Growth, employment and governments
Here are some recent news items on the global economic front:
* According to the ILO's report titled "World of Work 2012," global unemployment has started to increase since late 2011;
* The rate of unemployment in the Euro Zone (17 countries that use Euro) increased from 9.9% in March 2011 to 10.9% in March 2012;
* In some countries like Spain, over half the youth are unemployed;
* In USA, unemployment rate declined to 8.1% in April 2012, but has remained way above the pre-crisis (2007) level of 4.7%. What is worth noting is that the pre-crisis level of output has been exceeded with 5 million less workers.
Recapitulating some pieces of news on the political front:
* In France, Mr. Francois Hollande, the socialist party candidate, has won the presidential election (bringing a socialist to power after 17 years);
* In the Netherlands, the centre-right coalition government has fallen;
* Despite a degree of success in steering the US economy out of recession, Mr. Barack Obama faces a tough re-election challenge in the US presidential election;
* In the parliamentary elections in Greece (held on May 6), the pro-austerity parties saw support for them declining sharply. This has resulted in political uncertainty;
* Mr. Mario Draghi, the President of the European Central Bank recently told the European Parliament that a "growth compact" is needed, although he did not elaborate what he meant and how the growth compact was to be achieved.
The political importance of growth, employment and unemployment is clear from the pieces of news mentioned above. Voters in many countries are getting impatient with continued economic crisis and worsening employment situation. The key question in this respect is: why are so many countries finding themselves in such a difficult situation despite some success in coming out of the Great Recession of 2008-09? One answer is the premature attempt at reducing budgetary deficit and public debt by adopting a strategy of austerity in their budgets. The theory behind that strategy was that austerity and fiscal consolidation, by creating confidence among investors, will help increase investment and hence economic growth. But that thesis, as warned by several economists, has not worked; growth through the route of austerity and fiscal consolidation has not happened. In fact, country after country (e.g., Ireland, UK, Spain, to name a few) have gone back into a second (double dip) recession.
Does the experience summarised above have any implication for Bangladesh? In my view, yes, it does. Consider the following:
* After several years of decline in the growth of GDP, there was an upturn in growth in 2010-11. But the outlook for 2011-12 indicates that a reversal is almost certain;
* As for exports and foreign exchange earnings, the economy is heavily dependent on two items, viz., export of ready-made garments and remittances. Even a slight negative impact on any of these items makes the economy jittery. The vulnerability of the economy is indicated by the government's turning to the IMF for a credit of $1 billion;
* On the employment front, for a variety of reasons, open unemployment is not a good indicator of the labour market situation in a country like Bangladesh. And yet, even open unemployment has increased during 2005-10 -- a period when economic growth was quite good. Underemployment (which is a better indicator) increased for male members of the labour force. Moreover, the share of self-employment and unpaid family workers (which are regarded as indicators of vulnerable employment) in total employment increased during the period mentioned above;
* On the political front, general election is due in a year and a half. Whether voters in Bangladesh take into account the growth and employment performance seriously is not very clear. But if the present government intends to use performance in these areas as its strength, the record will need to improve substantially.
How serious is the government about economic growth and employment? Judged by the projections and targets of GDP growth, the government can certainly be called ambitious. The Sixth Five-Year Plan aims at achieving an average GDP growth of 7.3% per annum during the Plan period (2010-15) and a growth of 8% in the terminal year of the Plan. But it is not clear whether the Plan (or the ambition expressed through it) is backed by real efforts.
Take investment, which is critical for growth. In recent years, investment as percentage of GDP has hovered around 24-25%. That may be adequate for a GDP growth of 6 to 6.5% annum. But for moving to 7-8% GDP growth, the investment rate would have to be much higher, perhaps 30-35%. The major factors that act as constraints on investment (e.g., shortage of power, inadequate infrastructures, governance, etc.) are well-known and are recognised even by the government's policy makers. Unfortunately, however, significant improvements in any of these fronts are yet to be seen.
On the side of policies, macroeconomic policies are critical in achieving targeted growth of output and employment. Bangladesh is currently pursuing a restrictive monetary policy -- ostensibly to curb inflation -- although it is by no means certain whether inflation in the country is a demand-driven one and monetary policy is the most appropriate tool to fight that. In such a situation, it would have been advisable to pursue a growth oriented fiscal policy. Given the renewed tutelage of the IMF, it remains to be seen what transpires through the budget that is going to be announced in less than a month. The signals that have come up till now in this respect appear to be confusing. While mention is made of shortage of resources constraining the needed growth in the size of the budget, willingness to be a bit bold in terms of the size of budget deficit has also been expressed. What is not seen is a clear recognition of the need for a growth oriented budget in an environment of restrictive monetary policy and a willingness to tap the full potential for augmenting revenue resources and to create fiscal space needed for such a budget.
If growth is at least talked about, there is very little mention of employment in the policy discourse. Of course, it is expected that employment will result from growth. But the link is not automatic, and it has been seen that even with modest growth, employment performance can fall short of requirement. In such situations, governments need to get into the act. Indeed, the present government's election manifesto did contain a declaration of a programme for ensuring 100 days of employment per household per year. While there was some effort in this regard in 2009-10, the programme was allowed to become dependent on donor funding, and was not incorporated into the regular budget of the government. The issue of guaranteeing the availability of jobs was not even considered. On the other hand, if conceived, planned and implemented seriously, such a programme could not only play an important role in reducing poverty, but could also contribute to garnering of votes from the poorer section of the voters. It does not seem that the government gave serious thought to this issue.