counterparts to integrate the two space programs. Ukraine has expertise in launch vehicles, satellites and payloads. And Volkswagen inked a letter of intent regarding the assembly of its Passat, Golf, Bora and Polo models in Ukraine. According to Radio Free Europe/Radio Liberty, last month, the EU offered Russia, Ukraine, and Moldova - its future neighbors following enlargement - "preferential trade terms, expanded transport, energy, and telecommunication links, and the possibility of visa-free travel to the EU." The door to future accession was left ajar, though the inclusion of North African nations in the "New Neighborhood Policy" bodes ill for Ukraine's future membership. Long-stalled negotiations between Ukraine and the European Bank for Reconstruction and Development over the $215 million financing of two much-disputed nuclear power plants to replace the smoldering Chernobyl reactor have mysteriously restarted last week. The Bank's President, Jean Lemierre, promised positive results by summer - despite environmental concerns and studies, financed by the EBRD itself, which cast in doubt the project's feasibility. Quoted by Interfax-Ukraine, Foreign Ministry spokesman Markijan Lubkivskyy, announced last Tuesday, that "the U.S. may subcontract Ukrainian companies (for postwar reconstruction in Iraq), particularly those that have experience in working with firms in the Persian Gulf." There are good news from the East as well. Turkmenistan and Russia proposed to Ukraine - a major gas importer - a tripartite 25 year agreement to exploit and export Turkmen natural gas with prices frozen throughout at current levels, well below the market. In return, Ukraine is supposed to co-finance the construction of a $1 billion, 1070 kilometer long, 30 to 40 billion cubic meters a year, pipeline, mostly on Kazakh territory, along the shores of the energy-rich Caspian Sea. Inevitably, not all is rosy. In contravention of all prior measures of liberalization, President Leonid Kuchma intends to administratively halve grain exports to 1 million tons a month, due to a weak harvest in the first quarter of this year and rising domestic grain prices. The Crimean agricultural ministry announced that one is seven hectares of winter crops - mostly barley - are lost due to the harsh weather. This is half the average ratio in other parts of Ukraine. According to AgWeb.com, "the country's milling wheat crop (this year) may be only 10 million metric tons to 12 MMT, down sharply from 22 MMT in 2002 and 26 MMT in 2001". Domestic consumption, at 7 million tons, now equals inventories. The country - formerly Europe's breadbasket - lacks modern infrastructure and grain storage facilities. Its extempore export policy is muddled. Agricultural imports are surging. Ukraine bought 70,000 tons of - mainly Brazilian - sugar in February alone. In the worst of Stalinist traditions, the former Deputy Prime Minister for Agriculture Leonid Kozachenko, a reformer, was promptly arrested for "bribery and tax evasion". Grain merchants, foreign investors and multinationals included, are under official scrutiny. In an unusually strongly worded letter to Ukraine's Ambassador to the United States Kostyantyn Hryshchenko, President of Ukraine-US Business Council, Kempton B. Jenkins wrote: "We hope that this effort to turn back the clock to Soviet-style management of Ukraine's critical sector will soon disappear and allow Ukraine's dramatic march to productivity and prosperity to resume." Nor has Ukraine forsaken its erstwhile clients, frowned upon by an increasingly assertive United States. According to IRNA, the Iranian news agency, a Ukrainian delegation is in Iran to discuss the construction of Antonov An-140 aircraft. This week, Pakistan and Ukraine are slated to negotiate a free trade agreement. Standard and Poor's, the international rating agency, concluded, in a report it released earlier this month, that "despite some early successes, the political environment in Ukraine remains difficult and financing uncertainties continue". The Sovietologist John Armstrong dubbed the Ukrainians the Russians' "smaller brothers". This is no longer true. Unlike Russia, Ukraine aspires to NATO membership but is far less pro-American. It seeks Russian investments but is wary of the imperial intentions of its neighbor. Despite Russian coaxing, Ukraine hasn't even joined the Eurasian Economic Community, a pet project of the Russia-dominated Commonwealth of Independent States. In the meantime, Ukraine is bleeding both its least-skilled, menial workers - and its most highly educated brains. Ukrainians are welcome nowhere and abused everywhere. Israel has just deported 300 illegal Ukrainian aliens. Others - notably Turkey, Hungary, Poland, Slovakia, and Italy - are likely to follow suit. Ukrainian ombudswoman Nina Karpachova pegs the number of economic exiles at between 2 and 7 million. At least 5 million - one fifth of the workforce - seek seasonal employment abroad. Remittances amount to between $2 and $3 billion a year. One quarter of all Ukrainians barely survive under the wretched poverty line. Official unemployment - at 11 percent - underestimates the problem by half. A low birth rate conspires with elevated mortality to produce a self-induced demographic genocide. Capital flight is on the rise and equals half the foreign direct investment in the economy. The Governor of the National Bank, Sergiy Tyhypko, estimated this February that as much as $ 2.27 billion fled Ukraine in 2002 - compared to $898 million in 2001 and $385 million in 2000. This is the reflection of a thriving informal economy, half the size of its formal counterpart, by some measures. Appearances aside, ubiquitous corruption, tottering banks, clannish institutions, compromised leadership, illicit deals and barely contained xenophobia are entrenched in Ukraine's criminalized economy. As the 2004 presidential elections near, the oligarchs are augmenting their war chests abroad. Kuchma may try to postpone the elections to 2006 or 2007. The opposition vows to aggressively oppose such chicanery. Ukraine may be in for a bumpy ride ahead. Unemployment and Labor There is a connection between economic growth and unemployment. There is a connection between growth and inflation. Therefore, commonsense (and financial theory) goes, there must be a connection between inflation and unemployment. A special measure of this connection is the Non Accelerating Inflation Rate of Unemployment (NAIRU). Supposedly, this is the rate of unemployment which still does not influence inflation. If unemployment goes below NAIRU, inflationary pressures begin to exert themselves. This is closely linked to the other concepts, those of "structural", "frictional" and "conjectural or cyclical" unemployment types. Some unemployment, the theory, goes is frictional. It is the inevitable result of a few processes:
The frictional type of unemployment is a sign of economic health. It indicates a dynamic economy in fast development. It is a sign of labour mobility, of labour flexibility (part time solutions and flexitime) and of labour adaptability. This cannot be said about the second, more insidious, type, the structural unemployment. It is this kind of unemployment which really bothers governments and worries social planners. It has long term psychological and social effects and limits both economic growth and social cohesion. It is also the most difficult to battle. Usually, it is the result of ingrained, long term and structural processes and changes in the economy and cannot be fought with artificial one-time measure (employment initiated by the state or fiscal stimulus intended to encourage employment). Among the factors which create it:
The last, benign, type of unemployment is the cyclical one. It is the result of the natural business cycle (at least natural to capitalism) and of the ebb and tide of aggregate demand for workers which is a result of these cycles. This is considered to be an unavoidable side effect of market economy. The pain of the laid off workers can be ameliorated (through the introduction of unemployment benefits) but the solution comes from sorting out the cycle itself and not by attacking the unemployment issue in an isolated artificial manner. The "Natural Rate of Employment" takes into account that frictional and structural employment must exist. What is left is really the full employment rate. This is highly misleading. First, economists are forced to rely on government data which, normally, tend to underestimate and understate the problem. For example: the statistics ignore "discouraged workers" (those who despaired and stopped looking for work). A second, more philosophical issue, is that, as opposed to frictional unemployment, which is a welcome sign, structural unemployment is not and must be fiercely fought by the state. But Economy give Politics a legitimacy to ignore structural unemployment as a part of life. But the third problem is the most pressing: what is the "natural" rate of unemployment and how should it be determined? This is where NAIRU came in: the natural rate of unemployment could be construed as that rate of unemployment which prevented bad economic effects, such as inflation. In the USA this was estimated to be 5-6%. But this estimate was based on a long history of labour and inflation statistics. History proved the wrong guide in this case: the world has changed. Globalization, technological innovation, growing