Why the World Economy is ailing?

Heiner Flassbeck is the Director of the Division on Globalization and Development Strategies of the United Nations Conference on Trade and Development (UNCTAD). He is the leader of the team that prepared the UNCTAD’s “Trade and Development Report, 2012”. This report was released recently. This report covers the recent and longer term issues of the world economy and it can be seen in the website of UNCTAD.  Paul Jay, Senior Editor of the website “therealnews.com” interviewed him and published the same in the website “the realnews.com”  on 14.10.2012. Folloing are the important points mentioned by Mr. Flassbeck in this interview:

The neo-liberal economic policies prescribed by World Bank, IMF and the Finance Department of America for coming out of the economic problems of the world resulted in falling wages in the developed countries during the last 20 years. This was done in the name of making labour markets more flexible, which means increasing unemployment, cutting wages in relation to profits and cutting wages in relation to productivity. This lead to the present situation where the world economy is stuck and does not have any economic policy any more to get back into a recovery.

Take the United States. The unemployment has jumped due to the financial crisis and it has put pressure on the wages.In auto industry, the workers are getting $ 13, $ 14 an hour or even $ 9 an hour where earlier they used to make $ 25-$ 27 an hour.

In Europe the same thing is happening with more intensity. There are some countries which already cut wages by 20 per cent. But nevertheless, their economies are collapsing.

In the name of competitiveness, wages are reduced to make prices of the products competitive for exporting to other countries. But everybody cannot increase competitiveness, though every body can increase productivity.

 If wages fall, incomes fall and if incomes fall, consumption falls and if consumption falls, investment falls, and the economy will go deeper into recession.   If all your competitors are doing exactly the same thing as you are doing, that is, cutting wages, and then you are not really gaining any advantage. What you are doing is reducing the demand in the world economy thereby resulting in less production and recession.

When there is no real increase in demand due to fall in wages, the policy makers are suggesting the central banks to inject more money in the economy. It is supposed to give rise to growth. If fortunate, it may create another bubble, which is not a real solution. Earlier also this was done, bubble was created and it burst causing much more recession.

The theory that the market is growing in the developing countries and therefore the America and Europe should cut wages, and thus reduce the cost of their products to sell them at competitive rates in these developing countries is like the tail wagging the dog. In the global production the share of America, Europe and Japan is 65 per cent. Therefore unless there is recovery in these developed countries, China and India cannot save them from recession. Killing domestic markets by wage cuts will damage more than the gains coming in the exports.

This experiment is badly failing. In southern Europe, this failure is clearly evident. Greece has cut wages by 20 per cent, Spain is cutting by 10 per cent and Italy is on the path to cut. But it did not work and their economies are facing more and more recession.

But the American, and European Governments are following the same policies of wage cuts for securing profits to the Corporates. It will move their economies much deeper into recession.