Jan Kregel 

Global Crisis and the Imperative for Job Creation:

A Development Perspective

EMPLOYMENT GUARANTEE POLICIES: RESPONDING TO THE CURRENT ECONOMIC CRISIS AND CONTRIBUTING TO LONG

-TERM DEVELOPMENT A COLLABORATIVE PROJECT OF THE UNITED NATIONS DEVELOPMENT PROGRAMME,

REGIONAL BUREAU FOR LATIN AMERICA AND THE CARIBBEAN (RBLAC) AND THE BUREAU FOR DEVELOPMENT POLICY (BDP),

IN PARTNERSHIP WITH THE LEVY ECONOMICS INSTITUTE

22 June 2009

Developing Country Experience during the Dot-Com and Sub-Prime Bubbles

•  Exceptionally Positive Performance – Rising growth rates – Low, stable inflation rates –  Improved external (surplus) balances –  Improving debt burdens – Rising FDI Inflows (primarily in emerging

market economies) – Rising employment levels

2

3

        

-2

0

2

4

6

8

10

12

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

Annual Rate of change

GDP Constant Prices 1992-2008 Emerging and developing economies Africa Africa: Sub-Sahara Western Hemisphere Developing Asia

0

50

100

150

200

250

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008 Annual Rate of Consumer Price Inflation

Emerging and developing economies Africa

Africa: Sub-Sahara Western Hemisphere

Developing Asia

5 -10

-5

0

5

10

15

20

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Terms of Trade: Goods Emerging and developing economies

Africa

Africa: Sub-Sahara

Developing Asia

Western Hemisphere

-6

-4

-2

0

2

4

6

8

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008 Current Account Balance % GDP

Emerging and developing economies Africa

Africa: Sub-Sahara Western Hemisphere

Developing Asia

0

10

20

30

40

50

60

70

80

90

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008 Total External Debt, Percent of GDP

Emerging and developing economies

Africa

Africa: Sub-Sahara

Western Hemisphere

Developing Asia

-100

0

100

200

300

400

500

600

700

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008 Net Private Capital Flows ($ billions)

Emerging and developing economies

Africa

Western Hemisphere

Developing Asia

Emerging Markets BRICs were especially fortunate

9

-5

0

5

10

15

20

25

-1

0

1

2

3

4

5

6

7

S&P 500 INDEX

IBOVESPA INDEX

BSE SENSEX

SSE Composite Index

RTSI

US,

Chi

na, I

ndia

, Bra

zil %

C

hang

e OnlyRussia%

Change

10

-20

0

20

40

60

80

100

120

140

Estimated assets

Net asset flows

Emerging Market Hedge Funds: Estimated Assets and Net Asset Flows (In billions of U.S. dollars)

11

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

6%

1980 1985 1990 1995 2000 2005 2010

Private capital flows, net

Direct investment, net

Private portfolio flows, net

Other private capital flows, net

In p

erce

nt o

f GD

P Emerging Market Net Private Capital Flows

12

-200,000

0

200,000

400,000

600,000

800,000

1,000,000

2003 2004 2005 2006 2007 2008e 2009f

Private flows, net Commercial banks, net

External Financing for Emerging Market Economies U

S$ b

illio

n

What caused this good performance? •  Washington Consensus Policies? •  Or deregulated developed country financial systems?

–  Private Equity Funds – driving shareholder value •  Outsourcing of production and employment •  Rising foreign direct investment

–  Rising US household mortgage debt •  Rising demand for developing country exports

–  Commodity Index Funds + Speculation •  Rising Commodity Prices •  Improved developing country terms of trade

–  Rising energy prices •  Most developing countries are now petroleum producers •  Investment in biofuels also improved soft commodity prices

–  Interest Arbitrage – carry trade •  Short-term capital flows to emerging markets •  Lower interest rates / lower risk spreads – lower debt service

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Is this pattern likely to continue?

