Department of Economics
Canada P3E 2G9
phone: 1-705-675-1151, ext. 4265
* The author is Associate Professor of Economics at Laurentian University and editor of The Economics of Public Spending: Debts, Deficits and Economic Performance, Cheltenham: U.K., Edward Elgar, 2000.
One of the most urgent problems on the agenda of the United Nations Millennium Summit is the widespread poverty in Africa and other developing countries. A review of the reports of previous conferences sponsored by the United Nations reveals that poverty reduction has been a priority at least since 1990. These reports generally point to the lack of access to employment opportunities as the primary cause of poverty. International organisations such as the World Bank and the World Trade Organisation maintain that economic growth, which can be fostered through globalization and free trade, is the key to tackling unemployment and alleviating poverty. However, economic growth per se does not necessarily benefit the unemployed nor does it ensure that the jobs created provide workers with a minimum acceptable standard of living. Moreover, it is important to realize that although economic growth can generate employment, growth of gross domestic product (GDP) does not mean that enough jobs are being created to absorb new entrants to the labour force and to reduce existing unemployment. In fact, some studies have shown that employment growth does not follow the same pattern as GDP growth and that labour intensity of GDP growth has been declining in developing countries (Muqtada and Basu, 1994; Singh, 1991). Focussing on GDP growth as the point of departure for reducing unemployment and poverty is misleading, to say the least. Therefore, full employment, not economic growth, must be the primary objective of economic policy of national governments as well as international organisations. Indeed, the expansion of employment appears to be a major contributor to economic growth at least for two reasons: i) employment of idle labour resources adds to the production of goods and services, and ii) the incomes thus generated serve to support an increased consumption and a greater demand, therefore giving incentives to producers to expand and hire more workers to meet the increased demand.
The question then is how can we create the jobs in which to employ idle labour resources? The strategy proposed here is based on two pillars: i) promote employment creation in the private sector through the expansion of credit to small and micro-enterprises, and ii) hire all surplus labour by the government through a public-works programme. Most developed countries have in the past adopted economic policies that aimed at achieving full, or at least high, levels of employment. The argument that several of these countries have now de facto abandoned the goal of full employment should not deter developing countries from pursuing it. In fact, the reasons for a full-employment agenda are as compelling as ever.
The first major reason is that the economic and social costs of unemployment are extremely high. Since employment is the primary source of personal and family income for most people, lack of it (i.e., unemployment) is a major cause of poverty, especially when we know that in most developing countries the welfare system and unemployment insurance programmes are non-existent or have only a limited scope. Unemployment also causes a deterioration of labour skills and productivity and a permanent loss of potential output of goods and services. Furthermore, it represents a loss of tax revenues and leads to higher government spending in the form of various types of assistance. There are other social and psychological problems related to unemployment and poverty, which often result in crime, ill health, suicide, divorce, and lack of social cohesion. These problems will certainly impede the progress and development of any society and most likely will also reduce the effectiveness of foreign aid and assistance programmes.
The second argument in support of our strategy is based on the Universal Declaration of Human Rights, which contains the right to employment as one of the economic and social rights (see Article 26). The same right is also provided for in Article 6 of the International Covenant on Economic, Social and Cultural Rights, which was signed or ratified by most developing countries. According to this article, States Parties to the Covenant have the responsibility to provide all their citizens with technical and vocational guidance and training programmes, policies and techniques to achieve steady economic, social and cultural development and full and productive employment under conditions safeguarding fundamental political and economic freedoms to the individual. Since unemployment is systemic in capitalist societies, failure of governments to design and implement such policies amounts to letting unemployed workers and their families fall into poverty or rely on social assistance. Even if we did not refer to the International Covenant on Economic and Social Rights as a legally binding instrument, all the costs and problems associated with unemployment would still compel us to argue that national governments have the moral obligation to promote and maintain full employment.
The first pillar of the strategy: A major problem faced by poor people and owners of small businesses in developing countries is access to credit. The problem is even greater for potential start-ups because of lack of experience and collateral so that a large number of prospective borrowers is excluded due to the present banking practices (which discriminate against certain groups for rational economic reasons or others such as gender, age, and so on). As a result many employment opportunities are lost, often permanently. The expansion of credit to the poor, small and micro-enterprises at very low or zero interest rates can be an effective policy instrument in the generation of employment as shown by the experiences of some countries in Latin America and Asia (see Morisson et al., 1994; ILO, 1990). Many poor people are, and can become, entrepreneurs either as farmers, traders, or producers of goods and services but for this they require credit to purchase materials and inputs. These small enterprises can easily specialize and fill the gap in several niches in all major sectors of developing economies (agriculture, services and manufacturing). To increase the chances of survival of these enterprises, the strategy should be accompanied by training programmes to strengthen the productive and managerial skills of those starting new businesses. Education and skill upgrading are also essential to ensure that the goods and services produced by these enterprises are of high quality and competitive prices so that they can be exported to international markets.
