UN reproaches nations for austerity policies that risk deepening slump
Governments in the US, Europe and Britain must ditch austerity and tackle the yawning gap between rich and poor or risk being trapped in a deep economic slump, according to the UN's trade arm, Unctad, in a new report.
In its 200-page annual trade and development report, Geneva-based Unctad sets out a damning case against what it calls the "dogma" of flexible labour markets, and urges governments to focus instead on boosting wages to shore up demand.
"Any policy approach that dismisses the important contribution of income distribution to demand growth and employment is destined to fail," it says.
Heiner Flassbeck, Unctad's chief economist, said: "What we have now is an age of diminished expectations for working people. They have no positive income expectations any more, and this is the first time since the second world war that this has been the situation."
Without the hope of higher wages, workers will continue paring back their spending, he argues. With central banks' ammunition exhausted "if you don't have consumption, you can't get out of the slump".
Unctad predicts global growth of 2.3% for 2012: weaker than the 2.7% of last year, and well below the 4% that was the norm before the credit crisis. It expects expansion in emerging economies such as China and India to slow, as they suffer the knock-on effects from recession in the eurozone, and slowing demand from the US. "The developing and transition economies cannot avoid the impacts of economic troubles in the developed countries," it says.
Economists and politicians have become increasingly concerned about the impact of widening income inequality on an economy's growth prospects. The share of GDP taken home by workers in wages has declined across developed economies: in Britain, from 70% in 1970 to less than 63% in 2010; and in the US, from 65.3% in 1970 to 59% in 2010.
Labour leader Ed Miliband floated the idea of "pre-distribution" in a speech last week, arguing that left-of-centre politicians should concentrate on building a fairer economy, rather than rely on redistribution of tax revenues to narrow the gap between rich and poor.
Unctad suggests stronger collective bargaining, and a centralised "incomes policy" – conjuring up the age of beer and sandwiches in Downing Street – could boost growth. "The obvious failure to return the global economy to a sustainable growth path after 2008, and in particular the failure to revive domestic demand in the developed world, should be taken as a warning sign," it says.
"If a large majority of people lose faith in the willingness of companies and governments to provide them with a fair share of the collectively produced income, income growth itself will drastically suffer."
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