•  The Bubble turned developing countries to export-led growth dependent on primary commodity exports and semi-manufactured processed goods

•  Large external surpluses = Large global imbalances

•  US demand made trade the engine of global growth

•  US Financial System financed the growth of global demand

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Global Response to Crisis •  Global stimulus packages to offset decline

– Need Coordinated response – Surplus countries should lead to avoid aggravating

global imbalances – But Europe declines coordination or additional

stimulus – Only Japan and China have major stimulus – Most developing countries do not have financial

resources •  IMF will not approve financing for stimulus

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In absence of Global �Coordinated Response

•  US will adjust – Households will delever

•  Higher savings rates, •  lower demand for imports

– Financial institututions will delever •  Reduced foreign investment •  Reduced outsourcing •  Reduced foreign financing

– Global trade and finance will contract – Developing countries will again face external

constraints – IMF conditionality returns 16

What stimulus Response? •  Hydraulic Keynesian deficit spending

– Financial Bailouts •  little impact on incomes •  impact of balance sheets

– Government expenditures •  take time to implement •  are politically sensitive

– Are designed for cyclical downturns •  Designed to reduce excess capacity •  Not to make redundant capacity profitable

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Is there an alternative stimulus policy?

•  Roosevelt example –  increase incomes and employment directly

•  TERA used by Roosevelt when Governor of NY •  CCC, FERA, PWA-WPA

•  Argentina example •  First used by Duhalde as Intendente of Lomas Zamorra

– 1980s •  Jefes de Hogares after the crisis

•  Keynes’s example – Targetted sectoral demand

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Federal Emergency Relief Administration -- Hopkins

– Direct grants to States (with 3:1 matching) – Hired unemployed teachers

•  to teach adults literacy •  to provide vocational training •  to provide rural schooling

–  Jobs to students in laboratories, libraries and museums

– Rural rehabilitation -- seed fertilizer and live stock to provide self-sufficiency

– Non-farm family subsistence gardens – School lunches provided by women on work

relief 19

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Keynes’s concerns

•  With unemployment over 10% “We are more in need today of a rightly distributed

demand than of a greater aggregate demand” •  Facing a collapse in major export industries:

unemployment was in iron, shipbuilding, coal •  Replacing foreign demand to support these

industries would maintain excess capacity and create inflation

•  Better use demand to make transition to new industries 21

For emerging market developing countries

•  Facing loss of export-led growth : New National Development Strategy –  Use external surplus to support domestic demand-led growth –  This is not easy – example of Japan

•  How employment guarantee can help resolve this problem –  It can reduce domestic saving – income security –  It can reduce reliance on exports – sector programs – example of

Brazil’s Medium Term Plan –  It can reduce reliance on investment – financial stability of

consumption led domestic growth

•  Employment Guarantee can also alleviate inflation threat: Training – buffer stock

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For Least Developed Countries •  A suitably designed ELR programme to provide

employment can also be designed to satisfy: –  MDG Goal 1: Eradicate Extreme Hunger and Poverty –  MDG Goal 2: Universal Primary Education –  MDG Goal 3: Promote Gender Equality and Empower

Women –  MDG 4 and 5: Reduce Child Mortality and Improve

Maternal Health

23

Employment Guarantee •  Crucial Component of

– Stimulus policy – Anti-inflation policy – National development strategy – MDG policy

•  Emergency or Structural Policy? – Antecedents precede crisis – Provides structural support to labour market

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Annex:Major Groupings –IMF WEO Statistics

Western Hemisphere Antigua and Barbuda Argentina�

Bahamas, the�Barbados�Belize�Bolivia�Brazil�Chile�Colombia�Costa Rica�Dominica

Dominican Republic�Ecuador�El Salvador�Grenada�Guatemala�Guyana�Haiti�Honduras�Jamaica�Mexico�Nicaragua�Panama

Paraguay�Peru�St. Kitts and Nevis�St. Lucia�St. Vincent and the Grenadines�Suriname�Trinidad and Tobago�Uruguay�Venezuela, Rep. Boliv. de

Developing Asia Afghanistan, Rep. of2�Bangladesh�Bhutan�Brunei Darussalam2�Cambodia�China�Fiji�India�Indonesia�Kiribati�Lao PDR�Malaysia�Maldives Myanmar�Nepal�Pakistan�Papua New Guinea�Philippines�Samoa�Solomon Islands�Sri Lanka�Thailand�Timor-Leste, Dem. Rep. of2 �Tonga�Vanuatu�Vietnam •  2Because of insufficient data, this country is not included in the

WEO aggregates.

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Thank you