Governing globalization: jobs, equity and the management of systemic risks
On March 26, Prof Ian Goldin, Director of Oxford Martin School, delivered the keynote address to the Governing Body of the ILO on the future and the potential for jobs and decent livelihood. In his lecture, Prof Goldin made a remarkable analysis of the dynamics of globalization and offered insights and perspectives into how policy actions on equity, migration, innovation and growth will shape our lives and work in the twenty-first century.
It is an honour and a privilege to be here today, not least to be sitting alongside the Director-General, Juan Somavia, who has made a most remarkable contribution to the ILO since he was first appointed almost exactly 14 years ago, taking up the job 13 years ago.
It is a time when jobs have come onto the mainstream of the economic agenda. It is a time when, for the first time, the G20 centrally, together with the ILO, the OECD and IMF, will discuss jobs and youth unemployment. It has become mainstreamed and this is in no small part due to the efforts of the ILO and the remarkable leadership of its Director-General.
Politicians across the world, societies across the world recognize that we need to resolve these issues, and yet, unfortunately, we are no closer today to the resolution than we were. Indeed we may be further away due to the devastating effects of the economic crisis.
It has been a time under the Director-General’s leadership of the most remarkable changes in the world. A time of hyper-connectivity and acceleration of globalization. There is really only one society left in the world today, North Korea, which remains isolated from the ideas which are shared in this room. So it has been a time where we have been able to share knowledge, where we have been able to learn policy lessons, and yet we need to ask ourselves why is it, despite this extraordinary change, with hundreds of millions of newly educated people are we not able to resolve the most fundamental of these questions, which is how to create decent livelihoods and jobs for all. Is this beyond the wit, is this beyond the collective intelligence of humanity? I would argue resolutely, no. We can do it. We need to recommit ourselves to making this a policy focus. The ILO knows and has also followed this as a central point. A great source of hope is that this is now being more widely shared, but shared at a time when it has got more difficult, not less.
Globalization and the management of systemic risks
It is important when one is thinking about globalization to recognize the outstanding achievements of this time. There has been no stronger progressive force for employment creation and poverty reduction in the world in history. And if you look at the data on poverty particularly, but also on illiteracy, on improvement in life expectancy, this is due to connectivity. It is due to the sharing of ideas, the sharing of vaccines, the sharing of potential. But clearly, we have not gone far enough and we need to be mindful of the two central systemic failures of globalization, these are the underbelly.
As the ILO showed in its 2004 report ―”A fair globalization: Creating opportunities for all” ― the underbelly is growing inequality and increasingly we need to recognize systemic risk. How do we become more connected? How do we share our goods, our services, our financial systems, our people, without being more vulnerable? If we are not able to resolve these dual questions of how do we enjoy globalization without growing inequality and how do we enjoy globalization without increasing systemic risk, we will find our societies slam the doors. They will become more xenophobic, nationalist and protectionist. This would be devastating for the world. It would set back the advances and close the doors on development. It is something we need to collectively avoid, but we can only avoid it by putting these two issues at the centre of our attention: jobs and equity, and the management of systemic risks.
At a time when we have collectively become more connected, it is remarkable how the governance system of the world remains more fragmented than ever. I had the great privilege of serving on the Chief Executive Board of the United Nations with the Director-General. And what we see in those institutional structures and what we see in the role of national governments, is the growing disconnect between the challenges facing the world and the ability of our nations to join together to collectively solve global problems. And so at a time when the externalities or the issues of the commons have never been more pressing, the ability of the global governance structure to resolve them is failing to catch up.
The ILO again stands out in contrast to many of the other organizations, not only because it is a tripartite organization, it shows a new way of doing things with Employers and Workers and Governments together, but also because, in many other respects, it is also of the twenty-first century. Not least, I should add, in the open competitive structure which is voting for its new Director-General, in stark contrast to that of the Bretton Woods institutions.
