The IMF’s Interest in Inclusive Growth: Promising or PR?

Prakash Loungani Chief, Development Macroeconomics, Research Department, IMF

Co-Chair, Jobs & Growth Working Group, IMF

IDRC/CDESGOctober 13, 2015

VIEWS EXPRESSED ARE THOSE OF THE PRESENTER AND SHOULD NOT BE ASCRIBED TO THE IMF.

Growing Global Interest in “Inclusive Growth” …

Number of Google search results using "inclusive growth”

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 20150

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

100,000

… mirrored at the IMF

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 20150

50

100

150

200

250

300

350

Number of search results using “inclusive growth” on IMF eLibrary

Source: IMF eLibrary

THREE (inter-related) COMPONENTS OF IMF’s WORK ON INCLUSIVE GROWTH

Employment: Key Points

• “Two-handed approach”– Don’t forget “aggregate demand”

• a particularly important message at the onset of the Great Recession

• IMF advice on design on labor market institutions– Discussion paper on design for advanced economies– Is framework applicable to other economies?

Growth: Key Points

• In the short-run, don’t forget aggregate demand– Settings of monetary and fiscal policies key for

short-run growth

• Medium & long-run growth: – A more diagnostic approach– Emphasis on structural transformation– Realism about the effects of structural reforms

Equity: Key Points

• New research findings– Equity helps durability of growth– Redistribution within reason doesn’t hurt growth– Drivers of inequality:

• ‘Austerity’ and ‘(financial) openness’ have increased inequality in the past

• Decline in union density associated with increase in top share of incomes

• Inclusive growth agenda– Jobs as a key mechanism for inclusion– Equality of opportunity vs. outcomes

• Wide-ranging agenda to address equality of opportunity – (IMF-DFID collaboration)

Short-Run Fluctuations in Labor Markets

An old view: getting macro policies right will help labor markets

• “There is sometimes the naïve belief that unemployment must be due to a defect in the labor market, as if the hole in a flat tire must always be at the bottom, because that is where the tire is flat” (Solow, 2000).

• "It takes a heap of Harberger triangles to fill an Okun's gap.” (Tobin, 1977)

The

Two-

Han

ded

Appr

oach

The

Two-

Han

ded

Appr

oach

Facts and Diagnosis, 1985

• “[In Europe ] 11.2% of the labor force is unemployed today compared to only 2% in 1970. Long-term unemployment is a large and increasing portion … [There has been] an increase in both the level of youth unemployment and its share of total unemployment since 1979”

• “These are very gloomy statistics. Do they reflect an inevitable new economic reality, or can employment growth be restored?”

• “… a sharp decrease in aggregate demand is indeed the proximate cause of the rise in unemployment in the EC since 1980. The use of monetary policy to fight inflation and the major shift in fiscal policy towards "budgetary consolidation", however justified, seem to explain much of the poor growth performance of the 1980s “

The

Two-

Han

ded

Appr

oach

Recommendations, 1985

• “Neither supply nor demand measures will by themselves create and sustain employment growth. This simple point forms the basis of our approach …”

• “Supply measures, without accommodating demand policies, will have little impact on employment and output, at least in the short run … if firms do not see improved sales prospects, they will not increase capacity in response only to an improvement in factor prices … it is essential to make sure that demand is there to sustain supply … [But without supply measures] gains will be temporary at best and may in fact worsen structural problems. Thus, our call for a two-handed approach.”

• “We believe that structural changes on the supply side are more important than wage cuts at this stage, that they require a social compact which may not be feasible if workers are asked to take substantial wage cuts”

• “In summary …What is now needed is a social pact in which supply-friendly measures go hand in hand with a vigorous recovery”

The

Two-

Han

ded

Appr

oach

Fast forward to 2010:déjà vu all over again?

The

Two-

Han

ded

Appr

oach

The ‘Two-Handed Approach’ during the Great Recession: Unemployment and Output

Output and Employment Since the Great Recession

Employment growth since the Great Recession can be explained well by changes in output

Une

mpl

oym

ent a

nd O

utpu

t

USA

GBR

AUTBEL

DNK

FRA

DEU

ITA

NLD

NOR

SWE

CHE

CAN

JPN

FIN

IRL

PRT

ESP

AUS

NZL

-15

-10

-50

510

Em

plo

ym

ent g

row

th

-15 -10 -5 0 5Part explained by GDP growth

y = 1.03 x + 1.03 (Adj. R2 = 0.8)

Spain’s unemployment & employment growth can be explained by fall in output

Une

mpl

oym

ent a

nd O

utpu

t

Much of increased youth unemployment can also be explained by fall in output

Une

mpl

oym

ent a

nd O

utpu

t

UNEMPLOYMENT AND OUTPUT:HOW APPLICABLE IS “OKUN’S LAW”

TO DEVELOPING COUNTRIES?

