Global union leader calls for sustainable wealth creation

Sharan Burrow, the general secretary of the International Trade Union Confederation (ITUC), delivered the closing address to the recent Fiduciary Investors Symposium held in Beijing.

Burrow issued a challenge to pension funds to invest more in green energy and highlighted growing systematic problems in global markets that are exacerbating poverty, income inequality and unemployment.

Here is the full transcript of her speech to delegates.

Greetings from the world of labour, the human capital that, with employers, generates the productive wealth of the global economy.

Let me assure you up front that we have a real interest in a stable global economy that is experiencing sustainable growth and resulting in rising wages and thus economic demand, leading to a dramatic mitigation of inequity.

We take workers’ capital seriously. In the broad sense of the term (all assets under management by pension pre-funded schemes) amount to $24.76 trillion (in 2010) of which: $19.34 trillion are managed by occupational pension funds worldwide, and $5.42 trillion by public reserve funds (such as the Future Fund in Australia).

Assets held by pension funds with shared trustee management are around $13 trillion, with around half of that being in the US ($6.46 trillion).The big five are the US, Canada, the UK, Australia and the Netherlands. Japan, the Nordic Countries and Brazil also have rapidly growing funds.

There would be considerably more if other nations in Europe, and those in the emerging economies, vested pension dollars across the working life of employees.

Fiduciary responsibility is a serious principle, but it doesn’t completely exclude risk. Nor is it an exemption from a fundamental set of values, including international law on human and labour rights and environmental standards. Nor is it a license to simply focus on short-term returns which in many areas are actually generating medium- to longer-term risk.

Our interest in investment has been further sharpened by the global financial crisis.

Trust in the financial sector is at an all-time low with workers. Their anger may not be discerning, and consequently we need a narrative that shows how the use of workers capital will renew confidence.

That anger is possibly only eclipsed by the disillusionment with the actions of government, with a few notable exemptions.

From our perspective, the world is in the grip of the second wave of the financial crisis, and the most significant cause of this has been inaction.

A week out from the G20 leaders meeting in Cannes, the jury is still out on whether we will see real leadership or just more of the same.

London and Pittsburgh were impressive, and without the bold leadership shown at those two Summits, many more financial institutions and many sectors of the real economy would have taken a much bigger hit. By Toronto some leaders had changed, others were distracted, and the orthodoxy of sharp austerity won the day and thus demand was smashed.

We accept and have participated in negotiated fiscal consolidation in many countries at different times, but we would always argue for strategies leveraged off job-centred growth over a period of time that allows for both sustainable demand and growth.

A slash-and-burn policy with no growth strategy is economically damaging and socially and politically dangerous. Worse still the financial sector is just back to business as usual and the cycle continues.

From our perspective, leaders at the onset of the GFC promised financial reform with claims that the financial sector would never again be in control! They failed.

They said quality jobs would be at the heart of recovery. Not only did they fail to invest in jobs in the manner expected, but the race to austerity has further slashed jobs, wages, social protection and consequently dampened demand.

To make matters worse the run on sovereign debt makes governments look cowered by financial market dictates.

We cannot see any way that the marriage of the ratings agencies and the bond markets is in anyone’s interest.

Based on no published evidence, no due diligence, no peer review or any regulatory oversight one of the few big ratings agencies can ruin an economy overnight. Again, in whose interests?

Low growth, stagnation or double-dip recession is the set of possibilities facing us, but this doesn’t change the fact that one thing is absolutely clear – it is working people who will drive us out of the financial crisis, not the bankers and certainly not the speculators or the ratings agencies.

That means jobs, jobs and jobs. I wonder if any of you put your investment advice and asset choices through this lens.

Given that we are still arguing the case with the IMF to put employment or unemployment as a risk factor in the so-called new early warning system of the MAP (the IMF’s Mutual Assessment Process), I suspect we have a way to go with the advisers and the investment committees in your world.

Nevertheless, I will endeavour to address these two central demands: financial reform and jobs, jobs and jobs.

It seems not a lot has changed with speculative activity still growing rapidly.

