The IMF’s Interest in Inclusive Growth: Promising or PR?
Prakash Loungani
Chief, Development Macroeconomics, Research Department, IMF
Co-Chair, Jobs & Growth Working Group, IMF
IDRC/CDESG
October 13, 2015
VIEWS EXPRESSED ARE THOSE OF THE PRESENTER AND SHOULD NOT BE ASCRIBED TO THE IMF.
Growing Global Interest in “Inclusive Growth” …
Number of Google search results using "inclusive growth”
100,000
90,000
80,000
70,000
60,000
50,000
40,000
30,000
20,000
10,000
0
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
… mirrored at the IMF
Number of search results using “inclusive growth” on IMF eLibrary
350
300
250
200
150
100
50
0
2000
2001
Source: IMF eLibrary
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
THREE (inter-related) COMPONENTS
OF IMF’s WORK ON INCLUSIVE GROWTH
Employment: Key Points
• “Two-handed approach”
– Don’t forget “aggregate demand”
• a particularly important message at the onset of the Great
Recession
• IMF advice on design on labor market
institutions
– Discussion paper on design for advanced economies
– Is framework applicable to other economies?
Growth: Key Points
• In the short-run, don’t forget aggregate
demand
– Settings of monetary and fiscal policies key for
short-run growth
• Medium & long-run growth:
– A more diagnostic approach
– Emphasis on structural transformation
– Realism about the effects of structural reforms
Equity: Key Points
• New research findings
– Equity helps durability of growth
– Redistribution within reason doesn’t hurt growth
– Drivers of inequality:
• ‘Austerity’ and ‘(financial) openness’ have increased inequality in
the past
• Decline in union density associated with increase in top share of
incomes
• Inclusive growth agenda
– Jobs as a key mechanism for inclusion
– Equality of opportunity vs. outcomes
• Wide-ranging agenda to address equality of opportunity
– (IMF-DFID collaboration)
Short-Run Fluctuations in Labor Markets
The Two-Handed Approach
An old view:
getting macro policies right will help labor markets
• “There is sometimes the naïve belief that
unemployment must be due to a defect in
the labor market, as if the hole in a flat tire
must always be at the bottom, because that
is where the tire is flat” (Solow, 2000).
• "It takes a heap of Harberger triangles to fill
an Okun's gap.” (Tobin, 1977)
The Two-Handed Approach
The Two-Handed Approach
Facts and Diagnosis, 1985
• “[In Europe ] 11.2% of the labor force is unemployed today
compared to only 2% in 1970. Long-term unemployment is a large and
increasing portion … [There has been] an increase in both the level of
youth unemployment and its share of total unemployment since 1979”
• “These are very gloomy statistics. Do they reflect an inevitable new
economic reality, or can employment growth be restored?”
• “… a sharp decrease in aggregate demand is indeed the
proximate cause of the rise in unemployment in the EC since
1980. The use of monetary policy to fight inflation and the major shift in
fiscal policy towards "budgetary consolidation", however justified, seem to
explain much of the poor growth performance of the 1980s “
The Two-Handed Approach
Recommendations, 1985
• “Neither supply nor demand measures will by themselves create
and sustain employment growth. This simple point forms the basis of
our approach …”
•
“Supply measures, without accommodating demand policies, will have little
impact on employment and output, at least in the short run … if firms do not
see improved sales prospects, they will not increase capacity in response
only to an improvement in factor prices … it is essential to make sure that
demand is there to sustain supply … [But without supply measures] gains will
be temporary at best and may in fact worsen structural problems. Thus, our
call for a two-handed approach.”
•
“We believe that structural changes on the supply side are more important
than wage cuts at this stage, that they require a social compact which
may not be feasible if workers are asked to take substantial wage cuts”
•
“In summary …What is now needed is a social pact in which supply-
friendly measures go hand in hand with a vigorous recovery”
The Two-Handed Approach
Fast forward to 2010:
déjà vu all over again?