free international trade, growth in productivity, electronic money, the massive move to the "Third Wave" (Information and knowledge) industries all this meant that inflationary pressures could be exported or absorbed and the employment could go much higher without fostering them. This became part of a new paradigm in economy which proclaimed the death of the business cycle and of the inflationary boom-bust phases. Though exaggerated and probably untrue, the "New Paradigm" did predict that productivity will grow, inflation will remain subdued, unemployment will decrease drastically and the prices of financial assets will explode all simultaneously (which was considered hitherto impossible). The unemployment rate in the USA has stayed well below 5% and there are still no sign of inflation. This is remarkable (though probably short lived. Inflation will pick up there and the world over starting in 1998). And what about Macedonia? It is one of a group of countries in transition that suffered an unprecedented series of external shocks separation from a Federation, the loss of virtually all export markets, economic siege, monetary instability, a collapse of the financial system, and, lately, interethnic tensions. Small wonder that it endured an outlandish (official) rate of unemployment (more than one third of the active workforce). Granted, the real unemployment rate is probably lower (many workers in the black economy go unreported) still, these are daunting figures. Is this a structural or frictional or cyclical unemployment? It is tempting to say that it is structural. It seems to be the result of trying to adapt to a brave new world: new technologies, new determinants of survival, new market mechanisms, the need for a set of completely new skills and new consumer preferences. But a closer analysis will yield a different picture: most of the unemployment in Macedonia (and in countries in transition in general) is cyclical and frictional. It is the result of massive layoffs which, in themselves, are the results of efficiency and productivity drives. It is not that the workforce is ill adapted to cope with the new, post-transition situation. The composition of skills is well balanced, the education, in some respects, better than in the West, labour mobility is enforced by the cruelty of the new labour markets, the pay is low and is likely to remain so (wage pressures don't go well with high unemployment). The workforce has adapted wondrously. The failures belong to the management levels and, above all, to the political echelons. Unwilling to adapt, eager to make a quick (personal) buck, entrenched in cosy offices and old ways of thinking, more interested in their perks that in anything else, not educated in the new ways of the markets they led themselves and their workers (=their voters) to the unemployment swamp. This unfortunate condition was avoidable. There is no reason to assume that structural unemployment in Macedonia should be much higher than in Germany. The relative sizes and richness of the two economies is not relevant to this discussion. What is relevant is that labour in Macedonia is by far more mobile than in Germany, that it is paid much less, that it is, therefore, relatively more productive, that it is better educated, that both countries suffered external shocks (Germany the unification, Macedonia the transition), that both countries are macro-economically stable, that Macedonia has real natural and human endowments. By certain measures and theoretic formulas, the structural unemployment in Macedonia should be circa 9%, the frictional unemployment (the business cycle is turning up strongly so cyclical unemployment is bound to go down) contributing another 5%. The natural unemployment rate is, therefore, circa 15%. Moreover, Macedonia is in the rare and enviable position of not having to worry about inflation or wage pressures. Even much higher employment will not create wage pressures. Only the most skilled workers will possess the ability to dictate their own wages and, even then, we are talking about ridiculous wages in Western terms. There is so much competition for every vacancy ("an employers' market") that the likelihood of demanding (and getting) higher wages (and, thus, generating inflationary pressures is all but non-existent). So NAIRU in Macedonian terms is an abstract notion with no applicability. Every additional percent of permanent employment in the West entails 2-3 as much in economic (GDP) growth. Macedonia has to grow by 10% and more annually to reduce the level of unemployment to 15% in 5 years (taking additions to the workforce into account). This is doable: Macedonia starts from such a low base that it would take little effort to achieve this kind of growth (to add 300 million USD to the GDP annually=3 months exports at today's rate). But this rate of unemployment can be achieved only with the right policy decisions on the state level and the right management cadre to take advantage of these decisions and of the thrilling new vistas of the global market scene. It is here that Macedonia is lacking it is here that it should concentrate its efforts. Communism abolished official unemployment. It had no place in the dictatorship of the proletariat, where all means of production were commonly owned. Underemployment was rife, though. Many workers did little else besides punching cards on their way in and out. For a long time, it seemed as though Japan succeeded where communism failed. Its unemployment rate was eerily low. It has since climbed to exceed the United States' at 5.6%. As was the case in Central and Eastern Europe, the glowing figures hid a disheartening reality of underemployment, inefficiency, and incestuous relationships between manufacturers, suppliers, the government, and financial institutions. The landscape of labour has rarely undergone more all-pervasive and thorough changes than in the last decade. With the Cold War over, the world is in the throes of an unprecedented economic transition. The confluence of new, disruptive technologies, the collapse of non-capitalistic modes of production, the evaporation of non-market economies, mass migration (between 7.5% - in France - and 15% - in Switzerland - of European populations), and a debilitating brain drain - altered the patterns of employment and unemployment irreversibly and globally. In this series of articles, I study this tectonic shift: employment and unemployment, brain drain and migration, entrepreneurship and workaholism, the role of trade unions, and the future of work and retirement. I. The True Picture According to the ILO ("World Employment Report - 2001"), more than 1 billion people - one third of the global workforce - are either unemployed or underemployed. Even hitherto "stable" countries have seen their situation worsen as they failed to fully adjust to a world of labour mobility, competitiveness, and globalization. Unemployment in Poland may well be over 18% - in Argentina, perhaps 25%. In many countries, unemployment is so entrenched that no amount of aid and development seem to affect it. This is the case in countries as diverse as Macedonia (35% unemployment) and Zimbabwe (a whopping 60%). The much heralded improvements in the OECD countries were both marginal (long term unemployment declined from 35% of the total to 31%) and reversible (unemployment is vigorously regaining lost ground in Germany and France, for instance). Official global unemployment increased by 20 million people (to 160 million) between the nadir of the Asian crisis in 1997 and 2001. The situation has much deteriorated since. The ILO estimates that the world economy has to run (i.e., continue to expand as it has done in the roaring 1990's) - in order to stay put (i.e., absorb 500 million workers likely to be added to the global labour force until 2010). How can this be achieved with China unwinding its state sector (which employs 13% of its workforce) - is not clear. Add to this stubbornly high birth rates (esp. in Africa) and a steady decline in government hiring al over the world - and the picture may be grimmer than advertised. But the rate of unemployment is not a direct and exclusive result of growth or the lack thereof. It is influenced by government policies, market forces (including external shocks), the business cycle, discrimination, and investment - including by the private sector - in human capital. The problem with devising effective ways of coping with unemployment is that no one knows the true picture. Taking into account internal, rural-to-urban, migration patterns and the growth of the private sector (it now employs 5% of the labour force) - China may have a real unemployment rate of 9.5% (compared to the official figure of 3.1%). Egypt's official rate is 8% -but it masks vast over-employment in the public sector. Lebanon's is 9% - due to a one-time reconstruction bonanza, financed by the billionaire-turned-politician, Hariri. Algeria's unemployed easily amount to half the work force - yet, the published rate is 29%. In numerous countries - from Brazil to Sri Lanka - many people are mainly employed in casual work. The average unemployment rate in Central and Eastern Europe is 14% - but it is double that (more than 30%) among the young (compared to 15% for West European youths). The average is misleading, though. In Georgia the rate is 70% - in the Czech Republic 16%. Even in the OECD, the tidal wave of