2.2.1 The Economic Context

Facts/messages: Labour markets represent the most direct and important link between population dynamics and economic and social development. For countries with high fertility and a rapidly growing youthful population to seize the potential demographic bonus, they must create sufficient and sufficiently productive and remunerative employment opportunities for their labour force; for countries with low fertility and a rapidly ageing population to cope with increasing dependency ratios, they must focus on discouraging a labour market shortage and lifting labour productivity. Therefore, while the challenges associated with a youthful population are different from those associated with an ageing population, both ultimately require similar policy responses, namely i) efforts to promote employment (which requires employment-oriented economic growth) as well as ii) efforts to strengthen the employability of people (which requires human capital investment). To strengthen employability, investment in health is equally important as investment in education. Both must go beyond investment in basic services. Efforts to ensure universal primary education, for example, must be complemented by efforts to promote secondary and tertiary education and better educational standards. MDG 2 has been criticized for over-emphasizing the former, at the cost of the latter. Furthermore, there need to be appropriate investments in basic and applied research and development, technical and vocational training. The analysis of these issues should be the point of departure for any analysis of economic context, from a population perspective.

To combat poverty, countries may provide social transfers or social protection, including unemployment benefits and welfare payments, and/or they may seek to promote employment to raise incomes. Social protection is an important but ultimately unsustainable option, especially for the poorest countries, which suffer from a lack of financial resources and from high incidence of poverty. In the long run, a substantial and sustainable reduction of poverty therefore crucially depends on employment generation and a high percentage of economic activity.

Economic growth significantly contributed to poverty reduction in countries with low income, but it also shows that this strong and positive relationship is weakening as countries benefit from growing income. This is because in low-income countries, economic growth tends to be based on labour-intensive production and to generate a relatively large number of employment opportunities, whereas in middle-income and high-income countries, economic growth is increasingly based on capital-intensive production which tends to generate fewer employment opportunities. Hence, an increasing number of more advanced countries suffer from jobless economic growth. There are however important differences amongst developing countries, and the positive relationship between economic growth and poverty reduction does not hold true in all low-income countries alike. The low-income countries that have witnessed high and sustained rates of economic growth without a concomitant reduction in poverty largely specialize in extractive industries, including mining and the exploitation of oil. Extractive industries are typically capital-intensive industries, which create few employment opportunities, and often have weak linkages with the rest of the economy. Characterizing the nature of the economy and how this affects its employment generation capacity is a second element of the economic context.

Ideally, economic growth should be inclusive, creating sufficient and sufficiently productive and remunerative employment opportunities for all; fortunately, in many low-income countries this is the case. However, in countries where economic growth is not inclusive and therefore fails to reduce poverty, it is essential that growth-oriented policies be complemented by specific anti-poverty policies, including various social transfer programmes. While economic growth which fails to create employment and reduce poverty is not ideal, it is better than no or low economic growth, which would effectively limit the financing of social transfer programmes. Other factors that limit the impact of economic growth on poverty reduction include inflation, population growth, and environmental destruction. The evaluation of the inclusiveness and sustainability of economic growth is a third important element in the analysis of the economic context.

The capacity of economies to boost economic growth is often attributed to the investment climate, which must be understood broadly. It does not only include the transparency, accountability and the rule of law, and it cannot only be gauged by the ease of doing business. Most fundamentally, an appropriate investment climate requires – as was highlighted by the global economic and financial crisis – a stable and functioning financial system. Financial systems must promote productive rather than speculative investment, supported by growth-oriented macroeconomic policies. Monetary policies determine two of the most important prices in economies – interest rates and exchange rates – and strongly influence the national and international competitiveness of companies. Other policies with a strong influence on investment include fiscal, trade, industrial, infrastructure and labour-market policies. External demand (dependent on access to foreign markets) and internal demand (dependent on rising labour income) are other important determinants of growth. Economic policies are considered unsuccessful if they fail to promote capital accumulation and technological progress, and successful if they promote these processes and thereby encourage a favourable structural change, i.e. a shift from low to high technology, from low to high value added and from low productivity to high productivity sectors. The analysis of the economic context should assess to what extent this is happening.

Countries at different stages of economic development will need to pursue different types of economic policies. Countries at an early stage of economic development may not yet be able to seize the opportunities provided by free trade, whereas countries that already have a well developed and competitive economic sector may derive considerable benefits from free trade, for example. Because of this, it is not possible to provide a generic description of appropriate economic policies that are equally applicable to all countries.