Over-the-counter (OTC) derivatives trading – notional amounts outstanding – rose from 2.6 times world GDP in 1998 to nine times world GDP in 2010.

As a point of comparison, listed equity, debt securities and bank assets have remained in the range of 1.5 to 2 times world GDP during that period.

The number of derivatives contracts on commodity exchanges grew modestly between 1993 and 2004 from 10 million to 15 million.

But since 2005 it has exploded, both before and after the-crisis, reaching a level of 65 million in 2010.

Over the same period commodity price volatility increased significantly, including in 2008 when prices of many food commodities attained record highs.

High Frequency Trading (HFT), using computer-generated exchanges executing frequent but small trades in milliseconds to make profits from incremental price movements and/or exploiting differences in pricing between two separate trading venues, accounted for 25 per cent of spot foreign exchange transactions worldwide in 2010, 56 per cent of US equity trading (up from 21 per cent in 2005), and 38 per cent of European equity trading (up from 9 per cent in 2007). Casinos are more strictly regulated.

Speculation was and is still being facilitated by the complicity of the three credit rating agencies that currently form a global oligopoly: Moody’s, Standard & Poor’s and Fitch. Their ratings are pro-cyclical – they are over-optimistic during growth cycles and over-pessimistic during downturns.

As a result, they are agents of financial speculation, and yet no transparent due diligence or peer review is required as a basis for their assessments.

All the evidence suggests that a three-tier reform approach is necessary and urgent to tackle the destructive forces of financial speculation:

Limit destabilizing short-term bets by financial traders by:

  • Creating a financial transaction tax, which would go a long way toward curbing short term speculative trading, including high frequency trading;
  • Requiring all forms of derivatives trading to shift to organised exchanges;
  • Restricting short-term financial trading strategies, including a ban on naked short selling.

Limit destructive risk-taking by large financial firms by:

  • Splitting large financial conglomerates through mandatory separation of commercial and investment banking activities;
  • Considering nationalisation of large financial conglomerates as part of restructuring the financial sector;
  • Reforming the corporate governance of banks;
  • Preventing de-stabilising leaks from the regular to the shadow banking systems by imposing strict regulations on such entities;
  • Proceeding with a gradual phasing out of all government guarantees that were introduced post-crisis, by instead creating or expanding industry-financed insurance schemes such as the IMF-proposed financial stability contribution (FSC);
  • Increasing the legal liabilities of rating agencies, reducing reliance on them in banking and public finance prudential structures and shifting their business model back to an investor-pay model.

Re-orientate financial institutions and markets and reverse the balance of power between democratically governments and the financial markets by:

  • Diversifying the financial sector through a larger array of public and cooperative financial institutions;
  • Protecting financial reforms processes from regulatory capture by bankers, including through stronger regulation of political parties’ financing.

The snail-like speed, lack of transparency and low ambition of the Financial Stability Board has been shocking in the face of the urgency required.

Jobs – we have the highest unemployment on record and 45 million young people entering the labour market every year to economies that simply can’t accommodate them.

The informal economy in every country is growing, and tax evasion is now a multi-billion dollar game in all nations.

The growth model of the past two decades has been in large part the driver of vulnerability – that is, jobless growth and therefore inequity and unemployment which in turn depresses demand.

But beyond the need for financial reform we need a new growth model.

Christine Lagarde says the global economy is in a dangerous space, Angel Guerra says we need new economics, but neither the IMF nor the OECD are heeding their chief’s advice as they revert to the old and failed economic orthodoxy of the ‘Washington Consensus’.

In fact we say that the ‘Washington Consensus’ has migrated from Washington to Brussels.

What is now happening is that while workers were incidental victims of the first wave of the crisis, they are now under direct attack from their governments.

As I said, the old orthodoxies are back with a vengeance: IMF conditionality in the Eurozone, the ridiculous employment indicators from the vanquished enemy of the World Bank’s “Doing Business” report, the OECD’s structural reform policies of the “Going for Growth” report and now the European Commission: the Washington Consensus has indeed moved from Washington to Brussels.

