Pattern of growth Pattern of growth and employmentand employment

A case study of ArgentinaA case study of Argentina

UMKC, May 2006UMKC, May 2006

Job creation is not Job creation is not independent of the independent of the pattern of growthpattern of growth Which sectors explain the overall Which sectors explain the overall

growthgrowth How do they generate How do they generate

employmentemployment How much they contribute to How much they contribute to

overall growthoverall growth How do they affect other macro How do they affect other macro

indicatorsindicators

Chenery Chenery decompositiondecomposition Decomposes growth in three Decomposes growth in three

components:components:– Domestic demandDomestic demand– Import substitutionImport substitution– Export lead growthExport lead growth

Source: Taylor L. and R. Vos [2000] Source: Taylor L. and R. Vos [2000] Balance of Payments Liberalization in Latin America: Effects on Growth, Distribution and Poverty UNDP

The algebraThe algebra

X=GDPX=GDP D=C+I+G+M (domestic demand)D=C+I+G+M (domestic demand) S=aggregate supply (local S=aggregate supply (local

production plus X+Mcif) production plus X+Mcif) E= exports FOBE= exports FOB a=PBI/Sa=PBI/S

The example of the US The example of the US 2005-19962005-1996 GDP 05GDP 05 11,13111,131 GDP 96GDP 96 8,328.98,328.9 Exp 05Exp 05 11931193 Exp 96Exp 96 843.4843.4 Imp 05Imp 05 1825.21825.2 Imp 96Imp 96 923923 Employment 05: 141.7Employment 05: 141.7 Employment 96: 126.7Employment 96: 126.7 Unemp. 96: Unemp. 96: 7,236 7,236 Unemp. 05: Unemp. 05: 7,591 7,591

Contribution to growthContribution to growth DDDD 2762.52 (110%)2762.52 (110%) ISI -542.71 (-22%)ISI -542.71 (-22%) Exp 288.68 (12%)Exp 288.68 (12%) GDP growth: 30%GDP growth: 30% Emp. Growth: 11.9%Emp. Growth: 11.9% Employment/Growth Employment/Growth

elasticity: 0.39elasticity: 0.39

The example of the US The example of the US 2005-19982005-1998

GDP 05GDP 05 11,13111,131 GDP 98GDP 98 87478747 Exp 05Exp 05 11931193 Exp 98Exp 98 955.5955.5 Imp 05Imp 05 1825.21825.2 Imp 98Imp 98 1115.01115.0 Employment 05: 141.7Employment 05: 141.7 Employment 98: 137.6Employment 98: 137.6 Unemp. 98: Unemp. 98: 6,210 6,210 Unemp. 05: Unemp. 05: 7,591 7,591

Contribution to growthContribution to growth DDDD 2,303 (105%)2,303 (105%) ISI -310.76 (-14%)ISI -310.76 (-14%) Exp 192.70 (9%)Exp 192.70 (9%) GDP growth: 27.3%GDP growth: 27.3% Emp. Growth: 2.3%Emp. Growth: 2.3% Employment/Growth Employment/Growth

elasticity: 0.108elasticity: 0.108

The decomposition in The decomposition in ArgentinaArgentina

Domestic demand and Domestic demand and GDP growthGDP growth

Production of goods Production of goods and servicesand services

Sectoral growth and Sectoral growth and employment employment (source: Kostzer and Mazorra (source: Kostzer and Mazorra

2003)2003)

Using the I-O matrix and the open Leontieff Using the I-O matrix and the open Leontieff model 5 scenarios were simulatedmodel 5 scenarios were simulated

Overall GDP growth target 4%Overall GDP growth target 4% Each sector increases value added in 2%Each sector increases value added in 2% The leading sectors of the strategy have to The leading sectors of the strategy have to

grow in order to achieve the overall 4%grow in order to achieve the overall 4% Benchmark scenario: all sectors 4% Benchmark scenario: all sectors 4%

employment index 100employment index 100

The scenariosThe scenarios

1: Massive consumption1: Massive consumption 2: Conspicuous consumption2: Conspicuous consumption 3: Traditional exports3: Traditional exports 4: Non traditional exports4: Non traditional exports 5: Construction (housing and 5: Construction (housing and

infrastructure)infrastructure)

Scenario 1: massive Scenario 1: massive consumptionconsumption Industries involved = 31Industries involved = 31 of VA in those industries = 5,5%of VA in those industries = 5,5% of consumption= 6,6% - in total of consumption= 6,6% - in total

