HONG KONG (ILO News) The pain inflicted on Asian societies will continue to grow in 1998 largely as a result of inadequate policy responses to the financial crisis, says the International Labour Office (ILO) in a new report (Endnote 1) offering a series of proposals aimed at mitigating its disastrous social consequences.
In the worst-affected countries, millions will lose their jobs as a result of retrenchments, especially in the construction, financial services and manufacturing sectors. Underemployment will become widespread and the real earnings of those who can hang on to their jobs will fall substantially as a result of the decline in labour demand and the inflation induced by large currency devaluations.
Most dramatically, the report predicts, the impressive trends in poverty reduction achieved in these countries over the past 20 years, will be reversed.
To make matters worse, the effect of these developments will be amplified by "the absence of a meaningful social safety net". The vast majority of displaced workers are unlikely to receive assistance of any kind and will be left to fend for themselves. "This combination of sharp and unexpected social pain on the one hand, and lack of collectively provided relief on the other", warns the ILO, "is fertile ground for breeding social unrest".
The ILO report, based on the latest available data, focuses primarily on Indonesia, Thailand and the Republic of Korea. It will serve as a background paper for a high-level meeting of Governments, trade unions and employers' organizations in Bangkok, on 22-24 April 1998. The participating countries and territories will be China, Indonesia, Malaysia, the Philippines, the Republic of Korea, Singapore, Thailand, Viet Nam and the Hong Kong Special Administrative Region.
Indonesia
In Indonesia, the projected level of unemployment for 1998 ranges between 8 and 10 per cent 7.9 to 9.2 million workers depending on the GDP growth rate assumed for the year (zero growth or a 5% contraction). This compares with an unemployment rate of 5% in 1996.
In spite of remarkable achievements in reducing poverty, Indonesia still counted some 22 million persons living below the officially defined poverty line in 1996. This figure will increase by "a very sizeable number" as the present crisis unfolds. Poverty will be exacerbated by inflation and the disproportionate rise in the price of food and other essential goods. "The classic mechanism of high food inflation leading to an increase in the incidence of absolute poverty appears to be already at work", says the report. "This is illustrated by the fact that the rice equivalent of the daily minimum wage (Rp 5,800) fell from 6.28 kg in January 1997 to 4.76 kg at the end of December 1997".
Republic of Korea
In the Republic of Korea, unemployment is rising rapidly. The number of jobless increased from 451,000 (2.3%) in October 1997 to a record level of 1,240,000 in February 1998 (4.7%). Particularly affected are recent school leavers and first-time job seekers. "In the last quarter of 1997, the youth unemployment rate was 7.4% and 11.8% in the age groups 20-24 and 15-19 respectively", says the report. No improvement can be expected in the near future: "The Ministry of Labour has recently predicted that the number of unemployed will now exceed 1.5 million between March and May, with the seasonally adjusted unemployment rate soaring to a new high of 7 per cent."
At the same time, real wages which had been rising rapidly for almost 30 years in the Republic of Korea, fell by 2.3% during the last quarter of 1997. The inflation-adjusted real income of households fell by 4.4%, the first drop since the third quarter of 1981.
Thailand
Thailand enjoyed virtual full employment prior to the crisis as reflected by the growing presence of foreign migrants in the country. By the end of 1997 however, unemployment was thought to affect 1,170,000 persons, or approximately 3.4% of the labour force. "The Government now forecasts a rise in unemployment to just under 2 million by the end of 1998 and an unemployment rate of 5.6%". But these projections may prove to be overly optimistic assuming, as they do, a zero growth rate. Thai authorities now forecast a negative growth rate of minus 3.5% in 1998.
While inflation in Thailand is expected to reach 15% in 1998, many enterprises have reduced nominal wages. Senior management in the hard hit financial sector, for example, have seen reductions in their monthly earnings of between 10 to 30 percent. Lower-level employees have been subjected to a wage freeze. In other sectors, wage cuts and reductions in annual bonuses traditionally an important component of total wages "have been common responses to the economic context".
Women and migrants
Because of their unequal position in the labour market and their concentration in the most precarious forms of wage employment, women have proved especially vulnerable to the crisis throughout the region. Though reliable data is unavailable, the evidence at hand suggests that gender-biased dismissals are common practice. The inferior employment status of women often means that they are less likely to be entitled to unemployment benefits where these exist and to severance pay. Women also find themselves at a serious disadvantage in gaining access to credit and other employment promotion programmes.
Foreign migrant workers also face difficult prospects. Their numbers grew from 1 million in the early 1980s to an estimated 6.5 million by mid-1997 as a result of labour shortages in the "tiger economies" of South-East Asia. A large proportion of migrant workers are undocumented and thus particularly at risk of arrest and involuntary repatriation. But repressive measures alone will do little to stem the flow of unauthorized migrants. "It is already being anticipated", says the report, "that trafficking in clandestine labour migrants will rise" as a consequence of the build-up of emigration pressures in the worst-affected countries.