Une

mpl

oym

ent a

nd O

utpu

t

Country Groups

Total: 81 Countries• 24 Advanced Economies

• 20 Emerging Market Economies• 11 Frontier Market Economies

• 26 Other Developing Economies

Une

mpl

oym

ent a

nd O

utpu

t

Spai

n

Aust

ralia

Unite

d St

ates

Cana

da

Irela

nd

Finl

and

Swed

en

Unite

d Ki

ngdo

m

Denm

ark

Fran

ce

Gree

ce

Neth

erla

nds

Port

ugal

New

Zea

land

Israe

l

Germ

any

Belg

ium

Switz

erla

nd

Norw

ay

Hong

Kon

g SA

R

Aust

ria Italy

Japa

n

Sing

apor

e

-1

-0.9

-0.8

-0.7

-0.6

-0.5

-0.4

-0.3

-0.2

-0.1

0

Average=-0.30

Okun’s Law Coefficients: Advanced Economies

(based on “change” specification)

Notes: Ball and others (2013) do not cover Greece, Israel, Hong Kong SAR, and Singapore. These countries are marked with green.

Une

mpl

oym

ent a

nd O

utpu

t

Okun’s Law Coefficients: Emerging Market Economies

(based on “change” specification)

ColombiaChile

Poland

Egyp

t

Hungary

Czech Rep

ublic

South Afri

caBraz

il

Philippines

Mexico

KoreaRussi

a

Taiw

an Pro

vince

of China

Turke

yPeru

Thail

and

Malaysi

a

Indonesia

Morocco

China-0.8

-0.6

-0.4

-0.2

0

Average=-0.23

Une

mpl

oym

ent a

nd O

utpu

t

Okun’s Law Coefficients: Frontier Market Economies

(based on “change” specification)

Tunisia Lithuania Vietnam Bulgaria Argentina Croatia Jordan Kazakhstan Pakistan Romania Ukraine-0.5

-0.45

-0.4

-0.35

-0.3

-0.25

-0.2

-0.15

-0.1

-0.05

0

Average=-0.20

Une

mpl

oym

ent a

nd O

utpu

t

Okun’s Law Coefficients: Other Developing Economies

(based on “change” specification)

Slova

k Rep

ublic

Ecuad

orIra

n

Bosnia

and Herz

egovin

a

Urugu

ay

Moldova

Costa Rica

Venezu

ela

Georgi

a

Panam

a

Nicarag

ua

Albania

Kyrgyz

Republic

Armen

ia

Algeria

Seych

elles

Belaru

s

Saudi A

rabia

Dominican Rep

ublicSe

rbia

Azerbaij

an

Myanmar

El Sa

lvador

Uzbek

istan

Sudan

Honduras-0.5

-0.4

-0.3

-0.2

-0.1

0

0.1

Average=-0.14

Une

mpl

oym

ent a

nd O

utpu

t

Okun’s Law Coefficients: Summary(group average)

All Economies(81)

Advanced Economies(24)

Emerging Markets(20)

Other Developing Economies

(26)

Frontier Market Economies

(11)

-0.4

-0.3

-0.2

-0.1

0

Change Specification Level Specification ( HP 100 ) Level Specification ( HP 12 )

Une

mpl

oym

ent a

nd O

utpu

t

Making Output-Employment LinkagesPart of IMF Staff’s Toolkits

Une

mpl

oym

ent a

nd O

utpu

t

“IMF view” on Design of Labor Markets Institutions: Blanchard, Jaumotte, Loungani (2014)

http://www.izajolp.com/content/3/1/2/abstract

“Labor Market Flexibility”: Moving Beyond Mantras

Labo

r Mar

ket P

olic

ies

Unemployment insurance (UI)– welfare improving but possible efficiency cost– what matters: design of the system quality of active labor market

policies

Employment protection (EP)– some of it is desirable but too much can be

harmful (lower reallocation, longer unemployment duration)

– dual protection systems have ambiguous effects on efficiency and welfare

– reduce judicial uncertainty

Micro Flexibility: Two Key InstitutionsLa

bor M

arke

t Pol

icie

s

Micro FlexibilitySome countries don’t do it well:

low flows, long U duration

Labo

r Mar

ket P

olic

ies

Unemployment Duration and Employment Protection

(months; 1995 – 2007 average)

Labo

r Mar

ket P

olic

ies

Labo

r Mar

ket P

olic

ies

• Need for reallocation is greater …– Rodrik and McMillan (reallocation to higher-productivity

sectors key to growth in developing economies)

• … but also constraints:– High level of informality– Fiscal constraints may preclude generous UI

Micro flexibility:How applicable to developing economies?

