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

96 Pages Posted: 23 Jul 2020

See all articles by Edward F. Buffie

Edward F. Buffie

Indiana University Bloomington - Department of Economics

Luis-Felipe Zanna

International Monetary Fund (IMF)

Christopher Adam

University of Oxford

Lacina Balma

International Food Policy Research Institute (IFPRI)

Dawit Tessema

International Monetary Fund (IMF)

Kangni Kpodar

International Monetary Fund (IMF)

Date Written: June 1, 2020

Abstract

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.

JEL Classification: E62, F34, H54, H63, I25, I31, O43, E01, E2, J3, G21, D4

Suggested Citation

Buffie, Edward F. and Zanna, Luis-Felipe and Adam, Christopher and Balma, Lacina and Tessema, Dawit and Kpodar, Kangni, Debt, Investment, and Growth in Developing Countries with Segmented Labor Markets (June 1, 2020). IMF Working Paper No. 20/102, Available at SSRN: https://ssrn.com/abstract=3654356

Edward F. Buffie (Contact Author)

Indiana University Bloomington - Department of Economics ( email )

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Luis-Felipe Zanna

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Christopher Adam

University of Oxford ( email )

Mansfield Road
Oxford, Oxfordshire OX1 4AU
United Kingdom

Lacina Balma

International Food Policy Research Institute (IFPRI) ( email )

1201 Eye St, NW,
Washington, DC 20005
United States

Dawit Tessema

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Kangni Kpodar

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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