Economic &
UNITED NATIONS
Social Affairs
The Twin Challenges
of Reducing Poverty
and Creating Employment
ST/ESA/342
Division for Social Policy and Development
Department of Economic and Social Afairs
he Twin Challenges
of Reducing Poverty
and Creating Employment
This publication is based on presentations made at two Expert Group
Meetings on “Poverty Eradication” and “The Challenge of Building
Employment for a Sustainable Recovery” which were organized by
the Division for Social Policy and Development of the Department
of Economic and Social Affairs of the United Nations (UN/DESA)
in collaboration with the International Labour Organization (ILO) in
Geneva, Switzerland in June 2011.
United Nations
New York, 2013
Department of Economic and Social Afairs
The Department of Economic and Social Affairs of the United Nations Secretariat is
a vital interface between global policies in the economic, social and environmental
spheres and national action. The Department works in three main interlinked
areas: (i) it compiles, generates and analyses a wide range of economic, social
and environmental data and information on which States Members of the United
Nations draw to review common problems and to take stock of policy options; (ii)
it facilitates the negotiations of Member States in many intergovernmental bodies
on joint courses of action to address ongoing or emerging global challenges;
and (iii) it advises interested Governments on the ways and means of translation
policy frameworks developed in United Nations conferences and summits into
programmes at the country level and, through technical assistance, helps build
national capacities.
Notes
The views expressed in the present publication are those of the authors and
do not imply the expression of any opinion on the part of the Secretariat
of the United Nations, particularly concerning the legal status of any
country, territory, city or area or of its authorities, or concerning the
delimitation of its frontiers or boundaries. The assignment of countries
or areas to speciic groupings is for analytical convenience and does not
imply any assumption regarding political or other afiliation of countries
or territories by the United Nations. The designations “developed” and
“developing” are intended for statistical and analytical convenience and
do not necessarily express a judgement about the stage reached by a
particular country or area in the development process.
ST/ESA/342
United Nations publication
Copyright © United Nations, 2013
All rights reserved
This publication is available for download at: http://www.un.org/esa/
socdev/documents/employment/twinchallenges.pdf
5
Preface
The fallout of the global inancial and economic crisis, on the heels of a rapid
rise in food and fuel prices, slowed down global progress in poverty eradication
and led to a severe jobs crisis. In June 2011, the Division for Social Policy and
Development of the Department of Economic and Social Affairs of the United
Nations (UN/DESA), in collaboration with the International Labour Organization
(ILO), organized two Expert Group Meetings, on “Poverty Eradication” and “The
Challenge of Building Employment for a Sustainable Recovery”, in Geneva,
Switzerland. The meetings brought together specialists to undertake a review of
progress in eradicating poverty and to analyse policy responses to the global jobs
crisis in different countries and regions of the world. This volume includes some
of the papers presented at the Experts Group Meetings.
The articles in the present book make an important contribution to efforts to
analyse the impact of various policies on poverty eradication and employment
creation. These policies range from making sustained investments in the
social sectors (education, health and social protection), in agriculture and in
strengthening the role of the State in development. The goal of generating full
employment and decent work opportunities for all requires a reorientation of
macroeconomic policies from the current heavy emphasis on short-term stability
to the promotion of sustained, inclusive and equitable growth. Overall, the volume
emphasizes the need to rethink public policy, beyond poverty reduction strategies
and labour market programmes, and to reorient macroeconomic policy towards
the reduction of poverty and employment creation. It stresses the need for the
integration of social and economic policies to enable the attainment of peoplecentred development outcomes.
Special thanks go to Bibi S. Khan and Julie Pewitt, who worked diligently
with Amson Sibanda (Part I) and Marta Roig (Part II) to substantially edit the
chapters of this volume, to Donald Lee for his leadership during the Expert
Group Meetings and to Jomo Kwame Sundaram for his guidance. DESA would
also like to thank José Manuel Salazar-Xirinachs and his team at the ILO for
their contributions. This book would also not have been possible without the
excellent contribution of all of the experts who participated in the two Expert
Group Meetings, and the ongoing cooperation of the authors of the chapters of
this publication.
Daniela Bas, Director,
Division for Social Policy and Development, UN/DESA,
New York, December 2013
7
CONTENTS
Page
Preface
5
Contributors
12
Introduction
15
- Donald Lee, Marta Roig and Amson Sibanda
Part I:
Poverty eradication
21
Chapter 1.
Poverty maters - Jomo Kwame Sundaram
23
Chapter 2.
Educaion and the roles of the State and the market
in poverty eradicaion - Minquan Liu
37
Chapter 3.
55
Governance, development and poverty eradicaion - Goran Hyden
Chapter 4.
Agriculture, rural livelihoods and poverty eradicaion: some
policy lessons from the food price crises - Beina Prato
69
Chapter 5.
Sustaining efecive ani-poverty programmes beyond
transformaion: challenges and way forward - Julian May
87
Part II:
The challenge of building employment
for a sustainable recovery
103
Chapter 6.
Employment maters - Jomo Kwame Sundaram
105
8
Chapter 7.
Macroeconomic policy ater the global recession of 2008-2009: a
development perspecive - Iyanatul Islam
123
Chapter 8.
The distribuional efects of iscal austerity - Laurence Ball,
Davide Furceri, Daniel Leigh and Prakash Loungani
141
Chapter 9.
Achieving full, producive and freely chosen employment for
young people - Steven Miller
159
Chapter 10.
Financing social and labour market policies in imes of crisis
and beyond - Katja Hujo
175
Chapter 11.
Crisis-driven labour market programmes: the experience of
Lain America and the Caribbean - Jacqueline Mazza and Danilo
Fernandes Lima da Silva
199
Chapter 12.
Employment challenges in the Middle East and
North Africa - Azita Berar
215
List of tables
Table 9.1
Youth share of working age populaion
163
Table 10.1
Mobilizing revenues—iming and condiions
181
Table 10.2
Labour market policies and potenial funding sources
187
Table 10.3
Social policy and labour market responses to the crisis, selected
countries (2008-2010)
187
Table 12.1
Employment-to-populaion rate by gender
221
9
Table 12.2
Youth labour force paricipaion rates, 2000, 2010 and 2015
221
Table 12.3
Youth employment, several indicators, 2000, 2008 and 2011,
and adult employment-to-populaion raio
221
Table 12.4
Unemployment rate by gender
224
Table 12.5
Annual real GDP growth rates, selected countries
226
Table 12.6
Trends in producivity and wages, selected countries
227
List of igures
Figure 1.1
Global and regional trends in extreme poverty, 1981-2010
24
Figure 1.2
Changing regional shares in extreme poverty, 1981-2010
25
Figure 2.1
A two-sector long-run model of labour markets for skilled
and unskilled labour
42
Figure 3.1
Types of poverty manifestaions depending on
governance context
62
Figure 7.1
The “iscal diamond”
129
Figure 7.2
Public investment in LDCs, Africa and Asia, 1970-2008
130
Figure 8.1
Gini coeicient in advanced economies
144
Figure 8.2
Cumulaive change in the Gini coeicient before and ater
consolidaion measures
146
10
Figure 8.3
The efects of iscal consolidaion on inequality
146
Figure 8.4
150
The efects of iscal consolidaion on inequality—robustness check
for diferent sets of controls
Figure 8.5
152
The efects of iscal consolidaion on inequality—robustness check
for diferent lags
Figure 8.6
The efects of iscal consolidaion on inequality—spending versus
based measures
154
Figure 8.7
The efects of iscal consolidaion on wage income
156
Figure 10.1
Fiscal simulus plans
176
Figure 10.2
Fiscal transmission channels
179
Figure 10.3
Revenue type, distribuion and social relaions
185
Figure 10.4
Lain America and the Caribbean: Coverage of CCT and
related public expenditure
191
Figure 12.1
Total populaion in MENA, 1950–2100 (millions)
216
Figure 12.2
Labour force, 1980-2020 (millions)
218
Figure 12.3
Gender gap in labour force paricipaion, 2000 and 2010
218
Figure 12.4
Youth unemployment rate by region, 1991-2012
222
Figure 12.5
Youth unemployment rate by gender, 2000 and 2008-2010
223
11
Figure 12.6
Unemployment rate by gender, selected countries,
latest year available (percentage)
223
Figure 12.7
Working poverty at US$ 2 a day, share in total employment
228
Figure 12.8
Working poverty at US$ 1.25 a day, share in total employment
228
Figure 12.9
Labour producivity—output per worker
(constant 2005 internaional dollars), 1999-2012
229
Figure 12.10
Employment by sector, selected countries (percentage)
229
Figure 12.11
Employment share by sector in the Middle East
230
Figure 12.2
Employment share by sector in North Africa
230
Figure 12.13
Declining wage growth in Algeria and Egypt
233
List of boxes
Box 7.1
Financing the Millennium Development Goals and
the Social Protecion Floor
131
Box 7.2
The relaionship between debt relief and iscal space in LDCs
133
Box 7.3
Malawi: The exchange rate regime and its implicaions for
growth and employment
135
Box 11.1
Adaping unemployment insurance: Brazil, Chile and Uruguay
206
Box 11.2
209
Mexico’s fast-response “Preservaion of Employment” programme
becomes permanent to serve diferent types of crises
12
Contributors
Laurence Ball
Johns Hopkins University
Azita Berar
Director, Employment Policy Department, Internaional Labour
Organizaion
Danilo Fernandes Lima da Silva
Inter-American Development Bank
Davide Furceri
Internaional Monetary Fund
Katja Hujo
United Naions Research Insitute for Social Development
Goran Hyden
University of Florida
Iyanatul Islam
Chief, Country Employment Policy Unit, Employment Policy
Department, Internaional Labour Organizaion
Jomo Kwame Sundaram
Assistant Director-General for Economic and Social
Development, Food and Agricultural Organizaion of the United
Naions
Donald Lee
Former Chief, Social Perspecive on Development Branch,
Division for Social Policy and Development, Department of
Economic and Social Afairs, United Naions
Minquan Liu
Centre for Human and Economic Development Studies, Peking
University, and Asian Development Bank Insitute
13
Daniel Leigh
Internaional Monetary Fund
Prakash Loungani
Internaional Monetary Fund
Julian May
Insitute for Social Development, University of the Western Cape
Jacqueline Mazza
Inter-American Development Bank
Steven Miller
Internaional Labour Organizaion
Beina Prato
Research Coordinator, Oice of the Chief Development
Strategist, Internaional Fund for Agricultural Development
Marta Roig
Division for Social Policy and Development, Department of
Economic and Social Afairs, United Naions
Amson Sibanda
Division for Social Policy and Development, Department of
Economic and Social Afairs, United Naions
14 •
he Twin Challenges of Reducing Poverty and Creating Employment
15
Introduction
DonalD lee, Marta roig anD aMson sibanDa
The experience of countries that have succeeded in reducing poverty signiicantly
point to the important role of high rates of economic growth combined with high
rates of employment growth. High rates of economic growth on their own are
insuficient to guarantee that poverty reduction will occur unless the beneits
of economic growth are more equitably distributed. The creation of productive
employment plays a key role in this regard as a critical nexus between growth and
poverty reduction.
However, the challenge of achieving rapid economic growth in combination
with high rates of employment generation has become more daunting in the
aftermath of the Great Recession and the ongoing debt crisis in the eurozone area.
The initial commitment by the leaders of the major economies to avert a deeper
recession through coordinated iscal stimulus packages has been overtaken by an
increasing preoccupation with high levels of government debt and a shift towards
iscal austerity. This situation has engendered greater uncertainty about the ability
of many troubled countries to achieve more robust economic growth, let alone
expand opportunities for productive employment or reduce worsening income
inequality. Besides putting jobs recovery at risk in many countries, the effects
of the Great Recession and the huge public debt overhang in some advanced
economies have also been transmitted to developing countries through channels
such as trade, foreign direct investment (FDI) and remittance lows. The marked
shift towards iscal austerity has constrained the policy space available to most
countries to prioritize economic recovery through increased government spending
and in the process, aggressively tackle the jobless trap faced by the long-term
unemployed and young people.
It is against this background that two expert group meetings, on the subjects
of poverty and employment, respectively, were organized in collaboration with the
International Labour Organization (ILO) in mid-2011, from which the chapters in
this collection were drawn. The chapters in this volume are organized into two
sections: The chapters in Part I are primarily focused on poverty issues, while the
chapters in Part II primarily address employment-related issues.
16 •
he Twin Challenges of Reducing Poverty and Creating Employment
The irst chapter in Part I, by Jomo Kwame Sundaram, reviews recent global
poverty trends and highlights key issues in the current poverty debate. The author
makes the case for a fundamental rethinking of poverty, including how poverty is
measured, in order to determine the most useful and effective policy approaches to
poverty reduction. Citing the mixed record of poverty reduction efforts around the
world, he questions the wisdom of conventional approaches that favour economic
liberalization policies accompanied by targeted safety nets and services. The
chapter makes the case for a more balanced and inclusive strategy for poverty
reduction which has at its core macroeconomic policies focused on achieving
stability in real output, incomes and employment. Such a strategy would include
universal social policies that address the determinants of asset and income
inequality as well as poverty, the implementation of a social protection loor, and
the promotion of participation, inclusion and voice of poor people.
The chapter by Minquan Liu turns to the process of development and
examines the critical role education plays in poverty eradication. The author
argues that human capital accumulation, in particular education, is at the core of
development not only because it provides a self-sustaining force for development,
as experience from East Asia shows, but also because it is considered one of the
fundamental goals that development should really be about. He proposes that a
long-run strategy to eradicate poverty should focus on education and development,
with attention to more immediate priorities in the short term. He believes that
such a human capital accumulation–centred development strategy should not be
driven entirely by market forces. The chapter goes on to examine the relationship
between income inequality, economic growth and poverty, and the respective
roles of the State and the market in eradicating poverty. The chapter concludes
that the role of the State in the market for education is important in order to ensure
full and successful development.
The chapter by Goran Hyden explores the relationship between governance,
development and poverty eradication in order to uncover lessons learned and
new policy considerations. His chapter attempts to avoid a shortcoming of the
international policy discourse which tends to equate development with poverty
reduction or poverty eradication. The author argues that as our understanding
of governance, development and poverty reduction has changed over time, it is
also necessary to review the approaches to poverty reduction that are adopted by
both donors and recipients. He explores how policies can be made more effective,
given these shifts in understanding, by bringing governance to bear on poverty
reduction for both donors and recipient countries. The chapter then proceeds to
identify the more important lessons learned for understanding and dealing with
the governance–development nexus in relation to eradicating or reducing poverty.
It ends by discussing new policy options for the future.
The chapter by Bettina Prato points to the renewed focus on the role of
agricultural development as a driver of inclusive growth and poverty reduction,
and the increasing recognition of the potential for agriculture to contribute to food
Introduction
• 17
security and nutrition, and climate change mitigation. However, in spite of this
renewed focus on agriculture, there is underinvestment in the sector, and agriculture
is becoming increasingly incapable of providing a suficient, stable income source
for poor farming households in the developing world. The author believes that the
recent series of global food crises provide important policy lessons about how to
better tackle rural poverty. These crises highlight the vulnerability of poor rural
people’s livelihoods to food price volatility and shocks, as well as the importance
of food security and adequate nutrition. The chapter stresses the importance of
appropriate policy initiatives that focus on strengthening poor rural people’s
capabilities as well as facilitating the creation of opportunities. The author argues
that poor rural people should not be perceived merely as victims of the price crises
but also as active partners who can play an important role in inding a solution to
the global imbalances that triggered the crises, by opening up new opportunities
for inclusive rural growth and poverty eradication.
Julian May looks at the challenges facing South Africa’s efforts to sustain
effective anti-poverty programmes beyond the political transformation and
economic reforms that have been achieved. Despite being one of the 30 largest
economies in the world in terms of gross domestic product (GDP), South Africa
is home to the ifth-largest poor population in sub-Saharan Africa. While the
author is hopeful that many countries in Africa may see a long-term reduction
in structural poverty, he points to two areas of concern. First, there are deep
pockets of poverty in many parts of Africa that are not being adequately reached
by government policy and which have little chance of beneiting from Africa’s
wealth or the redistributive policies of its Governments. The second concern is
that the economies of many African economies remain ineficient in terms of
their ability to translate economic growth into sustained poverty reduction and
prosperity for their populations.
Part II turns to the chapters focused on employment-related issues. It starts
with the chapter by Jomo Kwame Sundaram, which provides a critical overview of
the current global employment situation and the way policy choices have shaped
the outlook for employment creation and poverty reduction. He argues strongly
that, in general, employment policies should be an integral component of a broad,
coherent and consistently countercyclical macroeconomic strategy for sustainable
development, and points out the crucial role of full and decent employment for
the irst Millennium Development Goal of reducing poverty by half by 2015. The
author reminds us that the policy responses to the Great Recession have done
little to address high, if not growing, unemployment in developed countries,
and challenges the current preoccupation of policymakers in most advanced
countries with reducing iscal deicits and public debt in the hope of inspiring
market conidence. The chapter concludes with a set of policy recommendations
to improve macroeconomic and labour market responses to the continuing effects
of the Great Recession.
In the next chapter, Iyanatul Islam questions the usefulness of the standard
18 •
he Twin Challenges of Reducing Poverty and Creating Employment
macroeconomic framework and proposes modiications that would make it
more development friendly. He points out that much rethinking of the standard
macroeconomic framework that emerged in the wake of the global recession
of 2008-2009 has been overshadowed by the ascendancy of the iscal austerity
agenda, particularly in the European Union. He notes that developing countries are
still preoccupied with iscal consolidation and inlation control and less focused
on poverty reduction, employment creation and social protection. The chapter
proposes the adoption of a “dual mandate” in which macroeconomic policy
managers act as both guardians of stability and active agents of development.
Policies for price stability should be sensitive to country-speciic growthinlation trade-offs, take account of food price inlation and promote inancial
inclusion. The chapter also argues for iscal policy that is less focused on attaining
predetermined targets for debts and deicits and that aims at restoring growth and
employment in times of crisis and at sustainably increasing revenue to meet core
development goals.
The joint chapter by Laurence Ball, Davide Furceri, Daniel Leigh and
Prakash Loungani assesses the short- and medium-term distributional effects
of iscal austerity. Using data for a sample of 17 Organization for Economic
Cooperation and Development (OECD) countries over the period 1978-2009,
they show that iscal consolidation episodes have typically led to a signiicant and
long-lasting increase in inequality accompanied by a fall in wage income, without
signiicant effect on proit and rent income. The authors caution Governments to
adopt more realistic expectations about the consequences of iscal consolidation.
In particular, they point out that countries should opt for a slower pace of
consolidation, combined with policies to support growth. Governments should
also take into account how these policies would respond to slower-than-envisaged
growth and should be able to adjust them accordingly.
Steven Miller’s chapter provides important insights into how Governments
should go about achieving full, productive and freely chosen employment for
young people. He shows that in the aftermath of the Great Recession, global
youth unemployment rose sharply and still has not recovered. The chapter points
out that while the private sector is the main driver and source of job creation, it
is not creating suficient decent jobs to meet the requirements of young people
entering the labour force, and that there is increased need for direct job creation
by public authorities. Such direct public sector interventions are seen as a means
of maintaining human capital during inancial, civil or political crises or economic
downturns, and of supporting the private sector in improving its productivity.
The chapter by Katja Hujo examines how labour market and social policies
should be inanced during and following a period of crisis. The chapter posits
that issues of inancing and social policy have to be approached simultaneously
in order to design social and economic systems that are mutually reinforcing
and sustainable. Using concrete country examples, the author presents several
instruments available for generating funding for social policies and discusses their
Introduction
• 19
pros and cons, including their impacts on growth and income distribution. The
challenge is to ensure that countries with limited iscal space and high exposure
to global market risks are adequately supported at the regional and global levels,
especially during times of crises when rich as well as poor countries face similar
inancing pressures. The chapter notes that the crisis should not result in measures
with adverse long-term consequences for State capacity or social development.
Jacqueline Mazza and Danilo Fernandes Lima da Silva examine key labour
policy experiences of the Latin American and Caribbean region in response to
crises, with a particular emphasis on the experience relating to the recent crises.
Their chapter notes that the crises did not result in major changes or improvements
in labour market policies, probably because many countries in the region were
not greatly affected by them. Mexico and other Central American countries that
suffered from the crises put in place various temporary measures, including onthe-job training, wage subsidies and temporary employment programmes, and
expanded several existing programmes. However, few of these countries put
in place more permanent labour market measures, including unemployment
insurance, which is available only in some of the richer countries in South
America. The chapter concludes that the region’s still developing labour market
policy mix would be well served to utilize evidence produced during crises more
strategically to build long-term institutional capacity and a more permanent set of
active and passive labour market policies available both in good and bad times.
The inal chapter in Part II of this volume, by Azita Berar Awad, takes a
critical look at the economic and labour market dimensions of the social and
political upheavals in the Middle East and North Africa, commonly called the
“Arab Spring”. Her chapter points to the failure of economic strategies in the
countries in the region to deliver on jobs, particularly decent jobs, which created
a widening gap between the educational attainment, capabilities and aspirations
of young women and men, and the opportunities available to them. The chapter
argues that the post–Arab Spring development agenda needs to focus on the
creation of decent jobs. In particular, macroeconomic policies should actively
promote employment creation, create iscal space for investing in labour market
policies and human capital, and enhance access to inance for the majority of
economic operators. In addition, labour market institutions should actively
promote fairness and equal opportunities, reach out to the most vulnerable and
provide them options to improve their employability.
Overall, the chapters in this volume emphasize the need to rethink public
policy, beyond poverty reduction strategies and labour market programmes,
and to reorient macroeconomic policy towards the reduction of poverty and
employment creation. They stress the importance of rebalancing the sources
of economic growth and taking a more proactive approach to industrial policy
and sector-speciic strategies. While no single policy prescription can secure the
transition to more inclusive, equitable and sustained patterns of economic growth,
the chapters discuss economic and social policies that can work together to reduce
20 •
he Twin Challenges of Reducing Poverty and Creating Employment
poverty and boost demand in a sustainable manner through increases in decent
work and universal social protection, rather than through speculation in credit and
asset markets.
21
Part I
Poverty eradIcatIon
22 •
he Twin Challenges of Reducing Poverty and Creating Employment
23
Chapter 1
Poverty matters
JoMo KwaMe sunDaraM1
Global poverty trends
World leaders agreed in 2000 to halve the number of people living on less than
a dollar a day by 2015. There has been some reported success in reducing global
poverty levels. The number of people living on less than $1.25 a day in developing
countries is said to have declined from 1.94 billion to 1.20 billion between 1981
and 2010 (igure 1.1). In addition, the proportion of people living in extreme
poverty dropped from 52 to 21 per cent over the period 1981-2010. Thus, the
Millennium Development Goal of halving poverty by 2015 (MDG 1) is said to
have been achieved well in advance of the target year.
Where do the poor live?
The distribution of people living in poverty within and across regions has changed
during the past three decades according to World Bank data (igure 1.2). Compared
with 1981, the absolute number of people living in poverty in 2005 went up in
many countries in sub-Saharan Africa, Latin America, the Middle East and North
Africa, as well as Central Asia (see igure 1.2). While 57 per cent of the world’s
poor lived in East Asia and the Paciic in 1981, the subregion was home to only
21 per cent of the global poor in 2010. In contrast, the share of the world’s poor
increased in South Asia, from 29 per cent in 1981 to 42 per cent in 2010, and more
than doubled in sub-Saharan Africa, from 11 per cent to 34 per cent between 1981
and 2010.
The changing regional distribution of poverty relects broad changes in
1
I am indebted to Anis Chowdhury and Amson Sibanda for their assistance in
inalizing this introductory chapter. Nevertheless, neither of them are accountable for any
remaining mistakes or controversies.
24 •
he Twin Challenges of Reducing Poverty and Creating Employment
economic performance. The decline in poverty has been largely due to rapid
growth in China in recent decades. Most of the world’s poor no longer live in
low-income countries (LICs) (Sumner, 2010). In 1990, 93 per cent of the world’s
poor lived in LICs. In 2007-2008, 75 per cent of the world’s poor—approximately
1.3 billion—lived in middle-income countries (MICs), while about 25 per cent
of the world’s poor, approximately 370 million, lived in the 39 LICs, largely in
sub-Saharan Africa.
Only four countries (India, Indonesia, Nigeria and Pakistan) account for much
of this shift as these MICs are no longer LICs. Besides China and India, the share
of global poverty accounted for by other MICs has risen from 7 to 22 per cent.
Fragile LICs account for only 12 per cent of the world’s poor, compared with the
earlier estimates of approximately 33 per cent. These indings are consistent across
monetary, nutritional and multidimensional poverty measures (Sumner, 2010).
Trends in inequality should also be considered, especially by those who view
poverty as relative, rather than absolute, in the sense of being deined in terms of a
ixed (usually money income) poverty line. Not only are there wider income gaps
Figure 1.1 Global and regional trends in extreme poverty, 1981-2010
Number of People living on less than $1.25 a day
3000
205
2500
239
568
Number of people (millions)
2000
290
330
257
574
617
43
349
377
632
390
593
53
1500
835
53
53
49
720
619
631
395
640
683
633
586
1000
443
399
414
60
54
446
63
598
571
363
500
1097
970
507
48
848
926
212
37
173
32
332
284
251
2005
2008
2010
871
640
654
156
523
0
1981
1984
1987
1990
1993
1996
1999
2002
East Asia and Pacific
China
Europe and Central Asia
Latin America and the Caribbean
Middle East and North Africa
South Asia
Sub-Saharan Africa
Source: World Bank (2013).
Poverty matters
• 25
Figure 1.2 Changing regional share in extreme poverty, 1981-2010
100%
10.6
12.9
14.5
15.2
17.3
20.5
21.6
23.8
28.4
80%
30.7
30.9
33.5
32.3
33.0
2.2
37.0
2.9
2.8
60%
35.6
39.1
2.8
2.8
43.1
43.1
3.2
38.8
33.1
43.8
3.5
33.1
3.8
26.0
25.6
22.2
3.4
2.8
15.3
56.6
52.2
47.9
41.7
35.8
40%
20%
34.1
29.3
48.5
45.5
37.5
37.5
13.3
2.7
12.8
31.9
23.9
21.8
20.7
2005
2008
2010
0%
1981
1984
1987
1990
1993
1996
1999
2002
East Asia and Pacific
China
Europe and Central Asia
Latin America and the Caribbean
Middle East and North Africa
South Asia
Sub-Saharan Africa
Source: World Bank (2013).
between rich and poor countries, but within-country income inequalities have
also increased in the majority of countries: between the early 1980s and 2008,
income inequality rose in 59 out of 114 countries for which data are available, and
declined in 40 countries.
Conventional poverty measures
Many analysts have challenged the conventional poverty estimates using the
Word Bank’s $1.25 a day measure. The main issue is the utility of the poverty line
as a meaningful measure of poverty. The evidence suggests that such poverty lines
misrepresent the actual extent of poverty. For example, many observers question
how poverty has gone down according to World Bank estimates while hunger and
undernourishment have increased over the last decade according to the Food and
Agriculture Organization of the United Nations (FAO). After all, the poverty line
is popularly understood as being deined by the money income required to avoid
being hungry.
Reddy (2011) exposes the methodological inadequacies of recent global
poverty estimates by the World Bank. The 2008 revision of the World Bank’s
26 •
he Twin Challenges of Reducing Poverty and Creating Employment
global poverty estimates based on a new $1.25 (2005 purchasing power parity
(PPP)) poverty line underscores their unreliability. Furthermore, the new World
Bank poverty line does not seem to have considered the United States inlation
rate; had it been used, the dollar a day (later $1.08 a day) line should have become
$1.45 a day in 2005, with obvious implications for corresponding poverty
estimates. Reddy argues that the Bank’s poverty line is not only lawed, but also
not very useful for policy purposes. He argues that much less weight should be
given to the Bank’s poverty estimates in monitoring MDG 1 to reduce poverty and
hunger by half from 1990 to 2015. This has serious implications for international
organizations’ recent claims to have achieved MDG 1 by 2010.
Chandy and Kharas (2012) emphasize the weak empirical basis for the
country and global poverty numbers used by the World Bank. For instance, taking
the Bank’s igures at face value would imply the following odd facts: the Democratic
People’s Republic of Korea has roughly the same poverty rate as China. Personal
consumption in India has grown at a paltry 1.5 per cent per year since the country’s
economic takeoff in the early 1990s. In India, with over 900 million cell phone
subscribers and 40 million cars, the middle class numbers only 9 million people.
Using these examples, Chandy and Kharas highlight key dificulties in
making global poverty estimates. First is the impossibility of saying anything
meaningful about poverty in a country without a household survey to explain how
income (or consumption) is distributed among its people. The World Bank avoids
this problem by making the heroic assumption that any country with no survey
has the same poverty rate as the average for its region. Thus, the Democratic
People’s Republic of Korea is assigned essentially the same poverty rate as China,
even though it regularly receives food aid from China.2
Second, surveys need to be reasonably accurate and representative, but the
World Bank uses household surveys as an article of faith, even when the data are
at odds with other sources of information, which is very common. For example,
in the case of India, the survey numbers suggest that the average Indian consumed
$720 per year in 2010, while the country’s national income accounts indicate
that household expenditure was about two-and-a-half times greater, at $1,673 per
person per year. Such a discrepancy should have dramatic implications for India’s
poverty estimates—a difference in the order of hundreds of millions.
Uncritical reliance on survey data by the World Bank, therefore, implies that
growth in India’s household expenditure per capita has been only 1.5 per cent per
year since the early 1990s. This also implies hardly any acceleration of per capita
household expenditure, as surveys reported an equivalent growth rate of 1.1 per
cent during India’s pre-reform period. However, corresponding data from the
national accounts show that household expenditure per capita grew, on average,
by 4.5 per cent annually over the past two decades. Thus, the survey data seem to
fail to take account of India’s faster economic growth.
The third dificulty is associated with generating global poverty data by
2
China dominates the East Asian regional poverty rate because of its vast population.
Poverty matters
• 27
using PPP estimates to convert survey data, measured in the local currency, into
globally comparable data that take into account cost-of-living differences among
countries. Current estimates are drawn from a global exercise conducted in 2005.
In addition to the methodological problems highlighted by Reddy (2011), for
some countries, most notably China, PPP conversions have little credibility. China
did not permit a random sample of locations to survey prices, as were carried out in
other countries. Instead, China restricted data collection to a few urban areas. This
resulted in China’s prices being 40 per cent higher than previously thought, meaning
that Chinese living standards were revised downwards by about 40 per cent.
If one takes this and Chinese growth rates at face value, it would mean that
in 1981, China was as poor as the poorest country in the world today (except
perhaps the Democratic Republic of the Congo), with a level of average personal
consumption below the current level in Liberia. According to the Bank, China has
173 million poor consuming less than $1.25 a day. But if the PPP conversion rate
were changed back to where it used to be, the poverty estimate would be cut to
69 million.
The World Bank’s global poverty estimates extend over nearly three decades,
with its earliest estimates being for 1981. Throughout this period, the global
headcount (based on the 2005 $1.25 poverty line) has been dominated by three
zones/countries: sub-Saharan Africa, China and India. These three account for a
remarkably constant three quarters of the world’s poor. Yet, poverty estimates for
the three suffer from glaring problems, including insuficient survey data, lawed
surveys and faulty PPP conversions. If the poverty estimates for these three cannot
be believed, then neither can the World Bank’s global estimates, and it must be
admitted that knowledge of global poverty is very limited.
However, the experience of poverty is increasingly viewed as multidimensional.
A wider understanding and deinition of poverty, adopted by the 1995 Copenhagen
World Summit for Social Development, includes deprivation, social exclusion
and lack of participation. Using this broader deinition, the situation appears
worse than what the monetary income poverty line would suggest. For example,
according to the new Multidimensional Poverty Index (MPI) of ten indicators
of social development, developed by Alkire and Santos (2010) and used in the
Human Development Report 2010 (United Nations, 2010), there are 1.7 billion
poor people.3 Of these, 51 per cent live in South Asia; 28 per cent in sub-Saharan
Africa; 15 per cent in East Asia and the Paciic, and 3 per cent in Latin America
and the Caribbean. In some countries, the MPI poverty rate is considerably higher
than the poverty rate using the money metric of US$ 1.25 per head.
Besides the ongoing criticisms of poverty measurement, there has been
considerable scepticism about reported progress in recent years. The number of
poor people in the world in 2008 was reported at 1.29 billion, and the decline in
poverty numbers of about 90 million in the period 2008-2010, two years of the
3
The Human Development Report 2010 considers 104 countries that have data for 78 per
cent of the world’s population.
28 •
he Twin Challenges of Reducing Poverty and Creating Employment
Great Recession, as well as higher food prices after 2006 has raised many doubts.
Of course, there was a lag in the economic slowdown between the developed
economies and developing economies, but more plausible explanations for these
trends are needed. With higher unemployment and lower incomes at the end of the
last decade, there is concern that PPP calculations may well not capture the higher
costs of living for the poor, especially of food, since food dominates the basket of
goods constituting the poverty line.
Poverty and vulnerability
Recent economic crises remind us that poverty is not an attribute of a ixed group,
but rather a condition that all vulnerable persons risk experiencing. The Asian
crisis of 1997-1998 has shown that poverty can go up dramatically within a very
short span of time. For example, the poverty rate in Indonesia shot up from about
11 per cent to about 37 per cent following the inancial crisis. The inancial crises
between 1994 and 2002 pushed approximately 40 million to 60 million people
into poverty, and possibly as many as 100 million, out of a total of 800 million
people (Cline, 2002). An estimated 64 million people fell back into poverty during
the Great Recession of 2008-2009 (World Bank, 2010). This is on top of the 130
million to 155 million people pushed into poverty in 2008 owing to soaring food
and fuel prices (World Bank, 2009a).
Despite various shortcomings of the World Bank’s money measure of
poverty, it may serve as a rough guide to assess the extent of vulnerability. For
example, the global poverty rate jumps from 18 per cent to roughly 40 per cent
when poverty measures are switched from $1.25 a day to $2 a day per person,
indicating that a large number of people live just above the extreme poverty line
($1.25 a day) and are probably very vulnerable to economic shocks or changes in
personal circumstances.
Vulnerability and economic insecurity have increased during recent decades
with the rise in unconventional and precarious jobs such as part-time employment,
self-employment, ixed-term work, temporary work, on-call work and homeworkers. An important aspect of precarious work is its gendered nature, as women
are continuously overrepresented in this type of work. This trend is associated
with rapid liberalization and perhaps globalization as well as declining workers’
bargaining power.
Procyclical macroeconomic policies in recent decades, focused on achieving
and maintaining low single-digit inlation, and limited social protection measures
have exacerbated economic insecurity and vulnerability. The World Social
Security Report, 2010-2011 (International Labour Organization, 2011) assumed
that people who fall under the international poverty line of $2 a day have no
effective basic social protection and, hence, are vulnerable. The Report assessed
the level of vulnerability using two combined variables: the poverty rate, measured
Poverty matters
• 29
as a proportion of people living on less than $2 PPP per day within a country, and
the extent of informal employment, measured by, as a proxy, the proportion of
those who are not employees (in wage/salary employment) in the total number
of employed. It found high or very high vulnerability in terms of poverty and
labour market informality in 58 countries, corresponding roughly to one third for
all countries. By this deinition, the majority of the most vulnerable countries are
in Africa and Asia.
Social protection and vulnerability
ILO Convention 102 enunciates comprehensive social protection systems covering
nine areas.4 However, only a small minority of countries currently provide such
comprehensive protection. Although all countries in the world provide some form
of social security, in many countries, coverage is limited and targeted, rather than
universal. Thus, only a small minority of the global population has legal, effective
and comprehensive access to existing social protection schemes.
According to the ILO World Social Security Report, 2010-2011, only one
third of countries globally (with 28 per cent of the global population) have all
nine types of social security. Taking into account those who are not economically
active, the Report estimates that only about 20 per cent of the world’s workingage population (and their families) have effective access to comprehensive social
protection. This implies that about 5.6 billion people in the world are vulnerable
to various degrees.
Working poor
The working poor are deined as those employed, but earning less than $1.25 PPP
a day in 2005. Despite working, they cannot earn enough to get out of poverty.
In many developing countries, most poor adults have to work, if only to survive,
especially in the absence of adequate social protection. Of the world’s poor, 75
per cent live in rural areas where agricultural wage workers suffer the highest
incidence of poverty, largely because of seasonal unemployment and the low
wages paid by small farms (World Bank, 2009b).
After all, most countries do not provide unemployment insurance or other
similar social protection. In the most vulnerable countries, more than 80 per cent
of the population have no social security coverage and no access to health services
(International Labour Organization, 2011). Women comprise the majority of the
working poor: of the 550 million working poor in the world, an estimated 330
million, or 60 per cent, are women (World Bank, 2009b).
There has also been a sharp rise in the working poor due to the ongoing crisis
4
Medical care; sickness beneit; unemployment beneit; old-age beneit; employment
injury beneit; family beneit; maternity beneit; invalidity beneit; and survivors’ beneit.
30 •
he Twin Challenges of Reducing Poverty and Creating Employment
in the wake of the 2008-2009 Great Recession. Estimates of the share of workers
in extreme poverty suggest that up to an additional 7 per cent, or 215 million
workers, were at risk of falling into poverty between 2008 and 2009. Using the
$2 a day poverty line, up to 5.9 per cent, or 185 million workers, were at risk of
falling into poverty (International Labour Organization, 2010).
Rethinking poverty
The 2010 United Nations Report on the World Social Situation: Rethinking
Poverty and Poor Poverty: The Impoverishment of Analysis, Measurement and
Policies (Jomo and Chowdhury, 2011) have sought to advance the debate on
poverty and its reduction. These two publications reafirmed the urgent need for
a strategic shift away from market fundamentalist thinking, policies and practices
of recent decades to more sustainable development- and equity-oriented policies
appropriate to national conditions and circumstances.
The two volumes critically examined the conventional policy framework
and popular poverty reduction programmes in the face of persisting poverty,
rising inequality and lacklustre growth in many developing countries. Current
approaches, based on procyclical macroeconomic policies and microeconomic
interventions targeted at the poor, are questioned, and a more developmental
role for the government is argued. This would entail an integrated approach to
economic and social policies to support inclusive output and employment growth
as well as to reduce inequality, vulnerability and economic insecurity.
Conventional policy approaches to poverty eradication are insuficient and
require serious rethinking by policymakers. The obstacles to reducing global
poverty remain formidable, numerous and complex, and have been exacerbated by
economic crisis. Countries need to prioritize sustainable development—involving
economic development, social progress and environment sustainability—including
growth of employment and incomes, with suficient inclusion beneiting people
living in poverty. Targeting is not only expensive, but also inadvertently excludes
many of the deserving. Furthermore, many poverty programmes favoured by
some donors have not been effective in reducing poverty, although some have
undoubtedly helped ameliorate poverty, especially during crises.
Countries, especially in Africa and Latin America, which adopted conventional
macroeconomic stabilization measures and structural adjustment programmes
generally experienced slower economic growth as well as increased inequality
and poverty during the 1980s and 1990s. In general, such macroeconomic policies
lowered public investment and increased growth and employment volatility. The
mixed record of poverty reduction calls into question the eficacy of conventional
approaches. Reductions in public investment in health, education and other social
programmes have a disproportionate adverse effect on people living in poverty.
They are also more negatively affected by economic volatility, since unskilled
Poverty matters
• 31
workers tend to lose their jobs irst, while job recovery generally lags behind
output recovery.
Redeining poverty and its eradication
By most standards, there has been modest progress globally in reducing poverty
and deprivation over the last three decades. Other than the spectacular reduction
of poverty in China and other parts of East Asia over this period, progress in the
rest of the world has been dismal. Wide-ranging deicits in the human condition
remain widespread in most LICs, but also in many MICs.
This disappointing situation has persisted despite several growth spurts at
the global level and sustained growth in several large developing countries. It
has continued despite professed commitments by the global community to
the Millennium Declaration. The situation has deteriorated with the ongoing
inancial and economic crisis. While the timing and sustainability of economic
recovery continue to be debated, job recovery and better work conditions will
lag considerably behind, with adverse consequences for real incomes and living
conditions.
The counter-revolution against development economics (Toye, 1987),
enabling the ascendance of the Washington Consensus in the 1980s (Williamson,
1989), signiicantly transformed the discourse on poverty. Washington Consensus
reforms—involving macroeconomic stabilization, deined as low singledigit inlation, as well as microeconomic market liberalization associated with
structural adjustment—were all supposed to accelerate poverty reduction. In this
new framework, poverty reduction was seen as an almost automatic consequence
of economic growth. Little attention has been given to structural causes of poverty,
including inequality of opportunities and initial conditions (such as assets), and
the distributional consequences of growth. While the reforms were supposed to
unleash rapid growth, social policy was reduced to social safety nets for those
falling between the cracks as well as victims of temporary setbacks such as natural
catastrophes and inancial crises.
However, the reforms have slowed growth and exacerbated inequality
(United Nations, 2005; Jomo and Baudot, 2007). Washington Consensus policy
prescriptions, often imposed through aid conditionalities, have signiicantly
constrained policy space for national development strategies. Failure to sustain
growth and reduced government revenues have also reduced developing
countries’ iscal space. Such reduction of policy and iscal space has greatly
undermined sustainable and equitable development, with dire consequences for
many developing countries.
Developing countries were also expected to reduce the size of their public
sectors, signiicantly reducing State capacity and capabilities. Thus, government
capacity was seriously undermined in many countries, which were also being
32 •
he Twin Challenges of Reducing Poverty and Creating Employment
coerced into liberalizing and globalizing on unequal and debilitating terms.5 The
World Bank has since emphasized the need for economic policies and policy
advice to be more country-speciic and institution-sensitive (Nankani, 2005).
The 2008-2009 global inancial and economic crisis—the worst since the Great
Depression of the 1930s—has prompted reconsideration of macroeconomic
policies, even within the international inancial institutions (see Blanchard and
others, 2010).6 There is now greater recognition of the need for countercyclical
macroeconomic policies and prudent capital account management.
Policy lessons
The decline in inluence of the Washington Consensus and the analytical
rethinking prompted by the failure to anticipate and redress the ongoing inancial
and economic crisis has resulted in signiicant new thinking on poverty and its
reduction, as suggested earlier. Some of this recent new thinking on poverty can
be summarized as follows:
• The dominant mainstream perspectives on poverty and deprivation
have fundamental problems, leading to poor and ineffective policy
prescriptions. These policies failed to accelerate growth and reduce poverty
signiicantly, and worse, inequality increased in most countries.
• While growth is usually necessary for poverty reduction, the generation
of productive and decent job opportunities is not an inevitable by-product of
output growth as the recent pre-crisis record of jobless or job-poor growth
implies.
• At the same time, growth needs to be more stable, with a consistently
countercyclical macroeconomic stance and better capacity to deal with exogenous shocks. Also crucial for development are measures to promote structural
change and reduce inequality (see Stiglitz and others, 2006; Taylor, 2011).
5
Such policy advice and loan conditionalities were challenged by the World
Bank–associated Growth Commission (2008), which noted that “… no generic formula
exists. Each country has speciic characteristics and historical experiences that must be
relected in its growth strategy” (p. 2). It also observed: “In recent decades governments
were advised to “ ‘stabilize, privatize and liberalize’.... this prescription deines the role
of government too narrowly. Just because governments are sometimes clumsy and
sometimes errant, does not mean they should be written out of the script. On the
contrary, as the economy grows and develops, active, pragmatic governments have crucial
roles to play” (p. 6).
6
However, ater reviewing International Monetary Fund agreements with 41 crisisafected countries—including Stand-By Arrangements (SBAs), Poverty Reduction and
Growth Facilities (PRGFs) and Exogenous Shocks Facilities (ESFs)—Weisbrot and
others (2009) concluded that 31 of them contained procyclical macroeconomic policy
prescriptions.
Poverty matters
• 33
• Aid conditionalities as well as treaty commitments have signiicantly
reduced developing countries’ policy space. Low growth and loss of
revenue owing to economic liberalization programmes have also reduced
developing countries’ iscal space. Such narrowing of policy and iscal
space has greatly damaged developing countries, with dire consequences
for poverty and destitution (see Jomo and Baudot, 2007; Stiglitz and others,
2006).
• Generally, economies which have done well in terms of both growth
and poverty reduction over the past three decades have adopted pragmatic,
heterodox economic development policies. While often invoking the
language of the market, they have generally managed the market to
encourage private investments, especially in desired economic activities,
for example, those creating more job opportunities or offering increasing
returns to scale.
• Programmes, such as microinance, formalization of land titles or
governance reforms, have not signiicantly reduced poverty. They have not
been effective in the face of faltering growth or in redressing inequality (see
Jomo and Chowdhury, 2011).
• Social policies have increasingly involved targeting, ostensibly for
greater cost-effectiveness. Generally, however, universal social policies
have been much more effective and politically sustainable. Policies
targeting the poor, or the “poorest of the poor”, have often been costly,
while missing out many of the deserving.
• Social provisioning and protection should be integral to development
and poverty reduction strategies. But such redistributive policies cannot be
sustained without ensuring rapid growth, thus raising average incomes as
well as iscal resources for social spending.
• Countries that have a social protection loor7 can better mitigate the
negative impacts of shocks and prevent people from falling deeper into
poverty. A basic social protection loor is affordable in most countries,
although the low-income and least developed countries will need assistance.
7
he right to social security contained in the Universal Declaration of Human Rights
requires universal social protection to ensure the basic well-being of all individuals,
including people living in poverty and those at risk of becoming poor.
34 •
he Twin Challenges of Reducing Poverty and Creating Employment
References
Alkire, Sabina, and Maria Santos (2010). Acute Multidimensional Poverty
Index: A New Index for Developing Countries. Oxford Poverty & Human
Development Initiative (OHPI) Working Paper No. 38.
Blanchard, Olivier, Giovanni Dell’Ariccia and Paolo Mauro (2010). Rethinking
Macroeconomic Policy. International Monetary Fund Staff Position Note.
12 February.
Chandy, Laurence, and Homi Kharas (2012). The Contradictions in Global
Poverty Numbers: Global Poverty, Millennium Development Goals, Development, Developing Countries, Foreign Aid. Brookings Institution, Washington, D.C. 6 March. Accessed at http://www.brookings.edu/research/
opinions/2012/03/06-contradictions-poverty-numbers-kharas-chandy
Chen, Shaohua, and Martin Ravallion (2012). An update to the World Bank’s
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Cline, William (2002). Financial Crises and Poverty in Emerging Market Economies. Working Paper No. 8, Center for Global Development, Washington,
D.C. June.
