Japan-UNDP-ILO-UNDESA Thematic Discussion on Macroeconomic Dimensions of employment and inclusive growth in a Post 2015 Development agenda
To begin my presentation today, I would like to share with you some thoughts on inclusive growth. Inclusive growth, a subject addressed by the Commission on Growth and Development, is often not well understood. It is sometimes interpreted as the need to promote broad-based or shared or pro-poor growth. Yet, conceptually, promoting inclusive growth is a more complex endeavor. For growth to be inclusive it has to go beyond being pro-poor growth and benefit all. Accordingly, inclusive growth should:
- Promote the right pace, sources and pattern of growth: it should be rapid, diversified and sustainable;
- Offer proper opportunities to all: deploy the work force effectively, lift people from poverty traps and offer low-income groups options to meet their needs
- Allow for productive opportunities to all so that they can contribute to the economy, while benefiting from the economic growth generated.
- Promote equality and equity of opportunities.
To achieve inclusive growth appropriate development strategies are needed. The strategies adopted should promote a conducive macroeconomic policy mix as well as good governance, backed by strong institutions, a supportive microeconomic framework that allows industries to diversify and be nurtured by liberal and competitive industrial and investment policies, incentives for proper firms’ behavior, and efficiency in the financial intermediation process.
Today the problem of unemployment, at historic highs in advanced countries, is mainly driven by the cyclical downturn associated with the protracted economic crisis. Global policy responses are now been reflected in signs of economy recovery, but growth remains incipient and uneven. A prolonged period of subdued growth and fiscal austerity in many economies has added 4 million more to the ranks of unemployed. Policy responses have had to disproportionately rely on monetary easing, but even the combination of conventional and unconventional monetary stances has not been able to revive strong, sustainable and balanced growth, as private sector and households deleveraging, issues in the financial sector intermediation process and fiscal austerity have held back several countries’ activity below potential.
The nature and context of unemployment varies across the globe. While advanced countries are facing cyclical unemployment, pervasive unemployment in some of them and in most developing countries is structural and requires long-term responses. While most economies in East Asia and Latin America have seen unemployment rates drop to or below pre-crisis levels, in Africa employment creation remains a critical concern, despite relatively strong GDP growth rates. Many developing countries face structural labour market challenges such as low participation rates, particularly among women, high youth unemployment and large informal sectors.
Growth is a necessary but not sufficient condition for job generation. In effect, pre-crisis rising tide of economic growth failed to lift all boats. In most cases rapid growth came associated with faster income growth of the rich relative to that of the poor. As a result, within-countries income inequality has risen in both developed and developing countries. There is evidence that inequality affects growth and prosperity. Studies have found a negative correlation between growth in per capita income and poverty even if inequality remains constant. On the other hand, if growth in per capita income is constant, an increase in inequality can generally exacerbate poverty. As a result, growth can only be good for poverty reduction as long it does not increase inequality. Nobel Laureate Joseph Stiglitz, for example, argues that growing levels of inequality in income, access and opportunities – leading to inadequate education, health care and social protection – can create volatility, fuel crises, diminish productivity, impede economic growth and wipe out the development achievements of the previous decades in many low and middle income countries.
The challenge for us is therefore to identify policies that promote growth without increasing inequality. Growing inequality reduces incentives for investment in education. High levels of income inequality have also been shown to be strongly correlated to shorter growth spans, meaning that countries with high level of income inequalities are typically unable to sustain their growth momentum. Politically, rising inequality means discontent and less stability.
Employment generation is a necessary condition, but not a sufficient one, for fostering inclusive growth. To reverse the trend of rising inequality we need to reorient our focus on the quality and sources of growth and not simply look at the level of economic growth. Growth tends to deliver more equitable outcomes when it is accompanied with jobs. However, it is not that simple. In a number of countries structural unemployment stems from excessive dependence on one or two sources of growth, as observed in oil or mineral rich countries, or because of other major impediments in output markets. Labor market inefficiencies and rigidities or low level of skills are other factors that stand in the way of smooth functioning and clearing of labor markets. We would need to ensure that growth not only generates jobs, but generates sufficient decent jobs to match demographic trends and skill profiles of our growing population. To ensure that growth creates decent job opportunities, there needs to be stronger policy focus on structural transformation of developing economies so that populations can gradually move from low-skill, low value added unsustainable livelihoods to high-skill, high value added decent jobs.
Employment growth momentum can only be generated if fiscal policies are growth friendly and growth is catalyzed by the right investment, be it in productive assets or human capital. Countries with low and stagnating levels of investment have experienced unstable and fluctuating growth trends. Investments in industrial diversification and small and medium enterprises have great potential for employment generation. Opening up new opportunities for productive employment is critical to enhance labor demand but it has to be reinforced by productivity growth, which calls for strengthening the productive resources and capacity of the people. Productivity growth has the potential to boost growth while lifting wages of those employed and the returns to the self-employed.
Getting the diagnostics right about how the economy and labor markets interact in this day and age is a prerequisite for ensuring appropriate design of inclusive growth policies. In the past we were looking at growth, poverty, human resource development and labor market issues separately when only an integrated perspective can offer us the right policy mix to resolve some of the growing and deep rooted social problems. It is for this reason that recently the G20 has called for a joint meeting of Finance Ministers and Labor Ministers: to ensure that the issues surrounding the strong, sustainable and balanced growth framework are examined in tandem with the labor market challenges the economies face, and thus the growth framework is better positioned to generate jobs. In conjunction with this there is an emphasis on promoting long-term finance, including for infrastructure, to promote jobs. According to a recent study for the MENA region, infrastructure investment growth of close to 7 percent (about $106 billion) has the potential to generate about 2.0 million in direct jobs and 2.5 million in indirect and induced infrastructure-related jobs.
There needs to be a stronger recognition among policy-makers in developing countries that we cannot treat growth separately from its under-lying institutional structures and that the quality of growth critically hinges on this. Growth has to be recalibrated, as employment creation calls for structural change and economic diversification.
- Industrial policies can support the entry of firms into new and dynamic industries with higher productivity and thus greater potential remuneration.
- Access to infrastructure is another key element that needs to be in place for businesses to operate successfully. This includes roads, electricity, and telecommunications infrastructure.
- Public investment and fiscal incentives for private investment in green infrastructure and new technologies in particular can put economies on a more sustainable growth path and generate strong employment effects.
- Public work programmes, employment schemes and access to social benefits on the other hand strengthen aggregate demand while improving distributional outcomes.
To conclude, we need to recognize the strong growth-employment-poverty-inequality nexus. As the world economy is expected to remain at below potential levels (World Gross Product is projected to expand at 2.3 per cent in 2013 and 3.1 per cent in 2014 according to DESA’s World Economic Situation and Prospects mid-2013 update), many economies will continue to find it difficult to recover the severe job losses of the Great Recession. If an agenda as the one laid out above were to be implemented in a coordinated manner, DESA simulations show that global growth would average 4.5 per cent between 2013 and 2017, returning employment to pre-crisis levels by 2014 in developed countries and adding an additional 33 million jobs per year on average in developing and transition economies.
The post-2015 Development Agenda will need to underscore the imperatives of fostering structural economic and social transformation and building strong institutions to deliver inclusive and sustainable growth. We need strong institutions to implement a set of macroeconomic, financial sector and industrial policies to ensure growth is equitable and broad based. At the same time, we need even stronger institutions to implement inclusive education policies, employment policies and competition policies to ensure an even playing field for all. There needs to be stronger coordination and coherence among macroeconomic and other policy instruments so that the bottom billion receives a larger share of income dividends when the world economy is back on the growth trajectory.