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International Monetary Fund

might affect labor force participation, it is hard to deduce the final employment creation effect. In addition, the focus on unemployment rates creates a bias because of the exclusion of program participants from unemployment statistics. Finally, total unemployment is not the right target variable when subsidies to private employment are included among ALMPs. Indeed, one would like to count the net job creation from subsidies to the private sector as an effect of the ALMP, unlike a pure accounting effect that would exclude participants in training programs from

Mr. Marcello M. Estevão
Using panel data for 15 industrial countries, active labor market policies (ALMPs) are shown to have raised employment rates in the business sector in the 1990s, after controlling for many institutions, country-specific effects, and economic variables. Among such policies, direct subsidies to job creation were the most effective. ALMPs also affected employment rates by reducing real wages below levels allowed by technological growth, changes in the unemployment rate, and institutional and other economic factors. However, part of this wage moderation may be linked to a composition effect because policies were targeted to low-paid individuals. Whether ALMPs are cost-effective from a budgetary perspective remains to be determined, but they are certainly not substitutes for comprehensive institutional reforms.
International Monetary Fund. External Relations Dept.

imports from low-cost nonmember sources to higher-cost member suppliers. In such cases, the cost difference borne by importing members is commonly known as a trade diversion effect. If, on the other hand, resources previously devoted to high-cost domestic production are reallocated domestically to more efficient producers as a result of the RTA, economic welfare can increase—a process known as the trade creation effect. The risk of a net welfare loss is more likely to be minimized if the protection versus nonmembers is low to start with, or if the RTA partners agree

Mr. Zubair Iqbal

the schemes have not been in operation long enough to provide a clear picture of their economic effects, it is possible to estimate their likely trade effects. Estimates have been made of the decline in exports of developed countries and the increase in exports from preference-receiving countries to the preference-granting countries as a result of preferences. Thus, the global trade creation effect, that is the difference between the increase in preference-receiving countries’ exports and the decline in developed countries’ exports, can be ascertained. This