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Three Recipes for Full Employment in Africa

by Leonce Ndikumana

The problem of unemployment has risen as the top emerging challenge in Africa today, especially in light of the critical role of the educated but unemployed youth in the revolution in North Africa year last. Unemployment is, however, a general problem, afflicting the working age population, educated or uneducated. The rising unemployment illustrates a failure the current policy frameworks to fully utilize the potential of African economies, including their financial resources. This note proposes policies that ought to be central to a national strategy to achieve full employment.

First, to achieve a goal, one must explicitly target the goal. Yet, in most African countries, achieving full employment remains tangential in national policy frameworks. Macroeconomic stability remains the overriding goal, and in a very narrow sense, focusing on achieving low inflation. In a conversation with a senior official of an international development institution a while ago, I queried why most African countries systematically target a single inflation rate of 5 percent. The answer was: “5 is a good number.” But then why not 7, 9 or even 11 percent? An inflation target ought to be country specific; but most importantly a very low target imposes excessive constraints on economic growth. When countries pursue very low inflation by constraining domestic demand – notably domestic credit – then do so at the cost of growth. While disciplined monetary and fiscal policy may have enabled African countries to stabilize prices over the last two decades, it is clear now that real outcomes, especially employment must rise at the top of the policy agenda. This requires broadening the policy framework.

Second, policy must be geared to utilizing the full capacity of the financial system to boost investment, trade, and job creation. In Back to Full Employment, Robert Pollin (p. 102) proposes a strategy to achieve full employment, with a third pillar consisting of “financial regulatory policies that direct the financial system toward promoting productive investments and job creation.” Evidence from African countries reveals vast unexploited potential in savings mobilization and inefficiencies in resource allocation. In African financial sectors, “banks lend only to those that do not need their money”, as the old saying goes. A recent study on the financial sector in Burundi finds that agriculture receives less than one percent of total bank credit, while the sector contributes over 42 percent of national income and employs 84 percent of the population.[1] The share of credit to industry is just 2%. At the same time, there is substantial idle financing capacity in the commercial banking sector. The story of Burundi is indicative of a general problem in other African countries, namely under-utilization of financial resources.

At the regional level, there is also scope for pooling resources to achieve full employment. In 2010, the twelve major African oil producers as a group had a resource surplus – savings minus investment – of about $60.3 billion, while the rest of the continent faced a resource deficit of $24.1 billion.[2] Pooling resources regionally would help fill the resource gap in oil importing economies and promote regional trade, with beneficial effects on employment.

All these measures, however, will have limited effects so long as Africa continues to lose its resources through capital flight. Thus, the third measure is to curb capital flight and repatriate Africa’s stolen wealth. By keeping most of its financial resources onshore, the continent will not only achieve full employment but it will also reduce its dependence on external financing.

So what does it take to implement these recipes? While the onus is primarily on African leaders to embrace flexible and employment-targeted policy, optimize resource utilization and commit to strategies that prevent illicit financial flows, the international community must do its share by promoting transparency and accountability in the global financial system. Else, poverty reduction and aid effectiveness – goals so central to international cooperation – will remain elusive.

[1] Nkurunziza, J.D., L. Ndikumana, and P. Nyamoya (2012) “The Financial Sector in Burundi.” NBER Working Paper 18289.

[2] Source: World Development Indicators, online. The 12 leading oil producers are: Algeria, Angola, Cameroon, Chad, Congo, Rep., Côte d’Ivoire, Egypt, Equatorial Guinea, Gabon, Libya, Nigeria, and Sudan.

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