MACROECONOMIC FRAMEWORK AND EMPLOYMENT CREATION Dr. Yaw Baah Deputy Secretary General Trades Union Congress (Ghana)

AGGREGATE DEMAND MODEL GDP = C+I+G+X-M Where: C = Consumption I = Investment G = Government Spending X = Exports M = Imports

The aggregate demand model (cont’d) In this model, an increase in any of the following variables will lead to growth (ceteris paribus) - Consumption, - Investment - Government Spend - Exports Note: Imports constitute a leakage in the model. Therefore, increase in imports reduces aggregate demand within the economy

EFFECTS OF GDP (GROWTH) ON EMPLOYMENT Growth means Increase in GDP (in nominal and real terms) What is Nominal Growth? What is Real Growth? How does Growth affect Employment Creation? Normally, it is expected that GDP growth leads to increased employment But empirical evidence shows that GDP growth may not lead to significant employment creation

EFFECTS OF CONSUMPTION AND EMPLOYMENT CREATION Growth in Private consumption means increased demand of goods and services in the economy. This will lead to the creation of jobs in the economy (if the goods are produced in the economy and not imported). The opposite is true (if all other variables are held constant) What factors affect consumption, generally? prices Income levels Population size

EFFECTS OF INVESTMENT AND EMPLOYMENT CREATION Investment enters the model with a positive sign. Therefore, an increase in investment leads to growth and employment creation (holding all other factors constant) What factors affect Investment? - Stable social and political (low political risks) - stable economy (low inflation, low interest rate, stable currency) – high degree of predictability and low economic risks, - availability of natural resources - availability of skills (human capital) - availability of social and economic infrastructure (road, railways, airports, seaports, water, electricity, energy, power, health facilities, educational facilities)

EFFECTS OF GOVERNMENT SPENDING AND EMPLOYMENT CREATION Increases in Government spending has positive impact on employment if : a reasonable portion of the expenditure goes into creation of employment in the public sector (health, education, etc.) Through multiplier effects

EFFECTS OF EXPORTS AND EMPLOYMENT CREATION Exports enter the model with a positive sign Therefore, increase in exports may generate employment provided: The source of the increased exports is labour intensive If the production for exports is capital intensive (like surface mining) exports may increase, GDP may increase (growth) but employment may not increase (as in the case of mining output in Ghana in recent years)

EFFECTS OF IMPORTS AND EMPLOYMENT CREATION Imports enter the model with a negative sign This means imports are a leakage in the economy It may create employment in the trade, transport and other service sectors But, generally, the net effect of imports on employment may be negative because the production of the goods take place elsewhere (employment is created in another the economy where the goods are produced. What constitutes imports in one economy is export in another economy)

MACROECONOMIC POLICY MACROECONOMIC POLICIES FOCUS ON THE FOLLOWING VARIABLES: GDP (growth)- The value of output of goods & services produced within a specific period of time Inflation – Persistent increases in price levels Interest rate – Cost of capital/borrowing Exchange rate – the value of domestic currency in terms of other (major) currencies such as the US$, Euro, Yuan, Yen, Pound, etc Employment rate – the percentage of the total labour force that is working Unemployment rate – The percentage of the labour force that is not working (but are ready to work at prevailing wages)

The Objectives of Macroeconomic Policy Growth in output Employment creation Domestic Price Stability External Price Stability Any weakness in any of these goals is a source of worry to Government and the people because of its welfare implications November 20, 2018 (c) Nii K. Sowa

Objectives of macroeconomic policy (cont’d) Economic policy management involves the creation of conditions which will enable the country to meet its desired targets with respect to these objectives. This is where the first challenge arises with economic policy management: Limitation of resources Conflicting Goals November 20, 2018 (c) Nii K. Sowa

+ + + Sectors of the Economy Households & Firms The Financial Sector The Government Sector + The Foreign Sector +

GDP Growth Year 1 Year 2 Size of the economy ECONOMIC GROWTH

Illustration of the aggregate demand model Taxes (T) Savings (S) Imports (M) Consumer Expenditure (C) Investment Expenditure ( I ) Government Expenditure (G) Exports-Imports (X-M) Leakages Investment Spending (I) Government Spending (G) Exports (X) Injections Demand Slump (Recession) Equilibrium Demand Expansion (Boom)

