ISS is the international Institute of Social Studies of Erasmus University Rotterdam

STRUCTURAL TRANSFORMATION AND PRODUCTIVE EMPLOYMENT, AN

IMPERATIVE FOR AFRICA IN THE POST 2015 DEVELOPMENT AGENDA

UN-ECA, Addis Ababa, 1 July 2015

Rolph van der Hoeven ISS-EUR, The Hague

Outline • Why greater concern for Structural

Transformation and Employment ?• Current Employment Challenges • Structural Transformation • Transformation and Employment in

Africa • Space for national policies• Implications for the 2015 Development

Agenda

Employment, Poverty and the MDGs

“To slay the dragon of poverty, deliberate and determined investments in jobs above starvation wages must play a central role, whether for self-employment or paid-employment.

The grass roots approach as advocated in the MDGs to solving poverty doesn’t ’ t go far enough, because it aims only at improving the supply side of the labour market, making job seekers more capable, and not the demand side, making new jobs available for them.…

Employment generation is different from poverty alleviation because it has a concept behind it, “ capital.”

This means that the labormarket is influenced by, and influences, all flows through the savings-investment nexus, including accumulation, distribution and innovation. It is at the heart of political conflict.” (Amsden 2011 , 62)

There are many aspects of the linkage between employment and poverty. The poor can escape poverty when they have:

(a) an increase in wage employment; (b) an increase in the real wage; (c) an increase in self-employment; (d) an increase in productivity in self-employment (e) an increase in the terms of exchange of the

output (real price) of self-employment.

Poverty declines if one or the aggregate of these employment effects is favorable for the poor.

Eight Important labourmarket trends in developing countries

over the last 20 years

• Decline in the employment-to-population rate• The changing pattern in production to services• The “precarization” (casualization) of labour• Youth unemployment• Declining labour share in National Income• Growing wage inequality• The internationalization of the production process• International migration

Source : van der Hoeven ,2014

The global labour market is rather different today than 30 years ago.

Growing inequality has led to the concept of ‘working poor’: fulltime work that does not generate sufficient income to live from and to place one’s family above the poverty line

Employment and Work needs to be redefined

Definition of (decent) work The World Bank distinguishes between: “good jobs” and “bad jobs”, largely based on income criteria. The ILO uses decent work, with four vantage points: employment, labour rights, social security and social dialogue. It was the intention to construct a decent work index, but as different members of the ILO could not agree on the precise elements of an index and the measurement and weighting factors, the index was never introduced. Progress in decent work is now analysed through yearly thematic reports at the International Labour Conference.

Structural Transformation

• Structuralism : reallocation of resources (capital and labour) to sectors that offer more benefits than other sectors in terms of employment, growth, competitiveness, productivity and value added, manufacturing sector offers better benefits for the whole economy (e.g. in terms of labour absorption, productivity growth) than other sectors

• Schumpeterism : process of technological innovation through creative destruction

• Evolutionism: accumulation of knowledge and capabilities.

Ideal Structural transformation combines all three aspects

Astorga et. al 2014

Astorga et. al 2014

Transition and Structural Change in Africa

ECA, 2014

ECA, 2014

McMillan et. al 2014

“From 2000 onward, we show that structural change contributed positively to Africa’s overall growth accounting for nearly half of it. We also find that in over half of the countries in our Africa sample, structural change coincided with some expansion of the manufacturing sector (albeit the magnitudes are small) indicating that these economies may be becoming less vulnerable to commodity price shocks.

For the other regions, the results do not differ significantly across periods.”

McMillan et. al 2014

“For a sample of 19 African countries, we find that for the period 2000-2010:

•the share of the labour force engaged in agriculture declined by an average of 10.61 percentage points;•the share of the labour force engaged in manufacturing expanded by an average of 2.15 percentage points;•The share of the labour force engaged in services increased by an average of 8.23 percentage points.

Combining these data on employment shares with data on value-added, we show that for the period 2000-2010, structural change accounted for roughly half of Africa’s growth in output per worker.”

McMillan et. al 2014

“Three factors for structural change to contribute to productivity growth:1.Economies with a revealed comparative advantage in primary products are at a disadvantage2.Countries with a competitive or undervalued exchange rate experience more growth enhancing structural change3.Countries with more dynamic labour markets experience greater growth enhancing structural change”

Page and Shimeles,2014

Intersectoral or variation of productivity growth

McMillan et.al 2014

Source: Page and Shimeles 2014

Appropriate Definitions of Employment,Unemployment and Work in Africa

Page and Shimeles,2014

Grimm et. al. 2012

La Porta and Schleifa,2014

The National Policy Context

Curbing poverty through employment generation demands deliberate action. It requires coordinating the supply of and demand for labour, because labour-intensive growth is necessary but not sufficient.

