Beyond Macroeconomic Stability Advances in Labour Studies Advances in Labour Studies is a wide-ranging series of research titles from the International Labour Office (ILO), offering in-depth analysis of labour issues from a global perspective. The series has an interdisciplinary flavour that reflects the unique nature of labour studies, where economics, law, social policy and labour relations combine. Bringing together work from researchers from around the world, the series contributes new and challenging research and ideas that aim both to stimulate debate and inform policy. Published in the series: THE LABOUR MARKETS OF EMERGING ECONOMIES: HAS GROWTH TRANSLATED INTO MORE AND BETTER JOBS? (by Sandrine Cazes and Sher Verick) BEYOND MACROECONOMIC STABILITY: STRUCTURAL TRANSFORMATION AND INCLUSIVE DEVELOPMENT (edited by Iyanatul Islam and David Kucera) WAGE-LED GROWTH: AN EQUITABLE STRATEGY FOR ECONOMIC RECOVERY (edited by Marc Lavoie and Engelbert Stockhammer) REGULATING FOR DECENT WORK: NEW DIRECTIONS IN LABOUR MARKET REGULATION (edited by Sangheon Lee and Deirdre McCann) SHAPING GLOBAL INDUSTRIAL RELATIONS: THE IMPACT OF INTERNATIONAL FRAMEWORK AGREEMENTS (edited by Konstantinos Papadakis) Forthcoming in the series: CREATIVE LABOUR REGULATION: INDETERMINACY AND PROTECTION IN AN UNCERTAIN WORLD (edited by Deirdre McCann, Sangheon Lee, Patrick Belser, Colin Fenwick, John Howe and Malte Luebker) TOWARDS BETTER WORK: UNDERSTANDING LABOUR IN APPAREL GLOBAL VALUE CHAINS (edited by Arianna Rossi, Amy Luinstra and John Pickles) Beyond Macroeconomic Stability Structural Transformation and Inclusive Development Edited by Iyanatul Islam and David Kucera © International Labour Organization 2013 Softcover reprint of the hardcover 1st edition 2013 978-1-137-37924-5 The designations employed in ILO Publications, which are in conformity with United Nations practice, and the presentation of material therein do not imply the expression of any opinion whatsoever on the part of the International Labour Office concerning the legal status of any country, area or territory or of its authorities, or concerning the delimitation of its frontiers. The responsibility for opinions expressed in signed articles, studies and other contributions rests solely with their authors, and publication does not constitute an endorsement by the International Labour Office of the opinions expressed in them. Reference to names of firms and commercial products and processes does not imply their endorsement by the International Labour Office, and any failure to m ention a particular firm, commercial product or process is not a sign of disapproval. All rights reserved. No reproduction, copy or transmission of this publication may be made without written permission. No portion of this publication may be reproduced, copied or transmitted save with written permission or in accordance with the provisions of the Copyright, Designs and Patents Act 1988, or under the terms of any licence permitting limited copying issued by the Copyright Licensing Agency, Saffron House, 6–10 Kirby Street, London EC1N 8TS. Any person who does any unauthorized act in relation to this publication may be liable to criminal prosecution and civil claims for damages. The authors have asserted their rights to be identified as the authors of this work in accordance with the Copyright, Designs and Patents Act 1988. First published 2013 by PALGRAVE MACMILLAN and the INTERNATIONAL LABOUR OFFICE Palgrave Macmillan in the UK is an imprint of Macmillan Publishers Limited, registered in England, company number 785998, of Houndmills, Basingstoke, Hampshire RG21 6XS. Palgrave Macmillan in the US is a division of St Martin’s Press LLC, 175 Fifth Avenue, New York, NY 10010. Palgrave Macmillan is the global academic imprint of the above companies and has companies and representatives throughout the world. Palgrave® and Macmillan® are registered trademarks in the United States, the United Kingdom, Europe and other countries. ILO ISBN 978–92–2–127800–9 ISBN 978-1-349-47866-8 ISBN 978-1-137-37925-2 (eBook) DOI 10.1057/9781137379252 This book is printed on paper suitable for recycling and made from fully managed and sustained forest sources. Logging, pulping and manufacturing processes are expected to conform to the environmental regulations of the country of origin. A catalogue record for this book is available from the British Library. A catalog record for this book is available from the Library of Congress. Typeset by MPS Limited, Chennai, India. Contents List of Tables and Figures vii Acknowledgements xi Notes on Contributors xii Introduction 1 Iyanatul Islam and David Kucera Part I Limits of the Conventional Macroeconomic Policy Framework 1 Dispensing Macroeconomic Policy Advice to Developing Countries: The IMF’s Article IV Consultations 31 Iyanatul Islam, Ishraq Ahmed, Rathin Roy and Raquel Ramos 2 Fiscal Consolidation: Issues and Evidence 72 Anis Chowdhury and Iyanatul Islam 3 Should Developing Countries Target Low, Single-Digit Inflation to Promote Growth and Employment? 