MAKING SENSE OF FULL EMPLOYMENT IN

DEVELOPING COUNTRIES

Neil Coleman

Co-Director

Institute for Economic Justice

Neil.Coleman@iej.org.za

ILO The Future of full employment symposium

Geneva

12-13 December 2019

Stimulate, stabilize, structurally transform

• In South African context IEJ has developed approach of: Stimulate, Stabilise,

and Structurally transform.

• Use a range of policy tools to achieve these goals:

• Stimulate- macro economic stimulus package

• Stabilise- MEP to reduce volatility and social protection, MW and measures to

stabilize struggling sectors

• Structurally transform- targeted and well resourced industrial policy to diversify

economy, SA and region.

• Broader continental context. Can adapt but critical pillar is resource

mobilisation strategy for investment.

The need for policy coherence

• Examples of developmental strands in individual countries policies. But no

coherent, coordinated development strategies on the continent provide an

example. Progressive elements of some countries policies are contradicted by

others, usually drawn from orthodox ME strategies, which either constrain

them, or render them largely ineffective, and aren't part of a strategy of

systematic structural transformation:

• SAs industrial strategy largely negated by contractionary ME policies.

• Botswana's effective monetary policy interventions.

• Ethiopia's state led investment etc.

• Francophone Africa monetary peg creates its own dynamics.

• The trajectory of African economies under neoliberalism-Africa's path

dependency ; lack of economic diversification; the relatively small size of the

domestic market etc. poses the need for a fundamental shift in approach if

there is to be any real prospect of a full employment and decent work agenda.

Africa growth story

• Impressive growth story

• Despite the collapse in commodity prices since 2014, the IMF projects that

Sub-Saharan Africa (SSA) will grow by 3.2% this year, above the global

projection of 3% and the advanced economies projection of 1.7%.

• 20 economies SSA, accounting for about 45% of the population and 34% of

the region’s GDP, are estimated to be growing faster than 5 percent this

year.

• But growth has failed

- to change economic structure: remain resource constrained

- to generate decent employment

IEJ Diagnostic for ILO study on pro employment MEP

1. Employment

Africa’s relatively strong growth during the 2000s did see some improvement in employment dynamics but these were insufficient given massive growth in the labour force.

Employment is still highly precarious: The proportion of vulnerable employment is at 71%, slightly down from 76% in 1991.

• One-third of employment in Africa in 2018 remained in extreme poverty and a further 22% was moderately poor (ILO, 2019a). Highest of any continent. ILO: the African working poor represented more than half (56%) of the world’s working poor in 2018, while African employment represented only 14% of global employment.

• Youth and women are more vulnerable: 39% of Africa’s employed youth lived in extreme poverty compared to 31% of Africa’s employed adults in 2018; and 37% of employed women were poor in 2018, compared to 30% of employed men

• Informality: 86% of employment in Africa is informal; 90% of employed women are in informal employment; 95% of youth who work, work in the informal economy.

Diagnostic2. Economies not structurally transformed / diversified

• There was shift of the labour force into formal sector employment work and away from agricultural employment. But to services sector: now accounts for 31.4% of employment in Africa in 2017, up from 20.48% in 2000.

• This did not dramatically boost productivity in Africa. Much of the service sector work was in low-paying, quasi-informal, work.

• Africa’s manufacturing sector’s contribution to GDP and employment remains small (less than 10% for most economies) .Dominated by small, not particularly productive, firms.

• As a result, self-employed workers declined by only 4 percentage points between 1991-2017 for SSA and remains at 74% in 2017.

3. Commodity constrainedAround 85% of Africa’s economies remain commodity-dependant today Africa is not, first and foremost, demand-constrained but instead commodity-constrained, defined as a lack of diversified and productive domestic capacity and capabilities. This is what limits the ability of Africa’s growth to transform its labour market and what leads to internal balance coming at the expense of unsustainable external balance. As a result, Africa’s relatively strong real GDP per capita growth during the 2000s not followed by big increases in formal sector employment.

South Africa austerity• This year Treasury announced full blown austerity plan, following moderate austerity

pursued over last few years. In context of close to 40% unemployment on expanded definition and economy on brink of recession.