Even if jobs are created, it is unlikely that the poor possess sufficient skills to take advantage of new employment opportunities.

Governments have the responsibility to encourage adequate private- sector-led labour-intensive investment and ensure that poor people have access to human capital development programmes and the skills needed by the labour market.

ECA, 2010

The National Policy Context :Challenges for Africa.

Africa will need coherent strategies and sustained reforms to address both demand-side and supply-side constraints in the labour market. Demand-side policies must focus on stimulating private-sector development and investment in labour-intensive high-value-added manufacturing and services sectors as well as modern agriculture. This requires the design and implementation of effective industrial strategies that reduce cost and improve competitiveness in a globalized market.Experience in East Asia provides a framework for African countries to design and implement successful industrial strategies that take into account their unique opportunities and constraint

ECA,2010

Employment strategies:Challenges for Africa

Employment strategies should aim at job opportunities and decent work to reduce the working poor. Doing so requires detailed macroeconomic and sectoral policies to influence labour demand and supply by promoting high and sustainable growth and introducing labour market reforms.An employment-focused growth framework is effective when it allocates public investment to infrastructure and other projects that facilitate private investment in high-productivity sectors in both urban and rural areas to facilitate broad-based growth and economic transformation. But it should also increase equity in the distribution of opportunities and income.

If the high-quality growth occurs in labour-intensive sectors, including agriculture, labour-intensive manufactures, construction, textiles, and services, the increase in employment has a positive effect on the working poor and their non-working dependants as well as on the unemployed poor in terms of higher productivity, higher incomes in existing employment or from self-employment, or shift to new and more rewarding occupations.

ECA,2010

Examples of successes in Africa

Industrialization in Mauritius was boosted by investment in export processing zones, which was initially dominated by domestic capital.

The boom in sugar and export earnings in the 1970s stimulated investment in joint ventures between domestic and foreign investors in such zones, taking advantage of promising conditions such as tax holidays and duty-free imports as well as other reforms that created an attrac- tive business climate.

Currently, Mauritius ranks high both in Africa and globally in terms of ease of doing business, and its economic transformation has benefited from an expanding tourism sector.

Examples of successes in Africa There are many examples in Africa that show that industrial policies remain relevant and can be made effective with sustained and well-targeted State intervention.

For example, Mauritius has substantially transformed its economy, moving from a nearly single-good economy based on sugar to a more diversified economy based on manufactured exports and services.

Through education and technical skills development, credit and export promotion and technology transfer strategies, the country was able to stimulate huge investment in manufacturing and other sectors and reduce dependence on agriculture to less than 7 per cent of GDP by 2008.

Economic transformation in Mauritius eventually attracted huge capital inflows and foreign investment and fostered rapid job creation.

Structural transformation should not neglect continuous attention to economic crises and economic shocks

Reactions to Economic crises

In the context of the recent global financial and economic crises, and, more generally, the high vulnerability of African economies to external shocks, there is a need to design employment-focused countercyclical interventions.

In reaction to the shock of the global contraction, an African economy suffers a fall in aggregate demand due to lower export prices and volumes.

For the countries with developed financial markets, the export shock was accompanied by net outflows of portfolio capital. In those countries for which remittances constitute a substantial portion of foreign exchange inflows, especially small countries the export decline was compounded by falls in international transfer payments.

Public Works Schemes

In sub-Saharan countries with low population densities and limited implementation capacity, governments could rely on temporary employment schemes, “cash for work.” Appropriate activities for these would be rapidly completed activities using employment-intensive techniques .The projects would make a contribution to community welfare, though their primary purpose is to increase aggregate demand through the expenditures of those directly and indirectly employed. To be effective, the employment schemes would have the following characteristics:1) identified and “stock-piled” prior to the need for them, with accounting procedures in place to reduce the likelihood of misuse of funds;2) easily initiated and quickly terminated, implying that they should be implemented by the central government in order to avoid delays due to limited administrative capacity of local governments; and3) wages and salaries are the major element of expenditure, with a low capital component.Some issues that plague public works projects with controversy need not be relevant for those, where the purpose is countercyclical.

