This presentation tries to provide a framework for the IMF's various recent policy forays and some of the key changes in IMF advice.

1. The IMF’s Interest in Inclusive Growth: Promising or PR?
Prakash Loungani
Chief, Development Macroeconomics
Research Department, IMF
CIGI
February 19, 2016
VIEWS EXPRESSED ARE THOSE OF THE PRESENTER AND SHOULD NOT BE ASCRIBED TO THE IMF.
AN EARLIER VERSION OF THIS TALK WAS GIVEN AT THE IDRC. I AM GRATEFUL TO PARTICIPANTS AT THAT SEMINAR FOR COMMENTS.

2. Growing Interest in Inclusive Growth
Global interest in “inclusive
growth” … … mirrored at the IMF

3. Definition of inclusive growth
Based on Elena Ianchovichina & Susanna Lundstrom (“What is Inclusive Growth?”, World
Bank, 2009)
• Inclusive growth = ‘growth that is broadly shared’
– “it should be broad-based across sectors and inclusive of the large part of the country’s
labor force”
• “inclusiveness – a concept that encompasses equity, equality of opportunity, and protection
in market and employment transitions – is an essential ingredient of any successful growth
strategy” (Growth Commission)
• In long-run, “productive employment rather than direct income redistribution as a means of
increasing incomes for excluded groups”
– “In the short run, governments could use income distribution schemes to attenuate
negative impacts on the poor of policies intended to jump start growth, but transfer
schemes cannot be an answer in the long run”
– “for growth to be inclusive, productivity must be improved and new employment
opportunities created”
What I add: Maintaining inclusive growth in the face of cyclical fluctuations & crises

4. Growth
EquityJobs
THREE (inter-related) COMPONENTS
OF IMF’s WORK ON INCLUSIVE GROWTH

5. Growth & Jobs: Key Messages
Part A. Short-run growth:
• Don’t forget “aggregate demand”
• Settings of monetary and fiscal policies
key for short-run growth
Part C. Long-run growth:
– A more diagnostic approach
– Emphasis on structural
transformation
– Realism about the effects of
structural reforms
Part B. Short-run employment:
•“Two-handed approach” (don’t forget
aggregate demand)
•Short-run link between growth and jobs
Part D. Long-run employment:
– Framework for IMF advice on
design on labor market
institutions & policies
– (Female) Labor force
participation

6. Part E. Equity: Key Messages
New research findings
– Equity helps durability of growth (Berg & Ostry)
– Redistribution within reason doesn’t hurt growth
(Ostry et al)
– Drivers of inequality:
• ‘Austerity’ and ‘(financial) openness’ have increased
inequality in the past
• Decline in union density associated with increase in top
share of incomes

7. BACKGROUND SLIDES

8. Part A: Short-Run Growth Fluctuations

9. IMF work on Fiscal Policy
• Support for global fiscal stimulus at the onset of
the Great Recession
• Fiscal consolidation lowers output and raises
unemployment in the short run
• Impacts of fiscal consolidation on output may
have been underestimated by IMF and others in
the early years of the start of the Great Recession
Short-RunOutput:
ImplicationsforFiscalPolicyAdvice

10. How IMF advice on fiscal issues was viewed
during our 2013 Spring Meetings
How the IMF became
the friend who wants
us to work less and
drink more
-- Washington Post
April 16, 2013
“It is to the credit of the
economists at the Fund that
their recommendations to
policymakers have adapted to
this strange world we’re living
in rather than sticking with
their more normal, doctrinaire
advocacy of monetary and
fiscal restraint.”
IMF Renews Push
Against Austerity
-- Wall Street Journal
April 17, 2013
“ … the International
Monetary Fund called on
countries that can afford it
… to slow the pace of their
austerity measures.”
Short-RunOutput:
ImplicationsforFiscalPolicyAdvice

11. Part B: Short-Run Fluctuations in Labor Markets

12. An old view:
getting macro policies right will help labor markets
• “There is sometimes the naïve belief that
unemployment must be due to a defect in
the labor market, as if the hole in a flat tire
must always be at the bottom, because that
is where the tire is flat” (Solow, 2000).
• "It takes a heap of Harberger triangles to fill
an Okun's gap.” (Tobin, 1977)
TheTwo-HandedApproach

