Losing Ground in the Employment Challenge

The Case of Paraguay

Albert Berry

• Publisher: Routledge
• Year: 2017
• ISBN:
  9781351508230
• Edition: 1
• Topic: Economics
• Subtopic: Economic Theory
• Index: Economics

Most developing countries face significant and sometimes dramatic challenges in generating stable jobs that provide reasonable incomes and decent working conditions. For developing countries that have undergone lengthy periods of economic stagnation, these challenges are especially acute, and popular dissatisfaction correspondingly marked.Paraguay is a case in point. It is unlikely that any "employment policy" could lead to a major improvement in the quality of labor market outcomes unless designed and implemented in a sophisticated and coherent way. Such an approach has been infrequent in developing countries in general, and especially so in those that, like Paraguay, also suffer severe institutional weaknesses of governance. Paraguay's past failure in employment creation is mainly the result of a number of structural weaknesses described in this volume. Its current crisis is also the accumulated legacy of over a quarter century of economic stagnation and political failure fl owing from those weaknesses. The new reformist administration of President Fernando Lugo has raised hopes that the future might be better than the past.This study aims to contribute to improved policy making by analyzing the source of the problems and providing policy recommendations. The chapters describe the potential contribution of various policy areas in the face of a dauntingly negative track record and identify a number of steps that have to be taken if success is to be achieved. They put into perspective the reforms that have been undertaken to date by the country's previous administration.Paraguay's experience offers insight into the problems faced by other developing countries in today's global economy. The central message is that policy improvements must be made in a number of areas and implemented in a coordinated fashion for there to be any reasonable hope of success.

1
Elements of an Employment Strategy for Paraguay

Albert Berry

The Challenge

Paraguay has now been suffering from economic stagnation for nearly all of the last quarter century. Growth must be accelerated to at least 5 percent and the anti-employment pattern that has too often characterized it recently must be rectified in such a way as to permit the creation of about 100,000 good jobs each year. This chapter provides an overview of what must happen to bring about this positive outcome.

What Has to Be Changed in Paraguay? A Diagnosis of the Present Situation

A number of factors are responsible for the slow growth and the lack of dynamism on the employment-creation front. Most of these factors have already been identified by other authors. Any diagnosis and policy prescription must pinpoint the key ones and those that need to be dealt with most urgently.

Signals and Symptoms of Growth Mechanism Defects

Focusing on the main mechanisms of economic growth—investment, technological improvement, and increases in human capital—it is important to note the following:

• i) Not surprisingly in light of the disastrous growth record over the last quarter century, there is now a large and growing excess supply of labor in the country. Adding together open unemployment, underemployment (those who work less hours than they want to) and discouraged workers (those not in the labor force because they have little hope of getting work), this excess now involves 55-60 percent of the “potential” labor force (defined to include discouraged workers).¹ The share of the potential labor force working age population that was “well-employed” in full time jobs with remuneration at least equal to the minimum wage fell from about 37 percent in 1997 to a much lower 32 percent or so in 2003 (Chapter 2, Table 2.2). On the one hand, the country’s poverty and desperation are concentrated within this group; on the other hand, it is also a resource whose potential productivity is currently being wasted or underused. The existence of a major labor surplus gives special importance, among other things, to a policy of expanding aggregate demand. Among the possible instruments to achieve such an increase, the exchange rate is of special interest (see below).
• ii) The country’s investment rate, although lower than in previous periods, seems not to be too far out of line with those of other countries in the region.² What is more striking is the low productivity of this investment (judged by the low marginal output/capital ratio for the economy) especially in the recent recession. Clearly, investment efficiency must be improved. In terms of public investment (and public spending in general),³ efficiency has been much restrained by the traditionally high level of corruption and the limited competence of most state institutions. In the case of private investment, the causes of low average productivity are less clear, though it is highly probable that one factor has been uncertainty as to the economy’s future direction and the areas in which competitiveness can be developed; this often both discourages investment per se and also creates a tendency to invest in lower yielding assets such as buildings, instead of in other more productive ones.
• iii) Given the need to raise both the quantity and quality (yield) of investment, it is very ironic that in recent years the banking system has had plenty of liquidity that it does not or cannot translate into loans and corresponding investments. Such funds constitute another underused resource.
• iv) The main challenges for the country’s fiscal policy are to increase tax revenues,⁴ reduce waste in the form of salaries of non-productive public employees, and more efficiently allocate investment spending (including spending on education). Two feasible and necessary fiscal policy objectives are, therefore, to produce a current available surplus for public investment, and to allocate this resource efficiently. A marked improvement in this area over the course of a few years should raise the growth rate of GDP by at least one or two percentage points.
• v) The low gross investment yield over the last few years points to a series of limitations and problems in the area of productivity. Given the dominant weight of small businesses (and farms) it can be deduced that productivity has shown little dynamism in these sectors of Paraguay’s economy.⁵ Neither the determinants of productivity on small farms and in small non-agricultural businesses, nor the mechanisms and support systems which may be used to improve their performance are well known. What is evident, however, is that the Paraguayan state spends very little on supporting such improvements and that without a significant increase in such support, overall productivity in Paraguay’s economy will continue to stagnate. It is important to identify channels through which the state can contribute to improve the technological development of businesses (see Chapter 8).

