Employment guarantees in developing countries

Continuing the developing country theme of Friday and in response to a comment from a reader I decided to write a short blog on the applicability of employment guarantees to poorer nations. They have particular issues which means that a Job Guarantee scheme has to be carefully designed. But with the experience of several countries and extensive research and evaluation of these schemes, I conclude that the employment guarantee approach to income security is broadly applicable. Most of the arguments against providing a buffer stock of jobs to insulate the workers against the fluctuations of the private economy are based on false neo-liberal arguments about national government budget constraints. Once you get over that sort of fallacious reasoning, then there are real issues left to confront and overcome. This is now an important part of my academic work and a very interesting part to say the least.

Recap: What is the Job Guarantee?

The basis of the proposal is that the sovereign government unconditionally offers a public sector job at the minimum wage to anyone willing and able to work, thereby establishing and maintaining a buffer stock of employed workers. This buffer stock expands (declines) when private sector activity declines (expands), much like today’s unemployed buffer stocks, but potentially with considerably more liquidity if properly maintained.

The sovereign government is thus offering to purchase a resource for which there is currently no market price – a zero bid input. In this sense, it expands its spending not by competing with other resource users but by utilising an unemployed resource. We call this spending on a price rule rather than a quantity rule. Currently, governments tend to spend on quantity rules – so they plan a budget deficit of a certain size and allocate program budgets to match. This is a flawed approach because it relies on them being able to exactly predict the spending gap that the deficit needs to fill. The likelihood of under-spending and leaving labour resources unemployed is high under this approach.

It is far better to have some leeway in the budget where the spending gap is closed with a employment guarantee – which means that the government would always be able to create “loose” full employment (buying labour at zero bid rather than competing in the market for it) and the deficit would be whatever it had to be – that is, exactly the right size relative to GDP.

So the JG fulfils an absorption function to minimise the real costs currently associated with the flux of the private sector. When private sector employment declines, public sector employment will automatically react and increase its payrolls. The nation always remains fully employed, with only the mix between private and public sector employment fluctuating as it responds to the spending decisions of the private sector. Since the JG wage is open to everyone, it will functionally become the national minimum wage.

While it is easy to characterise the JG as purely a public sector job creation strategy, it is important to appreciate that it is actually a macroeconomic policy framework designed to deliver full employment and price stability based on the principle of buffer stocks where job creation and destruction is but one component.

There is no question that advanced countries could fairly quickly introduce this type of scheme. Most have sovereign governments that have no difficulty creating a demand for their currency. Most have elaborate taxation, welfare and other administrative procedures which allow government to engage with their populations. Most have systems of checks and balances which do not prevent corruption but tend to make it harder to become entrenched.

A government that is not sovereign in its currency may not have the fiscal capacity to run a JG system without raising revenue first. So a state government in a federal system could clearly administer and operationalise an employment guarantee but would have to “finance” it with revenue. A national government which issues its own currency does not face these revenue constraints.

The question then is whether this a Job Guarantee could provide a solution to the massive income insecurity arising from chronic unemployment in developing countries which may not have the same degree of fiscal sovereignty or institutional machinery capable of administering such a program.

A Job Guarantee in developing countries

A small developing nation presents several challenges. First, the so-called “formal sector” may be relatively small so that most production and employment is located in the informal sector where wages and conditions are likely to be highly variable and unregulated.

Second, the country may only produce a small range of commodities and rely on imports for a large number of other types of goods. In many situations, these imports are luxury goods which do not increase the welfare of the general population. These sort of countries also rely on a very narrow range of exports to generate foreign exchange. In these cases, rising GDP and incomes can quickly push up imports and place the exchange rate under pressure. This problem is exacerbated if the exchange rate is linked (pegged) to another currency (often the former coloniser) or if the currency has been wiped out by so-called “dollarisation”.

Third, the administrative capacity of the national government might be quite limited and domestic infrastructure might be inadequate to allow any significant increase in productive capacity.

Under these circumstances, introducing a Job Guarantee at the minimum wage operating in the formal sector will generate significant flows of labour out of the informal sector. This would, in turn, increase wage incomes substantially and boost demand for consumption generally but also imports of goods and services (so-called “luxury” goods) which were previously too expensive for the workers.

The result would be that the balance of trade would deteriorate and foreign reserves would be depleted quickly. These reserves are necessary if the central bank is to maintain the exchange rate parity (as note above – these countries often have a fixed exchange rate system). The exchange rate would thus begin to depreciate and this pushes up import prices. If left unchecked, a full blow exchange rate crisis occurs and this usually becomes a broader domestic crisis as the government is forced to cut back aggregate demand to check imports.

