YEAR IN REVIEW 1997: ECONOMIC-AFFAIRS

CONSUMER AFFAIRS In November 1996 governments and nongovernmental organizations from around the world gathered in Rome for the United Nations Food and Agriculture Organization's (FAO's) World Food Summit. The conference identified policies needed at the national, regional, and international levels to alleviate global hunger and malnutrition. Its aim was to motivate government departments to tackle major global problems related to nutrition and the sustainability of the food supply. As part of World Consumer Rights Day 1996, on March 15, Consumers International, a federation of 215 consumer organizations in more than 90 countries, issued a booklet, entitled Safe Food for All, that discussed crucial food concerns throughout the world, including agricultural trade policies, advertising, and issues of scarcity. The UN Environment Programme used the booklet as part of its global campaign to educate consumers on various aspects of food production and consumption and their impact on the environment. Concerns about food safety became headline news in 1996 as consumers across England and much of Europe stopped buying English beef because of fear of bovine spongiform encephalopathy (BSE), or "mad cow" disease. An international furor occurred after several young people died of a new strain of Creutzfeldt-Jakob disease, which was thought to be related to BSE, and consumer groups demanded that governments make more rigorous efforts to eliminate BSE from the food chain. The genetic manipulation (or modification or engineering) of food was another major food issue of 1996. Generally, this aspect of biotechnology refers to such processes as transferring genes from one organism to another--for example, from bacteria to plants or from humans to cows. One important application is the creation of pest-resistant crops. The genetic manipulation of everyday foods became an issue of increasing concern by consumers during the year as, for the first time, supermarkets in many countries stocked genetically engineered tomato paste and cheese. Genetically modified soybeans were expected to enter the European market by the beginning of 1997. Consumer organizations were insisting that products created by genetic manipulation be rigorously monitored and properly labeled and that consumers understand the pros and cons of food that had undergone such processes. Few regulations requiring labeling of most genetically engineered food currently existed on national or regional levels. In October the World Health Organization and the FAO held an expert consultation on food safety and biotechnology in an effort to determine basic policies on both of these issues. Western European consumer groups heavily lobbied the European Commission to pass strict laws on the labeling of genetically modified foods. The Commission was expected to pass regulations by the end of 1996. In Central and Eastern Europe, as well as in the countries of the former Soviet Union, the dumping of poor-quality and mislabeled food from other countries was the major consumer concern in 1996. At the same time, however, many consumers in those regions believed that foreign food was better than the domestic offerings, which thereby undermined the local producers. A similar problem in the region existed in regard to pharmaceuticals. Medicine was commonly available on the black market, and people thus were able to prescribe for themselves. Aggressive marketing heavily influenced citizens, who, less aware of the influence of advertising than their Western counterparts, tended to believe advertisers' promises. Consumer groups were tackling these issues in a variety of innovative ways. In Poland, for example, a consumer group issued an information packet that looked identical to a box of aspirin. Entitled "Med-Sense," it contained leaflets on common medications and ways in which consumers could assert their rights. In Latin America and the Caribbean, consumer organizations focused on obtaining access to basic goods and services for vulnerable consumers as well as on ensuring that consumers played an active and critical role in decision-making and legislative processes. A major area of concern during the year was consumer input into the operation of newly privatized public utilities. The British Overseas Development Administration in 1995 began funding a two-year organizing, training, advocacy project in Argentina, Brazil, Chile, Colombia, Mexico, and Uruguay to empower Latin-American consumer organizations to represent the consumer on matters related to public utilities. Many countries in Asia and the Pacific deregulated and liberalized trade and services to meet the challenges of the global market. But increased choices for consumers did not come in tandem with adequate market rules and controls. In many countries policies governing quality and safety were nonexistent or not enforced. Fast-track development such as indiscriminate logging and unplanned housing and road construction caused serious environmental problems. In the South Pacific consumers grappled with the problems of toxic-waste dumping and the poor quality of foodstuffs, pharmaceuticals, and other products. In response to such problems, the consumer