Debt, Investment, and Growth in Developing Countries with Segmented Labor Markets

By Edward F Buffie, Luis-Felipe Zanna, Christopher S Adam, Lacina Balma, Dawit Tessema, Kangni R Kpodar

June 19, 2020

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Edward F Buffie, Luis-Felipe Zanna, Christopher S Adam, Lacina Balma, Dawit Tessema, and Kangni R Kpodar. Debt, Investment, and Growth in Developing Countries with Segmented Labor Markets, (USA: International Monetary Fund, 2020) accessed November 21, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

We introduce a new suite of macroeconomic models that extend and complement the Debt, Investment, and Growth (DIG) model widely used at the IMF since 2012. The new DIG-Labor models feature segmented labor markets, efficiency wages and open unemployment, and an informal non-agricultural sector. These features allow for a deeper examination of macroeconomic and fiscal policy programs and their impact on labor market outcomes, inequality, and poverty. The paper illustrates the model's properties by analyzing the growth, debt, and distributional consequences of big-push public investment programs with different mixes of investment in human capital and infrastructure. We show that investment in human capital is much more effective than investment in infrastructure in promoting long-run economic development when investments earn their average estimated returns. The decision about how much to invest in human capital versus infrastructure involves, however, an acute intertemporal trade-off. Because investment in education affects labor productivity with a long lag, it takes 15+ years before net national income, the private capital stock, real wages for the poor, and formal sector employment surpass their counterparts in a program that invests mainly in infrastructure. The ranking of alternative investment programs depends on the policymakers' social discount rate and on the weight of distributional objectives in the social welfare function.

Subject: Human capital, Infrastructure, Labor, Labor markets, National accounts, Wages

Keywords: Africa, Debt, Depreciation rate, Diminishing returns, Discount rate, Fiscal Policy, Growth, Human Capital, Infrastructure, Internal rate of return, Investment program, Involuntary unemployment, Labor Markets, Math display, Minimum wage, Private sector, Public Investment, Real wage, Sub-Saharan Africa, Unemployment rate, Wage differential, Wage premium, Wages, Welfare, WP

Publication Details

Pages:

95
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2020/102
Stock No:

WPIEA2020102
ISBN:

9781513545639
ISSN:

1018-5941

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