Extending credit to those who are unable to access formal finance in developing countries is often arranged through informal financial institutions but experience has shown that the success of this type of finance is limited for many reasons: i) moneylenders are notorious for charging high interest rates, ii) pawnbrokers require tangible property (e.g., jewellery) as collateral for loans, iii) group-based institutions (self-help and mutual assistance groups such as the Rotating Savings and Credit Associations) are limited by the amount of savings they can collect from the group or the community they serve, and iv) in most cases, the loans are small and only for short terms.
Some semi-formal financial institutions (e.g., Grameen Bank) operated by non-governmental organisations have had some success in helping the poor by providing them with microloans. However, the role of microlending schemes in alleviating poverty is also limited (see Hulme and Mosley, 1996; Khandker, 1998) and recently, following financial liberalization trends, some microfinance institutions have been under increasing pressure from governments and donors to become financially sustainable and adopt market-based techniques.Although these institutions continue to provide loans to the poor and small entrepreneurs, lending on commercial terms is not the solution to eradicating poverty. Financial exclusion of the poor can only be addressed adequately by government-sponsored, not-for-profit institutions. Providing the poor with credit and the skills, training and education needed to make a productive use of such credit is a public responsibility. This is why the intervention of national governments and the help of the international community are crucial.
Therefore, it is the responsibility of every sovereign government to ensure, through its central bank, that total spending in the country does not fall below the level of the full utilization of its productive capacity because otherwise, as Abba Lerner (1943) argued, it would permit the existence of unemployment. In order to achieve this objective, the sovereign government must set up a National Credit Bank with branches all over the country to dispense credit to all those who demand it, with a particular focus on the poor. This is not charity or welfare madness as neo-conservative critics would argue. This is good business for the government and for the country as whole because:
i) the loans must be, and will be, repaid since the government has more power than the informal and semi-formal financial institutions to enforce repayment.
ii) the poor and the unemployed get out of poverty, improve their standard of living, and participate in building healthier communities, which gives them a sense of personal fulfilment and social belonging.
iii) the government will be able to collect more tax revenues (from these new incomes) and spend less resources on social assistance and the problems associated with poverty and unemployment.
Neoliberal ideologues and proponents of sound finance are quick to dismiss this strategy as irresponsible and inflationary because, in their view, it puts a strain on fiscal resources and injects more money into the economy. However, as Abba Lerner (1943, p. 47) has shown over half a century ago ï¿½there is no risk of inflation from this, because if there were such a risk a greater amount [of money] would have to be collected in taxes. Therefore, unemployment, not inflation, should be the primary concern. This means that the population has the right to demand and expect from local governments and the international community a set of measures that seek to achieve full employment, eradicate poverty, and eliminate social injustice in order to build an inclusive society.
The second pillar of the strategy: In many parts of the developing world, there is a serious lack of basic public infrastructure (limited and congested road-networks, lack of water and sewerage systems in some communities, lack of waste collection and management programmes, lack of paved streets and sidewalks, lack of other public amenities such as recreation parks, streetlights, telephone booths, etc.). To build and maintain this infrastructure would require the employment of a large number of workers and, therefore, substantially reduce unemployment and alleviate poverty. Given that this obviously requires financing, there is often the objection to the use of fiscal resources for such purposes. However, it must be pointed out that the incomes earned by those workers who participate in the building and maintenance of public infrastructure and/or in the provision of other socially useful jobs constitute a source of tax revenue for the government, whereas the unemployed impose costs that drain fiscal resources (for details concerning public financing of such projects, see Bougrine, 2000). In addition, building such infrastructure is not a luxury but rather an economic necessity. Poor and underdeveloped infrastructure has long been recognized as a major impediment to growth and expansion of private enterprises, both small and large, including transnational corporations. Moreover, the resources allocated to public infrastructure are not a simple expenditure. Rather, they constitute an investment which has high social returns (creation of jobs, improvement in skills and education, reduction of poverty, and a healthier and more productive labour force, which all contribute to the social and economic development of the country).