movement continued to flourish. Consumers International's Asia office held the first-ever joint meeting with the China Consumer Association on the subject of consumer complaints and law. Considerable growth occurred in India, where more than 700 consumer organizations were operating. Western Samoa passed its first consumer protection legislation. The Model Consumer Protection Law for Africa was launched in 1996. The law marked a milestone in the development of the consumer movement on a continent where only two countries (Zimbabwe and South Africa) had small claims courts and only a handful had adopted legislation conforming to the 1985 UN Guidelines for Consumer Protection. (ALINA TUGEND) LABOUR-MANAGEMENT RELATIONS Europe. In Europe a generally high level of unemployment continued throughout 1996. In January the president of the European Commission, Jacques Santer, proposed a "confidence pact for employment," which, while emphasizing the need for sound economic policies, also stressed the value of the European Union's single market and infrastructure policies and modernization of the labour market. In addition to unemployment, there were other important issues engaging governments and labour and management organizations in several countries. One not confined to Europe was concern about the heavy costs of the social security arrangements developed over the years, particularly pensions, health care, and unemployment benefits, with labour unions striving to prevent cutbacks proposed by governments. A second problem arose from the plan for economic and monetary union (EMU) in 1999. After this had been decided in the Maastricht Treaty, there was doubt as to the desire of various member countries to join and their ability to satisfy the stringent criteria laid down for entry relating, notably, to public deficits, price stability, long-term interest rates, exchange-rate stability, and independent central banks. By 1996, however, it had become apparent that a substantial number of member governments had decided in favour of entry and that several of them would have to follow tough economic and expenditure policies to satisfy the entry criteria. In some of the countries, the proposed policies provoked union-led demonstrations during the year. Though no major initiatives concerning labour relations were launched by the European Commission, the year was not uneventful. For example, using the special procedure agreed upon at Maastricht, European employer organizations and unions reached an agreement concerning parental leave and asked the Commission to propose it as a directive, which was duly effected. And the European Works Council Directive, requiring many multinational companies (except most of the British ones, on account of Great Britain's opting out of the Maastricht social policy) to set up consultative bodies for their workers in member countries, became effective in September. Two noteworthy disputes in Britain were mainly in the form of repeated short stoppages of work. One, involving London Underground train drivers, concerned wages and working hours and was settled by an agreement to reduce the workweek to 35 hours by 1998, with pay increases over the intervening period at less than the rate of inflation. The other was in the Post Office's Royal Mail service and concerned flexible working practices and pay structure. Both disputes caused some irritation to the public and led the government to announce that it was considering legislation that would cause unions striking in "essential" public services to lose their immunity from legal action for damages, even if a prestrike ballot had been in favour of a strike. It was recognized that it would be difficult to produce workable legislation to this effect. One question that particularly exercised the British labour movement during the year was the desirability of a national minimum wage. Though the government and employers generally saw no virtue in this, both the unions and the Labour Party were committed supporters. The party's intention was to set up a commission that, when the party came to power, could make recommendations concerning the amount of such a minimum. The unions, however, generally supported a target figure of half the median male earnings (at present 4.26 an hour). The two views clashed at the Trades Union Congress (TUC) conference in September when, eager to avoid disharmony that might hurt the Labour Party's chances in the upcoming general election, the TUC insisted on maintaining the union viewpoint but also supported the establishment of a commission on minimum wage, which would name a figure. In January the German government, unions, and employers agreed on a program for the economy aimed at increasing investment and jobs. It envisioned substantial reductions in public expenditure and changes in social security contributions and arrangements for early retirement. Implementation was going to be difficult, but with future entry into the EMU in mind, as well as Germany's weakened competitiveness, the government decided to press on with its proposed reforms, which also included pay freezes for government workers and for unemployment benefits, together with other measures to reduce public expenditure. A