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Growth and Inclusive Development. Washington, D.C.: World Bank.
International Labour Organization (2010). Global Employment Trends: January
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_______ (2011). World Social Security Report, 2010-2011: Providing coverage
in times of crisis and beyond. Geneva: International Labour Ofice.
Jomo, K. Sundaram, and Jacques Baudot (eds.) (2007). Flat World, Big Gaps:
Economic Liberalization, Globalization, Poverty and Inequality. London:
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Jomo, K. Sundaram, and Anis Chowdhury (eds.) (2011). Poor Poverty: The
Impoverishment of Analysis, Measurement and Policies. Bloomsbury Academic, London, in association with the United Nations, New York.
Nankani, Gobind T. (ed.) (2005). Economic Growth in the 1990s: Learning
from a Decade of Reform. Washington, D.C.: World Bank.
Reddy, Sanjay (2011). The Emperor’s New Suit: Global Poverty Estimates
Reappraised. Poor Poverty: The Impoverishment of Analysis,
Measurement and Policies, Jomo K. Sundaram and Anis Chowdhury
(eds.). Bloomsbury Academic, London, in association with the United Nations, New York.
Poverty matters
• 35
Stiglitz, Joseph, Jose Antonio Ocampo, Shari Spiegel, Ricardo French-Davis,
Deepak Nayyar (2006). Stability with Growth: Macroeconomics, Liberalization and Development. New York: Oxford University Press.
Sumner, Andy (2010). Global Poverty and the New Bottom Billion: What if
Three-quarters of the World’s Poor Live in Middle-income Countries? IDS
Working Paper No. 349, November, University of Sussex, Brighton: Institute of Development Studies.
Taylor, Lance (2011). Growth, Development Policy, Job Creation and Poverty
Reduction. Poor Poverty: The Impoverishment of Analysis, Measurement
and Policies, Jomo K. Sundaram and Anis Chowdhury (eds.). Bloomsbury
Academic, London, in association with the United Nations, New York.
Toye, John (1987). Dilemmas of Development: Relections on the Counter-Revolution in Development Theory and Policy. Oxford: Basil Blackwell.
United Nations (2005). The Inequality Predicament: Report on the World Social
Situation, 2005. New York: United Nations. Sales No. E.05.IV.5.
_______ (2010). Rethinking Poverty: Report on the World Social Situation,
2010. New York: United Nations. Sales No. E.09.IV.10.
_______ (2011). The Global Social Crisis: Report on the World Social Situation,
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Weisbrot, Mark, Rebecca Ray, Jake Johnston, Jose Antonio Cordero and Juan
Antonio Montecino (2009). IMF-Supported Macroeconomic Policies and
the World Recession: A Look at Forty-one Borrowing Countries. Washington, D.C.: Center for Economic Policy Research. October.
Williamson, John (1989). What Washington Means by Policy Reform. Latin
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36 •
he Twin Challenges of Reducing Poverty and Creating Employment
37
Chapter 2
Education and the roles of the State and
the market in poverty eradication8
Minquan liu
Introduction
In examining the respective roles of the State and the market in eradicating poverty,
it is irst of all important to expand the scope of the enquiry to encompass not only
poverty but also income inequality and economic growth. Much of the modern
experience of development has shown that, save in a pure Malthusian situation
which may sometimes occur but which is generally rare, poverty is closely related
to income inequality, and both are closely connected with growth. In attempts to
ind effective ways to combat poverty, attention must therefore be cast widely
enough to examine the effect of income inequality and growth on poverty. In turn,
reduction and eradication of poverty can have an important impact on growth and
inequality.
This triangular set of relationships among poverty, growth and income
inequality has, in fact, received much attention in the literature (see, e.g.,
Bourguignon, 2004, and Agence Française de Développement and European
Development Research Network, 2003), so the basic points need not be further
laboured here. Rather, what this chapter intends to do is to push the enquiry a step
further by looking at some of the key relationships within this triangle across time,
in a manner that would relect key features of the process of modern economic
8
A drat copy of this paper was presented at the Expert Group Meeting on Poverty
Eradication sponsored by United Nations Department of Economic and Social Afairs
(UN/DESA) and the International Labour Organization (ILO), 20-22 June, 2011. he
author would like to thank the participants of the meeting and Qingjie Xia, Jiantuo Yu
and Yimeng Yin for their critical comments. All errors and omissions are, however, the
author’s responsibility.
38
•
he Twin Challenges of Reducing Poverty and Creating Employment
development facing a developing country. For much of the poverty which exists in
the world today lies, in fact, within these countries, and the persistence of poverty
in these countries may in part have to do with certain structural factors they face
at present. Understanding such structural factors is important, as it may suggest
possible room for effective intervention, as well as limits to such intervention.
Within the framework of the poverty–growth–inequality triangle, this also means
understanding the process of inequality and, indeed, the process of growth and
development itself.
The process of development that is the concern of this chapter involves some
rather fundamental changes to the existing social and economic structure of a
country. This primarily takes the form of industrialization and urbanization. Early
development economists such as Lewis (1954) and Kuznets (1955) studied and
provided much insight into this process, as did the literature on poverty traps
(Nurkse, 1953; Nelson, 1956). More recently, a growing body of literature has
appeared which aims to endogenize occupational choice and inequality (Banerjee
and Newman, 1993; Matsuyama, 2000; Mookherjee and Ray, 2005; Galor, 2011).
It will not be possible to summarize these bodies of literature, but they offer
important insights on which this chapter will draw.
The following section presents a stylized model of what are postulated as
the central aspects of the process of economic development which a poor and
developing country is expected to go through, and the accompanying challenges
it is likely to face as it attempts to successfully manage this process. In this
stylized model, as will be seen, fundamental forces exist to cause a Kuznets-type
inverse-U relationship to arise between income inequality and per capita income,
but the exact trajectory of this relationship need not be completely determined by
these forces. Much can be done to change the shape of this trajectory. In terms
of poverty, this can mean substantially more or substantially less poverty at any
particular point in time during a country’s developmental phase. This stylized
model will then serve as a framework for discussion in the section that examines
the roles of the State and the market in development and poverty reduction. Owing
to space limitation, only one market, the market for education, will be discussed.
A stylized model of development
The model
Almost by deinition, as an economy embarks on the journey of economic
development, it will have to undergo some major structural changes. Speciically,
the modern sector (often understood as the industrial sector, although it need not
be) will grow, attracting entrepreneurs with the inancial capital and workers with
the right skills and education to enter into the sector. Almost assuredly, these people
will earn a higher income, which is the reason why they moved into this sector
Education and role of the State and the market in poverty eradication
• 39
in the irst place. On the other hand, the traditional sector (primarily agriculture)
may concomitantly be burdened with surplus labour (i.e., labour having low or
close-to-zero marginal labour productivity), and frequently with high birth rates
as well. This is the setting Lewis (1954) was concerned with in his pioneering
contribution to the subject.
The presence of a possibly large income differential in favour of a relatively
small section of the population (those in the modern sector) in the early stage of
development is highly likely to worsen income inequality in that economy. Over
time, however, such differentials are likely to attract an increasing number of
people to enter into the modern sector, through acquisition of appropriate skills
and education. As more and more people move into this sector, the incomes
accruing from it will be spread more widely. At the same time, earnings in the
agricultural sector will also likely improve (not only might labour productivity
rise as a result of applications of modern science and technology to farming, but
so would demand for farm produce). And with generally better education and
health services for the agricultural sector as well, birth rates may fall in rural as
well as urban areas, reducing the rate of growth of the labour force. Eventually,
a point will be reached when income distribution improves. This is essentially
the reason which led Kuznets (1955) to advance the now well-known inverse-U
hypothesis between income inequality and economic growth.
But it may be worth exploring in more detail how all this might happen.
What the stylized model to be developed below does is to focus on the crucial role
which human capital accumulation plays in the process.9 Needless to say, inancial
capital is important, and some models in the endogenous inequality literature have
indeed focused on that, where imperfect capital markets result in some (the rich)
being able to borrow funds to invest in worthwhile projects and receive handsome
returns on them, and others (the poor) not (Matsuyama, 2000). The distribution of
inancial assets is, of course, an important consideration that could have serious
implications for the course and character of development. But, over the very long
run considered here, it could be argued that even the rich must have, in most
cases, owed their wealth to human capital accumulations by themselves or their
ancestors.10
Thus the stylized model below shall focus on human capital accumulation
only. At the level of an individual, human capital accumulation (principally
education, but also health) raises his or her productivity and, hence, income. From
the point of view of an economy, such accumulation (in the form of increasingly
better and more widespread education for the population) raises aggregate
9
his stylized model was irst presented in Liu and Yin (2010) as a framework for
understanding the long-run factors that characterize and explain the economic successes
of some East Asian economies in the past few decades.
10 Various predatory forms of wealth-amassing may also have been a cause, but even in
those cases, as classical economists would remind us, labour is, ater all, the sole source of
all wealth.
40
•
he Twin Challenges of Reducing Poverty and Creating Employment
productivity and thereby aggregate income.11 To examine the simplest possible
case for this, only two categories of workers, skilled and unskilled, are assumed,
who work in a skilled and an unskilled sector, respectively. What differentiates
one from the other is education. An unskilled labourer could be anyone from
a traditional agricultural worker to someone working in the modern sector but
doing menial tasks or otherwise engaged in providing some low value added
services, often with little education. On the other hand, to be a skilled worker
one has to undertake comparatively more—sometimes a lot more—education,
involving considerable human capital investment. Note that this categorization
of skilled and unskilled worker cannot but be left somewhat vague. In the early
phases of development, an unskilled (in most cases, rural) labourer may well be
illiterate. Subsequently, basic education may become popularized, so that even
an unskilled worker may have to have some basic education. Similarly, it might
have required someone to acquire only a basic education by today’s standards
to be a skilled worker in the early phases of development, but subsequently it
would require a person to receive a lot more education—often tertiary—in order
to qualify as a skilled worker. These changes are but part of a worldwide trend
towards increasingly better and more widespread education in a society which has
happened in most countries from developed to developing over the last century.12
Figure 2.1 provides the basic elements for the model, where the supply
curve of the unskilled labour is SA, and that of skilled labour SI. The shape of
these curves, each involving a lat and an upward sloping segment, needs some
explanation. First, earlier literature on development (Lewis, 1954; Sen, 1966)
stressed the importance of rural surplus labour, meaning labour that produces a
zero or close-to-zero agricultural marginal product. If such surplus labour indeed
exists, then it could be argued that the opportunity cost of unskilled labour is
simply its agricultural marginal product. This implies a zero or close-to-zero
reservation wage rate. However, the opportunity cost is only one way to think about
the reservation wage. There is also the factor of the “subjective cost of labour”,
which is a person’s marginal disutility of labour (or marginal utility of foregone
leisure) weighted by his marginal utility of income. Typically, this would give a
positive value, and hence a positive reservation wage rate. Sometimes, though,
11 Additionally, it can raise the share of income accruing to labour, which should be
good for income distribution, as we shall see later in this chapter.
12 It is worth emphasizing that the basic dichotomy of skilled and unskilled workers
is used here only as a simplifying device, to enable us to better develop a sense of what is
involved. he underlying issues have also been modelled as a case of “occupational choice”
in the new literature on endogenous inequality, where the occupational choice space can
be dichotomous, a multitude, or even a continuum. See Mookherjee and Ray (2005, 2010)
and the references therein. Our dichotomous characterization leaves out the important
role of entrepreneurs. See Banerjee and Newman (1993) for a model of how the otherwise
identical agents may diferentiate into entrepreneurs and workers because of capital
market imperfections, according to the initial distribution of wealth.
Education and role of the State and the market in poverty eradication
• 41
where survival is at stake, the subjective cost of labour, although positive, may
fall to a very low level indeed (as marginal utility of income in this case sharply
rises vis-à-vis that of leisure—nothing is more important than survival here and
now, so to speak, not even the sheer drudgery of the labour involved). In these
cases, the subjective cost of labour for a person may well fall below the minimum
cost of living that would be necessary to ensure a person’s continued survival
and continued supply of labour (i.e., to ensure that he could make the same level
of physical and mental exertion indeinitely into the foreseeable future). It is this
latter cost, denoted by WAR in igure 2.1, which will be used as the reservation
wage for unskilled labour in the present model.13
Second, regarding the reservation wage for the skilled, let a premium
relecting the cost of past human capital investment be added on top of the
unskilled reservation wage. This, of course, necessitates the assumption of a
perfect capital market whereby persons can borrow against future incomes to
invest in education today. However, much of the economic literature has, in fact,
concluded that capital markets are seriously imperfect, especially in developing
countries. In the present model, allowing for imperfections of the capital market
would mean either that some unskilled workers are denied the opportunity to
make the necessary investment in education to land them in the skilled category,
or, even if such opportunities are not completely denied, that they carry a higher
cost, implying a higher necessary wage markup than if the capital market were
perfect, to derive the reservation wage for the skilled. These complications shall,
however, be ignored in this chapter. When the respective roles of the market and
the State in eradicating poverty are discussed in the following section, these issues
will also be taken up. In the present stylized model, the uniform, post-markup
reservation wage is WIR.
Third, since the focus is on human capital accumulation in an economy, the
horizontal axis in igure 2.1 is used to denote the number of workers in both
the skilled and unskilled categories. Levels of skilled and unskilled wages can,
of course, affect the supply of labour hours by workers in each sector, but they
would not inluence the numbers of workers working in these sectors, which are
solely determined by past education. However, with assumptions of social and
cultural (or indeed legal) norms on a standard number of hours to be worked by a
worker over a given natural time period (a day or week), the extra hours supplied
by workers in each sector in response to a higher wage may be converted into
an equivalent additional number of workers working in these sectors. As may
be expected, the higher the wages for a sector, the greater the number of hours
13 hat is, under WAR, a labourer may continue to deliver the same amount of labour
per day or month indeinitely into the foreseeable future. A person may, of course, depend
on his or her family for survival and continued function as a labour supplier, but the
family’s survival will in turn have to depend on the incomes earned by its members. For a
critique of the concept of “ “subsistence wage”, see Dasgupta (1997).
•
42
he Twin Challenges of Reducing Poverty and Creating Employment
Figure 2.1: A two-sector long run model of labour markets for skilled and
Figure 1: A Two-Sector Long Run Model of Labour Markets for the Skilled and
unskilled labour
Unskilled Labour
W
W
SI
MI
WI*
MA
WIR
SA
WAR
OA
L
M
N
OI
Source: Author’s own elaboration.
supplied to it, and the greater the equivalent number of workers working in that
sector.14
The above explanations together then imply the shape of the two labour supply
curves as drawn in igure 2.1. The horizontal distance between OA and OI, two
origins of the graph, indicates the size of the full labour force. Initially, the OAN
portion of the entire workforce is unskilled, and the rest is skilled. Between OA
and N, the SA curve is lat (any demand less than OAN will not push the unskilled
wage rate above WAR), while beyond N the curve slopes upwards (any demand
beyond it will raise the unskilled wage rate above WAR). A parallel reasoning lies
behind the shape of the SI curve.
While supply-side factors in the stylized model essentially concern the long
run, demand-side ones are primarily about the short run. In igure 2.1, demand for
unskilled labour is given by the MA curve, and for skilled labour, the MI curve.
They are given by the marginal revenue product of labour curves in the two
sectors, which are in turn conditional on technology and product market prices for
irms in these sectors. Although technology is not expected to change materially
in the short run, product market conditions and prices may well do so. Both may
give short-run shocks to the system. And when they do, the two labour demand
curves shift.
The model thus captures both long-run and short-run factors, and there are
14 here is the complication of overtime pay, which in developed countries could be a
signiicant markup on a standard wage. Although overtime pay may also have been made
into law in some developing countries, its enforcement has usually been a problem.
Education and role of the State and the market in poverty eradication
• 43
also long-run and short-run outcomes to consider. In equilibrium, the markets for
hours of labour must clear in both sectors, giving rise to equilibrium wages for these
sectors. However, while in the short run, the hours supplied may equal the hours
demanded, this need not mean that, in the long run, all those who are dedicated
to the skilled or the unskilled sectors in terms of human capital are necessarily
fully taken up by these sectors (i.e., there need not be full employment). Figure
2.1 depicts such a situation in the unskilled sector, where the demand curve gives
rise to the short-run equilibrium wage equal to the reservation wage. However,
a signiicant number of unskilled workers (equal to the distance between points
L and N) are unemployed. On the other hand, the skilled sector shows full
employment. It transpires that, in both sectors, any equilibrium wages that are
above their respective reservation wages must mean full employment. However,
if they are only just equal to the reservation wages, some level of unemployment
in the workforce may well prevail in the sector in question.15
The stylized model presented in igure 2.1 provides a useful framework
for analysing a number of important points about the process of economic
development.
Education and “demands of full development”
What is meant by “full development” is a situation where no person is directly
left out of the process and fruits of development.16 Speciically, this means that
the process of shifting workers from the unskilled to the skilled sector, which
according to the view of this chapter is the essence of development, must
eventually encompass everyone in a society. This need not mean that everyone
must eventually become skilled and do only skilled work. Even in an ideal
situation, some may remain unskilled for various reasons, but all those who want
to become skilled should have the opportunity to do so (this is the “process” part of
the demands of full development). Moreover, even those who are not skilled can
also enjoy the beneits of development. Speciically, they should enjoy more or
less the same standards of well-being, which in the present model means more or
less the same wages (this is the “fruits” part of the demands of full development).17
15 Given these interpretations, naturally, equilibrium labour supply points of the
two sectors need not be vertically aligned in the present model, with or without full
employment in either sector.
16 Indirectly, of course, no one can really be left out of any development process
unfolding in his or her country or community.
17 Note that our view of what development centrally involves, by and large, conforms
well to the human development perspective, which argues that the aim of development
is to enlarge people’s capabilities to live the lives they value, where the basic capabilities
are health, education and a decent standard of living. Indeed, the view of development
presented here may be considered a reduced version of that, focusing as it does even more
centrally on education. Naturally, health is important and may even be considered to
have priority over education, as everyone must irst be alive and healthy before they can
44
•
he Twin Challenges of Reducing Poverty and Creating Employment
The key to full development in the present model clearly rests with
the expansion of education—indeed, a full expansion of superior education
opportunities to everyone. How this may be achieved (whether through a complete
reliance on the market, or whether the State, in fact, has a role to play) will be
discussed in the following section. For now, let us briely note two other important
effects of education (i.e., other than turning an unskilled worker into a skilled one).
First, past experiences from regions like East Asia suggest that a well-educated
workforce may well increase the demand for skilled workers as well. Indeed,
part of the reason why some East Asian economies have enjoyed spectacular
economic successes in the past several decades may have been exactly to do with
this, giving rise to a beneicial cycle of events. This theme will be taken up again
later in the chapter. Second, vast amounts of research also indicate that education,
especially female education, has an important downward impact on fertility, and
an upward impact on the quality of childhood upbringing. Both these impacts
should have a clear effect on the present model, but will not be explored here.
Inequality and “demands of successful development”
The model turns out, in fact, also to provide a way of capturing the Kuznets-type
inverse-U relationship between income inequality and economic growth. If one
imagines that, at the beginning of the development process, all workers are unskilled
and earn an unskilled wage (which is most likely to be the reservation wage) and
that at the end of it, all become skilled workers and earn a skilled wage, then over
the process, when an increasing number of workers must move from the unskilled
to the skilled sector through education, income inequality must irst rise and then
fall. Thus, if one accepts the characterization of the essence of a full development
process as embodied in the model, then the Kuznets hypothesis is clearly right. The
key point here is full development. Not all development processes may, however,
be full. Some may become stuck along the way, with persistently high levels of
inequality. It is not clear whether these economies are merely going through a
dificult phase and will soon see the light at the end of the tunnel, or whether they
may indeed be stuck indeinitely. One thing is clear, if they are going to come out of
the process fully, their income inequality will come down.
The above discussion may sound tautological: full development must be
characterized by low income inequality at the end of process, and if an economy
goes through the process fully, it must show a low level of income inequality.
But it is not. For the key to bringing about full development as identiied in the
present model is human capital accumulation. When all people in an economy are
well educated and skilled, there should be no reason why income inequality must
efectively pursue education. For reasons of space limitation, issues of health cannot be
addressed here. Note that in addition to its instrumental role in the economy, education
also has intrinsic value for many, as the human development view well emphasizes. See
Sen (1999).
Education and role of the State and the market in poverty eradication
• 45
stay high. Indeed, according to available wage share statistics, in most developed
countries where education is more widespread, equal and of higher quality, wage
incomes typically account for around 70 per cent of all incomes (although the
share has fallen in recent years, for reasons which cannot be delved into here).
In other, less developed countries, the share typically tends to be much lower.
On average, it is, in fact, in these less developed countries that better records of
income distribution are to be found (Schneider, 2011; Stockhammer, 2013).
While the present model demonstrates that a Kuznets-type inverse-U trajectory
of income inequality vis-à-vis per capita income may indeed arise if and when the
development process is fully completed (eventually all workers will enjoy good
and equal educational opportunities), the exact shape of this trajectory is yet to be
determined. Much, in fact, will depend on how various factors play out over the
course of development. And this opens up ample scope for policy intervention,
both in the short and long run. A closer examination of the model suggests that,
within the terms of the model, the gap between the skilled and unskilled wage
rates can inluence the concavity of the inverse-U curve. Speciically, the greater
the wage gap over the course, the more concave the curve (and the higher the
peak of the curve). Thus, besides aiming eventually to give everyone an equal
and good opportunity to education (which is what “demands of full development”
are about), a Government, if it also wishes to manage development successfully,
must also aim judiciously to keep the wage gap at low levels—indeed as low as
possible without compromising the incentives for agents to invest in education.
These requirements may be called “demands of successful development”.
Poverty
What about poverty? Poverty is not immediately visible from the present model.
Indeed, whether in respect of absolute poverty or relative poverty, poverty cannot
but be deined and measured in reference to some poverty-line level of income.
Unless and until this line is speciied, poverty remains undeined. Where might
one ind poverty in the present model? The poverty line income could be deined
to be just above the unskilled reservation wage rate (but deinitely below the
skilled reservation wage), in which case all those earning that wage (and this is
likely to include everyone in the unskilled sector) are poor. Development in this
case is tantamount to a process of poverty reduction. This, however, would appear
to be too broad a deinition of poverty.18 Rather, one may deine it to include only
18 While development must, among its aims, tackle poverty, to limit the aim of
development entirely to poverty elimination would appear to be too modest an ambition,
and in any case would not seem to accord well with the general sense in which we
understand poverty. Note that we have earlier deined the unskilled reservation wage
to be equal to the minimum cost of living that would be necessary to ensure a person’s
continued survival and continued capacity as a labourer. his could be seen as in line with
a threshold level of income for absolute poverty. hus, while only making the unemployed
the poor in our model, one should not forget the fact that even those employed unskilled
46
•
he Twin Challenges of Reducing Poverty and Creating Employment
those who are unemployed, in principle from both sectors but primarily or even
exclusively from the unskilled sector.19
In igure 2.1, an LN number of unskilled workers are unemployed and live
in poverty. There are short-term measures to combat this: anything that could
increase job opportunities in this sector (that is, anything that can push out the
unskilled labour demand curve) can reduce poverty. However, over the long run,
the best approach to combating poverty is to invest in education, to move those
who could otherwise end up unskilled (or who could otherwise stay unskilled)
to the skilled category. Other things being equal, the more this happens, the less
unemployment there can be from the unskilled sector, and the less poverty overall.
And in considering a long-term approach to combating poverty that is based
on education, short-term measures intended to push out the two demand curves
for skilled and unskilled labour can be seen to make a contribution to long-run
reductions in poverty as well. In the former case, a rise in the skilled equilibrium
wage can increase incentives for private investment in education; in the latter,
an increase in the unskilled equilibrium wage can increase private resources
available for such investment.
The roles of the State and market in development
and poverty eradication
The market, the State and the vision
The stylized model presented above postulates that development is essentially
about human capital accumulation. In addition, it is argued that full development
demands that all people in a society eventually enjoy the same opportunities
of superior education, and that successful development ought to mean that
development be managed in such a way that income inequalities are kept as low
as possible without compromising people’s incentives to invest in education. In
the long run, poverty is to be eradicated as part and parcel of this development
process. This constitutes, as it were, the long-run goals of development. That
being so, the resulting strategy for development must centre on human capital
accumulation. This section discusses how such a strategy might work in respect
workers are in fact just above poverty, and could easily fall back into it should there be any
shock to the economy (any letward shit in the unskilled demand curve in our model).
19 While unemployment can in principle happen to skilled workers in our model as
well, as a rule it will be assumed not to (certainly not that of the long-term, structural
kind). To allow this to occur would be against the very spirit of the development process
postulated here. Short-term, frictional skilled unemployment may well occur, but in these
cases one may expect the temporarily unemployed to live on their savings and to stay out
of poverty.
Education and role of the State and the market in poverty eradication
• 47
of one market, the market for education, and the respective roles of the market
and the State therein.
The economic literature—and the social science literature more generally—
contain countless discussions of both market and State failures. Textbooks
routinely offer quite stringent criteria for a perfectly competitive market. Failure
to meet any of these is said to result in a market failure. In practice, few markets,
if any, satisfy these criteria. And where there is a market failure, the Government
concerned may be advised to take any one of the following courses of action:
do nothing (laissez faire); regulate and improve the functioning of the market in
question (market strengthening); form partnerships with the market (public and
private partnerships, or PPPs), or directly take over all or some of the functions of
the market (market substituting). Active public policy may involve all or any of
the latter three courses of action, but exactly which would be the most effective
one to pursue in terms of best improving on the existing allocations by the market,
yet in a cost-effective manner, is case-speciic. Solutions that may improve on an
existing market allocation but which are highly costly are unlikely to be selected,
and rightly so. And it has also been widely recognized that, sometimes, a policy
package with a set of coordinated and complementary measures to address failures
in a range of related markets may be more effective than a single-pronged attack
on any one of these failures.
But if these are the only ways to think about the role of the Government and
how it may intervene in a market, something fundamental is missing. There must
also be vision, leadership and strategic planning from the Government. In contrast
to the function of detailed allocations which a market may or may not perform
well given circumstances (market conditions), vision, leadership and strategic
planning are things which a market simply cannot provide.
This may sound like calling for a return to the days of central planning and
State socialism, but to see it that way would be a mistake. First, some government
planning, yes; but State socialism, no. Second, even when it comes to planning,
it has to be based on a vision that all shall eventually receive an equal chance
of good education, which would appear to be both far better ethically grounded
and far less ambitious than the vision (if there was one) that guided past central
planning under State socialism (where people were supposed to live the lives that
were planned for them).
The case for vision, planning and leadership is paramount. Market
fundamentalists may view all this as gibberish. In their mind, why should a
Government have a vision anyway? Why shouldn’t one leave things to the
market, and accept whatever it delivers, for it may well be the best outcome
possible? However, to accept this view would be tantamount to condemning the
vast number of the poor to perpetual poverty, for history has shown that markets
alone, with their inevitable failures, simply cannot rid a country of poverty. If they
could, they would have done so already! And ad hoc interventions in the normal
48
•
he Twin Challenges of Reducing Poverty and Creating Employment
functioning of the market cannot deliver the full and successful development
which this chapter postulates either, for reasons just explained.
The market for education
Under a human capital accumulation–centred development strategy, the irst most
important area of policy concern, or what should constitute the centrepiece of
policy under this strategy, must concern investment in education. Such investment
may be organized through the market, and in many parts of the world and to
varying extents, this has indeed been the case. In theory, if the capital market is
perfect, if there are perfect foresights on future returns to education, and if there is
also no externality involved in education, individuals should make both privately
and socially optimal investment decisions. However, as has been well recognized,
externality in education does exist, and perfect foresights on future returns to
education are simply not possible. So even privately optimal decisions made by
(risk averse) individuals may not be socially optimal. Further, the capital markets
may be seriously imperfect, especially in developing countries, such that even with
good human capital investment opportunities, individuals may not be able to borrow
against their future streams of income, unless they have adequate resources to offer
the required collateral. This means that poor individuals or families may, in the end,
not be able to take advantage of such opportunities. But they are from the viewpoint
of this chapter precisely the people whom development must aim to encompass.
Given its key role and strategic importance in moving development forward,
there is clearly a case here for active public policy in respect of education (doing
nothing is simply not an option). Nothing is more important than an adequate,
sustained level of investment in education if one wants eventually to pull a country
out of poverty and underdevelopment. Such actions may take the form of any, or
indeed all, of the three active courses of public action noted above. Thus, efforts
may be made to improve the working of the capital market when it comes to, for
example, offering student loans. Private and public resources may be combined to
make investments on the supply side to increase and improve educational facilities
(schools, colleges, universities) and the quality of teaching, and on the demand
side to provide scholarships, hardship allowances and other similar schemes to
enable students from poorer families to avail themselves of the opportunity. Standalone direct public investments may also be made to supplement suboptimal
private investments on both the demand and supply sides. To ensure that such
investments do not crowd out private investments, public investments may be
used to target areas of education where private investment is particularly lacking,
or those that need speciic promotion for reasons of externality and, indeed, equity.
One such case is universalizing basic education. In many developing countries,
while some sections of the population are already enjoying fairly high levels of
education, others are still left without even basic education. Receiving a basic
education would be especially important for these people if they are to be part
Education and role of the State and the market in poverty eradication
• 49
of the development process. With general improvements in educational levels
across the world and, hopefully, in the country concerned, even though such basic
education may not be enough to turn a person into a skilled worker, it may be a
necessary qualiication for that individual to become an unskilled worker in the
future (as without this basic education, he or she may even become completely
unemployable). Ultimately, of course, full development should ensure all people
an equal chance of receiving the education available.
But, as already argued above, the role of the State should not be limited to
making only such ad hoc interventions in the otherwise normal functioning of the
market (where the market is in the driver’s seat, so to speak). The role of the State
must, especially in this crucial area of development, include a vision, leadership
and strategic planning. Beyond this general call for the State to act in matters
of education, there is another immediate practical imperative: it will take years
to educate a skilled worker, and it is better to do so while he or she is still at the
school- or college-attending age. Therefore, some forward planning must be done
if future demands for skilled workers are to be appropriately met.
But vision and planning should not be limited to making sure that only future
needs for skilled workers are to be properly met. After all, where are the clear
signals on such future needs to come from? Vision, planning and leadership must
also be about shaping expectations and making things happen! Doing so is not about
entertaining far-fetched ideas; it is about being at once realistic and farsighted. On
matters of education, there is, in fact, the East Asian experience to guide us.20
Consider the potential beneicial loop noted above about education (seen
against the numerous vicious cycles that usually lurk along the treacherous path
of development, this surely is one of the few beneicial ones to be quickly seized
upon). It will not only supply a steady stream of skilled workers, but may also
promote demand for these workers. This can especially be true today with mostly
externally open economies, free trade regimes, and increased levels of international
trade and foreign direct investment. With a well-educated and skilled workforce,
a country can produce and provide high-quality and knowledge-intensive goods
and services not only for its own domestic market, but for the international market
as well. The demand for these goods and services can therefore be rather elastic
or even shift, and accordingly the demand curve for skilled labour may also
shift. Moreover, the presence of a strong workforce of skilled workers may also
attract international demand for reasons of reputation, industrial clustering and
agglomeration effects, the ripples of which may spread across the globe. In short,
increased supplies of skilled workers, thanks to education, may actually create
their own demands for these workers. This is a modern example of Say’s law,21
and is the irst part of the East Asian success story.
20 For experience of some East Asian countries in this and other areas, see Liu and Yin
(2010) and the references therein.
21
Say’s Law states that supply creates its own demand.
50
•
he Twin Challenges of Reducing Poverty and Creating Employment
But might the education market in fact rise to meet the challenge of its own
accord, without any government involvement? The most informed answer is that,
left to its own devices, the market will not. A key factor causing critical failures
in this market is the lack of good foresight about the future by private agents.
The reason has to do with expectations. Needless to say, no expectation can ever
be perfect in the sense of eliminating all uncertainties. But a greater availability
of credible signals from the Government regarding its vision, its speciic plans
and aims, and indeed a stance of strong leadership and commitment, can help
private agents to make better and more intelligent decisions about education for
both themselves and their children, especially when it comes to having these
households borrow for such education, often against their limited present wealth
or future streams of income. On the lenders’ side, such vision, commitment and
leadership from the Government should also help them to make better and more
intelligent decisions about lending.
Therefore, a clear vision from the Government with strong leadership and
strategic planning in matters of education can even help the market function
better. But it would be unrealistic to think that the State needs to provide only
vision, planning and leadership. Even with a greater clarity of direction and
purpose from the Government, it will be extremely unlikely that the market can,
then, do all the delivery work alone. There is therefore a case for the Government
also to roll up its sleeves and do the hard work of delivery itself, in a way that
complements the private market. As noted, this could involve direct government
investment on both the demand and the supply sides. The Government could even
form partnerships with the private sector in certain programmes. And, of course,
it must regulate the private sector by monitoring the quality and standards of
teaching, and strengthening the capital market as much as possible. This is the
second part of the East Asian success story.
In addition to the experiences from East Asia, more recently, some successful
cases of public policy intervention that target education have emerged from
other parts of the world. Thus, cash transfer programmes such as Brazil’s Bolsa
Familia programme have been tried in several Latin American countries. These tie
social relief to a household to investment in its children’s education, in the form
of education-conditioned cash transfers. Certainly, the education so targeted is
only basic. However, as one step in an attack on the lack of even basic education
among the poor, it has much to recommend itself, even though further study is
necessary on issues about the quality of education received and the necessary
additional measures to make it part of an overall approach to attacking the problem
of education in these countries.
Education and role of the State and the market in poverty eradication
• 51
Conclusion
This chapter postulates that the essence of development rests with human capital
accumulation, in particular education, both because education can provide a selfsustaining force for development, as experience from East Asia shows, and because
it is essentially one of the few things which development should really be about.
Poverty, in the long run, is to be tackled through education and development,
although an anti-poverty programme may have more immediate priorities in the
short term. However, a human capital accumulation–centred development strategy
cannot entirely rely on the market. The State must have vision, leadership and
strategic planning, as well as make other substantive interventions in the normal
functioning of the market. Following a discussion, in particular, of the case of the
market for education, the chapter inds ample room for State action if the long-run
aim of full and successful development is to be realized.
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55
Chapter 3
Governance, development and poverty
eradication
Goran Hyden
Introduction
For over a decade now, the international policy discourse has been premised on the
thesis that development equals poverty reduction or poverty eradication. This is
particularly strongly stated in the United Nations Millennium Development Goals
(MDGs) which target improvement in human welfare and the human condition.
While approaching the inish line for this bold international project to tackle
poverty on a global scale, it has also become clear that (a) development is more
complex than just poverty reduction, (b) poverty reduction itself is a contested
practice, and (c) governance, as the critical process variable in this context, has
differential impact depending on the socioeconomic, that is, developmental
conditions of particular countries.
This chapter tries to unpack the relations between governance, development
and poverty eradication in ways that point both to lessons learned and to new
policy considerations. It begins by showing how the understanding of the key
concepts discussed in this chapter have shifted in the past decade and thus laid
the ground for changes also in policy. The next section discusses the challenges
of bringing governance to bear on poverty reduction, drawing attention to issues
in donor circles as well as recipient country contexts. The chapter then proceeds
to identify the more important lessons learned for understanding and dealing with
the governance–development nexus in relation to eradicating or reducing poverty.
It ends by discussing new policy options for the future.
Shifts in understanding
Beginning with governance, there has been a considerable change in how the
international policy community understands the concept and translates it into
speciic assessments and practices. Ten years ago the idea was that governance
is a prerequisite for development; it translates into the application of a liberal
democratic model; and, it relies on elaborate comparative measurement methods to
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he Twin Challenges of Reducing Poverty and Creating Employment
indicate where on a global ladder of “good governance” particular countries stand.
The “mother” of all these score-carding indices was the Worldwide Governance
Indicators produced by the World Bank Institute (for example, Kaufmann and
Kraay, 2008). It was liberally used by the donor community to “name and shame”
countries that failed to live up to the standards associated with this and other
indices such as the Corruption Perceptions Index that serves as a major input into
the Global Corruption Report published annually by Transparency International.
More recently, inluenced by the dificulties of converting data from these
indices into speciic policies and fuelled by changing perceptions of foreign
aid, as conirmed in such documents as the 2005 Paris Declaration and the 2008
Accra Agenda of Action, understanding governance has moved in the direction
of (a) viewing it as a political rather than a managerial challenge, (b) treating
it as a country-owned rather than a global and externally driven project, and
(c) acknowledging that institutional performance is determined by underlying
political economy variables (Organization for Economic Cooperation and
Development-Development Assistance Committee, 2008).
Development, ever since the early 1980s, has been interpreted through a
microfoundational model of choice. The global discourse and practice have
centred on getting policies right and making institutions more eficient and
effective in using and allocating resources. This approach has until recently
remained unhinged from the varying structural realities of the many countries in
the South. It has encouraged a tendency to assume that a single policy solution
its everywhere, is a matter of right design, and is expected to produce results
regardless of circumstances.
More recently, there has been a growing recognition of what the international
policy community took for granted in the 1960s and 1970s: the idea that
development is a historically embedded process (a comparison of modernization
and underdevelopment theories of those days) and thus determined as much by
structural factors as by rational choice. This has led a number of donor agencies
to change their approach to foreign aid and its role in development. In the name
of greater aid effectiveness, there is a tendency to (a) encourage greater national
ownership of foreign aid by recipient countries, thus tempering the “econocratic”
approach to policy design with political process considerations; (b) assess
progress in trajectory terms, that is, understanding where a country comes from
and what progress it has made rather than comparing it to other countries; and (c)
shift from a model-driven to a problem-driven approach to development (for an
example from the World Bank, see Fritz, Kaiser and Levy, 2009). This change
is also evident in the critique offered by heterodox economists like Khan (2007)
who believe that too much emphasis in the past has been laid on making the
system more eficient at the cost of making it more effective in transforming the
productive forces in society.
With regard to poverty reduction or eradication there has been a corresponding
shift in perception and approach. For the past ten years, until recently, the effort
Governance, development and poverty eradication
• 57
has been driven by the complementary role that reducing poverty is expected to
play in the context of the macroeconomic changes towards a neo-liberal model
of development. It has been fuelled by international proclamations like the
Millennium Development Declaration, donor-driven strategy formulation, and
debt-relief funding that made it convenient for donors to set aside resources for
the low-income countries of the world. Poverty reduction has been an integral part
of oficial development assistance (ODA) and its emphasis on government-togovernment transfers. The State—or various government institutions—therefore,
has been the principal recipient of the resource transfers for poverty reduction. In
many respects, the strategy adopted for poverty reduction has been an echo of the
basic needs approach that dominated in the 1970s.
A number of bilateral donors, accepting like the International Labour
Organization (ILO) that employment has been a neglected issue in reducing
poverty, have more recently shifted their priority to job creation. Initiatives that
promote economic growth—or income growth at the individual level—have been
given greater weight in the policies of Nordic Governments. An example is the
Danish Africa Commission Report of 2009, which stresses the importance of job
creation for the poor, especially the unemployed youth. The follow-up to this report
is Danish sponsorship of a number of regional and national projects focused on
poverty reduction through job creation. This does not signal a return to a complete
reliance on the market as in the 1980s and 1990s but a better balance between the
contributions that come through interventions by the State or through the market.
These shifts in perception and practice are part of an ever-changing
development narrative. They are important because they constitute, in many
respects, a challenge to many of the premises underlying the poverty eradication
efforts that became mainstream in the early 2000s. They call for caution where the
MDGs demand acceleration. They call for attention to process where the MDGs
demand results. They call for appreciation of local context and ownership where
the MDGs demand attention to global targets. They call for “best it” arrangements
where MDGs call for “best practice” interventions. They call for understanding
structural variables where the MDGs demand ixing institutions. These juxtaposed
positions are not necessarily irreconcilable but they do constitute challenges to the
inal phase of implementing the MDGs.
Addressing the challenges
These challenges call for reviewing the approaches to poverty reduction at both
donor and recipient ends. The bottom line must be how policies can be made
more effective given the shifts in understanding of governance, development and
poverty reduction that have taken place since the MDGs were irst launched.
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At donor level
There are two issues that deserve attention at the donor level. The irst is the extent
to which the MDGs have become an end in themselves, compared to being a
means to an end. The second is what the balance should be between the focus on
development and poverty reduction as compared to governance.
MDGs—ends or means?
The MDGs have become a powerful catalyst for global efforts to reduce poverty
with a special focus on low- and middle-income countries. Countries around
the world have gathered together to act in a way that is rather unique at least in
recent United Nations history. Governments in the North and the South alike have
subscribed to the MDG agenda. Civil society organizations have joined the effort
and added value through their own national and international networks. Although
more a framework for action than a speciic strategy, the Millennium Declaration
has replaced the Washington Consensus as the lead for global action.
A particular feature of the MDGs is that there are speciic targets that should
be met within the time agreed upon for eradicating poverty—ifteen years (2015).
While eradication of poverty is a noble aim of promoting social justice—and
should be kept for that reason alone—reduction is a more realistic ambition.
Each of the eight Goals derived from the Declaration relects this more pragmatic
approach. Even so, implementing these goals is a momentous task.
Commitment to implementation has been strong all around. The donor
community has made funds available on a scale that may be unique for United
Nations–led development ventures. This inancial commitment has been matched
by a high level of political dedication. Implementing the MDGs has been turned
into “Job No. 1” in many bilateral aid agencies.
While this resoluteness is commendable, it has also led to a somewhat one-sided
approach. First of all, the focus on implementation has encouraged a managerial
approach that neglects the differences that exist in context from one country to
another. Individual countries and regions of the world have been compared as
if they began from similar premises. Little, if any, attention has been paid to
the question of where a country started from and what distance it has travelled
on the way to implementing the Goals (Go and Quijada, 2012; Easterly, 2007).
Second, this attempt to benchmark these goals for national planning purposes
without adequately contextualizing and tailoring them to national circumstances
and capabilities has been criticized—even by one of the MDG architects, Jan
Vandemoortele. In his view, the MDGs have been turned into a master rather than
being a servant to national policy implementation (Vandemoortele, 2009; 2011).
Governance, development and poverty eradication
• 59
Governance—the overlooked variable?
The often blind focus on implementation relects the prevalence of a results
orientation among the donors. This has become increasingly pronounced since the
MDGs were irst adopted. The principal interest has been in identifying outcomes
that can be attributed to the inancial and programmatic support given by the
donors (Vandemoortele, 2011). The more important question has been what has
been achieved, not necessarily how it was achieved.
Being a process variable, governance has been, if not an afterthought,
nonetheless often an issue of secondary interest. Good governance is not included
as one of the MDGs. Furthermore, the process is complex and messy and thus
dificult to measure. Getting institutions to work well takes time and their
maturation does not easily lend itself to evaluation within the budgetary timelines
of donor Governments. For these reasons, there has been a tendency to rush the
implementation in ways that have not always been positive. For instance, building
schools in the rural areas of many African countries has been accelerated to the
point where the public revenue to maintain these structures, for hiring teachers
and obtaining educational resources, is often woefully insuficient (Therkildsen
and Buhr, 2010). The result is that students enrolled fail to graduate, and drop
out of schools with little knowledge. According to the Minister of Education of
the United Republic of Tanzania, no less than 46.5 per cent of all pupils failed
to pass their Standard Seven national examinations in 2010. Even though the
total number of pupils enrolled is much higher than before, this still means that
after seven years of schooling, almost half remain largely illiterate and unable to
function better in society (Lugongo, 2010).
The role of governance in development and poverty reduction is complicated
by the fact that the global discourse tends to use the concept in many different
ways. Particularly unhelpful is the suffusion of policy with governance. For
instance, in many agencies, good governance is tantamount to right development
policy. To fully appreciate the role that governance can play in reducing poverty,
it is important to make a distinction between public policy, on the one hand, and
governance, on the other. Public policy is made—and implemented—within a
governance framework. The latter can facilitate the policy process, but it may also
hinder it. Thus, the challenge is to develop the rules or institutions that promote
poverty reduction.
This task has become more demanding in recent years as the international
community has raised the bar by insisting on multiple stakeholder involvement
in making and implementing policy as well as by calling for attention not merely
to results but also to rights. This has meant a radicalization of the approach to
poverty reduction that not every donor inds easy to embrace in full. Several
dimensions of governance, therefore, are often overlooked because the human
rights agenda is politically controversial in inter-State relations. This being said, it
is also important to record the progress that has been made towards an acceptance
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he Twin Challenges of Reducing Poverty and Creating Employment
of a human rights–based approach to poverty reduction. This was noted as one
of the achievements at the 2010 MDG Summit. What is clear is that governance
issues, not least those of social justice and human rights, are becoming increasingly
salient within the donor community as it considers poverty reduction approaches.
At recipient level
Poverty reduction, especially when linked to the MDGs, is an international project
with its own global framework. In implementing it, not enough attention is always
paid to the differences on the ground in the countries of the South. Two issues
pose challenges in the effort to meet the MDGs. The irst is the structural factors
that often make policy implementation fall short of target in many low-income
countries. The second is the weakness of the indigenous middle class when it
comes to creating jobs and formalizing the relations of the informal sector.
What does digging down reveal?
The value of political economy analysis is that it allows for a deeper digging
down than one focused on policy and institutions alone. It has become a necessary
part of understanding why policies fail to get traction, especially in low-income
countries. There may be nothing wrong with the design of the policy, nor the
willingness to implement it, but a given initiative still falls short of full realization
because there are structural obstacles. Structural variables are slow-moving, that
is, it is unrealistic to expect that they will bend to policy initiatives right away.
They take time to conform to and facilitate the reforms that policymakers seek.
Of special relevance is the fact that low-income countries lack rationally
constructed systems for policy execution. Poverty exists in many forms and arises
in a broad range of circumstances. The causes may be man-made and systemic
or they may be environmental, meaning people may live in poverty because they
are not part of a system. In other words, poverty may be the result of effective
as well as ineffective policy interventions. Policies tend to be effective where
interdependent systems exist, it is possible to rationally coordinate and direct
collective action in a certain direction, and people are suficiently dependent upon
the system to “feel the pinch”. This is what is needed to redress mistakes and ensure
a policy dynamic that responds to what happens to citizens in a particular country.
The instrumental rationality that is required for the system to work is what helps
produce the conditions under which development becomes sustainable. Countries
that have emerged from low- to middle-income status or are already developed
have all acquired this quality and used it as an engine of economic growth as well
as redistribution.