We need an alternate growth model. The ILO Jobs Pact was negotiated at the height of the first wave of the GFC with workers, employers and governments.

It is an income-led growth model, located in the real economy, that would result in strengthening demand, reducing inequity and driving investment in emerging industries, particularly but not limited to the green economy and enabling infrastructure.

The key elements are on the demand side:

  • a social protection floor for the 75 per cent of people who have no social protection. This is both a social and an economic stabilizer. The G20 will endorse this strategy based on the work of the ILO and the UN’s Bachelet report next week;
  • a minimum wage on which people can live with dignity;
  • broader coverage of collective bargaining essential to reduce the yawning gap between wages and profits, which is at an all-time high;
  • and investment in jobs, jobs and jobs.

The supply side is important, but skills and active labour market policies will not settle unrest if the jobs are not there.

The jobs challenge is enormous, and even if all growth were job-centred, it would be inadequate for some time, so we all need to work out how to drive investment in job-centred growth without delay.

Let me enlarge on just one sector.

This is work in progress for us from us, but our preliminary research and analysis shows that five years of 2 per cent of GDP invested in the green economy across six sectors by policy choice in 12 countries can drive 55,329,000 sustainable jobs, decent jobs.

We will be pushing the case for this in the lead-up to the Rio plus 20 Summit on Sustainability. But you are not pulling your weight in the green economy stakes. Most funds are signatories of PRI, yet the investment percentage in this sector from pension funds is running at about 1.6 per cent.

The same analysts from the Australian Climate Institute’s Asset Owners Disclosure Project say the tipping point to drive serious investment is around 5 per cent. So what are you planning to get us there and beyond?

There are other sectors across industry, agriculture and community which are job intensive and in need of desperate growth including the soft infrastructure of the care sector as demographic challenges explode.

Then there is the confidence gap as the Eurozone crisis deepens. The Economist of October 8th says that “Analysts expect France’s largest 40 listed companies to increase profits by 15 per cent this year – close to the record high.  (Germany’s) Engineering Association is predicting a 14 per cent jump in production by its members to 199 billion Euros this year, just above the record high.”

Interestingly, the previous record highs mentioned are both for 2008.  So there is one great disconnect between the financial economy and the real economy in Europe.

The emerging  economies of countries like Brazil and Argentina demonstrate that growth, wage increases, investment in jobs and social inclusion are a package deal that works while neighbouring Chile has spectacular growth statistics and yet general strikes because even middle-income families have to take out a loan to send their kids to school or access health services.

Then there is the MENA region. At a WEF discussion at the Dead Sea last weekend that was dedicated to discussing job creation, the only clarity is that with transition governments the necessary democratic reforms have not got an economic reform partnership that will drive immediacy or scale in the job creation vital for stability.

The Arab league has an eye to longer-term, grand cross-border infrastructure projects, a common market et al, but the leadership vacuum in the short term could see more instability.

There are some developments in new partnership. The B20 and the L20, now part of the dialogue structure for the G20 leaders meeting, have negotiated a joint agreement. It is a commitment to work together particularly on formaIising the informal sector and on youth employment.

It advises governments of the centrality of employment, the need to ensure fundamental labour rights, the need for the social protection floor and the urgent requirement for coherence.

We acknowledge that the future growth path is not just the responsibility of others but that it is indeed a problem for all of us.

We are waiting for political leaders to show the necessary leadership and will, but that should not stop us, including our pension funds and the advisors and financial managers, from moving forward with both dialogue and a constructive agenda for the future.

If there is no co-joined dialogue or model that drives a different future, the risk of ongoing volatility is going to undermine your sustainability, the real economy and will lead to both greater economic and social unrest.

Indeed the risks of the ‘Occupy Wall Street’ movement, the indignados, union unrest, conflict over water and or/arable land with the ravages of climate change require us to all take responsibility. We invite you to a significant dialogue concerning these and other issues.

The ITUC and its affiliates are serious about the deployment of workers capital used, at least in significant part, for enabling the real economy. The demand from the AFL-CIO concerning infrastructure in the US, and our investment demands for the green economy globally, is just the beginning.