sticking point in the negotiations was the unions' unwillingness to accept cutbacks in Germany's generous sick-pay scheme, from 100% to 80% of wages. In the metals industry, the union argued that the industry's sick-pay arrangements were contractual and could not be broken because of a change in government policy. The chancellor then made it known that in his view contractual arrangements did indeed have precedence in this case, and the metal employers agreed to deal with the matter in their forthcoming round of negotiation. In December negotiators agreed to keep workers in Lower Saxony on full pay during sick leave for five years. In Belgium tripartite talks aimed at reducing unemployment, improving competitiveness, and moving to meet the criteria for entry into the EMU resulted in an agreement in April, which one of the two major union confederations--the socialist-inclined Fdration Gnrale du Travail de Belgique (FGTB)--did not ratify. The government then decided to legislate, again in consultation with the unions and employers organizations. Again the FGTB disassociated itself from the proposals, but the legislation was approved by Parliament on July 26. Its most unusual feature was a reform of the wage-determination system, requiring that the maximum annual wage increase not be more than the average increases in the neighbouring countries of France, Germany, and The Netherlands. The minimum level of increase would be indexed to the Belgian rate of inflation, and agreements would run for two years. A procedure was laid down for negotiation, with the government mediating a decision if the parties could not agree. The central deal would be followed by industry-sector and company-level negotiations within the framework established. Subsequent negotiations proved difficult. On January 25 the Spanish employers organizations and the main trade union centres finalized an agreement providing for compulsory mediation of several types of labour disputes. The mediator was to be chosen from a list maintained by the parties and would be given a maximum of 10 days to propose a solution. While the parties would be free to reject the mediator's proposal, they might then call in an independent arbitrator, who would make a binding decision. A new health and safety law came into force in February. It gave workers the right to stop work if they believed there to be a serious and imminent risk to their health or safety. In Portugal a central agreement for 1996 was made in January by the government, employers organizations, and the trade union confederation. It provided a general increase in wages, contractual annual bonus payments, increased government help for the unemployed, and a phased reduction of the normal working week to 40 hours. North America. On August 20 U.S. Pres. Bill Clinton signed a bill raising the U.S. federal minimum wage to $4.75 an hour, effective October 1, the first increase since 1991. A further increase to $5.15 an hour was scheduled for Sept. 1, 1997. The Teamwork for Employees and Managers Act, which would have effectively repealed section 8(a)2 of the National Labor Relations Act (1935), which forbade the establishment of employee groupings that were dominated by the employer, was vetoed by President Clinton on July 30. There were not enough votes in favour of the bill in Congress to override the veto. The most important collective bargaining of the year took place in the automobile industry. The United Automobile Workers (UAW) union first focused on the Ford Motor Co., where it secured a range of improvements including a strong job guarantee (guaranteed minimum employment floor of 95% of current covered jobs) and an up-front lump-sum payment of $2,000. An agreement with Chrysler Corp. containing similar job-security provisions followed. Finally the union turned to the General Motors Corp. (GM), which was the most difficultly placed of the "big three" in that it believed it needed to eliminate a considerable number of jobs. Agreement was reached on November 2, however, and it also included a measure of employment protection. The negotiations were concluded without any full-scale strikes (though two GM plants went on strike in the late stage of the GM-UAW negotiations). Canada, on the other hand, experienced a three-week strike in its GM factories--which also caused layoffs in some U.S. plants--before all of the companies and the union reached agreement. BANKING International. The banking industry was rocked by accusations that banks in Switzerland had concealed extensive World War II gold trading with Nazi Germany and that Swiss banks had deliberately hidden the deposits of Holocaust victims (mainly Jews). Jewish groups claimed that the banks held billions of dollars in assets, which they had prevented Holocaust survivors and their heirs from collecting, often by demanding unobtainable proofs and official documents, including original bank books and death certificates for those killed in the concentration camps. Swiss officials argued that no more than a few thousand dollars had been identified, but, under pressure from U.S. Sen. Alfonse D'Amato, the Swiss Bankers Association agreed to join with Jewish organizations to investigate the claims. A seven-member