Labo

r Mar

ket P

olic

ies

Two dimensions– A low average U rate– Limited fluctuations in U rate in response to

shocks

Key institutions– Minimum wage– Tax wedge– Collective bargaining structure

Macro FlexibilityLa

bor M

arke

t Pol

icie

s

Minimum wage– Small effect on E or U within a range– Limited redistributive role– Redistribution through negative income tax

(combined with ‘low’ minimum wage)

Tax wedge– Tends to increase labor cost and U (especially

in combination with high minimum wage or UI and if no deferred benefits)

Level of UnemploymentLa

bor M

arke

t Pol

icie

s

Can Flexicurity Be Exported?The Importance of Trust

Labo

r Mar

ket P

olic

ies

• Minimum wage

– Difficult issues of appropriate level– Greater need for it as redistributional tool but perhaps

also greater efficiency costs

• Collective bargaining– Very low levels in many countries– Informality

Macro flexibility:How applicable to developing economies?

Labo

r Mar

ket P

olic

ies

Short-Run Growth Fluctuations

IMF work on Fiscal Policy

• Support for global fiscal stimulus at the onset of the Great Recession

• Fiscal consolidation lowers output and raises unemployment in the short run

• Impacts of fiscal consolidation on output may have been underestimated by IMF and others in the early years of the start of the Great Recession

Sho

rt-R

un O

utpu

t: Im

plic

ation

s fo

r Fis

cal P

olic

y Ad

vice

How IMF advice on fiscal issues was viewedduring our 2013 Spring Meetings

How the IMF became the friend who wants us to work less and drink more

-- Washington Post April 16, 2013

“It is to the credit of the economists at the Fund that their recommendations to policymakers have adapted to this strange world we’re living in rather than sticking with their more normal, doctrinaire advocacy of monetary and fiscal restraint.”

IMF Renews Push Against Austerity

-- Wall Street JournalApril 17, 2013

“ … the International Monetary Fund called on countries that can afford it … to slow the pace of their austerity measures.”

Sho

rt-R

un O

utpu

t: Im

plic

ation

s fo

r Fis

cal P

olic

y Ad

vice

Medium & Long-Run Growth

IMF’s VIEWS ON GROWTH: CORPORATE DOCUMENTS

Med

ium

& L

ong-

Run

Out

put

DIAGNOSTIC CHECK: GROWTH

Med

ium

& L

ong-

Run

Out

put

IMF Research on Inequality

IMF Research on Inequality• Consequences: Inequality lowers the duration of growth spells (Berg &

Ostry)

• “Causes”: – ‘Austerity’ and ‘(financial) openness have raised inequality in the past

(Ball, Furceri, Leigh and Loungani; Furceri & Loungani)

– Decline in union density has raised share of top incomes; increases in minimum wages have lowered the top share (Jaumotte & Osorio-Buitron)

• “Cures”– Redistribution, if not extreme, does not harm growth (Ostry, Berg &

Tsangarides)– Greater care in design of policies (e.g. fiscal consolidation

IMF

Rese

arch

on

Ineq

ualit

y

Distributional effects of ‘austerity’

Ball, Leigh and Loungani, “Painful Medicine,” Finance & Development, September 2011

IMF

Rese

arch

on

Ineq

ualit

y

Impact of ‘austerity’ on the Gini

Ball, Furceri, Leigh and Loungani, “The Distributional Effects of Fiscal Consolidation” IMF Working Paper, June 2013

IMF

Rese

arch

on

Ineq

ualit

y

Impact of ‘openness’ on the Gini

Furceri and Loungani, “Capital Account Liberalization and Inequality” IMF Working Paper, forthcoming IMF Working Paper

IMF

Rese

arch

on

Ineq

ualit

y

0 1 2 3 4 50

0.5

1

1.5

2

2.5

3

Impact of ‘openness’ on the Gini depends on financial depth

Furceri and Loungani, “Capital Account Liberalization and Inequality” IMF Working Paper, forthcoming IMF Working Paper

IMF

Rese

arch

on

Ineq

ualit

y

0 1 2 3 4 50

0.5

1

1.5

2

2.5

3

3.5

Baseline

Low Financial Deepening

High Financial Deepening

Impact of ‘openness’ on the Gini depends on whether opening is followed by a crisis

Furceri and Loungani, “Capital Account Liberalization and Inequality” IMF Working Paper, forthcoming IMF Working Paper

IMF

Rese

arch

on

Ineq

ualit

y

0 1 2 3 4 50

0.5

1

1.5

2

2.5

3

3.5

4

Baseline

No crises

Crises

Inclusive Growth Agenda

IMF-DFID projectMonetary policy and macroeconomic stabilization

– the transition to modern monetary policy regimes.