Understanding Macroeconomic Policy Policy Options Fiscal Policy changes in taxation and government expenditure interventionist approach = Keynesianism Monetary Policy changes in short-term interest rates and liquidity influence on macroeconomic climate Exchange Rate and Trade Policy fixed v floating exchange rates implications for trade, capital flows, domestic inflation and competitiveness Supply-Side Policies sustainability of economic growth in long-term deregulation, competition, incentives

Fiscal Policy This is the government’s decisions about spending and taxes This seems to give power to fiscal policy to influence equilibrium output Direct taxes affect the slope of the consumption relationship and hence the slope of the AD schedule But this ignores crucial effects, e.g. on prices and the rate of interest Government expenditure affects the position of AD

Monetary Policy Interest rates pushed down Bond prices pushed up Increase in demand for financial assets (eg bonds) Increase in money supply Increase in demand for goods and services Further rises in consumer and investment spending Aggregate demand rises Money GDP rises or Output? P? Process by which an increase in the money supply affects aggregate demand

Recession GDP Wages & Salaries Welfare payments Gross personal incomes Government Expenditure Employment Unemployment Government Borrowing Taxes Money supply Interest rates Investment spending Savings Flow of foreign funds Inflation Inflation Personal disposable incomes Exchange rate GDP Demand for imports Exports Consumers expenditure Trade balance Demand for domestic output

Economic Performance Under Direct Controls (Ghana) Table 1: Some Economic Outcomes Under The System of Direct Monetary Control (percent) 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 Real GDP -3.2 -5.9 -3.9 8.5 5.1 5.2 4.8 5.6 3.3 Inflation 100.4 16.7 142.4 6.0 19.5 33.3 34.2 26.6 30.5 35.9 Money (M2) 38.2 23.4 64.5 44.7 59.5 53.5 53.0 43.1 26.9 18.0 Interest Rates 10.5 14.5 18.5 20.5 23.5 26.0 33.0 Source: Bank of Ghana November 20, 2018 © Nii K. Sowa

Economic Performance under the Indirect Monetary Control (In Ghana) Table 2: Some Economic Outcomes Under The System of Market-Based Monetary Control (percent) 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 Real GDP 5.3 3.9 5.0 3.8 4.5 5.2 5.1 4.7 4.4 3.7 4.2 Inflation 10.3 13.3 27.7 34.2 70.8 32.7 20.8 15.7 13.8 40.5 21.3 Money (M2) 15.0 59.4 27.4 46.2 37.4 45.1 28.2 19.8 33.8 47.9 Interest Rates 20.0 30.0 35.0 25.0 45.0 37.0 27.0 Source: Bank of Ghana November 20, 2018 © Nii K. Sowa

ECONOMIC OUTCOMES UNDER THE INFLATION TARGETING FRAMEWORK Table 3: Economic Performance in the MPC-Era (2000-2006, end year data, percent) GDP Growth Rate Rate of Inflation Treasury Bill Rate Ave. Lending Rate Repo Rate Reverse Repo Rate. 2000 3.74 40.5 38.0 47.0 27.0 26.0 2001 4.20 21.3 27.6 43.8 2002 4.50 15.2 26.6 38.5 24.5 21.0 2003 5.20 23.6 18.7 32.8 21.5 20.5 2004 5.80 11.8 17.1 28.8 18.5 17.5 2005 14.8 11.5 15.5 14.5 2006 6.20 10.5 9.6 23.8 12.5 Source: Bank of Ghana, Research Department; Government of Ghana, Budget Statements; and Ghana Statistical Service, various, CPI Newsletters. November 20, 2018 © Nii K. Sowa

CONCLUSION Economic policy in Africa in recent times has focused on growth and inflation-targeting as a result of the pressure from IMF to reduce inflation Even though Africa has experienced higher growth in recent times it has been jobless growth because the source of growth has been investment in the natural resource sector (gold, oil, timber) Macroeconomic policy should rather focus on employment creation (fiscal policy, monetary policy, investment policy, trade policy, labour market policy and all other policies must focus on employment creation) But the basic information/data on employment is lacking in most African countries The only effective way we can reduce poverty/increase living standards and achieve relative peace in the world is to reduce poverty. November 20, 2018 (c) Nii K. Sowa

END THANK YOU!