That is the worst-case scenario that critics of the Job Guarantee present in relation to developing countries.

So what is the answer?

First, as the economy develops, the minimum wage paid would have to be closer to the average paid in the informal sector to reduce the progam impacts on aggregate demand. To ensure an effective policy attack on poverty is in place, the Job Guarantee could then be supplemented with a range of social wage items provided on an “in-kind” basis. The government could offer domestically-produced food (not imported), clothing, housing and other services such as child care, aged care, public health, education and transport to JG workers to supplement their wage income.

Second, the JG workers could be employed on projects that provided many of these domestically-produced goods and services which would minimise the impact on the public budget and the trade balance.

So taken together, these design features and supplementary policies would improve the trade-off between growth in real incomes and the trade balance.

But it remains that we would want the JG workers to have greater command over income and we would also expect some of the capital required to support the program (tools etc) will be imported. This requires some forward planning by the Government. It could directly link imported material and tools required for the program to export earnings (that is, controlling imports). It could also link them to international aid. So regular international aid to poor countries could be used to maintain a Job Guarantee. However, the local government should never used funds “borrowed” from the international agencies for this purpose unless there is clear evidence that the JG will directly stimulate exports (and provide the currency to pay back the loans).

Further, the aim of the JG in these circumstances is to be as labour intensive as possible in the first instance to provide as many employment opportunities as is possible. So the capital required will be minimised while the nation is adjusting to higher levels of employment.

But this doesn’t mean the JG would produce nothing of value. A well targetted program would engage the JG workforce in large public infrastructure projects such as road construction and water management (drainage etc), which would directly increase the nation’s export capacity by reducing the costs of private business and providing an attractive investment environment.

So as long as the program is phased in carefully and the activities planned to enhance the productive capacity of the nation, the Job Guarantee approach can be successful. A phased-in approach also provides time for the government to also build its capacity to run the scheme on a “learning by doing” basis.

Many development economists, who have a concern for poverty argue that providing a basic guaranteed income is better in developing countries than providing a Job Guarantee schemes because the scale of the problem is too large. The argument is that in high unemployment countries where there is already a high wage sector defended by vested interests, the introduction of an employment guarantee based on public works projects would be unsustainable.

This is a common argument made by development economists against employment guarantees as a solution to poverty arising from mass unemployment.

However, notwithstanding the points I have made above, these criticisms are typically based on notions of financial unsustainability underpinned by a government budget constraint. Clearly, the same sort of arguments are used in advanced countries by neo-liberals. But a thorough understanding of how the modern monetary system operates will show you that these orthodox neo-liberal notions of fiscal unsustainability are without foundation.

Apart from the points made above, there is nothing intrinsically different in a developing economy that maintains sovereignty of its own currency that would prevent the introduction of a JG, particularly when such economies lack adequate social and economic infrastructure. There are political, ideological and perhaps administrative issues that need to be confronted but these are common to all development policy suggestions.

Some people might argue that these governments have problems collecting taxes and therefore their currency is not sovereign. Well in many developing countries, there is an alternative currency used by the citizenry to ease transactions. But they still have to meet their tax obligations in the sovereign currency and thus it still is demanded and traded. This is the case even in Zimbabwe!

However, if no-one uses the currency of issue and no taxes are paid then the government isn’t sovereign. But it will not be able to do anything in this situation much less introduce a Job Guarantee. I am hard pressed to think of a country in this situation. I know of many where dual currencies mix inside the country but none where there is no demand for the currency of issue.

The most typical case of currency impotence is dollarisation. There the government has no fiscal indepedence and would be advised to work out ways to reduce and eliminate the dollar currency from its country over time.

What are some examples?

In December 2001, the Argentine economy collapsed due to its failure to maintain foreign currency reserves. Most economists claimed it would have to adopt neo-liberal economic policies which meant it had to come to an understanding with its foreign creditors or face hyperinflation and a total boycott of foreign investment leaving the country is depression. The IMF wanted the government to take harsh measures to cut back its net spending and arrange payments to foreign creditors.

The Argentine Government decided to ignore this advice and declared a record debt default of more than $US100 billion which was the largest in history. They introduced the Jefes de Hogar (Head of Household) program which is a sort of Job Guarantee and created two million jobs in the first two years. The Heads of Household program is designed to provide a social safety net for poor households with children. The program intitially provided a wage of 150 pesos per month to a head of household for a minimum of 4 hours of work daily in a variety of community services and small construction or maintenance activities. Alternatively, participants could elect training which might include completion of basic education. To be eligible, the household had to contain children under age 18, persons with handicaps, or a pregnant woman.