To those who see no alternative to globalization and free markets, a proposal that seeks to bring the State back in may sound like swimming against the current. However, it must be recalled that it is only through the organized political will of the State that poverty and other forms of social injustice can be corrected. It is true that the current process of globalization has severely weakened the power of the State through privatization and public-sector downsizing, but it is equally true that such weakening has been a conscious choice of the present political elite. The challenge, therefore, is to reinvent the State as an institution which is capable of designing and organizing a viable social project. This progressive social framework can only be achieved by de-privatizing the State and must prevail not only at the national but also at the international level. In fact, it is becoming increasingly evident that this is a necessary condition for the success of any macroeconomic policies whether concerning regulation of financial activity, limits and responsibilities of transnational corporations or the role of central banks.
It must be emphasized that the role of central banks is crucial in the implementation and success of the above strategy. A national government, through its central bank, using its own money, has the power to create the means that would allow its citizens to buy virtually all the goods and services the national economy is capable of producing. The problem of course is that, at this stage, poor and developing countries are technologically incapable of producing many goods and services and must therefore import them. This is where the assistance of the international community becomes important. However, the Trade and Development Report of the UN Conference on Trade and Development (UNCTAD, 1999) indicates that the external constraint on growth in poor and developing countries is a major impediment. The report shows clearly that growth prospects in developing countries have been crippled by protectionist measures in advanced economies and declining terms of trade of the poor countries. In this regard, two major recommendations can be made:
Â i) lift the protectionist measures by reforming international organisations and by rewriting the rules and regulations governing trade and capital flows.
Â ii) increase the effective demand in developed countries by adopting an economic agenda based on low and stable interest rates, full employment, high wages, and more generous social programmes.
As mentioned above, the current trend in existing policies is characterized by a growing submission of national governments to private corporations and, for this reason, such reforms will be opposed by those who know that their interests will be adversely affected. However, if we are serious about eliminating or reducing poverty, we must strive to continue advancing in this direction and to make sure that the goals of public policy are dictated by human need, not by corporate greed. Social development, with greater equity and social justice, will be impossible if we leave it all to market forces because as history shows, under capitalism, the pursuit of profits justifies social deprivation and the destruction of nature. Public policy must aim for a long-run sustainable growth, which includes the protection of nature and human dignity.
Bougrine, H, 2000, ed., The Economics of Public Spending: Debts, Deficits and Economic Performance, Cheltenham: Edward Elgar.
Hulme, D. and P. Mosley, 1996, Finance against poverty, Vol. 1, London: Routledge.
ILO, 1990, Employment Challenges for the 1990s, Geneva.
Khandker, S.R., 1998, Fighting poverty with microcredit: Experience in Bangladesh, Oxford: Oxford University Press.
Lerner, A., 1943, "Functional finance and the federal debt," Social Research, Vol. 10, pp.38-51.
Morisson et al., 1994, Micro-enterprises and the institutional framework, Paris: OECD.
Muqtada, M. and P. Basu, 1994, Macroeconomic policies, growth and employment expansion: the experience of South Asia, Paper No. 8, prepared under the ILO/UNDP project Economic Policy and Employment.
Singh, A., 1991, "Labour markets and structural adjustments: A global view," in Standing, G. and V. Tokman, ed., Towards social adjustment: Labour markets issues in structural adjustment, ILO: Geneva.
 Official unemployment rates are especially high in low-income countries affecting well over a third of the labour force in some cases. If we use the internationally accepted definition of involuntary unemployment given by the ILO, these estimates will be even higher because they would include the disguised unemployment, which is so prevalent in the so-called informal sector (the World Bank's World Development Report,1995, estimates the share of workers with a wage contract to be only about 15% of the labour force in these countries). Other estimates of the World Bank indicate that over one-fifth of the world's population is living on less than a dollar a day (a standard measure of absolute poverty), one quarter of the world's adults are illiterate, and about 11 million children die every year of preventable diseases.
 In many developing countries, the social safety net is largely composed of close family members and friends.
 For instance, the Banco Solidario in Bolivia transformed itself from a non-governmental organization to a commercial bank and the Grameen Bank in Bangladesh became a chartered bank by government ordinance.
 The present political and financial institutions of global capitalism whether at the regional (e,g., NAFTA, EU, etc.) or the international level (World Bank, IMF, WTO, etc.) are designed to serve the interests of transnational corporations, promote free enterprise and downsize the public sector. Their policies are guided by two complementary principles: the fight against inflation and the elimination of budget deficits (through spending cuts, privatization of public corporations, and tax reforms). The ultimate consequence of this neoliberal agenda has been a greater worldwide financial instability, slow growth and an increase in social inequalities.