13. TheTwo-HandedApproach

14. Facts and Diagnosis, 1985
• “[In Europe ] 11.2% of the labor force is unemployed today
compared to only 2% in 1970. Long-term unemployment is a large and
increasing portion … [There has been] an increase in both the level of
youth unemployment and its share of total unemployment since 1979”
• “These are very gloomy statistics. Do they reflect an inevitable new
economic reality, or can employment growth be restored?”
• “… a sharp decrease in aggregate demand is indeed the
proximate cause of the rise in unemployment in the EC since
1980. The use of monetary policy to fight inflation and the major shift in
fiscal policy towards "budgetary consolidation", however justified, seem to
explain much of the poor growth performance of the 1980s “
TheTwo-HandedApproach

15. Recommendations, 1985
• “Neither supply nor demand measures will by themselves create
and sustain employment growth. This simple point forms the basis of
our approach …”
• “Supply measures, without accommodating demand policies, will have little
impact on employment and output, at least in the short run … if firms do not
see improved sales prospects, they will not increase capacity in response
only to an improvement in factor prices … it is essential to make sure that
demand is there to sustain supply … [But without supply measures] gains will
be temporary at best and may in fact worsen structural problems. Thus, our
call for a two-handed approach.”
• “We believe that structural changes on the supply side are more important
than wage cuts at this stage, that they require a social compact which
may not be feasible if workers are asked to take substantial wage cuts”
• “In summary …What is now needed is a social pact in which supply-
friendly measures go hand in hand with a vigorous recovery”
TheTwo-HandedApproach

16. Fast forward to 2010:
déjà vu all over again?
TheTwo-HandedApproach

17. The ‘Two-Handed Approach’ during the Great
Recession: Unemployment and Output

18. Output and Employment
Since the Great Recession
Employment growth since the Great Recession can
be explained well by changes in output
UnemploymentandOutput
USA
GBR
AUT
BEL
DNK
FRA
DEU
ITA
NLD
NOR
SWE
CHE
CAN
JPN
FIN
IRL
PRT
ESP
AUS
NZL
-15-10
-5
05
10
-15 -10 -5 0 5
Part explained by GDP growth
y = 1.03 x + 1.03 (Adj. R
2
= 0.8)

19. Spain’s unemployment & employment growth can be
explained by fall in output
UnemploymentandOutput

20. Much of increased youth unemployment can also be
explained by fall in output
UnemploymentandOutput

21. Jobs-Growth Linkages across
Countries: Summary
(group average)
-0.4
-0.3
-0.2
-0.1
0
All Economies
(81)
Advanced Economies
(24)
Emerging Markets
(20)
Other Developing
Economies
(26)
Frontier Market Economies
(11)
Change Specification Level Specification ( HP 100 ) Level Specification ( HP 12 )
UnemploymentandOutput

22. Making Output-Employment Linkages
Part of IMF Staff’s Toolkits
UnemploymentandOutput

23. Part C. Long-Run Growth

24. IMF’s VIEWS ON GROWTH:
CORPORATE DOCUMENTS
Medium&Long-RunOutput

25. DIAGNOSTIC CHECK: GROWTH
Medium&Long-RunOutput

26. “The IMF a Convert to Growth Diagnostics”
• “It’s surprising how the language of growth diagnostics and binding
constraints springs up in all kinds of unexpected places. The latest
example is the IMF’s new report on jobs and growth. The IMF’s
analysts say all the usual things about the primacy of
macroeconomic stability and fiscal sustainability – no surprise
there. But then we get a plea for contextual analysis and recipes
that sounds, to this set of ears, at least quite pleasing.
“There is scope,” the IMF says, for: More systematic diagnostic analysis
of the growth and employment challenges and the identification of the
most binding constraints to inclusive growth and jobs so as to provide
more tailored and relevant policy advice.
• “In bureaucratese, “there is scope” means: “gee, we sort of forgot
about this until now, didn’t we?”
• “Better late than never.”
• Dani Rodrik, April 5, 2013.
Medium&Long-RunOutput