The tragedy of lost opportunities and the tragedy of the commons
So we have this tragedy of lost opportunity. The tragedy of the commons is a tragedy because it could be different and we know that the individual collective actions do not sum up to global goods. It cannot be assumed that what every individual does rationally in their self-interest, or what every nation does rationally in their self-interest, would lead to a good outcome. This has been known by economists for a very long time, the tragedy of the commons, and it is becoming more intense because there is more spill over, because there is a greater need for shared management. The tragedy of the commons is mirrored in the modern tragedy of economics. A very significant cause of the economic failure that we have seen the crisis and our inability to solve jobs and to create societies which create decent livelihoods for all, is because of the capture of economics and the tragedy of its going up a blind alley. The detours that economics has taken over the last 20 years have meant that we are no closer in economics to dealing with these most significant issues than we were then. The assumption within economics, the rational economics expectations theories, that individual choice would be reflected in collective outcome, of course, is now questioned. Economics is pushing hard against a change, but it is happening and it is again becoming a more pluralistic understanding of what we can do, what we can do in individual decisions, and what we can do collectively.
In particular, the role of the nation state, the role of governments in setting the economic signals, in defining the regularity boundaries is become clearer. This is vital, because a significant cause of the crisis was the belief that rational economic actors collectively would come to the correct outcome, be it whether they were buying their mortgages or whether they were buying their derivatives. The realization that governments have to regulate, that governments have to set strong boundaries to ensure that these collective outcomes are in society’s interests, is dawning belatedly on policy-makers. But what to regulate, how to regulate, where to intervene, remains an area of great and urgent need for policy reflection and empirical analysis.
Tragedy of ethical failure
The tragedy of the commons at the global level, the tragedy of economics, is mirrored in a tragedy of our ethics. And I use the word tragedy because it reflects the fact it need not be so, and like the great Shakespearean tragedies, one can see the unwinding of history in ways which need not have taken place. But once particular paths are set in motion, they are extremely difficult to reverse and the paths’ dependence becomes the collective outcome.
The failure of ethics and trust I see as the third great tragedy along with the tragedy of the commons and that of economics. The failure of ethics is related to the failure of economics. Individual incentives and greed, self-interest, have become accepted as something which reflects the rational behaviour of people and the economic myth is that this is rational for society. This is not just at the individual level where we see CEOs justifying obscene salaries which bear no relationship to shareholder value or employment creation or any other indicator one may apply in an objective fashion. It also takes place at the national level. A significant part of the story on the euro is the failure of trust, the failure of governments which signed up to Maastricht to obey the letter of what they had signed up to. This was disingenuous, this was not abiding by the principles which they had held themselves up to. It occurred at the collective level and it occurred at the national level. We know now that Greece did not accurately reflect its levels of debt. For years and years the politicians and the bureaucrats were playing with the numbers.
This, I see as a failure of trust, I see it as a failure of trust when Europe and the United States collectively connive without an open political process or transparent process to agree the heads of the Bretton Woods Institutions. We cannot expect our societies to engage in trust, to establish trust and ethics as the basis of our activities when our leaders, our institutions, and our governments do not walk the talk. We have to believe that leadership at the national level starts with how do you decide the heads of institutions, how transparent are you in the budget processes, do you tell people what your deficit is or do you hide it, or how you reward the CEOs of your firms. If these basics of economic management, of social management, cannot be abided by our leaders it is no wonder that societies and the electorate do not trust them.
So we have a crisis that is deep that needs to be revolutionized through walking the talk that our leaders have been preaching. One of the greatest ironies of recent years has been to see how the Bretton Woods preached one thing for emerging markets, but their big G7 shareholders felt it was not for them. This is something that I have seen very much first hand as Vice-President of the World Bank and being on the other side of the negotiating table as the economic adviser to President Mandela. Seeing governments that used to preach and know the theory of macro management failing to abide by it in their own macro management. And yet the emerging markets after three very painful decades of the 1970s crises, the 1980s crises, and the crises of the 1990s ending with the Asian crises, did learn the lessons, they did learn through terribly bitter experience that one has to manage one’s macro, but one has to manage it oneself, whether the budget deficit is 3 per cent or 3.5 or 2.5 per cent does not really matter, these IMF hard rules are rules of thumb. They are not made in some sacred way but they do matter because one does have to, in the end, have hard goals, hard constraints, and live within one’s means. One has to do it not only because of the self-confidence that it gives but the confidence to others as well; and the confidence to society. And our failure in the OECD economies, to walk our talk, is a tragedy, it need not have been so. It need not have been so because we knew the theory, we just were unable to live up to our own principles.
