Contemporary analysis of industrial production and unemployment in emerging economies

It is well known that industrial production stands as the real measure of economic activity, constituting a certain proportion of Gross Domestic Product. Nevertheless, high levels of industrial production do not mean an increase in levels of employment in all economies. This is especially valid for the expansionary post-2001 period until the global financial and real crisis. This paper focuses on the dilemma between high levels of unemployment and high levels of industrial production in some middle size emerging market countries. We argue that the vast amounts of capital flows into such emerging markets between January 2000 and April 2010 period hardly helped to create any jobs due to the appreciation of domestic currency and the rise in domestic interest rates. Emerging economies have become net importers of intermediate goods with domestic firms shutting down production. Moreover, the appreciation of domestic currency meant a rise in current account deficit creating the need for higher levels of capital inflows which could only be achieved through higher interest rates. In addition, the domestic credit market has tightened and financial institutions have created alternative loan types for consumers with higher yields. Hence, the higher levels of industrial production has only offset the need for new jobs in some middle size emerging markets without adding to the stock of employment. This paper supports this theoretical relationship by empirically analyzing the causality between industrial production and unempleyment using pairwise Granger causality test applied just after the panel unit root and cointegration tests. Our preliminary results show that unemployment and industrial production follow similar patterns, rather than diverging from each other.