The ‘Two-Handed Approach’ during the Great
Recession: Unemployment and Output
10
AUS
5
CHE
0
NOR
BEL
DEU
SWE NZL
FRA
NLD
FIN
GBR
ITA
JPN
DNK
-5
CAN
AUT
USA
-10
PRT
ESP
IRL
-15
Unemployment and Output
Output and Employment
Since the Great Recession
-15
y = 1.03 x + 1.03
-10
-5
Part explained by GDP growth
2
(Adj. R = 0.8)
0
5
Employment growth since the Great Recession can
be explained well by changes in output
Unemployment and Output
Spain’s unemployment & employment growth can be
explained by fall in output
Unemployment and Output
Much of increased youth unemployment can also be
explained by fall in output
Unemployment and Output
UNEMPLOYMENT AND OUTPUT:
HOW APPLICABLE IS “OKUN’S LAW”
TO DEVELOPING COUNTRIES?
Unemployment and Output
Country Groups
Total: 81 Countries
• 24 Advanced Economies
• 20 Emerging Market Economies
• 11 Frontier Market Economies
• 26 Other Developing Economies
(based on “change” specification)
0
-0.1
-0.2
-0.3
Average=-0.30
-0.4
-0.5
-0.6
-0.7
-0.8
-0.9
Singapore
Japan
Italy
Austria
Hong Kong SAR
Norway
Switzerland
Belgium
Germany
Israel
New Zealand
Portugal
Netherlands
Greece
France
Denmark
United Kingdom
Sweden
Finland
Ireland
Canada
United States
Australia
-1
Spain
Unemployment and Output
Okun’s Law Coefficients:
Advanced Economies
Notes: Ball and others (2013) do not cover Greece, Israel, Hong Kong SAR, and Singapore. These countries are
marked with green.
Unemployment and Output
Okun’s Law Coefficients:
Emerging Market Economies
(based on “change” specification)
0
-0.2
-0.4
-0.6
-0.8
Average=-0.23
Unemployment and Output
Okun’s Law Coefficients:
Frontier Market Economies
(based on “change” specification)
0
-0.05
-0.1
-0.15
Average=-0.20
-0.2
-0.25
-0.3
-0.35
-0.4
-0.45
-0.5
Tunisia
Lithuania
Vietnam
Bulgaria
Argentina
Croatia
Jordan
Kazakhstan
Pakistan
Romania
Ukraine
Unemployment and Output
Okun’s Law Coefficients:
Other Developing Economies
(based on “change” specification)
0.1
0
-0.1
Average=-0.14
-0.2
-0.3
-0.4
-0.5
Unemployment and Output
Okun’s Law Coefficients:
Summary
(group average)
0
-0.1
-0.2
-0.3
-0.4
All Economies
(81)
Advanced Economies
(24)
Change Specification
Emerging Markets
(20)
Level Specification ( HP 100 )
Other Developing
Economies
(26)
Frontier Market Economies
(11)
Level Specification ( HP 12 )
Unemployment and Output
Making Output-Employment Linkages
Part of IMF Staff’s Toolkits
“IMF view” on Design of Labor Markets Institutions:
Blanchard, Jaumotte, Loungani (2014)
http://www.izajolp.com/content/3/1/2/abstract
Labor Market Policies
“Labor Market Flexibility”:
Moving Beyond Mantras
Labor Market Policies
Micro Flexibility: Two Key Institutions
Unemployment insurance (UI)
– welfare improving but possible efficiency cost
– what matters: design of the system
quality of active labor market policies
Employment protection (EP)
– some of it is desirable but too much can be harmful
(lower reallocation, longer unemployment duration)
– dual protection systems have ambiguous effects on
efficiency and welfare
– reduce judicial uncertainty
Labor Market Policies
Micro Flexibility
Some countries don’t do it well:
low flows, long U duration
Labor Market Policies
Unemployment Duration
and Employment Protection
(months; 1995 – 2007 average)
Labor Market Policies
Labor Market Policies
Micro flexibility:
How applicable to developing economies?
• Need for reallocation is greater …
– Rodrik and McMillan (reallocation to higher-productivity sectors
key to growth in developing economies)
• … but also constraints:
– High level of informality
– Fiscal constraints may preclude generous UI
Labor Market Policies
Macro Flexibility
Two dimensions
– A low average U rate
– Limited fluctuations in U rate in response to shocks
Key institutions
– Minimum wage
– Tax wedge
– Collective bargaining structure
Labor Market Policies
Level of Unemployment
Minimum wage
– Small effect on E or U within a range
– Limited redistributive role
– Redistribution through negative income tax
(combined with ‘low’ minimum wage)
Tax wedge
– Tends to increase labor cost and U (especially in
combination with high minimum wage or UI and if no
deferred benefits)
Labor Market Policies
Can Flexicurity Be Exported?