commission, headed by former U.S. Federal Reserve Board (Fed) chairman Paul Volcker, was expected to make its report in 1998. Many Eastern European countries suffered banking crises in 1996, notably the Czech Republic, where the Czech National Bank stepped in to take over Agrobanka Praha (the nation's largest privately owned bank and the fifth largest overall) in September. More than two dozen people were charged with fraud, including five top financial officials charged in connection with the failure in August of Kreditni Banka Plzen (the country's sixth largest), with losses of close to $500 million. Twelve smaller banks had also been liquidated or placed under forced administration during the past three years (six in 1996 alone) because of fraud or excessive loan losses. On August 1 a new regulation come into force, aimed at improving bank security. In October the Prague government announced plans to reorganize the largely state-owned industry and privatize the four largest banks. In the first half of 1996 alone, 145 Russian banks had their licenses withdrawn, while new regulations were also introduced in Romania, Bulgaria, Lithuania, and Latvia. In Japan, after 15 bank failures in a two-year period, the government allowed Hanwa Bank Ltd. to close. This was generally perceived as an indication that the government was at last dealing with the industry's underlying problems of bad loans and overvalued land assets. Meanwhile, Japanese banks remained atop the list of the world's largest, led by Tokyo-Mitsubishi Bank, a $738 billion financial institution formed by the merger in April of Mitsubishi Bank and Bank of Tokyo. At the other end of the spectrum "microbanking," which sought to help poor borrowers by providing loans of very small amounts, had become extremely successful in Bangladesh and elsewhere. (See Sidebar.) In Canada Native Indians and Inuits were expected to gain from the creation of the First Nations Bank of Canada, a joint partnership between Toronto Dominion Bank and a federation of Saskatchewan native chiefs. Major privatizations continued in several countries, including Australia, Brazil, Venezuela (which offered stakes in the country's two largest banks), and Austria (which finally accepted bids on Creditanstalt Bankverein, more than six years after announcing its privatization plans). The British banking industry was shaken in July by the apparent suicide of Amschel Rothschild, chief executive of asset management and investment for the London branch of the Rothschild dynasty and heir apparent to the family's global banking operations. In December Michael Bruno, a chief economist with the World Bank in Washington, D.C., and the former hyperinflation-fighting governor of the Bank of Israel, died. (MELINDA C. SHEPHERD) United States. Wearing flowered, open-necked shirts and sipping colourful cocktails, bankers attending the 1996 gathering of the American Bankers Association in Honolulu toasted a year of record profits. Back on the mainland, their stockholders were also celebrating. U.S. banks earned more than $50 billion in 1996, a new record, and their stock prices soared. Money-centre banks led the way, with the value of their shares increasing by nearly 50% for the year, more than twice the increase in the Standard & Poor's 500. Just eight years earlier the U.S. had been on the brink of a recession, the savings-and-loan crisis was becoming a scandal, and the banks' sizable commercial loan portfolios were falling apart. What changed? First and foremost, the economy. Low interest rates meant strong profit margins on loans and healthy returns on government bonds, both key sources of bank earnings. Commercial loan volume soared, fueled by an explosion in merger-and-acquisition activity. Syndicated loans--big multibank loans to companies--topped $1 trillion in 1996, a new record. U.S. banks continued to become increasingly shareholder-oriented and to focus their attention on the bottom line, boosting investments in back-office technology while encouraging consumers to bank by telephone and automated teller. Efficiency ratios, which measure how much a bank spends for every dollar of additional revenue it brings in, improved to their lowest level since the 1950s. Many banks used excess cash to launch major stock buybacks, which in turn helped boost their share prices. New York City-based Chase Manhattan Corp., the country's biggest bank, and San Francisco-based BankAmerica Corp., the third biggest, offered multiyear options packages to all full-time and most part-time bank employees, joining a small but growing cadre of companies in other industries that used stock options as performance incentives. Although consolidation in the industry, which set a record in 1995, eased a bit, two of the biggest deals in banking history happened in 1996. In January San Francisco-based Wells Fargo successfully completed its $11.6 billion hostile acquisition of in-state rival First Interstate, the largest bank merger ever. In late August Charlotte, N.C.-based NationsBank Corp. stunned rivals with an $8.7 billion acquisition of St. Louis, Mo.