• the Treasury proposes government expenditure reduction of R487bn over the next three years: cuts in public employment; cutting government spending on goods and services; reducing government transfers and subsidies; reducing general government investment in economic and social infrastructure

• ADRS modelled impact: The proposed expenditure reductions, which are equivalent to 3% of GDP during the first year, translate to negative direct and indirect demand shocks to the economy

• Model results show that the proposed fiscal austerity programme will shave 0.16 of a percentage point from the average annual growth rate and raise the average unemployment rate by 2.2 percentage points.

• By 2022 the measures are expected to reduce total employment by 550,000, mainly due to the cuts in public employment. Negative effects of reduced household income and expenditure on output and employment will persist well beyond 2022.Overall, by 2030, total employment is projected to be lower by 730,000

Indicators for pro-employment macroeconomic policy

IEJ working on pro employment macro economic policy guide for Africa as part

of ILO project, in collaboration with the AU. Some indicators suggested to

measure whether MEP pro-employment

• Aggregate employment

• Disaggregated employment – age, gender, etc.

• Form of employment - formal/informal, permanent/casual etc. ; and

underemployment

• Labour force size and trends

• Skills and training

• Wage levels

Policy proposals

1. Price and exchange rate stabilisation (short-run):

• Maintaining a stable exchange rate and stable domestic prices. Avoiding

Dutch Disease affects through reserve asset accumulation.

2. Managing financial integration:

• Capital management techniques.

3. Developmental monetary policy:

• Expanding the tool box of monetary policy instruments to direct credit in

the economy in way that is expansionary and structurally transforms the

economy.

4. Revenue mobilization:

• Through greater capturing of mineral rents and revenues; as well as

using institutionalized rules-based mechanisms to help reinvest the

revenues over time.

Policy proposals

5. Fiscal policy – investment facilitation and demand management:

• Domestic spending management to limit balance of payments imbalances while maximizing domestic employment. Increasing investment. Counter-cyclical demand policy during low commodity prices by increasing revenue

6. Productivity enhancing social expenditures:

• Technology, human capital accumulation, infrastructure, and capacity building. This includes productivity-enhancing inclusive social policies.

7. Industrial policy and sectoral planning:

• greater value addition and greater productivity. Investment coordination. Infrastructure and skills.

*Revenue mobilization• Need to ensure increased domestic revenue mobilization while

encouraging foreign investment.

• Tax

• Limiting incentives competition to avoid base erosion and excess profits

• Proper capturing of revenues through removing exemptions

• Increased progressivity of tax structure (WAEMU area, Mauritania,

Senegal, Ugandan examples).

• Taxing mineral revenues - taxes can occur on excavation, land, income,

windfall profits, and resource rent taxes. And this can be applied through

royalty, licensing, leases, joint ventures, and a variety of other instruments.

(Zambia, Mozambique, Botswana and Norway).

• Combating illicit financial flows and tax evasion

Macroeconomic regime and structural transformation

• This shows the important link between macroeconomic policies

and structural transformation

• Structural transformation must aim to achieve a diversified industrial

structure that allows for productivity gains and climbing value chains. This

can be employment enhancing.

• Macroeconomic policy must facilitate this structural transformation.

• Appropriate transformation will also ease constraints on macroeconomic

policies, e.g. foreign exchange and inflation

(*)Contextual constraints to macroeconomic policy

• The current structure of many African economies places

constraints on macroeconomic policy choices

• Monetary sovereignty

• Limited by hard pegs and monetary unions

• Limited by nature of financial liberalization

• Currency hierarchies

• Fiscal space

• Potentially limited by growing debt levels (contextual if this is true or not)

• Cost of borrowing

• Denomination of debt

• Small domestic financial sectors / low savings

(*)Contextual constraints to macroeconomic policy

• Fiscal (expenditure) policy

• Limited by domestic multipliers, propensity to import, supply-side constraints, lack

of structural transformation.

• Available revenue

• Monetary indicators

• Potential inflation.

• Exchange rate appreciation

• Both related to propensity to import, supply-side constraints, lack of structural

transformation.

• Crucial link between macro and sectoral seen

Issues for further work

Issues for further work include

• Strategies for an African Green New Deal

• Investment strategy, domestic resource mobilisation and employment

multipliers

• Fiscal allocation and maximizing fiscal multipliers

• Researching multipliers.

• Link to developing domestic supply-capacity in the short- and long-run, at both the national

and regional levels.

• Implement spending.