– the nature of “business cycles” in low-income countries in contrast to emerging markets and advanced economies: for example the role of structural shocks, food prices, informal labor markets.

– hybrid policy regimes with multiple targets and instruments, including managed

exchange rates and capital controls, and macrofinancial stability objectives.

– macro prudential policies for LICs, including considerations of financial inclusion and development, shallow financial systems, interaction with monetary policy regimes, and capital controls and how they interact with different sorts of shocks and structural features.

– the role of labor markets in macroeconomic policy and adjustment. This will include an analysis of informality and its implications for fiscal, monetary, and exchange rate policy.

Incl

usiv

e G

row

th A

gend

a

IMF-DFID projectDebt sustainability analysis and management of natural resources

• A consideration of human capital investments (health and education) in addition to physical capital. An important consideration for growth/debt sustainability will include the delay between the human capital investment and potential growth payoffs.

• Investment in energy is also becoming an important objective of many LICs. Several countries want to exploit their hydro or gas resources and export energy as part of their development strategy.

• An analysis of optimal investment policy.: how to spend optimally on infrastructure, while taking

into consideration key characteristics of developing countries such as inefficiencies in public investment and tax collection as well as high returns to public capital, among others.

• incorporating uncertainty about parameters (e.g. efficiency of public investment) and external shock shocks (e.g. price of oil)

• Public-private partnerships have emerged as a financing alternative to foster development, but they also involve macroeconomic tradeoffs which will be analyzed.

• Empirical analysis of stylized facts such as infrastructure gaps, debt and natural resource management, as well as investment efficiency and absorptive capacity.

Incl

usiv

e G

row

th A

gend

a

IMF-DFID projectInequality and Macroeconomics

• Analysis of distributional implications of commodity price shocks and fiscal policy response.

• Extensions to other macroeconomic policies and shocks (public investment booms, fiscal consolidation, and/or structural reforms) and the introduction of richer LIC-specific features, such as informal labor markets.

• Incorporation of distributional consequences into a new-Keynesian model with nominal rigidities, drawing on the work above for calibration and model design, to analyze monetary policy. Specific focus would be on the role of limited financial participation for monetary policy.

• Analysis of aggregate patterns with respect to inequality, growth, and structural transformation.

Incl

usiv

e G

row

th A

gend

a

IMF-DFID project

Growth and structural change: Macroeconomic Perspectives

• Extension of diversification work and toolkit: While the current toolkit offers almost complete country coverage for more than 50 years, one downside is that the toolkit only covers goods (manufacturing and agricultural) exports. Given that trade in services has grown in importance over the last few decades, we would like to expand the dataset to cover services exports.

• Exchange rate misalignment and growth

• enhancing sectoral productivity in LICs.

Incl

usiv

e G

row

th A

gend

a

IMF-DFID projectGrowth and structural change: Macroeconomic Perspectives

• Extension of diversification work and toolkit: While the current toolkit offers almost complete country coverage for more than 50 years, one downside is that the toolkit only covers goods (manufacturing and agricultural) exports. Given that trade in services has grown in importance over the last few decades, we would like to expand the dataset to cover services exports.

• Exchange rate misalignment and growth: An analysis of the implications of exchange rate misalignment for medium-term growth. Many policymakers and some academics, especially since the work of Dani Rodrik (Brookings 2008), have argued that undervalued exchange rates are critical for sustained economic growth. If so, this may have many implications for exchange rate assessments and Dutch disease and the role of external resources, among other policy issues.

• Sectoral productivity: enhancing sectoral productivity in LICs.

IMF-DFID projectCapital Flows

• Capital Account Liberalization in low-income countries: This part of the project aims to understand the impact of opening the capital account in LICs. To analyze the impact of capital account liberalization, it is necessary to gain an understanding of the actual state of the openness of the capital account. Although there are several well known indices that focus on capital account liberalization, very few have significant coverage of LICs. In addition, those that cover LICs do not capture the disaggregation of the capital account into various types of assets.

Gender and Macroeconomics

• Provide the first comprehensive assessment of gender budgeting initiatives, which take a variety of approaches to incorporating gender considerations into the government budget to reduce gender inequalities and strengthen growth. The research would use descriptions of the initiatives available from UN Women and elsewhere at the first stage to provide an overall summary.

• Develop a quantitative approach to assessing whether these gender budgeting initiatives have been successful in their immediate objectives to influence fiscal policies, and in their ultimate objectives to eliminate gender disparities and improve economic outcomes.

• Quantify the extent to which restrictions to women’s economic rights impede sectoral shifts and diversification, and thus growth. To do this, we will use the recent IMF-DFID dataset on diversification. Data permitting, we will also analyze the circumstances under which structural transformation has led to an improvement of gender equity indicators.

Incl

usiv

e G

row

th A

gend

a

THANKS!