2-3-98, Statement of George Becker

#98-02

Testimony of George Becker
President of the United Steelworkers of America
before the
Banking and Financial Services Committee
U.S. House of Representatives
on the Asian Financial Crisis and the Role of the IMF

February 3, 1998

Mr. Chairman and Members of the Committee:

My name is George Becker, and I am president of the United Steelworkers of America and chairman of the Economic Policy Committee of the Executive council of the AFL-CIO. I appreciate the opportunity to be here today on behalf of the thirteen million working men and women of the AFL-CIO. We in the labor movement are well aware that the financial crisis now roaring through east Asia will have profound consequences for working people all over the world. We stand in solidarity with the working people of Asia to urge the International Monetary Fund (IMF) and the U.S. Congress to put the interests of workers and communities at the top of their priority list as they take steps to address this crisis--not at the bottom, after the bankers, financiers, and multinational businesses have been taken care of.

Deep currency devaluations, in conjunction with austerity programs, will cut wages and purchasing power in South Korea, Indonesia, and Thailand. The United States will be pressured to act as importer-of-last-resort, absorbing cheap Asian goods while at the same time Asian markets for our exports dwindle.

In the aftermath of the crisis, the U.S. trade deficit is projected to grow by about $100 billion in 1998, resulting in a loss of approximately 1 million jobs (or potential jobs), most of them in the better-paying manufacturing sector. Job losses will be heavily concentrated in industries such as steel, electronics, apparel, and automobiles, in which east Asia is a large producer. Buyers in these key industries are enormously price sensitive. Export-intensive industries such as aircraft and capital goods will also suffer. Boeing is already reporting that Garuda Airlines of Indonesia has delayed taking delivery of six jets. If the crisis worsens, China will certainly reduce orders.

Without fundamental changes in the structure of international financial markets and the institutions that regulate these markets, we can expect continued volatility and future crises of growing severity. The present moment of crisis is the time to press for necessary changes in the international financial system, particularly in the conditions imposed by the IMF in exchange for the "bailouts" it gives to countries that have exhausted all other sources of credit. The United States should condition further contributions to the IMF on fundamental changes in the IMF’s program.

The clout and leverage exercised by the IMF must serve a broad set of social and economic goals. Currently, the IMF defines its mission narrowly, as protecting the interests of international capital. The IMF requires debtor governments to raise interest rates, cut public spending, deregulate financial markets, and weaken labor laws to facilitate massive layoffs and deep wage cuts. These terms may solve some short-term credibility problems with foreign investors, but will necessarily exacerbate the tensions, inequality, and instability of the global economy. Such policies are short-sighted and must be fundamentally altered.

The United States, which is the single largest contributor to the IMF, must use every means at its disposal, both formal and informal, to change the way the IMF operates. The AFL-CIO will support members of congress in efforts to assure that IMF programs reflect the following principles:

1. Commitment to and vigorous enforcement of international labor and human rights. Countries that receive IMF funds must commit themselves, in an enforceable way, to respect for internationally recognized worker rights. If necessary, this would involve modification of laws and practice to comply with ILO standards and human rights. These commitments must ensure that governments will protect workers’ rights, even during times of crisis. Strong and independent labor unions play a crucial and irreplaceable role in assuring that the benefits of economic expansion are equitably distributed.

Some Administration spokespeople have argued that it is impossible to introduce worker rights conditionality in the context of emergency bailouts, given the short timeframe and the many other demands being put forth. We disagree. In any case, however, time pressures do not prevent the IMF from taking such action with respect to the seventy or so countries not in immediate crisis that are also receiving IMF funding. We realize that implementing such provisions cannot be accomplished unilaterally by the United States, but representatives of the U.S. government need to declare publicly that this is a policy we are seeking to achieve. This needs to be consistently reinforced by all relevant U.S. government agencies.

The Sanders-Frank Amendment, enacted by Congress in 1994, requires that the U.S. Executive Directors to the international financial institutions (including the IMF and World Bank, among others) use the "voice and vote of the United States" to urge these institutions to encourage borrowing countries to guarantee internationally recognized worker rights. Our experience to date with this law has been disappointing. Nowhere in the IMF program for Indonesia, for example, are worker rights given even a cursory mention. Yet, in principle, with a contribution of 18 percent of the IMF’s quotas, the United States could, if it so chose, effectively veto any loan package (IMF rules require 85 percent agreement on most decisions).

In addition to using our voice and vote at the IMF to this end, the U.S. government can and should act to garner support for such a move from our trading partners, especially in Europe. It would be useful to consult with the new governments of France and Britain, in particular, to develop a joint strategy, that would be more effective than independent action on the part of the United States.

