87951 East Asia Pacific At Work WO RL D BA N K E A S T A SI A A N D PAC I FIC REG I O N A L REP O R T S Known for their economic success and dynamism, countries in the East Asia and Pacific region must tackle an increasingly complex set of challenges to continue on a path of sustainable devel- opment. Learning from others within the region and beyond can help identify what works, what doesn’t, and why, in the search for practical solutions to these challenges. This regional flagship series presents analyses of issues relevant to the region, drawing on the global knowledge and experience of the World Bank and its partners. The series aims to inform public discussion, policy formulation, and development practitioners’ actions to turn challenges into opportunities. T I T LES I N T H E SERIES East Asia Pacific At Work: Employment, Enterprise, and Well-being Toward Gender Equality in East Asia and the Pacific: A Companion to the World Development Report Putting Higher Education to Work: Skills and Research for Growth in East Asia All books in this series are available for free at https://openknowledge.worldbank.org /handle/10986/2147 World Bank East Asia and Pacific Regional Report East Asia Pacific At Work Employment, Enterprise, and Well-being Truman G. Packard Trang Van Nguyen © 2014 International Bank for Reconstruction and Development / The World Bank 1818 H Street NW, Washington DC 20433 Telephone: 202-473-1000; Internet: www.worldbank.org Some rights reserved 1 2 3 4 17 16 15 14 This work is a product of the staff of The World Bank with external contributions. 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ISBN (paper): 978-1-4648-0004-7 ISBN (electronic): 978-1-4648-0005-4 DOI: 10.1596/978-1-4648-0004-7 Cover image: Bill Pragluski of Critical Stages Cover design: Critical Stages Library of Congress Cataloging-in-Publication Data has been applied for Contents Foreword . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xv Acknowledgments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xvii About the Authors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xix Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xxi Abbreviations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xxxv Part I 1. Introduction and Road Map . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 The context for work in East Asia Pacific . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Has growth in East Asia Pacific been “jobless”? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Road map to the report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Note . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 2. The Demand for and Supply of Labor and Human Capital . . . . . . . . . . . . . . . . . . . . . . . . 15 The demand for work: A profile from fi rm surveys . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 A profi le of the labor force in East Asia Pacific: Who is working and where? . . . . . . . . . . . 19 Note . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 Spotlight 1. Work in the Informal Economy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 What is the informal economy? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 Why does it matter? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 How is informal employment measured? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 Informal employment in East Asia Pacific . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 v vi CONTENTS 3. Is Work in East Asia Pacific Transformational? Greater Productivity, Living Standards, and Social Cohesion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 Work and productivity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 Work and living standards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 Work and social cohesion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 Conclusion: Do not take the transformative role of work for granted . . . . . . . . . . . . . . . . 59 Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61 Part II 4. The Fundamentals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 Prices and exchange rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66 Public spending and taxation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72 An enabling environment for enterprise? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82 Are the “fundamentals” in East Asia Pacific pro-work? . . . . . . . . . . . . . . . . . . . . . . . . . . . 86 Annex 4A Supplementary data for chapter 4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89 Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91 5. Building Human Capital. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95 Progress in health and education . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96 Supply, demand, and skills gaps . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99 Why do skills gaps exist and persist? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107 Policy priorities and examples of success in skills development . . . . . . . . . . . . . . . . . . . . 116 Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 118 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 119 6. Labor Market Regulations, Interventions, and Institutions . . . . . . . . . . . . . . . . . . . . . . . 123 Regulations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125 Interventions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 135 Institutions: Organized labor in East Asia Pacific . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 141 The impact of labor policy on work and earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 144 Conclusions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 155 Annex 6A Supplementary Tables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 159 Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 165 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 167 Part III 7. Priority Policy Challenges to Well-being from Work in East Asia Pacific . . . . . . . . . . . . . 171 The “jobs challenges” typology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 173 Country categorization by level of development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 174 Country categorization by demographics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 180 Country categorization by endowments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 185 Country categorization by institutional factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 188 Implications for policy makers concerned about work . . . . . . . . . . . . . . . . . . . . . . . . . . . 