From the TUC

Production, consumption and wages

20 May 2009, by in Economics, International, Labour market

This morning’s Financial Times finds Martin Wolf in reflective mood (‘This crisis is a moment, but may not be a defining one’, p. 13). Wolf argues that “the (economic) crisis is global, with a particularly severe impact on countries that specialised in exports of manufactured goods or that relied on net imports of capital.” Wolf adds that policymakers have thrown the most aggressive fiscal and monetary stimuli and financial rescues ever seen at this crisis, and that this effort has brought some success.

On the same page, Michael Pettis of Peking University (‘Asia needs to ditch its growth model’) returns to a familiar theme. Pettis says that “At the centre of the Asian development model, with China providing a steroid-fuelled example, were policies aimed at mobilising high levels of domestic savings and channelling massive investment into productive capacity. These policies boosted savings by constraining consumption even while they forced rapid growth in domestic production.”

Wolf and Pettis have both commented on the relationship between producer economies (China, German and Japan) and their consuming counterparts (particularly the US, but also, to a lesser extent, the UK) in recent weeks. China, Germany and Japan built export-led economic models that only worked while consumer nations were willing and able to buy their products. Those economic models were specifically designed so that overseas buyers, not domestic populations, did the purchasing. With little spare cash and even less confidence in recent months,  consuming nations have kept their wallets in their pockets. The result is that export-oriented countries are now feeling the heat.

What does all this mean for British trade unions? For one thing, we must push for balanced economies. The UK needs to export more, because our trade deficit of the past 30 years should be addressed. That means that the new industrial activism pursued by Lord Mandelson should think about the strategic sectors that can build a healthy level of  exports for UK plc. Our strengths in high value manufacturing and, especially, our potential in green manufacturing sectors spring to mind. But we don’t seek exports for exports sake and we certainly don’t seek to achieve them by holding down domestic consumption.

That, in turn, raises the issue of wages and their role in creating demand. When trade unions so much as whisper about higher pay, the doom mongers start talking about the threat of wage inflation. However, as our German trade union colleagues have frequently argued, the export-led policies of the German Government stress wage moderation in order to work. This is a conscious choice and it has consequences. Put simply, during the good years, Germany squandered the chance to boost real wages.

Here in the UK, we are in that strange place where one level of inflation, CPI, is still above its target rate, while another, RPI, is in negative territory. All trade unions are aware of the fragile state of the economy, its impact on jobs and the dangers of excessive wage demands. But anyone seeing the economic crisis as an excuse to clamp down on legitimate wage demands could damage the economic recovery more than they realise.

3 Responses to Production, consumption and wages

  1. Fons Tuinstra
    May 20th 2009, 12:55 pm

    Describing China as a “producer” economy would be slightly deceptive as it has been important for receiving countries, but the export industry added less than 10 percent to its GDP. The Chinese saving rate is indeed a problem, but asking to end it would be like asking the rain from not falling.

  2. Owen Tudor

    Owen Tudor
    May 21st 2009, 11:36 pm

    It’s not quite impossible to reduce the savings rate in China. One of the main reasons savings rates are quite high is the lack of social protection. China no longer has (if it ever did in reality) a proper NHS free at the point of need, free state education, decent unemployment benefits or pensions, so people save: in the same way as the absence of socialised medicine internalise health costs in the US auto giants, social costs are internalised to the Chinese family. Providing a better welfare state in China would release funds for consumption and so, indeed, would higher wages: this was the reason that the Chinese government introduced new laws on collective bargaining in the teeth of opposition from the American Chambers of Commerce (and, before the ETUC made them back off, the European Chambers too). That law is unlikely to have an impact in the near future because of the global recession, but wages in China were rising quite fast before the recession hit

  3. Chinese low wages and the global recession | ToUChstone blog: A public policy blog from the TUC
    May 22nd 2009, 12:06 am

    […] Tim Page has written in this blog, a similar issue afflicts the German economy. Although wages in Germany are obviously […]