Pattern of growth and employment

1. Pattern of growth and employment A case study of Argentina UMKC, May 2006

2. Job creation is not independent of the pattern of growth • Which sectors explain the overall growth • How do they generate employment • How much they contribute to overall growth • How do they affect other macro indicators

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

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

5. GDP 05 11,131 GDP 96 8,328.9 Exp 05 1193 Exp 96 843.4 Imp 05 1825.2 Imp 96 923 Employment 05: 141.7 Employment 96: 126.7 Unemp. 96: 7,236 Unemp. 05: 7,591 Contribution to growth DD 2762.52 (110%) ISI -542.71 (-22%) Exp 288.68 (12%) GDP growth: 30% Emp. Growth: 11.9% Employment/Growth elasticity: 0.39 The example of the US 2005-1996

6. The example of the US 2005-1998 • GDP 05 11,131 • GDP 98 8747 • Exp 05 1193 • Exp 98 955.5 • Imp 05 1825.2 • Imp 98 1115.0 • Employment 05: 141.7 • Employment 98: 137.6 • Unemp. 98: 6,210 • Unemp. 05: 7,591 • Contribution to growth • DD 2,303 (105%) • ISI -310.76 (-14%) • Exp 192.70 (9%) • GDP growth: 27.3% • Emp. Growth: 2.3% • Employment/Growth elasticity: 0.108

7. The decomposition in Argentina

8. Domestic demand and GDP growth

9. Production of goods and services

10. Sectoral growth and employment (source: Kostzer and Mazorra 2003) • Using the I-O matrix and the open Leontieff model 5 scenarios were simulated • Overall GDP growth target 4% • Each sector increases value added in 2% • The leading sectors of the strategy have to grow in order to achieve the overall 4% • Benchmark scenario: all sectors 4% employment index 100

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

12. Scenario 1: massive consumption • Industries involved = 31 • of VA in those industries = 5,5% • of consumption= 6,6% - in total 4,6% • Rise of imports = 2,3% • Rise of employment in the involved industries 5,5% - total 4.0% • Index of job creation = 109,0

13. Scenario 2: conspicuous consumption • Industries involved = 10 • Rise of VA in those industries = 9,5% • Rise of consumption= 11,5% - in total 4,5% • Rise of imports = 7,3% • Rise of employment in the involved industries 10.1% - total 3.8% • Index of job creation = 102,4

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

15. Scenario 4: non traditional exports • Industries involved = 31 • Rise of VA in those industries = 9,2% • Rise of exports in the sector 60% - total 14.8% • Rise of imports = 3.1% • Rise of employment in the involved industries 7.8% - total 3.5% • Index of job creation = 95,2

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

17. Index of Evolution of employment: base homogeneous growth of 4%

18. Results E 1 E 2 E 3 E 4 E 5 # of sectors involved in the strategy 31 10 16 31 1 Yearly increase on the component involved 6.6% 11.5% 23.0% 60.0% 11.0% Job creation per year % 4.0% 3.8% 3.5% 3.5% 3.9% Index of job creation. Base homogeneous 4%=100 109.0 102.4 95.3 95.2 106.6 Employment multiplyier 1.46 1.48 1.63 1.62 1.52 Results of the simulation

19. Intermediate requirements in each scenario

20. Job creation over 5 year according strategy with 1.5% of rise in labor productivity

21. Exchange rate and employment From Frenkel, R. and L. Taylor [2006] Real exchange rate, monetary policy and employment. DESA working paper No. 19

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

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

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

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

26. Credit and employment in Argentina (source: Filippo, Kostzer and Schlesser 2004) Credit rationing with unlimited supply of money DANIEL KOSTZER UMKC April 2006

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

28. Some notes on the banking system during the 90´s • Currency board => convertibility • Central bank passive actor • International banks as lenders of last resort • Trans-national banks • Banks to finance firms to… • Banks to finance … banks

29. Evolution of registered employment

30. Evolution of loans

31. Assumptions and stylized facts (1) FIRM BEHAVIOUR • Finance new fixed investment with retained profits • Working capital has two sources • Inputs: suppliers credit • Wages: over drafting and collaterals • Inventories evolution define the short run productive requirements

32. Assumptions and stylized facts (2) BANK BEHAVIOUR • They had no limitations in order to get the money for loans • Inflows plus deposits • The are price takers for deposits and price setters for loans • Validate productive projects in relation to the macro assessments with inventories as collateral

33. The macro evolution diagram • Expansionary phase with joint growth of employment and loans • Stagnation of employment with inertia of loans • Stagnation of loans with employment redution • Contraction of both loans and employment

34. Relationship between loans and employment

35. Cross section of employment and “quick” types of loans

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

37. Nothing more misleading than the obvious (S. H.) Induced crowding out ? • Crowding out induced by banks • Do not affect private loans • Private loans are redirected to consumption and to the state • The state is not responsible of the reallocation of loans and the crisis

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

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

40. Conclusions (1) • Our main hypothesis that loans are a function of employment and aggregate demands seems to be valid • Financial savings (money in the banks) is not sufficient condition for economic growth • Does not matter who is the lender of last result

41. Conclusions (2) • Against the general wisdom, credit rationing only accelerated the crisis • State expenditures did not displaced firms from credit market, they were already out • Orthodox adjustment is based on a wrong diagnosis (less G does not imply less interest rate) • Real variables were affected before financial variables