189 Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 190 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 191 CONTENTS vii Spotlight 2. Past Jobs Strategies in East Asia: Could They Work Today? . . . . . . . . . . . . . 193 What exactly are employment—or jobs—strategies? . . . . . . . . . . . . . . . . . . . . . . . . . . . . 193 East Asia’s experience with employment strategies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 194 Are these strategies viable for emerging East Asia Pacific countries now?. . . . . . . . . . . . . 195 Note . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 197 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 197 8. Well-being from Work in the Pacific Island Countries . . . . . . . . . . . . . . . . . . . . . . . . . . . 199 Employment challenges of the small Pacific island countries . . . . . . . . . . . . . . . . . . . . . . 201 Five employment priorities for Pacific island countries . . . . . . . . . . . . . . . . . . . . . . . . . . . 205 Conclusions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 236 Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 237 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 238 9. A Region at a Crossroads . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 241 What should an employment strategy set out to achieve? . . . . . . . . . . . . . . . . . . . . . . . . . 243 Remove biases that hurt working people . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 246 Make labor regulation and social protection work for all working people . . . . . . . . . . . . 248 Take proactive measures to address remaining failures and capture externalities. . . . . . . 253 Why should this approach to crafting employment strategies appeal to governments in East Asia Pacific? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 257 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 259 Boxes 3.1 Nonfarm labor market dynamics in rural Thailand. . . . . . . . . . . . . . . . . . . . . . . . . . . 50 3.2 Are young people “scarred” from how they enter the labor market? . . . . . . . . . . . . . . 55 3.3 Unemployment and confl ict: Is the link strong in East Asia Pacific countries? . . . . . . . 56 4.1 Capital controls: An alternative for sustaining demand for work? . . . . . . . . . . . . . . . . 71 5.1 Gender differences in education and skills attainment . . . . . . . . . . . . . . . . . . . . . . . . 104 5.2 Skills poaching and matching in imperfect labor markets . . . . . . . . . . . . . . . . . . . . . 111 5.3 The Systems Approach for Better Education Results–Workforce Development . . . . . 115 6.1 Temporary contracts and labor flexibility: A cautionary note on partial reforms . . . 131 6.2 Can public works act as social insurance for informal workers? . . . . . . . . . . . . . . . . 138 6.3 Do trade unions have a hand in monetary stability? . . . . . . . . . . . . . . . . . . . . . . . . . 146 7.1 Papua New Guinea’s landowner companies: Leveraging the extractive sector for nonextractive employment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 185 8.1 Where is the work?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 203 8.2 Pacific island countries face overlapping employment challenges . . . . . . . . . . . . . . . . 206 8.3 Is labor regulation “off the plateau” in Pacific island countries? . . . . . . . . . . . . . . . . 209 8.4 Are the costs of distance declining? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 211 8.5 Labor mobility arrangements in Australia and New Zealand affect development outcomes in Pacific island countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 212 8.6 An expanded seasonal worker scheme has potential benefits . . . . . . . . . . . . . . . . . . . 217 8.7 Seasonal worker schemes in New Zealand and Australia are an important opportunity to expand work opportunities for Pacific people . . . . . . . . . . . . . . . . . . 219 8.8 A copra subsidy scheme intended to support rural development in Kiribati is costly and inefficient . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 225 8.9 Unmanaged urbanization increases poverty and weakens social cohesion in the Solomon Islands . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 227 viii CONTENTS 8.10 Public sector expenditure supports economic growth in Vanuatu and the Marshall Islands. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 229 8.11 Outsourcing aid? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 231 8.12 Employment in fisheries or employment supported by fisheries revenues? . . . . . . . . . 234 8.13 Regulatory requirements for extractive industries to support overall employment creation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 235 9.1 Decent? Better? What are “good jobs for development”? . . . . . . . . . . . . . . . . . . . . . . 243 9.2 Denmark’s “flexicurity”: Protection does not have to come at the cost of efficiency . . . 250 9.3 A more neutral minimum wage policy? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 252 9.4 Universal health coverage in Thailand: Protecting people no matter where they work . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .254 Figures 1.1 Countries in East Asia Pacific have sustained higher levels of global integration longer than other developing regions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 1.2 East Asia’s high growth has been relatively stable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 1.3 East Asia Pacific’s share in world output and growth has risen rapidly . . . . . . . . . . . . . 5 1.4 East Asia Pacific did not experience large contractions in employment during the crisis . . .6 1.5 Growth in earnings slowed down during the crisis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 1.6 Unemployment remained low during the crisis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 1.7 Recovery has been slow . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 1.8 Domestic demand is becoming more important to growth in East Asian economies . . . 