So policies matter, and following the policies matter, and we know what many of these policies are. The book I have just published called “Globalization for Development” seeks to identify these policies in a number of critical economic dimensions. In finance we know that heterodox policies make more sense than some rule-bound immediate capital account liberalization or any other policy that is built in theory, not in practice. Countries need to work their policies out for themselves but they need to work over defined times towards certain goals and heterodoxy is important. When any single part of the economic system becomes too big it is dangerous . We understand this about finance, we understand too that the macroprudential rules on regulation need to be in place, that we cannot allow any node of the system to become too big to fail. We also know now that we cannot allow technologies to take root that overwhelm our knowledge and our institutional capability. We also know that the multilateral rules are absolutely vital, and that multinational corporations require investment codes. These codes need to be hammered out in organizations like the ILO, the OECD, and others. Abiding by these, creating transparency is absolutely vital.
So, there is no rocket science in finance and investment, much is common sense, it is about being prudent, it is about being careful and not allowing things to happen that one does not simply understand. Trade, too, is an area where we have learned a huge amount. The continued support for the crazy policies of the Common Agricultural Policy in the European Union, and in the USA cotton and biofuel subsidies, and other very high levels of subsidy causing the consumers in the rich countries over US$250 billion a year. This has a particularly regressive impact on poor people and workers. Citizens pay over a €1,000 a year for food products in Europe, the US and Japan in order to support perverse subsidies. These benefit a tiny, much less than a fraction of 1 per cent of the electorate. These continue to political lobbying and a lack of awareness that these are bad policies. They create economic rents for a tiny minority of society and they are terrible for the environment because they lead to capitalization of land, excessive chemical applications, and monoculture. I particularly care about them because they are bad for poor people in both developed and developing countries. So trade protectionism of agriculture, the blockage on the Doha Round is a tragedy because much more can be done.
Capacity building behind the border of investment is also well known, this needs to be advanced. But we also know equally that not all trade is good and worth increasing connectivity and globalization also comes the flow of very bad things, arms, drugs and illicit trade. About 10 per cent of all trade is thought to be illicit, including dear to the heart of the ILO, forced labour, child labour, slave labour, and other forms or exploitation. These areas need a greater focus.
On aid, which are another vital flow for a more inclusive globalisation, there has been great progress in terms of knowing what should be done. Developing countries have never been better governed, the rich countries absolutely have never been richer and yet the excuses as to why we give lower levels of per capita aid than in the 1980s remain pervasive. The harmonization agendas, the commitment to aid coordination set in major conferences in Rome, Accra and Paris remain extremely significant. These are always very small flows relative to domestic savings and investment but they can become very significant at critical times for countries.
Migration flows are perhaps the most neglected of the globalization flows and I have spent a lot of time in recent years thinking about this, both in the context of my book Globalization for Development but also for my previous book called Exceptional People: How migration shaped our world and will define our future. Migration will define our future, it has shaped our past. It will become the defining policy area for many countries.
The Oxford Martin School where I work is a group of about 350 academics across many different disciplines who together are thinking about the future, including and not least, in demography and technological change.
Demography and migration
Their projections show that the OECD workforce, assuming entry and exit ages remain roughly the same, will be declining from about 800 million to about 600 million people over the next 40 or so years. Dependency ratios will also be increasing sharply. Fertility is collapsing, ageing accelerating. While you are here in Geneva for this week, your life expectancy will increase by about 20 hours. The ILO is a wonderful and rejuvenating place to be!
The extraordinary increase in life expectancy is only matched by the even more surprising collapse in fertility. This is a global phenomena. The ten countries in the world with the lowest fertility rates are emerging markets. When women get educated, when they get jobs, when they become urbanized, they have less children. The cost of living and benefits of having children are changing dramatically. We will control the world – people of Juan’s age, and my age and the Chairperson’s age and looking around some of you too – because we will become the voting majority very rapidly. The frustration of the youth will mount. We need to ensure in our societies is that we create and continue to have dynamism. As I show in Exceptional People, half of innovation is created in the United States by migrants, although they are only about 10 per cent of the population; half the Silicon Valley start-ups; half of the patents in the United States; and of course half the births.