Methodology: The capacity of an economy to cope with changes in population size and age structures is most directly influenced by the growth of the economy and the rate of employment creation. Economic growth and employment creation, as well as economic diversification and upgrading, crucially depend on capital accumulation, technological progress, and structural change. The examination of these variables is therefore of greatest importance. It is also important to examine whether economic growth is high enough to compensate for inflation, population growth and environmental degradation, and whether economic growth contributes to employment, higher household incomes and poverty reduction. If it does not, because it is not inclusive, it should be high enough to enrich an economy and thereby open up opportunities for social transfer and protection programmes. Key variables for this evaluation include, but are not limited, to the following:

Real Gross Domestic Product (GDP) per capita, corrected for inflation and ideally, to account for environmental degradation, adjusted for genuine national savings. Genuine national savings are not an ideal measure for environmental degradation, as they largely focus on the loss of forests, but at present they are the best available proxy. In accordance, the gross domestic savings rate should be replaced by the genuine national savings rate to derive at the national income.

Dependency ratio: The dependency ratio most commonly used is the number of people in working ages (typically 15-64) in relation to the number who are not in working ages (demographic dependency ratio). But in developed countries a working age of 25-64 may be more appropriate, as people enter the labour force relatively late, and in the least developed countries 15-80 may be more appropriate, as many people never really leave the labour force. An increase in these dependency ratios however says nothing about a potential shortage in labour markets, and about the capacity of economies to cope with the challenges of age structural transformations. A more appropriate measure is therefore the number of people who have productive jobs relative to those that do not (economic dependency ratio). To account for the fact that a large number of people who have low productivity and low income jobs cannot support a large number of dependents, it is desirable to adjust this ratio for labour productivity and labour income. Where labour income is significantly below labour productivity, the dependency ratio can be reduced through higher wages and salaries; where it closely matches labour productivity, the dependency ratio is essentially at its lowest possible level. When making adjustments for labour income, it would also be desirable, to facilitate the international comparability of this dependency burden, to adjust for purchasing power parities.

Labour productivity, approximated by the value generated by the economy (or by sector), relative to the number of people employed. Given that the promotion of full employment is one of the main economic policy objectives and an MDG target, it is outright scandalous that many countries, especially the poorest, have no adequate employment data. In countries that do not have these data, labour productivity may be approximated by dividing value added by the active labour force (which leads to an underestimation as it includes people who are not employed), or even by dividing value added by the number of people of working age.

Labour shortage: Particular demographic changes, e.g. population ageing, may lead to a labour shortage. In order to evaluate whether this is actually the case, one should carefully evaluate the labour market effects, to establish whether i) a larger number of older people has already translated into a smaller working age population; ii) whether a shrinking of the working age population has translated into a decline in the active labour force; iii) whether a decline in the active labour force has translated into a decline in long-term unemployment or underemployment, the latter being the only meaningful measure for a labour market shortage. Finally, to design appropriate policy responses, one must evaluate whether there is a generalized shortage or only a shortage of specific kinds of workers. The former type of shortage can be addressed through rather crude measures, such as a general increase in immigration or a general postponement of the retirement age, the latter requires more specific measures, e.g. recruitment of specific retirees or targeted immigration.

Poverty: Poverty is not a strictly economic concept, although it is usually measured in economic terms. In the context of the MDGs, one may distinguish between poverty in the wider sense, which is addressed by the MDG Agenda as a whole, and poverty in the strict sense of MDG 1. While there is agreement that, even for the latter purpose, the focus on household income or consumption is too limited, the money metric remains the predominant poverty measure today because other, more comprehensive descriptions of poverty are difficult to implement in practice while maintaining analytical rigour. A more complex poverty measure would make it even more difficult to collect international comparable data on poverty and would make it nearly impossible to evaluate whether a given set of policies is reducing poverty. Although the World Bank is officially responsible for this MDG indicator, the most comprehensive and robust estimates of the number of people who live in poverty – both with $1 per day and $2 per day in purchasing power parities – is actually provided by UNCTAD.

Productive investment: Productive investment is investment in assets, including infrastructure and machinery. It is best approximated by gross fixed capital formation. But productive investment also arguably includes investment in human capital, and consumption expenditures on health and education may therefore be added to it. International investment flows to countries often result in productive investment, but they can also be mere portfolio investments, which are highly liquid and often disassociated from economic activities in the real economy.

Technological progress: The most advanced countries may acquire new technologies by developing them themselves (possible indicator: the number of patents that the country files). A less advanced country may acquire new technologies by copying blueprints (possible indicator: the number of licenses that a country acquires). The least advanced countries may acquire new technologies by purchasing machinery (possible indicator: resources spent on capital goods imports).