Countries that are lagging in terms of eradicating poverty are those that lack the
qualities needed for systems strategies. Leaders use personal and informal relations
to govern, and citizens are not suficiently captured by the market to respond in
terms of rational choices that enhance their position in society. Individuals use
Governance, development and poverty eradication
• 61
personal connections to enrich themselves or cope with the conditions of their
poverty. Human rationality, and therefore, by extension, policy interventions do
not penetrate society in the same dynamic manner as in societies that have fully
embraced such an approach. For example, poverty eradication policies tend to get
implemented with little regard to feasibility and cost-effectiveness because there
is no rational feedback or citizen response that makes the system avoid similar
mistakes in the future. Leaders act like chiefs, people respond as subjects, and the
future is seen to lie in the hands of forces over which they perceive themselves as
having little control. Community-based projects work in these contexts but these
efforts tend to become isolated islands and often falter once the external input
comes to an end.
When it comes to poverty eradication and understanding the developmental
context in which it is being pursued, there are, from a governance perspective,
two basic and distinctly different scenarios: one where systems work and policies
can be assessed in terms of speciic gains or losses and another one where systems
do not work or are still in the making and policies therefore tend to slip and
meaningful and sustainable results are hard to identify. These two scenarios can
be further differentiated between those where either the State or the market tends
to be the prime mover when it comes to poverty eradication, as illustrated in igure
3.1 below.
Systemic rationality is modern and encourages adherence to abstract principles
and rules. It creates solutions that are meant to apply universally regardless of
context. Rule of law, human rights and the perception of the individual as an
autonomous actor with capacity to determine his or her own destiny are among
the more obvious manifestations of this type of rationality. As Giddens (1990)
argues, it is “disembedded” from place and time. It is being constrained by
systemic rules that make calculability possible. The effects of poverty eradication
policies, therefore, are possible to measure and, if necessary, correct.
Where systemic rationality is lacking or not strong enough to decisively
determine the outlook of the policy elite, environmental conditions shape the
outcome of various initiatives and interventions. These conditions are typically
non-modern: a belief in supernatural forces controlling human destiny; a
preference for face-to-face interaction; a respect for patriarchal authority; and
a reliance on particularistic rather than universalistic norms. Policy preferences
relect differential environmental conditions. Because people do not have a sense
of sharing their destiny with others outside their own community, they tend to
become disappointed when government is not giving them everything they ask for
because it must share scarce resources with people in other communities. This has
proved to be a serious challenge in trying to effectively implement participatory
or “bottom-up” budgeting aimed at empowering the poor. The point is that in
these circumstances, local community priorities tend to get dropped at higher
levels and the feedback from these higher levels back to the communities tends
to come with only the message that “there was not enough money in the budget
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he Twin Challenges of Reducing Poverty and Creating Employment
to include your project”. In these circumstances, it is not particularly surprising
that the poor try to fast-track their request by engaging a political patron. The
phenomenon of clientelism, therefore, should not be viewed as merely driven by
powerful individuals. In the context of trying to get out of poverty, it is also driven
from below by the poor because there is no system to really incorporate them in a
civic and constructive way.
Having laid out the parameters for identifying different manifestations of
poverty, the next step is to provide some empirical examples of countries that
it the descriptions in the matrix. Social exclusion tends to be most prevalent
in two scenarios. The irst is in countries that already rely on a universalized
State but face challenges from groups that call into question existing norms of
governing. In the case of Canada, for example, this has occurred with the growing
activism on the part of indigenous peoples. In Europe, it has occurred as a result
of immigration of people from other cultures. The most apparent case is the Roma
people, but it applies to other groups as well. The response has vacillated between
a softer multicultural approach and a harder insistence on existing universal
norms. France´s response to cultural challenges from its Muslim minority is
a case in point. Policies aimed at correcting gender inequalities constitute yet
another example of how political measures have been taken to extend universal
norms to all groups in society (Narayan and Petesch, 2007).
Figure 3.1. Types of poverty manifestations depending on
governance context
SYSTEMIC
Social
exclusion
Economic
alienation
MARKET
STATE
Social
isolation
Informal
coping
ENVIRONMENTAL
Source: Author’s own elaboration
Governance, development and poverty eradication
• 63
The second scenario is in countries that are modernizing and trying to
universalize norms in ways that leave certain groups outside the mainstream. In
Botswana, for example, where the Tswana-speaking majority has modernized the
State and its system of making and carrying out policy, the Basarwa and Weyeyi
groups of people in the northern part of the country have become increasingly
excluded (Nyati-Ramahobo, 2008). Much the same happens in other countries
undergoing this process. In India, the victims tend to be ethnic peoples that
depend on social activists rather than the State to be part of society. Indigenous
people in Latin America are yet another case in point. In many of these countries,
as in the United States of America before, these minorities have been brought onto
reservations so as to be more easily approached by the authorities.
Economic alienation occurs when people are uprooted from their land and
forced into employment either on somebody else’s land or in new social settings
such as industries. In the classical analysis of alienation, the process was seen
as the cause of poverty and powerlessness. This was conirmed by upheavals
and revolutions in Europe in the nineteenth and at the beginning of the twentieth
centuries, but was gradually brought under control. People leaving the land by the
1950s in Europe had become a natural process of escaping poverty. Alienation,
however, was also an integral part of creating the conditions for development. As
part of modernization, the process had the effect of making people more dependent
on a system that could be adjusted in response to market or bureaucratic failures
(Kohli, Moon and Sorensen, 2003). Greece is a recent example of where the
governance of the system has failed to the point where the poor have taken to the
streets to protest. A similar process of economic alienation has been intensiied in
many parts of the world since the introduction of neo-liberal economic policies.
Although it has not always crystallized into social class formation, the social
dynamic that stems from the penetration of the market has grown in importance.
It is the disjuncture between the social differentiation in the marketplace, on
the one hand, and the sluggishness of the governance sphere, on the other, that
has led to the uprisings in the Arab world. In short, the operational demands of
the economic system cannot be ignored. Wherever governance measures fail to
respond to these demands with an eye also on their human consequences, poverty
is likely to increase and with it the risk of protests going out of control.
Social isolation is different from social exclusion and occurs where social
interaction is not perceived in rational and objective terms. In other words, poverty
is not foremost an intentional outcome of speciic policies but a consequence
of particularistic preferences in resource allocation. The phenomenon of social
isolation seems particularly prevalent in multi-ethnic societies. The isolation of
nomadic people by sedentary groups of agriculturalists in African countries is one
case in point. There are other examples not only from Africa but other regions as
well where similar particularistic norms based on religion, ethnicity or race lead
to social isolation and a state of poverty. The worst examples are those where the
system is so inadequate in bringing people into a functioning economic system
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he Twin Challenges of Reducing Poverty and Creating Employment
that it produces the “failed State” phenomenon. The social fragility associated
with this scenario is a signiicant contributory factor to poverty, as the 2011
World Bank Development Report shows. Social isolation therefore stems from
some people being denied the same opportunities as others and is a consequence
of developmental conditions that are still infused with non-modern norms and
where, for example, physical infrastructure is lacking and thus exacerbates the
situation.
Informal coping occurs in situations where market institutions are inadequate
in serving people. It is a manifestation of poverty because there are not enough
levers to lift people out of poverty or access to them is dificult, if not outright
denied. People in the informal sector may be trying very hard to succeed; many
of them are entrepreneurs but their aspiration and ambition are not suficiently
supported by the system. In many African countries, this issue arises because
of the continued existence of customary rules of asset ownership that limit the
issue of credit. Following the initiative several years ago by Hernando de Soto
in the informal sector in Lima, Peru, efforts have been made in select African
countries to work towards regularizing asset ownership in the informal sector, and
some progress has been made. For the majority of the poor in the informal sector,
however, things have not changed and “graduating” from poverty status is still a
long way away. Microcredit systems similar to the Grameen Bank in Bangladesh
have been tried and many projects have alleviated the worst forms of poverty,
but few have had the effect of helping the poor to become full participants in
an economic system where they can decide the future on their own. Above all,
the very few examples of collective action by the poor in response to challenges
posed by the economic system would indicate that they have not yet moved from
merely coping to being willing and able to take organized steps to change the
system.
Lessons learned
Governance is relatively easy in countries with functioning economic systems
because they have the mechanisms for generating development and reducing
poverty. These are countries that have fully embraced modern values and
norms of rationality. Even though progress is never linear, what characterizes
these countries is their ability to self-propel. They respond to speciic policy
interventions and can correct what goes wrong.
The real challenge lies with countries where these qualities are still in short
supply and thus fail to produce the systems strategy capabilities that have been
referred to above. Universal policy prescriptions fail to get traction. It becomes
dificult to create the sense of ownership and commitment to policy that these
universal policies call for. The results expectation is not adjusted to the capabilities
of the institutions of these countries. They are therefore inevitably described as
Governance, development and poverty eradication
• 65
falling behind or failing to the reach the goal. In the name of accelerating the
effort, these countries are induced to expand their social services sector to a point
where there is a great risk that they cannot meet the recurrent costs of sustaining
any gains made (Therkildsen and Buhr, 2010).
The inclination of the international policy community to deal with these
institutional capability issues has been to transfer models and practices from
already functioning systems. These implants have been hard to sustain because
universal, abstract models do not work in particularistic settings. These are
two distinctly different governance regimes. What has been missing in the
prescriptions to date is a sense of history, notably with reference to how a State
is formed and how it functions at different developmental stages. The prevailing
assumption in the public choice model that has served to underwrite so much
of the policy in the past three decades is that the State is autonomous and free
from corruptive private interests. From a historical perspective, it is clear that
the State has never been a neutral instrument for good only, but has been the
subject of power struggles. It is only out of such struggles that it has eventually
emerged in the shape that we now use as the model of good governance. The
destiny of the State has been determined by local stakeholders with an interest
in improving governance. Wherever systems capabilities remain weak, the fate
of poverty eradication will be determined by the extent to which modernizing
social forces will grow and establish themselves as architects and builders of a
self-sustaining system and governance regime. In the meantime, it is necessary
to reduce the inluence of particularistic norms by steering resource lows to the
poor via channels that encourage professional management of funds according to
universally acceptable norms.
Policy recommendations
Many of the countries that have found it dificult to meet the MDG goals are
also highly aid-dependent. The responsibility for their shortcomings, therefore,
must be shared by the development partners. Because ODA goes through the
principal treasury institution, it feeds central government institutions. Since
these institutions in many countries plagued by widespread poverty do not act
in a strategic and rational fashion, aid money tends to get tied up in red tape
or misappropriated. Local government institutions that are closer to addressing
poverty issues are starved of funds and rarely get them on time. For example,
most African Governments have an 80/20 formula for sharing expenditures—
four ifths going to central Government, one ifth to local governments. This
is a serious misallocation of funds that has not been possible to correct despite
pressure to decentralize funding and the establishment of special means to track
public expenditure. This formula not only generates governance problems, such
as incidents of corruption, but also sustains a centralized, top-down approach to
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he Twin Challenges of Reducing Poverty and Creating Employment
development that does little to reduce poverty and fails to satisfy current principles
of how aid money should be utilized. Above all, it does nothing to reduce the
inluence of particularistic norms in resource allocations.
A new approach is needed as part of an emerging development narrative
in order to strengthen poverty reduction efforts in these countries. It should be
designed in accordance with the following simple but basic principles: (a) it must
be demand-driven; (b) it must cater to local institutions, governmental or nongovernmental; (c) it must be independent of direct presidential or ministerial
control; and (d) it must be professionally managed by an autonomous board of
directors or trustees. The operational formula for such funds has been around
for some time and there are examples to show that it works (Dag Hammarskjöld
Foundation, 1995). The beneit of this approach is that it provides incentives for
local stakeholders to adopt universalistic principles for managing their affairs and
reduce their adherence to particularistic norms, including reliance on political
patrons.
A second recommendation concerns the geographic focus of poverty
reduction programmes. To date, the emphasis has been on rural poverty based on
the assumption that the majority of the poor live in the countryside. This, however,
is rapidly changing. More and more young people, especially in African countries,
are moving to the cities, in most cases triggered by the education that they have
received in the village. A primary or secondary school certiicate has become a
passport to urban living to most young people. Poverty reduction programmes in
the rural areas, therefore, have helped push the poverty problem to the cities.
Building schools and health centres as well as reducing infant mortality and
other related activities are the easy part of poverty eradication. They produce
igures to make it possible to measure outcomes. They encourage a sense that
poverty reduction is a managerial and technical task. Dealing with urban poverty
is more dificult. It is more complex, messier and politically contested. Yet, it is in
the cities, large and small, that the real challenges of poverty reduction lie in the
near future. Tackling urban poverty issues not only requires a different focus, but
also calls for governance measures that help overcome ethnic and other forms of
particularistic conlicts that cause displacement, and by extension, poverty. What
happened in Kenya in 2008 and more recently in Côte d’Ivoire, two countries
that have generally been regarded as economic success stories, provide a warning
that urban poverty is a potential time bomb that can explode with disastrous
consequences for development.
Governance, development and poverty eradication
• 67
References
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Copenhagen: Ministry of Foreign Affairs.
Easterly, William (2007). How the Millennium Development Goals are unfair to
Africa. Brookings Global Economy and Development Working Paper 14.
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Fritz, Verena, Kai Kaiser and Brian Levy (2009). Problem-driven governance
and political economy analysis: A good practice framework. Washington,
D.C.: World Bank. September.
Giddens, Anthony (1990). The Consequences of Modernity. Stanford, CA: Stanford University Press.
Go, Delin S., and José Alejandro Quijada (2012). The odds of achieving the
MDGs. The World Bank Research Observer, vol. 27, No. 2, pp.143-184.
Kaufmann, Daniel, and Aart Kraay (2008). Governance indicators: Where are
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Kohli, Atul, Chung-in Moon and G. Sorensen (eds.) (2003). States, Markets and
Just Growth: Development in the 21st Century. Tokyo and New York: United
Nations University Press.
Lugongo, Bernard (2010). 47pc of candidates fail exam. The Citizen, 5 December. Available from http://www.thecitizen.co.tz/news/4-national-news/608047pc-of-candidates-fail-exam.html.
Narayan, Deepa, and P. Petesch (eds.) (2007). Moving Out of Poverty. Washington, DC: World Bank.
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Recognition. London: Minority Rights Group International. December.
Organization for Economic Cooperation and Development-Development Assistance Committee (2008). Survey of Donor Approaches to Governance
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Therkildsen, Ole, and Lars Buhr (2010). Recurrent cost boom threatens Millennium Development Goals. Elites, Production and Poverty (EPP) Project,
Danish Institute for International Studies, Copenhagen, November.
Vandemoortele, Jan (2009). The MDG conundrum: meeting the targets without
missing the point. Development Policy Review, vol. 27, No. 4, pp. 355-371.
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Fragility. Washington, D.C.: World Bank.
69
Chapter 4
Agriculture, rural livelihoods and poverty
eradication: some policy lessons from the food
price crises
bettina Prato22
INTRODUCTION
The role of agricultural development as a driver of inclusive growth and poverty
reduction has regained policy attention since the mid-2000s. In addition, today
agriculture is increasingly seen as a provider of other major development goals—
notably food security, improved nutrition, more resilient ecosystems and climate
change mitigation. Though not yet fully recognized, the potential for agriculture
to drive inclusive growth, reducing poverty on a large scale in the coming years
particularly in rural areas, is linked to its ability to deliver on these other goals.
However, in the aftermath of two global food price spikes and in the midst of
growing climate instability affecting harvests, we are only beginning to see some
convergence between discourses on agriculture as a driver of poverty reduction
and those that link it to food security and nutrition, climate change mitigation, or
a “green economy”.
While the importance of agriculture is thus increasingly emphasized in
eminent publications and in policymaking circles, this same sector has been less
and less able to provide a suficient, stable income source for the roughly 2 billion
people who belong to farming households in the developing world. This is partly
due to a shrinking and impoverished natural resource base, partly to population
growth, and partly to social and economic changes encouraging or necessitating
rural livelihood diversiication. Particularly in some regions, most very poor
people continue to be rural, and rural poor women and men are disproportionately
22 Research assistance from Samadhi Lipari (consultant, International Fund for
Agricultural Development) is gratefully acknowledged.
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he Twin Challenges of Reducing Poverty and Creating Employment
represented among the undernourished. While this may not be true for long, today
agriculture is the main available livelihood strategy, or an important complement
to other income sources (as well as, in many cases, the driver of other income
opportunities), for most of these people. Underinvestment in agriculture remains one
important reason why rural poverty is still widespread and entrenched in many areas.
Just as important as sector-speciic investment, however, is inadequate investment
in rural services, institutions, and infrastructure, as well as in the capabilities of
poor rural women and men as social and economic agents. Increasingly, failure to
respond to new risks and vulnerabilities affecting both rural areas and agriculture is
also a major factor hindering inclusive, poverty-reducing rural growth.
Given all this, what do the food price crises signal to policymakers tackling
the challenge of eradicating rural poverty? Essentially, they point to a global food
supply–demand imbalance set in a context of rapid, ongoing transformations in
agricultural markets around the world. This context and imbalance entail both
challenges and opportunities for agriculture and for inclusive rural growth. The
challenges are linked to increasing risk of marginalization of poor rural people in
agricultural markets, which are changing fast to cater to growing demand in highvalue sectors and in urban areas. They relate to risks of poor households losing
their rights over natural resources, as these acquire greater market value and attract
larger investors. Challenges are also linked to pressure on the productive capacity of
farmers caught between a more fragile environment and more demanding markets.
They are, inally, related to the vulnerability of rural livelihoods to new risks and
shocks—price spikes included. There are, however, also important opportunities
linked to market transformations and to the supply–demand imbalance that underlie
recent price volatility. These are related to growing demand for agricultural
goods and services (which can create income opportunities for farmers and other
rural workers) and to the growing interconnection and reorganization of markets
and supply chains (which can broaden and diversify those opportunities). They
are linked to the slow emergence of reward systems for improved management
of ecosystems, which can bring new sources of income and foster dynamics of
sustainable economic growth in rural areas. Finally, the prominence of food security
and nutrition on policymakers’ agendas in recent times—partly fuelled by the food
price spikes—offers an opportunity to direct more resources and policy attention to
agriculture, and hence to rural areas.
Against the backdrop of the crises, one critical question23 that policymakers
tackling rural poverty must address is thus the following: how can poor rural
women and men be supported to harness opportunities linked to growing market
demand around agriculture, while strengthening their resilience to shocks, and
with greater focus on their food security?
23 Other critical questions concern creating opportunities in the non-farm rural and
urban economies for rural poor people and harnessing migration lows to boost inclusive
growth. hese are already critical questions today for millions of people. However, given
the narrow topic of this paper they are not addressed here.
Agricultural, rural livelihoods and poverty eradication
• 71
Clearly, this question requires more than policy responses. However, policy
factors are critical: sound policies are needed to create an enabling environment
for investment in agriculture and the non-farm economy. A policy agenda is
needed to support smallholders to shift to agricultural practices that are more
productive, sustainable and resilient, capable of meeting growing demand for
high quality food and of better withstanding environmental pressures. Also,
there is need for policies to mitigate the risks rural people face and to reduce
their vulnerabilities. The crises point, in particular, to the importance of food and
nutrition-centred safety nets24 and of policy initiatives to reduce risks facing small
agricultural producers, rural workers and their households. Combining policy
initiatives coherently in these areas requires joint actions across ministries, levels
of government, and stakeholder groups. It requires a focus on agriculture, but in
the broader context of improving the economic and social environment of rural
areas, mitigating the risks poor rural people face, and nurturing their capabilities
to take advantage of changes in agriculture and in rural markets.
Rural poverty, rural livelihoods and agriculture
According to the International Fund for Agricultural Development (IFAD) Rural
Poverty Report 2011, 1 billion people among those living on less than $1.25 a
day are rural dwellers (International Fund for Agricultural Development, 2010).
Despite rapid urbanization under way across the developing world, a majority
of poor people will continue to be in rural areas in the next decades. The picture
is, however, different across regions and countries, both in terms of urbanization
and of the relative share of rural and urban populations among the very poor. In
Latin America and the Middle East, most poor people live in urban areas. Over
three quarters of people living below $1.25 a day are in rural areas in sub-Saharan
Africa, South Asia and Southeast Asia. In the second half of the 2000s, over 80
per cent of those living in extreme poverty in South Asia were rural (International
Fund for Agricultural Development, 2010) In addition, about one third of the rural
population of developing countries live below $1.25 a day, and more than 60
per cent on less than $2 a day. In sub-Saharan Africa, over 60 per cent of rural
people live in extreme poverty, and nearly 90 per cent live on under $2 a day
(International Fund for Agricultural Development, 2010).
Looking at poverty as a multidimensional problem does not yield a rosier
picture: across the developing world, rural areas are at a disadvantage when it
24 Safety net programmes may include non-contributory transfers of cash or food,
which may be unconditional or be delivered upon condition that children are kept in
schools, that work is undertaken in exchange, that medical checkups for infants and
children are performed regularly, or other conditions. hey are generally targeted to
population groups meeting speciic criteria. Some non-targeted or diicult-to-target types
of initiatives, such as food subsidies, may also be considered to be safety nets, but they are
not dealt with here.
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he Twin Challenges of Reducing Poverty and Creating Employment
comes to services and infrastructure of critical importance for development, from
energy to roads, from drinking water to sanitation, from healthcare services to
education. For instance, over 1.6 billion people are reported to lack access to
electricity, the vast majority of them in rural areas (Carr and Hartl, 2010). Only
a couple of years ago, the United Nations Development Programme (UNDP)
estimated that the number of people lacking access to electricity and modern fuels
was expected to grow, notably in least developed countries and in sub-Saharan
Africa, with major negative impacts particularly on rural women (United Nations
Development Programme, 2009). Rural children also have less access to good
quality education opportunities or less of a chance to stay in school than their urban
peers, and rural girls less than boys (United Nations Educational, Scientiic and
Cultural Organization, 2010). In general terms, the same can be said about access
to health care, inancial services and opportunities for political participation. To no
small extent, spatial inequalities underlying rural poverty result from urban bias,
or a relative neglect of rural areas, people and economic sectors in public policies
and investments. Weak human and collective capabilities and the fragmentation
of agricultural production systems, on the other hand, weaken the ability of
poor rural people—especially women and minority groups—to inluence public
budgets and investments.
As noted at the outset, poor rural households today have diverse sources of
income, although livelihood diversiication is unequally prevalent across regions—
more so in Latin America and Asia, less in sub-Saharan Africa. In India, for instance,
almost one third of the rural labour force is in the rural non-farm economy, mostly in
casual employment, with salaries typically higher than in agriculture, but generally
not suficient—or stable enough—to exit from poverty (Himanshu and others,
2010). Yet, the majority of poor rural households still have livelihoods that rely on
agriculture—as a source of income, a risk-mitigating strategy, or a source of food
and other items for household consumption (International Fund for Agricultural
Development, 2010). Also very importantly, many rural non-farm jobs are in
activities ancillary to agriculture—related to input supply, processing, transportation
and marketing. Depending on household gender roles and on existing opportunities,
different activities in or outside agriculture may be more important for poor rural
women or for men in each context. In general, women are estimated to make up about
half of the agricultural labour force in sub-Saharan Africa and East Asia (Food and
Agriculture Organization of the United Nations, 2010a). However, in some regions
they are prominently represented among non-farm workers, for instance in food
processing. Going forward, fewer and fewer households will be able to make a living
entirely based on agriculture, owing to population growth and a shrinking resource
base. However, in some regions, notably sub-Saharan Africa, non-farm (or urban)
opportunities that may absorb a growing labour force will remain insuficient in the
near future. Even elsewhere, tapping agricultural growth to provide opportunities for
inclusive, job-rich rural growth in ancillary sectors is likely to be a priority for many
years to come. Redressing urban bias is, however, necessary for this to occur.
Agricultural, rural livelihoods and poverty eradication
• 73
In parts of the world where rural poverty is more prevalent (notably subSaharan Africa) or where poor rural people are more numerous (notably South
Asia), the overwhelming majority of agricultural holdings are small (and are often
getting smaller), and the main production system is based on family labour.25
Smallholder agriculture, however, includes a variety of farming practices in
diverse landscapes and on a diverse resource base. It includes crop farming but also
livestock production, artisanal ishing, aquaculture and forestry. It encompasses
the production of food, ibre, fuel, medicinal products and other goods and
services. In a context of growing global preoccupation with food security and
food prices, it is important to note that up to 80 per cent of food consumed in Asia
and sub-Saharan Africa is produced on small farms, which, however, host about
half of the undernourished in the world (Hazell and others, 2007).
By and large, poor smallholders (especially women farmers) operate on a
limited asset base in terms of land and other natural resources, equipment and
inancial capital, with inadequate access to agricultural technology, extension
and advisory services, inputs and services (International Fund for Agricultural
Development, 2011). Like other rural citizens, moreover, they suffer from the
underdeveloped state of rural infrastructure and services, as well as from unequal
opportunities for political participation and limited inluence on policymaking
(Prato, 2009). In this, they are just as held back from participating in inclusive
economic growth as are small entrepreneurs and workers in other rural sectors.
As agricultural producers, they also have to face poorly organized and/or highly
asymmetrical agricultural markets, and high transaction costs for market access
and participation—especially in urban and modern retail markets (Vorley and
Proctor, 2008). This is not to deny that in some countries smallholders and
agricultural workers are active in modern supply chains serving domestic or
export markets, often with a positive impact on poverty (Swinnen, Maertens and
Vandeplas, 2010). However, in many areas the development of modern supply
chains, coupled with a legacy of weak market institutions and poor infrastructure
and services, has not occurred in ways broadly inclusive of smallholders, nor has
it brought about the sort of decent job-creating process that can contribute to rural
poverty eradication.
Given the centrality of agriculture in the livelihoods of poor rural people, it
is not surprising that economic growth in this sector tends to generate the greatest
beneits for poor people, particularly those in low-income countries. One source
shows that growth in agriculture is up to 3.4 times more effective at reducing
extreme poverty than growth in other sectors (Christiaensen, Demery and Kuhl,
2010). Other sources state that growth in agriculture—especially smallholder
agriculture, and especially where land ownership is more equal—is at least twice
as beneicial to the poorest people as growth in other sectors (Food and Agriculture
25 However, among the about 500 million farms of less than 10 hectares, or the about
450 million below 2 hectares, not all are farmed entirely with family labour, and family
farms can be much larger than 10 hectares in parts of the world, notably Latin America.
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he Twin Challenges of Reducing Poverty and Creating Employment
Organization of the United Nations, 2009). In recent decades, countries where vast
progress has been made in reducing extreme poverty—for example, China, Viet
Nam, other countries in East and Southeast Asia—are ones where smallholder
agriculture has played a major role in driving inclusive growth.26 In recent
times, agriculture has played an important role in growth and poverty reduction
also in some African and Latin American countries, such as Ghana and Brazil.
Agricultural development has also been instrumental in reducing the number of
the hungry in these and other countries—from 303 million in the period 19791981 to 122 million in the period 2003-2005 in China, or from 262 million to 231
million during the same period in India (Spielman and Pandhya-Lorch, 2009). It
has enabled such achievements by increasing food availability through improved
supply, improved nutrient quality, increased farmer incomes, and lower food
prices for poor urban consumers.
Many stories of growth and poverty reduction driven by agriculture are linked
to the history of the “green revolution” in the 1970s-1990s. This encompasses the
development and popularization in several Asian and Latin American countries of
improved seeds and crop and livestock varieties, combined with increased use of
agrochemical inputs, land tenure reforms, price management policies, and public
investment in rural and agricultural infrastructure (irrigation, roads) (International
Fund for Agricultural Development, 2010). Today, many call for a replication
or extension of these approaches to areas where the green revolution did not
reach—notably in Africa. However, in many areas traditional green revolution
approaches have had signiicant negative externalities or have reached their limits
in environmental and social terms. Also importantly, the leading role of the public
sector in boosting agriculture under the green revolution, and some of the policies
implemented in that context by several Governments (notably concerning price
stabilization and public marketing), do not lend themselves to easy replication in
today’s circumstances.
It is apparent today that there is a need to scale up investments in agriculture
to move beyond the green revolution, to continue on its path in terms of research
and development (R&D) and technology dissemination, and also to further a
new agenda for sustainability and resilience. It is also clear that both public and
private investment are needed for this, given the magnitude of the task at hand,
and the fact that most investment in agriculture is private anyway—coming in
particular from farmers—but requires supporting public investments and policies.
Today, investment in agriculture is inadequate in many developing countries. One
estimate of the needed additional public investment in agriculture for meeting
the irst Millennium Development Goal (MDG 1) amounts to US$ 14 billion a
year from 2008 to 2015 (Fan and Rosegrant, 2008). It is harder to estimate the
26 For instance, rural poverty rates declined in China from 76 to 12 per cent between
1980 and 2001, driven by a combination of policies boosting agricultural production,
while rural poverty declined from 64 to 34 per cent in India between 1967 and 1986 (see
Chen and Ravallion, 2007).
Agricultural, rural livelihoods and poverty eradication
• 75
investments in a range of sectors that agriculture needs in order to thrive (and to
help eradicate poverty under today’s circumstances). What is clear is that more
resources need to go in and around agriculture to support the kind of inclusive
growth that can help eradicate rural poverty. Policymakers have critical roles to
play in making this possible—via public investments in speciic areas, and by
designing, implementing and enforcing enabling policies to ensure not only that
greater investment does occur, but also that it does so in ways that are conducive
to enabling agriculture to drive inclusive growth and to deliver on a range of
development goals.
The price crises and smallholder farmers
After about three decades of relatively stable, overall low food prices, global
food markets have experienced a resurgence of volatility, accompanied by two
signiicant price spikes between 2006 and 2011. The irst global price hike took
place in the period 2007-2008, affected virtually all internationally traded food
commodities, and was followed by a relative stabilization of prices at higher
levels than in previous years. The more recent one began in mid-2010 and had
built up more unevenly across countries and commodities in 2011. In both cases,
the surge of international food prices has been variously transmitted to domestic
markets, and combined in different ways with national and local factors affecting
prices—which often remain greater determinants of volatility, particularly in
poorly market-integrated rural areas.
While an analysis of the many factors behind the price hikes is beyond the
scope of this short chapter, two of these are worth emphasizing because they are
important aspects of the new environment facing policymakers tackling rural
poverty. These are a growing imbalance between demand and supply of food
and other agricultural products, and the (possibly more frequent) occurrence of
supply shocks linked to extreme weather events. Other factors have been behind
the spikes—for example, dollar depreciation, decline in global cereal stocks,
rising oil prices and growing biofuel production, misguided trade policies and
the inancialization of commodities. Some of these may also affect the capacity
of agriculture to be a driver of inclusive economic growth in the near future.
However, the irst two factors are part of a longer-term change in the environment
for agriculture that has greater implications for the ability of this sector to
contribute to rural poverty eradication. These implications need to be coherently
addressed by policies and strategies to foster poverty-eradicating rural growth.
At a minimum, they signal the need to focus policy initiatives on harnessing
opportunities for smallholder producers to contribute to rebalancing food supply
and demand, and for other rural poor people to ind entrepreneurial and decent
job opportunities in other approaches to rebalancing food supply and demand not
centred on smallholder agriculture. Moreover, this signals that agriculture needs
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he Twin Challenges of Reducing Poverty and Creating Employment
not only to produce more (and to lose less post-harvest), but also to be far better
adapted to a changing environment.
Whatever the underlying opportunities, the balance of the impact of the price
hikes on poverty and hunger has been negative. During the 2007-2008 crisis, it
was calculated that about 105 million people had been added to the fold of the very
poor (Ivanic and Martin, 2008). By 2009, the Food and Agriculture Organization
of the United Nations (FAO) estimated that as many as 115 million had been
added to the fold of the hungry, raising their total number above one billion (Food
and Agriculture Organization of the United Nations and World Food Programme,
2009). Though the current price hike has not ended, some calculations of its
poverty effects have been made. The World Bank places the net igure of people
that have fallen below the extreme poverty line as a result of the price spike
between mid- and end-2010 around 44 million people—resulting from about 67.7
million falling into poverty and 24 million rising above the poverty line, based
on extrapolations of data from 40 countries (Ivanic, Martin and Zaman, 2011).
During both crises, poor households have resorted to consumption of less, or
less nutritious food. The result has been increased hunger and malnutrition, often
affecting particularly poor women and children.
While some income-related effects of the price spike may be short term, they
show the precariousness of livelihoods just above the poverty line in a context
of food price volatility. Traditionally, crossing the line upwards tends to be a
slow process, while crossing it downwards can occur suddenly, as a result of a
shock (e.g., a harvest failure, an extreme weather event, etc.) (International Fund
for Agricultural Development, 2010). What the food price crises suggest is that
sudden increases in food prices can also be shocks with impoverishing effects
for rural households, especially if the increases are large and protracted. While
the direct income effect may be short term, the impact of household assets, food
security and malnutrition may have long-lasting consequences for the income
generating capacity of entire households, and the growth prospects of entire
communities (World Bank, 2006).
When it comes to poor rural people with livelihoods based on agriculture,
it may be expected that they would generally beneit from higher food prices.
After all, small farmers across the developing world have suffered the impact
of artiicially low food prices for decades. However, most poor farmers in the
developing world are net food buyers—either because they sell less food than
they buy, or because they make less money selling food than they make buying it.
Moving from net food buyer to net food seller may thus appear to be a precondition
for farmers to beneit from higher food prices, including perhaps new price spikes
in the coming years. Indeed, being net sellers or buyers is the main discriminating
factor between losers and winners from the recent price surges, according to the
recent World Bank study (Ivanic, Martin and Zaman, 2011).
Unfortunately, the reasons why most small farmers are net food buyers are
often not simple, nor easy to address. They have to do with low land, labour or
Agricultural, rural livelihoods and poverty eradication
• 77
capital productivity. They may have to do with poor access to inancial services,
inhibiting investment or forcing farmers to sell their surplus when market prices
are unfavourable. Other reasons have to do with poor storage capacity, prompting
early sales or leading to post-harvest losses. Very often, they include limited and
costly access to markets due to poor rural infrastructure and poor governance
of existing infrastructure. Weak market power is also a critical impediment. All
these factors need to be addressed to allow poor smallholders to become net food
sellers, where they have potential and opportunities to do so. At the same time, the
limited ability of agriculture to sustain the livelihoods of all those who currently
rely on it makes the shift to net food seller status an unfeasible proposition for all
of today’s poor farmers. Hence, of critical importance is to ensure that those who
cannot become net food sellers have suficient income to be “solvent” buyers.
Again, part of the solution to this challenge may also come from ensuring that
good entrepreneurial and decent job opportunities are created for these people
in the effort to rebalance food demand and supply, whether or not centred on
smallholder agriculture.
As observed during the recent food price crises, price volatility hinders a proper
response from small farmers (including net food sellers) to price increases, hurting
them both as consumers and as producers. Price unpredictability makes investment
to meet growing market demand and higher prices too risky for many farmers,
especially when they have a limited asset base, little access to risk-management
tools through inancial markets or other, and limited market information. Where
rural infrastructure and services are inadequate, the risks of increased investment are
even greater (World Bank, 2011). On the one hand, increasing market integration for
small farmers and rural workers is thus required to seize new opportunities around
agriculture. On the other hand, this entails being more exposed to market volatility
risks. These need to be mitigated and better managed to allow rural women and men
to work their way out of poverty through agricultural markets (Delgado and others,
2011). This is not only important for fostering poverty-reducing rural growth, but
also for increasing food availability on domestic markets, helping to reduce food
insecurity and contain price spikes (Prato and Alpha, 2011).
In short, at present, rural people working in agriculture or in ancillary rural
sectors hold one important key to the solution to food insecurity and to supply
shocks that may entrench poverty, thanks to their critical role in food production
(Food and Agriculture Organization of the United Nations and others, 2011).
However, both price volatility and poverty, combined with other factors, hold
them back from playing this role as effectively as needed. Addressing this
situation requires focusing more policy efforts and resources on agriculture, as
well as on rural areas and people, ensuring that not only smallholders beneit from
efforts to rebalance food demand and supply, but also others working in or around
agriculture. While much of what is needed is well known to policymakers, some
additional pointers can be derived from policy responses to the price spikes—
although it is early to assess the poverty impact of individual responses.
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he Twin Challenges of Reducing Poverty and Creating Employment
A few policy lessons from responses to the crises
The 2007-2008 crisis prompted a variety of policy and investment initiatives for
food security and nutrition. International responses have, among other things,
included initiatives for greater donor, donor-country and policy coordination
to achieve food security, the development of new mechanisms to sustain larger
donor investments in food security in developing countries. Regional initiatives
have also emerged or been re-energized by the food price crisis—the latter
applying in particular to the Comprehensive Africa Agriculture Development
Programme (CAADP) process in Africa. At the national level, more countries
have been prioritizing food security in their policies and investments. Many have
also resorted to short-term safety net initiatives, or strengthened existing social
protection programmes. Though urban populations have typically been more easily
reached by such programmes, the crisis showed that rural poor people need food
security–sensitive safety net (and broader social protection) coverage just as much
as urban people do (Food and Agriculture Organization of the United Nations,
2010b). In general, policy responses (especially in 2007-2008) have aimed to
reduce the immediate impact of each food price crisis, but many have also aimed to
tackle the underlying imbalance between food supply and demand—where supply
is not simply the result of production but of market availability and accessibility,
and demand includes the ability of poor people to purchase the food they need
(Viatte and others, 2009). Indeed, perhaps the key policy lesson of the crises is that
both sets of responses need to be coherently integrated into policy approaches to
rural poverty eradication centred on agriculture in a context of price volatility.
Support to agricultural investment has been part of both short- and longerterm responses. In some countries, public investments or incentives to private
investments have been driven by a search for food self-suficiency (e.g., this has
been the case in some Asian countries such as China, Indonesia and the Philippines,
as well as in some Latin American countries, some countries in sub-Saharan
Africa, such as Senegal, and some capital-rich and farmland-poor countries in
the Gulf, for instance). Large-scale private or public–private investments in land
for agriculture have also been driven by a combination of a focus on increasing
production and maximizing proit. However, increasing large-scale investment
in agriculture has evidenced important policy gaps in many countries. These
include weak policies and institutions protecting the land and water entitlements
of poor rural women and men, weak business and contract laws, and inadequate
governance and accountability mechanisms for allowing poor rural people to
articulate their interests. Some international initiatives of policy relevance for
rural poverty eradication have emerged in this context—for instance, around the
Voluntary Guidelines on Responsible Governance of Tenure of Land, Fisheries
and Forests and the FAO, IFAD, the United Nations Conference on Trade and
Development (UNCTAD) and World Bank Principles for Responsible Investment
in Agriculture. Other initiatives concern the search for inclusive business models
Agricultural, rural livelihoods and poverty eradication
• 79
in agricultural supply chains. One important lesson from the price hikes is
that this is a critical area of policy work for rural poverty eradication around
agriculture. In particular, it is of paramount importance to focus policy attention
on how to harness private investments in agriculture so as to bring new resources
and capacity to rural areas to beneit smallholders and rural workers, with due
attention to protecting the rights and resources of poor rural households (Cotula
and Leonard, 2010).
Another type of policy response to the crises concerns short-term support
to food production through measures to boost small farmers’ access to seeds,
energy and fertilizers. In many cases, countries have resorted to non-marketbased measures to achieve this, granting privilege to short-term concerns over
considerations of sustainable local production capacity. For instance, access to
fertilizer has been boosted through subsidy or free distribution programmes,
sometimes with impressive short-term results. Some Governments have resorted
to policy measures introducing or scaling up subsidies to use electricity or fuel
for irrigation. India, for instance, kept in place subsidies on fertilizers, irrigation
and power during the 2007-2008 price spike. While the short-term impact of such
measures may be positive, their sustainability given recurrent price volatility and
environmental scarcities is debatable.
A more limited number of Governments have taken a longer-term
perspective. They have undertaken to strengthen their national seed industries
through supporting seed production, building up improved seed buffer stocks,
and strengthening seed quality control and related institutional capacity. Some
have strengthened or put in place new farmer-based seed multiplication initiatives
to maximize participation of smallholders. In some cases, there have been
initiatives geared towards supporting private sector agro-dealers to better reach
out to smallholders (Cotula and Leonard, 2010). In other countries, the crises have
prompted new investments in rural infrastructure (storage, irrigation, energy). In
a limited number of countries, multi-stakeholder platforms have been set up to
bring public and private sector representatives together to develop investment
plans to boost agricultural supply, reduce poverty, and enhance food and nutrition
security (e.g., through growth corridors). All such measures are part of what
is needed to put in place better functioning markets for agriculture, which can
contribute to inclusive, poverty-reducing rural growth. As such, they are likely
to be an important part of policy agendas aiming to harness changes in global
agricultural markets to progress towards eradicating rural poverty.
The importance of investing in more sustainable and resilient agriculture to
stabilize supply and avoid food price crises has also become evident from the price
spikes, and some Governments have boosted their commitments in areas such as
climate adaptation and disaster risk reduction in agriculture and in rural areas.
Against the background of climate change, weather shocks are expected to become
more frequent in many parts of the world. The implications for rural poverty are
multifold. Severe weather events may disrupt infrastructure and markets, undermine
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he Twin Challenges of Reducing Poverty and Creating Employment
livelihoods and destroy or damage assets. They may undermine agricultural supply
by affecting production and by making transportation from surplus to deicit areas
more dificult. The poverty implications can be both immediate and long-lasting.
Making rural livelihoods less vulnerable to such shocks is a priority for poverty
eradication going forward. When it comes to agriculture, this calls for an agenda
of more sustainable agricultural intensiication, climate change adaptation and
risk mitigation, as articulated in many recent publications (International Fund
for Agricultural Development, 2010; International Assessment of Agricultural
Knowledge, Science and Technology for Development, 2009; Foresight, 2011).
Effective policy work in this area needs to engage agriculture ministries with
climate and environmental ofices, ministries of inance, and others. As detailed
in the IFAD Rural Poverty Report 2011, ministries of education also have a
critical role, as sustainability and resilience in agriculture and in rural livelihoods
depend on strengthening the capabilities of small farmers and poor rural people—
young people in particular—to deal with challenging environmental and market
circumstances (International Fund for Agricultural Development, 2010).
Another important set of policy measures through which Governments have
sought to address the price crises concerns trade and price policies. These have
included trade restrictions, tariff reductions and trade subsidies, as well as price
setting, legislation and measures to discourage hoarding or to encourage market
operators to mitigate price swings, and public or public–private food marketing.27
This is a critical area for policy attention going forward because it is one where
short-term conlict of interests between different social groups easily emerge, and
which need to be well managed to harness the potential of agriculture to foster
inclusive growth. For instance, often designed to pacify urban consumers, trade
and market measures that aim to depress or ix prices can beneit poor consumers
in the short term. However, they can undermine prospects for domestic food
security and for poverty reduction through agriculture. Increasingly, it is important
to achieve a balance between shielding poor consumers (rural and urban) and
enabling food producers to seize new opportunities to overcome poverty.
Rather than trade restrictions and price-depressing policies, policy initiatives
that can help achieve such a balance include safety net programmes that reduce
people’s vulnerabilities rather than altering market signals. There is evidence that
such programmes, if well targeted and managed, can have signiicant impact on
27 For instance, a 2009 FAO review of country responses to the 2007-2008 crisis found
that, out of 81 sampled countries, 43 had resorted to reduction of tarifs or custom fees,
while 35 had resorted to public sales from public stocks or imports. he review found that
such responses had, in many cases, positive short-term impacts in terms of minimizing
the poverty and food insecurity impacts of the price hike, but they also posed problems
in terms of economic or inancial sustainability. About 25 sampled countries resorted
to export bans, and 21 countries enforced price controls, either through single-handed
government action or through agreements with the private sector (e.g., in Burkina Faso,
Mexico and elsewhere) to prevent local price hikes. See Demeke, Pangrazio and Maetz
(2009).
Agricultural, rural livelihoods and poverty eradication
• 81
reducing income inequalities—for instance, this has been the case of conditional
cash transfers in countries like Brazil, Chile and Mexico. A variety of safety net
initiatives have been undertaken in response to the price crises, with a focus on
improved access to food and nutrition.28 In some cases, these have built on preexisting programmes. Where they have done so, safety net interventions have
often been rather effective in buffering the effect of the 2007-2008 price crisis,
demonstrating the importance of maintaining well-targeted safety net programmes
that can be scaled up or adjusted quickly during crisis periods. This was, for
instance, the experience of the conditional cash transfer programme Oportunidades
in Mexico. However, in the developing world as a whole, the coverage of safety net
programmes is very low, particularly in countries with limited iscal resources. How
to develop sustainable inancial bases for such programmes should be a major issue
on the agenda of policymakers in the near term.
In addition, the recent crises have demonstrated the importance of putting
rural areas and rural people high on the policy agenda when it comes to
social protection. They have demonstrated this not only for food security and
nutrition reasons, but also in terms of enabling people to overcome poverty or to
preserve their livelihoods once they have moved above the poverty line. IFAD
surveys among smallholders in various countries in 2009 and in 2011 show that
smallholder households tend to respond to price hikes not only by changing their
nutrition patterns and cutting down on welfare expenditures, but also by altering
their production patterns—taking less risks, often producing less for the market
and more for their own consumption, selling productive assets, and so forth. Such
coping mechanisms can entrench poverty among small farmers, and drive into
poverty those who live just above the poverty line. On the other hand, where
smallholder households are covered by adequate safety net programmes (as in
the cases of many rural households in Brazil, Mexico and elsewhere), this is less
likely to happen.
Going forward, given an increasingly unstable natural and market
environment, investing in adequate safety net programmes targeted to include
smallholder households is a necessity in many countries. However, again, to
combine short-term food security and nutrition achievements with inclusive,
poverty-reducing growth, it is critical to balance well the interests of different
constituencies in such programmes. For farmers, incentives to produce more and
better food for the market, and to do so on more sustainable grounds, need to be
in focus in the context of safety net programmes targeting food insecurity and
under- (or mal-)nutrition. For policymakers, models to draw from are those that
combine support to food supply capacity with support to solvent demand among
poor people. Programmes that source from small farmers for school-feeding and
28 For instance, Demeke, Pangrazio and Maetz (2009) report that 23 countries out of
81 sampled used cash transfers, 19 used direct food assistance, and 16 used a variety of
measures to increase the disposable income of poor people, to dampen the efect of the
2008 price spike on vulnerable people.
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he Twin Challenges of Reducing Poverty and Creating Employment
other social programmes, such as those implemented on a large scale in Brazil
and elsewhere in recent years, are a good example. Other lessons can be drawn
from initiatives combining production-focused safety nets (e.g., fertilizer or seed
vouchers for farmers), or building or restoring rural infrastructure, with food and
nutrition assistance.