4,6%4,6% Rise of imports = 2,3%Rise of imports = 2,3% Rise of employment in the involved Rise of employment in the involved

industries 5,5% - total 4.0%industries 5,5% - total 4.0% Index of job creation = 109,0Index of job creation = 109,0

Scenario 2: Scenario 2: conspicuous conspicuous consumptionconsumption Industries involved = 10Industries involved = 10 Rise of VA in those industries = 9,5%Rise of VA in those industries = 9,5% Rise of consumption= 11,5% - in total Rise of consumption= 11,5% - in total

4,5%4,5% Rise of imports = 7,3%Rise of imports = 7,3% Rise of employment in the involved Rise of employment in the involved

industries 10.1% - total 3.8%industries 10.1% - total 3.8% Index of job creation = 102,4Index of job creation = 102,4

Scenario 3: Traditional Scenario 3: Traditional ExportsExports Industries involved = 16Industries involved = 16 Rise of VA in those industries = 11,2%Rise of VA in those industries = 11,2% Rise of exports in the sector 23% - Rise of exports in the sector 23% -

total 12.4%total 12.4% Rise of imports = 2.6%Rise of imports = 2.6% Rise of employment in the involved Rise of employment in the involved

industries 9.2% - total 3.5%industries 9.2% - total 3.5% Index of job creation = 95,3Index of job creation = 95,3

Scenario 4: non Scenario 4: non traditional exportstraditional exports Industries involved = 31Industries involved = 31 Rise of VA in those industries = 9,2%Rise of VA in those industries = 9,2% Rise of exports in the sector 60% - Rise of exports in the sector 60% -

total 14.8%total 14.8% Rise of imports = 3.1%Rise of imports = 3.1% Rise of employment in the involved Rise of employment in the involved

industries 7.8% - total 3.5%industries 7.8% - total 3.5% Index of job creation = 95,2Index of job creation = 95,2

Scenario 5: Scenario 5: construction and construction and infrastructureinfrastructure Industries involved = 1Industries involved = 1 Rise of VA in those industries = 10,2%Rise of VA in those industries = 10,2% Rise of investment= 11,0% - in total Rise of investment= 11,0% - in total

9,5%9,5% Rise of imports = 2.4%Rise of imports = 2.4% Rise of employment in the involved Rise of employment in the involved

industries 10.2% - total 3.9%industries 10.2% - total 3.9% Index of job creation = 106.6Index of job creation = 106.6

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

109,0

100,0

106,4

102,4

95,2

95,3

Escenario 1

Escenario 5

Escenario 2

Crecimiento homogéneo del 4%

Escenario 3

Escenario 4

índice puestos de trabajo

Results of the Results of the simulationsimulation

1.521.621.631.481.46Employment multiplyier

106.695.295.3102.4109.0Index of job creation. Base homogeneous 4%=100

3.9%3.5%3.5%3.8%4.0%Job creation per year %

11.0%60.0%23.0%11.5%6.6%Yearly increase on the component involved

131161031# of sectors involved in the strategy

E 5E 4E 3E 2E 1Results

Intermediate Intermediate requirements in each requirements in each scenarioscenario

Yearly % changeYearly % change E 1E 1 E 2E 2 E 3E 3 E 4E 4 E 5E 5

Intermediate demandIntermediate demand 4.34.3 4.24.2 4.84.8 4.74.7 4.54.5

Intermediate importsIntermediate imports 4.24.2 4.24.2 4.74.7 5.65.6 4.34.3

Total importsTotal imports 2.32.3 2.32.3 2.62.6 3.13.1 2.42.4

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

1,730

1,583

1,368 1,368

1,670

1,000

1,100

1,200

1,300

1,400

1,500

1,600

1,700

1,800

E 1 E 2 E 3 E 4 E 5

Exchange rate and Exchange rate and employmentemployment

From FFrom Frrenkel, R. and L. Taylor [2006]enkel, R. and L. Taylor [2006]Real exchange rate, monetary policy Real exchange rate, monetary policy and employmentand employment. DESA working paper . DESA working paper No. 19No. 19

Influential channels of Influential channels of RER on employmentRER on employment Macroeconomic channelMacroeconomic channel

– RER determines levels of economic activity RER determines levels of economic activity and employment in the short runand employment in the short run

Development channelDevelopment channel– RER affects economic growth and the RER affects economic growth and the

speed of job offeringsspeed of job offerings Labor intensity channelLabor intensity channel