Public Works Schemes For counter cyclical schemes wage is a secondary consideration because these are not long-term employment schemes. The appropriate wage will vary across regions, guided by the principle that the primary purpose of the projects is to increase demand quickly. This would be best achieved by hiring as many people as possible, which implies paying wages at or below prevailing rates. These programs are to be introduced when labour is in excess supply, thus making them unlikely to affect prevailing wage rates. But clear rules should be established for the initiation and termination of countercyclical projects.

A “countercyclical” expenditure that becomes permanent will distort the labourmarket and negates its purpose.

Initiation and termination should thus be triggered by a policy rule based on appropriate macroeconomic indicators and not on a political basis .

Public Works Schemes

Good results can be achieved when choices (e.g. between addressing short-term shock-induced unemployment or structural under-employment) are made explicit and reflected in design; and when arrangements are institutionalised

Infrastructure created through Ethiopia’s Safety Nets Programme (PSNP) has reduced vulnerability to drought, while providing direct support that is more helpful to vulnerable households. This is provided at lower cost than earlier emergency food aid. India has piloted an approach which guarantees each rural household up to 100 days of public works employment per year. Although effectiveness varies with state-level differences in capacity and implementation, the guarantee serves as a form of unemployment insurance and has exerted upward pressure on extremely low rural wages.

DFID, 2011

Employment policies in context of crises

A successful outcome of the employment-focused stimulus requires a careful balance between fiscal expansion and exchange rate adjustment. It would be dangerous to seek the necessary balance by trial and error.

The policy package should be based on empirical estimation of key parameters, which could be used to construct a basic simulation model.

Such a model has been constructed to guide the stimulus package implemented by the government of Sierra Leone. The fact that it was possible to construct a model for such an underdeveloped country with extremely limited statistics owing to a decade of conflict indicates that it can be done for almost all countries.

Example of an employment oriented stimulus model ( Weeks, 2010)

It is necessary to give special attention to employment during and after economic crisis because employment, human and social effects of the financial crisis will last for a while:

a deceleration or decline in GDP growth will lead to rising unemployment with a much longer duration than the deceleration or decline in GDP itself . (4.8 years, compared 1.9 years).

Also labourshares in national incomes manifest a ratchet. Labourshares decline during crises but in many cases do not return to their pre-crisis level.

Indicators for human development exhibit a similar ratchet effect. In Africa child mortality increases during growth decelerations, but hardly falls during growth accelerations.

Policy Lessons from the 2008 crisis

Rebalance Assymetry in treatment between Labour and Capital!

Goverment has been banker of last resort, should not become employer of last resort but give employmnet as much attention as it gave the banks :

Nationally • Minimum wages combined with employment guarentee

schemes• Minimum social floor • Make stimulus packages contribute to employment creation Internationally • As goverments did coordinate support to capital should now

also coordinate internationally support to labour:• Tax coordination to avoid beggar neighbour investment

40

Quote

“The consequences of mistakes in financial markets, where capital is volatile and mobile globally, far exceeds the consequences of mistakes in the labour markets, where labour is largely immobile across national lines.”

Richard Freeman (Harvard & LSE)

Employment and transformation in a post 2015 development agenda, with special relevance for Africa

2005 World Summit Outcome

The World Summit 2005 outcome document, contains a reference (paragraph 47) to employment issues: We strongly support fair globalization and resolve to make the goals of full and productive employment and decent work for all, including for women and young people, a central objective of our relevant national and international policies as well as our national development strategies, including poverty reduction strategies, as part of our efforts to achieve the Millennium Development Goals. …………

Employment as MDG Goal

Paragraph 47 in the summit outcome document led to the inclusion of a new sub-goal under MDG1 : Achieve full and productive employment and decent work for all, including women and young people with four indicators : 1 Growth rate of GDP per person employed 2 Employment-to-population ratio 3 Proportion of employed people living below $1 (PPP) per day and 4 Proportion of own-account and contributing family workers in total employment

But what are MDG’s all about ?

This remark reflects the somewhat ambivalent role the MDG’s have been and are playing in the current development discourse, namely that the MDG’s were designed to measure some important aspects of development without proscribing a concomitant development trajectory so that all countries could agree with goals without being obliged to proscribe the same policy prescriptions

Yet the MDG’s have no doubt led to a situation where those issues that were not explicitly mentioned ,like employment , received therefore less attention from the development aid community

So in that respect it has been and it is useful that full employment has been added as one of the (sub) goals of the MDG’s .