Finally, one lesson from the crises is the need to strengthen the risk
management capacity of small farmers. Four areas appear to deserve particular
policy attention in this regard. First, an enabling policy environment is needed
for inancial institutions to develop and reach out to rural poor women and men
with a range of products (savings, credit, insurance, remittance transfer) and
inclusive modalities, and for them to develop new products suited to meeting
new challenges, including price volatility and weather shocks. Second, securing
farmers’ natural resource entitlements so they can beneit at lower risk from
opportunities to take part in agriculture-led growth requires improved land and
water policies and strengthened capacity for implementation and for conlict
management. Third, enabling policies are needed to foster R&D and innovation
agendas for more risk- and shock-resilient production, and post-harvest processing
and marketing, targeting both women and men farmers to play more effective
roles in addressing supply gaps. Finally, organization is critical for risk-spreading
and risk management among farmers, and it is also very important to advance
the rights of rural workers. However, building strong rural organizations requires
enabling policies concerning group formation and registration, cooperative laws,
decent work legislation, and so forth.
In sum, policy responses to the price spikes have been diverse, but yield some
important common lessons particularly as concerns the need to balance shortand longer-term considerations, the interests of poor urban consumers and rural
producers and workers, and the importance of reducing and better managing risk.
The needed policy agendas should, however, be developed to respond to different
contexts and the needs and expectations of different constituencies. The common
thread is the possibility of using policy tools to seize opportunities for inclusive
rural growth linked directly or indirectly to agriculture in all those areas where
the latter has signiicant potential to help address the underlying causes of price
volatility.
Conclusions
The food price crises have highlighted the vulnerability of poor rural people’s
livelihoods to price volatility and shocks, and placed food security and nutrition
high on the agenda of policymakers tackling rural poverty. They have also
highlighted the inadequacy of global and domestic food systems that keep
the majority of small food producers and rural workers from living up to their
Agricultural, rural livelihoods and poverty eradication
• 83
potential to contribute to inclusive growth and a rebalancing of food supply and
demand through sustainable and resilient agriculture.
It is generally agreed that responding to the price crises requires a combination
of short-and long-term actions—the twin-track approach well detailed in the
United Nations Comprehensive Framework for Action, among others—and that
these need to focus on support to smallholder agriculture, rural areas and rural
people. As noted, this requires a broad set of policy actions, spanning agricultural
production, agricultural markets and trade, improving the environment of rural
areas in terms of infrastructure and services, putting in place adequate social
protection and safety net programmes, and reducing the risks involved in working
in agriculture and in rural areas.
There is no blueprint to follow in terms of speciic policies or their
sequencing. However, it is critical everywhere that poor rural people be supported
in their ability to overcome poverty by seizing new opportunities at reduced risk.
Appropriate policy initiatives very much need to focus on strengthening poor
rural people’s capabilities as well as on facilitating the creation of opportunities.
Whatever the nature of speciic initiatives, a change of mindset is also in order,
to see poor rural people not only as victims of the price crises but also as part of
the solution to the global imbalances that underlie them, and which may hold new
opportunities for inclusive rural growth and poverty eradication.
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87
Chapter 5
Sustaining efective anti-poverty programmes
beyond transformation: challenges and way
forward
Julian May
Introduction
In January 1961, the United Nations declared its irst “decade of development”
focusing on increasing the growth rate of aggregate national income in developing
countries while recognizing the need to beneit the poorer sections of the population.
Four decades later, on 8 September 2000, following a jointly produced report
entitled A Better World For All: Progress towards the international development
goals—published by the International Monetary Fund (IMF), the Organization for
Economic Cooperation and Development (OECD), the United Nations and the
World Bank—189 countries committed themselves to the Millennium Declaration
and, subsequently, to a set of measurable goals and targets proposed for attainment
by 2015, the Millennium Development Goals (MDGs). Notwithstanding these
sentiments, at the beginning of the twenty-irst century, high levels of poverty
persist in almost all regions of the world, and especially in sub-Saharan Africa.
While the share of the global population categorized as being poor may have
declined during the 1990s, the actual number of poor people continued to rise, and
had approached 1.2 billion by 2010, the most recent baseline available. The poor
prospects of achieving the MDG goal of halving world poverty for sub-Saharan
Africa are noteworthy. While the poverty headcount in the region has declined
from 51.5 per cent in 1981 to 48.5 per cent in 2010, continued progress could
see sub-Saharan Africa’s extreme poverty rate drop to 42.3 per cent in 2015 and
to 23.6 per cent in 2030 (World Bank and International Monetary Fund, 2013;
Chandy, Ledlie and Penciakova, 2013).
The persistence of poverty is especially startling in the context of South
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he Twin Challenges of Reducing Poverty and Creating Employment
Africa. On the eve of South Africa’s transition to democracy, the country was
described by international development agencies as an upper-middle-income
country with a per capita income in 1991 similar to that of Botswana, Brazil,
Malaysia or Mauritius (United Nations Development Programme, 2003).
However, it was estimated that over half of South Africans were poor, with almost
2.5 million people thought to be suffering from malnutrition (Carter and May,
1999). Worryingly, despite the priority given to reducing poverty and inequality
in 1994 by the incoming Government, most studies have revealed that levels of
poverty continued to increase in South Africa between 1993 and 2000 (Özler,
2007; Leibbrant and others, 2010; Statistics South Africa, 2001; van der Berg and
others, 2005). The result has been an increase in the number of people categorized
as poor between 1995 and 2000 by some 2 million, irrespective of whether the
poverty line used is the well-known $1 or $2 per day, corrected for purchasing
power parity (PPP), or any of the various national poverty lines that have been
proposed. Despite being one the 30 largest economies in the world in terms of
gross domestic product (GDP), and after almost two decades of transformation
from a pariah State grounded on institutionalized discrimination to the democratic
host of international sporting events, poverty remains a critical issue in South
Africa. Indeed, with a population of some 16 million poor people as reported by
the United Nations Development Programme (UNDP), South Africa is home to
the sixteenth largest number of poor people among the 67 countries for which
comparative data are provided, and to the ifth largest number in sub-Saharan
Africa (United Nations Development Programme, 2009). This, coupled with the
gloomy predictions for poverty reduction in the region, provides the motivation
for understanding poverty dynamics in South Africa as an example of the problems
facing any society in sustaining poverty reduction after political transformation
and economic reforms.
Assessing the scale of deprivation in
post-apartheid South Africa
Although attempts to assess the scale of poverty in South African have a long
history, as with most other aspects of the country, the data and measures used are
inconsistent and often incomplete and relect a legacy of 40 years of segregation
and dispossession. In one of the earliest studies, using sample surveys conducted
in 1959, some 50 to 75 per cent of the African population of urban South Africa
were thought to be unable to afford a diet and life-style determined to be minimally
adequate (de Gruchy, 1960). During the mid 1970s, it was estimated that between
68 per cent and 77 per cent of all African families lay below a national poverty
line (the minimum living level), suggesting a surge in poverty levels during the
era of “grand apartheid” (Study Project of Christianity in Apartheid Society,
1972). By the mid 1980s, estimates for the rural areas designated for African
Sustaining efective anti-poverty programmes beyond transformation
•
89
settlement lay at about 75 per cent, and at 43 per cent for the total population
(Simkins, 1984; Nattrass and May, 1986). Data collected from the irst nationally
representative sample survey undertaken in 1993 revealed that just over half (52
per cent) of all African households in rural areas were poor as their scaled per
capita expenditure fell below a commonly used poverty line derived from the
Household Subsistence Level (HSL) (Carter and May, 1999). Using a poverty line
of R(2000) 322 per person per month, Özler (2007) reports that some 58 per cent
of South Africa’s population can be categorized as being poor in 1995, a situation
that had not changed by 2000, although there had been a marginal decline in the
poverty incidence of Africans, from 68 per cent in 1995 to 67 per cent.
An important point that can easily be overlooked is that whatever line, data
or approach is used, the actual number of poor people increased in the immediate
post-apartheid era. This is illustrated by a recent OECD report on poverty trends
in the post-apartheid era (Leibbrandt and others, 2010). While the incidence
of poverty modestly declined from 56 per cent in 1993 to 54 per cent in 2008,
the population increased by an estimated 8.5 million people, and as a result, the
number living below the poverty threshold increased by 3.8 million. The changing
nature of South African poverty is also evident from the OECD report, with the
urban population increasing by 9.5 million, swelling the numbers of urban poor
by 4.7 million, while the number of rural poor declined by 770,000. This rise in
urban poverty may be a result of migration by the poor from rural to urban areas.
Although the discussion thus far has focused on money-metric poverty,
poverty reduction programmes must take account of other forms of deprivation.
Physical poverty relects inadequate access to essential services and is largely
derived from a basic needs approach to development. This recognizes that changes
in the quality and availability of services are not captured by changes that measure
income alone. Using large sample surveys for South Africa, Bhorat, Naidoo and
Westhuizen (2006) report improvements in housing, access to water, access to
electricity and access to toilets between 1993 and 2004, with access to electricity
for lighting increasing from 52 per cent of households to 80 per cent, and access
to piped water increasing from 59 per cent to 68 per cent of households, a result
that is conirmed by the relatively positive position of South Africa in a report
released in 2010 by the Oxford Poverty and Human Development Initiative
on multidimensional poverty (Alkire and Santos, 2010). However, in addition
to resources to keep up with population growth, migration into urban areas and
further household fragmentation, an estimated R110 billion will still need to be
found to eliminate the remaining backlogs in basic service delivery (National
Treasury, 2008, p. 143).
In summary then, although South Africa does not yet have an oficial poverty
line, the poverty proile of the country is comparatively well established. The
highest incidence of absolute poverty is to be found in South Africa’s rural
communities, especially in the former “homelands” in which poor infrastructure,
a weak asset base, repeated shocks and limited economic opportunities create
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he Twin Challenges of Reducing Poverty and Creating Employment
poverty traps from which it is dificult to escape. This in turn leads to the migration
by those who can to the urban centres of South Africa, and to a steady increase in
the numbers of poor in these areas. Urban poverty is thus emerging as an important
dimension of the poverty problem in South Africa, while rural communities fall
further behind. At the same time, South Africa is characterized by other forms of
poverty that include the exclusion of a substantial portion of the population from
the economic mainstream. This is particularly noteworthy among young schoolleavers who ind it dificult to obtain employment in the face of the very high
levels of unemployment and the limited prospects for a substantial expansion in
the formal labour market which could absorb the numbers of young people who
enter the market each year. Even among those who are already employed, poor
work conditions and informality result in low wages and insecurity.
The inal component of the South African poverty proile that warrants
comment relates to the quality of life that many of the poor face. Poor health is
one aspect of this, relating to the numbers of people living with HIV/AIDS as well
arising from poor nourishment, crowded and unsanitary conditions in urban slums
and lifestyle diseases such as diabetes, heart diseases, depression and obesity.
Other issues relate to the different aspects of child poverty, the situation of older
people who are often expected to resume caring for children and ill people, and to
prejudice and discrimination, including xenophobia.
Anti-poverty strategy in post-apartheid South Africa
The analysis just presented means that the South Africa poverty proile is complex,
as are the causes and outcomes of deprivation. To be successful, policies will
have to be similarly nuanced, with clear target groups in mind and appropriately
inserted into the equally complex legacy of apartheid, as well as the complex
system of government that South Africa has adopted. Anti-poverty strategies
have been a consistent theme of successive South African Governments since
1994. Indeed, the Reconstruction and Development Programme (RDP) prepared
in 1993 as the incoming Government’s manifesto, singles out the reduction of
poverty in all its dimensions as the central concern for the post-apartheid era.
However, the macroeconomic environment has obviously conditioned the
economic possibilities for achieving this. During the 1960s, the South African
economy grew at some 6 per cent per annum, while total employment grew by
nearly 3 per cent per annum, in line with population growth. By the late 1980s,
the real economy was shrinking, as was formal sector employment. This trend
was briely reversed after the country’s irst democratic elections, with sustained
growth throughout 1995. By the middle of 1998, economic growth fell to less than
0.5 per cent per annum. The subsequent period saw a more favourable trend, with
positive, if at times weak, per capita growth peaking at 4.5 per cent in 2004 owing
to both the rate of expansion of the economy and slowing population growth.
Sustaining efective anti-poverty programmes beyond transformation
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The South African Government’s response to these periods of poor economic
performance was constrained both by international economic trends as well as
by inherited iscal realities. The apartheid Government left a total public debt of
R190 billion, of which foreign debt amounted to some R5 billion (South African
Reserve Bank, 1996). Between 1993 and 1998, some 6.7 per cent of GDP,
and 24 per cent of the budget, was annually absorbed by interest on this debt.
Further, in line with the conservative macroeconomic stance taken by the Growth
Employment and Redistribution plan (GEAR), the Government contained growth
in public expenditure and reduced its public sector borrowing requirement from
9.3 per cent of GDP in 1993/94 to just 0.3 per cent in 2005/06, and a modest
surplus in 2006/07 and 2007/08.
Weak economic growth resulted in declining formal employment, which
fell by 12 per cent, or some 642,000 jobs, between 1993 and mid-1998 (Central
Statistical Service, 1994; Statistics South Africa, 1999). Job losses were highest in
those sectors that employ unskilled labour, with the manufacturing sector suffering
a 6 per cent loss in jobs between 1993 and 1998, compared with 21 per cent in
construction and 27 per cent in mining (Central Statistical Service, 1994; Statistics
South Africa, 1999, 2001). This was followed by a period of job creation, with
the number of formally employed increasing by almost 2.5 million between 1998
and 2004, half of which took place in the formal non-agricultural sector (Statistics
South Africa, 2005). Nonetheless, unemployment has increased for much of
the post-apartheid period. According to a narrow deinition of unemployment,
20.0 per cent of the economically active population were unemployed in 1994,
climbing to 25.2 per cent in 1998 before peaking at 30.4 per cent in 2002 and
eventually falling to 24.4 per cent in 2008 (Leibbrandt and others, 2010).
Responding to these challenges during the period that followed the irst
democratic elections, the South African Government’s orientation towards
addressing the problems of poverty and inequality underwent some marked
shifts, in language and emphases, if not in substance. The 1996 closure of the
Ofice of the Reconstruction and Development Programme signalled, to some at
least, a symbolic reduction in the priority given to improving the access of the
majority of South Africans to adequate shelter, sanitation and education. While
programmes to provide such social services continue to reside within relevant
ministries, in this period, the dominant acronym in South African public policy
debate shifted from RDP to GEAR, the label attached to the Government’s
macroeconomic stabilization and structural adjustment framework. Justifying the
iscally conservative stance adopted by GEAR, the South African Government
pointed to the need for economic adjustment, improved revenue collection and the
maintenance of investor conidence. During this period, South Africa’s Minister
of Finance lauded this decision, arguing that recent stronger growth in GDP
allowed for greater spending by all spheres of government, and as a result, from
2004 to 2006, the Government embarked on a relatively expansionary phase,
unveiling the Accelerated and Shared Growth Initiative—South Africa (Ofice
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he Twin Challenges of Reducing Poverty and Creating Employment
of the President of the Republic of South Africa, 2004). As a result, the amount
allocated in the national budget also increased steadily between the periods 20032004 and 2008-2009, although the iscally cautious approach of the Government
to borrowing remained. Budgeted expenditure increased at an average of 14.8 per
cent per annum compared with national revenue, which increased by 18.7 per cent
per annum. Overall, the revenue available for the total budget has grown ivefold
since 1994-1995, to R559.8 billion in 2008-2009, with a decrease in the budget
share allocated to military expenditures. However, the share allocated to social
services increased from 54 per cent in 1994 to 59.2 per cent in 2003-2004 (Ajam
and Aron, 2007). Of this allocation, education received the largest share, followed
by health, social security and housing.
Decentralization has been implicit in many of the policies and strategies
adopted for poverty reduction. The South African Constitution adopted in 1996
introduced an elaborate system of cooperative governance and replaced the
previously centralized national Government with three separate, interdependent
and interrelated “spheres” of government: a national Government, nine provincial
governments and 284 municipal governments who are expected to work within
a system of “cooperative governance”. The devolution of authority adopted after
1994 can be distinguished from other forms of decentralization in which some
of the activities of national Government are simply delegated to lower tiers of
government, to be revoked should the central authority deem otherwise. Instead,
there is a vertical division of authority, assigning each sphere its own powers,
functions and responsibilities, while limiting the extent to which each can
intervene in the decisions of the other spheres (Pimstone, 1998). However since
responsibility for revenue generation is unequally distributed, with the national
Government having access to a much wider variety of tax instruments compared
to other spheres, on average, between 2001 and 2004, 89 per cent of national
revenue accrued to the national Government, while the share of provincial and
municipal governments was 5 per cent and 6 per cent, respectively (Yemek, 2005).
Compared to the provincial governments, municipalities have greater powers
to raise their own revenues through property and business taxes and to impose fees
for services such as electricity, water and sewerage. As a result, municipalities
obtain on average about 86 per cent of their income from their own revenue
sources, with just 14 per cent of municipal budgets being derived from national
and provincial transfers. To adjust for inequalities between municipalities and
provinces in terms of their ability to generate revenue, the Division of Revenue
Act (DoRA) provides for the annual allocation of national revenues to each of the
three spheres of government. Through this mechanism, there has been a steady
growth in transfers from the national Government to provincial and municipalities,
which increased by 10 per cent to provinces and 13 per cent to municipalities
between 2005 and 2007 (National Treasury, 2005). In 2008-2009, just over 50 per
cent of the consolidated budget was allocated to the national departments, 42 per
cent to the provinces and 7.7 per cent to municipalities (National Treasury, 2008).
Sustaining efective anti-poverty programmes beyond transformation
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93
This system of decentralized government is important, since the 2007 South
Africa MDG report comments that Government’s overarching policy to address
MDG 1 (eradicate extreme poverty and hunger) is through the provision of a
“social wage” package. This includes free clinic-based primary health care (PHC)
for all, compulsory education for all those aged seven to thirteen years, and
subsidies on housing, electricity, water, sanitation, refuse removal, transportation
and so forth for those who qualify. Most of these programmes fall within the
mandate of the subnational spheres of government.
The value of the social wage was estimated to be R88 billion in 2003 and
it is evident that South Africa has achieved considerable success in terms of
improvements to household access to most services (Ofice of the President of
the Republic of South Africa, 2007a). In the case of piped water, some 15 million
previously unserviced people have been connected to a formal water supply since
1994, with 85 per cent of households reporting access in 2001, rising to 80 per
cent by 2006 (National Treasury, 2008). Just 7 per cent of the population now live
without access to an improved water source while 15 per cent still have a water
supply that is less than the Government’s target provision (Ofice of the President
of the Republic of South Africa, 2007b). Nonetheless, considerable backlogs still
exist for most of these services in terms of the unserviced population, carrying
a substantial burden in terms of the cost of delivery. In addition to keeping up
with population growth, migration into urban areas and further household
fragmentation, an additional R110 billion will need to be found if the remaining
backlogs in basic service delivery are to be eliminated.
As a short-term measure to address poverty, social grants payments are
especially important in South Africa, where there has been an increase in the
number of beneiciaries in receipt of grants from 2.9 million in 1994 to 13.4
million people in April 2009 (Leibbrandt and others, 2010). Although the Old
Age Pension (OAP) was established during the apartheid era, the introduction in
1998 of a Child Support Grant (CSG) for children younger than seven years is
especially noteworthy. The coverage of this grant was expanded to older children
in later years and now reaches 9.1 million children. Grant payments have risen
from 2.9 per cent of GDP and now amount to 4.4 per cent, which is three times
higher than the median spending of 1.4 per cent of GDP across developing and
transition economies (Leibbrandt and others, 2010, p 53)
Another important component of the Government’s short-term response to
poverty reduction has been through the Extended Public Works (EPWP) which
was introduced in 2004. By 2008, the EPWP had provided more than 1 million
work opportunities with a wage bill of just less than R1 billion. The National
Treasury (2008) believes that more can be done by local government, and has
recommended that municipalities opt for more labour-intensive approaches to the
delivery of services. A recent pilot initiative, the Community Works Programme,
provides an employment safety net in selected areas.
Education is an important long-term strategy for poverty eradication and
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he Twin Challenges of Reducing Poverty and Creating Employment
despite the inequities of the apartheid era in terms of education, primary school
enrolment has been consistently high. The South African Schools Act (1996)
made educational attendance compulsory for all children aged 7 to 15, placing
this responsibility on both parents and the State. Further, the 2005 Education
Amendment introduced a School Fee Exemption policy in 2007 that exempts
parents from paying fees according to a means test, while a no-fee policy establishes
schools without fees. The Primary School Feeding Scheme Programme provides
one meal a day to some 6 million primary school children in 18,000 schools.
The mid-term MDG report shows an improvement on the already favourable
position of 2004 in which 95 per cent of children aged 7 to 13 years were in school.
Enrolment is shown to be increasing for secondary schooling, while functional
literacy is also improving. As a result, less than 1.5 per cent of youth aged 15-24
years have never attended school (Republic of South Africa, 2007). Furthermore,
the teacher/learner ratio is below the government target of 40:1 in primary
schools (Ofice of the President of the Republic of South Africa, 2007b). Indeed,
South Africa has a relatively high adult literacy rate of 87.6 per cent of adults
above the age of 15 years, and a combined primary, secondary and tertiary gross
enrolment ratio of 76.8 per cent of eligible children (United Nations Development
Programme, 2009). These statistics conceal the relatively poor performance of
many children once enrolled in school.
A number of important policy changes have taken place in the post-apartheid
period which should result in improved provision of health care and the reduction
of child and maternal mortality and of some infectious diseases. These include
the provision of free health care for pregnant women and children aged less than
six years, shifting the method of health care from a curative to a preventative
approach, as well as legislation concerning health insurance and the termination
of pregnancy (Poggenpoel and Claasen, 2004). There has also been improvement
in the provision of health services and facilities.
Despite these promising advances in the provision of health care, South
Africa’s controversial position on HIV/AIDS during the late 1990s and early 2000s
has earned the country some notoriety. By the middle of 2006, 5.4 million people
were estimated to be living with HIV in South Africa, the largest number of persons
living with HIV infection in the world (Joint United Nations Programme on HIV/
AIDS, 2008). While this is partly due to the country’s overall population size,
HIV prevalence is extremely high. Prevalence among women with HIV attending
antenatal care increased from 7.6 per cent in 1994 to 30.2 per cent in 2005, while
that for the population as a whole has increased from 8.5 per cent in 2001 to
11.1 per cent by 2007 (Ofice of the President of the Republic of South Africa,
2007b). Among adults aged 15-49 years, the HIV prevalence rate is estimated to
have reached 21.5 per cent. There are signals that prevalence may be reducing,
with Matjila and others (2008) reporting a decline in prevalence among women
attending antenatal care to 29 per cent in 2006 and 28 per cent in 2007. However,
premature adult mortality continues to increase with an estimated 345,000 South
Sustaining efective anti-poverty programmes beyond transformation
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95
Africans dying of AIDS in 2006, making the disease the leading cause of death in
almost all South African provinces (Dorrington and others, 2006).
Recent events conirm better prospects, a less controversial stance on this
issue and greater responsiveness to needs. The Comprehensive HIV and AIDS
Programme provides support to approved prevention, treatment, care and support
interventions including implementation of the Operational Plan for Comprehensive
HIV and AIDS Care, Management and Treatment for South Africa (Streak, 2005).
By 2007, this programme had 264,423 patients, almost double the number of
patients treated one year earlier, but still accounting for only 5 per cent of those
living with AIDS (National Treasury, 2007; Joint United Nations Programme
on HIV/AIDS, 2008). HIV and AIDS thus remains an area of deep concern in
terms of South African’s prospects for poverty eradication, especially in terms
of meeting health-related targets. For example, with 55 per cent of cases being
co-infected with HIV, the incidence of reported tuberculosis (TB) cases has also
increased by over 250 per cent since 1996, to reach 0.3 million cases by 2006
(Ofice of the President of the Republic of South Africa, 2007b). The implication
is that the incidence of TB has increased from 269/100,000 to 720/100,000, and is
one of the highest in the world (Department of Health, 2007).
Finally, international experience shows that land reform, an intervention
which transfers assets into the hands of poor households, is potentially a long-term
way of reducing the level and depth of poverty. This has been long recognized by
the South African Government and, after social grants and housing grants, land
reform is an important element of the country’s policies for targeted transfers.
Compared with land reform programmes in other countries, which are focused
more on productive development, the South African land reform programme has
a strong emphasis on equality and the redress of historical inequities, including
those associated with gender. In the formulation of policy, particular attention has
been paid to the interests of the rural poor and the interests of rural women (van
den Brink and others, 2007). The initial land reform target for the redistribution
programme was massive: to transfer 30 per cent of South Africa’s 99 million
hectares of farmland, or 30 million hectares, between 1994 and 1999. After three
years of operation, about 200,000 hectares of land had been transferred to about
20,000 households, representing just 0.6 per cent of the target, and 0.2 per cent
of the households demanding land. The slow delivery provoked claims that land
reform was not working and several reviews of the original policies have resulted
in more lexible strategies. Subsequent to 2002, the pace of delivery slowed,
although it remains well above the levels achieved during the 1990s. The estimated
number of land redistribution and land tenure projects in early 2005 was 2,025,
with an estimated total of 100,000 beneiciaries, and some 11,000 beneiciaries
having received land in 2004. Impact evaluations of progress that has been made
conclude that South Africa’s land reform was initially well targeted towards less
resourced beneiciaries and that, once received, land does make a signiicant
impact in terms of income (Deininger and May, 2000). However, the high failure
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he Twin Challenges of Reducing Poverty and Creating Employment
rate of the projects casts doubt on the their sustainability without further support
from the public and private sectors. This is especially so in the case of projects in
which large groups must be formed in order to access grants (Hall, 2009).
Lessons learned
Despite its relative wealth when compared with other African countries and its
adherence to much of the mantra of the Washington Consensus (iscal discipline,
macroeconomic stability, openness to trade and the protection of property rights),
South Africa’s experience does not offer simple solutions to the problem of
poverty eradication. Instead, its economy has proven to be ineficient in terms of
its ability to translate what economic growth has taken place into the prosperity
of its population. According to Heltberg (2002), the poverty elasticity of growth,
a measure that shows what decrease in poverty results from economic growth,
has been well below that of countries in Asia and South America and little better
than countries in sub-Saharan Africa that have far less developed economies.
Nonetheless, there are a number of important lessons that can be derived.
First, although this has not yet been empirically demonstrated, it seems
possible that high and growing inequality is a concern for poverty reduction
in South Africa. Internationally, inequality, especially in terms of wealth, has
been shown to slow economic growth, and economic growth has been shown to
reduce poverty (Deininger and Olinto, 2000; Dollar and Kraay, 2000). Although
the emergence of a non-racial middle class may have assisted in short-term
political stability, recent divisions within the ruling party and its allies suggest
growing dissatisfaction among those who have not yet beneited from the fruits of
democracy (Bond, 2000).
Second, it is evident that substantial delivery of services and infrastructure
has taken place through South Africa’s decentralized system of local government.
These form an important component of South Africa’s strategy for poverty
reduction, and it is apparent that a substantial proportion of the population has
beneited from this delivery. It is also apparent that a much greater contribution
would be possible if a number of eficiency concerns were addressed. These relate
to underspending, skills constraints at the local level, poor coordination between
government spheres and line functions, and inadequate attention directed towards
maintenance. The South African experience also shows the extent of the policies
and acts required to achieve effective decentralization and the need for ongoing
policy reform as circumstances change. Indeed, many of the shortcomings that
have been identiied relate to slow or incomplete implementation of existing
policies rather than to policy gaps. Finally, the steady surge in service delivery
protests suggest that the services which have been delivered may not be affordable
for the beneiciaries, or are not of the quality or consistency that they expect.
Third, to the extent that they can be afforded, social grants make an important
Sustaining efective anti-poverty programmes beyond transformation
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97
and direct contribution towards the reduction of poverty. Furthermore, such
grants have been found to beneit both the recipients and other members of their
households. The Child Support Grant has been shown to produce substantial
reductions in stunting of young children and this is likely to produce, in turn,
substantial increases in those children’s productivity and wages once they grow
up (Agüero and Valdivia, 2010). There are also likely indirect beneits. Case,
Hosegood and Lund (2005) ind that the Child Support Grant also results in an
increase in school enrolment among 6-year olds and suggest several possible
reasons for this, including that the Grant may improve children’s health and
nutrition, and thus school-readiness, as well as allow the household to afford fees,
uniforms and other school-related expenses. Samson and others (2001) argue that
receipt of pension income also can increase school enrolments, while Boler and
Timæus (2006) ind that the child grant contributes towards lessening the negative
educational impact of orphanhood on older children.
Fourth, failure to attend to health care needs, especially those arising from HIV/
AIDS, constrains prospects of achieving a reduction in poverty. As Steinberg and
others (2002) note, two thirds of respondents surveyed in South Africa reported a
fall in household income as a result of their actions to cope with the impact of HIVrelated illness, including the direct loss of earners. Households reported increased
expenditure on health, diverting income from other requirements, potentially with
signiicant opportunity costs. Studies by May and others (2007) and Carter and
others (2007) found that, on average, young adult deaths had an adverse impact on
the growth expenditure per head of households in KwaZulu-Natal. In the period
(1998-2004) young adult deaths had a particularly negative impact on households
who received above the median income. This was because the young adults who
died in these households did not have lower earnings than survivors, as was the
case in poorer households. However, the economic impact of adult deaths varies
by the age of the person dying, and over time, and depends on the economic
characteristics of the affected household. The implication is that while the deaths
of young adults (largely from AIDS) do not usually appear to be catastrophic for
poor households at least in economic terms, no simple generalizations concerning
the impact of adult mortality can be identiied, and it does appear that illness and
death hinder prospects of escaping poverty.
Finally, redistributive actions that transfer assets to poor households do appear
to increase their incomes and their prospects of escaping poverty. However, in the
case of land, and perhaps other forms of asset transfers, success in targeting does
not necessarily translate into sustainable projects. Further support is required,
including access to information, markets and social networks. Programmes
involving the formation of large groups appear to be especially vulnerable,
whereas programmes involving partnerships between better and less resourced
beneiciaries appear more likely to succeed.
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he Twin Challenges of Reducing Poverty and Creating Employment
Conclusion
While South Africa’s transformation contains many unique features, many of the
indings of this chapter are applicable elsewhere in sub-Saharan Africa. Thus, it
seems that the already high levels of poverty found in the 1960s peaked in the
1990s and may have declined in the irst part of this century, but are likely to have
risen during the economic crisis and rapid food price increases of 2008-2009.
If the results from recent analyses are correct, despite a global downturn, many
countries in Africa may now be on a long-term path of gradual asset accumulation
for poor households, which may result in a reduction in structural poverty.
However, the data discussed in this chapter give rise to two concerns.
The irst is that there may be deep pockets of poverty in many parts of Africa
that are not being adequately reached by government policy. The data from some
regions show that there are areas with extraordinarily high levels of poverty
in terms of all measures, and that within these areas, there may be severely
deprived groups who have little chance of beneiting from Africa’s wealth or the
redistributive policies of its Governments.
The second concern is that the economies of many African economies remain
ineficient in terms of their ability to translate economic growth into the prosperity
of the continent’s population. A useful tool here is known as the poverty elasticity
of growth, which shows what decrease in poverty results from economic growth.
Most African countries perform badly in this area, well below that of countries
in Asia and South America (Heltberg, 2002). The reasons for this, including
the possible inluence of inequality, need to be better understood if the pace of
poverty reduction is to be increased beyond its current sluggish rate. Even with
the harnessing of this potential, it seems likely that deprivations will persist
despite the availability of policies and resources that could be used to sustain
poverty reduction.
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land reform issues in sub-Saharan Africa. World Bank Working Paper No.
71. Washington, D.C.: World Bank.
van der Berg, Servaas, Ronelle Burger, Rulof Burger, Megan Louw and Derek
Yu (2005). Trends in poverty and inequality since the political transition.
Stellenbosch Economic Working Papers No. 1/2005. Bureau for Economic
Research and University of Stellenbosch. Available from http://www.ber.
sun.ac.za/downloads/2005/working _papers/WP-01-2005.pdf (accessed on
14 July 2009).
Yemek, Etienne (2005). Understanding iscal decentralization in South Africa.
Africa Budget Project Occasional Paper. I.-B. I. Service. Cape Town:
IDASA.
World Bank and International Monetary Fund (2013). Global Monitoring Report
2013: Rural-urban dynamics and the Millennium Development Goals.
Washington, D.C.: World Bank.
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Part II
tHe cHallenGe of
buIldInG emPloyment for a
sustaInable recovery
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Chapter 6
Employment matters
Jomo Kwame Sundaram29
The 2005 World Summit put the goal of full and productive employment as well
as decent work for all at the forefront of the United Nations development agenda.
This essentially reafirmed Article 55 of the United Nations Charter which states,
“With a view to the creation of conditions of stability and well-being which are
necessary for peaceful and friendly relations among nations based on respect for
the principle of equal rights and self-determination of peoples, the United Nations
shall promote: higher standards of living, full employment, and conditions of
economic and social progress and development….”
The 2005 Summit outcome document also reiterated one of the central
commitments of the World Summit for Social Development held in Copenhagen in
1995, to achieve full employment, poverty reduction and social integration. Since
the 2005 World Summit, the United Nations has prioritized full and productive
employment and decent work for all in its deliberations.
The irst Millennium Development Goal (MDG 1) of reducing poverty by half
by 2015 cannot be met without economic and social policies aimed at achieving
full and decent employment. In general, the generation of decent jobs should
not be treated as an addendum to macroeconomic stabilization programmes or
microeconomic liberalization reforms. Employment policies should be central to
a broad, coherent and consistently countercyclical macroeconomic strategy for
sustainable development, including a universal approach to social protection.
The issue of full and productive employment is not relevant for developing
countries only, as the recent crises remind us. While the global economic recovery
remains anaemic, most developed economies continue to face high, if not growing,
unemployment. Average unemployment in developed countries rose from under
6 per cent in 2007 to over 8 per cent in 2012 (International Labour Organization,
2013). In the United States of America, the unemployment rate is on the rise
29 I am indebted to Anis Chowdhury for assistance in inalizing this chapter.
Nevertheless, he should not be held accountable for any remaining mistakes or
controversies.
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he Twin Challenges of Reducing Poverty and Creating Employment
again, with 12.3 million Americans without work, bringing the unemployment
rate to 7.9 per cent in January 2013. The jobless rate in Spain in the last three
months of 2012 rose to 26 per cent, or close to 6 million people, the highest
since the mid-1970s. The unemployment rate in Greece also increased in the inal
quarter of 2012 to almost 27 per cent, the highest in the European Union. The
unemployment rate in the 17-nation euro zone climbed to 11.9 per cent in January
of 2013, according to Eurostat.30
Long-term unemployment has continued to rise in many developed countries,
reaching 40 per cent of the unemployed in half of these countries. The share of
long-term unemployed has risen signiicantly in the United States, the United
Kingdom of Great Britain and Northern Ireland, and the debt-distressed euro zone
countries. Youth unemployment has also increased markedly. In Spain, youth
unemployment surged to 55 per cent, and in Greece, it reached around 60 per cent
towards the end of 2012.
However, policymakers in most advanced countries remain focused on
reducing iscal deicits and public debt in the hope of inspiring market conidence.
This appears to ignore lessons from historical experience. For example, to secure
re-election in 1936, President Roosevelt promised “a balanced budget”. After
securing re-election, he proceeded to cut government spending in 1937, citing the
threat of inlation; soon, unemployment shot up to 19 per cent.
The Keynesian revolution implied that public inance deicits and surpluses
should be adjusted countercyclically over the business cycle (Matthews, 1968).
Thus, government iscal balances should help smooth business cycles in order
to achieve full employment. Also, Governments were increasingly expected to
build infrastructure and provide public services such as health care and education.
This inspired the United Kingdom’s “full employment compact” after the Second
World War (Abel-Smith, 1992) and the adoption of “maximum employment” as a
key policy goal in the United States (Strayer, 1950).
In the 1970s, economic stagnation and inlation in developed countries
contributed to the ascendance of new anti-Keynesian economics, including
the “new classical macroeconomics”, which does not foresee the possibility of
involuntary unemployment caused by insuficient aggregate demand. It also
presumes that labour markets will “clear” if lexible enough. Therefore, any
signiicant and persistent unemployment was either voluntary (due to optimizing
economic agents collectively preferring to “consume” more “leisure”) or caused
by labour market distortions and rigidities.
Thus, full employment was largely replaced as a key macroeconomic goal,
with central banks pursuing “inlation-targeting” and inance ministries embracing
iscal balance to serve the inlation-targeting monetary policy, in the hope that full
employment and rapid growth would follow by “divine coincidence” (Blanchard
30 he United States jobless igures are from the United States Department of Labor
Statistics and the igures for the European countries are from Eurostat.
Employment matters
• 107
and Gali, 2005). The new policy emphasis shifted to either removing labour
market rigidities or making work more attractive by scaling back “generous”
unemployment beneits that allegedly induce long periods of job search,
complemented by appropriate training to enhance “employability” (e.g., see the
Organization for Economic Cooperation and Development (OECD) jobs report
of the mid-1990s (Organization for Economic Cooperation and Development,
1994)).
The decline of the full employment commitment in advanced economies
and the oficial turn to employability, inlation-targeting and iscal prudence
also impacted policymaking in developing countries. The policy regime change
followed the 1980s debt crisis in many developing countries, especially in Latin
America. Commercial banks, especially in the United States and the United
Kingdom—lush with petrodollars (deposits by the Governments and others from
oil exporting countries)—were keen to lend, and borrowing countries were happy
to borrow, after some persuasion, in the light of low real interest rates owing to
high inlation.
The development strategy of international inancial institutions sought to
ensure “eficiency-enhancing” structural adjustment and labour market reforms,
and macroeconomic stability through inlation targeting and iscal prudence,
to unleash latent productive potential. More than 900 structural adjustment
programmes were implemented in developing countries between 1980 and 1998.
It was believed that sustained job creation and poverty reduction would be the
outcome of the new policy framework. After almost two decades of apparent
failure and criticism, the Bretton Woods institutions ostensibly replaced structural
adjustment programmes from 1999 with supposed poverty reduction strategies,
which essentially maintained the same policy framework.
Broad structural reforms—involving privatization, inancial deregulation and
trade liberalization, and the new macroeconomic policy priorities—since the early
1980s adversely affected employment opportunities in most developing countries
except in about a dozen or so countries which were well placed to enhance
their exports. Perhaps, faith in “divine coincidence” was so strong that full and
productive employment was not mentioned when the MDGs were irst articulated
in 2001. Although the 2005 Summit corrected this shortcoming, employment
has not received as much attention as other targets for monitoring purposes as
no target date was speciied. By the middle of the last decade, the employment
content of Poverty Reduction Strategy Papers (PRSPs) was low in 7 of the 21
African countries with full PRSPs and medium-low in another 13 countries;
only the United Republic of Tanzania’s PRSP had a high employment content
(Nkurunziza, 2007). Thankfully, there has been some change of heart since—for
example, see the 2013 World Development Report on jobs (World Bank, 2012).
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Economic liberalization and employment
Trade liberalization has not brought about economic growth to all developing
countries.31 The World Bank (2002) found that developing countries that
integrated into the world economy most rapidly during 1977-1997 were not
necessarily those that had adopted policies promoting trade liberalization. Trade
liberalization has induced structural change in many countries, and such change
has brought about both job destruction and job creation. The net employment
effect, therefore, depends on eficiency gains, productivity growth and most
importantly, exchange rate competitiveness. However, many developing countries
do not have the capacity to rapidly raise productivity through trade liberalization.
Consequently, job losses in import-competing sectors are often much greater than
new jobs created in export competitive sectors (see, for example, Olayiwola and
Rutaihwa, 2010).
Even among “successful” developing country globalizers regarded as
regional “models”, there were temporary increases in unemployment following
trade reform (Rama, 2003). Where trade liberalization created jobs, in many
instances, they were of poor quality, lacking job security as well as decent
working conditions and pay (see, for example, Pholphirul, 2007). Female
workers have been particularly affected by this trend as there has often been some
feminization of employment in labour-intensive export sectors (Dias, 2010). In
some developing countries, trade liberalization has failed to bring about dynamic
structural change. Export enclave development has been typically dominated by
footloose industries which have often moved on to lower-cost locations.
In sum, increased trade openness in many developing countries has resulted
in large adjustment costs, including increased income inequality, unemployment
and limited creation of decent jobs (Jansen and Lee, 2007). Economies have
become much more dependent on externally determined technological change
and sources of productivity growth. In many cases, these factors have reduced
demand for labour in developing countries.
Starting in the 1980s, inancial sector deregulation was encouraged under the
assumption that low administratively determined interest rates were detrimental
to growth, by discouraging savings and encouraging the ineficient use of capital.
It was also argued that growth would be enhanced by opening the capital account
of the balance of payments. This would attract much greater foreign capital
inlows. Instead, however, inancial deregulation has raised real interest rates,
while its impact on domestic saving and investment has been mixed (see Reinhart
and Tokatlidis, 2005; Galbis, 1993). The elimination of specialized inancial
institutions, coupled with higher interest rates, have actually reduced access to
inance of employment-intensive small and medium-size enterprises (SMEs),
31 See chapters by G. Andrea Cornia, Eddy Lee and Bernard Hoekman, and L. Alan
Winters in Ocampo, Jomo and Khan (eds) (2006). Also see Jomo, Schwank and von
Arnim (2011).
Employment matters
• 109
including those in the agricultural sector. To make banks proitable again, a wave
of bank mergers followed. There is a considerable body of work showing that
this caused further exclusion of SMEs and small borrowers from formal credit
markets.32
External or international inancial liberalization or inancial globalization has
contributed to the surge in international capital lows since the early 1990s. While
the direct growth beneits of inancial openness are dubious, many developing
countries have also experienced greater economic volatility and macroinancial
instability and crises. In their study of 53 countries during 1980-1995, DemirgüçKunt and Detragiache (1998) found that banking crises were more likely to occur
in liberalized inancial systems. These crises have had considerable adverse
impacts on gross domestic product (GDP) and long-term growth prospects, while
labour has suffered disproportionately as job recovery typically lags behind
output recovery. For example, the inancial crises between 1994 and 2002 pushed
approximately 40 million to 60 million people into poverty (Cline, 2002).
Macroeconomic stabilization and employment
Since the early 1980s, macroeconomic policy has often sought to stabilize inlation
rates at between 3 and 5 per cent. It is presumed that low inlation encourages
savings and investment, removes distortions in resource allocation and improves
the eficiency of investment. Large iscal deicits have been identiied as a major
reason for higher inlation. Fiscal deicits are also presumed to crowd out private
sector investment.
On these premises, developing countries have been advised to reduce their
deicits and to maintain a primary budget surplus. Low inlation and balanced
budgets are supposed to reduce inancing costs, and thus promote growth and
employment. The current dominant approach to central banking does not focus on
either output growth or employment generation, but rather on keeping inlation
rates within the low single digits.
However, employment generation and economic growth are rarely, if ever,
by-products of inlation-focused central bank policy management. Summarizing
lessons from the 1990s, the World Bank (2005, p. 95) concluded, “Macroeconomic
policies improved in a majority of developing countries in the 1990s, but the
expected growth beneits failed to materialize, at least to the extent that many
observers had forecast. In addition, a series of inancial crises severely depressed
growth and worsened poverty.”
Instead, the macroeconomic policy conventional wisdom of the past three
decades has resulted in declining public investment, output growth volatility
and high borrowing costs (Chowdhury and Islam, 2011). Revenues fell in many
developing countries owing to trade liberalization with the removal of trade32 See Bagchi and Dymski (2007); Chandrasekhar and Pal (2006) and Pillarisetti (2007)
for evidence from India.
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he Twin Challenges of Reducing Poverty and Creating Employment
related taxes which were not replaced by increased revenues from other sources
or by other tax reforms. With lower revenues, these countries were forced to
further cut public investment to attain iscal balance. Reviewing the situation,
an International Monetary Fund (IMF) (2004, p. 3) report noted, “The share of
public investment in GDP, and especially the share of infrastructure investment,
has declined during the last three decades in a number of countries, particularly in
Latin America. Since the private sector has not increased infrastructure investment
as hoped for, signiicant infrastructure gaps have emerged in several countries.”
The primary focus on price stability, benchmarked to single-digit inlation
and balanced budgets, has made macroeconomic policies procyclical. Monetary
policy aimed at keeping inlation low tends to result in high real interest rates, often
detrimental to growth and employment generation. In conjunction with tight iscal
policies, austere monetary policy has reduced demand for productive loans, and
consequently, investments and growth, thus adding to global employment problems.
In addition, higher interest rates attract short-term capital lows which add to
inlationary pressure, requiring further tightening of monetary policy. At the same
time, exchange rates appreciate due to high short-term capital inlows, adversely
affecting employment-intensive export-oriented sectors.
In sum, the narrow focus on macroeconomic stabilization, coupled with
inancial liberalization, has often imposed constraints on growth and employment
in developing countries. Governments are compelled to reduce iscal expenditures
to keep down inlation and to retain the conidence of foreign investors, even in
the presence of underutilized capacity and large-scale unemployment. Policies
tend to be delationary, prompting reductions in consumption and hindering
employment creation. In addition, capital inlow surges have been damaging,
albeit with different consequences compared with capital outlows. The costs
of sterilization to avoid exchange rate appreciation and the opportunity cost of
maintaining increased reserves have been high.
Fiscal austerity and employment
Both developed and developing countries responded to the recent crises with
expansionary policies to stem the sharp decline in aggregate demand across the
world.33 According to the International Labour Organization (ILO) (2010), Group
of Twenty (G20) Governments saved or created an estimated 21 million jobs in
2009 and 2010. Policy interest rates remained historically low throughout 2009 to
stave off a potential depression. Key international institutions, ranging from the
IMF to the OECD, all became Keynesian, urging national policymakers to adopt
and sustain iscal interventions.
33 By April 2009, liquidity injections into the inancial system and bailouts of some
major inancial institutions had cost over $18 trillion, or almost 30 per cent of world gross
product (WGP), while iscal stimulus packages for 2009-2011 were expected to cost about
$2.7 trillion, or 4 per cent of WGP.