We encourage the U.S. government to continue its efforts to bring the ILO into a more central role in the development of structural adjustment packages. Incorporating labor standards and social safety nets in the IMF program will produce an adjustment program that is more equitable, more successful and more sustainable, as has been shown in the case of the Czech Republic. A more balanced program will ensure that IMF demands for labor market flexibility (often functionally equivalent to weakening labor unions) are consistent with core labor rights.

Finally, the imprisonment of Muchtar Pakpahan in Indonesia continues to serve as an egregious and glaring example of the IMF’s and the U.S. government’s indifference toward worker rights. If it is possible for the IMF to recommend dismantling Korean labor law as a condition of emergency loans, then surely it is possible for the IMF to use its extraordinary leverage to force the Indonesian government to free this courageous and suffering man. Mr. Pakpahan’s only crime is to have worked toward building independent labor unions. His health continues to be precarious, and his medical care continues to be extremely inadequate. U.S. government officials who have visited Indonesia recently have failed to make any public statements advocating the release of Mr. Pakpahan. Whatever private communications that may have taken place, if any, have failed to yield results. The release of Muchtar Pakpahan would be a symbolic, but important, step toward recognition of how integral the improvement of labor rights is to the current situation. It would also be a positive statement to Indonesian workers that welcome changes are occurring.

2. Domestic economic growth and development, not austerity and export-led growth. The model that led to this crisis glorifies export expansion as the preferred development path. This model leads to destructive, low-road international competition and worker impoverishment and is ultimately unsustainable, as the current crisis demonstrates. The United States has neither the capacity nor the will to absorb unlimited exports; thus, the rescue plan for east Asia must not rely exclusively on this premise. The U.S., Europe, and Japan must work together to stimulate domestic demand in the developing economies and avert a dangerous tendency toward global deflation.

3. Reduction in the volume of destabilizing capital flows. Over the long run, it is essential that policies to regulate short-term borrowing and to dampen speculative flows of capital be implemented. There are three structural dimensions to the crisis. They concern the interaction of exchange rates, foreign portfolio investment, and foreign currency denominated lending. All three dimensions need to be addressed.

First, the existing system is unstable and vulnerable to speculative exchange rate movements. A small "Tobin" transactions tax on foreign exchange dealings would discourage speculatively induced collapses. It would be sufficiently large to penalize speculative trading, but not so large as to deter long-term investors.

Second, foreign portfolio investment is extremely sensitive to exchange rate movements. The natural mechanism to slow such flows are "speed bumps," whereby investors commit to a minimum stay when they bring money in. Speed bumps stop sudden outflows because investors cannot withdraw their money at will. This has the beneficial effect of forcing investors to consider risk carefully before committing money.

The third element of the crisis concerns foreign currency denominated loans. Many countries cannot borrow in their own currency, and are therefore exposed to increases in debt burdens resulting from foreign exchange fluctuations. Since it is costly to "hedge," or pay a small fee to ensure against currency loss, borrowers often choose not to do so. Monetary authorities should require lenders to hedge their foreign country loans. This is equivalent, in a rough sense, to requiring international deposit insurance. This will cause the cost of credit to rise. However, the risk is there, and it needs to be priced in. Credit should not be subsidized through the provision of bail-outs paid for by taxpayers.

4. Transparency and broader participation in determining IMF policy. The IMF must consult regularly with labor unions and other broad-based organizations, not just with business and financial institutions, in the development of structural adjustment programs and emergency loan packages. Program documents should be made publicly available. By recognizing that workers must be included in developing a response to economic crisis, the tripartite commission (including representatives of labor, business, and government) established in South Korea is a promising step.

5. Ensure that speculators pay their fair share. The banks, corporations, and individuals who profited from risky investments during good times must not be shielded from losses during downturns. Banks must reschedule their debts with longer maturities and at appropriate terms, ensuring that financial losses fall on those who made poor decisions. This must be an explicit and widely understood condition for future IMF funding, as well. Asian and American workers and taxpayers must not be asked to foot the bill for a party to which they were not invited.

In his testimony before this committee on January 30, Secretary of the Treasury Robert Rubin argued that forcing investors and creditors to take losses involuntarily would "risk serious adverse consequences." He cited three reasons, none of which is entirely convincing. He argued that forcing losses could cause banks to pull money out of the country involved. Yet, banks are already pulling what money they can out of these countries. He raised the concern that such actions would reduce the nation’s ability to access new sources of private capital. This was not, however, the experience of the 1980s, when banks did return to markets (such as Brazil) where they had been forced to accept reduced payments on their loans -- after stability had returned. Third, Secretary Rubin argued, the "most troubling" issue was that this could cause banks to "pull back" from other emerging markets. But is not a central cause of this problem that banks have loaned excessively and imprudently in these emerging markets? It should be considered an advantage if a policy change causes banks to act more cautiously in the future.