part-time workers, short term contracts, outsourcing, sub-contracting, and self-employment - renders most figures rough approximations. Part time work is now 20% of the OECD workforce (German attempts to reverse the trend notwithstanding). Temporary work and self-employment constitute another 12% each. No one knows for sure how many illegal economic migrants are there - but there are tens of millions of legal ones. II. The Facts IIa. Labour Mobility "Mobility", "globalization", "flextime" - media imagery leads us to believe that we move around more often, and change (less secure) jobs more frequently. It is not so. By many measures, the world is less globalized today than it was a century ago. Contrary to popular perceptions, job tenure (in the first 8 years of employment) has not declined, nor did labour mobility increase (according to findings published by the NBER and CEPR). Firms' hiring and firing practices are more flexible but this is because "sarariman" jobs are out of fashion and many workers (80% of them, according to the Employment Policy Foundation) prefer casual work with temporary contracts. Workers keep moving, as they always have, among firms and between sectors. But they are still reluctant to relocate, let alone emigrate. The subjective perception of job insecurity is high, even after the most prosperous decade in recent history. Witness the sparse movement of labour among members of the EU, despite the existence, on paper, of a single labour market. Still, rising systemic unemployment everywhere serves to increase both the efficiency and productivity of workers and to moderate their wage claims. IIb. Collective Bargaining Studies linked collective bargaining to an increased wage level, decreased hiring and more rigid labour markets. But unionized labour has greatly contracted in almost all OECD countries. Why has unemployment remained so persistently high? In France and the Netherlands collective agreements were applied to non-unionized labour (close to four fifth of the actually employed in the latter). Employment increases only where both union membership and coverage by collective agreements are down (USA, UK, New Zealand, Australia). There are different models of wage bargaining. In the USA and Canada agreements are sometimes signed at the firm or even individual plant level. Throughout Scandinavia (though this may be changing in Norway and Denmark now that centre-right parties have won the elections), a single national agreement prevails. There is no clear trend, though. Britain, New Zealand and Sweden decentralized their collective bargaining processes while Norway and Portugal are still centralized. Both types of bargaining - centralized and decentralized - tend to moderate wage demands. Centralized bargaining forces union leaders to consider the welfare of the entire workforce. Either of the pure models seems preferable to a hybrid system. The worst results are obtained with national bargaining for specific industries. Hybrid-bargaining Europe saw its unemployment soar from 3 to 11% in the last 25 years. Pure-bargaining USA maintained a low unemployment rate of 5-6% during the same quarter century. IIc. Unemployment Benefits Blanchard and Wolfers studied 8 market rigidities in 20 countries (including the EU, USA, Canada, and Japan) between the years 1960-96. The unemployment rate in an imaginary composite of all the studied countries should have risen by 7.2% in this period. But unemployment increased by twice as much in countries with strict employment protection laws compared to countries with laxer labour legislation. Unemployment in the country with the most generous unemployment benefits grew five times more than in the most parsimonious one. It grew our times faster in countries with centralized wage bargaining than in countries with utterly decentralized bargaining. Labour market rigidities all amplify the effects of asymmetrical shocks - which bodes ill for the eurozone. Other studies (e.g., the 1994 OECD one year study, the more substantial DiTella-MacCullouch study) seem to support these findings. The transition from a rigid to a flexible labour market does not yield immediate results because it increases labour force participation. But the unemployment rate is favorably affected later. IId. Minimum Wages In the USA, the minimum wage is 35% of the median wage (in France it is 60%, in Britain - 45%, and in the Netherlands it is declining). When wages are downward-flexible - more lowly skilled jobs are created. A 1% rise in the minimum wage reduces the probability of finding such a job by 2-2.5% in both America and France, according to the NBER (Lemieux and Margolis). The proponents of minimum wages say they reduce poverty and increase the equality of wealth distribution. Their opponents (such as Peter Tulip of the Federal Reserve) blame them for job destruction, mainly by raising the NAIRU. The OECD's position is that wage regulation cannot remedy poverty. As "The Economist" succinctly puts it, "few low paid workers live in low-income households and few low-income households include low paid workers. (Thus), the benefits of the minimum wage, such as they are, largely bypass the poor." Again, it is important to realize that unemployment is not universal - it is concentrated among the young, the old, the under-educated, the unskilled, and the geographically disadvantaged. One in eight of all workers under the age of 25 in the USA are unemployed, more than twice the national average (the figure in France is one in four). A 10% rise in the minimum wage - regardless of its level - reduces teenage employment by 2-4%, calculates the OECD. Many countries (USA, UK, France) introduced "training wages" - actually, minimum wage exemptions for the young. But even this sub-minimum wages still represent a high percentage of mean youth earnings (53% in the USA and 72% in France) and thus have an inhibiting effect on youth employment. Minimum wages do reduce inequality by altering the income distribution and by equalizing wages across ages and genders - but they have no effect on inequality and poverty reduction, insists the OECD. "The Economist" quotes these figures (in 1998): "In American households with less than half the median household income, only 33% of adults have a low-paid job. (compared to 13% in the Netherlands and 5% in the UK). In most poor households no one is employed in a regular job. Many low earners, on the other hand, have well-paid partners, or affluent parents ... Only 33% of those Americans who earn less than two-thirds of the median wage live in families whose income is less than half the national median. (In the UK the figure is 10% and in Ireland - 3%). Over a 5-year period, only 25% of low paid Americans are in a poor family at some point; in Britain 10% are." Thus, minimum wages seem to hurt poor families with teenagers (by making teenage employment unattractive) while benefiting mainly the middle class. Still, the absolute level of the minimum wage seems to be far more important that its level relative to the average or median wage. Hungary's unemployment went down, from 9% to 6%, while its minimum wage went up (in real terms) by 72% in 1998-2001. During the same four year period, its economy grew by an enviable 5% a year, real wages skyrocketed (by 17%), and its inflation dropped to 7% (from 16%). IIe. Structural Unemployment Most unemployment in Europe is structural (as high as 8.9% in Germany, according to a 1999 IMF study). It is the ossified result of decades of centralized wage bargaining, strict job protection laws, and over-generous employment benefits. The IMF puts structural unemployment in Europe at 9%. This is compared to the USA's 5% and the UK's 6% (down from 9%). The remedies, though well known, are politically unpalatable: flexible wages, mobile labour, the right fiscal policy, labour market deregulation, and limiting jobless benefits. Some hesitant steps have been taken by the governments of Germany and France (cut jobless benefits and turned a blind eye to temporary and part-time work), by Italy (decoupled benefits from inflation), and by Belgium, Spain and France (reduced the minimum wage payable to young people). But piecemeal reform is worse than no reform at all. In an IMF Staff Paper, Coe and Snower describe the Spanish attempt to introduce fixed term labour contracts. It established two de facto classes of workers - the temporary vs. the permanently employed - and, thus, reduced labour market flexibility by granting increased bargaining power to the latter. France introduced a truncated, 35-hours, working week. Other countries imposed a freeze on hiring with the aim of workforce attrition through retirement. Yet, these "remedies" also led to an increase in the bargaining power of the remaining workers and to commensurate increases in real wages. IIf. Unemployment and Inflation Another common misperception is that there is some trade off between unemployment and inflation. Both Friedman and Phelps attacked this simplistic notion. Unemployment seems to have a "natural" (equilibrium) rate, which is determined by the structure and operation of the labour market and is consistent with stable inflation (NAIRU - Non Accelerating Inflation Rate of Unemployment). NAIRU is not cast in stone. Employment subsidies, for instance, make low skilled workers employable and lower NAIRU. So do unilateral transfers which raise incomes. According to Phelps, big drops in