Employment matters
• 111
However, the policy discourse changed in developed countries, as relected
at the June 2010 Toronto Summit of the G20, with key Governments calling
for iscal consolidation to bring sovereign debt down to sustainable levels. In
the words of the Economist (2010), “Across much of the rich world an era of
budgetary austerity beckons.” A leading advocate of this view, Fatas (2010, p. 7)
argued, “Given that the current levels of debt are high by historical standards and
that they are very high in many advanced economies, it might be that markets will
soon ask for a strong signal of commitment and, in its absence, risk premia on
government bonds will increase. To avoid an increasing cost of rolling over the
debt, governments could be better off with a strong early adjustment.”
There are various ways in which a iscal consolidation programme can achieve its
goal without imposing any output or employment loss or, even better, accompanied by
growth and employment creation. For example, an IMF study (Dermott and Wescott,
1996) of 74 cases of iscal consolidation in 20 industrialized countries during 19701995 concluded that in 14 “successful” cases, there was sustained reduction of the
debt-to-GDP ratio (by about 3 percentage points over three years) as well as increased
growth and employment creation. Similarly, Alesina and Ardagna (2010) found 27
cases of iscal consolidation with growth among 107 episodes of iscal consolidation
in OECD countries during 1970-2007 (Alesina, 2010).
In the cases of “successful” iscal consolidation accompanied by growth
and employment creation, other factors often played a more important role than
the iscal actions per se, including the global business cycle, monetary policy,
exchange rate policy and structural reforms. For instance, the IMF study by
Dermott and Wescott (1996, p.10) noted that “strong global economic growth
helps to achieve a successful consolidation, and weak global growth reduces
the chances that consolidation will cut the debt-to-GDP ratio”. Expansionary
monetary policy also seemed to have offset the recessionary consequences of
iscal retrenchments. Similarly, devaluation that boosts net exports may help
offset the decline in aggregate demand as a result of iscal austerity. Finally, in
the long-run, growth and employment expansion owing to structural reforms may
outweigh the negative growth and employment impacts of austerity measures.
The United Nations Conference on Trade and Development (UNCTAD)
Trade and Development Report 2011 argued that premature iscal austerity
contributed to a vicious circle of low growth and high public debt. The IMF
World Economic Outlook 2010 claimed that iscal consolidation typically reduced
output and raised unemployment in the short term. A iscal cut of 1 per cent of
GDP typically reduced output by about 0.5 per cent within two years, and raised
unemployment by about 0.3 per cent. The IMF also suggested that simultaneous
budget deicit cuts in many countries were likely to have a cumulatively adverse
effect. In the World Economic Outlook 2012, the IMF acknowledged serious
underestimation of the values of multipliers at the time; hence, the actual adverse
output and employment impacts are likely to have been much larger—as is clear
from more recent evidence cited earlier.
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Using data from the past 30 years, recent IMF research (Ball, Leigh and
Loungani 2011) found that iscal consolidation raised both short- and longterm unemployment, with its impact on long-term unemployment much greater,
hurting wage earners disproportionately more than proit- and rent earners. Thus,
it concludes, “… slamming on the brakes too quickly will hurt the recovery
and worsen job prospects. Hence the potential longer-run beneits of iscal
consolidation must be balanced against the short- and medium-run adverse
impacts on growth and jobs.”
The ILO World of Work Report 2011 reviewed the extent to which budget
cuts can be counterproductive, from both employment and iscal perspectives,
and assessed efforts to maximize the employment impact of iscally constrained
labour market policies through good design. The simulation exercise showed that
spending cuts that increase unemployment will erode the tax base, stretch social
budgets and thus signiicantly reduce—and, in some cases, entirely eliminate—
the iscal savings from spending cuts.
Recent work at the ILO (Matsumoto, Hengge and Islam, 2012) found a direct
relationship between youth unemployment and iscal austerity. The correlation
between changes in the general government structural iscal balance (share of
potential GDP) and changes in youth unemployment rates in Europe during
2009-2011 was found to be 0.69. The increase in youth unemployment rates
between 2009 and 2011 tended to be higher for economies undertaking stronger
iscal tightening measures. Simple regression estimates (R2 = 0.47) suggest that
a percentage point increase in the structural (cyclically adjusted) iscal balance
raised the youth unemployment rate by 1.5 percentage points, while 47 per cent
of the variation in youth unemployment rates across the OECD can be attributed
to iscal policy differences. More elaborate macroeconometric models suggest
that “if austerity measures continue in the current form until the irst half of
2013, employment in the group of advanced countries is expected to grow only
moderately—by 0.2 per cent” (ILO, 2012, p. 69).34
Labour market lexibility and employment
As unemployment has risen sharply and continues to remain high, policy advocacy
of labour market lexibility has gained added momentum. In fact, the recent
crises have triggered further deregulation of labour markets. While the World
Bank (2009, p. 4) has suggested short-term policies to stabilize employment and
income, it maintains that “overly stringent employment protection laws constrain
irm hiring and lead to suboptimal level of employment, a feature particularly
important during economic downturns”.
34 he indings of the analysis show that the ratios of public investment and public
wages to total expenditure have a positive and signiicant impact on employment in the
short term and during times of crisis. A 1 percentage point increase in each of these two
ratios would raise employment by 0.43 and 0.3 per cent, respectively.
Employment matters
• 113
Alejandro Foxley (2009), former Foreign Minister and Finance Minister of
Chile, argues that the economic crisis provides opportunities to remove labour
market protection, stating that labour reform is always politically contentious,
but the current crisis, by illustrating the dangers of ignoring necessary long-term
reforms, has made it easier to reach consensus on the need for action. Labour
market regulations are seen by many as detrimental to job creation, growth and
innovation. It is argued that employment protection legislation in developing
countries tends to reduce the creation of formal sector salaried jobs, encourage the
growth of the informal sector, and thus slow investment and growth. Therefore,
reform of labour market institutions is needed to increase labour market lexibility
to provide incentives for job creation. Pressure to make labour markets more
lexible has been reinforced by the transfer of production and jobs to emerging
economies, especially in Asia.
The apparent consensus claiming a link between labour market lexibility and
economic performance has been challenged by several empirical studies. OECD
(2006) concedes that it is not easy to identify a uniquely optimal set of labour
market institutions that engender and sustain economic prosperity. A variety
of regulatory regimes governing the labour market are compatible with good
economic performance. Other studies, such as Berg and Kucera (2008), conclude
that one cannot, on the basis of available evidence, maintain that deregulating
labour markets will lead to faster job creation and more growth. Although the
World Bank 2013 World Development Report promotes labour market lexibility,
its message is more nuanced. For example, it acknowledges, “In most cases,
however, the constraints to creating transformational jobs are not connected to
the labor code (…). There is no consensus on what the content of labor policies
should be.” (World Bank, 2012, p. 26-27.)
Advocacy of labour market lexibility overlooks three key considerations.
First, countries with “labour-friendly” regulations seem to lower wage inequality.
Freeman (2007) suggests that regulations protecting labour rights tend to lower
inequality without any signiicant loss of output and employment.
Second, the recent discourse on lexibility refers to a regime of “employment
at will” (Santos, 2009), where Governments impose no restrictions on hiring and
iring, or on employment conditions; both employers and workers would be free
to choose terms of employment to their mutual satisfaction. But in reality, only
lexibility for employers is advocated (see the World Bank’s Doing Business35
surveys). In good times, with close to full employment, such asymmetrical
lexibility may not be signiicant. But in bad times, if irms are allowed to cut
wages or to ire at will, for example, in order to reduce costs, such lexibility for
employers implies greater insecurity for most workers, albeit unevenly.
Third, speeding up labour market adjustments to cope with the global economic
crisis runs the risk of impairing long-term growth potential if regulatory changes
create a “low pay–low productivity trap”. Investors compete exclusively on the
35
World Bank’s Doing Business: http://www.doingbusiness.org/data.
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he Twin Challenges of Reducing Poverty and Creating Employment
basis of wage costs with little incentive to invest to enhance labour productivity.
If each and every country attempts to lower labour standards and wages in order
to enhance attractiveness to investors, such competition would result in a “race to
the bottom”, beneiting no country while leaving all workers worse off.
There is an implicit normative message in the basic model of labour market
competition that “any job is better than no job”, undermining the value of
strengthening job security. In the absence of formal risk-mitigation schemes,
workers could be induced to readily accept low productivity jobs at low wages,
possibly sending the economy into a “low wage–low productivity trap”, with “bad
jobs” driving out “good jobs”.
High worker turnover induced by greater labour market lexibility might
also reduce incentives for employers to invest in training for their employees
and for workers to acquire training. In the absence of job security and legal
protection, workers pay a premium (in the form of low wages and willingness
to accept any job) to employers to reduce the risk of being unemployed. Under
such circumstances, higher labour standards and risk-mitigation schemes could
be both eficient (inducing an economy towards a “high productivity, high wage
equilibrium”) and equitable (enabling vulnerable workers to better deal with
labour market risks).
Precarious and informal employment
Globalization, procyclical macroeconomic policies and labour market deregulation
have encouraged poorly paid, insecure and unprotected employment. As a result,
employment has become increasingly precarious (Rodgers and Rodgers, 1989;
Standing, 2011). Part-time employment, self-employment, ixed-term work,
temporary work and other non-standard forms of employment have grown.
Typically, workers are not in such precarious employment by choice.
Precarious or non-standard forms of employment were already widespread
in developed countries before the crises. For example, the ILO World of Work
Report 2008 showed that the incidence of part-time and temporary employment in
advanced countries has been increasing since the mid-1990s (also see Houseman
and Osawa, 2003). However, there has been a rise in precarious employment in
developed countries in recent years, especially owing to the tepid recovery and
iscal austerity. According to the ILO World of Work Report 2012, involuntary
part-time and temporary employment increased in two thirds of developing
countries and more than half of advanced economies, respectively. The World
of Work Report 2012 noted a high share of informal employment, of more than
40 per cent, in two thirds of emerging and developing countries for which data
are available. Women and youth are disproportionately affected by precarious
employment conditions.
Employment matters
• 115
Way forward
Structural factors—such as mismatch between skills and job requirements or
inadequacy of the educational and training system, as well as poorly designed labour
market and social security systems—can certainly contribute to unemployment.
However, these factors cannot adequately explain the recent unemployment spike
in terms of the skills mismatch that has been worsening signiicantly since 2007.
Furthermore, there has been a reduction, rather than an increase, in
employment protection legislation in most countries, especially in the advanced
economies. Similarly, it is dificult to argue that red tape and bureaucratic
impediments to employment generation have worsened signiicantly since the
2008-2009 global inancial and economic crises. Instead, the decisive shift from
iscal stimulus to iscal austerity after 2009 has been borne disproportionately by
unemployed young people.
Measures to boost consumer conidence and aggregate demand are not helped
by widespread layoffs or lower wages—ostensible structural adjustments to boost
productivity and competitiveness, key planks of the current policy approach to the
European Union jobs crisis. While wage reduction by some irms may increase
their proitability relative to competitors, when all irms cut wages, they engender
the “paradox of thrift”, further depressing aggregate demand, thus compounding
the contractionary consequences of iscal tightening.
Therefore, while policymakers should design labour market, training
and education programmes to enhance overall employability, they should also
implement policies to increase labour demand. They should pursue a longerterm countercyclical approach to iscal consolidation and ind iscally neutral
ways by which targeted interventions for job creation can be supported. For
example, making it mandatory for public sector organizations to hire long-term
unemployed young workers for, say, two years, by spending the equivalent of the
unemployment and job search beneits that would otherwise be spent on them
could be iscally neutral. This would transform the role of government from a
provider of unemployment and job search beneits into an employer of last resort.
The guiding principle for macroeconomic policy should be consistent with
the preamble of article IV of the IMF Articles of Agreement which states, “each
member shall endeavor to direct its economic and inancial policies toward the
objective of fostering orderly economic growth with reasonable price stability,
with due regard to its circumstances”. With these Bretton Woods norms of central
bank policy, employment creation and more rapid economic growth are key goals
besides ensuring monetary and inancial stability.36
36 At an IMF workshop in March 2011, Oliver Blanchard, the IMF chief economist,
rejected the dominant macroeconomic paradigm of the past three decades: “Before
the crisis, mainstream economists and policymakers had converged on a beautiful
construction for monetary policy. To caricature just a bit: we had convinced ourselves that
there was one target, inlation. here was one instrument, the policy rate. And that was
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he Twin Challenges of Reducing Poverty and Creating Employment
Central bank policies can affect foreign demand for exports through the
real exchange rate, and domestic demand by reducing the costs of credit and
increasing its availability. Central bank policy for employment creation should
therefore focus on enabling aggregate demand expansion, making credit available
for investment and maintaining a stable and competitive real exchange rate to
support export demand.
Allowing central banks to promote growth and employment generation,
however, may increase the risk of runaway inlation in the event of supplyside shocks, as happened during the 1970s oil price shocks. Possible remedies
include tripartite or collective wage bargaining and ixing mechanisms, backed
by increased government social spending and directed credit allocation to
employment-generating sectors and irms. While the former dampens wage
demands and thus helps avoid wage-price inlationary spirals, the latter can protect
employment from the effects of a general credit crunch that would be triggered
if policy were to rely solely on the rather blunt instrument of interest rate hikes.
In the case of inlationary pressures from imported food prices, Governments can
consider supplying food grains from stocks if available.
Available evidence from emerging market economies suggests that moderate
inlation, that is inlation under 15 to 20 per cent, does not have negative effects
on growth (e.g., Bick, 2010; Pollin and Zhu, 2006). On the other hand, moderate
inlation expands Governments’ iscal space through seigniorage revenue and the
“inlation tax”, referring to slightly diminished real income owing to higher prices
and, hence, costs. Instead of relying on such an “inlation tax”, Governments
should make serious political commitments to raise domestic revenue to ensure
iscal sustainability.
Fiscal sustainability also depends on ensuring adequate productive
investments. Hence, Governments should invest in social and economic
infrastructure, which not only enhances productivity, but also induces or “crowds
in”—rather than “crowds out”— private investment. This also enhances the
political feasibility of tax reform to raise revenue, as tax payers will beneit from
better social and physical infrastructure and can clearly see the results of enhanced
revenue collection.
Fiscal policy should be consistently countercyclical, building surpluses
during booms and inducing recoveries during economic slowdowns by increasing
Government expenditure despite running budgetary deicits. In addition to
strengthening automatic stabilizers to reduce vulnerability to shocks and job
losses, Governments should also adopt short- and long-term policies to mitigate
the adverse impacts of economic reforms. For example, Governments can increase
basically enough to get things done… . If there is one lesson to be drawn from this crisis, it
is that this construction wasn’t right, that beauty is unfortunately not always synonymous
with truth. he fact is that there are many targets and there are many instruments. How
you map the instruments onto the targets, and how you use these instruments best is a
very complicated problem.” (Blanchard, 2011. p. 1.)
Employment matters
• 117
public sector expenditures where underutilized capacity exists, particularly
in rural areas where unemployment levels may be higher, in order to generate
employment and increase incomes. As noted earlier, social wage provisioning
(through subsidized public education, health care, housing, etc.) can be used to
offset potential inlationary pressures from the removal of ineficient subsidies and
price liberalization. Therefore, iscal policy should be judged from the perspective
of its impacts on productivity and employment, and not merely from a simplistic
accounting perspective of balancing the budget in all circumstances.
Employment and growth-oriented macroeconomic policies, as outlined
above, are likely to need appropriate capital account management. This sovereign
right is provided for by article VI, section 3, of the IMF Articles of Agreement.
However, such capital controls should discriminate between greenield foreign
direct investment and other inancial inlows, considering the differing potential
of different types of inlows to contribute to economic growth and employment
creation.
An international inancial system consistent with employment objectives
should provide liquidity when needed, stability for global markets and enough
space for policy autonomy for all countries. Policy coherence is needed at three
levels—policies in industrialized countries, multilateral rules and policies in
developing countries—for an international inancial system more conducive to
growth and employment.
By eliminating an important source of revenue through tariff reductions, trade
liberalization reduced Governments’ iscal space in many developing countries.
It also removed an important policy instrument to inluence structural change.
Therefore, in attempting to integrate developing countries effectively within the
world trading system, there should be what UNCTAD calls “a positive trade
agenda”. This implies helping developing countries to enhance their productive
and export capacities—thus overcoming supply constraints. Developing countries
should not be asked to give up their right to formulate development-oriented trade
policies in meeting their World Trade Organization (WTO) obligations.
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he Twin Challenges of Reducing Poverty and Creating Employment
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123
Chapter 7
Macroeconomic policy after the global
recession of 2008-2009: a development
perspective
iyanatul islaM37
Introduction: the limits of the standard macroeconomic
framework
The standard macroeconomic framework assigns a central role to macroeconomic
stability as a prerequisite for economic growth. It gained prominence in the case of
developing countries during the structural adjustment era of the 1980s and 1990s.
Over that period, 149 adjustment lending programmes were initiated on average
per annum by the Bretton Woods institutions. In some cases, these programmes
were highly persistent.38 The structural adjustment era formally came to an end
in 1998. Structural adjustment programmes were replaced by poverty reduction
strategies (PRSs), but the focus on macroeconomic stability remained intact.
Macroeconomic stability is usually assessed in terms of the ability of countries
to attain and sustain preferred nominal targets (whether implicit or explicit)
pertaining to debts, deicits and inlation. The rationale is that predictability in terms
of key nominal targets engenders market conidence, boosts investment, propels
growth, and supports employment creation and poverty reduction. In principle,
these nominal targets should be tailored to country-speciic circumstances, but in
practice they have often become part of a “one-size-its-all” approach. Thus, in the
case of inlation, the target suggested by the International Monetary Fund (IMF)
for developing countries is usually less than 5 per cent, while for debt-to-gross
domestic product (GDP) ratios the prudential thresholds are set at 40 per cent,
37 For queries on this chapter, please contact islami@ilo.org.
38 As Easterly (2003, p. 379) puts it “Adjustment lending has been so continuous for
some economies that it is hard to speak of it as purely a transitional phenomenon.”
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he Twin Challenges of Reducing Poverty and Creating Employment
despite the fact that they do not seem to be anchored in robust empirical evidence
(International Monetary Fund, 2007a; Goldsbrough, Adovor and Elberger, 2007).
Maintaining foreign exchange reserves worth at least three months of import
coverage is also a popularly cited threshold for monitoring the sustainability of
current account deicits.
There is a well-established body of evidence that the relationship between
macroeconomic stability and growth is asymmetric. Extreme instability—
such as hyperinlation and out-of-control budget deicits—kills growth, but it
does not follow that restoration of stability will be suficient to promote selfsustaining growth and lead to durable and productive job creation (Zagha,
Nankani and Gill, 2006). Indeed, it is possible for a country to be judged a major
macroeconomic success story, but this can coexist with signiicant incidence of
poverty and vulnerability, high inequality, inadequate structural transformation
and modest employment and labour market outcomes. Hence, a rethinking
of the standard macroeconomic framework is under way, a process in which
leading IMF economists themselves are playing an important role (Blanchard
and others, 2012). Such re-thinking appeared to receive a boost in the wake of
the global recession of 2008-2009 that was unleashed by the United States–
centred inancial crisis of 2007. Yet, the global macroeconomic policy discourse
is poised at a delicate juncture. The shift from ighting a worldwide recession
with macroeconomic stimulus packages to a iscal austerity agenda between 2009
and 2010—particularly pronounced in the European Union (EU)—has raised
concerns among many commentators of reverting to a “business as usual” mode
(Farrel and Quiggin, 2012).
From the perspective of developing countries, the primacy of the iscal austerity
agenda does not augur well. It means the continued dominance of the standard
macroeconomic framework, despite its well-known limitations. Indeed, a review
of 2009-2010 IMF Article IV Consultations—a traditional instrument through
which macroeconomic policy advice is dispensed to developing countries—for
a sample of 50 low- and middle-income countries suggests a preoccupation with
iscal consolidation and inlation control and insuficient attention to poverty
reduction, employment creation and social protection (Islam and others, 2012).
This is consistent with the advice proffered by the Bretton Woods institutions
in their Global Monitoring Reports of 2010 and 2011. Despite this, there are
some signs that the IMF is striving to develop “new generation” article IVs
that will focus a lot more on the development and employment dimensions of
macroeconomic policy advice.39
Given the fact that the global discourse on macroeconomic policy is poised
at a critical juncture, this chapter seeks to a make a contribution to the discourse
by suggesting how the standard macroeconomic framework can be made
39 An IMF Press Release notes that the organization is committed to strengthening its
policy advice on “various aspects of employment and growth” (International Monetary
Fund, 2012).
Macroeconomic policy after the global recession of 2008-2009
• 125
development-friendly. This will mean that macroeconomic policy managers in
developing countries will have to eschew the “single mandate” that they have
inherited from the structural adjustment era, refrain from succumbing to the EUled siren song of iscal consolidation at all costs and move to a “dual mandate”
in which Governments have to play the delicate balancing act of being guardians
of stability while promoting their role as active agents of development. This will
necessitate signiicant reconceptualization, but by no means a radical overhaul, of
orthodoxies pertaining to monetary policy, iscal policy, exchange rate regimes
and capital account management.
Monetary policy: going beyond a preoccupation with low,
single-digit inlation targets40
A core element of the mainstream macroeconomic framework is the role that
is assigned to monetary policy. Ever since New Zealand adopted an inlationtargeting framework in 1990, it has become de rigueur among most orthodox
economists to regard this as a best practice approach. Thus, the primary role of
the central bank, both in developing and developed countries, is to foster price
stability within a medium-term framework by pursuing low, single-digit inlation
using the interest rate as a key policy instrument. This in turn is expected to
promote policy credibility and to support growth.
Presently, 44 countries around the world have adopted explicit inlation
targets. Eighteen are emerging and developing countries. The median inlation
target of these 18 countries is 3.5 per cent. Excluding the countries in transition—
Armenia, the Czech Republic, Hungary, Poland, Romania and Serbia—there are
12 developing countries, with a median inlation target of 4.25 per cent (Anwar
and Islam, 2011).
How were these inlation targets set? Are they anchored in the historical
experience of developing countries or on robust empirical evidence? It appears
that the inlation targets that are set for emerging economies and developing
countries are well below the long-run inlation rate observed in developing
countries, on average, during the period (1961-2009, excluding the very high
inlation episode of 1989-1995) and, in many cases, below the actual inlation
rate of the 2000s. The inlation targets that are set do not take account of nonlinearities in the growth–inlation relationship, that is, there is a threshold below
which inlation has a positive impact on growth, while above this threshold
inlation has a negative effect on growth.
The existence of a threshold effect in the growth-inlation relationship should
be taken into account when setting inlation targets. Based on an analysis of 19
studies, the threshold effects for the developing world, that is, the values under
which inlation has proven no negative impact on growth, vary from 11 per cent to
40
his section draws on Anwar and Islam (2011) and Islam and others (2012).
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he Twin Challenges of Reducing Poverty and Creating Employment
40 per cent in cross-section estimates and from 6 per cent to 11 per cent in countryspeciic estimates. Hence, from this perspective, the median targeted inlation
rate for the 12 developing economies of 4.25 per cent appears to be too low in
the sense that it might impose opportunity costs in the form of forgone growth.
One should also note that the growth–inlation trade-off itself appears to have
changed over time, with data from the 2000s suggesting a positive relationship
between inlation and growth. This is unlike previous decades when the growthinlation relationship was negative, but even this negative trend is sensitive to the
presence of outliers. In addition, when a comparison is made between a group
of inlation-targeting and non-inlation-targeting countries at similar levels of
income and human development, inlation-targeting countries do not exhibit
better employment and labour market outcomes than their non-inlation-targeting
counterparts (Anwar and Islam, 2011).
One of the expected beneits of an inlation-targeting regime is that it
generates a premium for the private sector by reducing inlation risks. This should
then lead to reduced costs of borrowing, which should in turn spur private sector
investment. Unfortunately, this does not seem to be the case as the available
evidence shows that the median cost of borrowing in many developing countries
has either remained at elevated levels or gone up in the 2000s (a period of low
inlation) relative to previous decades.
One reason why borrowing costs may not come down to capture the
premium of reduced inlation risks is that such costs might be determined largely
by structural factors. It is likely that in many developing countries, the banking
system is dominated by a few large inancial (and multinational) institutions.
Such market imperfections might mean that the premium of reduced inlation
risks is being largely captured by these institutions rather than being passed on
to borrowers in the form of lower cost of credit. These market imperfections
are likely to be compounded by the weak institutional and legal environment
prevailing in many developing countries. Inlation-targeting regimes—however
lexible and effective—cannot deal with these structural issues and hence are
limited in their capacity to make a major contribution to employment creation
(Anwar and Islam, 2011).
Perhaps the biggest challenge of pursuing low, single-digit inlation targets
for developing countries in the current global climate is the challenge of tackling
food price inlation. The correlation coeficient between median inlation rates in
low-income countries (LICs) and a global food price index is highly signiicant,
that is, there is a statistically signiicant positive co-movement between domestic
inlation and a global food price index.41 One estimate suggests that about 44
million people might have been pushed into at least a transient episode of poverty
as a result of high and rising food prices (World Bank, 2012; Asian Development
Bank, 2011). In July 2012, the World Bank’s global food price index reached
41
Authors’ estimates. The correlation coeficient is 0.8.
Macroeconomic policy after the global recession of 2008-2009
• 127
its highest level. Unfortunately, an inlation-targeting regime that relies heavily
on using the interest rate to foster price stability is not really designed to deal
with food price inlation. Not surprisingly, the Bretton Woods institutions take
a circumspect view in dealing with inlationary pressures in the current global
environment. Thus, in the case of the LICs, the 2011 Global Monitoring Report
(International Monetary Fund and World Bank, 2011, p. 64) offers the following
advice:
Most low income countries …. must closely monitor the efects
of commodity prices on their domestic inlation rates, given
risks associated with rising world prices for food and fuel. If
these global shocks persist and feed through to local prices,
monetary policy should accommodate the direct impact;
however it may need to be tightened in some cases to counter
second round efects.
In light of such concerns of the limitations of a strict adherence to low, singledigit inlation targets, what should the appropriate role of monetary policy be?
One approach would be to resurrect an idea that is embedded in the founding
principles of the IMF Article IV Agreements. This is where member States are
exhorted to pursue the goal of “reasonable price stability” with due regard to
country-speciic circumstances and with the aim of sustaining “orderly” growth.
This is a formulation that is far more lexible than recent tendencies to focus on
low, single inlation targets that are applicable to large groups of countries.
A major challenge for monetary policy in LICs is to ind ways of reducing the
cost of borrowing and promoting inancial inclusion. This means taking account
of the extent to which lack of access to inance acts as a binding constraint on
growth. Private sector irms in developing countries usually regard lack of access
to inance as a major impediment to business operations and their employmentcreating potential (International Finance Corporation and the World Bank, 2011).
Hence, central banks and inancial authorities have an obligation to enhance
inancial inclusion without forsaking their prudential obligations and their role in
safeguarding price stability. Enhancing inancial inclusion means (a) increasing
access to inance for the private sector, especially small and medium-size irms,
and (b) encouraging the development of well-regulated and eficient microinance
institutions (MFIs) that can respond to the inancing needs of poor and vulnerable
households that seek durable self-employment. Of course, even the pursuit of
a well-designed inancial inclusion agenda will not, on its own, be suficient
to sustain productive job creation. Complementary initiatives are required
ranging across various policy spheres. The rest of the discussion is devoted to an
examination of these complementary initiatives.
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he Twin Challenges of Reducing Poverty and Creating Employment
Fiscal policy: going beyond prudential targets on debts and
deicits42
Should developing countries focus on particular targets when designing iscal
policy? In its 2005 review of macroeconomic policy design for 15 LICs with
access to concessional lending that were classiied as “mature stabilizers’,43 the
IMF noted that several studies showed that the “level at which deicit reduction
no longer boosts growth ranges between 1.5 per cent and 2.5 per cent, although
it acknowledged that these estimates were ‘subject to considerable uncertainty’”
(International Monetary Fund, 2005, p. 40). The 2005 report also pointed out
that the observed average deicit was 4.5 per cent of GDP for the countries under
review, but it did not see the beneits from further iscal consolidation. Hence,
one can infer that an average iscal deicit of 4.5 per cent of GDP was deemed
appropriate for LICs.
Is such a norm being used in assessing the conditions of today? A more
stringent limit seems to be implicit in the 2010 Global Monitoring Report. For
example, the average iscal deicit of developing countries is projected to expand
from approximately 1.5 per cent of GDP in 2008 to 4.5 per cent of GDP in 2010
(International Monetary Fund and World Bank, 2010, p. 79). Yet, this expansion
is deemed to be unsustainable in many cases. Hence, the implication is that
developing countries as a group should aim for iscal deicits that are closer to the
levels that prevailed in 2008 (less than 2 per cent of GDP).
On prudential thresholds pertaining to public debt, the IMF is more explicit
in its guidance. A 2002 report noted that, for developing economies, a 40 per
cent debt-to-GDP ratio should be used as a prudential threshold when monitoring
the sustainability of external borrowing (International Monetary Fund, 2002). A
2010 report issued by the Fiscal Affairs Department used this threshold to offer
illustrative examples of the extent of iscal adjustment that would be required for
developing countries to stabilize the debt-to-GDP ratio by 2030 (International
Monetary Fund, 2010a).
Of course, one can raise questions about the empirical robustness of the
prudential thresholds on public debt that are being used for policy guidance.
Studies on the public debt–growth link suggest that the level at which public debt
harms growth in developing countries and emerging market economies ranges
from 20 per cent of GDP to 90 per cent of GDP (Chowdhury and Islam, 2012).
Furthermore, the relationship between initial debt-to-GDP ratio and subsequent
growth for developing economies is weak. The “slope” in the “line of best it” is
rather shallow. For example, one study (Kumar and Woo, 2010, p. 4) that served
as a key input in the IMF 2010 Fiscal Monitor notes that “a 10 percentage point
increase in the initial debt-to-GDP ratio is associated with a slowdown in annual
42 his section draws on Islam and others (2012), and Islam and Anwar (2011).
43 he moniker “mature stabilizers” refers to countries that have managed to
consolidate macroeconomic stability.
Macroeconomic policy after the global recession of 2008-2009
• 129
real per capita GDP growth of around 0.2 percentage points per year”. One also
infers from this study an important point that is not emphasized by the authors.
Even a modest negative effect of debt on growth can be easily offset by other
variables that promote growth (such as schooling) which, in the aforementioned
study, has a positive and statistically signiicant coeficient that is substantially
larger in magnitude than the coeficient on public debt.
If recent proclivities to focus on iscal targets, and the growing popularity
of iscal rules that are anchored in these targets, are not necessarily based on
robust empirical evidence, what can one advocate as an alternative approach?
(International Monetary Fund, 2009). The role of iscal policy in a development
context is twofold. First, one should focus on long-term inancing needs
engendered by an appropriate conceptualization of core development goals.
Second, one should highlight the countercyclical role that iscal policy can play.
Robust and regular estimates are required to assess the inancing needs
associated with meeting core development goals. Such goals might be nationally
adapted versions of the Millennium Development Goals (MDGs) of 2000 and their
amended version in 2008, and the Social Protection Floor (SPF) Initiative as adopted
by the United Nations system in 2009. An illustration of such estimates is shown
in box 7.1. The message is that there are conspicuous and unmet inancing needs.
Once evaluations of inancing needs are done, the next step is to identify
a country’s “iscal diamond” as shown in igure 7.1. The iscal diamond is a
compact, but critical, summary of the way one can increase iscal space to meet the
Figure 7.1 The “iscal diamond” (percentage of GDP)
1. External resources (percentage of GDP)
Source: Author’s adaptation from the International Monetary Fund–World Bank
Development Committee (2006).
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he Twin Challenges of Reducing Poverty and Creating Employment
Figure 7.2 Public investment in LDCs, Africa and Asia, 1970-2008
(percentage of GDP)
Source: World Development Indicators, World Bank (2010). Available from
http://data.worldbank.org/data-catalog/world-development-indicators/wdi-2010.
core development goals. This entails mobilizing domestic and external resources
within a framework of iscal sustainability to support enhanced public investment
in health, education, water supply, sanitation and infrastructure—all critical in
attaining the MDGs. This needs to be combined with sustained efforts to harness
resources to inance an SPF that includes such targeted interventions as public
employment programmes.
It is well known that there has been a secular decline in public investment in
the developing world, most notably in the least developed countries (LDCs) as
shown in igure 7.2. What is the scale of the public investment challenge facing
LDCs? The Commission on Growth and Development (2008) suggests that a
public investment rate in infrastructure of around 7 per cent of GDP is needed as
an important element of a national development strategy. Yet, the data suggests
that barely 2 to 3 per cent of GDP is invested in infrastructure in many developing
countries and emerging economies. This is clearly a policy challenge, given that
50 per cent of enterprises in Asia and Africa cite lack of access to electricity as a
major constraint on their business operations (International Finance Corporation
and the World Bank, 2011).
Addressing these concerns requires determined public action to cope with
the public investment deicit that has built up over decades. Hence, a resource
mobilization strategy pursued through improved budgetary execution and
enhanced domestic revenue-to-GDP ratios in countries with a low tax burden
Macroeconomic policy after the global recession of 2008-2009
• 131
Box 7.1
Financing the Millennium Development Goals and
the Social Protection Floor
In 2002, the World Bank estimated that, if countries improved their policies and institutions, the additional foreign aid required to attain the MDGs by 2015 would be
between US$ 40 and US$ 60 billion a year (Devarajan, Miller and Swanson, 2002) and
the Asian Development Bank (ADB) estimates the additional per person costs for the
poverty income goal to be between US$ 550 and US$ 880 (Markandya and others,
2010). To meet these per capita costs, foreign aid commitments would have to be
twice their current projected size.
A forerunner to the SPF is the ‘basic social security package’ that was proposed
by the ILO in 2008. Such a package includes the following elements: (a) basic old-age
and disability pensions (beneits set at the rate of 30 per cent of GDP); (b) beneits
at the rate of 15 per cent of GDP for the irst two children below the age of 14; (c)
100 days guaranteed employment at a wage of 30 per cent of per capita GDP for a
maximum of 10 per cent of all people of all ages; and (d) essential health care based
on one health professional per 300 persons. Using these benchmarks, the study
examined 12 countries, out of which seven are in Africa (Burkina Faso, Cameroon,
Ethiopia, Guinea, Kenya, Senegal, United Republic of Tanzania) and the rest in Asia
(Bangladesh, India, Nepal, Pakistan and Viet Nam), using projections for the period
2010–2030. The iscal requirements range from over 10 per cent of GDP (Burkina
Faso) to a little over 4 per cent (Guinea).
The iscal challenges of meeting the MDGs and the SPF in the wake of the Great
Recession are brought out by an OXFAM study. It shows that the global recession of
2008-2009 has created a huge ‘iscal hole’ in the 56 LICs, by reducing their budget
revenues (and their ability to spend to confront the crisis and reach the MDGs) by
$65 billion over the 2009–2010 period (Kyrili and Martin, 2010). As a result of the
iscal hole and following some iscal stimulus to combat the crisis in 2009, most LICs
are cutting MDG spending, especially on education and social protection.
Source: Author’s adaptation from the International Monetary Fund – World
Bank Development Committee (2006).
are core planks of a development strategy (International Monetary Fund, 2009;
United Nations Development Programme, 2010; United Nations Conference on
Trade and Development, 2010). For example, estimates show that the Bangladesh
Government can fully upgrade its public employment programme to an Indian
standard national employment guarantee scheme by increasing its historically
low tax-to-GDP ratio by 3 percentage points and by better utilizing its existing
resources (Islam, Mujeri and Ali, 2011). This can be complemented by other
initiatives, such as public–private partnerships and efforts to tap domestic savings
and channel them into productive investment. In addition, where energy taxation
can be used effectively and equitably, it can become a new source of revenue that
has the beneit of supporting initiatives to cope with climate change.
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he Twin Challenges of Reducing Poverty and Creating Employment
Domestic resource mobilization needs to be supported by enhanced
development assistance from donors. Hence, maintaining aid commitments and
exploring feasible options for identifying alternative sources of reliable and
low-cost development inance to supplement traditional sources are important
elements of a development-friendly macroeconomic framework.
As part of enhanced development assistance, an important issue is the role
that debt relief has played in enhancing iscal space for developing countries, as
shown in box 7.2. While debt relief in aggregate has contributed to enhancing
iscal space, country-speciic experiences suggest that there is signiicant scope
for improvement.
As noted, iscal policy has an important role to play in stabilizing business
cycles. This was once regarded as part of the conventional wisdom, but was
superseded by the preoccupation with using monetary policy within an inlationtargeting framework that emerged during the 1990s. At the same time, the need
to attain iscal discipline as a means of boosting investor conidence came to the
fore of policy priorities. As a result, the role of iscal policy in smoothing business
cycles fell into a state of benign neglect. The global recession of 2008-2009,
and the iscal stimulus packages that emerged across the world to cope with the
consequences of the recession, has led to renewed attention to the countercyclical
role of iscal policy. Of course, if a developing country is laden with high debts and
deicits, and if the institutional capacity does not exist to design and implement
countercyclical policy, then using iscal measures in this way is not feasible.
Hence, the advice offered now is that developing countries need to use the normal
periods of growth and boom times to build up resources that can be set aside
in purpose-built stabilization funds that can be tapped to cope with aggregate
demand shocks. At the same time, investments need to be made in developing
automatic stabilizers (such as employment guarantee schemes and conditional
cash transfers) that can come into play during a recession. The evidence clearly
suggests that procylical policies are deleterious from a development perspective.
Exchange rate and capital account management: aiming for
competitive and stable real exchange rates and coping with
capital lows
A perennial issue in the case of designing exchange rate regimes that are
conducive to core development goals is the extent to which one should aim
for either loating or ixed exchange rate regimes. It used to be fashionable to
suggest that developing countries should adopt “corner solutions”, that is, either
ixed or loating exchange rate regimes. The “corner solutions” approach does
not obviate painful trade-offs between stability and development objectives that
a given exchange rate regime might entail. For example, a ixed exchange rate
regime—and stronger versions, such as “dollarization” schemes and currency
Macroeconomic policy after the global recession of 2008-2009
• 133
boards—might provide stability through a reliable nominal anchor, but will rob
countries of crucial policy autonomy. Moreover, it will then not be possible to use
the exchange rate as a key instrument for fostering structural transformation by
inluencing resource allocation between traded and non-traded sectors (Krueger,
1997).
What can one prescribe as an appropriate exchange rate regime? One
possibility is the adoption of institutional arrangements that sustain competitive
and stable real exchange rates, given the evidence that the real exchange rate—
and even a protracted period of modest undervaluation—exerts a powerful
inluence on structural transformation (McMillan and Rodrik, 2011). A study on
sub-Saharan Africa using data for the period 1970-2004 shows that real exchange
rate overvaluation reduces growth and impedes export diversiication (Elbadawi,
Box 7.2
The relationship between debt relief and iscal space in LDCs
According to the IMF’s African Department Director, the iscal space created by high
levels of debt relief is supporting poverty-reducing spending in LDCs (International Monetary Fund, 2007b). Initiatives such as the Heavily Indebted Poor Countries
(HIPC) and the Multilateral Debt Relief Initiative (MDRI) have substantially reduced
the debt-to-GDP and debt-to-export ratios of a signiicant subset of countries in the
LDC group, improving the overall sustainability of their debt and freeing considerable amounts of resources that were previously earmarked for debt servicing (United
Nations Conference on Trade and Development, 2010).
The trends indicate that the level of debt relief for LDCs spiked at a high level from
2005 to 2006, following the Gleneagles Summit, but swiftly came down in 2007. Total
debt service steadily declined from above 20 per cent of total exports to less than
5 per cent in 2008. However, this progress does not mean that the debt issue is no
longer relevant in LDCs. As of April 2010, 14 LDCs which still remained in debt distress
or at high risk of debt distress were not identiied as HIPCs or had not reached the
completion point. Even in the best-case scenario of a fast recovery and a long-term
growth path, LDCs and developing countries alike will face higher debt burdens as a
result of the global economic crisis.
The relationship between debt relief and iscal space difers across LDCs. The iscal
space assessments for Malawi and Mozambique noted that debt relief under the
HIPC Initiative had expanded iscal space and thereby allowed for a scaling up of
public investments (United Nations Development Programme, 2010). The MDG Report for Malawi noted that with 84 per cent of the country’s external debt stock cancelled, the country’s annual debt service had been reduced to US$15 million, freeing
up US$110 million for expenditures in priority programmes. However, one country
study, using the MDG framework to critically examine iscal policies in Zambia, inds
that the Zambian Government enjoys very little policy space and when all calculations are carried out and attendant conditionalities on policy-making are taken into
account, HIPC debt relief actually provides marginally less iscal space, rather than
more (Weeks and McKinley, 2006).
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he Twin Challenges of Reducing Poverty and Creating Employment
Kaltani and Soto, 2008). As box 7.3 shows in the case of Malawi, moving towards
a competitive and stable real exchange rate regime is an essential component of a
pro-employment macroeconomic framework.
An issue closely related to the exchange rate regime is the management of
the capital account. It used to be fashionable to argue that developing countries
should aim for capital account liberalization as a major policy goal. Indeed, prior
to the onset of the 1997 Asian inancial crisis, a proposal was proffered by the
international inancial institutions (IFIs) that all member States belonging to such
institutions should aim for an open capital account as an eventual goal. The pitfalls
of this proposal were exposed by the experiences of the East Asian economies
during the inancial crisis of 1997. Some of them acquired unsustainable “liability
dollarization” (that is, liabilities denominated in dollars, but assets denominated in
local currency). When the quasi-ixed exchange rate system maintained by some
East Asian economies collapsed as a result of sudden capital outlows caused
by an abrupt shift in investor sentiments, the sharp devaluation that followed
had a strong negative wealth effect on the balance sheet of the private sector.
This triggered a balance-sheet recession (Islam and Chowdhury, 2001). Hence,
it is now recognized that, in cases where unrestrained capital lows pose a policy
challenge, a more prudent approach to capital account management might be
justiied, as this opens up policy space for initiatives that create employment and
reduce poverty (Ostry and others, 2010).
Concluding remarks
The global discourse on macroeconomic policy is now poised at a critical
juncture. On the one hand, a rethinking is under way in light of the realization that
the standard macroeconomic framework, with its emphasis on iscal discipline
and inlation control, has its weaknesses in dealing with recessions, especially
those engendered by large-scale external shocks. At the same time, the standard
macroeconomic framework as it has evolved since the structural adjustment era
of the 1980s and 1990s is insuficiently connected to core development concerns
pertaining to poverty reduction, employment creation and social protection.
Despite such a momentum for rethinking macroeconomics, the shift from
ighting a recession with stimulus packages to an EU-led iscal austerity agenda
between 2009-2010 has raised concerns among many commentators of a
regression to a “business as usual” mode. This chapter has argued that developing
country policymakers should not succumb to this “business as usual” mindset.
This will entail the need to sustain the momentum on rethinking macroeconomics
in a way that makes it development-friendly. This will in turn entail a signiicant
reformulation, but by no means a radical overhaul, of prevailing orthodoxies
in monetary policy, iscal policy, exchange rate regimes and capital account
management. The overarching idea is one of adopting a dual mandate in which
Macroeconomic policy after the global recession of 2008-2009
• 135
Box 7.3
Malawi: The exchange rate regime and its implications for
growth and employment
A study commissioned by the ILO shows that “macroeconomic policy, particularly
exchange rate policy, matters a great deal” in afecting economic growth and employment creation. The study maintains that Malawi has a “tradition of attempting to
maintain a stable nominal exchange rate, i.e., ixing the value of the Kwacha in terms
of US dollars…The oicial purpose of maintaining a stable exchange rate is primarily
to reduce inlation,” with the Government arguing that this anti-inlation dimension
of exchange rate policy is worth preserving because export supply is not very responsive to the exchange rate. This might be true in the short term, but ignores the
role that a competitive real exchange rate plays in supporting structural transformation in the medium term. The study shows that, given the higher inlation rate in Malawi relative to its trading partners, attempting to maintain a nominal exchange rate
leads to a real appreciation and also induces volatility. There is also evidence that the
real appreciation is associated with a sharp jump in import penetration from 44 per
cent of GDP in 2007 to 53 per cent in 2008. The study urges policy-makers to recognize that with a competitive and predictable real exchange rate regime, “irms would
most likely have created more jobs, invested more and diversiied more in Malawi”
Source: ILO and Government of Malawi (2010: 84–87).
macroeconomic policy managers act as both guardians of stability and active
agents of development. Getting the balance right between the two roles is a key
policy challenge.
The chapter has argued that, within the framework of the dual mandate,
policymakers in developing countries should aim for reasonable price stability
that is sensitive to country-speciic growth-inlation trade-offs, take account of
food price inlation and seek to deal actively with the agenda of inancial inclusion.
Diligently practicing these ideas will entail a departure from the preoccupation
with maintaining low, single-digit inlation as the sine qua non of monetary policy.
In the sphere of iscal policy, the chapter has advocated the need for
moving away from a focus on attaining predetermined targets pertaining to
debts and deicits. Fiscal policy in a development context entails both long-term
and short-term dimensions. In the long term, the aim should be a sustainable
resource mobilization strategy that seeks to meet core development goals (such
as nationally adapted MDGs and SPFs). In the short-term, iscal policy has an
important role to play by seeking to smooth business cycles. This entails restoring
demand and thereby growth and employment in times of crisis. It will necessitate
prior investments in institutional and funding capacities.
The chapter has also noted that the issue of an appropriate exchange rate is
important in dealing with the challenges of structural transformation. The available
evidence suggests that supporting a stable and competitive real exchange rate
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he Twin Challenges of Reducing Poverty and Creating Employment
regime might be effective in supporting the process of structural transformation.
A related conclusion of the chapter is that prudent capital account management is
an important ingredient of a development-friendly macroeconomic framework. It
enables the preservation of policy autonomy and allows Governments to shield
their citizens from the vagaries and volatility of short-term capital lows.
Macroeconomic policy after the global recession of 2008-2009
• 137
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Chapter 8
The distributional efects of iscal
austerity
laurence ball, DaviDe Furceri, Daniel leigh anD PraKash loungani44
Introduction
Financial crises are typically associated not only with sharp economic downturns
but also with a substantial deterioration of iscal positions (Reinhart and Rogoff,
2009). Declining revenues owing to weaker economic conditions, higher
expenditures associated with bailout costs and demand stimuli have historically
led to a rapid deterioration of iscal balances and a signiicant and long-lasting
increase of public debt. In particular, looking at past historical episodes of
severe inancial crises, Furceri and Zdzienicka (2012) ind that the debt-to-gross
domestic product (GDP) ratio has typically increased by about 35 percentage
points compared with pre-crisis trends, with the effect lasting for about 10 years.