– RER defines the labor content in economic RER defines the labor content in economic processes processes

Macroeconomic Macroeconomic channelchannel Depreciated RER increases net exports (X-M) Depreciated RER increases net exports (X-M)

increasing the competitiveness of local firmsincreasing the competitiveness of local firms– This does not necessarily implies export lead This does not necessarily implies export lead

growth, but also import substitutiongrowth, but also import substitution Consequently, higher demand for local Consequently, higher demand for local

activities with higher gdp and employmentactivities with higher gdp and employment These effects depend on the economic and These effects depend on the economic and

social structure of the countrysocial structure of the country This channel operates when there is excess This channel operates when there is excess

capacity and unemploymentcapacity and unemployment These effects must offset the contractionary These effects must offset the contractionary

effects of devaluations stated by Krugman effects of devaluations stated by Krugman and Taylor 1979and Taylor 1979

Development channelDevelopment channel

High RER is similar to a proactive industrial policyHigh RER is similar to a proactive industrial policy– As long as it does not affect strategic investmentAs long as it does not affect strategic investment– Domestic industrial production biasDomestic industrial production bias– This works better in the framework of globalization and This works better in the framework of globalization and

free tradefree trade Rodrik (2003) Competitive RER generates initial Rodrik (2003) Competitive RER generates initial

conditions for a growth process and the conditions for a growth process and the appropriate institutions for that process in the appropriate institutions for that process in the long run. long run. – It is an easy instrument that can be applied overnightIt is an easy instrument that can be applied overnight– An externally oriented economy generates the learning An externally oriented economy generates the learning

process necessary to develop businessesprocess necessary to develop businesses– The main problem can be the financial deregulationThe main problem can be the financial deregulation

The labor intensity The labor intensity channelchannel RER induces the tradable sector, RER induces the tradable sector,

mainly goods productionmainly goods production But induces a technological choice But induces a technological choice

with more labor content and less with more labor content and less imported capital and inputsimported capital and inputs

Goods production have more linkages Goods production have more linkages with other sectorswith other sectors

Goods production tend to operate in Goods production tend to operate in non competitive markets (Rima) with non competitive markets (Rima) with oligopolistic structures, while services oligopolistic structures, while services in competitive marketsin competitive markets

Credit and employment Credit and employment in Argentina in Argentina (source: Filippo, Kostzer and (source: Filippo, Kostzer and

Schlesser 2004)Schlesser 2004)

Credit rationing with unlimited Credit rationing with unlimited supply of moneysupply of moneyDANIEL KOSTZERDANIEL KOSTZER

UMKC April 2006UMKC April 2006

Objective of the Objective of the presentationpresentation How did we started with the researchHow did we started with the research Study of the relationship between Study of the relationship between

loans to firms and employmentloans to firms and employment– Development of the Argentinean banking Development of the Argentinean banking

systemsystem– Stylized facts and aspects of the Stylized facts and aspects of the

mechanics behind the financial sectormechanics behind the financial sector– Microeconomic rationality of agentsMicroeconomic rationality of agents– The role of the state in this contextThe role of the state in this context

Is there any novelty to contribute to PK Is there any novelty to contribute to PK theory of credit?theory of credit?

Some notes on the Some notes on the banking system during banking system during the 90´sthe 90´s Currency board => convertibilityCurrency board => convertibility Central bank passive actorCentral bank passive actor International banks as lenders of International banks as lenders of

last resortlast resort Trans-national banksTrans-national banks

– Banks to finance firms to…Banks to finance firms to…– Banks to finance … banksBanks to finance … banks

Evolution of registered Evolution of registered employmentemployment

92

94

96

98

100

102

104

1996 1997 1998 1999 2000 2001

EIL

Evolución del empleo formal. Base Jun 99=100

Evolution of loansEvolution of loans

50

60

70

80

90

100

110

1996 1997 1998 1999 2000 2001

INDACTPAS INDADDES INDTOTBIM

Indices de adelantos y descubiertos, créditos bimonetarios al sector privado y

total de activos y pasivos del sistema base agosto 1998=100

Assumptions and Assumptions and stylized facts (1)stylized facts (1)

FIRM BEHAVIOURFIRM BEHAVIOUR– Finance new fixed investment with Finance new fixed investment with

retained profitsretained profits– Working capital has two sourcesWorking capital has two sources

Inputs: suppliers creditInputs: suppliers credit Wages: over drafting and collateralsWages: over drafting and collaterals