Another source of low investment yield is the scarcity of human capital. Despite the overall advances in the share of the population reaching each given level of education during the last 15 years, there is still much to be done on the quality front. And it appears that the educational gap between better off and worse off people has been widening. Additional details on this and other points are presented below and in Chapter 9.

The Solution, in Brief

The above-cited symptoms afflicting the Paraguayan economy are interrelated in many ways. The required solution is a policy package quite unlike that implemented during the period of stagnation. The essence of this package may be summarized in two key elements: (i) a set of policies to induce and promote a high and efficient utilization of available resources—labor, land, capital, etc. and (ii) a set of policies that facilitate growth of productive capacity and raise international competitiveness.

Macroeconomic, microeconomic and sectoral policies are all needed to contribute to each of these broad goals, though their relative roles differ. While macroeconomic policy is dedicated primarily to achieving stability and fuller utilization of resources, microeconomic and sectoral policies are directed more towards achieving a good allocation of resources among possible uses. For two key resources, physical capital and labor, this is more a question of improving the functioning of the labor and capital markets. Improved policies on education and training are the key to raising investment in human capital for the future. As for land, it is necessary to design policies that get it into the hands of families who currently do not have enough.

Within this broad area of policies are some whose principal function is to create a positive business environment (private and public). For example, monetary and fiscal policy must generate an aggregate demand that is not only strong, but also stable and sustainable. With this base, businesses can invest with confidence that conditions will not turn sour. A relatively high exchange rate contributes to high aggregate demand, without slanting the demand toward any specific activities.

Better functioning markets and a positive business environment contribute both to assuring that the economy’s existing potential is taken advantage of and to expanding this potential, through public and private investment, the introduction of more efficient technology, etc. These latter elements have two aspects:

• i) general increases and improvements in the supply of resources available as inputs to production; and
• ii) identification and promotion of branches of activities, products, or areas in which the country can develop competitiveness.

The second of these aspects requires a planning exercise to coordinate efforts, especially in small countries like Paraguay that are unable to develop competitiveness in a wide range of activities. Without this coordination—between the public and private sector on the one hand, and between the different private and public agents/investors on the other—the country can wind up (and has recently wound up) with a combination of investments and efforts that are not complementary to each other, and for this reason do not turn out to be profitable from the point of view of the economic system as a whole.

The objective of this planning effort is to partially identify and begin to develop the future structure of comparative advantage. Although some elements of the existing structure of comparative advantage have served the country well and contributed to its growth, this structure could not serve, for example, as a base from which per capita income could be tripled over the next thirty years—a necessary objective to eliminate or almost eliminate poverty within this time frame. Exports per capita will have to greatly increase (i.e., by four or five times), an objective impossible to reach based on products such as cattle and soybeans. The new comparative advantages must include goods and services with greater added value in comparison to current products, with greater inputs of modern technology (informatics, etc.) with greater involvement of qualified people, etc. Some exports will be processed primary products, i.e., preserved or conserved fruit, tropical fruit juices, perfumes, honey, milk products, etc.; others will be wood products (i.e., parquets), items of clothing, some of them artisanal in character. There may be generic drugs, formerly illegal light manufactured goods, and engineering products (an area that received a boost during construction of the dams).