Similarly, the Great Recession of 2007-2009 has led to a signiicant increase
in public debt, in large part because of the collapse in tax revenues as incomes
fell. Other contributors to the debt build-up were the costs of inancial bailouts
of banks and companies and the iscal stimulus provided by many countries to
stave off a Great Depression. All in all, in advanced economies public debt has
increased from 70 per cent of GDP in 2007 to about 100 per cent of GDP in
2012—its highest level in 50 years (International Monetary Fund, 2013).
In the absence of signiicant consolidation measures, debt-to-GDP ratios in
many advanced economies are likely to remain high over the medium term. In
particular, based on the assumption that consolidation measures are only gradual
but suficient to stabilize the government debt-to-GDP over the medium term
44 Ball: Johns Hopkins University; Furceri, Leigh and Loungani: International
Monetary Fund. We are grateful to Saurabh Mishra and Jair Rodriguez for excellent
research assistance. he views expressed in this paper are those of the authors and do not
necessarily represent those of the IMF or IMF policy.
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he Twin Challenges of Reducing Poverty and Creating Employment
(Organization for Economic Cooperation and Development, 2011), debt-to-GDP
ratios may still increase by about 30 percentage points by 2025 compared with
pre-crisis levels. Moreover, looking ahead, population ageing could create even
more serious problems for public inances.
Against this backdrop, many Governments are already undertaking or
planning policies to reduce government debt and deicits, through a combination
of spending and tax-based consolidation measures.
When British Prime Minister David Cameron announced his Government’s
deicit reduction plans in 2011 at Davos, he said “Those who argue that dealing
with our deicit and promoting growth are somehow alternatives are wrong. You
cannot put off the irst in order to promote the second.” (Cameron, 2011). The
challenge facing the United Kingdom of Great Britain and Northern Ireland and
many advanced economies is how to bring debt down to safer levels in the face of
a weak recovery. Will deicit reduction lead to stronger growth and job creation in
the short run? What will be the distributional consequences?
While the effects of iscal consolidation on output and unemployment have
been extensively investigated in the literature,45 up to now, only a few studies have
looked at their distributional effects. The empirical evidence reported in these
studies suggests that iscal consolidation measures: (a) are typically associated
with an increase in poverty and a rise in the income gap (Smeeding, 2000); (b)
affect the trade-off between economic growth and income inequality (MulasGranados, 2005); and (c) increase income inequality (Agnello and Sousa, 2012;
International Monetary Fund, 2012).
The aim of this chapter is to contribute to the literature on this topic and
assess the short- and medium-term distributional effects of iscal austerity. For
this purpose, the chapter considers past historical episodes of iscal consolidation
to estimate impulse response functions (IRFs) of iscal consolidation episodes
on income inequality (proxied by the Gini coeficient) and on different types of
income.
Using past episodes of iscal consolidation measures for a sample of 17
Organization for Economic Cooperation and Development (OECD) countries over
the period 1978-2009, the results of the chapter suggest that iscal consolidation
episodes have typically led to a signiicant and long-lasting increase in inequality.
Differentiating between spending- versus tax-based consolidation episodes, the
results suggest that the latter tend to have a more persistent effect. The empirical
evidence presented in the chapter also show that while iscal consolidation
measures have typically led to a fall in wage income, they have not had a
signiicant effect on proit and rent income.
The rest of the chapter is organized as follows. The next section describes
the data and presents some descriptive statistics. The section following presents
the empirical methodology used to examine the effects of iscal consolidation
45 See, for example, Alesina and Perotti (1995, 1997), Alesina and Ardagna (2010),
Broadbent and Daly (2010), and Guajardo, Leigh and Pescatori (2011).
he distributional efects of iscal austerity
• 143
episodes on income inequality and on different types of income. The penultimate
section describes the results. And, inally, the chapter concludes with the main
indings and policy implications.
Data
Inequality
The dependent variable in our regression is the Gini coeficient for disposable
income. Our main source for the data is the Standardized World Income Inequality
Database (SWIID) (Solt, 2011; 2009).
Focusing on the subsample of advanced economies covered in the empirical
analysis, it can be noted that the Gini coeficient varies considerably across
countries, ranging from more than 35 in Italy, Portugal and the United States of
America to less than 25 in Denmark and Sweden (see igure 8.1). Inequality has
increased almost everywhere, with Italy, Japan, Portugal and the United States
recording the largest increase.
Up to now, the evolution of inequality does not seem to have been affected
by the global crisis (Jenkins and others, 2011). In particular, changes in inequality
have varied among both those worst hit by the crisis—with point estimates of the
Gini increasing in Latvia and Lithuania but falling in Estonia, Greece and Iceland
from 2007 to 2010—and among those economies that experienced smaller
contraction in economic activity (the Gini increased in France and Spain but fell
in the Netherlands and Portugal).46 However, previous empirical evidence shows
that distributional effects of crises can take many years before they materialize
(Atkinson and Morelli, 2011), suggesting that it may be still too early to predict
what the distributional consequences of the recent global recession will be.
Fiscal consolidation episodes
Fiscal consolidation episodes are taken from Devries and others (2011) database.
The database contains information on 173 episodes of iscal consolidation for
17 OECD economies (Australia, Austria, Belgium, Canada, Denmark, Finland,
France, Germany, Ireland, Italy, Japan, Netherlands, Portugal, Spain, Sweden, the
United Kingdom and the United States) during 1978-2009. The magnitude of the
iscal consolidation episode ranges between 0.1 per cent and about 5.0 per cent of
GDP, with an average of about 1 per cent of GDP.
The measure of iscal consolidation constructed by the authors is based on
a narrative approach and focuses on policy actions—tax hikes and/or spending
cuts—taken by Governments with the intent of reducing the budget deicit. This
approach differs from previous studies in the literature in which iscal consolidation
46 hese results have to be treated with caution given the large standard errors
associated with the Gini point estimates.
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he Twin Challenges of Reducing Poverty and Creating Employment
Figure 8.1.Gini coeficient in advanced economies
High inequality country
43
38
33
28
23
18
1970
1975
United States
1980
1985
United Kingdom
1990
1995
Portugal
2000
Canada
2005
Italy
Japan
Medium inequality country
38
33
28
23
18
1970
1975
France
1980
1985
Germany
Australia
1990
1995
2000
Ireland
2005
Netherlands
Spain
Low inequality country
38
33
28
23
18
1970
1975
Belgium
1980
Denmark
1985
1990
Sweden
1995
2000
Austria
2005
Finland
Source: Solt, Frederick, Standardized World Income Inequality Database, Version 3.1,
released December 2011. Available at: http://myweb.uiowa.edu/fsolt/swiid/swiid.html..
See also Solt (2009).
he distributional efects of iscal austerity
• 145
is measured by successful budget outcomes (e.g., Giavazzi and Pagano, 1990;
Alesina and Ardagna, 2010). Speciically, the cyclically adjusted primary balance
(CAPB)—the primary balance adjusted for the estimated effects of business cycle
luctuations—is used as a measure of iscal consolidation. The cyclical adjustment
is needed because tax revenue and government spending move automatically with
the business cycle. The hope is that, after this cyclical adjustment, changes in
iscal variables relect policymakers’ decisions to change tax rates and spending
levels. An increase in the CAPB would therefore, in principle, relect a deliberate
policy decision to cut the deicit.
In practice, however, budget outcomes turn out to be an imperfect measure
of policy intent. One problem is that the cyclical adjustment suffers from
measurement errors. In particular, it fails to remove swings in government tax
revenue associated with asset price or commodity price movements from the
iscal data, resulting in changes in the CAPB that are not necessarily linked to
actual policy changes. For example, in the case of Ireland in 2009, the collapse
in stock and housing prices induced a sharp reduction in the CAPB, despite the
implementation of tax hikes and spending cuts exceeding 4.5 per cent of GDP.
Another problem is that the standard approach ignores the motivation behind
iscal actions. Thus, it includes years in which Governments deliberately tightened
policy to restrain excessive domestic demand. For example, in Finland in 2000,
there was an asset price boom and rapid growth, and the Government decided to
cut spending to reduce the risk of economic overheating. If a iscal tightening is
a response to domestic demand pressures, it is not valid for estimating the shortterm effects of iscal policy on economic activity, even if it is associated with a
sharp rise in the CAPB.
It transpires that these problems with the CAPB bias the analysis towards
downplaying contractionary effects and overstating expansionary ones. It tends
to select periods associated with favourable growth outcomes but during which
no austerity measures were actually taken. It also tends to omit cases of iscal
austerity associated with unfavourable growth outcomes.
Inequality and iscal consolidation
While the impact of iscal adjustments on income disparities varies substantially
across countries (Agnello and Sousa, 2012), there is a reasonably large number
of countries in which iscal consolidation has triggered an increase in inequality
(e.g., Finland, Italy and Spain in the 1990s, or Germany, Japan and Portugal in
the 1980s). On average, however, past episodes of iscal adjustments seems to be
associated with a sizeable increase in income inequality. In particular, looking
at cumulative changes in the Gini coeficient before and after the beginning of a
consolidation episode (igure 8.2), it emerges that iscal consolidation episodes,
on average, have been typically associated with an increase in the Gini of about
0.3 percentage points in the short term (two years after the occurrence of a
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he Twin Challenges of Reducing Poverty and Creating Employment
Note: High inequality is deined as countries with Gini coeicient above 32 in latest
period available, Medium as countries with Gini above 27 but less than 32, and low for
countries with Gini coeicient of less than 27.
Figure 8.2. Cumulative change in the Gini coeficient before
and after consolidation measures
Source: Solt, Frederick, Standardized World Income Inequality Database, Version 3.1,
released December 2011. Available at: http://myweb.uiowa.edu/fsolt/swiid/swiid.html..
See also Solt (2009). (Authors calculations)
Figure 8.3. The effects of iscal consolidation on inequality
Source: Solt, Frederick, Standardized World Income Inequality Database, Version 3.1,
released December 2011. Available at: http://myweb.uiowa.edu/fsolt/swiid/swiid.html..
See also Solt (2009). (Authors calculations).
he distributional efects of iscal austerity
• 147
consolidation episode) and of about 1.7 percentage points in the medium term (10
years after the occurrence of a consolidation episode). Inferential analysis on the
dynamic effect of iscal consolidation on income inequality will be presented in
the following sections.
Empirical methodology
In order to assess the distributional impact of iscal consolidation episodes over
the short and medium terms, the chapter follows the method proposed by Jorda
(2005), which consists of estimating the dynamic change in inequality in the
aftermath of iscal adjustment episodes. In detail, for each future year, k, the
following equation has been estimated on annual data:
(1)
with k = 1,..8. Where G represents our measure of inequality (proxied by the Gini
coeficient for disposable income);
is a dummy variable that takes the
value equal to 1 for the starting date of a consolidation episode in country i at time
t and 0 otherwise;
are country ixed effects;
is a time trend;
and
measures the impact of iscal consolidation episodes on the change of
the Gini coeficient for each future period k. Since ixed effects are included in the
regression, the dynamic impact of consolidation episodes should be interpreted as
changes in the Gini coeficient compared to a baseline country-speciic trend. The
number of lags (l) has been chosen to equal two, as this produces the best
speciication, but the results are extremely robust with respect to different numbers
of lags included in the speciication (see robustness checks presented in the next
section). Equation (1) is estimated using the panel-corrected standard error
(PCSE) estimator (Beck and Katz, 1995).47
The dynamic response of inequality to iscal adjustments are then obtained by
for k= 0,1,..8, with conidence bands for the estimated
plotting the estimated
effects being computed using the standard deviations associated with the estimated
coeficients
. While the presence of a lagged dependent variable and country
ixed effects may in principle bias the estimation of
and
in small samples
the length of the time dimension mitigates this concern.48
Reverse causality is addressed by estimating changes in the Gini coeficient
in the years that follow a iscal consolidation episode. In addition, robustness
checks for endogeneity conirm the validity of the results.
47 his procedure is better placed to deal with the nature of our data (such as a small
number of countries compared to the number of years) and to correct for panel-speciic
heteroscedasticity and serial correlation.
48 he inite sample bias is in the order of 1/T, where T in our sample is 32.
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he Twin Challenges of Reducing Poverty and Creating Employment
Results
The results from estimating the impact of iscal consolidation on inequality
using equation (1) are presented in igure 8.3. The igure presents the estimated
effect of iscal adjustments on the Gini coeficient and the associated lower and
upper conidence bands (dotted lines). Looking at the igure, it can be noted that
iscal consolidation episodes have long-lasting effects on income inequality. In
particular, the estimates suggest that consolidation episodes (on average of about
1 per cent of GDP) have typically increased the Gini index by about 0.1 percentage
points (equivalent to about 0.4 per cent) in the very short term49—1 year after
the occurrence of the consolidation episode—and by about 0.6 percentage points
(equivalent to 2.5 per cent) in the medium term—12 years after the occurrence of
the consolidation episode.50 In addition, the Gini coeficient has typically reached
the peak around 8 years following the occurrence of a consolidation episode, after
which it has gradually declined.
To check the robustness of the results, equation (1) is re-estimated by including
time ixed effects to control for speciic time shocks, such as those affecting world
interest rates. The results for this speciication remain statistically signiicant and
broadly unchanged (igure 8.4, panel B).
As shown by Teulings and Zubanov (2010), a possible bias from estimating
equation (1) using country ixed effects is that the error term of the equation
may have a non-zero expected value, owing to the interaction of ixed effects
and country-speciic arrival rates of consolidation episodes. This would lead to a
bias of the estimates that is a function of k. To address this issue and check the
robustness of our results, equation (1) has been re-estimated by excluding country
ixed effects from the analysis. The results reported in panel C of igure 8.4,
however, suggest that this bias is negligible (the difference in the point estimate is
small and not statistically signiicant).
Estimates of the impact of consolidation on inequality could be biased because
of endogeneity. In particular, while potential reverse causality is addressed by
estimating changes in the Gini coeficient in the years that follow the occurrence
of a consolidation episode, it could still be the case that unobserved factors
inluencing the dynamics of the Gini coeficient may affect the probability of the
occurrence of a consolidation episode. In particular, a signiicant deterioration
in economic activity, which would affect unemployment and inequality, may
determine an increase in the debt-to-GDP ratio via automatic stabilizers, and
therefore increase the probability of consolidation. To address this issue, equation
(1) is augmented to control for: (a) contemporaneous and past crises episodes
(banking and currency crises); (b) change in economic activity (proxied by real
49 his result is in line with Agnello and Sousa (2012), who ind that iscal
consolidation leads to a short-term increase in the Gini of about 0.3 per cent.
50 his result, however, has to be treated with caution given the large uncertainty
surrounding the estimates over the long term.
he distributional efects of iscal austerity
• 149
GDP growth); and (c) change in unemployment. The results of this exercise are
reported in panel D of igure 8.4 and conirm the robustness of our results.
Finally, as an additional robustness check, equation (1) has been re-estimated
for different lags (l) of changes in the Gini coeficient. The results presented in
igure 8.5 conirm that the results are not sensitive to the choice of the number of
lags. In particular, the peak effect ranges from 0.8 percentage points in the case of
ive lags to about 1 percentage point in the case of zero lags.
Spending- versus tax-based consolidation episodes
Does the composition of iscal consolidation (spending- versus tax-based)
matter for inequality? There is a broad consensus in the literature that tax-based
consolidations are typically more distortionary than spending-based consolidations
and therefore more contractionary over the medium term.51 In particular, Guajardo
and others (2011) ind that, in the case of tax-based programmes, the effect of a
iscal consolidation of 1 per cent of GDP on output is -1.3 per cent after two
years, while in the case of spending-based programmes it is -0.3 per cent after two
years and not statistically signiicant. Similarly, their results show that the effect
of tax-based consolidations on unemployment is about three times larger than
spending-based consolidation and much more persistent. Based on this evidence,
it is reasonable to expect that the composition of iscal consolidation also matters
for inequality, and that tax-based programmes are likely to have a larger and more
persistent effect.
To test for this hypothesis, equation (1) is separately estimated for taxbased and spending-based consolidation episodes, by constructing starting date
dummies of taxes and spending consolidation episodes.52
The results presented in igure 8.6 show that while spending and tax-based
programmes have a similar effect over the short and medium term, tax-based
consolidation measures typically lead to a more persistent increase in income
inequality. This result corroborates the inding that austerity measures based on
tax programmes are typically more contractionary than spending consolidation
measures.
Wage versus proit income
Another way to assess the distributional effects of iscal consolidation measures
is to look at the effect of iscal consolidations on different types of income. A
traditional way of splitting total income is into wages, proits and rents. This
harks back to times when the roles of workers, capitalists and landlords were
fairly distinct. While these distinctions have eroded somewhat over time, the
51 See, for example, Alesina and Perotti (1995, 1997), Alesina and Ardagna (2010),
Broadbent and Daly (2010), and Guajardo, Leigh and Pescatori (2011).
52 he average magnitude of both spending- and tax-based consolidation is about 1 per
cent of GDP.
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he Twin Challenges of Reducing Poverty and Creating Employment
Figure 8.4. The effects of iscal consolidation on inequality robustness check for different sets of control
Panel A. Baseline
Panel B. Time ixed efects
he distributional efects of iscal austerity
• 151
Panel C. No country ixed efects
Panel D. Additional controls
Source: Solt, Frederick, Standardized World Income Inequality Database, Version 3.1,
released December 2011. Available at: http://myweb.uiowa.edu/fsolt/swiid/swiid.html.
See also Solt (2009). (Authors Calculations).
Note: dotted lines equal one standard error bands. Gini coeicient in the y-axis, years in
the x-axis
152
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he Twin Challenges of Reducing Poverty and Creating Employment
Figure 8.5. The effects of iscal consolidation on inequality robustness check for different lags
Panel A.
Baseline (lags=2)
Panel B. lag=0
Panel C. lag=1
he distributional efects of iscal austerity
• 153
Panel D. lags=3
Panel E. lags=4
Panel F. lags=5
Source: Solt, Frederick, Standardized World Income Inequality Database, Version 3.1,
released December 2011. Available at: http://myweb.uiowa.edu/fsolt/swiid/swiid.html.
See also Solt (2009). (Authors Calculations).
Note: dotted lines equal one standard error bands. Gini coeicient in the y-axis, years in
the x-axis
154
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he Twin Challenges of Reducing Poverty and Creating Employment
Figure 8.6. The effects of iscal consolidation on inequalityspending vs. based measures
Panel A. Spending
Panel B. Tax
Source: Solt, Frederick, Standardized World Income Inequality Database, Version 3.1,
released December 2011. Available at: http://myweb.uiowa.edu/fsolt/swiid/swiid.html.
See also Solt (2009). (Authors Calculations).
Note: dotted lines equal one standard error bands. Gini coeicient in the y-axis, years in
the x-axis
he distributional efects of iscal austerity
• 155
split between wages and other forms of income represents a starting point for
describing how income is divided between “Main Street” and “Wall Street”.
To assess the effects of iscal consolidation on the distribution of income
between wage earners and others, equation (1) is estimated for wage income:
where W represents the share of wage in GDP.
The results of this empirical exercise are reported in igure 8.7, and suggest
that iscal consolidation measures typically reduce the slice of the pie going
to wage earners, while they do not have signiicant effects on proit and rent
incomes. The reasons why wage income declines more than proits and rents have
not yet been studied much in the literature. Some iscal austerity plans call for
public sector wage cuts, thus providing a direct channel for this effect. But there
could be an indirect channel as well, for instance because consolidations increase
unemployment, and particularly the share of long-term unemployed in the total
(Morsy, 2011).
Conclusions and policy implications
This chapter examines the distributional effects of iscal austerity. Using episodes
of iscal consolidation measures for a sample of 17 OECD countries over the
period 1978-2009, it shows that iscal consolidation episodes have typically led
to a signiicant and long-lasting increase in inequality. Differentiating between
spending- versus tax-based consolidation episodes, the results suggest that the
latter tend to have a more persistent effect. The empirical evidence presented in
the chapter also shows that while iscal consolidation measures have typically led
to a fall in wage income, they have not had a signiicant effect on proit and rent
income.
• The results described here show that it is important to have realistic
expectations about the consequences of iscal consolidation: in addition to
lowering incomes—hitting wage earners more than others—and raising
unemployment, it is likely to lead to a long-lasting increase in inequality.
These costs must be balanced against the potential longer-term beneits that
consolidation can confer as interest rates decline, and the lighter burden of
interest payments permits cuts to distortionary taxes.
• Fiscal measures that are approved now but only take effect to reduce
deicits in the future—when the recovery is more robust—would be
particularly helpful. Examples include linking statutory retirement ages to
life expectancy and improving the eficiency of entitlement programmes.
In contrast, iscal consolidations that are unduly hasty pose risks to the
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he Twin Challenges of Reducing Poverty and Creating Employment
Figure 8.7. The effects of iscal consolidation on wage income
(% of GDP)
Source: Solt, Frederick, Standardized World Income Inequality Database, Version 3.1,
released December 2011. Available at: http://myweb.uiowa.edu/fsolt/swiid/swiid.html.
See also Solt (2009). (Authors Calculations).
Note: dotted lines equal one standard error bands. Wage income in the y-axis, years in the
x-axis.
recovery. Therefore, countries with the scope to do so should opt for a
slower pace of consolidation, combined with policies to support growth.
In countries such as the United States, where unemployment remains at
historical highs and long-term unemployment is at alarming levels, more
active policies are needed to spur job creation and increased consumer
conidence, including measures such as mortgage relief for distressed
homeowners.
• Fiscal consolidation plans should also spell out how policies would
respond to shocks, such as slower growth than envisaged in the plan. For
instance, plans could specify that unemployment beneits would be shielded
from cuts in the event of growth slower than assumed in the plan. History
shows that iscal plans succeed when they permit some lexibility while
credibly preserving the medium-term consolidation objectives (International
Monetary Fund, 2011; see also Mauro, 2011).
he distributional efects of iscal austerity
• 157
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impact on income inequality? Banque de France, Document de Travail 382.
Alesina, Alberto, and Roberto Perotti (1995). Fiscal expansions and iscal adjustments in OECD countries. Economic Policy, vol. 10 No. 21, pp. 205-248.
——— (1997). Fiscal adjustments in OECD countries: Composition and macroeconomic effects. IMF Staff Papers, vol. 44, No. 2, pp. 210-248.
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be expansionary? Tales of two small European countries. NBER Macroeconomics Annual, vol. 5, pp. 75-122. National Bureau of Economic Research.
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austerity: New international evidence. IMF Working Paper No. 11/158.
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159
Chapter 9
Achieving full, productive and freely
chosen employment for young people
steven Miller
The nature and dimensions of youth employment 53
Youth unemployment
Youth employment has been a persistent global challenge over recent decades.
While there has been some progress in reducing youth unemployment during
the past decade, the ongoing inancial and economic crises have reversed such
progress. The youth unemployment rate rose from 11.6 per cent in 2007 to 12.7
per cent in 2010 (International Labour Ofice, 2012a).
Overall, the number of unemployed youth (aged 15-24) is estimated to
have declined only slightly from a high of 75.4 million in 2009 to a projected
74.6 million in 2012, which remains well above the 2007 level of 70.3 million.
Youth unemployment has been most sensitive to the global crisis in industrialized
countries, and has reached record levels of 54 per cent in Spain and 58 per cent in
Greece.54 But, even before the crisis, employment growth had not been suficient
to absorb the growing cohort of young workers.
When trends on youth participation are factored in, the situation of young
people within global labour markets is even more unsettling. Globally, youth
labour force participation rates decreased by 4.1 percentage points between 2000
and 2010. Previous to the global economic crisis, the decline in youth labour
53 his overview of recent global and regional trends in youth employment draws
primarily on the following recent International Labour Organization (ILO) publications:
“Global Employment Trends for Youth 2012”; and “he youth employment crisis: Time
for action”, report to the 101st Session of the International Labour Conference.
54 Data from the European Commission, Eurostat can be found at http://epp.eurostat.
ec.europa.eu/portal/page/portal/euroindicators/labour_market/main_tables.
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he Twin Challenges of Reducing Poverty and Creating Employment
market participation had largely been a result of young people prolonging their
education and delaying entry to the labour market. The change at the global level
is driven to an important extent by the large decreases during the past ten years in
South Asia (-6.7 per cent), East Asia (-5.3 per cent) and in South-East Asia and the
Paciic (-3.8 per cent), all regions where huge strides have been made in educational
enrolment. The crisis, however, impacted youth participation in a different way,
discouraging many from entering the labour market owing to their lack of hope
in inding a job. According to the International Labour Ofice’s Global Economic
Trends for Youth 2012 report “The crisis-induced withdrawal from the labour
force amounts to 6.4 million young people worldwide” (International Labour
Ofice, 2012a, p. 7), which means that the adjusted global youth unemployment
rate would be 13.6 per cent (compared with the actual rate of 12.6 per cent).
Those regions with the highest participation rates (namely, East Asia, SouthEast Asia and the Paciic, developed economies and the European Union and
South Asia) also saw the largest decreases in participation over the decade. Some
of the youth in these regions, which are characterized by above average levels
of economic growth, have reacted to the crisis by extending their education
and waiting for better times before entering the labour market. However, an
increasingly large share of young people are neither in employment, education nor
training (NEET). The NEET rate for the Organization for Economic Cooperation
and Development (OECD) countries was 12.8 per cent for 2010 (International
Labour Ofice, 2012a), signifying a crisis-induced growth in social exclusion and
dislocation from the labour market.
Youth population in countries at diferent levels of development
Although the youth share of the working age population is on the decline in most
regions of the world, the absolute number of young people remains much higher
and continues to grow in the least developed regions of the world (table 9.1). Those
regions with a large “youth bulge” within the overall demographics of the working
age population are: sub-Saharan Africa (35.4 per cent), the Middle East (30.8 per
cent), North Africa (29.9 per cent), South Asia (28.9 per cent), South-East Asia and
the Paciic (25.6 per cent) and Latin America and the Caribbean (25.1 per cent).
Whether this youth bulge is a problem, as conventional wisdom would have it, or a
demographic bonus, is a matter of debate.
While a large youth cohort combined with high rates of unemployment is
an explosive mix, a whole set of different problems arise in those countries where a
relatively small youth cohort coincides with growing dependency ratios, meaning that
young people are faced not only with the burden of inding and keeping a job, but also
with that of taking care of an ageing population.
Achieving full, productive and freely chosen employment
• 161
Youth in working poverty, informal and vulnerable employment
Unemployment rates do not relect the fact that many young people are trapped
in low-quality jobs and underemployment in the informal economy, as well as
in vulnerable forms of employment in the formal economy. Over 90 per cent of
young people live in developing countries and fewer young people show up in the
unemployment statistics of developing countries than in those of industrialized
countries owing to high degrees of employment in the informal economy.
Although these young people are, strictly speaking, employed, the quality of this
employment is low as measured in terms of remuneration, working hours and
productivity. Since most developing countries lack State-sponsored social safety
nets, many young people have no choice but to earn a survival income in the
informal economy.
Evidence points to the fact that young people are disproportionally represented
amongst the ranks of the working poor. “In the 52 countries for which data is
available, youth accounted for 23.5 per cent of the total working poor, but only
18.6 per cent of non-poor workers” (International Labour Ofice, 2012b, p. 13).
The explosive combination of a well-educated young population and a deicit of
decent jobs helps to describe the growing frustration of young people in many
regions of the world, such as North Africa and the Middle East.
The conventional wisdom on youth employment
Job creation is habitually perceived to be a result of sound macroeconomic
policies, of efforts to promote private sector development, including through a
competitive business environment and reducing the cost of doing business, and
inally of correcting mismatches between job seekers and employers in the labour
market. Traditionally, this has meant iscal and monetary policies which focus on
reducing public debts, targeting inlation, encouraging foreign direct investment
(FDI) and promoting exports as means to stimulate economic growth which in
turn—it was argued—would create jobs. Beyond this overall framework for job
creation, youth employment policies have been largely targeted and based on
special labour market programmes in the ields of training and self-employment.
Training and employability
Lack of appropriate skills and work experience are seen to be key entrance barriers
to the labour market. In a Youth Employment Inventory carried out by the World
Bank in the framework of its partnership with the Youth Employment Network,
38 per cent (111 out of 289) of youth employment interventions recorded in
2007 addressed skills barriers through training (Betcherman and others, 2007).
Training has become the standard conventional wisdom with respect to barriers
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he Twin Challenges of Reducing Poverty and Creating Employment
youth face in making the school-to-work transition. However, vocational training
programmes have typically been evaluated in terms of the number of youth trained
and successfully placed in employment, whereas longer-term retention and issues
of job displacement have not been addressed systematically.
One avenue to improve youth employability includes making general
and technical secondary education more skills- and career-oriented. Often the
knowledge and skills acquired in the formal education system are poorly adapted
to the needs of employers, and to the self-employed; and therefore supplementary
training is required to make young people “employable” by industry standards.
This can be done by bringing the workplace into schools and also by bringing
schools into the workplace. The German Dual System is one well-known initiative
which divides the technical secondary school week between time spent in the
classroom and time spent under the direct supervision of employers in places
of work. This system has been promoted in various forms by German technical
cooperation projects around the world, such as the Mubarak-Kohl Dual System
(MK-DS) which ran for 14 years in Egypt. While this programme appeared to be
successful in helping those young people who were enrolled in special DS schools
to ind and retain a formal sector job, it covered only a small percentage of the
workforce enrolled in secondary technical education; and it did not seem to help
youth working in the informal economy to break into formal sector employment
(Adams, 2010).
Putting the DS training approach in the historical and macroeconomic
context in which it was implemented in Egypt can help in better understanding
its objectives and limitations. President Hosni Mubarak and German Chancellor
Helmut Kohl agreed in 1991 on a programme of German technical cooperation
that would help Egypt address weaknesses in its secondary technical education
system and support economic reforms (Adams, 2010). The economic reforms
revolved around providing a skilled and disciplined workforce for new exportoriented enterprises. Despite the fact that many of the opportunities were in
relatively labour-intensive sectors such as the ready-made garment industry, the
period from the early 1970s through the 1990s was marked by a ivefold rise in
unemployment rates, a doubling of capital output ratios and a marked growth of
informal forms of employment. Overall, while the Egyptian Dual System may have
served the labour requirements of investors seeking to reach new export markets
and be successful in highly competitive sectors, the DS training programme did
not respond to the aspirations of the majority of Egypt’s young people.
Similarly, in Tunisia, where youth unemployment likewise spurred a popular
revolution, high levels of education and labour market preparedness did not
address the need for job creation. Fadhel Kaboub (2007, p. 8) wrote prophetically:
High unemployment is not only an economic problem, but it is
also increasingly becoming a social and political issue that has
the potential to destabilize Tunisia if not dealt with promptly
• 163
Achieving full, productive and freely chosen employment
and strategically…. Tunisia has spent 25 % of its annual
government budget on public education.. . .In 2006, for the irst
time in Tunisia’s history, two thirds of the irst-time job seekers
have a university degree.
Recognizing the limitations of training programmes which are focused
quasi-exclusively on employers’ and labour market needs without integrating a
clear understanding of youth motivations in the labour market, there has been
a movement towards more comprehensive “training plus” approaches. These
programmes, which have been positively evaluated in a number of Latin American
countries, combine vocational, in-classroom training with workplace-based
training plus a variety of intermediation services (Fares and Puerto Gonzalez,
2009).
A World Bank evaluation of skills training, work experience, apprenticeship
and school-to-work transition programmes (Adams, 2007) lays out the potential
beneits of such programmes, but also their limitations unless the demand side
of the equation is simultaneously addressed: “Employers are unlikely to take
Table 9.1 Youth share of working age population,
1997, 1998 and 2006-2009 (percentage)
1997
1998
2006
2007
2008
2009
World
25.8
25.7
24.9
24.7
24.7
24.4
Developed economies
and European Union
16.8
16.7
15.7
15.5
15.4
15.2
Central and SouthEastern
Europe (non-European Union)
and Commonwealth
of Independent States
22.0
22.1
22.2
21.9
21.5
21.0
South Asia
31.0
29.6
29.5
29.2
28.9
30.6
South-East Asia
and the Paciic
29.8
29.4
26.9
26.5
26.0
25.6
East Asia
22.6
21.8
21.0
20.8
21.6
21.3
Latin America
and the Caribbean
29.3
29.0
26.2
25.8
25.5
25.1
Middle East
34.4
34.9
33.3
32.7
31.6
30.8
North Africa
33.1
33.3
31.0
30.5
30.6
29.9
Sub-Saharan Africa
35.7
35.7
36.1
36.1
35.5
35.4
Sources: International Labour Oice (2008), Global Employment Trends for Youth, annex
A8, p. 54; and International Labour Oice (2010), Global Employment Trends for Youth,
Special Issue on the Impact of the Global Crisis on Youth, annex A1, p. 61.
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•
he Twin Challenges of Reducing Poverty and Creating Employment
on board large numbers of youth for training when conditions for sustained
employment are not present.” (Ibid., p. 2.)
Wray (2007) and Minsky (1973) argue that public policy that favours
education and training over job creation puts “the cart before the horse” and is
unlikely to succeed. Such policies lay the blame on the unemployed for their
own situation. They can send the message that young people must change their
behaviour or their personal characteristics in order to get a job. Furthermore, there
is always a danger that training policies will only increase competition amongst
the unemployed over scarce available jobs, and rather than increase employment,
will simply displace previously employed workers (Wray, 2007).
Nevertheless, youth employment initiatives continue to embrace a nearly
exclusive focus on training and skills development while the levels of investment
in education and training have never been higher. Training will not resolve
the fundamental problem of structural unemployment, underemployment and
informality. The wave of popular uprisings in North Africa in 2011 has brought
home this message forcefully.
Self-employment
Programmes to promote self-employment and entrepreneurship amongst young
people provide the second main thrust for youth employment policy. However,
only a minority of young people have the desire, motivation and capabilities
to succeed in business and the majority of young entrepreneurs are driven by
necessity. Entrepreneurship or self-employment are rather taken up as a result of
the lack of wage employment opportunities. A 2006 survey of young entrepreneurs
in 14 Latin American countries (Llisterri and others, 2006, pp. 2 and 4) found that:
Young entrepreneurs can be divided into two broad groups:
those who become entrepreneurs by necessity because they
are unable to ind other forms of formal employment or
continue their education, and what can be called “vocational
entrepreneurs” who seize a business opportunity.
...
Most young entrepreneurs are self-employed. Household data
for a sample of 14 Latin American countries covering 89 percent
of the total population show that 12.8 per cent of workers between
the ages of 16 and 24 are entrepreneurs. Most of them (11.9 per
cent) can be classiied as self-employed by necessity, while the
rest (0.9 per cent) are employers. . . . Young entrepreneurs are a
small segment of the total universe of entrepreneurs.
Despite the sparse and ambiguous results of studies of youth entrepreneurship,
these programmes remain extremely popular with funding organizations from
the private and public sectors. This appears to be in part because of the lack of
Achieving full, productive and freely chosen employment
• 165
other viable employment creation alternatives, and in part because of an almost
ideological preference for private sector options for job creation, to the quasiexclusion of other, including public sector, alternatives.
Complementary policies for youth employment
Integrating youth into mainstream job creation policies
Better preparing young people for an insuficient number of decent jobs will not
solve the problem of youth unemployment and underemployment. Furthermore,
better matching between job seekers and potential employers may ease structural
unemployment, but it will not address the fundamental problem of lack of decent
work. Whereas training and intermediation services will continue to play a role in any
comprehensive youth employment strategy, durable progress cannot be made without
policies and programmes which create additional and good quality employment
opportunities for new labour market entrants, that is, young people. Wray (2007)
argues that policies which focus on training and motivating the unemployed or try to
address skills’ mismatches conceal the true problem—a chronic job shortage (ibid.).
To address job shortages, the focus is typically on supporting the private
sector to create new and additional employment. There are a number of strategies
to encourage private sector job creation. Wray (ibid.) discusses hiring and wage
incentives which government can provide to employers. These, however, carry
many potential drawbacks, such as the danger that the private sector will simply
reduce the cost of existing employment, rather than create new jobs for those
unlikely to ind employment otherwise.
Another means commonly advocated to encourage the private sector to hire
workers is to introduce greater lexibility into labour market regulations on hiring
and iring workers and into their conditions of employment. The World Bank—
International Finance Corporation Doing Business Initiative rates countries based
on the ease of setting up and operating a business, with the implicit assumption
that the easier it is to create and maintain a business, the better it will be for job
creation (International Finance Corporation and the World Bank, 2010). A dialogue
between the World Bank and the International Labour Organization (ILO) on the
Employing Workers Indicator has led to a modiication of this indicator to give
greater emphasis to the importance of social protection for a competitive business
environment and to stop using it as a component of the overall Doing Business
rankings.55 There is little concrete evidence which ties the ease of doing business
55 Doing Business measures the regulation of employment, speciically as it afects
the hiring and redundancy of workers and the rigidity of working hours. In 2007
improvements were made to align the methodology for the Employing Workers indicators
with the relevant International Labour Organization (ILO) conventions, and in 2010,
the Employing Workers indicators were removed both from the overall Doing Business
rankings and were no longer used as a basis for policy advice. See Berg and Cazes, 2006.
166
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he Twin Challenges of Reducing Poverty and Creating Employment
to decreased levels of youth unemployment or underemployment.
Whereas the private sector will continue to be the main engine for job
creation, there is a new openness to the role of the State in employment policy,
particularly in light of the massive public sector interventions in both industry
and in the banking sector as a result of the global inancial crisis (2007-2009).
However, with the political environment increasingly focused on austerity rather
than on stimulus, this window of opportunity is rapidly closing; and it is essential
to quickly put in place the basic pillars of an employment-generating macropolicy framework as well as direct job creation programmes.
Whereas the tendency over the past decades has been for the government
to withdraw from key areas of intervention, wage policy, industrial policy and
investment policy are all worth revisiting in order to leverage their potential impacts
on youth employment. Macroeconomic, sectoral and labour market policies are
often neglected with respect to youth employment, which is usually conined to
the realm of active labour market programmes. Policies for the promotion of youth
employment suffer from being labelled as “special” or “targeted” interventions,
and hence end up becoming temporary measures which inadequately address the
essence of a structural and long-term phenomenon.
Youth in the informal economy
Since the majority of young people in the world are involved in informal
employment relationships, a clear understanding of the heterogeneity and the
dynamics of informal work are important in helping create new employment
opportunities while at the same time addressing decent work deicits. The World
Bank highlights two sides to informality. On the one hand, citizens may be excluded
from formal institutions and employment opportunities. On the other, “workers,
irms and families, dissatisied with the performance of the state or simply not
inding any beneit to interacting with it, opt into informality” (Perry and others,
2007, p. xi). The International Labour Ofice (2007) argues that informality arises
less as a result of individual choice and more as the result of lack of alternative
employment opportunities. Lack of State capacity or political will to create decent
employment in the formal economy are the problem.
The International Labour Ofice (2007) maintains that not all informality can
be ascribed to excessive regulations driving economic agents into the shadows of
informality. There are activities or groups that fall outside the national regulatory
framework, such as the self-employed, domestic workers or new forms of
employment such as subcontracting. Where laws exist, lack of compliance and
enforcement in the informal economy is the problem. Yet, in some instances, the
regulatory framework is not seen as a provider of basic protection or an instrument
Also, see the World Bank’s Doing Business website regarding the changes which have
been made with respect to the Employing Workers index, available from http://www.
doingbusiness.org/data/exploretopics/employing-workers.
Achieving full, productive and freely chosen employment
• 167
for creating a level playing ield but as an impediment to employment creation
and a factor contributing to the spread of informality.
Since informality is often characterized by long hours, low productivity
and revenues and poor working conditions, the challenge is to improve working
conditions, productivity and earnings. Policy interventions have tended to focus on
training and capacity-building efforts for workers and enterprises in the informal
economy, a supply-side approach. However, a focus on the demand for the goods
and services produced by the informal economy is also called for, one which
not only takes into account the heterogeneity of informal work and production
but also addresses its varying degrees of integration within the formal economy.
Rather than viewing the informal economy as a marginal phenomenon, destined
to disappear as countries develop, informality should be seen as an integral feature
of modern capitalist development, one which is strategically captured not only by
the survival strategies of informal workers, local micro- and small enterprises
and their dependents, but also by industries and economic sectors seeking to take
advantage of global supply chains.
In conclusion, the key policy avenue for addressing decent work deicits for
young people in the informal economy would be to promote the creation of decent
work in the formal economy. The following section explores the role which public
employment programmes can play in this regard.
Youth in public employment programmes
There is renewed interest in public employment programmes as a vehicle
for directly providing employment opportunities, coupled with training and
work experience, to young people. The manner in which public employment
programmes have linked job creation with delivery of basic infrastructure and
services has been evolving over recent decades. In the follow-up to the World
Employment Conference of 1976, the ILO launched a global initiative in favour
of labour-intensive Special Public Works Programmes (SPWPs). The objective
was to mobilize international assistance in favour of short-term job creation
(for example, in response to the drought that hit the Sahel in the 1970s), while
putting in place much needed infrastructure as a basis for sustainable employment
creation.
The SPWPs were initially rural projects such as water supply, reforestation,
erosion control, small dam construction, irrigation, watershed management,
feeder road construction and improvement, and construction of buildings such
as schools, health centres and cereal banks. Later, urban works such as slum
upgrading, street paving, sanitation and drainage were included. Rather than being
limited to a series of stand-alone labour-intensive projects, the ILO approach,
now implemented under the Employment-Intensive Investment Programme
created in the 1980s, has evolved towards increasing the employment content of
infrastructure investments, without compromising technical standards and long-
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•
he Twin Challenges of Reducing Poverty and Creating Employment
term sustainability (International Labour Ofice, 1998). This programme, which
now has more than 30 years of experience in over 70 countries, has been largely
supply-driven in that it seeks to increase the employment impact of alreadyallocated project funding and infrastructure investment budgets.
Major public investment programmes are under way in a number of countries,
such as South Africa’s Expanded Public Works Programme and Ethiopia’s
Productive Safety Nets Programme. However, there is new interest in moving
from a supply-driven to a demand-driven approach in the form of employment
guarantee programmes, such as India’s National Rural Employment Guarantee
Act (NREGA)56 (Lal and others, 2010). Rather than using the limited supply of
public investment resources as their starting point for job creation, employment
guarantee programmes (see below) are demand-based in that they respond to the
overall demand for employment opportunities.
Many of the World Bank’s Youth Employment Loans and Grants to
developing countries contain public works as a major, if not the primary,
component. Such programmes include components such as procurement and
community contracting, which can have multiplier effects. They inject workers’
income into the local economy, which can help young people contribute to
demand-led economic growth and sustainable employment57 (World Bank,
2010). Cunningham (2009) presents public service programmes with a list of
possible active labour market responses to constraints and labour market failures
facing young people. Infrastructure development and public service can provide
meaningful work experiences which can accommodate the speciic needs and
interests of young people.
An employment guarantee for young people?
The ongoing structural nature of youth unemployment calls for a permanent
mechanism for youth job creation. Given the high costs to society of
unemployment and underemployment of young people—in terms of forgone
production, increased welfare and transfer payments, decreased iscal revenues,
social unrest and deterioration of human capital—policies wherein Governments,
either at the local or national level, agree to step in and become “employer of last
resort” may prove to be a cost-effective strategy for youth employment58 (Lal and
others, 2010; Wray, 2007). Rather than making training a prerequisite for young
people inding employment, an employer of last resort, or employment guarantee
56 For further background, see Lal and others (2010) and ILO (1998).
57 See World Bank, 2010. Also, for an overview of diferent strategies and approaches
for both supply- and demand-driven public employment programmes, see Lal and others
(2010).
58 For further background on the concept and examples of Employer of Last Resort,
or employment guarantee programmes, see Lal and others (2010); Wray (2007); and
the website of the Economists for Full Employment network, available from www.
economistsforfullemployment.org.
Achieving full, productive and freely chosen employment
• 169
programme, can make jobs available that “take workers as they are”, regardless
of their skills, education, or personal characteristics (Wray, 2007). These jobs can
be created in a number of ields, including community infrastructure and services,
environmental restoration and in the care economy.
Whereas such programmes may be perceived to be unaffordable, political
will and conducive iscal and monetary policies, together with the necessary
government capacity, are the key requirements. Studies have shown that a
universal employment guarantee could be put in place in many countries for 1-2
per cent of gross domestic product (GDP)59 (ibid.; Harvey, 2003) and that the costs
of creating employment are not prohibitive, especially when compared with the
costs of unemployment. Kaboub (2007) estimated that an employment guarantee
programme in Tunisia could be implemented for between 3 and 5 per cent of GDP.
Although limited to rural areas, India’s NREGA is a rights-based, demand-driven
programme which by law provides 100 days of work per year to everyone who
applies for a job card and for work.
An employment guarantee would provide protection against economic risks
and poverty traps as well as a means of defusing social tensions, and would
buy time for employment-friendly economic reforms to take root. By drawing
in young people who have often never before been part of the workforce, welldesigned employment guarantee programmes can potentially increase their
“employability” and/or facilitate re-entry into the private sector, suggesting that
in many instances the private sector prefers to hire people who already have work
experience or are working60 (Wray, 2007). Employment Guarantee programmes
can also complement some of the programmes aimed at retraining and retaining
workers in other sectors by helping to stabilize local demand and income.
Conclusions on policy coherence for youth employment
While education and training are key factors for labour market access for young
people, it must be recognized that, globally, young people are already the best educated
generation ever and that education and training do not create jobs. Furthermore,
underemployment in the informal economy, rather than unemployment, is the
primary indicator of labour market malaise for most of the world.
While the private sector is the main driver and source of job creation, private
sector industries are not creating suficient decent jobs to meet the requirements
59 Wray (2007, p. 27) argues that the net increase of government spending would be
less than 1 per cent of GDP. According to Harvey (2003), based on a comparative study
of United States social and iscal policy, the additional tax revenue requirements to fund
a universal employment guarantee in the United States in 1999 would have required a 1.6
per cent increase in personal and corporate income taxes.
60 Wray (2007, p. 5) states that “Upgrading of these characteristics would be the second
step—with much of the necessary training occurring on the job. he unemployed need
jobs, not merely the promise of a job for those who successfully reform themselves.”
170
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he Twin Challenges of Reducing Poverty and Creating Employment
of young people entering the labour force. Likewise, these same structural
constraints cannot be solved by “matching” or “signalling” a greater number of
job seekers with a lesser number of decent jobs. In fact, the matching process
will channel the most qualiied job seekers to the limited number of decent jobs,
thereby exacerbating marginalization and informality amongst the rest.