So we will be turning this debate on its head and we need to be mindful of the very particular impact on jobs, on employment and that particular impact on societies. And like in the trade debates, we need to ensure that social protection, that particular policies for particular localities that are most affected are central to governments’ thinking. If we want an inclusive globalization we need to ensure that we are able to adopt policies that are inclusive of people, including migrants, but not at the cost of our local communities who need to be protected. Transformation and diversity are vital to ensure vibrancy of societies, but this needs to be accompanied by social protection and redistributive policies that ensure that the benefits of change, which are shared by the society as a whole, are at least in part directed to reduce the pain of transformation experienced at the sector or community level.
More crises to come
I see systemic risks as a key other dimension of globalization going forward. Unfortunately, the financial crisis is only the first of the crises of the twenty-first century. It will be and should be understood as the first of too many: there will be many more. It reflects a failure of institutions and also a failure to understand the dynamics of globalization, hyperconnectivity and technical change, in this case, particularly derivatives. Our societies will become more subjected to shock. Shocks induced by a wider and wider range of different cascading failures – failures that come from surprising areas and across our borders at increasing speed.
We need to ensure that poor people and the most vulnerable are protected because they always suffer most from a shock: be it climate shock, a pandemic shock or a shock from finance. And we need to build the regulatory and other capacity to mitigate these shocks and build resilience. When you read the evidence of the Commission looking into the causes of the financial crisis, the exposition from the Treasury Secretary is remarkable as he had been the CEO of Goldman Sachs and should have understood banking. But the Treasury, the FEC, and the SEC and the FED, and everyone else supposedly in charge did not have a clue what was happening. The collective statement that emerges from the evidence is: ―we did not know what was happening. They did not know that when they pulled the plug on Lehman it would lead to a cascading failure.
How was this? We have a data deluge; we need to learn to drink from the fire hydrant. If we cannot do so, we will not able to manage. The weak signals are important, rather than the overwhelming noise of data. And in this we need to understand that our institutions have to keep pace not only with technological change but with the pressures that come from new technologies and from new sources.
A key concern is that our regulatory institutions need to urgently shape up to become fit for 21st Century purpose. We do not want to allow the tragedies I have mentioned to also be reflected in the future tragedy of democracy.
Can democracy deliver?
Can the short-run and the increasing pressure on governments to deliver the cascading events that come off the Internet and other sources get in the way of the important and longer term decisions? Democracy has a remarkable ability to act in the interests of individuals and people but it also has the worrying ability to be overwhelmed. And this battle of ideas, this battle of institutions needs to be joined. We need to ensure that we can deliver on national and global interests. We need to ensure that our leadership is fit for twenty-first century purposes.
Employment, Youth and the ILO
Youth unemployment, joblessness has many, many dimensions. Of course global growth and growth nationally is significant but the failure of growth to translate into jobs, particularly youth jobs is evident everywhere. We need urgently to advance this. This is not only about questions of employment and employers; it is about housing markets, education, mobility, investment and technical change. An urgent programme of research and action needs to be joined across the world. A programme which is reflected in the Global Jobs Pact that the ILO has just put out.
Director-General, you and your colleagues have shown that putting jobs at the heart of the debate is, and has been, central to your mission and you are to be congratulated on now ensuring that this becomes part of a broader discussion in the G20 and elsewhere. You have been ahead of your time and remains so in this. The question is, are we running out of time? Where is the political will? Where is the leadership? You have shown in your opening remarks that you too see this as a central concern. This is a dangerous time. A time of handover from the old leadership of the world to one that is not yet sure of its role. It is organizations like this that need to provide the much needed direction. Organizations where people come together in tripartite ways, find solutions and can have the power because of your depth and breadth across societies around the world, the power to implement, the power to not wait for someone else but to be in the driving seat to provide the direction. There is no one else at the wheel when it comes to the key questions of jobs, employment and the ILO’s mission. The power is with this institution. I wish you all my very best as you exercise it. Thank you.
Ian Goldin was Vice President of the World Bank (2003-2006) and served on the Bank's senior management team, leading the Bank's collaboration with the United Nations and other partners. From 1996 to 2001 he was Chief Executive and Managing Director of the Development Bank of Southern Africa and served as an advisor to President Nelson Mandela. Previously, he was Principal Economist at the European Bank for Reconstruction and Development (EBRD) in London, and Program Director at the OECD Development Centre in Paris, where he directed the Programs on Trade, Environment and Sustainable Development.