27 May 2008

Jobless growth, a new impediment to development

by Codrina Rada
Following the lost decades of the 1970s and 1980s, during which many developing economies recorded extended periods of output decline, the economic profession has seen a renewed interest in the debate about what drives economic growth. Much of the mainstream academic work on the issue has been focused on those classic factors that foster capital accumulation and productivity growth -- savings, human capital or technological change. Nothing surprising here since the theoretical basis had already been well-established by the Solow model of growth, versatile enough to accommodate the sustainable take off of yet a few more academic careers. Unfortunately, there wasn’t much sustainability for development and therefore for many in poverty in the policy prescriptions derived from such models. 

Empirical evidence shows that strong labor productivity growth is not anymore sufficient to solve problems of acute poverty or underdevelopment. For the last decade or so many developing economies have claimed good economic performance but oddly enough growth has not led to a substantial decline in the underutilized labor force. In fact the informal sector in most of the developing countries has been on the rise. Global Employment Trends, a 2004/5 report from the International Labor Organization and Key Indicators from the Asian Development Bank’s 2005 report on Asian economies show that “out of a total labor force of 1.7 billion in the DMCs[1], around 500 million are underutilized in terms of being either unemployed or underemployed…” (ADB 2005)[2]; “during the 1990s, own-account and family workers[3] represented nearly two-thirds of the total non-agricultural labor force in Africa, half in South Asia, a third in Middle East…”; “In Latin America the urban informal economy was the primary job generator during the 1990s....urban informal employment in Africa was estimated to absorb about 60 per cent of the urban labour force and generate more than 93 per cent of all new jobs in the region in the 1990s” (ILO 2005).

 The problem with the jobless growth phenomenon in the developing countries is two-fold. First, efforts to fight wide-spread poverty levels are destined to fail unless jobs are created for the many unemployed and poor. As Fields (2004) points out “poor are poor because they earn little from the work they do”[4]. And if growth does not produce high-productivity, high-pay jobs, its purpose to foster development and alleviate poverty, will eventually be defeated. Secondly, economic history suggests that sustainable growth is associated with structural changes towards secondary and tertiary sectors, shifts in sectoral employment from low to high-productivity sectors and changing patterns of specialization towards higher value-added products (UN 2006). For economists and policy makers alike these recent trends pose a significant challenge: strong productivity growth generates unwanted social and economic outcomes i.e. under and unemployment.

This is not to say that productivity growth is unwelcome. On the contrary, it remains the essential ingredient for long-run growth. But it will fail to produce development unless outcomes, such as the jobless growth and lack of structural change, are addressed by policy. Generally speaking the solution to this dilemma is a matter of successful implementation of both pro-growth as well as socially relevant economic policies.

While there are many dimensions policies should address I want to refer here to few which I think are essential. Strategies can be thought of based on their target: vulnerable groups, distributive issues, inadequate demand and anemic structural changes. First of all, households in the informal sector are especially vulnerable because they lack a steady income flow and often fall outside the social safety net system. In the short-run an economic shock or natural disaster reinforces development and poverty traps as resources are usually insufficient to distribute to all those in need. In the long run consequences for development are substantial as these groups lack adequate access to education, health care and consequently economic opportunities. Finally, economic insecurity for extended periods of time is conducive to political instability which is likely to put a check on investment and therefore economic growth. Institutional changes and policies which target the most vulnerable groups in a society become essential (see 2008 World Economic and Social Survey, UN, DESA).

 Second, there is the issue of how to distribute the gains from economic expansion. This is a delicate matter from both a socio-political and an economic perspective. On the social and political side, redistributive measures are often resisted by those in the formal sector who are asked to give up part of their income. In fact a large informal sector may make it impossible for the government to implement any redistributive measures without strangling expansion in the formal sector or facing serious political opposition from the affluent part of the society. From an economic point of view, redistribution has to take into account how different economic classes behave in terms of their consumption and investment patterns, otherwise growth may be adversely affected. Overall, redistribution is effective in the long-run only if it encourages the creation new productive activities.

 Third, strong productivity growth generates job loss when aggregate demand is insufficient. The 2006 World Economic and Social Survey suggests that the structural transformation from primary to secondary and finally tertiary sectors in the rapidly growing East Asian economies throughout the last few decades was supported a great deal by fixed investment. The core strategy is a classic example of Keynesianism and it calls for either an increase in domestic expenditures, investment or government expenditures, or for measures that would stimulate external demand, such as a competitive exchange rate policy. Either one should ultimately target the absorption of underutilized labor force.

 Finally, when structural change is anemic or in other words economic growth does not lead to changes in the basic configuration of the economy, policy should look to establish forward and backward linkages between different sectors of the economy, including the informal sector.

