Tue, Mar 22, 2011 - Page 9 News List

In the global economy, a good cause is worth some inefficiency

All countries, advanced and emerging, have to address issues of inclusiveness, distribution and equity as part of the core of their growth and development strategies

By Michael Spence and Sandile Hlatshwayo

The global economy is at a crossroads as the major emerging markets (and developing countries more broadly) become systemically important, both for macroeconomic and financial stability, and in their impact on other economies, including the advanced countries.

Consider, for example, what has occurred over the past 20 years in the US. Some parts of the tradeable sector (finance, insurance and computer systems design) grew in value added and employment, while others (electronics and cars) grew in value added, but declined in employment, as lower value-added jobs moved offshore. The net effect was negligible employment growth in the tradeable sector.

The US economy did not have a conspicuous unemployment problem until the crisis of 2008 because the non-tradeable sector absorbed the bulk of the expanding labor force. That pace of employment growth now appears unsustainable. Government and healthcare alone accounted for almost 40 percent of the net increment in employment in the entire economy from 1990 to 2008. Fiscal weakness, a resetting of real-estate values and lower consumption all point to the potential for long-term structural unemployment.

One response is to assert that market outcomes always make everyone better off in the long run, but that is not supported by theory or experience. In the US, for example, while many goods and services are less expensive than they would be if the country were walled off from the global economy, we cannot assume that these cost savings necessarily compensate for diminished employment opportunities. People might trade away cheaper goods for assurances that a wide range of productive and rewarding employment options would be available, now and in the future.

A second response is to acknowledge the distributional implications, but to accept them as the price of efficiency and openness. According to this view, the alternative — not having an efficient market system operating in a relatively open global economy — would be far worse.

There probably are real choices to be made between income levels and distribution, on the one hand, and the range of employment opportunities on the other. It is not realistic to define the challenge as resisting or overriding the powerful market forces operating in the global economy. Rather, the challenge is how best to shift incentives at the margin in order to improve the distributional effects.

There are several dimensions on which action can be taken. On the supply side of the economy, the state can invest or jointly invest with the private sector in physical capital (infrastructure), institutions, human capital, and the knowledge and technology underpinnings of the economy. These investments generally have the effect (in advanced and developing countries alike) of raising the return to private investment, causing the latter to expand in scale and scope, lifting employment along with it. Reforming the tax system to favor investment and eliminate complexity and inefficiency would also help.

High value-added, higher-paying jobs, especially in the tradeable sector, generally require highly educated people. Of course, more and better education does not by itself guarantee that the number of such jobs is significantly expandable, given the scope of the tradeable sector, but more scientific and engineering degrees might promote job growth and — together with some public-sector investment in promising technologies — it might also expand the scope of the tradeable sector as well.

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