UNCTAD calls for a reorientation
of macroeconomic policies to create jobs
and reduce poverty

Low interest rates and productivity-related wage increases are preconditions for faster employment creation, report says

Geneva, 14 September 2010 -- A sustained expansion of domestic demand growth through increasing mass purchasing power and through spurring fixed investments and technological innovation are needed to create employment and combat poverty, the Trade and Development Report 2010 (TDR) contends. But it adds that strengthening domestic demand this way calls for shifting the focus of macroeconomic policies and also requires strategic institution-building to enable sustained growth of labour incomes in line with productivity growth.

The Trade and Development Report 2010(1) , subtitled "Employment, globalization and development," was released today. It reviews the experience of developing countries with export-oriented growth strategies over the past 30 years, especially with regard to their abilities to generate sufficient decent jobs to absorb the labour surpluses that are typical for developing countries.

Many of these countries have become overly reliant on exports, but not all of them can succeed with export-led development strategies at the same time, UNCTAD warns. The organization´s economists suggest that more attention than in the past be given to domestic forces of growth and job creation. This is considered all the more important as the recent financial and economic crisis has pushed unemployment in many countries to the highest levels of the past 40 years, while the scope for export-led growth is now shrinking as the United States will no longer serve as the main market for exports and other major economies are unlikely to assume this role in the near future.

In the development strategies that have dominated for the past 30 years, keeping wages low was the main recipe for enabling the export sector to gain a competitive edge in world markets. Persistently high unemployment was blamed on labour market rigidities that kept wages from falling to market-clearing levels. This approach, which is based on microeconomic reasoning, neglects the important macroeconomic role of wage increases for spurring the growth of domestic demand and boosting employment to satisfy that demand, the report says. Moreover, it is the expectation of rising demand and favourable financing conditions, rather than a reduction in unit labour costs, that drives investment in productive capacity, UNCTAD economists contend.

"A promising strategy for rapid employment generation could be to focus more on investment dynamics, and to ensure that the resultant productivity gains are distributed between labour and capital in a way that lifts domestic demand," UNCTAD Secretary-General Supachai Panitchpakdi writes in the overview to the report.

To strengthen the contribution of domestic demand to employment creation, the principles and objectives of monetary and fiscal policies need to be redefined, the TDR says. These areas of macroeconomic policy also need to be combined with what the report calls an "incomes policy" -- a set of instruments and institution-building measures that would ensure that mass incomes in real terms rise along with average productivity growth.

During the recent global crisis, countercyclical fiscal policy to stabilize aggregate demand has been rediscovered by most governments. Such a policy orientation is also essential for stabilizing aggregate demand in less dramatic times, the report says; and so is the provision of infrastructure and State services to enable profitable investment in productive capacity. An employment-friendly monetary policy would keep credit costs for investment in fixed capital low and would protect the international competitiveness of domestic firms by preventing currency appreciation.

An incomes policy should ensure that productivity gains are distributed in such a way that the wage share in total national income does not fall as it has in many countries over the past four decades, the TDR advises. A policy aimed at a sustained increase in wages in line with productivity growth raises consumption at the same rate as productivity, thereby generating employment opportunities. At the same time, it serves as an instrument to control inflation. As labour costs are the most important determinant of the overall cost level in most economies, adjusting wages to productivity prevents both increases in production costs and demand growth in excess of the supply potential and also widens the room for investment-friendly monetary policy.

Incomes policies can be helped by institutional arrangements for collective bargaining among workers´ and employers´ associations, the report notes. Centralized negotiating mechanisms and prudent tripartite arrangements -- which may include government recommendations for wage increases -- have in the past helped some countries to achieve steady expansions in domestic demand. In the absence of, or as a complement to, such institutional arrangements, a legal minimum wage and its augmentation over time -- in line with productivity growth -- may also contribute to ensuring that domestic demand and the domestic supply potential rise approximately in parallel.

In many developing countries, including the poorest, public employment schemes are potentially important instruments of fighting unemployment and poverty, the TDR notes. In addition to reducing unemployment directly, they also generate purchasing power that will have indirect employment effects on the rest of the economy, and they set an effective floor for earnings and working conditions, especially in sectors outside formal manufacturing and services. In many countries where the share of informal employment and self-employment, especially in agriculture, is high, such instruments of incomes policy need to be complemented by measures to raise the incomes of agricultural producers in line with overall productivity growth, as has been the practice in most developed countries for decades.

"All these measures taken together would provide considerable scope for demand management to combat unemployment while keeping inflation in check and reducing export dependence," concludes Secretary-General Supachai in the overview to the report.