 Source: United Nations, World Economic and Social Survey 2006, UN, New York. Asian Development Bank, Key Indicators 2005: Labor Markets in Asia: Promoting Full, Productive, and Decent Employment International Labour Organization (2004), Employment Trends, ILO Geneva. [1] Developing Member Countries (DMC) of the Asian Development Bank [2] Where Asia’s labor force of 1.7 billion accounts for about 57.3% of the world’s total labor force (ADB 2005) [3] The two categories account for a broad definition of underemployment. ILO 2005 [4] The quotation by Fields (2004) is from the ADB (2005) report. Codrina Rada is Assistant Professor at the Department of Economics, University of Utah. Education: 2007, Ph.D. in Economics, New School for Social Research; 2005, M.Phil in Economics, New School University; 2000 MA in Sociology, University of Massachusetts, Boston, BA in Economics. Current research interests: ‘Jobless growth: A New Tale for the Global World’, ‘The Macroeconomics of Pensions’ and ‘Developing and Transition Economies in the Late 20th Century: Diverging Growth Rates, Economic Structures, and Sources of Demand’

13 May 2008

Bush, Rice and the Global Food Crisis

by Ashwini Deshpande George Bush and Condoleezza Rice recently suggested that the global food crisis is in large part due to the rising prosperity and the consequent increase in the demand for food by the Indian and Chinese middle classes. Coming from Bush, the likelihood of any statement being a smokescreen is extremely high (the world is still reeling from the devastating consequences of the WMD lie and its aftermath). In this case too, their argument is a smokescreen for some of the factors that the US leaders would prefer to not have under public scrutiny. One wonders why, though, since the US leaders and their policies have shown precious little regard, if any, to any international public opinion. In contrast to the ‘prosperity and rising food demand’ theory, consider this. The 1996 World Food Summit resolved to reduce the number of hungry people in the world by half by the end of 2015. By 2006, there were more hungry people in the developing world (820 m) than in 1996. According the FAO, instead of decreasing, the number of hungry people in the world is increasing at the rate of 4 million a year. Keeping the 1996 pledge would require decreasing the number of undernourished by 31 million every year, which would mean increasing the food consumption of the hungry. The World Bank has estimated that approximately 100 million people have fallen into poverty in the last two years due to rising food prices and that this trend is unlikely to be reversed any time soon. Food prices are expected to remain high through 2015. High prices threaten to increase malnutrition, already a cause of premature death of children in many countries. The worst-hit are the countries of sub-Saharan Africa, as they collectively import 45% of their wheat needs and 84% of their rice. But according to Bush and Rice, the food shortage in the world is being caused by the fact that two large developing economies are eating more and more. How true is this? According to the FAO, of the projected 582 million undernourished in 2015, 203 would be in South Asia alone, i.e. close to 35 percent. So, for every Indian who, by eating more, is supposedly pushing up food prices, there are hundreds who remain undernourished. Mr. Bush and Ms. Rice, just imagine the horror that would unleash if their hunger was either reduced or eradicated altogether! Indians and Chinese are not merely consumers of food grains, they produce them too. Take rice. India is the second largest rice grower in the world behind China. Rice being the staple of over 65% of the Indian population, much of the production is consumed domestically. Rice prices in India have been rising and due to the low purchasing power of the poor, even a small increase can cause a decline in their real incomes. The fact is that agricultural growth has not kept pace with overall rate of growth and it is believed that there might be other factors such as overuse of fertilisers and so forth that might put a question mark on the sustainability of rice production. Thus, while a section of the Indian population might be prospering (but not necessarily consuming more rice), it is certainly true that large sections of the poor would join the ranks of the malnourished due to increasing rice prices, especially, if current levels of rice production are unsustainable. Now let’s look at the other side of the picture that Bush and Rice are completely silent about. Rising oil prices and fears of climate change have led to a massive increase in the production of bio-fuels. The World Bank, by no means radical or left-wing, provides figures that establish how the encouragement of production and use of bio-fuels has led to increased demand for raw materials such as maize, wheat, soy and palm oil and increased competition for cropland. Almost all the increase in global maize production from 2004-07 (the period in which prices have been rising) went for bio-fuels production in the US. From 2004 to 2007, global maize production increased 51 million tons, bio fuel use in the US increased 50 million tons and global consumption for all other uses increased 33 million tons, which caused global stocks to decline by 30 million tons. Finally, when prices rise, just as many are hurt, some benefit. The World Bank has divided countries into large and moderate gainers (and conversely, losers) in terms of the impact of the food price increase on their trade balance. Large gainers would be those countries whose trade balance would improve by more than 1 percent of their 2005 GDP as a result of rising prices. Moderate gainers would be those countries whose trade balance would improve by less than 1 percent of their 2005 GDP. It turns out the largest losers are going to be several African countries. India and China are among the moderate losers. The USA, incidentally, would be moderate gainer. Of course, the distributional impact of high food prices can be serious even in countries where the balance of payments has not been adversely affected. A study for eight countries indicates that an increase in food prices between 2005 and 2008 has increased poverty by 3 percentage points. For several countries where the progress in poverty reduction has been slow, the increase in food prices threatens to wipe out gains in poverty reduction made in the last 5-10 years. Thus, the overall picture of the food crisis is a far cry from the “prosperous Indians and Chinese eating more” theory. Weather related shocks (drought in Australia) and rising oil prices have contributed to the rise in prices. But in large part, the crisis is due to the needs of the energy intensive US economy that Bush is committed to protect – even if millions have to go hungry in the rest of the world in order to sustain those needs.