Structural change: An important, but crude indicator for structural change is the shift of an economy from agriculture to manufacturing, which can be gauged by changes in the value added in each sector. Economic theory places a strong emphasis on this shift, as manufacturing tends to contribute more strongly to economic growth than other sectors. This is because productivity in manufacturing tends to grow faster and employment to be more remunerative, but also because demand conditions for manufactured products tend to be more favourable. Within the manufacturing sector, the benefits from specialization in low-tech manufactures (e.g. garments) are usually lower than the benefits from specialization in high-tech manufactures (e.g. medical instruments). The same is true within the agricultural sector. Therefore, it is not only important whether an economy shifts from agriculture to manufacturing, but also whether it shifts from low-tech to high-tech, and low value added to high value added activities. Furthermore, in recent years the international prices of many low-tech manufactures have fallen considerably whereas the prices of many primary commodities have risen, thereby changing the terms of trade. Eventually, it is diversification that matters most. Horizontal diversification (from one activity to another at the same level of sophistication) can broaden the production and export baskets of economies and make them less vulnerable to economic shocks (such as a price decline in a single commodity). Vertical diversification (from one activity to another, at a higher level of sophistication) increases the returns from production and exports. The extent to which an economy is upgrading and diversifying its activities is best evaluated by using comprehensive industrial statistics or, in the absence of these, trade data.

Trade: Trade data can be used to examine the integration of economies in global value chains, and the extent of their diversification. Economic diversification, horizontally, but especially vertically, can be influenced by trade barriers. Import restrictions may help local companies to develop some of these products themselves, particularly at the initial stages of product cycles, when companies are just beginning to develop new products. Export subsidies (or trade preferences by trading partners) may help companies to sell new products internationally, particularly at the second stage of product cycles, when companies are just beginning to launch a new product. Such types of trade policies, however, have a mixed record of success. On balance, it appears that they are most successful in countries where the governments have strong analytical and administrative capacities. Eventually, companies must face international competition and protective measures must be phased out.

Primary Source:

  • Economic statistics from National Statistical Offices and Central Banks.

Secondary Sources:

In general, data coverage and quality is best for the most developed countries (i.e., OECD), and worst for the world’s least developed countries (LDCs). Data on poverty, household income and consumption, as well as employment, unemployment and underemployment are particularly difficult to get for developing countries.

  • UN Statistical Division, UNDESA, UNCTAD, IMF, and World Bank: Economic growth and national accounts. In some cases, there are considerable differences in these basic economic estimates for countries;
  • IMF: Interest rates, exchange rates;
  • IMF, World Bank: Government finances;
  • IMF, UN Statistical Division, UNCTAD: Balance of payments;
  • UNCTAD: Foreign direct investment;
  • UNCTAD, IMF: Portfolio investment;
  • UNCTAD, WTO, IMF and International Trade Centre: Trade flows, structures, barriers;
  • UNCTAD, IMF, Bloomberg, Thomson Reuters Datastream: Commodity prices;
  • OECD: Development assistance;
  • World Bank: Development finance;
  • UNCTAD: Industrial structures;
  • FAO: Agriculture;
  • World Bank: Ease of doing business (has a very narrow focus);
  • UN Population Division: Working-age population;
  • ILO: Labour force, employment, underemployment and unemployment. The availability of data on employment and unemployment, and in particular on underemployment, is limited for the majority of developing countries;
  • ILO, UN Statistical Division: Labour productivity: Best derived or approximated using data on employment provided by the ILO and output provided by the UN Statistical Division;
  • UNCTAD: Poverty: Millennium Development Goals indicators are largely based on data collected by the World Bank; the most reliable and comprehensive dataset on poverty, which covers the largest number of least developed countries.

Tool:

  • African Development Bank and UNFPA (2005). Training Module on integration of population issues into African Development Banks programmes and projects. Module 1 on the Conceptual Framework of Population and Poverty.

12 UNCTAD (2002). The Least Developed Countries Report 2002: Escaping the Poverty Trap. Geneva and New York. UNCTAD (2008). The Least Developed Countries Report 2008: Growth, Poverty and the Terms of Development Partnership. Geneva and New York.
13 In Latin American, for example, high levels of income inequality make poverty relatively insensitive to growth of the GDP. See the 2002 study by ECLAC/UNDP/Instituto de Pesquisa Econômica Aplicada (IPEA) which attempted precisely to quantify the potential effect of growth and reduction of income inequality on poverty.
14  Herrmann, Michael (2010). “Population ageing and the generational economy: policy implications”. UNFPA Economic Angle, October 2010.
15  Herrmann, Michael (2010). “Population ageing and the generational economy: policy implications”. UNFPA Economic Angle, October 2010.