The unemployment is a global issue that many economies faces today. There are many countries that face an unemployment rate above of 6% (145 out of 202 according to CIA World Factbook). To sort out the unemployment rate, governments have to work on proper investment rates, there is clear evidence on high investment and low unemployment. The sources of investment are three: Private Saving, Public Saving, and Foreign Saving. The first one is an own society decision that governments have to leave to free market in the short run, but through education has to be pointed the fact to save in economic booms and spend in economic crisis. The second saving shows a short run problem, there are a lot of duties that governments have to sort out, then they face deep public deficits and in some cases the public spending shows high corruption, for instance in Colombia case. This corruption brings a cost through high unemployment rates. The last saving is the foreign one, this is the most important to sort out unemployment issue, through long run credits (well targeted) and Foreign Direct Investment, this saving pulls up the total investment to reduce unemployment rate. However, developed economies through monetary and fiscal policies have to pull up this saving, for instance an expansive Dollar, Yen, Pound, Yuan and Euro can improve this type of saving, but this policy have to be targeted through multinationals and banks who invest abroad (long run investment). In the very long run one calls for a monetary and fiscal union with one (unique) global currency. This note shows these three types of savings for Colombia and their impact on unemployment rate.
Author: Humberto Bernal,
Economist,
e-mail: zhumber@gmail.com
Twitter: Humberto_Bernal
Nowadays, many countries have high unemployment rates, most of them are located in Africa such as Zimbabwe, Nauru, Liberia and many others, moreover there are developed countries that have same issue such as Spain, France, Portugal, Italy, Greece and many others. Some of BRICS countries have same issue to deal such as South Africa and India. Some countries in Latin America face unemployment problem also, for instance Bolivia, Paraguay, Venezuela and Colombia. Therefore, unemployment rate is an economic problem that many countries face and government work hard to reduce. This note deals with unemployment rate in Colombia through Macroeconomic Identity S(Private)+S(Public)+S(Foreign)=I , where the three types of savings (S) must be equal to total Investment (I).
It is a fact that investment brings the unemployment rate down, for example the relation between these two variables in Colombia is shown in figure 1. Colombia shows an “inverse” relation between these two variables. Through an econometric model, one finds as the investment rate increases (investment as a share of GDP %) in 1.0%, then the unemployment rate shows a decline in 0.47%. Therefore, society through their government has to work to achieve high rates of investment. Now, the issue is how do society achieve a high investment rate?, the answer is through an increase of the three types of saving: Private, Public and Foreign.
Figure 1. Unemployment and total investment in Colombia 1970-2012
(annual data)
Source: Bureau of Statistics Colombia (DANE) and own calculations.
Private saving is the most difficult rate to increase because societies' preference tend to be smooth, in Colombia case, the 20 years annual average Private Saving was 15.1% of her GDP in 2012. Colombia faced high Private Saving rates few years before economic crisis: 1930, 1952, 1970, 1991, 1999 and 2009 as figure 2 shows. Society keeps in mind the importance of saving during economic booms and spending during economic crisis. However, colombians Private Saving is still low during economic booms. From my point of view governments have to work on education to society keeps her private saving smoothed during booms to sort out economic crisis. Moreover, during crisis an increase of Private Saving do not have to be the answer to increase investment and sort out unemployment issue, government have to work on the other types of saving, mainly in the Foreign Saving. From an econometric model one finds that as the Private Saving in Colombia (Private Saving as a share of GDP %) increases in 1.0%, then her unemployment rate shows a decline in 0.25%, it is an excellent information to take into account when economy is in her boom path or crisis path.
Figure 2. Private saving in Colombia 1925-2012
(annual data as % of GDP)
Source: Bureau of Statistics Colombia (DANE, DNP) and own calculations.
An increase of Public Saving is other way to increase investment to sort out unemployment rate. Colombia had a high Public Saving before 1930, then it was close to zero until 1990 and now it is negative (it means public sector has to get credit to carry their activities). Nowadays, the Central Public Saving is about -1.9% of Colombia GDP (its 20 years annual average is -3.69% of GDP in 2012) as figure 3 shows. This information are bad news for Colombia. Colombia is a country with strong income inequality and internal war, therefore there is huge public spending to sort out these issues but the big problem is the corruption and inefficient uses of this public spending. Colombia government realizes on these two issues (high public deficit and corruption) and she is working on them but the speed is slow due to lack of proper justice to penalize those who break the Law. In a proper environment, an increase of 1.0% in Public Saving, then the unemployment rate will be reduced in 0.81%.
Figure 3. Public saving in Colombia 1925-2012
(annual data as % of GDP)
Source: Bureau of Statistics Colombia (DANE, DNP, Central Bank Colombia) and own calculations.
The last and most important source of investment is the Foreign Saving (Imports menus Exports of goods, services and transfers). When unemployment is to high in a country, then the Foreign Saving must have to be a target point. The sources of this Foreign Saving are external credit and foreign investment both short and long run. The proper one are those for long run such as Foreign Direct Investment and long run target credits, therefore an International Monetary and Fiscal Policy are in the focal point. It means strong currencies such as Dollar, Pound, Yuan, Yen and Euro have the duty to support countries to sort out the unemployment issue. For example, monetary emission through multinationals to invest abroad when crisis come and credits for specific targets such as education, infrastructure and better living conditions in countries where unemployment rate is high. Of course as they give these economic resource, then they have to supervise that they are well managed to avoid corruption. In Colombia case, the Foreign Saving shows an increasing trend since 1950 but there are gaps due to economic crisis in 1991 and 1999 as figure 4 shows. This Foreign Saving have helped to sort out the low Private Saving and negative Public Saving, but the Foreign Saving of type of Foreign Direct Investment is short in Colombia still, moreover most of them is in extractive resources what means low added value and low employments. As Foreign Saving increases in 1.0% as a share of Colombia GDP, then unemployment faces a decline of 0.11%, it is according with an econometric model.
Figure 4. Foreign saving in Colombia 1925-2012
(annual data as % of GDP)
Source: Bureau of Statistics Colombia (DANE, DNP, Central Bank Colombia) and own calculations.
In conclusion, it is a priority to invest to reach economies of scale and reduce unemployment rate. Sources are the three types of saving where foreign one has to take attention. In Colombia the investment rate has showed a tiny increase but it is still low, it was 23.4% of Colombia GDP in 2012 as figure 5 shows.
Figure 5. Investment in Colombia 1925-2012
(annual data as % of GDP)
Source: Bureau of Statistics Colombia (DANE, DNP) and own calculations.
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