Ashwini Deshpande is Professor of Economics at the Delhi School of Economics, University of Delhi, India.


05 May 2008

In Argentina, the Rich are Taking to the Streets

by Leandro Serino Some Argentineans have reverted to one of the country's favorite sports: reclaiming the streets. This time, however, streets and roads are not occupied by the unemployed or by civil servants or workers from declining industries. Instead, the protests come from agricultural producers and a selective group of Argentina's urban middle and upper classes; paradoxically, some of the groups who benefited most from the recent economic recovery.

The protests started when the government modified the export tax regime on March 11th. To understand their causes, it is useful to look at the recent history of the application of a tax to Argentina’s exports of meat, soybeans, maize, wheat and related products. Export taxes were re-established in Argentina during the last economic crisis, in 2002. At the time, the rationale for the policy was simple. Argentina is an exporter of wage goods whose prices, like those of many other commodities, are determined in international markets. This means that, all other things being equal, the 200% nominal devaluation that took place in 2002 would have caused domestic food prices to skyrocket. In a context of massive unemployment and record poverty levels, it was necessary to truncate the link between international prices and domestic ones. And this is what export taxes actually do and did, for they establish a wedge between these two prices, thereby inciting local producers to sell to the domestic market.

(To have an idea of the problem this policy was trying to address, imagine -if you can- today's food price inflation, raising the concerns of international organizations such as the IMF, the World Bank and various Central Banks in both developed and developing countries, and multiply it by a three digit factor.)

The system had remained in place since then, with export taxes occasionally increasing. The second justification for this policy, even after the economic recovery, was not very different from the first one. The stable and competitive exchange rate policy implemented in Argentina (to counteract the de-industrialization experienced in the 1990s and promote new competitive sectors) is only politically sustainable in a wage-good exporter country if prices do not jump with a devalued exchange rate. Hence, until productivity and wages rise, export taxes have a role to play.

By the end of 2007, a third reason for the tax arose as increases in international food prices accelerated, fuelled by Asian giants’ economic growth, substitution of certain crops to produce fashionable biofuels, and even by speculation. The recent change to the export tax regime intends to address this new phenomenon, linking domestic prices to developments in international markets. (See ‘Mad, bad taxes on food’, The Economist, March 29th-April 4th, 2008)

This time, however, the change in export taxes is different from previous increases, for it establishes a scheme of moving export taxes. In the new regime, export taxes are not fixed but follow changes in international primary commodity prices, increasing when international prices rise and decreasing if international prices fall. In the current scenario of booming international prices, where the price of certain crops has almost (or more than) doubled in less than six months, modifications to the export tax system and the design of alternative policies (involving not only export taxes but also long-term policies for small agricultural producers and particular products, as well as countercyclical macroeconomic policies) were certainly necessary.

Protests started after the government announced the first type of policies (the change to the tax system). They emerged as a response to the lack of long-term policies for the agricultural sector, but also because, in a context of high international prices and expectations of further increases, flexible export taxes imply lower (extraordinary) benefits for the most profitable sector in the Argentine economy. The large amounts of present and future income at stake, taken for granted by some producers as a fair reward to their productive efficiency, thus represent the fundamental important reason behind the recent protests – which are likely to continue.

The dispute over extraordinary benefits, however, in no way justifies three weeks' of lock-out and piquetes affecting the entire Argentine population and especially its most deprived section. While it is fair to say that these benefits are in part a consequence of technical change and of the extension of the land frontier, they are also linked to a particular exchange rate regime and international context.

The conflict is still unresolved and open, and is transforming the distribution of ‘abundance’ as one of the fundamental political economy disputes of the 21st century.


Argentina’s newspapers cover this issue daily. See Pagina12, Clarin or La Nacion (in Spanish) and Buenos Aires Herald (in English).

Leandro Serino is a PhD Candidate at the Institute of Social Studies (ISS) in The Hague, where he also completed a Masters in Development Economics in 2003. In recent years, Serino devoted most of his time to his PhD research, which focuses on the question of structural change in countries with abundant natural resource endowments, like his own country Argentina. During his ‘free’ time, Serino participated in different projects in the fields of development economics and applied macroeconomics, at the University of General Sarmiento, the ISS, ECLAC Buenos Aires and the Ministry of Economy and Production of Argentina.