Although these constraints are generally acknowledged, the remaining
solution traditionally proposed for the youth employment problem tends to be
self-employment and entrepreneurship development. It is as if policymakers are
telling youth that since there are not enough decent jobs available, they have two
options: either accept employment which does not meet with their expectations,
or create their own!
Another “solution” to the problem of youth unemployment tends to be the
creation of special funds, which largely begs the question of how to use these
resources most effectively to address youth unemployment and amounts to
throwing money at the problem. All too often, the focus of such funds is on the
distribution of microcredit to young people, at times with political motivation,
to start their self-employment income-generating activities.61 The high political
priority and visibility of youth employment becomes its own worst enemy. Since
policies and programmes for youth employment are often targeted and special
measures, they are either marginalized or treated separately from the broader
macroeconomic (both iscal and monetary) and labour-market policy debates
on job creation. Whereas youth employment is often a top political priority, the
solutions proposed end up being second-best.62
Since young people have a proportionately greater chance of being outside the
labour market, the focus of youth employment policy should be on the creation of
new and additional jobs. Even if not explicitly reserved or targeted towards young
people, these jobs will beneit them relatively more than they do older workers.
Demand stimulation or job creation policies can be either private or public sector
driven. The panoply of policy measures available to stimulate or subsidize private
sector employment provides only partial answers, and usually leads to displacing
existing labour.
61 For example, the Government of South Africa launched a 9 billion rand (1.1 billion
United States dollars) jobs fund in 2011 which invites competitive bids from projects with
innovative ideas on how jobs can be created (see http://www.jobsfund.org.za/default.
aspx). Senegal has put in place a Youth Development Fund, based largely on microinance
grants and loans, which has had mixed results over the past decade. For a critical review of
the Fund, see http://www.lasenegalaise.com/index.php?lasenegalaise=infos&infos=politiq
ue&politique=214089 .
62 During discussions by the author with Wendy Cunningham of the World Bank
on 7 September 2010, she indicated that youth employment interventions were oten
necessarily “second best” with respect to the potential impacts which macroeconomic
policies can have on job creation. Nevertheless, such interventions could have more
immediate impacts in situations where the political imperative does not allow for longterm policy impacts.
Achieving full, productive and freely chosen employment
• 171
Hence, the time is now ripe to revisit direct job creation by public authorities.
Such programmes should not be seen as competing with or replacing the private
sector’s primary role in job creation. Rather, such direct public sector driven
job creation programmes provide a means of maintaining human capital during
inancial, civil or political crises or economic downturns while at the same time
providing basic infrastructure and services which will help the private sector
improve its productivity. Public job creation programmes can also provide
green jobs through work which protects the natural resource base, restores the
environment, addresses climate change and builds a foundation for sustainable
job creation.
Direct public job creation schemes should not, of course, be seen as the only
solution for addressing decent work deicits for young people. Rather, it should
be an integral part of a larger menu of options available to public policymakers.
Better mapping, evaluation and costing of different interventions is called for
within a coherent framework.63 Just as in the inancial sector, where they have
recently stepped in and assumed the role of lender of last resort, Governments
should likewise be willing to face up to the challenge of becoming an “employer
of last resort”.
63 In order to ascertain the relative requirements for diferent types of interventions
along the supply–demand continuum outlined above, a mapping of the resources and
needs with respect to youth employment should be carried out. Such mapping can be
done at the national, regional and local levels. he National Youth Employment Action
plan process, put into place with both political commitments and with technical resources,
provides a good place to begin. Despite this demand-driven national framework, backed
up by General Assembly resolutions, national commitments at the highest level and
the technical resources of the United Nations system, separate and ad hoc approaches
continue to prevail. See United Nations General Assembly resolution 57/165 calling for
the development of National Action Plans on Youth Employment, available from http://
www.un.org/Docs/journal/asp/ws.asp?m=A/RES/57/165.
172
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he Twin Challenges of Reducing Poverty and Creating Employment
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he Twin Challenges of Reducing Poverty and Creating Employment
175
Chapter 10
Financing social and labour market
policies in times of crisis and beyond
KatJa huJo 64
Introduction
The global inancial crisis that broke out in 2008 was one of the worst crises
in recent decades, with countries still struggling to overcome its consequences.
The Global Jobs Pact adopted by the International Labour Organization (ILO) in
2009 aimed to address the neglected social and employment impact of the crisis,
promoting a recovery based on investment, employment and social protection
(International Labour Organization, 2009a). The document mentioned explicitly
the need to support developing countries and least developed countries (LDCs)
with limited iscal space and State capacity through additional donor funding and
cooperation. In 2012, this agenda has lost nothing of its urgency: according to
the United Nations Department of Economic and Social Affairs (UN/DESA),
“recovery of global employment remains the most pressing challenge” (United
Nations, 2012, p. 1).
This chapter will examine the question of inancing labour market and social
policies in a context of crisis and beyond. Although issues of inancing are usually
treated separately from social policy, the latter being primarily concerned with
social expenditure and social outcomes, it is posited here that both have to be
approached simultaneously in order to design social and economic systems that
are mutually reinforcing and sustainable (Hujo and McClanahan, 2009).
The main conclusion of the chapter is that countries with broad and
institutionalized social and labour market policies are better prepared to respond
to a crisis situation and to reduce poverty. However, aid, international funds and
stabilization mechanisms at regional and global levels are required for countries
64 United Nations Research Institute for Social Development (UNRISD) research
assistance and very useful comments from Mariana Rulli and the editorial team at UN/
DESA are gratefully acknowledged.
176
Figure 10.1 Fiscal stimulus plans, Q4 2008-Q1 2009 (percentage of GDP)
•
he Twin Challenges of Reducing Poverty and Creating Employment
Source: Ortiz, 2009.
Financing social and labour market policies
• 177
with limited iscal space and high exposure to global market risks—a challenge in
a global environment where rich as well as poor countries face similar inancing
pressures and policymakers seem to be increasingly reluctant to support a global
solidarity agenda.
The chapter is organized into six parts: the second section introduces the general
background, the third section discusses the concept of iscal space and affordability,
the fourth section takes a longer term view by linking revenue instruments with
social development strategies, the ifth section gives some country examples on
inancing labour market policies, and the sixth presents conclusions.
The context: social protection and labour markets
in times of crisis
The effects of the global inancial and economic crisis starting in 2008 have been
transmitted to the developing countries through several channels, notably foreign
capital and domestic credit, trade and foreign direct investment (FDI), commodity
prices and terms of trade as well as remittances. As a consequence, countries across
the globe have suffered declines in national income, investment, employment,
worsening iscal accounts and balance of payments, increasing debt and inancial
sector distress (International Labour Organization, 2009b; International Monetary
Fund, 2009; World Bank, 2009; United Nations Conference on Trade and
Development, 2010).
At a micro level, the negative impact on well-being has occurred mainly
through deterioration of the labour market situation (unemployment, wage
declines and informalization), price hikes in inancial and goods markets, effects
on household income and assets (savings, assets, unpaid work, remittances) and
through adverse effects on social protection provided through States, markets and
communities (McCord, 2010; Mesa-Lago; 2009, Hujo and Gaia, 2011; Utting,
Razavi and Buchholz, 2011).
In most countries, at least initially, the public sector responded with countercyclical measures, both in the economic and social sectors, trying to offset some
of the negative impacts of the crisis on economic activity and employment and to
cushion adverse effects on the population through labour market policies (LMPs),
cash transfer programmes, public work schemes, food subsidies and investments in
social infrastructure. These measures were partly inanced through iscal stimulus
packages (see igure 10.1), with expenditure on social protection accounting on
average for 25 per cent of stimuli (Zhang, Thelen and Rao, 2010). However, many
countries moved towards iscal tightening from 2010 onwards, with social sectors
and pro-poor spending on health, education, social protection and agriculture
suffering severe cuts (Kyril and Martin, 2010; United Nations, 2011a).
Developing countries have in many cases been more resilient to the most
recent crisis than to previous ones, mainly due to improved fundamentals (debt,
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•
he Twin Challenges of Reducing Poverty and Creating Employment
inancial sector, balance of payments, exchange rates and monetary indicators,
foreign reserves) which are largely the result of strong growth over the mid2000s, less exposure to global inancial markets in the case of poorer African
and Asian countries, some policy changes at the global and national levels, such
as the debt relief granted through the Heavily Indebted Poor Countries (HIPC)
Initiative, a reduction of public debt in selected middle-income countries, as well
as expansion of social protection and production-oriented policies in selected
countries (Ocampo, 2009; United Nations Conference on Trade and Development,
2010; Ferreira and Schady, 2009).
This notwithstanding, in the ifth year following the start of the crisis, effects
are still visible and the global economy is struggling to get back onto a sustainable
and inclusive growth track (World Bank, 2013; International Monetary Fund,
2012; United Nations, 2012).
The following section will focus on the issue of iscal space and affordability
of public policies, before presenting some evidence on how countries have
mobilized and allocated funds and what the challenges for the future are.
Financing social and labour market policies: iscal space
and afordability
The availability of budgetary room to inance public policies in a sustainable
way is labelled “iscal space” (Heller, 2005). Fiscal sustainability implies that
Governments are able to inance planned expenditures while honouring any debt
obligations and ensuring solvency in the medium to long term.65
In general, iscal space depends on a country’s economic performance,
including its capacity to produce income and savings and to generate government
revenues; the performance of its domestic capital and inancial markets; and the
availability of external funding such as foreign investment, loans or grants. A
dynamic economic environment and a stable world economy are therefore key
determinants of healthy national public inances.66
The global crisis has affected iscal space negatively. Fiscal deicits rose
sharply owing to falling revenues in combination with expenditure increases,
65 he literature on debt sustainability is vast—at a minimum, variables such as a
country’s growth rate, exports, remittances, interest rates, revenue elasticities, composition
of existing debt in terms of interest rates, maturity and currency denomination have to be
taken into account. See Heller, 2005.
66 Mobilizing resources is, however, only part of the battle. Decisions about revenue
policies and the allocation of public funds are the result of political processes, oten
dominated by elite groups. Consequently, such policies may not lead to the best outcomes
in terms of providing public goods and reducing poverty. Furthermore, institutional
capacity, including the quality and eiciency of public administration and service
providers, inluences how successfully resources are translated into social outcomes (see
United Nations Research Institute for Social Development, 2010).
Financing social and labour market policies
• 179
Figure 10.2: Fiscal transmission channels
Source: International Monetary Fund (2009:21).
as igure 10.2 illustrates. In order to create additional iscal space for social
policies (Millennium Development Goal (MDG)-related policies, or development
enhancing policies more generally), two basic options stand out:
(a)
Reallocation of existing revenues;
(b)
Mobilization of additional revenues.
Reallocation or reprioritization of expenditure is usually the irst option to
look into for Governments aiming at a greater economic and social eficiency of
public expenditures, especially in times where key economic, social or political
variables change—for example, in the case of economic or political crisis or
natural disasters, or changing demographics. The room for reprioritization is,
however, limited in most countries, as a signiicant part of the budget is tied
up in so-called non-discretionary spending (spending mandated by law, for
example, social security spending—in contrast to discretionary spending that is
decided annually by government and parliament). Reductions in public sector
employment, wages or subsidies may entail signiicant political costs and are
likely to be counterproductive with regard to employment goals and demand
stabilization. In the case of aid-dependent countries, conditionalities on how to
spend funds limit the space for discretionary government spending. In addition,
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•
he Twin Challenges of Reducing Poverty and Creating Employment
the following aspects have to be considered carefully in order to avoid immediate
savings being offset by higher future costs:
• The cutting back of programmes in times of crisis can be costly over
time, if expensive rebuilding of institutions and programmes is deemed
necessary afterwards
• Eficiency gains through improved implementation of programmes
(including programmes inanced through aid, which can be costly due to
donor coordination and conditionalities) are a long-term endeavour and can
usually not be achieved in the short term or in a crisis situation
• Any reform has to consider any potential future liabilities and
contingent costs as well as shifts in the maturity and sequencing of inancial
liabilities, which can have adverse effects on the short-term iscal position
of countries, triggering adverse market reactions67
With regard to mobilizing additional revenues, the instruments used fall into
the categories shown in table 10.1.
In a context of crisis, the potential for implementing structural reforms such
as tax reforms, expansion of contributory systems or capture of a greater share of
commodity production seems limited, at least in the very short term: Governments
typically implement tax and contribution reductions and exemptions in a crisis with
the objective of stabilizing production and employment levels, whereas commodity
sectors such as oil and minerals tend to suffer from price declines in global markets.68
Additional public borrowing, use of foreign reserves or sovereign funds, and foreign
aid are the dominant instruments in a recession, although conditions with regard to
access to credit and credit costs often deteriorate as well.
Finally, an important question is how to actually estimate or calculate
iscal space and iscal affordability (taking into account both expenditures and
revenues) for social policies, including labour market policies, in a particular
country or country group. For this exercise, one approach is to compare national
revenue and expenditure igures with international benchmarks; for example, how
a country compares in terms of tax revenues or social expenditure (both level and
67 Privatization of public pay-as-you-go pension schemes illustrates the argument:
long-term liabilities, the so-called implicit pension debt, is made explicit with immediate
consequences for public debt and iscal deicits (workers save their contributions on
individual accounts and the State has to inance current pension expenditures through
the general budget). See Arenas de Mesa and Mesa-Lago (2006) for the case of Chile,
and Hujo (2004) for the Argentinian case and the link between pension reform and the
breakdown of the currency board in 2001.
68 here is however, some evidence that reforms that are already under debate or
part of a broader strategy can be accelerated by a crisis (the so-called beneit-of-crisis
hypothesis); this happened, for example, with market-oriented reforms during the 1990s
in Latin America and Eastern Europe, and with the expansion of social protection in Asia
ater the 1997 crisis.
Financing social and labour market policies
• 181
Table 10.1: Mobilizing revenues – timing and conditions
Instrument
Short term
potential
Medium to
long term
potential
Tax reform
Low
High
-Political support
-Growth
-State capacity
-Growth of formal economy
Extension of
contributory
systems
Low
High
-Employment-intensive growth
-Growth of formal economy
-Organized labour force
-State capacity
-Insurance markets
Capture of
mineral rents
Low
High
-State capacity (negotiation with foreign
investors/management Dutch disease)
-Rising commodity prices
-Improved sector productivity
-Strong public enterprise
Foreign aid
High
High
-Predictable and sustainable donor
commitments
-Global growth
-Innovative funds and instruments
-Management of Dutch disease efects
Domestic
and external
borrowing
High
High
-Economic stability
-Interest rates and country risk
-Access to international credit markets
-Developed national capital markets/
inancial sector
-Debt sustainability/repayment capacity
Public private
partnerships
High
High
-Higher private sector eiciency
-Low risk of private sector insolvency
Source: Author’s own elaboration.
Supporting conditions
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•
he Twin Challenges of Reducing Poverty and Creating Employment
composition) as a percentage of gross domestic product (GDP) with the average
performance of countries within the same income group or region. If a country
is signiicantly below the average, this is interpreted as an indication that there is
room to increase tax efforts or to spend more on social policies.
A second approach is to compare actual spending on social protection
with estimated costs of a basic social protection package (International Labour
Organization, 2008) in order to determine whether additional social expenditures
could be deemed affordable or whether the actual spending commitments match
the costs of such a package (Bauer and others, 2010; Economic and Social
Commission for Asia and the Paciic, 2011); similar costing models have been
developed to assess necessary spending to attain the MDGs (Vos, Sánchez and
Kaldewei, 2008) or for calculating the costs of speciic programmes such as social
pensions or other cash transfers.69
Third, more detailed calculations of iscal space or iscal affordability of
planned reforms take place at the country level, for example, as part of International
Monetary Fund (IMF) or World Bank-supported programmes, taking into account
the above-mentioned issues of debt sustainability, medium-term iscal strategies
and macroeconomic stability. Kyrili and Martin (2010) have developed a iscal
space index for International Development Association (IDA) countries in order to
calculate how these countries could respond to decreased revenues in the current
crisis context.70 They assess the potential to borrow (domestically and externally),
to mobilize additional domestic revenues such as taxation, and to mobilize more
grants, taking into account additional indicators such as iscal deicits and inlation.
They ind that more than half of the countries in the sample (54 low-income countries
(LICs)) have no space to increase domestic revenue and more than half of the countries
have already critical levels of debt, leading to their conclusion that scaling up of aid
for the majority of countries which are not aid dependent is the preferred option.
The following two issues invite further thinking:
• First, iscal space is a concept that has to be embedded in a speciic
country context, paying due attention to the country’s economic, social and
political structure.
• Second, costing models and debates on sustainable inancing have
problems in measuring economic and social costs and beneits that are
not easily expressed in monetary terms or not easily estimated owing to
the complexity of variables involved: What are the opportunity costs of
not investing in decent work and social policies? How can indirect social
costs of targeting or increased risk associated with market insurance
69 Organizations such as HelpAge International and the United Nations Children’s
Fund (UNICEF) have developed costing tools (see www.helpage.org and www.unicef.
org).
70 he iscal space index (Kyrili and Martin, 2010), irst developed for the United
Nations Educational, Scientiic and Cultural Organization (UNESCO), draws on the iscal
space diamond developed by IMF and World Bank, and the United Nations Development
Programme (UNDP) (Development Committee, 2006; Roy, Heuty and Leoutzé, 2007).
Financing social and labour market policies
• 183
be measured? What are the distributional and developmental effects of
tax reform and public borrowing? How can the risks of foreign debt or
expansive iscal policies in countries with weak monetary systems and
currencies be calculated? What are the systemic costs for the global
community of not delivering on aid commitments?
Finding answers to these questions requires moving beyond a crisis context to
explore the issue of how to build sustainable and equitable inancing systems for
social protection and social development in normal times, to analyse the political
economy of reform processes and budget allocations and to combine different
methodologies for measuring iscal space and the long-term costs and beneits of
social policy.71
Thinking beyond a crisis context: social policies need sustainable
and equitable inancing72
Distributional and developmental impact of revenue instruments
Which revenue instruments are best suited to generate suficient funding while
minimizing or avoiding negative consequences for production, redistribution
and equity? From a point of view of social justice, more progressive inancing
instruments are preferable (in terms of redistributing resources towards lower
income, disadvantaged or vulnerable groups) as they have a positive impact on
solidarity and social cohesion.
From a macroeconomic perspective, the stabilization and growth effects of
different revenue instruments are of interest. Progressive tax systems combined
with transfer schemes are also known as automatic stabilizers, smoothing both
boom and bust cycles.73 Pension funds can be a source of inance, stimulating
inancial sector development and, in the case of occupational funds, providing
“patient capital” (long-term inancing) and wage moderation to irms, while
supporting employment stability and incentives for workers to invest in industryspeciic and/or irm-speciic skills (Manow, 2001; Estevez-Abe, Iversen and
Soskice, 1999).
71 UNRISD has conducted research on the issue of inancing social policy aiming
at a better understanding of the potential and constraints of diferent revenue sources
and instruments such as taxation, social contributions and pension funds, remittances,
mineral rents and aid. See United Nations Research Institute for Social Development
(2010, chap. 8), Hujo and McClanahan (2009) and Hujo (2012).
72 his section draws heavily on chapter 8 of United Nations Research Institute for
Social Development (2010).
73 he idea of automatic stabilizers goes back to the writings of J.M. Keynes, in
particular his General heory of 1936. For a more recent discussion from the perspective
of the IMF, see Baunsgaard and Symansky (2009). he concept featured prominently in
calls for iscal stimulus measures in response to the crisis.
184
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he Twin Challenges of Reducing Poverty and Creating Employment
Public revenues—options and contraints
Creating fair and eficient tax systems
In developing countries, designing equitable and eficient tax systems is crucial to
inancing social policy in a context of consistent national development strategies
and strong State–citizen relationships. The mobilization of domestic resources
through tax reform was considered a key pillar of the 2002 Monterrey Consensus on
Financing for Development and its follow-up Declaration in Doha in 2008 (United
Nations, 2008), and it is recommended as the principal inancing strategy (together
with limited public and foreign borrowing, reallocation of funds and eficiencyenhancing measures) for Latin America and the Caribbean for achieving the MDGs
(Vos, Sánchez and Kaldwei, 2008). Taxation revenue is generally deemed superior
to other sources because of its stability and its potential for distributional justice
and for inancing programmes with universal coverage. Tax systems are also said to
enhance State ownership and accountability compared to external revenues, which
in the case of aid, for example, is tied to donor conditionality, therefore bypassing
national constituencies and political institutions (Moore, 2004; Fjeldstad and
Rakner, 2003; Bräutigam, Fjeldstad and Moore, 2008).
Tax reform, including more eficient tax administration and measures against
evasion, remain key policy issues for most countries. The well-known challenges
are to obtain higher tax receipts from high-income groups, property and asset
owners, inancial transactions, mineral rents and large commodity producers and
environmentally damaging production. Di John (2008) recommends exploring
alternative approaches for LICs, such as tariffs on commodity exports, land and
property taxes, urban property taxes and agricultural marketing boards. At the
global level, discussions continue on the potential and practicability of international
taxes, global funds and reforms of the international inancial architecture (United
Nations, 2011b).
Contributory social insurance systems
Social insurance schemes are a common instrument for inancing and providing
social transfers. They can be initiated on a small scale and gradually extended to
other groups of citizens as the formal economy expands. As with tax systems, the
speciic design of social insurance programmes matters, both in terms of inancial
stability, redistribution, equity, social cohesion and contribution to economic
growth. Fiscal subsidies for social insurance schemes with limited coverage should
be avoided, unless they are targeted to inclusion of dificult-to-cover groups such
as informal workers or smallholders. With regard to extension of contributory
insurance schemes in contexts where informality and poverty affect a considerable
part of the population, innovative approaches, inancial incentives and commitment
of the State have contributed positively in the more successful cases.74
74 See United Nations Research Institute for Social Development (2010, chap. 5), as
well as International Labour Organization (2010a) for best practices in extension of social
Financing social and labour market policies
• 185
Figure 10.3 Revenue type, distribution and social relations
Regressivity
Solidarity
Time-burden tax (self-provision)
User fees (most regressive, least
solidaristic)
Private insurance schemes (pre-paid
schemes)
Public insurance schemes
Indirect taxes
Earmarked taxes
Direct taxes (most progressive, most
solidaristic)
Source: Based on Delamonica and Mehrotra (2009).
Mineral rents
For many developing countries, natural resource rents represent a substantial and
growing proportion of total government revenues, either by means of taxation
or royalty payments or direct ownership, with potentially enormous implications
for the design and delivery of social policies. Mineral-rich countries are often
said to suffer from a “resource curse”, a supposed correlation between natural
resource abundance on the one hand, and a set of negative economic, political and
social outcomes on the other (Sachs and Warner, 1995; Auty, 2001; Collier and
Hoefler, 2005). However, numerous resource-rich countries do not suffer from
these symptoms, which points to the more interesting issue of explaining these
variations in outcomes (Hujo, 2012).
One precondition for successfully tapping mineral wealth for social
development is to avoid falling into the trap of “Dutch disease”. This requires
macroeconomic policies that counteract inlationary pressures arising from
the huge inlow of foreign exchange stemming from the mineral sector, with
negative effects on stability and the competitiveness of manufacturing. Equally
important are investments in infrastructure, such as electricity and transport, and
in technologies that reduce the adverse environmental effects of mining. Lastly,
insurance in diferent country contexts.
186
•
he Twin Challenges of Reducing Poverty and Creating Employment
improved taxation systems and contracts with private investors are crucial to
ensure a fair share of income for the State (Stürmer, 2008).75
Aid
International donors have agreed to substantially increase oficial development
assistance (ODA) for LICs in order to accelerate the MDG process. And, although
development assistance in the past has shown a procyclical pattern with regard to
global economic boom and bust cycles, donors have promised to maintain ODA
levels despite the recent economic crisis.76 Aid is important not only in terms of
inancing social expenditure (and pro-poor economic infrastructure) in recipient
countries, but also as an element of international justice and, as the case of the
recent crisis demonstrates, of global stability (Ortiz, 2009; United Nations, 2011b).
Additional funding for poor countries can ease inancial constraints. But,
like rents from natural resources, aid lows are volatile, tend to parallel global
and national economic trends, and pose a variety of challenges related to
conditionality, accountability and the effects of Dutch disease, which have to be
addressed successfully in order to make aid more effective for development.
Financing of labour market policies: country examples
Building on existing programmes and as part of iscal stimulus packages, many
countries have implemented or expanded LMPs and social protection measures
such as conditional cash transfers (CCTs) or public works programmes. Tables
10.2 and 10.3 present policy tools and selected country evidence on policies
implemented by Governments in developing countries as a response to the global
crisis.77 The portfolio of labour market responses to a crisis situation comprises
reduction of working hours, on-the-job training, wage subsidies and reductions of
social insurance contributions, public works, cash transfers and social assistance
programmes, job search assistance, training programmes, entrepreneurship
incentives and extension of unemployment beneits. However, not all of these
75 See also the studies of United Nations Conference on Trade and Development
(2010) on rent capture with regard to diferent minerals.
76 According to the United Nations (2011a), total net ODA of Development Assistance
Committee-Organization for Economic Cooperation and Development members has
slightly increased, by 0.7 per cent in real terms in 2009, to US$ 120 billion, although
falling short of donor commitments made at the 2005 Group of Eight (G8) Summit in
Gleneagles.
77 Some measures are more costly than others, but also more rapidly efective and are
therefore recommended for the short term (subsidies, beneit extensions, public works),
whereas measures aimed at improving irm competitiveness, labour intermediation
services, education and training and reformed beneit schemes are more appropriate for a
long-term crisis scenario (Inter-American Development Bank, 2009).
Financing social and labour market policies
• 187
Table 10.2: Labour market policies and potential funding sources
Policy tool
Financing source
Challenges/bottlenecks
Subsidized reduction
in working hours
(work sharing)
-unemployment
insurance/funds
-subsidies paid to
employers (general
revenues)
-can be costly for developing
countries
Non-subsidized
reduction in working
hours
-employees might
depend on safety net
-only applicable to formal sector
-wages in developing countries on
average too low to cut
On-the-job training
-government revenue -low capacity for training
-enterprises
Wage subsidies, cuts
to employer social
contributions
-government revenue -high costs, leakage, only for
-reserves of social
formal sector, problematic for
security funds
social insurance funds
Public works, CCTs,
social assistance
-government revenue -widely used, but mixed
-ODA
success due to poor design and
implementation
-absence of social protection
scheme, costly to establish
Job search assistance
-government revenue -absence of institutions or skilled
staf
Training programmes
Work experience,
apprenticeship
programmes
-government revenue
-ODA
-enterprises
-PPP
Entrepreneurship
incentives (capital and
skills)
-government revenue -only few countries have existing
-ODA
programmes, not always efective
-private resources
Extending
unemployment
beneits
-government revenue -not applicable in countries
without UB
-programmes oten underfunded,
diicult to expand
-improving efectiveness in
informal economy
Source: Based on table 1 in Cazes, Verick and Heuer (2009).
188
•
he Twin Challenges of Reducing Poverty and Creating Employment
Table 10.3: Social policy and labour market responses to the crisis, selected cou
Country
LMP
Argentina
-Public employment services: LM intermediation, training
programmes
-Expansion of Production Recovery Programme (REPRO): subsidized
reduction in working hours; subsidy of 10% of labour cost for 12
months extendable by a further 12 months (at 5%).
- Promotion of worker formalization (through incentives, e.g. pension
moratorium)
-wage increases for public sector employees
- Plan to create 100,000 jobs (cooperatives: Plan Ingreso Social con
Trabajo
-expansion non-coverage expan
contributory par
-public (employm
plans Plan Famil
(non-contributo
Brazil
-minimum wage adjustment
-extension of unemployment beneit (2 months)
-increase of Bols
- expansion of B
families (total co
-housing progra
Vida (cost 1.2%
Chile
-Employment subsidy for low-wage young workers, as well as
additional cash transfers to low income households. Payment of US$
67 per families/individuals participating in social programmes, March
2009
-Extension of Unemployment Solidarity Fund to provide access for all
unemployed workers
-increase of minimum wage (2008)
Mexico
-he temporary employment programme at the federal level was
expanded by 64% over what had been planned, bringing it up to US$
182 million in 2009.
-US$ 140 million earmarked under the Employment Preservation
Programme for protecting employment in vulnerable businesses.
-Support to unemployed urban workers (US$ 110 per month)
for a period of four to six months through the Urban Temporary
Employment Programme.
-minimum wage increase
-support for workers in tourism
-short-term training and capacity building SMEs
-extended ability
accounts for une
-extension of he
unemployed
-Oportunidades
(World Bank in
-nutrition progr
India
-increase in budget allocations for large lagship programmes for
employment, education and health
-Further extensi
Guarantee Act (c
South
Africa
-Public investment programme
-Expanded Public Works Programme (EPWP)
-raising means-t
programmes
-age extension o
-equalized minim
pension
Source: Author’s compilation based on Marinakis, 2011; Frejie-Rodriguez and Murrugarra, 200
ILO, 2010b; Rial 2009.
Financing social and labour market policies
• 189
untries (2008-2010)
Social protection
Financing
-contributory pensions
nsion child beneits (current cost nonrt 0.55% GDP)
ment) programmes Jefas, and follow-up
lias, Training and Employment Insurance
ory), Youth Work Programme
-government funds (including National Social Security
Funds - nationalization of private pension funds in 2008:
additional contribution lows 1.5% GDP p.a., accumulated
pension stock ca. 10 % GDP; 30% of export tax on soy
beans distributed to provinces)
-World Bank loans
sa Familia value (CCT)
Bolsa Familia to an additional 1.3 million
ost 0.4% GDP)
amme 1 million units (Minha Casa, Minha
GDP)
-FAT (Fundo de Amparo ao Trabalhador), might use up to
10% of its technical reserves
-public debt
-general revenues
y to withdraw funds from retirement
employed
ealth coverage up to 6 months for
s CCT expanded by 1,500 million US$
nanced)
ramme
-Contingency Fund activated when unemployment rate
rises above 10% (regional levels)
-unemployment funds, unemployment solidarity fund
-enterprises
-general revenues
-loan World Bank and IDB
-contingent credit line IMF, special drawing rights
-government funds (including from oil revenue
stabilization fund)
-US$ 6’000 million cut in public expenditure
-private pension accounts
-2010: tax reform, further expenditure cuts, price increases
for fuel
ion of National Rural Employment
cost approx. 0.6% GDP)
-NREGA: central government (wages, ¾ material) and
states (1/4 material, unemployment allowance)
test income threshold for social
-Government Revenues
-National Jobs Fund (contributions from Unemployment
Insurance Fund, National Skills Fund)
of child grant
mum age for men and women for social
09; Ferreira and Schady, 2009; Comisión Económica para América Latina y el Caribe, 2010b;
190
•
he Twin Challenges of Reducing Poverty and Creating Employment
are available or suitable for all countries, especially as some of them require
certain labour market structures and institutions to be in place before the onset of
a crisis, are costly or demanding in administrative terms, or are not suitable for
workers in the informal economy. As table 10.2 shows, the funding sources for
these measures include social insurance funds, general budget revenues, private
resources (including from enterprises) and ODA.
Where unemployment insurance is less developed, social assistance becomes
the dominant social protection instrument for providing income support to
vulnerable groups.
Latin America consolidated its position as a pioneer in cash transfer
programmes, both social pensions as well as CCTs for families with children
(transfers are conditional on school attendance and health check-ups for children).
In 2010, CCTs covered almost 20 per cent of the region’s population, as shown
in igure 10.4.
CCTs exist in 19 countries in the region, covering more than 113 million
persons or 19.3 per cent of the population (47.5 per cent of the poor), with
expenditures of 0.4 per cent of GDP inanced through national Governments
and multilateral credit agencies such as the World Bank and the Inter-American
Development Bank, and some bilateral donors (Economic Commission for Latin
America and the Caribbean, 2010a). Income transfers, especially for lower income
groups, have important multiplier effects and stimulate domestic demand and, by
extension, employment (Berg and Tobin, 2011).
As table 10.3 shows, in addition to expanding CCTs as a crisis response,
countries in Latin America have implemented a range of policies in support of
labour markets and the unemployed (Freije-Rodríguez and Murrugarra, 2009;
Economic Commission for Latin America and the Caribbean, 2010b). Social
policy responses, including LMPs that were implemented in the countries, fall
into the broad categories listed in table 10.3, but the speciic policy mix in each
country depends on the particular crisis impact, existing social programmes and
institutions, the size of iscal stimulus packages and iscal space beyond the short
term. Revenue sources and volumes vary also according to country context, with
those countries depending on mineral rents, remittances, and trade revenues being
most negatively affected. Access to domestic and external borrowing has been
important in terms of funding iscal stimulus measures, but some countries with
less policy space in this area, for example Argentina, have resorted to exceptional
measures (pension renationalization) that have increased iscal space, whereas
others (Chile) were able to make use of institutionalized anticyclical iscal policy
rules. In Latin America, as a result of the implemented measures in combination
with the strong pre-crisis position and positive external demand for exporters,
growth and employment levels recovered quickly (with Central America and the
Caribbean still lagging behind), although, as stated above, some basic questions
about medium-term implications of the crisis remain (Marinakis, 2011; Ocampo,
2009). In Latin America and in other contexts where open unemployment is a
• 191
Financing social and labour market policies
Figure 10.4: Latin America and the Caribbean: Coverage of CCT and related public expenditure
A. Coverage, 2000-2010 (% of total population)
B. Expenditure, 2000-2009 (in % of GDP)
Source: Comisión Económica para América Latina y el Caribe, 2010a: Graph III:7 (19 countries)
192
•
he Twin Challenges of Reducing Poverty and Creating Employment
deeply entrenched structural problem (e.g., in South Africa) or where informality
is the reality for a substantial part of the population (India and many LICs), the
challenge is to move towards a more inclusive growth model, with less residual
and fragmented social policies and more integrated labour markets that provide
decent work.
Conclusions and policy implications
In the current global context marked by a continued crisis in the euro zone and
decreasing growth projections in other regions, there is a continued need to boost
economic growth and to invest in employment and social protection. At the same
time, many countries seem to have exhausted their iscal space to fund these
measures and have prematurely cut expenditures. If there is some truth in the
argument of a beneit of crisis, the recent experience should encourage policymakers
to advance further in institutionalizing social and labour market policies and
progressive inancing systems. In order to support return to a sustainable growth
path, more funds have to be allocated to economic and social policies that foster
employment and protect household income. It is also worth mentioning that iscal
constraints do not justify countries not securing certain minimum standards in
terms of social security as enshrined in the international human rights framework
and other conventions (International Labour Organization, 2010a; Sepúlveda
Carmona, 2011).
The following paragraphs summarize some fundamental lessons with regard
to inancing labour market and social policies in times of crisis and beyond.
Financing policies have a political and social dimension
Revenue policies and budget processes are part of complex political and social
processes. The more democratic, accountable and transparent the political process,
the more likely these will relect the public interest and combine economic and
social goals. In times of crisis, hard choices have to be made and the immediate
need to stabilize the inancial economy often works to the detriment of social
policies and employment concerns. It is therefore important that international
organizations and civil society actors continue to alert policymakers to the fact
that the economic, social and political costs of this neglect can be enormous.
Financing policies have distributional efects
The way in which social expenditure is inanced is not neutral in its distributional
or productive effects. Reforms entail potential losers and winners, which may or
may not correspond to groups beneiting from public transfer schemes and social
investments. The macroeconomic effects of different inancing sources, such as
the impact on domestic demand, investment and savings, monetary stability and
currency risks, have to be considered carefully. Similarly, the implementation of
Financing social and labour market policies
• 193
progressive direct taxes on wealth and income tends to create opposition from
inluential social groups and can lead to reform blockades. Therefore, the more
universal social programmes are, the easier it is to ind convincing arguments for
progressive funding structures, which are built on relatively greater contributions
from higher income groups.
Anchor a country’s social policy system with domestic sources of inancing
External sources of funding, in particular ODA, are only sustainable as long as donor
commitments last. Internal sources, such as tax revenues or social contributions/
funds, if designed effectively, have the potential to create intergenerational and
interclass linkages that are more dificult to break over the long term. These
domestic inancing structures are the core or the anchor of social policy systems.
Domestic inancing instruments are levied on national economic activity and they
redistribute income and risks among different groups. Macroeconomic policies
that foster income creation and decent, formal employment are therefore central
to any successful iscal strategy.
Develop a clear strategy for inancing social policies
A strategy for inancing social policies should build on reliable calculations of
the estimated costs of planned programmes over longer periods and take into
account different scenarios. It is important that Governments evaluate different
inancing techniques and assess their pros and cons from a political, economic
and social point of view; analyse any relevant experiences in other countries;
and seek early dialogue with relevant stakeholders, including social and inance
ministries, external donors, international organizations, social partners and civil
society organizations; and last, but not least, include a contingency plan for a
crisis situation.
Avoid costly short-term measures and plan for the future
Many developing countries are actually living in a situation of permanent crisis or
crises, which has major negative implications for sustainable and equitable longterm development. This crisis should not be used (as has happened in the past) to
justify measures with adverse long-term consequences for State capacity, poverty
reduction and social development; to the contrary, it should pave the way for more
inclusive economic and social policies.
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he Twin Challenges of Reducing Poverty and Creating Employment
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199
Chapter 11
Crisis-driven labour market programmes:
the experience of Latin America and the
Caribbean
Jacqueline Mazza anD Danilo FernanDes liMa Da silva
Introduction
Latin America and the Caribbean (LAC) are no strangers to economic shocks,
natural disasters or inancial crises. During the most recent inancial crisis of
2008-2010, the region showed a striking resilience in comparison with other
developing countries that suffered much greater employment effects.
Despite the region’s experience with dramatic economic downturns, it is
still developing the core labour market programmes and policies both to better
weather future crises and to promote productivity growth. This chapter examines
key labour policy experiences of the LAC region in response to crises, with a
particular emphasis on the recent crisis of 2008-2010.78 Since unemployment
insurance is relatively rare in the region, the chapter focuses on the adaptation of
active labour market policies—the principal LAC policy response—along with
the innovations and adaptations made to existing unemployment insurance, socalled passive policies. Much of the evidence regarding programme results during
the recent crisis, however, is still anecdotal. The chapter argues in favour of the
need for a more systematic and rigorous set of programme evaluations, examining
the targeting, timing and outcomes of crisis-driven programmes to support the
region’s responses to future crises. The chapter concludes that Governments in
the region should use evidence produced during crises more strategically to build
78 he chapter draws on an earlier work by the Inter-American Development Bank
team, “Social and Labor Policies for Tumultuous Times” (Duryea, Mazza and Regalia,
2009).
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long-term institutional capacity and a more permanent and productive set of active
and passive labour market policies.
Social and labour policy responses to the crisis in Latin America
and the Caribbean
Speciic transmission and policy channels for the LAC region
LAC suffers from higher income and asset inequality than other developing
regions. It has suffered as well from stagnant labour productivity growth, low
savings rates, high levels of labour informality (in key countries) and an education
system that does not deliver quality education. The informal sector tends to grow
during crises, with low-productivity work serving as a response to unemployment.
These problems affect the nature and intensity of shocks in the region and should
be taken into consideration in devising policy responses.
Only a few countries in LAC have unemployment insurance or emergency
labour assistance programmes to smooth consumption spending during periods
of high unemployment. Unemployment insurance programmes are largely in
the higher-income South American countries, Chile being the one with greatest
coverage. Argentina, Brazil, Colombia and Uruguay are the other South American
countries that can count on unemployment insurance programmes to buffer formal
sector job losses. Barbados is the only Caribbean country with unemployment
insurance. Mexico does not have such a programme, nor does any country in
Central America.
When the recent crisis hit the region, most countries had already established
national conditional cash transfer (CCT) programmes. This provided a loor for
structural, long-term poverty, but it is not a policy instrument designed for the
“newly poor”. These programmes provide the very poor with income supplements
conditioned on keeping school-age children in school and maintaining health
check-ups. In some countries, the current CCT programmes include only a
fraction of the chronically poor population. Whereas CCT programmes have
been shown to be effective in addressing issues of structural poverty, they serve
merely to maintain consumption levels in the face of an aggregate shock. These
programmes do not have administrative mechanisms to rapidly and accurately
assess the eligibility of the newly poor, nor would those newly poor who still
have assets qualify.79 Argentina, Brazil, Costa Rica, El Salvador and Paraguay are
among the countries that expanded either the number of beneiciaries and/or the
value of the transfers during the most recent crisis.
Other instruments such as targeted food stamps and self-targeted temporary
employment programmes more typically provide income support in response to
79 CCTs typically target according to a household’s assets rather than the current
income low, with eligibility checked every two to three years
Crisis-driven Labour Market Programmes
• 201
a crisis of short duration in the absence of other forms of insurance. Temporary
employment programmes and on-the-job training (both adult and youth) have
formed the bulk of the more speciic labour programme responses to crises in the
region, as discussed in detail in the section on the LAC experience with crisisdriven labour market programmes.
Many labour ministries in the region are making advances in institutional
capacity-building to launch more extensive active labour market policies,
particularly improvements of national employment services (e.g., job inding
and brokering services), demand-based training systems and skills standards/
certiication. However, these ministries, especially those in the poorer countries,
have limited resources, personnel and programme experience that constrain
institutional advances. Institutional advances of labour ministries and of labour
policies, this chapter concludes, lie at the heart of improving both the speed and
quality of labour responses to future crises. Thus, the ability to respond to shortterm employment crises and the strengthening of the capacity of labour ministries
are complementary goals in or out of a crisis.
How the recent crisis afected LAC economies
There are a number reasons why the most recent crisis did not affect poverty as
much as previous crises had, including overall macroeconomic conditions and the
concentration of job losses among formal sector workers. During the crises of the
1990s, poverty increased by 7 percentage points from 1994 to 1996 in Mexico and
by 8 percentage points in Argentina from 1993 to 1995 (Lustig, 2000). In contrast,
it is estimated that poverty increased by only 0.1 per cent in the region, on average,
between 2008 and 2009 and that it decreased by 1.6 per cent between 2009 and
2010, although these numbers obscure the more heterogeneous impacts of the
crisis in different countries and sectors (Economic Commission for Latin America
and the Caribbean, 2011). Moderate poverty actually decreased by 5.8 percentage
points in Argentina once the recovery started (2008-2010), and it increased by 3.5
per cent on average in Mexico during the same period (Socio-Economic Database
for Latin America and the Caribbean, 2012).
Overall, the largest employment impacts were felt in those countries with
the greatest integration into United States markets (Mexico, and Caribbean and
Central American countries). Key sectors in these countries were affected either by
declines in trade or commodity prices—auto manufacturing, tourism, agriculture,
mining—or via a slowdown in remittance lows. Gross domestic product (GDP)
slowed throughout the region, on average by 1.9 per cent in 2009 following an
expansion of 4.1 per cent in 2008 (World Bank, n.d.). Mexico suffered the biggest
contraction with a 6.2 per cent GDP decline (ibid.), its worst performance in
70 years, from the combination of trade and manufacturing contractions along
with tourism losses from the H1N1 inluenza outbreak. In the early stages of the
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he Twin Challenges of Reducing Poverty and Creating Employment
crisis, unemployment was registered principally in the export-dominated sectors
(e.g., automobiles, agriculture and mining) and tourism. On a country basis,
disproportional impacts can be seen in formal sector employment in the mining
sectors (e.g., Chile and the Dominican Republic), textiles and apparel (e.g., the
Dominican Republic, El Salvador and Honduras) and the auto industry (e.g.,
Argentina and Mexico).
More stable macroeconomic conditions contributed both to a smaller
immediate impact of this latest crisis (relative to the 1990s) and to the ability
to recover. An analysis by Banco de España found that Latin America learned
from past crises and pursued sounder monetary and iscal policies, including
more lexible (managed) exchange rates and fewer regulations on excessive
capital controls (Gallego and others, 2010). Latin America’s sounder economic
fundamentals were supported by stable commodity prices, aiding the relatively
shorter-term impact of the crisis (Council on Foreign Relations, 2008; Izquierdo
and Talvi, 2009). The International Monetary Fund (IMF) concluded that this
stronger macroeconomic framework was a key factor in the smaller impact of
the crisis in Latin America relative to past crises (International Monetary Fund,
2010).
While employment losses in the United States of America fell
disproportionately on male workers in the manufacturing sector, the impacts were
felt disproportionately by female workers in manufacturing sectors in LAC. In
2008 in Mexico, 71 per cent of all workers laid off were women (Mazza, 2009).
Similarly, in Honduras, where employment losses were concentrated in the
heavily female textile (maquila) sector, 70 per cent of jobs lost through February
2009 (29,000 jobs) were those of female workers.
In previous Latin American crises (e.g., the peso crisis of 1994), outmigration
to Organization for Economic Cooperation and Development (OECD) countries
and increased remittance lows back to the region functioned as important safety
valves. As the 2008 recession originated in the United States and Europe, these
markets were contracting and limited the ability of outmigration to serve as a
labour crisis response. There was a drop off in the value of remittances to the
region from 2008, largely due to exchange rate effects and employment losses
from migrants in sending countries. By 2011, remittances began to grow again,
but even at $61 billion they have not climbed back to the level reached just before
the crisis ($64 billion in 2008) (Multilateral Investment Fund, 2011). The limited
evidence available indicates the crisis did not lead to a substantial increase in the
number of migrants leaving the region or returning. There was clearly a sharp
decline in Mexican migration to the United States noted in the 2008-2009 period
(Organization of American States, Organization for Economic Cooperation
and Development and the Economic Commission for Latin America and the
Caribbean, 2011). The United States also reported that border apprehensions fell
by almost two ifths between 2007 and 2009, even as border patrols increased
(Department of Homeland Security, 2010). Countries did not report an increase
Crisis-driven Labour Market Programmes
• 203
of return migration, with the exception of small countries such as those affected
more by the Spanish crisis. Ecuador reported that for every four migrants who
left the country from 2001-2010, one returned home (Mosquera, Moncayo and
Escobar García, 2012). Mexico’s 2010 census, in contrast, reported only 1.5 per
cent of Mexicans were return migrants, in contrast to 8 per cent in 2000, and the
majority of the return migrants were older men (Campos-Vasquez and Sobarzo,
2012).
Latin American and Caribbean experience with
crisis-driven labour market programmes
LAC countries responded to the crisis by making adjustments to current active
or passive labour market policies, or by creating new temporary programmes.
The LAC response required more new programming and attention than that of
developed countries which beneited from both automatic policy “stabilizers”
such as unemployment insurance and larger iscal resources to devote to stimulus
spending. Like many developing countries, LAC Governments work more at the
policy margins, making reinements and adding instruments where they can.