27. Part D. Long-Run Employment
“IMF view” on Design of Labor Markets Institutions:
Blanchard, Jaumotte, Loungani (2014)
http://www.izajolp.com/content/3/1/2/abstract

28. “Labor Market Flexibility”:
Moving Beyond Mantras
LaborMarketPolicies

29. Unemployment insurance (UI)
– welfare improving but possible efficiency cost
– what matters: design of the system
quality of active labor market policies
Employment protection (EP)
– some of it is desirable but too much can be harmful
(lower reallocation, longer unemployment duration)
– dual protection systems have ambiguous effects on
efficiency and welfare
– reduce judicial uncertainty
Micro Flexibility: Two Key Institutions
LaborMarketPolicies

30. Micro Flexibility
Some countries don’t do it well:
low flows, long U duration
LaborMarketPolicies

31. Unemployment Duration
and Employment Protection
(months; 1995 – 2007 average)
LaborMarketPolicies

32. LaborMarketPolicies

33. • Need for reallocation is greater …
– Rodrik and McMillan (reallocation to higher-productivity sectors
key to growth in developing economies)
• … but also constraints:
– High level of informality
– Fiscal constraints may preclude generous UI
Micro flexibility:
How applicable to developing economies?
LaborMarketPolicies

34. Two dimensions
– A low average U rate
– Limited fluctuations in U rate in response to shocks
Key institutions
– Minimum wage
– Tax wedge
– Collective bargaining structure
Macro Flexibility
LaborMarketPolicies

35. Minimum wage
– Small effect on E or U within a range
– Limited redistributive role
– Redistribution through negative income tax
(combined with ‘low’ minimum wage)
Tax wedge
– Tends to increase labor cost and U (especially in
combination with high minimum wage or UI and if no
deferred benefits)
Level of Unemployment
LaborMarketPolicies

36. Can Flexicurity Be Exported?
The Importance of Trust
LaborMarketPolicies

37. • Minimum wage
– Difficult issues of appropriate level
– Greater need for it as redistributional tool but perhaps also
greater efficiency costs
• Collective bargaining
– Very low levels in many countries
– Informality
Macro flexibility:
How applicable to developing economies?
LaborMarketPolicies

38. Part E. IMF Research on Inequality

39. IMF Research on Inequality
• Consequences: Inequality lowers the duration of growth spells
(Berg & Ostry)
• “Causes”:
– ‘Austerity’ and ‘(financial) openness have raised inequality in
the past (Ball, Furceri, Leigh and Loungani; Furceri &
Loungani)
– Decline in union density has raised share of top incomes;
increases in minimum wages have lowered the top share
(Jaumotte & Osorio-Buitron)
• “Cures”
– Redistribution, if not extreme, does not harm growth (Ostry,
Berg & Tsangarides)
– Greater care in design of policies (e.g. fiscal consolidation
IMFResearchonInequality

40. Distributional effects of ‘austerity’
Ball, Leigh and Loungani, “Painful Medicine,”
Finance & Development, September 2011
IMFResearchonInequality

41. Impact of ‘austerity’ on the Gini
Ball, Furceri, Leigh and Loungani, “The Distributional Effects of
Fiscal Consolidation” IMF Working Paper, June 2013
IMFResearchonInequality

42. Impact of ‘openness’ on the Gini
Furceri and Loungani, “Capital Account Liberalization and Inequality”
IMF Working Paper
IMFResearchonInequality
0
0.5
1
1.5
2
2.5
3
0 1 2 3 4 5

43. Impact of ‘openness’ on the Gini
depends on financial depth
Furceri and Loungani, “Capital Account Liberalization and Inequality”
IMF Working Paper
IMFResearchonInequality
0
0.5
1
1.5
2
2.5
3
3.5
0 1 2 3 4 5
Baseline
Low Financial Deepening
High Financial Deepening

44. Impact of ‘openness’ on the Gini depends on
whether opening is followed by a crisis
Furceri and Loungani, “Capital Account Liberalization and Inequality”
IMF Working Paper
IMFResearchonInequality
0
0.5
1
1.5
2
2.5
3
3.5
4
0 1 2 3 4 5
Baseline
No crises
Crises

45. THANKS!