The Unassuming Economist

A new IMF report on UK says that “Reducing regional disparities by boosting labor productivity in underperforming regions would promote faster and more inclusive growth. Interregional differences in productivity are related to differences in well-being and inclusion. For instance, UK regions with low productivity tend to have a larger share of young population that is neither employed, in training or in education. At the same time, disparities may signal untapped potential for catching up, and if addressed may contribute to overall growth. The potential benefits of addressing regional disparities have long been recognized by UK authorities, and all recent major party manifestos promised action to reduce them. Policies should be judged based on their impact on growth and inclusion, rather than whether they narrow the gap between particular regions. The challenge for the government is to help address failures or frictions underpinning regional disparities, allowing those less successful regions to build the conditions for economic success, while not cutting off the ability of leading regions to play their role.”

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From the remarks by Managing Director Christine Lagarde:

“As of now, I see the contours of this agenda revolving around the following three priorities.

Priority 1: How to create a vibrant private sector for higher growth and more jobs

The old model where the state is employer of first resort is no longer viable. The private sector needs to step in and step up, and in some aspects government actions can help. This means leveling the playing field for private firms by combating corruption, increasing competition, and taking advantage of global trade and new technologies.

It also means firms investing more within the region, paying their fair share of taxes, and collaborating with the public sector to improve infrastructure.

Priority 2: How to support excluded groups

Integrating youth, women, rural populations, and refugees requires targeted policies. This means preparing people for jobs in the economy – through better education and active labor market policies that help youth and women find meaningful employment.

Financial inclusion can also be an important empowering agent, especially for women. And as I have said so often, including women financially and economically is a potential global game-changer.

I look forward to my conversation after lunch with remarkable women from across the region, and to discussing practical solutions to close gender gaps.

Priority 3: How to use fiscal policy to invest in people and infrastructure

Fiscal policy can and must be redesigned to support inclusive growth in the region. Today, social spending – on social safety nets, health and education services – is less than 11 percent of GDP. This compares to 19 percent in emerging Europe. Infrastructure needs are also large in many countries.

The question is then how to increase spending on social services and infrastructure when budgets are so tight? A key priority is building broader and more equitable tax bases. All must pay their fair share, while the poor must be protected.

And if countries can make progress in moving away from the state being the employer of first resort, as mentioned above, this too can help make room for high-return social and infrastructure outlays.”

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A new IMF working paper “assesses the effects of foreign direct investment (FDI) on gender development and gender inequality. In fact, FDI through increased labor demand, technological spillovers but mostly through corporate social responsibility and economic growth, can potentially influence women’s welfare. Using a panel dataset of 94 developing countries from 1990 to 2015, we find that FDI inflows improve women’s welfare and decrease gender inequality. However, the impact is lower in countries where women have low access to resources and face a heavier burden to open a business. This suggests that for countries to fully benefit from FDI inflows, they should ensure that women can enjoy free access to the labor market and associated income.”

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A new IMF working paper “describes a new database of major labor and product market reforms covering 26 advanced economies over the period 1970-2013. The focus is on large changes in product market regulation in seven individual network industries, employment protection legislation for regular and temporary workers, and the replacement rate and duration of unemployment benefits. The main advantage of this dataset is the precise identification of the nature and date of major reforms, which is valuable in many empirical applications. By contrast, the dataset does not attempt to measure and compare policy settings across countries, and as such is no substitute for other publicly available indicators produced, for example, by the ILO, the OECD or the World Bank. It should also be seen as work in progress, for researchers to build on and improve upon. Based on the dataset, major reforms appear to have been more frequent in product markets than in labor markets in the last decades, and were predominantly implemented during the 1990s and 2000s.”

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From a new IMF Staff Discussion Note:

“Overall income inequality has remained broadly stable in the EU over the past decade but disparities in poverty and income inequality across generations have increased markedly. Developments and drivers of overall inequality are well documented but the generational dimension of inequality has received much less attention. In Europe, real disposable incomes of the young have fallen behind those of other generations. Also, the young are facing increasing risks of poverty relative to those faced by other generations.”

“High youth unemployment has been a major source of growing youth poverty. Unemployment disproportionately affects the young. Also, there is a strong association in the data between unemployment and youth poverty. Facilitating the integration of the young into the labor market is a crucial task facing policymakers. In this regard, market-based and meritocratic institutions in general can help mitigate inequality of opportunity, offering relatively larger benefits for the young.”

“Fiscal redistribution needs to be more inclusive to better tackle youth poverty. Social protection schemes have reduced old-age poverty but they have not prevented an increase in youth poverty following the global financial crisis. Reducing youth poverty is likely to require additional resources. However, for countries with an already high level of social spending and a heavy tax burden, as well as limited fiscal space, this may not be an option. In these countries, reducing youth poverty and inequality across generations in a fiscally-neutral way may require partially rebalancing fiscal redistribution to better protect the young, while continuing to protect minimum pension assistance schemes to avoid reversing the trend decline in old-age poverty.”

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