unemployment need not greatly increase permanent inflation. Stiglitz calculated that America's NAIRU may have dropped by 1.5% due to increased competition in the markets for jobs and goods. These findings are supported by other prominent economists. Stiglitz concluded that NAIRU, in itself, is meaningless. It is the gap between the estimated NAIRU and the actual rate of unemployment that is a good predictor of inflation. IIg. The Rhineland Model, the Poldermodel, and Other European Ideas The Anglo-Saxon variant of capitalism is intended to maximize value for shareholders (often at the expense of all other stakeholders). The Rhineland model likes to think of itself as "capitalism with a human face". It calls for an economy of consensus among stakeholders (shareholders, management, workers, government, banks, other creditors, suppliers, etc.). Netherlands, too, has an advisory Social and Economic Council. Another institution, the Labour Foundation is a social partnership between employees and employers. Both are relics of a corporatist past. But the Netherlands saw its unemployment rate decline from 17% to less than 2% while ignoring both models and inventing the "Poldermodel", a Third Way. Wim Duisenberg, the Dutch Banker (currently Governor of the European Central Bank), quoted in an extensive analysis of the Poldermodel prepared for "The Economist" by Frits Bolkstein (a former Dutch minister for foreign trade), attributed this success to four elements:
According to Thomas Mayer and Laurent Grillet-Aubert ("The New Dutch Model"), the "Dutch Miracle" traces its beginnings to 1982 and the Wassenaar Agreement in which employers' organizations and trade unions settled on wage moderation and job creation, mainly through decentralization of wage bargaining. The government contributed tax cuts to the deal (these served to compensate for forgone wage increases). These cuts generated a fiscal stimulus and prevented a contraction in demand as a result of wage moderation. Additionally, both social security payments and the minimum wage were restricted. Wage increases were no longer matched by corresponding increases in minimum social benefits. Working hours, hiring, firing and collective bargaining were all incorporated in a deregulated labour market. Small and medium size businesses costly regulation was relaxed. Generous social security and unemployment benefits (a disincentive to find work) were scaled back. Sickness benefits, vacation periods, maternal leave and unemployment benefits were substantially adjusted. The Netherlands did not shy from initiating public works projects, though on a much smaller scale than France, for instance. The latter financed these projects by raising taxes and by increasing its budget deficit. The Dutch preferred to rely on the free market. Long term (more than 12 months) unemployment in Europe constitutes 30% of the total. About half the entire workforce under the age of 24 is unemployed in Spain - and about one quarter in France and in Italy. Germany, Austria and Denmark escaped this fate only by instituting compulsory apprenticeship. But the young unemployed form the tough and immutable kernel of long-term unemployment. This is because a tug of war, a basic conflict of interest, exists between the "haves" and "have-nots". The employed wish to defend their monopoly and form "labour cartels". This is especially true in dirigiste Europe. While, in the USA, according to McKinsey, 85% of all service jobs created between 1990-5 paid more than the average salary - this was not the case in Europe. Add to this European labour immobility - and a stable geographical distribution of unemployment emerges. The Dutch model sought to counter all these rigidities. In a report about "The Politics of Unemployment" dated April 1997, "The Economist" admiringly enumerated these steps:
Even the Dutch model is not an unmitigated success, though. More than 13% of the population are on disability benefits. Only 74% of the economically active population is in the workforce - one third of them in part time jobs. But compare the Dutch experience to France's, for instance. The Loi Robien exempted companies from some social security contributions for 7 years, if they agree to put workers on part time work instead of laying them off. Firms promptly abused the law and restructured themselves at the government's expense. The next initiative was to reduce the working week to 35 hours. This was based on the "Lump of Labour Fallacy" - the idea that there is a fixed quantity of work and that reducing the working week from 39 to 35 hours will create more jobs. In Spain, hiring workers is unattractive because firing them is cost-prohibitive. The government - faced with more than 22% unemployment in the mid-90's - let more than 25% of all workers go on part time contracts with less job protection, by 2001. Still, no one knows to authoritatively answer the following substantial questions, despite the emergence of almost universally applied UN-sponsored Standard National Job Classifications: How many are employed and not reported or registered? How many are registered as unemployed but really have a job or are self-employed? How many are part time workers - as opposed to full time workers? How many are officially employed - but de facto unemployed or underemployed? How many are on "indefinite" vacations, on leave without pay, on reduced pay, etc.? Many countries have a vested interest to obscure the real landscape of their destitution - either in order to prevent social unrest, or in order to extract disproportionate international aid. In a few countries, limited amnesties were offered by the state for employers' violations of worker registration. Firms were given a few, penalty-free, weeks to register all their workers. Afterwards, labour inspectors were supposed to embark on sampling raids and penalize the non-compliers, if need be by closing down the offending business. The results were dismal. In most countries, the unemployed must register with the Employment Bureau once a month, whether they receive their benefits, or not. Non-compliance automatically triggers the loss of benefits. In other countries, household surveys were carried out - in addition to claimant counts and labour force surveys, which deal with the structure of the workforce, its geographical distribution, the pay structure, and employment time probabilities. Yet, none of these measures proved successful as long as government policies - the core problem - remained the same. Faced with this trenchant and socially corroding scourge - governments have lately been experimenting with a variety of options. III. The Solutions IIIa. Tweaking Unemployment Benefits Unemployment benefits provide a strong disincentive to work and, if too generous, may become self-perpetuating. Ideally, unemployment benefits should be means tested and limited in time, should decrease gradually and should be withheld from school dropouts, those who never held a job, and, arguably, as is the case in some countries, women after childbearing. In the USA, unemployment benefits are not available to farm workers, domestic servants, the briefly employed, government workers and the self- employed. Copious research demonstrates that, to be effective, unemployment benefits should not exceed short-term sickness benefits (as they do in Canada, Denmark, and the Netherlands). Optimally, they should be lower (as they are in Greece, Germany and Hungary). Where sickness benefits are earnings-related, unemployment benefits should be flat (as is the case in Bulgaria and Italy). In Australia and New Zealand, both sickness benefits and unemployment benefits are means tested. Unemployment benefits should not be higher than 40% of one's net average monthly wage (the "replacement rate"). Most unemployment benefits are limited in time. In Bulgaria, to 13 weeks, in Israel, Hungary, Italy and the Netherlands to 6 months and in France, Germany, Luxemburg and the United Kingdom - to 12 months. Only Belgium offered time-unlimited unemployment benefits. In most countries, once unemployment benefits end - social welfare payments commence, though they are much lower (to encourage people to find work). In many countries in transition (e.g., in Macedonia), the unemployed are eligible to receive health and pension benefits upon registration. This - besides being an enormous drain of state finances - encourages people to register as unemployed even if they are not and distorts the true picture. Some countries, mainly in Central Europe, attempt to provide lump sum block grants to municipalities and to allow them to determine eligibility, to run their own employment-enhancement programs, and to establish job training and child care centers. Workers made redundant can choose to either receive a lump sum or be eligible for unemployment benefits. A third approach involves the formation of private unemployment, disability, and life, or health insurance and savings plans to supplement or even replace the benefits offered by the relevant state agencies. An intriguing solution is the municipal "voucher communities" of unemployed workers, who trade goods and services among themselves (in the UK, in Australia, and in Canada). They use a form of "internal money" - a voucher. Thus, an unemployed electrician exchanges his services with an unemployed teacher who, in return tutors the electrician's off-spring. The unemployed are allowed to use