The Importance of Trust
Labor Market Policies
Macro flexibility:
How applicable to developing economies?
• Minimum wage
– Difficult issues of appropriate level
– Greater need for it as redistributional tool but perhaps also
greater efficiency costs
• Collective bargaining
– Very low levels in many countries
– Informality
Short-Run Growth Fluctuations
Short-Run Output:
Implications for Fiscal Policy Advice
IMF work on Fiscal Policy
• Support for global fiscal stimulus at the onset of
the Great Recession
• Fiscal consolidation lowers output and raises
unemployment in the short run
• Impacts of fiscal consolidation on output may
have been underestimated by IMF and others in
the early years of the start of the Great Recession
Short-Run Output:
Implications for Fiscal Policy Advice
How IMF advice on fiscal issues was viewed
during our 2013 Spring Meetings
How the IMF became
the friend who wants
us to work less and
drink more
-- Washington Post
April 16, 2013
“It is to the credit of the
economists at the Fund that
their recommendations to
policymakers have adapted to
this strange world we’re living
in rather than sticking with
their more normal, doctrinaire
advocacy of monetary and
fiscal restraint.”
IMF Renews Push
Against Austerity
-- Wall Street Journal
April 17, 2013
“ … the International
Monetary Fund called on
countries that can afford it
… to slow the pace of their
austerity measures.”
Medium & Long-Run Growth
Medium & Long-Run Output
IMF’s VIEWS ON GROWTH:
CORPORATE DOCUMENTS
Medium & Long-Run Output
DIAGNOSTIC CHECK: GROWTH
IMF Research on Inequality
IMF Research on Inequality
IMF Research on Inequality
• Consequences: Inequality lowers the duration of growth spells
(Berg & Ostry)
• “Causes”:
– ‘Austerity’ and ‘(financial) openness have raised inequality in
the past (Ball, Furceri, Leigh and Loungani; Furceri &
Loungani)
– Decline in union density has raised share of top incomes;
increases in minimum wages have lowered the top share
(Jaumotte & Osorio-Buitron)
• “Cures”
– Redistribution, if not extreme, does not harm growth (Ostry,
Berg & Tsangarides)
– Greater care in design of policies (e.g. fiscal consolidation
IMF Research on Inequality
Distributional effects of ‘austerity’
Ball, Leigh and Loungani, “Painful Medicine,”
Finance & Development, September 2011
IMF Research on Inequality
Impact of ‘austerity’ on the Gini
Ball, Furceri, Leigh and Loungani, “The Distributional Effects of
Fiscal Consolidation” IMF Working Paper, June 2013
IMF Research on Inequality
Impact of ‘openness’ on the Gini
3
2.5
2
1.5
1
0.5
0
0
1
2
3
4
Furceri and Loungani, “Capital Account Liberalization and Inequality”
IMF Working Paper, forthcoming IMF Working Paper
5
IMF Research on Inequality
Impact of ‘openness’ on the Gini
depends on financial depth
3.5
Baseline
3
Low Financial Deepening
2.5
High Financial Deepening
2
1.5
1
0.5
0
0
1
2
3
4
5
Furceri and Loungani, “Capital Account Liberalization and Inequality”
IMF Working Paper, forthcoming IMF Working Paper
IMF Research on Inequality
Impact of ‘openness’ on the Gini depends on
whether opening is followed by a crisis
4
3.5
Baseline
3
No crises
Crises
2.5
2
1.5
1
0.5
0
0
1
2
3
4
Furceri and Loungani, “Capital Account Liberalization and Inequality”
IMF Working Paper, forthcoming IMF Working Paper
5
Inclusive Growth Agenda
Inclusive Growth Agenda
IMF-DFID project
Monetary policy and macroeconomic stabilization
– the transition to modern monetary policy regimes.
– the nature of “business cycles” in low-income countries in contrast to
emerging markets and advanced economies: for example the role of
structural shocks, food prices, informal labor markets.
– hybrid policy regimes with multiple targets and instruments, including
managed exchange rates and capital controls, and macrofinancial stability
objectives.
– macro prudential policies for LICs, including considerations of financial
inclusion and development, shallow financial systems, interaction with
monetary policy regimes, and capital controls and how they interact with
different sorts of shocks and structural features.
