Pattern of growth and employment - PowerPoint PPT Presentation

Pattern of growth and employment

A case study of Argentina

UMKC, May 2006

• Which sectors explain the overall growth
• How do they generate employment
• How much they contribute to overall growth
• How do they affect other macro indicators

• Decomposes growth in three components:
• Domestic demand
• Import substitution
• Export lead growth
• Source: Taylor L. and R. Vos [2000] Balance of Payments Liberalization in Latin America: Effects on Growth, Distribution and Poverty UNDP

• X=GDP
• D=C+I+G+M (domestic demand)
• S=aggregate supply (local production plus X+Mcif)
• E= exports FOB
• a=PBI/S

GDP 96 8,328.9

Exp 05 1193

Exp 96 843.4

Imp 05 1825.2

Imp 96 923

Employment 05: 141.7

Employment 96: 126.7

Unemp. 96: 7,236

Unemp. 05: 7,591

Contribution to growth

DD 2762.52 (110%)

ISI -542.71 (-22%)

Exp 288.68 (12%)

GDP growth: 30%

Emp. Growth: 11.9%

Employment/Growth elasticity: 0.39

The example of the US 2005-1998

• GDP 05 11,131
• GDP 98 8747
• Exp 05 1193
• Exp 98 955.5
• Imp 05 1825.2
• Imp 98 1115.0
• Employment 05: 141.7
• Employment 98: 137.6
• Unemp. 98: 6,210
• Unemp. 05: 7,591

• Contribution to growth
• DD 2,303 (105%)
• ISI -310.76 (-14%)
• Exp 192.70 (9%)
• GDP growth: 27.3%
• Emp. Growth: 2.3%
• Employment/Growth elasticity: 0.108

• Using the I-O matrix and the open Leontieff model 5 scenarios were simulated
• Overall GDP growth target 4%
• Each sector increases value added in 2%
• The leading sectors of the strategy have to grow in order to achieve the overall 4%
• Benchmark scenario: all sectors 4% employment index 100

• 1: Massive consumption
• 2: Conspicuous consumption
• 3: Traditional exports
• 4: Non traditional exports
• 5: Construction (housing and infrastructure)

• Industries involved = 31
• of VA in those industries = 5,5%
• of consumption= 6,6% - in total 4,6%
• Rise of imports = 2,3%
• Rise of employment in the involved industries 5,5% - total 4.0%
• Index of job creation = 109,0

• Industries involved = 10
• Rise of VA in those industries = 9,5%
• Rise of consumption= 11,5% - in total 4,5%
• Rise of imports = 7,3%
• Rise of employment in the involved industries 10.1% - total 3.8%
• Index of job creation = 102,4

• Industries involved = 16
• Rise of VA in those industries = 11,2%
• Rise of exports in the sector 23% - total 12.4%
• Rise of imports = 2.6%
• Rise of employment in the involved industries 9.2% - total 3.5%
• Index of job creation = 95,3

• Industries involved = 31
• Rise of VA in those industries = 9,2%
• Rise of exports in the sector 60% - total 14.8%
• Rise of imports = 3.1%
• Rise of employment in the involved industries 7.8% - total 3.5%
• Index of job creation = 95,2

• Industries involved = 1
• Rise of VA in those industries = 10,2%
• Rise of investment= 11,0% - in total 9,5%
• Rise of imports = 2.4%
• Rise of employment in the involved industries 10.2% - total 3.9%
• Index of job creation = 106.6

Results

E 1

E 2

E 3

E 4

E 5

# of sectors involved in the strategy

31

10

16

31

1

Yearly increase on the component involved

6.6%

11.5%

23.0%

60.0%

11.0%

Job creation per year %

4.0%

3.8%

3.5%

3.5%

3.9%

Index of job creation. Base homogeneous 4%=100

109.0

102.4

95.3

95.2

106.6

Employment multiplyier

1.46

1.48

1.63

1.62

1.52

Exchange rate and employment

From Frenkel, R. and L. Taylor [2006]