voucher money to pay for certain public goods and services (such as health and education). Voucher money cannot be redeemed or converted to real money - so it has no inflationary or fiscal effects, though it does increase the purchasing power of the unemployed. IIIb. Enhancing Employability In most such schemes, the state participates in the wage costs of newly hired formerly unemployed workers - more with every year the person remains employed. Employers usually undertake to continue to employ the worker after the state subsidy is over. Another ploy is linking the size of investment incentives (including tax holidays) to the potential increase in employment deriving from an investment project. Using these methods, Israel succeeded to absorb more than 400,000 working age immigrants from Russia in the space of 5 years (1989-1994) - while reducing its unemployment rate. IIIc. Encouraging Labour Mobility Workers are encouraged to respond promptly and positively to employment signals, even if it means relocating. In many countries, a worker is obliged to accept any job on offer in a radius of 100 km from the worker's place of residence on pain of losing his or her unemployment benefits. Many governments (e.g., Israel, Yugoslavia, Russia, Canada, Australia) offer the relocating worker financial and logistical assistance as well as monetary and non-monetary incentives. The EU is considering to introduce standard fixed term labour contracts. They would reduce the insupportable costs and simplify the red tape now involved in hiring and firing. The only country to buck the trend is Germany. It is looking to equate the rights of part time workers and full time ones. Similar ideas are debated in Britain. In France and most countries in Central and Eastern Europe, to dismiss a worker, the employer has to show that it has restricted hiring, applied workforce attrition, and reduced overall overtime. The EU's "social chapters" - now on of every member's law books - provides sacked employees with recourse to domestic and European courts against their employers. In other parts of the world, the two parties are subject to conciliation, mediation, or arbitration. IIId. Reforming the Minimum Wage Minimum wage hinders the formation of new workplaces - and yet almost all countries have it. Both the USA and the UK have just increased it. Many are considering a scaled minimum wage, age-related, means tested, and skills-dependent. IIIe. Administrative Measures: Early Retirement A favorite of post-communist countries in transition, early retirement was liberally applied in order to get rid of "technologically-redundant" workers and thus trim under-employment. Romania, for instance, offered its workers a handsome up-front payment combined with unemployment benefits. A special Early Retirement Fund was created by setting aside receipts from the privatization of state assets and from dividends received by the state from its various shareholdings. IIIf. Administrative Measures: Reduction of Working Hours France has recently implemented the second phase of its transition to a 35 hours working week, making it obligatory for medium and small businesses. It is considered by many economist to be a wasteful measure, based on the "lump of labour" fallacy. IIIg. Administrative Measures: Public Works The Civilian Conservation Corps (CCC) was established in the USA in 1932. It offered work for young and unmarried men. They planted trees, erected flood barriers, put out forest fires, and constructed forest roads and trails. They lived in semi-military work camps, were provided with food rations and a modest monthly cash allowance, medical care, and other necessities. At its apex, the CCC employed 500,000 people - and 3 million people throughout its existence. It was part of a major "public works" drive known as "The New Deal". This Keynesian tradition continues in many countries - from deflationary Japan to racially imbalanced South Africa - to this very day. Such workers are usually paid a salary equal to their unemployment benefits (Workfare). The Encyclopedia Britannica has this to say about public works: "The weakness in the proposal to use disguised unemployment for the construction of social overhead capital projects arises from inadequate consideration of the problem of providing necessary subsistence funds to maintain the workers during the long waiting period before the projects yield consumable output. This can be managed somehow for small-scale local community projects when workers are maintained in situ by their relatives - but not when workers move away. The only way to raise subsistence funds is to encourage voluntary savings and expansion of marketable surplus of food purchased with these savings." Public works financed by grants or soft loans do serve as an interim "unemployment sink" - a countercyclical buffer against wild upswings in unemployment - but, for all we know, they may simply be displacing existing employment at great cost to the public purse. IIIh. Administrative Measures: Public Education and Dissemination of Information Employment Bureaus throughout the world - spurred on by stiff competition from the private sector - have transformed themselves from mere registries to active (and computerized) labour exchanges. Many also strive to educate workers, retrain them, and enhance their employability through the acquisition of new skills. The unemployed are taught how to prepare a professional bio, a business plan, a marketing plan, feasibility studies, credit applications and interview skills. Employment Bureaus now organize job clubs, labour exchanges and employment fairs. IIIi. National Employment Contract Many countries - especially in Latin America and in Central and Eastern Europe - have signed "National Employment Contracts" between government, trade unions, employers (represented by the Chamber of Commerce), and Central Bank. In this neo-corporatist approach, employers usually guarantee the formation of new work places against a freeze on employee compensation, the exclusion of part time labour from collective bargaining, and added flexibility on minimum wages, job security, hiring and firing procedures, social and unemployment benefits, indexation of wages and benefits, the right to strike, and wage increases (increasingly linked to productivity gains). Trade unions, in return, are granted effective control of the shop floor - issues like unemployment insurance, employment protection, early retirement, working hours, old age pensions, health insurance, housing, taxation, public sector employment, vocational training, and regional aid and subsidies to declining and infant industries. In Sweden and Germany there is co-determination. Workers are represented even in non-wage related matters (such as the work organization). Wages and unemployment benefits are perceived as complementary economic stabilizers. Many countries instituted an "Incomes Policy" intended to ensure that employers, pressurized by unions, do not raise wages and prices. In Sweden, for instance, both labour and management organizations are responsible to maintain price stability. The government can intervene in the negotiations and even threaten a wage freeze, or wage AND price controls. In Holland the courts can set wages. Another possibility is a Guaranteed Wage Plan - Employers assure minimum annual employment or minimum annual wages or both to tenured employees. In return, firms and trade unions forego seniority (LIFO, last in first out, firing the newly hired first) and the employer is given a free hand in hiring and firing employees, regardless of tenure. IIIj. Labour Disputes Settlement Most modern collective agreements require compulsory dispute settlement through mediation and arbitration with clear grievance procedures. Possibilities include conciliation (a third party brings management and labour together to try and solve the problems by themselves), mediation (a third party makes nonbinding suggestions to the parties), arbitration (a third party makes final, binding decisions), or Peer Review Panels - where management and labour rule together on grievances. IIIk. Non-conventional Modes of Work Work is no longer the straightforward affair it used to be. In Denmark, a worker can take a special leave. He receives 80% of the maximum unemployment benefits as well as uninterrupted continuity in his social security rights. But he has to use the time for job training, a sabbatical, further education, a parental leave, to take old people (old parents or other relatives), or the terminally ill. This is also the case in Belgium (though only for up to 2 months). These activities are thought of as substitutes for social outlays. In Britain, part time and full time workers are entitled to the same benefits if wrongfully dismissed and in Holland, the pension funds grant pensions to part time workers. In many countries, night, shift and weekend workers are granted special treatment by law and by collective contract (for instance, exemption from social benefits contributions). Most OECD countries now encourage (or tolerate) part-time, flextime, from home, seasonal, casual, and job sharing work. Two people sharing the same job as well as shift workers are allowed to choose to be treated, for tax purposes and for the purposes of unemployment benefits, either as one person or as two persons. In Bulgaria, Macedonia, and a host of other post-communist countries, a national