Inadequate response
In the face of this massive crisis and in spite of various efforts to contain its social costs, "the overall impression must be that the response so far has been inadequate", says the ILO report.
Although different initiatives to minimize the extent of lay-offs and to save viable enterprises facing temporary liquidity crises through "active cooperative action between workers and employers" have taken place, these have had little incidence on the course of events. In the Republic of Korea, says the report, "enterprise unions have been unable, in any broad way, to negotiate alternatives to layoffs or to mitigate their social costs" in spite of "indications that most union members would be willing to accept redeployment within the enterprise, or a wage reduction if the chaebol owners made sincere efforts to reform their business and avoid layoffs".
In Thailand, the "meagre level of workplace organization means that collective bargaining, were it to bear fruit at all in finding solutions to layoffs, would apply to a narrow minority" of the workforce. And in Indonesia, the report points out, the unions have been so "weakened by the loss of membership arising from layoffs" that some have been unable to monitor the rate of layoffs involving their own members.
Apart from Korea where different job creation programmes are being introduced, measures to assist displaced workers have largely been confined to labour-intensive public works projects of the type used in the past in poverty alleviation programmes, mainly in rural areas. "The critical issue in the present crisis is whether they can be scaled up sufficiently and soon enough to cope with the vastly greater numbers that are likely to be in need of such relief".
"The limited level of social protection in many of the countries of the region, and in particular in Indonesia and Thailand is a reflection of choices on social and economic policy", says the report. "Throughout the period of sustained economic growth which pre-dated the crisis there was a tendency to rely on the belief that the alleviation of poverty would follow as a direct consequence of economic growth". Only limited priority has, as a rule, been given to the development of social protection systems based on redistribution and solidarity. "The safety net remains the family or individual savings, with the State occupying a relatively minor role in this respect".
The extent to which social dialogue has played a role in the search for practical solutions and in defusing the danger of social unrest varies widely among the three countries covered by the ILO report. "It is clearly in Korea that the evolution of strong institutions in civil society has made the greatest strides in recent years". Korea's Tripartite Commission, composed of representatives from the government, workers' and employers' organizations, launched on January 15 and the Tripartite Social Accord, signed on February 9, "have become essential ingredients in the development of social and economic policies to contain the social costs of the financial crisis".
Among the key elements leading to this development, according to the report, were "the consolidation of political and civil democracy evidenced by the victory of the opposition leader, Kim Dae-Jung, in last December's presidential election and the considerable social and political power of the trade union movement, as manifested in the general strikes of early 1997".
In Thailand, by contrast, "the level of trade union organization is extremely low". The 245,000 union members registered nationwide represent some 3.5% of the 7 million industrial workers who themselves account for only one fifth of the country's workforce of 34 million. The role that collective bargaining could play in negotiating the downturn's social consequences is, under the circumstances, "rather minimal".
While tripartite bodies do exist in Indonesia, their track record does not suggest "any ability to effectively confront the many pressing labour and social issues arising from the current financial crisis", says the report.
At the root of the problem, says the report, "are the continued constraints on freedom of association. In fact the credibility of the officially sanctioned and legally recognized national trade union centre is very much eroded now and workers, including members of the official unions, are increasingly looking elsewhere for representation". But, "recent initiatives aimed at developing independent and democratic trade unions in Indonesia have been contained by government repression".
"That workers and their organizations are unable to participate as genuine representative partners to the State and capital during the present crisis", adds the report, "is symptomatic of a major shortcoming in the industrial relations culture in Indonesia".
But the problem is not confined to a single country. Neither Indonesia nor Korea nor Thailand have ratified ILO's Freedom of Association Convention (No. 87). "In all three countries there are legal and practical restrictions on the creation and functioning of trade unions".
Lessons for the future
To overcome the crisis and current levels of social distress, "a two-pronged approach is required", says the ILO report. The first is to bring about economic recovery by pressing ahead with structural reforms. An array of technical measures must be introduced in order to correct various deficiencies in the financial systems of the countries concerned. Among the issues which must be faced, the report underlines, is "the need to find effective instruments to control the degree of exposure to foreign debt by private economic agents, to set prudent limits to debt/equity ratios in the corporate sector and to discourage speculative and unproductive investment".
Such measures "are absolutely essential but by no means sufficient", states the report. "It was not only weaknesses in formal institutions that created the preconditions for the crisis but also the contamination of market processes by politics. Unless the latter are contained, no amount of tinkering with institutions and regulatory mechanisms will be to much avail".
To reduce the risk of future crises, priority attention must furthermore be given to the strengthening of employment policies. The massive layoffs witnessed in recent months have demonstrated that a high rate of job creation means little if their sustainability is not ensured. As the report points out, "much of the job loss since the onset of the crisis has been in activities associated with an over-expanded construction and financial sector".