The recovery of the Argentine economy in the years after the crisis was notable with GDP growth strong and poverty indicators all showing favourable movements.

In terms of design, Argentina clearly limited its program by allowing participation by only one head of household from each poor family.

A Job Guarantee program can thus start small and develop as the capacity of the nation to maintain the program expands over time. There are a number of ways of limiting the coverage of the program if that is desired. I have written about this in major reports for the International Labour Office (on the Expanded Public Works Program in South Africa) and for the Asian Development Bank (for work in central Asia).

If the trade balance continues to be an issue then other, more traditional methods are available including tariffs, import controls, and capital controls. What has to be emphasised is that economic growth in developing countries which raises monetary incomes and stimulates aggregate demand (and imports) will create trade balance problems. There is nothing unique about the Job Guarantee in this regard. The problem is the capacity of the nation to absorb higher levels of imports with a narrow export sector.

So countries can use these measures (tariffs, import and capital controls) to provide “room for growth” which includes room to develop a Job Guarantee system and improve the income security of its vulnerable residents.

The National Rural Employment Guarantee Act (2005) passed by the Indian Government commits the government to providing employment in a public works project to any adult living in a rural area. The National Rural Employment Guarantee Scheme (NREGS) began in 2006 and guarantees 100 days of work a year to one member of each household. As at December 2008, “over 3.5 billion days of work have been created … and 90 million individuals – 50 percent of them women – have been collectively paid Rs.282 billion … in wages …” (Source).

The aim of NREGS was to reduce the incentive of rural folk to migrate to the already overcrowded cities as the economy began to experience rapid growth. While the scheme has not been without problems and I have written about them myself in reports and papers the fact remains that “over the last three years, 4.7 million projects have been taken up, roughly 50 percent of them relating to water conservation.” Other projects provide irrigation facilities to farmers, roads and land development. The projects have provided real value to the communities where they have been located.

More recently, the NREGS is also turning its attention to Green Jobs in rural areas, which was not part of the initial planning.

The secretary in the Ministry of Rural Development ministry which adminsters NREGS says it is:

… helping address the problem caused by reverse migration as thousands of unskilled workers return home due to the slowdown in infrastructure and other sectors … The nature of jobs being created are green jobs. Today, one individual from … 35 million … households across the country are engaged in … two million … projects, half of them relating to water conservation … This will result in drought proofing through the conservation of water bodies and in the long run reduce water stress .. [and create] … durable and sustainable assets that, over a period of time, will also ensure that the productivity of the land will go up and increase the income of farmers.

Recently, as the global crisis has impacted on the urban centres, an official task force has recommended extending the rural job guarantee to urban areas to make it a national minimum social security net, given that 93 per cent of the labour force work in the informal sector. This is being debated at present.

At present I am working on a contract with the Asian Development Bank to design employment guarantee schemes and integrated skill development frameworks for the so-called CAREC Nations of Central Asia. As this work unfolds and my contracts permit I will report the results of my work there. These are fascinating countries that have been devastated in various ways by their period of market liberalism following the collapse of the Soviet system. But they have great potential and they need to generate higher levels of employment and build basic public instructure. The Job Guarantee framework is ideal for them. I will report in the future on this part of my research and policy work.

I may also report soon on the work I did between 2007-2008 in South Africa on their Expanded Public Works Program. This program employed 1 million people in its first 5 years and has more ambitious targets in the second five year period. But again, I need to wait until all contractual commitments are clear before I can freely talk about it.

Conclusion

Overall, there is nothing intrinsically different in a developing economy that maintains sovereignty of its own currency that would prevent the introduction of a carefully designed and phased-in Job Guarantee, particularly when such economies lack adequate social and economic infrastructure.

There are political, ideological and perhaps administrative issues that need to be confronted but these are common to any development proposal. Further, the Job Guarantee can be used to create some of the infrastructure needed-for example, roads, simple housing, schools, and water and sewage facilities are ideal projects for a Job Guarantee.

Phasing-in and forward planning may be essential to make the program work in a developing country.

The challenge is greater in these countries that is clear. But with the Indian scheme providing millions of jobs it makes you wonder why a wealthy nation such as Australia, which a sovereign government and sophisticated education and administrative structures cannot generate several hundred thousand jobs and eliminate the scourge of unemployment forever.