part time employment program (called in Macedonia the "Mladinska Zadruga") encourages employers to hire the unemployed on a short term, part time basis. IIIl. Full Employment Budgets The national accounts of many countries now produce a full employment budget. It adjusts the budget deficit or surplus in relation to effects of deviations from full or normal unemployment. Thus, a simple balanced budget could be actually contractionary. A simple deficit may, actually, be a surplus on a full employment basis and government policies can be contractionary despite positive borrowing. IIIm. Apprenticeship, Training, Retraining and Re-Qualification In France, Germany, the UK, the USA, and many other countries, sub-minimum wages are paid to participants in apprenticeship and training programs. Most of the unemployed can be retrained, regardless of age and level of education. This surprising result has emerged from many studies. The massive retraining and re-qualification programs required by the technological upheavals of the last few decades are often undertaken in collaboration with the private sector. The government trains, re-trains, or re-qualifies the unemployed - and firms in the private sector undertake to employ them for a minimal period of time afterwards. It is a partnership, with the government acting as educational sub-contractor for the business sector (with emphasis on the needs of small to medium enterprises) and a catalyst of skill acquisition. Such programs include vocational training, entrepreneurship skills, management skills, and even basic literacy and numeracy. Students are often employed as instructors in return for college credits and scholarships. IIIn. Entrepreneurship and Small Businesses Small businesses are the engine of growth and job creation in all modern economies. Even the governments of rich countries encourage innovative credit schemes (such as micro-credits) and facilities (such as business incubators), tax credits, and preference to small businesses in government procurement. Unification, German and Korean It has been an eventful month. The north and south rumps of an erstwhile unified Korea have agreed to reconvene, at North Korea's rare request, cabinet-level talks severed nearly a year ago. Only 6 weeks before, on June 29, vessels of these two countries clashed to lethal effect in the Yellow Sea - an incident for which the North now, startlingly, expressed its regrets. The South's indefatigable unification ministry will conclude the three-days negotiations on August 14, a day before both polities celebrate the end of the brutal Japanese occupation. North Korea also consented to participate in the 14th Asian Games, to be held in September in Busan in South Korea. It will even partake in a friendly football match with the South. Noble prizewinner South Korean president, Kim Dae Jung launched his "sunshine policy" - a Korean Ostpolitik - towards the famished and decrepit North in June 2000, when he met the "Dear Leader", Kim Jon Il. This led to precious little hitherto. A few members of families divided by the war in 1950-3 were finally allowed to briefly reunite. North Korea gorged on South Korean and Japanese grain and extorted cash from visitors to the much adored Mount Geumgang. UPI was among the first to report a discernible shift to market principles in the North. This is coupled with thawing relations with the West, notably the United States. Both the Japanese foreign minister and America's secretary of state conversed with their North Korean counterpart during the ASEAN regional forum in Brunei last week. The North even requested talks with the US-led United Command it so decries. But, otherwise, the North remains as recalcitrant and belligerent as ever. The prospects of Korean unification are best gauged in Panmunjom, scene of the armistice that ended the Korean war, where a South Korean rail line ends abruptly. The North has yet to construct the few miles to Kaesong within its territory. North Korea's Committee for the Peaceful Reunification of the Fatherland continues its vitriolic diatribes against South and West alike. Unification is not a straightforward matter not only geopolitically or politically - but also, and, perhaps, mainly, economically. In a Northeast Asia Peace and Security Network Special Report dated August 1999 and titled "Modeling Korean Unification", the authors, among them Marcus Noland, a leading authority on the subject, recommended a customs union between the two Koreas as a way to ameliorate northern famine and generate a peace dividend through military demobilization. The authors believe that unification will affect South Korea's "composition of output, the distribution of income, and the rate of economic growth". Should capital flow in from the rest of the world, the won is likely to appreciate and the "nontraded goods sectors could expand at the expense of the traded goods sectors". It would take at least a decade for northern incomes to reach 55 percent of southern ones. "The amount of capital investment necessary to raise Northern per capita incomes to 60 percent those of the South would actually drive the rate of return on capital in the North below that in the South. However, it would be possible to attain the 60 percent target without such equalization of the rate of return in the two parts of Korea under high-end estimates of the speed of technological convergence. This suggests that either the rate of technological convergence would have to be very rapid (say, 12 percent annually), or restriction on migration from the North to the South would have to be imposed on a semi-permanent basis." South Korea itself is likely to be as transformed by unification as the north. Cheap migrant labour from the across the erstwhile border will tilt the balance between income from capital and income from labor in favor of the former. As northerners occupy low-skill jobs, southerners are bound to monopolize the high end of the labor market. Income inequality will widen. Noland believes that the cost of unification can be limited. It is hard to see how, though. Inter-Korean trade leapt 21 percent year-over-year to a meager $130 million in the first four months of 2002 - including $51 million in "non-trade" items, such a food grants. The North maintained a trade surplus of $51 million with the South in these 120 days, excluding humanitarian assistance and Southern gifts. It exported to the South agricultural products, fish, and textiles and imported from it machinery, chemicals, and processed textiles. A mere 62 companies - of a total of 188 - worked on a "processing-on-commission" basis, elsewhere a very common practice in least developed countries. The World Bank sounds more realistic when it pegs the overall cost at 5-6 times South Korea's GDP, or $2-3 trillion. Noland notes that between $300-600 billion over ten years would be needed to raise North Korean income levels to 60 percent of the Southern average and to prevent ruinous mass migration from North to South. Young-sun Lee, another scholar, concurs with the high end of Noland's estimate. The historical irony is that the North, until 1950, has been the industrial powerhouse of the united Korea. Mining, heavy industry, and science were all concentrated in the north. The south was home to agriculture and light, family-owned, industry. Despite American carpet bombing which pulverized its manufacturing base, the North grew faster than the south throughout the 1950's and 1960's - albeit partly thanks to Chinese and Russian monetary infusions. But while the south - with double the north's population - leapt from an average GDP per capita of $90 in the mid-60's to almost $9000 in 1999 - the north crept to one tenth, some say one twentieth, this figure last year. And while North Korea's foreign trade is a measly $2 billion - the South trades almost $300 billion in goods and services. After China and Japan, South Korea is the North's largest trading partner. The harrowing stories of fatal famine in the North are a commonplace by now. Even by its official - and, thus, false - figures, the North admits to a quarter of a million deaths by starvation. The figure may be 10 times as high. Energy shortages mean that factories are working at 10-15 percent capacity, reported "The Economist" last week. Though far more suave, the South may be pursuing a passive-aggressive tack of its own. Unification is likely to be a better avoided prohibitively expensive and economically destabilizing affair. An apt parallel would be with Yemen, whose Marxist and destitute south united with the far more prosperous and open north only to yield a devastating civil war two years later. But the Koreans optimistically prefer to compare their situation to pre-unification Germany. A decade and $1 trillion in subsidies later, not counting $2.6 billion in annual handouts from the European Union - east Germany is still woefully trailing its west. According to figures published by The Frankfurter Allgemeine Zeitung, the growth rate and productivity of the east - the German mezzogiorno - is a mere 70 percent of the western Lander. The east contributes one tenth of German GDP with one fifth of the population. A quarter of a million jobs have evaporated in the last 4 years. Unemployment, at 17.8 percent in June, is the highest since 1990. The tax base is shrinking as the dreary region is drained of its populace. Recently, Germany has extended federal aid