The following section discusses the range of speciic employment policy
options implemented in LAC that have been both developed and adapted in crisis
contexts. It draws on the experiences of not only the most recent inancial crisis but
also prior crises, which were often more severe in terms of employment effects.
The section discusses immediate actions and those that are intended to support a
more permanent labour policy framework. These policies often respond to three
key policy objectives: to protect the most vulnerable, to prevent irreversible
impacts and to respond in a consistent manner.
Immediate actions addressing employment, beneits
and labour costs
Training and wage subsidies
Long-term and classroom-based labour training (more than one year, typically for
the non-poor) has a very mixed record in getting the structurally unemployed back
into the marketplace. Short-term training, however, if it is done “on the job” (OJT),
has a much stronger record in getting the unemployed re-employed and upgrading
existing worker skills (Ibarrarán and Rosas Shady, 2008), and has been shown to
be adaptable to LAC employment crises. In the 2008-2009 crisis, Honduras and
Mexico, in particular, drew on OJT both to keep workers employed and to provide
income to unemployed workers with the possibility of future employment. For
employed workers, such training (two to six months long, typically) acts, in
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he Twin Challenges of Reducing Poverty and Creating Employment
effect, as a wage subsidy, as the employer receives a training subsidy from the
Government for the worker’s salary (e.g., typically, 1-2 minimum salaries). OJT is
typically a better adaptation to a crisis than a wage subsidy because its temporary
nature does not distort salaries or incentives within the irm and can be targeted
easily by region, industries or job level. In addition, it can be targeted to the
sectors where there is a fear of large job loss. There is even more international
and LAC experience for OJT as a form of inserting unemployed workers into
new jobs (Gonzalez-Velosa, Ripani and Rosas Shady, 2012). In times of crises,
these training programmes are scaled up and targeted to areas or sectors of high
unemployment. If the crisis persists to the medium term, however, OJT to support
increased labour insertion of the unemployed is much less viable, e.g., it will be
harder to get employers to agree to employ trainees after the traineeship period if
irm viability is in question.
A number of countries in the region, including Argentina, Chile, Mexico and
Uruguay (Marinakis and Velásquez, 2010), used a combination of training and wage
subsidy instruments to retain workers on the job during the last set of crises. Wage
subsidies were the principal instrument, sometimes complemented with days of
training. Peru enacted a nationwide free training programme for those who lost their
jobs in the 2008-2010 period, called Revalora Peru. Beneiciaries must register at
one of the local ofices of the Labour Ministry. Since 2009, 50,000 people have been
trained. An impact evaluation has not been conducted on the programme, which
continues in the post-crisis period (and is now named Vamos Peru).
Temporary employment and public works
Temporary employment programmes were common prior to the inancial
crisis, probably due to the scarcity of non-crisis labour market programmes,
unemployment insurance or anti-poverty instruments. Temporary employment
(short-term jobs where resources are principally directed to salaries) and public
works (iscal stimulus projects that indirectly are intended to create shortterm jobs) were used by some LAC countries in the recent crisis, as well as by
countries in East Asia and Eastern Europe. Temporary employment programmes
are best targeted to the very poor so as to maintain consumption during the worst
points of a crisis, typically a period of 3-6 months. If pure income transfer or
consumption smoothing is the goal, then other safety net interventions would
likely yield more income transferred per worker. As a labour market instrument,
temporary employment has had, at times, negative labour market effects in both
the short and medium terms (Kluve, 2006) and has in some cases impaired, rather
than improved the ability of recipients to get employment after the temporary
programme. However, such employment programmes have also been shown to
be effective in helping mitigate income shocks (Ninno, Subarrao and Milazzo,
2009). Public works projects rarely focus on maximizing employment per dollar
spent, but are justiied in crisis times as they generate short-term jobs at high- and
Crisis-driven Labour Market Programmes
• 205
low-income levels in construction and services.
Latin America has had experience in temporary employment dating back
to Chile’s 1975 Minimum Employment Programme (Economic Commission
for Latin America and the Caribbean, 2006), the Plurinational State of Bolivia’s
Plane programme, as well as experiences in Argentina, Colombia and Mexico.
In the most recent crisis, Mexico and Peru implemented temporary employment
programmes and previously utilized public works instruments. Administrative
capacity to quickly launch such programmes is key. In Latin America, temporary
employment programmes have been generally administered by government
agencies; in contrast, countries in East Asia have at times contracted temporary
employment jobs to private or non-proit irms. Latin America has struggled to
keep these programmes temporary, as political pressures have led many of them
to have more permanent status, albeit at lower levels of operation. Overall, the
region has experienced substantial lag times to get programmes running, missing
the crisis period only to be inaugurated after recovery has begun (Reinecke, 2005).
Argentina’s programme Jefes y Jefas de Hogares (Heads of Household) offers a
good example of the risks of keeping a crisis-focused programme running after
the crisis. Although it was a well- designed programme that made a signiicant
impact during the relevant crisis, it was expanded in the post-crisis period, and
targeting to the very poor was loosened as was the link to employment (Galasso
and Ravallion, 2003; Kostzer, 2008).
Temporary extensions of health, pension and unemployment insurance
During the most recent crisis, a number of Latin American countries more readily
used adjustments to existing labour beneit programmes to provide supplemental
income or reduce labour costs than had been seen in previous crises. Southern
Cone countries, in particular, extended health beneits to laid-off workers to
support a social safety net during the crisis. Chile took actions to protect the
pension contributions of older, now unemployed workers close to retirement.
The few unemployment insurance systems in place in the region, all with
limited scope, were put to work and adapted to the crisis. Unemployment
insurance systems in Latin America, in general, are for much shorter durations
and lower levels of income replacement than their OECD counterparts. In past
crises, even these small coverage systems were overwhelmed by the demands of
higher levels of unemployment, and beneit levels were reduced from low levels
(via shortened periods of time, increased requirements for eligibility) even while
iscal costs rose (Mazza, 1999). Box 11.1 shows adaptations of Brazil’s, Chile’s
and Uruguay’s existing unemployment insurance programmes.
Chile incorporated beneit changes within a wider strategy that included
linking training to employment-retention criteria. In addition to the adaptations of
its unemployment insurance and iscal incentives of up to US$ 4 billion (2.8 per
cent of GDP), Chile achieved agreement on a National Agreement for Employment,
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he Twin Challenges of Reducing Poverty and Creating Employment
Box 11.1
Adapting unemployment insurance: Brazil, Chile, and Uruguay
Brazil, Chile and Uruguay tested and adapted changes in their unemployment insurance programmes to better respond to the inancial crisis. Before the crisis struck,
these countries had already been considering an extension to the length and modality of beneits if a certain unemployment level was reached, or if the country entered
into an economic recession (Velásquez, 2010). As the crisis hit, Brazil and Chile extended the length of unemployment beneits by two months for workers in hard hit
sectors. In Brazil, almost 310,000 workers received the beneit for seven months (the
maximum allowed) (International Labour Organization and International Institute for
Labour Studies, 2011). In Uruguay, oicials permitted employers to use the unemployment insurance system to temporarily suspend workers contracts for up to six
months. The mechanism was widely used and allowed thousands of workers to go
back to their jobs after the sharpest moment of the crisis (Velásquez, 2010).
Uruguay, which has not been greatly impacted by the inancial crisis, concentrated its eforts on expanding and adapting unemployment insurance. Unemployment
insurance has been used on a temporary layof basis, relaxing rules on rehiring. There
is evidence that many employers did not ire their employees because of such insurance and some employees continued working while others were temporarily covered
by insurance before going back to their previous job (Velásquez, 2010).
Training and Labor Protection (Acuerdo Nacional por el Empleo, la Capacitación y
la Protección Laboral), a programme that provided training incentives to employers
to allow their employees to take up to ive months of government-paid training with
the condition that these employers would not be ired after this period.
Systematic measures to support employment and human capital
development
Not all labour policy responses in the region have been of a temporary nature. In
some cases, economic crises have provided the political moment for reforms and
consensus or policy experimentation that was not possible before. They have also
provided opportunities to expand capacity for labour market programmes, such
as in the case of Mexico’s National Employment Service, which grew into one of
the region’s strongest national networks of employment ofices after delivering
responses to economic crises in 1992, 1994 and 2008-2009 (Mazza, 2011).
Restructuring and implementing labour beneit systems: pensions,
severance pay and unemployment insurance
Pension systems in the region are still relatively rare and most provide relatively
low levels of national coverage and deined beneits. Unemployment insurance
programmes are also relatively rare. Calculations by the Inter-American
Development Bank estimate that only 5 per cent of the unemployed in Latin America
Crisis-driven Labour Market Programmes
• 207
were covered by unemployment insurance programmes in 2009, compared with
66 per cent in the United States.80 Creating such programmes in a crisis can be
administratively dificult although a crisis can prompt political attention to both the
creation of more permanent beneit programmes and improvements to protect the
solvency. The inability to make severance payments provided a critical moment
in Barbados to enact an unemployment insurance programme which provided a
system of more secure payments for workers’ overtime (Mazza, 1999). This most
recent crisis posed greater challenges to portfolio-based beneit systems, such as
pension systems, given the simultaneous unravelling of key inancial institutions
and investments.
Twelve LAC countries have implemented mandatory pension systems
in the past two decades, shifting pensions from social (public) to individual
responsibility, with the expansion of private pension systems as well. The
pressures of the most recent crisis have put a spotlight on the need for fundamental
reforms and restructuring of many pensions systems, aiming at making them
sustainable and expanding their coverage under dificult inancial circumstances.
Only three pension systems in the region are “multi-funds’, that is, they reduce
risk to pensioners by shifting the asset allocation over time to progressively less
risky investments as the pensioner ages. In preparation for future crises, pension
solvency, lexibility and coverage will be at the forefront of insuring that future
downturns do not continue to put retiring populations at great risk; as will the use
of unemployment insurance schemes to adapt and stabilize economies in times of
economic crisis.
Building employment service capacity
If they work well, labour intermediation systems (e.g., job inding or employment
services) are designed to help get workers into jobs and make transitions from
work, employment and training. OECD research has amply identiied employment/
intermediation services as the most cost-effective active labour policy investment
(Martin, 2006) with consistent indings for developing countries (Betcherman,
Olivas and Dar, 2004). In OECD countries, many intermediation services also
serve as the gateway for unemployment insurance and other social services
(Mazza, 2003).
In a short-term crisis, the job-matching function of intermediation services
cannot produce the same level of results owing to the falloff of new job listings.
Such services have more often been used in Latin America in crisis times as a
platform for labour interventions as they provide walk-in services via regional
ofices and maintain direct connections with local employers and workers.
Investments in the short-term in such labour services, however, can pay dividends
80 Includes 2009 extensions of eligibility in the United States (Inter-American
Development Bank staf calculations in March 2009, based on unemployed populations
relative to unemployment insurance programme recipients).
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he Twin Challenges of Reducing Poverty and Creating Employment
in the creation of more modern, eficient and lexible services once the economy
recovers. Honduras, Mexico and Peru provide important examples of pursuing
modernizations in the context of crises that serve to build labour market capacity in
the medium-term, such as in reforms and service upgrading (e.g., computerization,
quality control systems, staff training, mobile services for rural workers, electronic
job banks), expanding connections with employers and focusing instruments on
moving workers into higher quality jobs. The Mexican experience described in
box 11.2 demonstrates how labour policy experimentation during the most recent
crisis has led to the creation of more permanent instruments to deal with labour
market contingencies.
Advancing labour training and human resources restructuring for irm
competitiveness
In LAC, training is too often divorced from irm needs and conducted in an isolated
fashion, separately from other human resource and technical changes within a
irm. Another opportunity offered by economic crises is to pilot new methods of
training or expand ones better linked to private sector demand, thus preparing
for more competitive labour markets in better economic times. Mexico’s former
CIMO programme (Calidad Integral y Modernización) combined diagnostics of
irms that identiied what they needed to grow, be it marketing, training, design or
restructuring. Training and technical assistance was then provided to implement
the identiied needs of the irm, speciically training related to implementing
irm-level training with positive results for irm performance. While the piloted
programme preceded the economic crisis, the programme was ready to be expanded
and adapted during crisis times to work directly with affected employers. More
systematic labour policy responses to economic crises can help to shift labour
policy instruments to serve wider changes in how irms operate on a competitive
basis.
Improving technical education and human capital formation
A key to future competitiveness of LAC lies in improving the quality of its human
capital. The region now offers conditional cash transfers (CCTs) to the poor in
nearly every country, in most countries tied to educational attendance and health
indicators. However, CCTs are not instruments for the newly poor who often still
have enough assets that they do not qualify for a CCT. While LAC countries
have inanced short-term training as policy responses to crises, little use has been
made of education scholarships or investments in better technical education as
part of the mix of policy responses to advance human capital. Instruments to
improve the region’s human capital base could include reform and modernization
of technical education, creation of community colleges or technical colleges
linked to local industries and service, university-level scholarships in highdemand skills for the unemployed, as well as curriculum reform to establish core
Crisis-driven Labour Market Programmes
• 209
Box 11.2
Mexico’s fast response “Preservation of Employment” programme becomes permanent to serve different types of crises
Mexico was the Latin American country that sufered the most in the 2008-2009 period, experiencing both the inancial crisis, the H1N1 inluenza and dependence on
U.S. markets. In January 2009, Mexico adapted an existing set of Ministry of Labour
programmes to protect workers and expanded temporary work programmes under
the Social Development Ministry. Under the umbrella project Apoyo a la Preservación
del Empleo (Support to the Preservation of Employment) 47,525 workers beneitted
from either temporary employment programmes or vouchers for training. In order to
weather the tourism crisis and prevent mass layofs or cutbacks in tip income (often
the principal source of income for low-level workers), the Mexican government created the Programa de Apoyo Emergente a Trabajadores del Sector Servicios (Programme
of Emerging Support to Social Sector Workers).
This programme provided 58,681 workers with up to two months of one or two
minimum salaries. This programme evolved into the 2010 Programa de Atención a
Situaciones de Contingencia Laboral, (Program for Attention to Labor Contingencies)
a permanent program which ofers a pre-set framework of instruments to be activated in case of an employment crisis. The federal programme was adapted in Cuidad
Juarez to respond to the surge in youth violence. In Jalisco, along the beaches of the
Paciic coast, the local government created its own version of the Federal programme,
the Programa Estatal Emergente de Capacitación para la Productividad (Emerging State
Program of Training for Productivity). Government, enterprises and workers in Jalisco
agreed that employers would not dismiss its workers, while the government paid 55
per cent of workers’ salaries for three months in government-provided training, and
the employers paid 25 per cent (the remainder was absorbed by workers as a salary
cut). More than any country in the region, Mexico has drawn on its network of statebased employment oices to adapt labour instruments to address short-term social
and labour crises (Mexican Ministry of Labour, 2012).
competencies demanded across labour markets (e.g., communication, critical
thinking, problem-solving and group work). Such rethinking of labour policy
options would signiicantly expand the human capital value of policy responses.
Conclusions
LAC has had its share of experience in weathering economic crises. By all
accounts, the region performed relatively well in the 2008-2010 inancial crisis
compared with past crises, with shorter-term impacts than many developed
countries. Most countries in the region resumed a modest recovery in 2010.
As in the past, countries in the region strove to adapt existing labour market
programmes and work rules and to initiate crisis-speciic interventions. However,
the crisis was perhaps not severe enough to motivate a rethinking of the use of
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he Twin Challenges of Reducing Poverty and Creating Employment
immediate measures versus more systematic measures as outlined in this chapter.
What explains the diversity of instruments and scale in this crisis? First,
available funding was highly limited in the region, affecting which countries
mounted responses. No country could marshal resources in the range of a United
States–type stimulus programme. Second, labour policies and institutions were
stronger in higher-income countries, giving them more lexibility when the crisis
hit. Third, the diverse response can be partly explained by the heterogeneous
impact of the crisis as outlined in the opening section on social and labour policy
responses to the crisis. Mexico and countries where the impact was felt more
strongly implemented more measures than, for instance, the Plurinational State
of Bolivia, where export or tourism exposure was not as great. Finally, countries
with lower institutional capacity (largely the poorer countries of Central America
and the Caribbean) continue to be highly constrained in their capacity to respond
to a crisis quickly and on a large scale.
The future challenge for the countries of LAC will be to create the capacity
to implement systematic programmes that provide lexibility for future crises, but
more importantly, lay the foundation for addressing the human capital priorities
of the region. This would be a social safety net of both social and labour market
programmes that promotes productivity—the most pressing labour market
problem in the region—while protecting welfare in and out of a crisis. This means
deploying a coherent mix of social and labour programmes that prevents welfare
from falling below a minimum level but, at the same time, does not include
instruments that distort employment growth towards less productive areas.
The Latin American experience with crisis-driven employment programmes
demonstrates the need for caution with some immediate types of interventions
(such as temporary work programmes) in favour of more systematic measures that
can be adapted as crises arise. Crises can yield institutional and policy legacies—
laying the foundation for sound, market-driven active labour market policies that
can lead the region to a more productive labour force in the future.
Crisis-driven Labour Market Programmes
• 211
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215
Chapter 12
Labour markets and the Arab spring:
widening gaps among aspirations,
capabilities and opportunities
azita berar
Introduction
The tragic self-immolation of Abdel-Aziz Bouazizi, a young educated Tunisian,
whose repeated attempts to ind a decent job and a livelihood were shattered,
was more than a symbolic trigger of youth-led protests in several countries and
territories in the Middle East and North Africa (MENA),81 commonly called the
“Arab Spring”. It brought to the fore the more profound roots of protests embedded
in the social and economic developments in the region and, in particular, the
limited opportunities in labour markets.
While world attention to the Arab Spring, then and now, is primarily focused
on the quest for democratic regimes, rights and political participation, this article
focuses on the economic and labour market dimensions of the social and political
upheavals in the MENA region. It shows that the economic strategies pursued in
the countries in the region, hailed for achieving high economic growth by national
and some international institutions, failed to deliver on jobs, particularly decent
jobs. Moreover, the growth patterns did not have any signiicant impact on poverty
and informality. The strategies pursued also did little by way of structural change
in the economies of the region, or to create endogenous capabilities that would
eventually underpin a high road to integration in the globalized world economy.
In fact, labour market trends in the MENA region over the last two decades
81 North Africa: Algeria, Egypt, Libya, Morocco, Sudan, Tunisia, Western Sahara.
Middle East: Bahrain, Iraq, Israel, Jordan, Kuwait, Lebanon, Occupied Palestinian
Territory, Oman, Qatar, Saudi Arabia, Syrian Arab Republic, United Arab Emirates and
Yemen.
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he Twin Challenges of Reducing Poverty and Creating Employment
show a widening gap between the aspirations and capabilities of a youthful population
better educated than ever, and the opportunities available to them to obtain decent
employment and to gain their rightful place in more inclusive societies. The “good”
gross domestic product (GDP) growth performance and the proclaimed objectives
of economic reforms that were set out in several countries in order to deliver better
standards of living have not contributed to reducing this gap.
The analysis of key aspects of labour market dynamics in the region shows
the need to give centre stage to quality job creation and to social justice.
Demographic dynamics and labour markets: the youth bulge
Demographic dynamics, the age composition of the labour force, the number of
new entrants into the labour markets each year, and their educational and training
proile are key determinants of labour supply and have a signiicant impact on
labour markets. During the twentieth century, the MENA region experienced
profound demographic changes and an unprecedented rapid population growth.
The region’s population grew from 83 million around 1950 to approximately 382
million in 2010. According to the 2010 revision of United Nations population
estimates and projections, the population will reach almost 700 million in 2090,
at which time there will be a slight decline (igure 12.1).
The notable youth bulge is the result of sustained high fertility until the late
Figure 12.1 Total population in MENA (millions), 1950-2100
Source: United Nations (2010).
Labour Markets and the Arab Spring
• 217
twentieth century. The signiicant decline in child mortality and the relatively slow
decline in fertility initially led to an increase in the child population in the 1980s. The
present youth bulge consists of the children born in the 1980s and early 1990s, who
are now aged 15 to 24. Nearly one in ive people is between the ages of 15 and 24. The
size of the youth population in the region is unprecedented: over 85 million in 2010.
Given that countries are at different stages of a decline in fertility, the youth
bulge will still rise in some countries and territories while it recedes in others. Over
the next two decades, for example, the youth populations of high-fertility Iraq,
Yemen, and the Occupied Palestinian Territory will see the fastest growth. On the
other hand, countries already well into the transition to lower fertility—including
Lebanon, Morocco and Turkey—will see their youth share decline between 2005
and 2025. The conluence of these trends will cause the youth population to peak
in 2020 at about 98 million (Assaad and Roudi-Fahimi, 2007).
MENA is also one of the world’s most urbanized regions and it is expected
that urbanization will increase dramatically between now and 2050, partly because
of persistent rural to urban migration (Berar, Fortuny and Awad, forthcoming). In
general, unemployment rates are higher in urban than in rural areas, although
there are important country differences. In Morocco, for example, unemployment
is mainly an urban phenomenon, with more than 80 per cent of the unemployed
population living in urban areas (Ibourk, 2012). Urban women are the most
affected group, as revealed by their urban unemployment rates, which double the
national average. The structure of active population by age shows that children and
older people (over 60 years of age) are an important proportion of the labour force
and the rural labour market is characterized by an early entry and a late exit. In
this context, child labour and old age poverty are issues of concern (ibid.). Jordan
illustrates the converse situation, where unemployment rates have traditionally
been—and remain—higher in rural governorates, particularly for women.
Over the past ifty years, international migration has also played an important
role in population change in the region. Economic expansion following the boom
in oil revenues in the 1970s attracted millions of labour migrants, of all skill
levels, especially to the Arabian Peninsula. Millions moved from labour-rich, nonoil-producing countries to seek jobs in the oil-rich countries within the region.
Over time, as job opportunities diminished in the oil-rich countries, migration to
Europe increased. Increasingly, lack of employment opportunities at home has
become the driver of international labour migration.
In sum, the timing and pattern of the region’s demographic transition have
had a signiicant effect on the dynamics of labour markets. This rapid labour force
growth, with better education, improved health care and longer life expectancy,
provides economies in the region with a large pool of creativity, innovation and
productivity. The stark realities of economic and labour market developments in
the past two decades have shown, however, that this potential is largely unrealized,
and what is a demographic dividend is turning into a burden of unemployment and
underemployment and low productivity jobs. The gaps among capabilities of the
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he Twin Challenges of Reducing Poverty and Creating Employment
Figure 12.2 Labour force (millions), 1980-2020
180,000
160,000
140,000
120,000
100,000
80,000
60,000
40,000
20,000
1980
1985
1990
1995
2000
2005
2010
2015
2020
Source: International Labour Organization (2011a).
Figure 12.3 Gender gap in labour force participation,
2000 and 2010 (percentage)
Source: International Labour Organization (2011a).
Labour Markets and the Arab Spring
• 219
young generation, their aspirations and opportunities offered have been widening.
Over the next two decades, the Middle East and North Africa region will
face an unprecedented challenge. In 2010, the labour force of the region totalled
some 146 million workers, and is expected to reach 162 million by 2015 and
176 million by 2020 (igure 12.2). Given this expansion, the economies of the
region will need to create some 30 million new jobs in the next decade just to
accommodate the new labour force entrants, without taking into account the
backlog of the unemployed and those “discouraged” who have given up looking
for jobs in the present circumstances.
Increased labour force participation: still too low, particularly
for women
Labour force participation increased substantially between 1980 and 2005. This was
mainly due to increases in female labour force participation rates, which had been
below 20 per cent in most countries in 1980. Rising female labour participation
during this period was one of the most important developments affecting the size
and gender composition of the region’s labour force. From 2005 to 2011, however,
labour force participation rates for both sexes remained practically constant, at
around 47.5 per cent, and projections show that between now and 2020 they will
remain the same or even decline slightly (this will be the case for Egypt, Libya
and Morocco). Despite these trends, female participation rates remain at very low
levels—below 25 per cent in the Middle East and below 30 per cent in North Africa.
Figure 12.3 shows the wide gender gap that is closing all too slowly.
Lowest employment-to-population rates worldwide…
The MENA countries have the lowest employment-to-population rates in the
world. In 2010, the estimated employment-to-population rate in the Middle East
was 42.7 per cent and in North Africa it was 44.2 per cent, meaning that less
than one out of two persons of working age actually worked (table 12.1). These
rates have increased by only around 2 percentage points in the past ten years.
In both regions the low employment-to-population rate is associated with low
participation of women and youth in work. The female employment-to-population
rate is about one third the male rate.
... and highest unemployment rate
Unemployment in the region is among the highest in the world. In North Africa,
some progress has been made in reducing the unemployment rate in recent years,
from a peak of 14.1 per cent in 2000 to 9.6 per cent in 2008, with economic
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he Twin Challenges of Reducing Poverty and Creating Employment
growth rates in the range of 4.5-6.5 per cent. The unemployment rate slightly
increased with the economic crisis, and in 2010 it was estimated at 9.8 per cent.
The unemployment rate in the Middle East has remained relatively unchanged
over the past ten years. During the years leading up to the global economic crisis,
from 2004 to 2008, the unemployment rate had decreased by 1 percentage point,
but the downward trend stagnated in 2008, and estimates for 2009 and 2010 show
a steady rate of unemployment at 10.3 per cent. This continues to be the highest
regional rate in the world, and only in North Africa was the unemployment rate
nearing a similar level in 2010.
However, the impact of the global inancial crisis on the Middle Eastern
labour market is not adequately relected in trends in the unemployment rate
(International Labour Organization, 2011b). One of the reasons is that a large
number of expatriates and migrant workers in the Gulf States have residence
permits that are linked to employment contracts. When these workers are made
redundant, they are more likely to return to their countries of origin and therefore
drop out of the labour force of the country of destination, whereas migrant workers
in Europe, for example, can often remain and “sit out the crisis” in the country of
destination (Awad, 2009).
The most pressing challenges: tackling the youth employment
crisis…
Several labour market indicators relect the deep youth employment crisis in the
region, including the number of job opportunities as well as the quality of jobs.
Youth unemployment in MENA is the highest in the world (igure 12.4).
Youth labour force participation rates in the Middle East and North Africa
remain among the lowest in the world (36.3 and 37.9 per cent, respectively) and
they have decreased over time. The decline in youth labour force participation
observed between 2000 and 2010 (table 12.2) relects a decrease seen across all
regions. In most regions, these declines apply to both young men and women.
Participation rates for young women are much lower than for young men. In
North Africa the youth female participation rate decreased faster than the male
rate, leading to an increase in the gender gap.
The low and decreasing labour force participation of youth has not been the
result of more young people engaging in education and prolonging their years of
learning. Instead, it is associated with high and increasing rates of the inactive
youth population, those who have detached themselves from the labour market
(International Labour Organization, 2012). Amongst this composite group of
“detached” or “discouraged” workers, a signiicant portion have withdrawn from
the labour market and given up searching for work in view of the low expectations
they have of inding a job that matches their qualiications or offers decent
conditions of work. The educated, including university graduates, form a nonnegligible segment of the disenchanted youth.
• 221
Labour Markets and the Arab Spring
Table 12.1: Employment-to-population rate by gender (percentage)
Region 2000
Middle East
Both 41.1 41.0
Male
67.4
Female 13.2
North Africa
Both 41.8 41.5
Male
66.3
Female 17.5
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011a
2012a
41.0
66.9
13.4
41.0
66.3
13.7
42.0
65.6
14.3
42.5
66.6
15.0
42.4
67.1
15.3
42.6
67.0
15.1
41.9
67.3
15.1
42.3
66.6
14.3
42.7
67.1
14.5
42.9
67.6
14.8
43.2
67.8
15.0
68.1
15.2
41.3
66.1
17.2
41.9
66.1
16.7
42.7
66.7
17.4
43.2
67.5
18.2
43.2
68.4
18.2
43.8
68.1
18.6
44.1
68.1
19.8
44.1
68.6
19.9
44.2
68.7
19.8
43.6
68.6
20.0
43.7
68.0
19.6
68.1
19.8
Table 12.2: Youth labour force participation rates, 2000, 2010 and 2015 (percentage)
Total youth
Male youth
Female Youth
2000
2010
2015a
2000
2010
2015
2000
2010 2015a
Middle East
32.7
30.3
30.0
51.0
46.7
45.8
13.4
12.9
13.4
North Africa
36.1
33.6
33.1
50.7
47.2
45.9
21.2
19.5
19.9
Table 12.3: Youth employment, several indicators (2000, 2008 and 2011) and
adult employment-to-population ratio (2011)
Employed youth
(thousands)
Middle East
North Africa
2000
8,811
9,521
2008
9,617
10,831
Youth employment-topopulation ratio
2011a
9,475
10,058
Source: International Labour Organization (2011b).
a Preliminary estimates.
2000
24.9
25.7
2008
22.6
26.3
2011 a
22.4
24.4
Share of employment of
young women amongst all
young people employed
2011 a
16.7
23.3
Adult employmentto-population ratio
2011 a
51.3
51.2
222
•
he Twin Challenges of Reducing Poverty and Creating Employment
Figure 12.4 Youth unemployment rate by region,
1991-2012 (percentage)
Source: International Labour Organization (2011b).
Note: Young people are deined as persons between the ages of 15 and 24.
Youth employment (see table 12.3) and unemployment also reveal a daunting
picture. While 4 out of 10 male youths were working in 2008 (39.5 and 40.7 per
cent in the Middle East and North Africa, respectively), less than 2 out of 10
young women were engaged in work (14.9 and 15.9 per cent, respectively).
Youth unemployment rates in the region are the highest in the world, with
female youth unemployment surpassing male youth unemployment (igure 12.5).
And youth unemployment is much higher than that of adults. In 2011, 6 out of 10
unemployed were young.
A closer analysis of youth school-to-work transition patterns shows that long
unemployment durations are common among youth entering the labour market.
For example, more than half of unemployed Syrian youth surveyed in 2005 had
been searching for a job for more than one year. In Egypt, those between the ages
of 20 and 24 reported searching for an average period of 34 months. For many,
the state of prolonged unemployment relects a mismatch between expectations
and the quality of jobs available. In Egypt, the socioeconomic background of
a young person affects the length of unemployment spells. Youth from middleclass, urban backgrounds are generally slower to enter the labour market than
both the poor and the rich. These youth can afford to search longer for good jobs
than the poor because they are able to depend more on family support than those
from low-income family backgrounds. However, they lack the connections that
wealthier youth can draw on to actually secure decent jobs. Young people from
Labour Markets and the Arab Spring
• 223
Figure 12.5: Youth unemployment rate by gender, 2000 and
2008-2010 (percentage)
Source: International Labour Organization (2011b).
Figure 12.6 Unemployment rate by gender, selected countries,
latest year available (percentage)
45
40
35
30
25
20
15
10
5
0
MF M
F MF M
F MF M
F MF M
F MF M
F MF M
F MF M
F MF M
F
2010
2009
2008
2009
2009
2010
2009
2008
Algeria
Egypt
Iran
Jordan
Occupied
Palestininan
Territory
Syria
Yemen
United Arab
Emirates
Source: International Labour Organization, Labour Force Surveys (LFS), various years;
International Labour Organization (2011c).
224
•
he Twin Challenges of Reducing Poverty and Creating Employment
Table 12.4: Unemployment rate by gender,
2000 and 2007-2011 (percentage)
2000
Middle East
North Africa
Both
Male
Female
Both
Male
Female
10.5
8.8
18.9
13.6
11.5
20.8
2007
2008
2009
10.3
8.4
18.6
10.1
8.1
16.1
10.4
8.6
18.9
9.6
7.5
16.0
10.1
8.2
18.7
9.6
7.3
16.5
2010
9.9
8.1
18.5
9.6
7.4
16.4
2011 a
2012 a
10.2
8.3
18.7
10.9
8.2
19.0
10.3
8.4
18.6
11.0
8.4
18.9
Source: International Labour Organization (2011b).,
a Preliminary estimates.
poor backgrounds are likely to enter the market more quickly, but often engage in
lower-quality jobs at the expense of completing formal education (International
Labour Organization, 2012).
…and closing the gender gap
With high rates of female inactivity, low participation and employment-topopulation rates, women are particularly disadvantaged in availing themselves
of opportunities in the labour market (table 12.4 and igure 12.6). For those who
do look for work, the job search is long and dificult and oftentimes ultimately
unsuccessful. This is relected in the soaring female unemployment rates, twice as
high as those of men, resulting in the highest gender gap in the world (International
Labour Organization, 2012). In 2010 the female unemployment rate in the Middle
East was estimated at 18.5 per cent and in North Africa at 16.4 per cent, compared
with 8.1 and 7.4 per cent for their male counterparts.
Economic growth and reforms failed to deliver on employment
opportunities, quality jobs and labour market inclusion
Between 1965 and 1985, the region’s economic growth rates were among the
highest in the world. In the mid-1980s, with the decline of oil prices, Governments
initiated structural adjustment programmes with reforms that included privatization
of State-owned enterprises, iscal reform, trade liberalization and deregulation.
By the early 1990s, a slow economic recovery had begun; however, the lack of
economic diversiication and export dependence made the region very vulnerable
to trade shocks and oil price volatility. Furthermore, an extended drought that
affected the region in the late 1990s caused a sharp drop in agricultural production.
Between 1997 and 2007, the Middle East experienced solid GDP growth of
an average of around 4.5 per cent per year. Economic growth was heightened
Labour Markets and the Arab Spring
• 225
between 2003 and 2007, averaging approximately 6 per cent per year, the surge in
the price of oil being the main driver.
In the second half of the past decade, North Africa also experienced remarkable
growth, especially in 2006 and 2007, when GDP growth rates exceeded 6 per cent
per year. In addition, the impact of the 2008 economic and inancial crisis was
less severe in the Middle East and North Africa than in other regions of the world.
North Africa, in particular, was not strongly affected. This was due to the relative
insulation of some economies in the region from global markets. The Middle East
beneited from surplus liquidity built up from high oil prices.
Table 12.5 illustrates the large disparities in terms of GDP growth and GDP
per capita between the oil-producing Gulf States and the rest.
In spite of the overall good growth performance, the reforms did not result
in employment generation of the magnitude and type that can productively
harness the human potential and the increasing demand for decent work, dignity
and fairness in access to opportunities. Overall, employment growth remained
far behind and to some extent disconnected from trends in economic growth
(International Monetary Fund, n. d.; International Labour Organization, 2011b).
Jobs created were of low quality, whether we assess the quality in terms
of productivity, ability to lift people out of poverty or the share of informal
employment.
Working poverty and informality remain pervasive
MENA countries are generally regarded as having a relatively low incidence of
income poverty. However, important challenges remain. In the Middle East, while
the share of the working poor at the US$ 1.25 per day level is small, working
poverty at US$ 2 per day is very signiicant (igures 12.7 and 12.8). During the
1990s, progress was made towards reducing the working poverty rate, but since
the turn of the century, the decrease in this rate has been limited. In North Africa,
working poverty at US$ 2 a day has declined by 11 percentage points in the past
10 years. Over 30 per cent of the employed still live with their families on less
than US$ 2 a day and over 16 per cent do so on less than US$ 1.25 a day. Lack of
progress in reducing working poverty is linked to low labour productivity growth
rates (igure 12.9).
Self-employment represents the major component of informal employment.
It accounts for between one third and one half of total employment, except in
Jordan, where it is closer to one fourth (Fortuny and Al Husseini, 2010). There
is a tendency for informal paid employment to increase more rapidly than selfemployment, a phenomenon which can been explained: either paid employment is
growing in the microenterprise segment, or it is growing in the informal segment
of medium and large enterprises of the formal sector, meaning a deterioration
of the working conditions of wage earners. Most probably both dynamics are
at work in most countries in the region. Informal employment in formal irms
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
Estimates
start after
•
2005
226
North Africa
Algeria
5.1
2
3
2.4
2.4
3.8
4.0
4.1
4.1
4.1
4.1
2008
Egypt
4.5
6.8
7.1
7.2
4.6
5.2
5.5
5.7
5.9
6.2
6.5
2009
Libya
10.3
6.7
7.5
2.3
-2.3
10.6
6.2
6.4
7.4
7.7
7.7
2009
Morocco
2.9
7.7
2.7
5.6
4.9
4
4.3
4.9
4.9
4.9
4.9
2009
Tunisia
4
5.6
6.3
4.5
3.1
3.8
4.8
4.9
5.6
5.7
5.9
2006
Bahrain
7.8
6.6
8.4
6.3
3.1
3.9
4.5
4.8
4.8
4.9
5.2
2009
Iran (Islamic Republic of)
4.7
5.8
7.8
1.1
1.1
1.5
3.02
3.03
3.1
3.1
3.1
2008
Iraq
-0.8
6.2
1.5
9.5
4.2
2.6
11.4
11.3
10.1
11.1
10.2
2008
Jordan
8.1
7.9
8.5
7.6
2.3
3.4
4.2
5
5.5
5.5
5.5
2009
Kuwait
10.6
5.2
4.45
5.5
-4.8
2.3
4.4
5.1
5.2
5.3
5.3
2008
1
0.6
7.5
9.3
9
8
5
4
4
4
4
2007
Oman
3.9
5.5
6.8
12.8
3.6
4.7
4.7
4.1
4.0
4.2
4.5
2009
Qatar
7.6
18.6
26.7
25.4
8.6
15.9
18.6
9.3
4.6
4.9
5.1
2009
Saudi Arabia
5.5
3.1
2.1
4.23
0.6
3.4
4.5
4.4
4.46
4.6
4.6
2009
Sudan
6.3
11.3
10.2
6.8
4.5
5.5
6.2
6.2
5.1
5.4
5.1
2009
Syrian Arab Republic
4.5
5.1
4.2
5.2
3.9
4.9
5.5
5.6
5.6
5.6
5.7
2008
United Arab Emirates
8.2
8.7
6.1
5.2
-2.5
2.4
3.2
3.9
4.08
4.1
4.1
2008
Yemen
5.6
3.8
3.3
3.6
3.8
8.1
4.1
4.1
4.3
4.4
4.5
2008
Middle East
Lebanon
he Twin Challenges of Reducing Poverty and Creating Employment
Source: International Monetary Fund (n.d.), World Economic Outlook Database (accessed
March 2011).
Table 12.5 Annual real GDP growth rates, selected countries, 2005-2015 (percentage)
Table 12.6 Trends in productivity and wages, selected countries, 2000-2009
Labour Productivity,
GDP per person
engaged (constant 1990
US dollars at PPP)
2000
2007
2008
Growth, real average
monthly wages
20002005
2007
2008
Minimum
wage
PPP (US
dollars),
most
recent
year
Growth, real
minimum wage
2009
2007
2008
2009
Share of wage
employment
(2006 or latest
available year)
Male
Female
All
7831
8083 8051
-0.1
4.7
...
...
-3.4
-4.6
-5.4
308
61.9
49.8
59.8
2004
Egypt
11079
12680 13248
1.7
-0.8
...
...
-9.9
-10.5
-14
14
62.2
50.8
60.0
2005
8056
9883 10200
...
0.8
1.7
5.2
-2
1
3.9
371
46.8
33.4
43.2
2006
Morocco
Tunisia
13139
14998 15253
2.7
2.2
0
2.3
0.3
-0.3
-2.6
315
...
...
64.3
2003
Jordan
13310
15742 16016
0.6
3.4
-0.1
...
-5.1
-13
37.3
261
...
...
...
...
Saudi Arabia
27760
27881 28460
0.2
-1.7
...
...
-3.9
50.5
-1.2
...
...
...
...
...
Syrian Arab
Republic
19204
17985 18107
...
-0.9
2.3
2.2
-4.5
-10.1
...
49.8
46.6
49.2
2001
Source: International Labour Organization (2008; 2010;2011c).
207
Labour Markets and the Arab Spring
Algeria
• 227
228
•
he Twin Challenges of Reducing Poverty and Creating Employment
Figure 12.7: Working Poverty at US$ 2 a day, share in total
employment, 1999-2011 (percentage)
Figure 12.8: Working Poverty at US$ 1.25 a day, share in total
employment, 1999-2011 (percentage)
Source: International Labour Organization, (2011b).
Labour Markets and the Arab Spring
• 229
Figure 12.9 Labour productivity—output per worker,
1999-2012 (constant 2005 international dollars)
Source: International Labour Organization (2011b).
Figure 12.10: Employment by sector, selected countries
(percentage)
120
100
80
60
40
20
Egypt (2008) Iran (2008) Iraq (2008)
Agriculture
Jordan
(2009)
Industry
Source: International Labour Organization (2011c).
Services
Morocco
(2008)
Male
Female
Total
Male
Female
Total
Male
Female
Total
Male
Female
Total
Male
Female
Total
Male
Female
Total
Male
Female
Total
Male
Algeria
(2004)
Female
Total
0
Saudi Arabia Syria (2007)
(2008)
230
•
he Twin Challenges of Reducing Poverty and Creating Employment
Figure 12.11:
Employment
share by sector in
the Middle East,
2000-2011
(percentage)
Source: International Labour Organization (2011b).
Figure 12.12:
Employment share
by sector in
North Africa,
2000-2011
(percentage)
Source: International Labour Organization (2011c).
Labour Markets and the Arab Spring
• 231
is often linked with the development of export industries in free trade zones,
through subcontracting of home-based workers or outworkers, particularly in
textiles, garment or electronic appliances industries. Over the past decade, in
Jordan, Morocco and Tunisia, subcontracting has taken on an important role in
the economy.
Although the informal economy is generally an important source of
employment for women in developing countries, in MENA, the proportion of
men in informal employment exceeds that of women (Berar, Fortuny and Awad,
forthcoming). However, among working women, the proportion of those working
informally is generally much higher than for men. Patterns of employment by
age show that both youth and older workers are more likely to be informally
employed, as are the illiterate and the population below a secondary schooling
level (ibid.).
The sectoral composition of employment also explains the high levels of
informality. Although the sectoral composition of employment differs by country,
as shown in igure 12.12, about half of the total employment is in the service
sector, with this share remaining constant for the last decade (igures 12.10 and
12.11). The services sector typically covers heterogeneous activities with a small
share of highly productive inancial and banking sectors and mainly micro and
small informal economy operators. The latter are the predominant source of jobs
and livelihoods for large segments of the population in the Middle East and North
Africa. The employment share in the agriculture sector (particularly in North
Africa) is also quite substantial, and it has declined by about 2 percentage points
in both North Africa and the Middle East.
The inancial and privatization reforms implemented in several countries
did not address the needs of the large pool of rural, urban informal and small
operators, nor did they provide a level playing ield for catalysing private sector
development, including that of the small and medium-size enterprises.
In the past decade, countries began to reform and deregulate labour markets
hoping to encourage employment. However, the lack of enforcement of legislation
for new labour market entrants fostered informalization of labour markets well
beyond self-employment and wage employment in small informal enterprises,
to include unregulated employment in the formal private sector. Interestingly, in
2006, among the 52.6 per cent of informally employed, about 31 per cent were
employed in the public sector, showing that public enterprises, too, have been
offering low quality unprotected jobs (Berar, Fortuny and Awad, forthcoming).
Low productivity and low wages
Similarly, economic growth did not lift up low productivity, relected in low
wages.82 In the past decade, real wages either increased marginally or remained
82
Wage statistics in MENA are scarce and their quality is sometimes questionable.
232
•
he Twin Challenges of Reducing Poverty and Creating Employment
stagnant (table 12.6). In the Middle East and North Africa, worker productivity,
which should be a determinant of real wages, registered the lowest regional pace
of growth during the 1990s, with the exception of Europe and Central Asia, which
were undergoing signiicant economic restructuring. Between 2000 and 2008,
worker productivity increased only marginally and, for example, declined in the
Syrian Arab Republic. In Algeria and Egypt, there was a decline in real wages
(igure 12.13).
The public–private divide
There has been much focus on the role of the public sector as the employer of
irst resort in the MENA region. The public sector, which in several countries
offered near guaranteed employment for all educated workers, is still considered
by many as the employer of irst resort, offering better conditions of work. This
is particularly attractive for women, who face less discrimination and harassment
and can combine work and family responsibilities. However, employment in the
public sector is not sustainable in the long term; several countries have already
limited recruitment. It is true that the share of employment in the public sector is
the highest in the world, and it can be afirmed that the public sector cannot play
the role of job creator and guarantee employment for the young women and men
entering the labour market.
However, an adequate strategy cannot lie solely in limiting the size and role
of the public sector—as was attempted during the previous economic reforms—
without offering real alternatives in the private sector. Many analysts suggest
lowering the relatively better quality of employment, wages and conditions of
work in the public sector as a solution to the duality in MENA labour markets.
This chapter argues, in contrast, that the onus should be on reforms that create
a true level playing ield for a more inclusive and transparent private sector
development and that offer a fairer deal to employees and workers. In a number of
sectors, job vacancies remain in spite of high unemployment and discouragement.
In many countries, including in those that have advanced in their reform
agendas and privatized signiicant segments of the economy, the decent jobs
offered by the private sector’s rapid development are too few, and reserved for
those with the right connections. A major turnaround is needed to improve the
reality and the perceptions.
An agenda for the future
In sum, labour markets in the MENA region face signiicant challenges. There is
an ever-widening gap between educational attainment, capabilities and aspirations
of young generations of women and men and the opportunities available to
them. There is a gap between much-acclaimed economic growth and the impact
Labour Markets and the Arab Spring
• 233
Figure 12.13: Declining wage growth in Algeria and Egypt
Source: International Labour Organization (2010).
on people’s lives. It is not surprising, therefore, that the quest for decent work,
dignity, rights and social justice have been among the most pressing demands
throughout the protests and the political transition processes. They are intimately
intertwined with the quest for freedoms, rule of law and political participation.
Expectations are high for a better and fairer future. For that, the post–
Arab Spring development agenda needs to project decent job creation as the
overarching goal of new and alternative development strategies. Availability of
quality employment opportunities for women and men who seek work and their
impact on working poverty should become the main indicators against which to
gauge the economic performance in the region. Alternative economic strategies
and reforms that result in diversiication, investment in infrastructure, science and
innovation, and lead to structural transformation, are needed. Macroeconomic
policies should not be solely concerned with stability and inlation-targeting but
should also promote employment, ensure iscal space for investing in labour
market policies and human capital, and facilitate access to inance for the majority
of economic operators. There is a strong case for investing in labour market
institutions that can actively promote fairness and effectively reach out to the
most vulnerable in the labour market to provide them with real options to improve
their employability and with equal opportunities; and for building the capabilities
of intermediary and democratic institutions, including freedom of association for
workers and employers as partners for this new development agenda.
The road ahead may seem long and ambitious, the demands pressing and
present. Action is needed now.
234
•
he Twin Challenges of Reducing Poverty and Creating Employment
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