98 Sarah Anwar and Iyanatul Islam Part II Structural Transformation and the Development of Capabilities 4 Structure Matters: Sectoral Drivers of Growth and the Labour Productivity–Employment Relationship 133 David Kucera and Leanne Roncolato 5 Creating Productive Capacities, Employment and Capabilities for Development: The Case of Infrastructure Investment 198 Irmgard Nübler and Christoph Ernst 6 Investing in People: Extending Social Security through National Social Protection Floors 228 Christina Behrendt Part III Inequality, Wages and their Macroeconomic Consequences 7 Wages and Growth in Open Economies: A Policy Dilemma? 263 Massimiliano La Marca and Sangheon Lee v vi Contents 8 Keeping up with the Joneses or Keeping One’s Head above Water? Inequality and the Post-2007 Crisis 288 David Kucera, Rossana Galli and Fares Al-Hussami Index 326 List of Tables and Figures Tables I.1 Effect of real exchange rate (RER) movements on employment 1 1.1 Public debt and growth: revisiting the evidence 40 1.2 Nature of IMF advice on fiscal adjustment 42 1.3 Fiscal statistics and the countries in the Article IV consultations 46 1.4 Tests of statistical significance (at 5 per cent level) of different mean values of debts/deficits 46 1.5 Coefficient of variations (CV) to measure dispersion/ uniformity in projections 47 1.6 IMF on inflation projections in 27 countries 53 1.7 Nature of IMF advice on inflation targeting 54 1.8 Nature of employment analysis in the Article IVs: some country-specific examples 60 1.9 Nature of poverty analysis in the Article IVs: some country-specific examples 60 1.10 Financing needs for infrastructure 61 1.11 Financing needs for pro-poor spending 62 3.1 Inflation targeting countries (emerging and developing countries) 101 3.2 IMF policy statements on inflation in 19 developing countries: examples from the Article IV consultation process 104 3.3 Cross-country threshold studies 106 3.4 Country-specific threshold studies 108 3.5 Median growth and inflation rates (2000–2007) 110 3.6 Inflation targeting developing country and comparator country list 122 4.1 Specifications of studies in literature review 139 vii viii List of Tables and Figures 4.2 Aggregate labour productivity, output and employment growth by regional average (%) 149 4.3 Correlation coefficients (Pearson) between aggregate labour productivity, output and employment growth 151 4.4 Aggregate employment, working age population and labour force growth by country (%) 152 4.5 Covariance coefficients between sectoral contributions to aggregate labour productivity growth and aggregate labour productivity growth (%) 156 4.6 Industry-level contributions to aggregate labour productivity and employment growth for Asian countries (%) 158 4.7 Industry-level contributions to aggregate labour productivity and employment growth for Latin American and Caribbean countries (%) 161 4.8 Within-sector and employment reallocation effects on aggregate labour productivity growth by regional average (%) 167 4.9 Industry-specific labour intensity by regional average (unweighted) 170 4.A.1 Industry-level contributions to aggregate labour productivity and employment growth for countries not in Asia or Latin America and the Caribbean (%) 178 4.A.2 Within-sector versus reallocation effects on aggregate labour productivity growth by country 190 5.1 Impact of an improved road at the local level in Kenya 206 7.1 Profi t-led paradise – strategic form 275 7.2 Wage-led paradise – strategic form 277 7.3 No distributional effects – strategic form 278 7.4 Prisoner’s dilemma – strategic form 281 7.5 Pure coordination problem – strategic form 283 8.1 Changes in consumption shares in the United States by household income quintiles from 1990–2009 311 Figures I.1 Defining employment intensity 14 1.1 IMF policy recommendations for 50 countries 37 List of Tables and Figures ix 1.2 IMF policy recommendations on employment generation, poverty reduction and social protection 59 2.1 Initial debt to GDP ratio (1981) and subsequent real GDP growth (annual % change) average of 1981–2010 74 2.2 Median growth and debt to GDP ratios, 1981–2009 75 2.3 Highest and lowest median initial debt to GDP ratios and median GDP growth, 1981–2009 76 2.4 Debt trend – number of countries with different debt levels, 1981–2009 77 2.5 Debt and growth relationship (movement versus shift) 80 3.1 Long-run median inflation rates, recent inflation versus median targeted inflation rate 102 3.2 Growth and inflation relationship (linear) 105 3.3 Growth and inflation relationship (nonlinear) 107 3.4 Inflation–growth relationship (1980–1989) 110 3.5 Inflation–growth relationship (1990–1999) 111 3.6 Inflation–growth relationship (2000–2007) 112 3.7 Inflation targeting countries and non-inflation targeting countries: inflation rate 112 3.8 Inflation targeting countries: growth–inflation relationship (2000–2007) 113 3.9 Non-inflation targeting countries: inflation–growth relationship (2000–2007) 113 3.10 Co-movement of inflation and food price index 114 3.11 Inflation and poverty relationship 120 3.12 Change in median least developed country interest rates 121 3.13 Macro indicators (2000–2007) 123 3.14 Labour productivity 123 3.15 Labour market indicators (2000–2007) 124 5.1 Global product and technology space, capabilities and capacities 201 5.2 Partial backward linkages of economic sectors, Indonesia, 2010 208 6.1 Share of recipients of a contributory or non-contributory pension and active contributors to a pension scheme, regional estimates (weighted by population), latest available year 234