to the east - financed by a much-resented 5 percent surtax - by another 20 years. This massive failure is a hot topic in the election campaign. BMW has been courted, cajoled, and bribed with copious tax breaks to open a new factory in Leipzig. Volkswagen's decision to launch a positively minor plant in Dresden was hailed as a breakthrough. On a recent visit to Seoul, German Nobel laureate Gunter Grass cautiously suggested that unification may follow a long period of engagement. He hoped, he said, that Korea will not repeat the mistakes that his country committed - the exorbitant taxes and the human dislocation. He bemoaned the lack of cultural and artistic exchanges between the Koreas. But Korean unification may pose more than belletristic predicaments. Another German, Otto Graf Lambsdorff, compared the Korean experience to the German one in a guest column in the "Korea Herald": "The (economic) conditions in Korea ... (are) more difficult than those in Germany around the time of its reunification ... In relation to the West German population, the East German population was much smaller than the respective proportions of North to South Koreans ... The discrepancy regarding the level of economic development is much larger between South and North Korea than it was between West and East Germany ... It is sometimes overlooked that in the case of East Germany about one-third of the economic production was delivered by a private and cooperative sector ... Furthermore, in contrast to the ... isolation (of North Korea), (East Germany) participated actively and with a certain degree of success in international economic exchanges." He noted that it took Germany 20 years to unite after the first east-west summit in 1970. But the parallels end there. By being absorbed in West Germany, the east gained immediate access to the European Union. There is no Asian equivalent of a common market. Moreover, the North Korean market is geared to support a bloated military and to produce weapons, especially missiles. Demobilization may prove to be a thorny issue economically as well as politically. In Korea's case the very term "unification" may be misleading. According to a "Korea Times" commentary by Dr. Park Eung-kyuk of Hanyang University, the South aims at an EU-like confederation while the North counters with a loose federation. Is there anything these two disparate polities can learn from the German experience? The first serious effort to answer this question was made in 1993 by an expert group chaired by former German chancellor, Helmut Schmidt. Its conclusions and policy recommendations reverberate through subsequent scholarship and commentary. Two weeks ago, the Frankfurter Allgemeine Zeitung, neatly summed up the error-ridden unification process thus: "At unification, many western companies viewed the East as a new export market, a consumer land. Instead of investing in production sites there, they funneled goods and services to a consumption-starved public armed with a cash windfall from the currency exchange." The Kohl-mandated exchange rate of 1 ostmark to 1 deutschmark rather than the previous and more realistic rate of 4:1 had grave repercussions. To avoid inflation, the Bundesbank was forced to raise interest rates and induce a recession. The paper continues: "Eastern goods were priced out of the market as manufacturing cost quadrupled overnight. The country's chief export market, the former Soviet bloc, also went bankrupt. Local consumers bought western goods. No revenue flowed back to the East, touching off a mass exodus of labor that reduced the workforce by one-third in three years." In a book titled "Avoiding the Apocalypse" and published last year by the Institute for International Economics, Marcus Noland disputes this scenario. The culprit was wage policy, not the exchange rate. On the contrary, the transfer of wealth to the east through the exchange rate mechanism eased its problem of lack of competitiveness and did not result in inflation. He even goes as far as floating an idea of dollarizing inter-Korean trade. Driving east German wages beyond productivity - in response to labor union pressure - depressed output and may have encouraged westward migration. The sluggish rate of privatization served to perpetuate mismanagement. The practice of property restitution impeded the assignment of clear property rights and, as a result, hampered investment. Privatization was further hobbled by the refusal to write off enterprise debt outright. The Schmidt commission strongly differs: "In transferring to a market economy, it is not possible to leave everything to market forces. The deficiencies of the infrastructure in the former GDR were grossly underestimated as was the environmental contamination, the lack of modern technology. The political, legal, economic, educational, and social security systems changed, including traffic rules. It is an enormous achievement for the East German population to have coped with the stress created by this veritable revolution. But it also created distrust, lack of initiative, confusion, and fear all of which should have been more effectively addressed." The recipe which seems to enjoy a consensus among scholars and politicians alike calls for a gradual unification. Trading and investments should be followed by a currency union at a realistic exchange rate, land reform in the North, and the institution and restitution of property rights. Tourism and services establishments should be privatized first, agriculture later. The state would have to design and implement a series of industrial policies to prevent market failures and provide public goods. Its top priorities should be infrastructure and institution building. Human capital must be augmented by the transfer of qualified personnel from the south while northerners are trained or retrained. It may be necessary to restrict immigration during a transition period. Help and support from the international community - Korea's neighbours, the Asian Development Bank, the IMF, the World Bank, the West - would be indispensable. It is here that unification may blunder. Many Asian countries - not least, China - may be unhappy with the idea of a united, independent, and economically prosperous Korea under Western influence. Lending to emerging economies - not to mention unification projects - has dried up and is likely to remain so for years to come. The West has its own agenda regarding the "axis of evil". Ultimately, Koreans trying to unite may be faced with an insurmountable common adversary - geopolitics. United Nations Arab nations plan to table a resolution at the United Nations General Assembly condemning the U.S.-British led "invasion" and "occupation" of Iraq and calling for immediate troop withdrawal. A similar effort at the Security Council last week failed, doomed by the veto powers of both alleged aggressors. This is not likely to endear the organization to the Bush administration whose hawks regard it as a superfluous leftover from the Cold War era. Rep. Ron Paul (R-Texas) even introduced legislation to withdraw from the organization altogether. Nile Gardiner, a visiting fellow at the Heritage Foundation, summed up these sentiments in Insight Magazine thus: "I think the U.N. has been in gradual decline for many years. It failed to act spectacularly in Rwanda and did nothing about Slobodan Milosevic's brutal regime. Iraq is the latest in a long line of failures." Admittedly, like any bureaucracy, the organization is self-perpetuating, self-serving and self-absorbed. But it - and its raft of specialized offshoots - still give back far more than they receive. In recognition of the U.N.'s crucial role, several liberal Democrats have entered legislation to create a "permanent U.N. security force" and to "voluntarily contribute" to the U.N. Population Fund. Consider peacekeeping operations. At a total annual cost of c. $5 billion last year, U.N. peacekeeping missions employ close to 40,000 police and military and another 11,000 civilians from 89 countries. The budget is shoestring and more than half the pledged contributions are still outstanding. The U.N. consumes less than 0.001 percent of the world's gross domestic product. As James Paul, Executive Director of Global Policy Forum, observes: "All UN staff, including the specialized agencies and funds, are fewer than the civil service of the City of Stockholm or the staff of McDonalds. The core UN budget is one half of one percent of the US military budget and far less than the cost of one B-2 bomber aircraft." Even the United States Mission to the United Nations, on its Web site, seeks to debunk a few myths. Despite a massive increase in remit and operations, the organization's budget, at $2.6 billion, has remained constant since 1995. The workforce was cut by 11 percent, to 9000 employees, since 1997: "The UN has done a great deal to increase efficiency and overall accountability. In 1994, the UN created the Office of Internal Oversight Services (OIOS) to serve as the inspector general and promote efficient management and reduce waste, fraud and abuse. During the year ended June 30, 2001, OIOS recommended $58 million in savings and recoveries for the UN and persuaded UN program managers to implement hundreds of recommendations for improving management and internal controls. OIOS investigations also led to successful convictions of UN staff and others for fraud and stealing UN funds." Yet, bad - and expensive - habits die hard. Budget discipline is lax with no clear order of priorities. The United Nations suffers from an abundance of obsolete relics of past programs, inertly and futilely maintained by beneficiary bureaucrats. Follow-up U.N. conferences - and they tend to proliferate incontrollably - are still being held in exotic resorts, or shopping-friendly megalopolises. United Nations entities at the country level duplicate efforts and studiously avoid joint programming, common databases and pooling of resources. The aforementioned OIOS has hitherto identified more than $200 million in waste and fraud and issued 5000 recommendations to improve efficiency, transparency and accountability. Disgusted by the flagrant squandering of scarce resources, the United States - which covers one fifth of the august establishment's pecuniary needs - accumulated more than $1.2 billion in arrears by 1999, double the debts of all other members combined. It has since repaid the bulk of these even as it reduced its share of the United Nations' finances. It now contributes 22 percent of the regular budget, down from 25 percent and 25-27 percent of the costs of the U.N. peacekeeping forces, down from 30-31 percent. But a row is brewing in the corridors of power with regards to the proposed budget for 2004-5. Ambassador Patrick Kennedy, United States Representative for United Nations Management and Reform, called it "a step backwards". The European Union, predictably, "fully concurred" with it and urged members to increase the budget in line with the U.N.'s enhanced responsibilities. Kofi Annan, the U.N. General Secretary since 1997, is promoting the nation-building and humanitarian credentials of his reformed outfit for the postwar reconstruction of Iraq. American President George Bush is less than keen and Prime Minister Tony Blair of Britain has moderated his pro-multilateralist rhetoric following his meeting with Bush last week. Even erstwhile keen supporters of the United Nations, such as Japan, a surprising member of the "coalition of the willing", are hesitant. Japan contributes close to one fifth of the international body's regular budget. Yet, disillusioned by its inability to gain permanent membership of the Security Council despite its economic clout, Japan announced, in January, its intention to cut its participation by 5 percent. The United States seems to wish to consign the organization to the humanitarian aspects of Iraq's restoration. Last Friday, the U.S. Agency for International Development (USAID) granted $8 million to the U.N.'s Children's Fund (UNICEF) to pay for sanitation, healthcare and potable water schemes in Iraq as well as for micronutrients, vitamins and medicines for its malnourished and disease-stricken populace. Succumbing to its niche typecasting, the United Nations has launched an unprecedented $2.2 billion "emergency appeal for immediate humanitarian assistance for the people of Iraq over the next six months, with $1.3 billion devoted to a massive food aid operation ... to help the displaced, refugees, children, the elderly and other especially vulnerable groups". The donor funds will augment the proceeds of the revamped oil-for-food program, now entirely under the control of the General Secretary. So, is the United Nations really "just a farce" and its members mostly "petty despots" as Conrad Black, The Canadian media mogul, has it in recent interviews? Or, paradoxically, has this international body been strengthened by its faithful depiction of resistant world opinion in the face of perceived Anglo-Saxon bullying? The global assembly's future largely depends on an incensed and disenchanted United States. Unable to rely on the kindness of strangers, Annan is reaching out to new constituencies. At the 1999 World Economic Forum in Davos, he challenged the global business community to enter a "Global Compact" with the U.N. to uphold "human rights, labour standards and environmental practices." The International Chamber of Commerce, representing 7,000 business organizations in 137 countries, picked up the gauntlet and published a joint statement at a July 1999 meeting with United Nations bigwigs. This uneasy partnership drew severe criticisms from non-governmental organizations the world over. Corpwatch, a California-based NGO, observed acidly that "in the first 18 months of the Global Compact, we have seen a growing but secret membership, heavy influence by the International Chamber of Commerce, and a failure to publish even a single case study of sustainable practices. The Global Compact logo has been used without attribution by DaimlerChrysler, even as Global Compact officials insist that use of the general UN logo is strictly controlled. The Global Compact represents a smuggling of a business agenda into the United Nations. It should not be considered a contribution to or framework for the Johannesburg Summit." The United Nations - like NATO and other Cold War critters - is an organization in search of a purpose. The demise of the USSR constituted a tectonic shift in international affairs. The U.N.'s inability to accommodate its institutions to the supremacy of the United States, the demography of China, the decline of Britain and France and the economic clout of Germany and Japan are symptoms of denial and delusion that are detrimental to the future of this otherwise benign and useful establishment. The war in Iraq is merely a rude wake-up call. And about time, too. United States-China Relations European intellectuals yearn for the mutually exclusive: an America contained and a regime-changed Iraq. The Chinese are more pragmatic - though, bound by what is left of their Marxism, they still ascribe American behavior to the irreconcilable contradictions inherent in capitalism. The United States is impelled by its economy and values to world dominion, claimed last week an analysis titled "American Empire Steps Up Fourth Expansion" in the communist party's mouthpiece People's Daily. Expansionism is an "eternal theme" in American history and a "main line" running through its foreign policy. The contemporary USA is actually a land-based empire, comprising the territorial fruits of previous armed conflicts with its neighbors and foes, often one and the same. The global spread of American influence through its culture, political alliances, science and multinationals is merely an extrapolation of a trend two centuries in the making. How did a small country succeed to thus transform itself? The paper attributes America's success to its political stability, neglecting to mention its pluralism and multi-party system, the sources of said endurance. But then, in an interesting departure from the official party line, it praises US "scientific and technological innovations and new achievements in economic development". Somewhat tautologically, it also credits America's status as an empire to its "external expansions". The rest of the article is, alas, no better reasoned, nor better informed. American pilgrims were forced westward because "they found there was neither tile over their heads nor a speck of land under their feet (in the East Coast)". But it is the emphases that are of interest, not the shoddy workmanship. The article clearly identifies America's (capitalistic) economy and its (liberal, pluralistic, religious and democratic) values as its competitive mainstays and founts of strength. "US unique commercial expansion spirit (combined with the) the puritan's 'concept of mission' (are its fortes)", gushes the anonymous author. The paper distinguishes four phases of distension: "First, continental expansion stage; second, overseas expansion stage; third, the stage of global contention for hegemony; and fourth, the stage of world domination." The second, third and fourth are mainly economic, cultural and military. In an echo of defunct Soviet and Euro-left conspiracy theories, the paper insists that expansion was "triggered by commercial capital". This capital - better known in the West as the military-industrial complex - also determines US foreign policy. Thus, the American Empire is closer to the commercially driven British Empire than to the militarily propelled Roman one. Actually, the author thinks aloud, isn't America's reign merely the successor of Britain's? Wasn't it John Locke, a British philosopher, who said that expansion - a "natural right" - responds to domestic needs? Wasn't it Benjamin Franklin who claimed that the United States must "constantly acquire new land to open up living space" (the forerunner of the infamous German "Lebensraum")? The author quotes James Jerome Hill, the American railway magnet, as exclaiming, during the US-Spanish War, that "If you review the commercial history, you will discover anyone who controls oriental trade will get hold of global wealth". Thus, US expansion was concerned mainly with "protecting American commercial monopoly or advantageous position". America entered the first world war only when "its free trade position was challenged", opines the red-top. American moral values are designed to "serve commercial capital". This blending of the spiritual with the pecuniary is very disorienting. "Even the Americans themselves find it hard to distinguish which matter is expanding national interests under the banner of 'enforcing justice on behalf of Heaven' and which is propagating their ideology and concept of value on the plea of national interests." |