Even if we move toward reform of the international financial system, concrete steps must be taken to stop the destabilizing flood of cheapened imports which have already been unleashed by this crisis. Strategic intervention by the United States and Japan could help the embattled currencies of Indonesia, Thailand, and South Korea stabilize and regain some of their lost value. In the United States, steel, autos, electronics, apparel, and other threatened industries face an immediate threat which requires specific trade actions to maintain import shares consistent with 1997 levels in order to protect the jobs of these workers.

AFL-CIO Executive Council
January 29, 1998
Statement

ASIAN FINANCIAL CRISIS

The financial crisis now roaring through east Asia will have profound consequences for working people all over the world. Deep currency devaluations, in conjunction with austerity programs, will cut wages and purchasing power in South Korea, Indonesia, and Thailand. The United States will be pressured to act as importer-of-last-resort, absorbing cheap Asian goods while at the same time Asian markets for our exports dwindle.

Without fundamental changes in the structure of international financial markets and the institutions that regulate these markets, we can expect continued volatility and future crises of growing severity. The present moment of crisis is the time to press for necessary changes in the international financial system, particularly in the conditions imposed by the International Monetary Fund (IMF) in exchange for the "bailouts" it gives to countries that have exhausted all other sources of credit. The United States should condition further contributions to the IMF on fundamental changes in the IMF’s program.

The clout and leverage exercised by the IMF must serve a broader set of social and economic goals. Currently, the IMF defines its mission narrowly, as protecting the interests of international capital. The IMF requires debtor governments to raise interest rates, cut public spending, deregulate financial markets, and weaken labor laws to facilitate massive layoffs and deep wage cuts. These terms may solve some short-term credibility problems with foreign investors, but will necessarily exacerbate the tensions, inequality, and instability of the global economy. Such policies are short-sighted and must be fundamentally altered.

The United States, which is the single largest contributor to the IMF, must use every means at its disposal, both formal and informal, to change the way the IMF operates. The AFL-CIO will support members of Congress in efforts to assure that IMF programs reflect the following principles:

1. Commitment to and vigorous enforcement of international labor and human rights. Countries that receive IMF funds must commit themselves, in an enforceable way, to respect for internationally recognized worker rights. If necessary, this would involve modification of laws and practice to comply with ILO standards and human rights. These commitments must ensure that governments will protect workers’ rights, even during times of crisis. Strong and independent labor unions play a crucial and irreplaceable role in assuring that the benefits of economic expansion are equitably distributed.

2. Domestic economic growth and development, not austerity and export-led growth. The model that led to this crisis glorifies export expansion as the preferred development path. This model leads to destructive, low-road international competition and worker impoverishment and must be reversed. The United States, Europe, and Japan must work together to stimulate domestic demand in the developing economies and avert a dangerous tendency toward global deflation.

3. Political and economic democracy. Without a strong and vibrant civil society, there is no counterweight to crony capitalism and no accountability for governments.

4. Reduction in the volume of destabilizing capital flows. Policies to regulate short-term borrowing and to dampen speculative flows of capital must be implemented.

5. Stabilization of exchange rates at levels closer to their pre-crisis values. The excessive devaluations caused by the loss of confidence in the East Asian currencies should be reversed. This is essential to blunt the negative impact of the crisis on American workers.

6. Transparency and broader participation in determining IMF policy. The IMF must consult regularly with labor unions and other broad-based organizations, not just with business and financial institutions, in the development of structural adjustment programs and emergency loan packages. Program documents should be made publicly available. By recognizing that workers must be included in developing a response to economic crisis, the tripartite commission (including representatives of labor, business, and government) established in South Korea is a promising step.

7. Ensure that speculators pay their fair share. The banks, corporations, and individuals who profited from risky investments during good times must not be shielded from losses during downturns. As banks reschedule their debts, financial losses must fall on those who made poor decisions. Asian and American workers and taxpayers must not be asked to foot the bill for a party to which they were not even invited.

Even if we move toward reform of the international financial system, concrete steps must be taken to stop the destabilizing flood of cheapened imports which have already been unleashed by this crisis. Steel, autos, electronics, apparel, and other threatened industries face an immediate threat which requires specific actions to maintain import shares consistent with 1997 levels in order to protect the jobs of these workers.

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