Developing the capacity to monitor enterprise restructurings and to facilitate the redeployment of laid-off workers will require major efforts. It "will involve strengthening the research and policy analysis functions of Labour ministries and the establishment of close working links between labour and economic ministries". Qualified staff, now in short supply, will be needed to plan and administer active labour market measures as well as for designing and implementing direct employment creation schemes targeted at the unemployed and underemployed.
Social protection
But, as the report underlines, "finding the economic solutions to a crisis cannot be divorced from dealing with its social consequences". As high growth rates can no longer be taken for granted, "a significantly higher degree of social protection must be aimed for. Just as the great depression forged a new social contract in many industrialized countries in the 1930s", says the report, "so too must the current Asian crisis be an impetus to creating a more socially-oriented model of development".
The ILO report outlines several areas requiring active attention:
- Unemployment insurance The latter "spreads the cost of dealing with the major social consequences of a crisis evenly among all enterprises", thus protecting those most affected without distorting competition between enterprises. "Experience suggests that an adequate unemployment insurance scheme can be financed by a total contribution rate of about 2 per cent of insured earnings (...) shared equally between employers and workers", says the report suggesting that "the collection of contributions can be started right away".
- Severance pay guarantees Although not an ideal method of providing social protection to the unemployed, severance pay is an established practice in many of the countries concerned. The problem is that some employers may fail to pay it. Part of the solution is better enforcement but, another "is to establish a severance pay guarantee scheme which may, as in the Republic of Korea, be combined with a guarantee of unpaid wages, in the event of enterprise bankruptcy". Such a scheme, says the report, "should be financed by a modest employer contribution".
- Social safety net Essential as it may be, unemployment insurance does nothing for first-time job-seekers, the self-employed or workers in the informal sector. "Some kind of safety net is vital to ensure that everybody falling into such categories is able to cover the basic subsistence needs of themselves and their dependents". But setting up social assistance schemes of the type, for example, existing in Hong Kong, will take years. "This should not, however, be used as a pretext for doing nothing". An alternative "is the guarantee of work on public projects in return for a subsistence wage". This is "a crude solution" acknowledges the report, but "in the short term it is probably the only feasible safety net that can be provided in most of the countries affected by the crisis".
- Health care "Services must be expanded; access to them must be made convincingly universal; they must be made cheaper to the user; and for the poor, user costs should be waved." Strategies include action "to limit the extent to which health care providers can exploit an inflationary situation and "to promote the extension of health care coverage to workers who are dismissed."
- Minimum pension The crisis has revealed just how little protection is provided by personal savings. Many have lost all they had in stock market crashes and with the collapse of financial institutions, "while devaluation and inflation have spared only the very rich and the very well connected". Moving towards a social insurance scheme providing periodical benefits is admittedly difficult but, because of demographic trends pointing to an aging population, "countries which do not make the effort to introduce pensions now are going to find themselves in deep trouble next century". One way of addressing the problem is to establish "a minimum basic pension (...) financed from general revenues". For financial reasons, "eligibility should be based on both age and income. The age criteria", adds the report, "would need to be set fairly high over 70 for example and the income criteria fairly low above the poverty line, but not much above in order to provide a subsistence level of income to those who could not otherwise achieve it."
- Informal sector The millions of workers in the informal sector enjoy little or no social protection. One way to assist them is through a universal pension system. "Another priority is to find suitable ways to finance health care for them". No quick or easy solutions are on offer, but "governments with a will to achieve real progress may do so, however, if they tackle the problem simultaneously from both ends, i.e. by helping to promote self-help grassroots mutual insurance schemes and by gradually extending compulsory coverage and improving the level of compliance".
- Vulnerable groups Policies and programmes to cope with the effects of the crisis "must be sensitive to the special needs of vulnerable groups such as working children, women and migrant workers". Specific steps appropriate to each group are discussed in the report.
- International labour standards "Ratification of all seven of the ILO's Fundamental Conventions concerning forced labour, child labour, discrimination and freedom of association would clearly constitute a positive step". The Freedom of Association Convention (No. 87) is of particular significance. The social dialogue needed to avert risks of social unrest requires "the existence of free, representative and strong trade unions to defend the interests of workers and act authoritatively, as interlocutors for enterprises, employers' organizations and government. Yet the reality", regrets the report, "is that in the three countries most affected by the crisis, as in other countries of the region, these conditions are not met."
Endnote 1:
The Social Impact of the Asian Financial Crisis.
Technical report for discussion at the High-Level Tripartite
Meeting on Social Responses to the Financial Crisis in East and
South-East Asian Countries, Bangkok, 22-24 April 1998. ILO
Regional Office for Asia and the Pacific, Bangkok. ISBN
92-2-111093-1.
The text is available on the Internet:
http://www.ilo.org/public/english/new/index.htm(until
30 April 1998); and
http://www.ilo.org/public/english/60empfor/cdart/pub.htm