• A developmental ME framework

• Industrialisation strategy in context of changing global dynamics. Role of

expanding regional demand, currently small

Additional slides

Current approaches to macroeconomic policy in Africa

• Policy has made gains in increasing investment spending.

Uganda

*Employment target – Kenya

• Proposed reforms (Pollin et al. 2008):

• Use a core short-term real interest rate as an intermediate monetary target.

• Remove the anti-growth bias in monetary policy.• provide economic stimulus during a contraction

• distinguish between demand-pull and cost-push inflation

• Diversify the toolkit for addressing inflation in Kenya.

• Institute reforms to the financial sector to channel credit to socially productive uses

• Introduce new policy tools for channeling credit to employment expansion, poverty reduction, and improving the BOPs

• Significant growth benefits shown [in model?].

• [engagement with policy makers?]

*Employment targeting – South Africa

• Epstein developed an employment targeting framework for central bank policy to replace the

Reserve Bank of South Africa's destructive inflation targeting approach.

• CB, along with other key government institutions, identified an "unemployment rate").

• CB lowers interest rate from 11% to 7% and holds it at that level for 5 years, economic growth will

increase on average by 5% per year, inflation will go up by 1% point and the increase in exchange

rate variability will be quite modest.

• In combination with other policies – such as credit guarantees and subsidized credit for labor

intensive sectors, as well as capital management techniques and incomes policies if necessary – the

unemployment rate can be halved by 2014 as proposed by the South African government.

• [engagement with policy makers?]

* Botswana (1976 – 1989)

• Policy:

• 1976: own currency – Pula

• Low interest rates

• Inflation ~10%

• Interest rate policy focused on promoting investment

• In 1980s Pula devalued to maintain competitiveness

• Complemented by fiscal policy

• Outcomes:

• Between 1980 and 1991, the economy grew at 10.3% per annum, employment growth was 9.1%.

• Savings rose from 10.1% in 1981 to peak of 46.4%of GDP in 1989

Poverty

I World Bank 2019

• Most of the poor (82 percent) live in rural areas, earning their living primarily in

farming. Nonwage microenterprises are the main source of nonagricultural

employment and income for the poor and near poor.

• Africa comprises many countries with quite varying poverty rates and

divergent socioeconomic and agroecological conditions. Half of Africa’s poor

live in 5 countries; 10 countries account for 75 percent of Africa’s poor

• about half of Africa’s poor are younger than 15 years old

Uganda [combine with Ethiopia slide?]

• An African growth story, but analysis reveals fundamental structural

constraints

Ethiopia- state led investment?

• [insert summary]

• Signs that Ethiopia may be moving away from state led investment model

• Liberalisation of MEP

• Loan from IMF

Ethiopia

• The experience of Ethiopia is illustrative.

• The government simultaneously and sustainably focused on

• Increasing smallholder staple crop productivity by deploying 45,000 extension

agents (three per district), facilitating access to credit, and improving water and

land management;

• Improving market connectivity through rural road investment; and

• Providing a form of insurance through the Productive Safety Net Program, one

of the largest social protection programs in Africa.

• Since the mid-1990s, smallholder cereal yields in Ethiopia have more than

doubled; extreme poverty has more than halved.

Fiscal policy – investment facilitation and demand

management• Fiscal allocation and maximizing fiscal multipliers

• Researching multipliers.

• Link to developing domestic supply-capacity in the short- and long-run, at both

the national and regional levels.

• Implement spending.

• Domestic input requirements through public procurement

• Strengthen automatic stabilisers rather than only discretionary

spending, including through social expenditure

• Ethiopian and Kenyan case studies

*Context• As a result of a relative lack of sectoral transformation the nature of

employment has not changed sufficiently, despite important gains. Sectoral transformation to higher productivity, formal sector, output and employment offers opportunities for better pay and working conditions. Export diversification declined during the 2000s for Africa’s major economies. And around 85% of Africa’s economies remain commodity-dependant today

• These economies are more likely to be subject to cyclicality and shocks in export revenue, financial flows, and indebtedness, leading to unsustainable fiscal and current account deficits when commodity pricesfall.

• Poverty in Africa has fallen substantially—from 54 percent in 1990 to 41 percent in 2015— but the number of poor has increased, from 278 million in 1990 to 413 million in 2015.

• Present production is largely low productivity and informal. Africa’s manufacturing sector’s contribution to GDP and employment remains small (less than 10% for most economies) and is dominated by small firms