-based Boatmen's Bancshares, the third largest bank deal on record. In December Citicorp engaged in unsuccessful talks to acquire American Express, a transaction that, if completed, would have been the largest merger in U.S. history, worth more than $25 billion. The deal would have had the potential to reshape the financial services landscape, uniting the nation's leading provider of revolving credit (Citicorp) with the leading provider of nonrevolving credit (American Express) and creating an international investment-management powerhouse, with operations in well over 100 countries. Banks did face several obstacles in 1996, including worrisome losses in their credit card portfolios. Credit card delinquency rates, which measure the percentage of payments more than 30 days late, hit 3.66% at midyear--a new record--before tapering off slightly. Meanwhile, personal bankruptcies topped the one million mark for the first time. Even as they were writing off credit card loans worth tens of billions of dollars, however, banks were pocketing hefty earnings on those same portfolios, collecting record spreads between their cost of funds and what they charged consumers in credit card interest. Nevertheless, credit cards were the number one item on analysts' worry lists for 1997, with some predicting dire consequences in the event of a national recession. Bankers also failed to persuade Congress to repeal the Glass-Steagall Act, the Depression-era law separating commercial and investment banking. In 1987 the Fed began granting some banks the power to underwrite stocks and corporate bonds--taking advantage of a loophole in the 1933 law--but it had imposed severe constraints on how significant their involvement in those activities could be. As 1996 drew to a close, the Fed responded to Congress's inaction by dramatically raising the cap on investment-banking activity. Bankers hailed the move but vowed to continue their legislative battle in 1997. (STEPHEN E. FRANK) This article updates bank. STOCK EXCHANGES In 1996 the world's stock exchanges continued the bull run that got under way during the previous year and registered a 12% gain in dollar terms (15% in local currency), as measured by the Financial Times/Standard & Poor's (FT/S&P) World Index. Sustained economic growth (or recovery) and continuing low or falling interest and inflation rates, coupled with higher corporate profitability, were the main factors that drove up the world markets. Successive record-breaking performances of the Dow Jones industrial average (DJIA) also acted as a locomotive for the world bourses. Starting from a lower base and recovering from the past year's disappointing performance, Europe rose by 19%, while the Pacific markets, including Japan, lagged behind with a 3% gain (both in local currency). (See Table VI.) These broad gains would have been higher had it not been for a sharp correction in early December following remarks by Alan Greenspan, the Fed chairman, about "irrational exuberance" in asset markets. While most markets subsequently recovered a large part of the 2-3% fall suffered on that "Frantic Friday," they remained volatile during the closing weeks of the year. The markets interpreted Greenspan's comments as a veiled signal that the Fed would, sooner rather than later, have to raise interest rates to cool off potentially inflationary pressures. There was a similar midsummer setback on Wall Street and in other equity markets when it looked as if the U.S. interest rates were about to rise. As the Fed left the U.S. interest rates unchanged, share prices recovered and then reached record levels in many countries. Given Wall Street's runaway form, it was not surprising that some of the features seen in the 1980s staged a comeback. Salaries on Wall Street and to a lesser extent in London broke records, with massive bonuses for high-flying investment bankers and equity dealers. Many investment houses on both sides of the Atlantic poached each other's best staff with massive pay offers. The main stimulus for the U.S. market was continuing low interest rates, which made deposit accounts unattractive to investors and in turn encouraged high levels of money to flow into mutual funds. Productivity improvements leading to robust earnings growth, stock repurchase by corporations, and considerable merger-and-acquisition activity were the other main factors behind the exceptional performance of Wall Street. In Europe the rises seen during the first half of the year mirrored declining short-term interest rates in Germany and other European countries with currencies that shadowed the Deutsche Mark in the foreign exchange markets. The Japanese market was driven up early in the year by the dual stimulus to the economy of the decline in the value of the yen against the U.S. dollar and the cumulative effect of the fiscal packages introduced the year before. Foreign investors' enthusiasm for Japanese equities also propelled the Japanese market. The Japanese market came under pressure in early autumn and could not hold on to its earlier gains. The mixture of continued low inflation and gently declining long-term interest rates against a background of higher economic activity turned out to be a favourable backdrop to government bonds. A major beneficiary of this trend was the European Bond markets, in particular German and French bonds. (IEIS)