– the role of labor markets in macroeconomic policy and adjustment. This
will include an analysis of informality and its implications for fiscal,
monetary, and exchange rate policy.
Inclusive Growth Agenda
IMF-DFID project
Debt sustainability analysis and management of natural resources
•
A consideration of human capital investments (health and education) in addition to
physical capital. An important consideration for growth/debt sustainability will include
the delay between the human capital investment and potential growth payoffs.
•
Investment in energy is also becoming an important objective of many LICs. Several
countries want to exploit their hydro or gas resources and export energy as part of
their development strategy.
•
An analysis of optimal investment policy.: how to spend optimally on infrastructure,
while taking into consideration key characteristics of developing countries such as
inefficiencies in public investment and tax collection as well as high returns to public
capital, among others.
•
incorporating uncertainty about parameters (e.g. efficiency of public investment) and
external shock shocks (e.g. price of oil)
•
Public-private partnerships have emerged as a financing alternative to foster
development, but they also involve macroeconomic tradeoffs which will be analyzed.
•
Empirical analysis of stylized facts such as infrastructure gaps, debt and natural
resource management, as well as investment efficiency and absorptive capacity.
Inclusive Growth Agenda
IMF-DFID project
Inequality and Macroeconomics
• Analysis of distributional implications of commodity price shocks and
fiscal policy response.
• Extensions to other macroeconomic policies and shocks (public
investment booms, fiscal consolidation, and/or structural reforms)
and the introduction of richer LIC-specific features, such as informal
labor markets.
• Incorporation of distributional consequences into a new-Keynesian
model with nominal rigidities, drawing on the work above for
calibration and model design, to analyze monetary policy. Specific
focus would be on the role of limited financial participation for
monetary policy.
• Analysis of aggregate patterns with respect to inequality, growth,
and structural transformation.
Inclusive Growth Agenda
IMF-DFID project
Growth and structural change: Macroeconomic Perspectives
• Extension of diversification work and toolkit: While the current
toolkit offers almost complete country coverage for more than
50 years, one downside is that the toolkit only covers goods
(manufacturing and agricultural) exports. Given that trade in
services has grown in importance over the last few decades,
we would like to expand the dataset to cover services exports.
• Exchange rate misalignment and growth
• enhancing sectoral productivity in LICs.
IMF-DFID project
Growth and structural change: Macroeconomic Perspectives
• Extension of diversification work and toolkit: While the current toolkit
offers almost complete country coverage for more than 50 years, one
downside is that the toolkit only covers goods (manufacturing and
agricultural) exports. Given that trade in services has grown in importance
over the last few decades, we would like to expand the dataset to cover
services exports.
• Exchange rate misalignment and growth: An analysis of the implications of
exchange rate misalignment for medium-term growth. Many policymakers
and some academics, especially since the work of Dani Rodrik (Brookings
2008), have argued that undervalued exchange rates are critical for
sustained economic growth. If so, this may have many implications for
exchange rate assessments and Dutch disease and the role of external
resources, among other policy issues.
• Sectoral productivity: enhancing sectoral productivity in LICs.
Inclusive Growth Agenda
IMF-DFID project
Capital Flows
•
Capital Account Liberalization in low-income countries: This part of the project aims to understand
the impact of opening the capital account in LICs. To analyze the impact of capital account
liberalization, it is necessary to gain an understanding of the actual state of the openness of the
capital account. Although there are several well known indices that focus on capital account
liberalization, very few have significant coverage of LICs. In addition, those that cover LICs do not
capture the disaggregation of the capital account into various types of assets.
Gender and Macroeconomics
•
Provide the first comprehensive assessment of gender budgeting initiatives, which take a
variety of approaches to incorporating gender considerations into the government budget to
reduce gender inequalities and strengthen growth. The research would use descriptions of
the initiatives available from UN Women and elsewhere at the first stage to provide an overall
summary.
•
Develop a quantitative approach to assessing whether these gender budgeting initiatives
have been successful in their immediate objectives to influence fiscal policies, and in their
ultimate objectives to eliminate gender disparities and improve economic outcomes.
Quantify the extent to which restrictions to women’s economic rights impede sectoral shifts
and diversification, and thus growth. To do this, we will use the recent IMF-DFID dataset on
diversification. Data permitting, we will also analyze the circumstances under which
structural transformation has led to an improvement of gender equity indicators.
•
THANKS!