– Inventories evolution define the Inventories evolution define the short run productive requirementsshort run productive requirements

Assumptions and Assumptions and stylized facts (2)stylized facts (2)

BANK BEHAVIOURBANK BEHAVIOUR– They had no limitations in order to They had no limitations in order to

get the money for loansget the money for loans Inflows plus depositsInflows plus deposits

– The are price takers for deposits and The are price takers for deposits and price setters for loansprice setters for loans

– Validate productive projects in Validate productive projects in relation to the macro assessments relation to the macro assessments with inventories as collateralwith inventories as collateral

The macro evolution The macro evolution diagramdiagram Expansionary phase with joint Expansionary phase with joint

growth of employment and loansgrowth of employment and loans Stagnation of employment with Stagnation of employment with

inertia of loansinertia of loans Stagnation of loans with Stagnation of loans with

employment redutionemployment redution Contraction of both loans and Contraction of both loans and

employmentemployment

Relationship between Relationship between loans and employmentloans and employment

92

94

96

98

100

102

104

50000 55000 60000 65000

TOTBIM

EIL

Evolución de empleo y créditos bi monetarios al sector privado

Cross section of Cross section of employment and “quick” employment and “quick” types of loanstypes of loans

92

94

96

98

100

102

104

18000 20000 22000 24000 26000 28000 30000

ADDES

EIL

Evolución del empleo y adelantos en cta. cte. y descuentos de documentos a las empresas

Reasons for the Reasons for the discrepancy discrepancy Inertia of loans at the beginning of the Inertia of loans at the beginning of the

crisiscrisis– The misalignment between the rise of loans The misalignment between the rise of loans

and the rise of production/employment shows and the rise of production/employment shows a “short-circuit” in the process of capital a “short-circuit” in the process of capital reproductionreproduction

– How can if employment stagnates loans How can if employment stagnates loans continue rising? (other uses)continue rising? (other uses)

– This process anticipates a future decline in This process anticipates a future decline in GDP, loans and employment (recessive GDP, loans and employment (recessive spiral)spiral)

Nothing more Nothing more misleading than the misleading than the obvious (S. H.)obvious (S. H.)Induced crowding out ?Induced crowding out ? Crowding out induced by banksCrowding out induced by banks Do not affect private loansDo not affect private loans Private loans are redirected to Private loans are redirected to

consumption and to the stateconsumption and to the state The state is not responsible of the The state is not responsible of the

reallocation of loans and the crisisreallocation of loans and the crisis

Excess demand or excess Excess demand or excess supply of productive supply of productive loans?loans? Since there are almost no restrictions to Since there are almost no restrictions to

bring money into the economy, supply is bring money into the economy, supply is always there.always there.

Since there is no crowding out, there is Since there is no crowding out, there is no excess demand for loansno excess demand for loans

Total assets growth all the timeTotal assets growth all the time The rise of non-performing loans The rise of non-performing loans

increases interest rate (Credit increases interest rate (Credit Rationing?)Rationing?)

Customers that yesterday had loans they Customers that yesterday had loans they do not today => excess supply of loans do not today => excess supply of loans

The emergence of the The emergence of the crisiscrisis Investment needs concrete Investment needs concrete

incentives, based on sales and incentives, based on sales and aggregate demandaggregate demand

Financial investment and savings do Financial investment and savings do not imply productive investment nor not imply productive investment nor economic growtheconomic growth

Reduction on public expenditures do Reduction on public expenditures do not correct the problems. ¡¡¡!!!???not correct the problems. ¡¡¡!!!???

Conclusions (1)Conclusions (1)

Our main hypothesis that loans Our main hypothesis that loans are a function of employment and are a function of employment and aggregate demands seems to be aggregate demands seems to be validvalid

Financial savings (money in the Financial savings (money in the banks) is not sufficient condition banks) is not sufficient condition for economic growthfor economic growth

Does not matter who is the lender Does not matter who is the lender of last result of last result

Conclusions (2)Conclusions (2)

Against the general wisdom, credit Against the general wisdom, credit rationing only accelerated the crisisrationing only accelerated the crisis– State expenditures did not displaced State expenditures did not displaced

firms from credit market, they were firms from credit market, they were already outalready out

– Orthodox adjustment is based on a Orthodox adjustment is based on a wrong diagnosis (less G does not imply wrong diagnosis (less G does not imply less interest rate)less interest rate)

– Real variables were affected before Real variables were affected before financial variablesfinancial variables