The task of developing this new structure of comparative advantage typically requires three distinct activities on the part of the state. First, it must participate with the private sector in the process of identifying activities of potential comparative advantage. Second, it must carry out a series of investments whose function is to facilitate and complement the private investment in prioritized activities. Such investments include infrastructure (for example, a good communications system is a necessary condition to be competitive in information industries), human capital (engineering industries require a supply of engineers and skilled workers), research and development (R&D), market research abroad, etc. In terms of R&D the government can facilitate relations between universities and private business, and support the development of incubators and industrial parks, etc. Finally, the state has to coordinate all policies with the objective of promoting these priorities and thus achieving a gradual transition towards the new comparative advantage structure. Key elements in this are a permanent dialogue with the private sector and public statements on policy, all with the aim of making clear which priorities the government is going to support. The management of each of the various policy areas should be kept in tune with this objective. In other words, not only must public investments contribute to the development of new comparative advantages, but there must also be a contribution towards the same goals from international trade policy, financial policy, etc. This has been, in large degree, the recipe for success in various South East Asian countries, in Chile during its period of strong expansion, and in others.

Some competencies evolve on their own without major efforts from the public sector, while others depend principally on those efforts. Most of the recent successful growth experiences of small countries seem to have been based substantially on the identification of possible competencies that could act as motors of development, followed by the coordination of efforts around these competencies. Once a sector with potential future competitiveness is identified and the needed public investment is in place, the private sector (national and/or international) finds it attractive to invest. This type of planning accompanied by complementary public investment sends a clear message to the private sector, and helps to generate a very productive cooperation (implicit or explicit) between public and private sectors, as evidenced in cases such as Chile, Ireland, Malaysia, Mauritius, and Costa Rica—all small countries needing to choose carefully among possible competencies.⁶

The large positive impact of dam construction on the Paraguayan economy was due, in part, to the fact that no large planning efforts were needed at the national level for the benefits of those projects to materialize; by their large size they generated an important market for various goods and services produced by Paraguayans, and thus induced national investments which complemented the large outlays on the dams themselves. On occasion, various agricultural products have also constituted motors of growth as well as focal points for complementary investments (public and private).

Currently, however, no such easy routes to growth are available and the country urgently needs to identify such “motors,” focal points around which to mount the efforts necessary to reach high levels of aggregate investment, efforts that are coordinated so as to achieve high overall returns. A basic task, therefore, is to advance this process of identifying (in some cases) and promoting (in other cases) the sectors and activities whose future competitiveness is promising. Part of this document seeks to facilitate this process of identification and support for industries and activities with good future potential.

In the present context of Paraguay, this responsibility can be expressed in terms of “Where are the 100,000 annually needed new jobs going to come from?” Broadly speaking, small and medium scale agricultural enterprise and the MSME non-agricultural sector are the only two serious options that the country currently has. To a greater or lesser degree, the instruments of this “sectoral” or “industrial” policy include international trade policy, credit policy, technical assistance and other forms of direct support, along with investment in infrastructure.

The General Relation between Policies to Increase Resource Utilization and Policies to Identify and Strengthen Competitiveness

There is a basic complementarity between the two broad policy objectives of (i) increasing and improving the use of already existing resources in the country; and (ii) expanding the economy’s productive capacities through a coordinated process that maximizes appropriate technological change together with investment level and yield. The more completely either of these objectives is fulfilled, the easier it is to achieve the other one. They are complementary in another sense as well—the benefits of good policy for high resource utilization are usually achievable in a shorter time period than some elements of the policy for identifying and promoting future motors of economic development through new investments. So while the latter policies are still in their gestation period, the former can be the source of much of the economic growth.

Three principle requirements for the improvement of resource use in the country are:

• i) a sufficiently expansive fiscal-monetary policy to promote short and medium term growth through fuller resource utilization and stronger inducement for investment and technological improvement;
• ii) an exchange rate policy that improves the external demand for Paraguayan exports and raises the internal demand for locally produced importables with similar effects as those of monetary and fiscal policy; and
• iii) a policy that improves land use, inducing a transformation towards greater labor intensity and greater land productivity.

Each of these three elements has the capacity to induce investment and technological improvement because a more active and growing market generates confidence on the part of business. Expansion based on aggregate demand can also help to identify some of the future centers of growth (future competitiveness that can be developed). There are, however, natural limits to the growth and employmen...