The right focus? Project versus Macro approach

A review of the MDG’s , five years after the inclusion of the (sub)goal of employment in the MDG’s , (UNDG,2010, Thematic paper on MDG1 , Eradicate Extreme Poverty and Hunger,) reports indeed on the progress or regress in employment issues globally as well as in some countries by means of a number of employment indicators .

It also gives some narratives of how certain development projects have contributed to more or better employment in individual countries. The examples mention successes of employment schemes, training schemes for entrepreneurs, training schemes for unemployed youth, improved collective bargaining etc.

However looking at the different examples chosen, it is not yet clear how development aid contributes to more and or better employment in general. Absent is a full macro analysis of total volumes of aid on growth and volume and structure of employment.

Some attempts are made but this is the biggest challenge.

Page and Shimeles, 2014

Macro Approach: Foreign resources, Structural Change, Growth and

Employment We need to look at various employment effects of Foreign resources on •increasing demand in situations of under capacity and thus effecting employment,• the Dutch disease in changing the balance between trade-ables and nontrade-ables and the consequences for employment,•increasing infrastructure and thus removing bottlenecks of production in order to create more employment ,•making capital more productive , with an ambivalent effect on quality and quantity of employment ,•increasing education and hence human capital ,• the effect of aid on health issues so as to make work more productive ,• the effects of aid on social security to make workers more productive and willing to adjust etc.

Employment in the post 2015 development agenda

In discussing national policies for employment creation, it is important to distinguish between short-term (macroeconomic) policies and longer-term structural policies. The first should strive for full capacity utilization, so that all productive forces, including labor, can be fully engaged in the production process.The second should strive for an expansion of capacity and in the employment content of growth, to the extent that increasing the employment content of growth does not jeopardize growth itself (or at least not to the extent that the economy arrives at a declining growth and employment trajectory).  

Global Governance and policy coherence for Employment

Although the Millennium Declaration had a paragraph on strengthening the role of the United Nations and on improved global governance in general, the MDGs did not contain explicit references to global governance, except some vague references in MDG8.

An important element of an improved global governance system is better policy coherence in areas of employment, economic, social and environmental policies at the national and international level.

(van der Hoeven, 2014)

Ocampo and Stiglitz (2011) suggest using the increased acknowledgment for improved policy coherence and momentum of support for a body like the G20 to strive for a Global Economic Coordination Council (GECC) which would have more global political legitimacy.

A GECC would be an ideal forum to foster the necessary policy coherence for a post-2015 framework of development.

Financing for Development not only about price tags for SDGs

Fundamental changes needed in International financial system.1.Less volatile, less need for costly foreign reserves which then can be used for investment.2.No illicit tax and other outflows. 3.Sovereign Debt Reduction Mechanism.

Literature Amsden, A. 2011. “Say’s law, Poverty Persistence, and Employment Neglect.” Employment, Inequality and Globalization: A Continuous Concern, edited by R. van der Hoeven. London: Routledge.

Astorga et al.,2014,The role of Industrial and exchange rate policies in promoting structural change ,productivity and employment, in J.M. Salazar et.al. Transforming Economies, Geneva, ILO

Bergeijk, P., A. de Haan and R. van der Hoeven,2012, The financial crisis and developing countries, Cheltenham, Edward Elgar

DFID,2011,Cash Transfers: Evidence Paper , London ECA, 2010, Promoting High-level Sustainable Growth To Reduce Unemployment In Africa Addis Ababa

ECA,2014, Dynamic Industrial Policy in Africa, Addis Ababa

Grimm, M. et. al, 2012, Constrained Gazelles: High Potentials in West Africa's Informal Economy,  World Development 40(7) 

Martins, P., and P. Lucci. 2013. Recasting MDG 8: Global Policies for Inclusive Growth. London: ODI

McMillan and Rodrik,2014, Globalization, Structural Change, and Productivity Growth,with an Update on Africa, World Development Vol. 63,

Van der Hoeven, R., 2014, Full Employment Target: What Lessons for a Post-2015 Development Agenda? Journal of Human Development and Capabilities, DOI: 10.1080/19452829.2014.883370

Ocampo, J. A., and J. Stiglitz. 2011. From the G20 to a Global Economic Coordination Council. New York: Columbia University

Page, J. and A. Shimeles,2014, Aid, employment, and poverty reduction in Africa, WIDER 2014/043, Helsinki

La Porta, R. and Shleifer, A.,2014, Informality and development , Journal of Economic Perspectives 28(3):

Weeks, J.,2010, Policies Options for Reducing Unemployment and Mitigating the Social Impact of the Global Financial Crisis ECA , Addis Ababa.