Real exchange rate, monetary policy and employment. DESA working paper No. 19

• Macroeconomic channel
• RER determines levels of economic activity and employment in the short run
• Development channel
• RER affects economic growth and the speed of job offerings
• Labor intensity channel
• RER defines the labor content in economic processes

• Depreciated RER increases net exports (X-M) increasing the competitiveness of local firms
• This does not necessarily implies export lead growth, but also import substitution
• Consequently, higher demand for local activities with higher gdp and employment
• These effects depend on the economic and social structure of the country
• This channel operates when there is excess capacity and unemployment
• These effects must offset the contractionary effects of devaluations stated by Krugman and Taylor 1979

• High RER is similar to a proactive industrial policy
• As long as it does not affect strategic investment
• Domestic industrial production bias
• This works better in the framework of globalization and free trade
• Rodrik (2003) Competitive RER generates initial conditions for a growth process and the appropriate institutions for that process in the long run.
• It is an easy instrument that can be applied overnight
• An externally oriented economy generates the learning process necessary to develop businesses
• The main problem can be the financial deregulation

• RER induces the tradable sector, mainly goods production
• But induces a technological choice with more labor content and less imported capital and inputs
• Goods production have more linkages with other sectors
• Goods production tend to operate in non competitive markets (Rima) with oligopolistic structures, while services in competitive markets

Credit and employment in Argentina (source: Filippo, Kostzer and Schlesser 2004)

Credit rationing with unlimited supply of money

DANIEL KOSTZER

UMKC April 2006

• How did we started with the research
• Study of the relationship between loans to firms and employment
• Development of the Argentinean banking system
• Stylized facts and aspects of the mechanics behind the financial sector
• Microeconomic rationality of agents
• The role of the state in this context
• Is there any novelty to contribute to PK theory of credit?

• Currency board => convertibility
• Central bank passive actor
• International banks as lenders of last resort
• Trans-national banks
• Banks to finance firms to…
• Banks to finance … banks

FIRM BEHAVIOUR

• Finance new fixed investment with retained profits
• Working capital has two sources
• Inputs: suppliers credit
• Wages: over drafting and collaterals
• Inventories evolution define the short run productive requirements

BANK BEHAVIOUR

• They had no limitations in order to get the money for loans
• Inflows plus deposits
• The are price takers for deposits and price setters for loans
• Validate productive projects in relation to the macro assessments with inventories as collateral

• Expansionary phase with joint growth of employment and loans
• Stagnation of employment with inertia of loans
• Stagnation of loans with employment redution
• Contraction of both loans and employment

• Inertia of loans at the beginning of the crisis
• The misalignment between the rise of loans and the rise of production/employment shows a “short-circuit” in the process of capital reproduction
• How can if employment stagnates loans continue rising? (other uses)
• This process anticipates a future decline in GDP, loans and employment (recessive spiral)

Induced crowding out ?

• Crowding out induced by banks
• Do not affect private loans
• Private loans are redirected to consumption and to the state
• The state is not responsible of the reallocation of loans and the crisis

• Since there are almost no restrictions to bring money into the economy, supply is always there.
• Since there is no crowding out, there is no excess demand for loans
• Total assets growth all the time
• The rise of non-performing loans increases interest rate (Credit Rationing?)
• Customers that yesterday had loans they do not today => excess supply of loans

• Investment needs concrete incentives, based on sales and aggregate demand
• Financial investment and savings do not imply productive investment nor economic growth
• Reduction on public expenditures do not correct the problems. ¡¡¡!!!???

• Our main hypothesis that loans are a function of employment and aggregate demands seems to be valid
• Financial savings (money in the banks) is not sufficient condition for economic growth
• Does not matter who is the lender of last result

• Against the general wisdom, credit rationing only accelerated the crisis
• State expenditures did not displaced firms from credit market, they were already out
• Orthodox adjustment is based on a wrong diagnosis (less G does not imply less interest rate)
• Real variables were affected before financial variables