8 1.9 East Asia Pacific faces much higher disaster risks than elsewhere, and it bears the largest share of global losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 1.10 Few economies rose from low to high income, but among those that did, most are in East Asia Pacific . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 1.11 The simple correlation between growth and employment is weak . . . . . . . . . . . . . . . . 10 1.12 Growth creates more employment in services than in other sectors . . . . . . . . . . . . . . . 11 1.13 The WDR 2013 presents conceptual tools used to structure the arguments of this report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 2.1 The share of employment in small and medium enterprises varies substantially across countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 2.2 Micro, small, and medium enterprises employ a large fraction of the labor force . . . . 17 2.3 Mature fi rms account for most employment in East Asia Pacific . . . . . . . . . . . . . . . . . 18 2.4 Small and medium enterprises account for most employment creation in East Asia Pacific . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 2.5 Young fi rms create more than half of new employment . . . . . . . . . . . . . . . . . . . . . . . 19 2.6 Most new fi rms in middle-income East Asian economies do not expect to increase employment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 2.7 Falling fertility is driving rapid population aging in many East Asia Pacific economies . . .21 2.8 The population is aging faster in East Asia Pacific than in other regions . . . . . . . . . . . 21 2.9 The labor force in East Asia Pacific relative to the rest of the world is still very rural, participation in labor markets is high, particularly of women, and open unemployment is low . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 2.10 Access to schooling and educational attainment have increased substantially in most East Asia Pacific economies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 2.11 Many people are working in the primary sector and are not dependent on wage employment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 2.12 Dependent wage employment is not the dominant form of economic engagement in East Asia Pacific . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 CONTENTS ix 2.13 The distribution of working people by type of engagement has been fairly stable over time in Indonesia and the Philippines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 2.14 Most people in the poorest households work in agriculture . . . . . . . . . . . . . . . . . . . . . 26 2.15 Several Pacific island economies have the highest emigration rates . . . . . . . . . . . . . . . 27 2.16 “Vulnerable” forms of work are more common in East Asia Pacific than in other countries at similar levels of development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 S1.1 Vulnerable employment has remained steady in most East Asia Pacific countries . . . . 33 S1.2 Informal employment is higher where governance is weaker . . . . . . . . . . . . . . . . . . . . 34 3.1 Labor productivity grew faster in most East Asia Pacific countries than elsewhere . . . 39 3.2 Crop yields have increased substantially across the region . . . . . . . . . . . . . . . . . . . . . . 39 3.3 Productivity gains in agriculture spurred the shift of labor to higher value-added sectors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 3.4 Movement of labor across sectors was an important driver of productivity growth in East Asia Pacific . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 3.5 The productivity gap between large and small fi rms in Korea has widened . . . . . . . . . 44 3.6 Among household enterprises, those with fewer workers are more productive . . . . . . 45 3.7 Among household enterprises, mature fi rms are more productive . . . . . . . . . . . . . . . . 45 3.8 Real wages have been rising in many East Asian countries . . . . . . . . . . . . . . . . . . . . . 46 3.9 Labor earnings are an important source of household income in East Asia Pacific . . . 46 3.10 People in poor households derive a large share of their income from agriculture . . . . . 48 3.11 The share of earnings from agriculture in overall income of the poorest group has fallen . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 3.12 Income from work explains a large share of reduction in poverty . . . . . . . . . . . . . . . . 49 3.13 Share of labor in GDP declined in China and several other East Asia Pacific economies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 3.14 Youth idleness is high in some of the Pacific island countries, Indonesia, and the Philippines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 3.15 Inequality has been rising in several countries, including China and Indonesia . . . . . . 57 3.16 The welfare gap between rich and poor can be very large . . . . . . . . . . . . . . . . . . . . . . 57 3.17 The poverty rate among ethnic minorities and the majority in Vietnam has fallen over time, but the gap persists . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 3.18 Ethnic minorities in Lao PDR experience poorer labor market outcomes . . . . . . . . . . 59 3.19 Skills premia in labor earnings have risen sharply in many East Asian countries . . . . 60 4.1 East Asian economies have achieved price stability . . . . . . . . . . . . . . . . . . . . . . . . . . . 67 4.2 Although still volatile, interest rates in many East Asia Pacific economies are trending downward . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69 4.3 Flexible exchange rates helped to absorb the blow of the global fi nancial crisis in East Asian economies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73 4.4 Real effective exchange rates are on the rise across East Asia Pacific . . . . . . . . . . . . . 74 4.5 East Asian economies were in a better position to adopt countercyclical spending to manage the global fi nancial crisis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75 4.6 The volume of taxation does not appear to have a strong effect on labor force participation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76 4.7 A large number of people still in agriculture and unregistered forms of work con- strains government revenue in many East Asia Pacific economies . . . . . . . . . . . . . . . . 77 4.8 East Asia Pacific has both the leaders and the laggards in “ease of doing business” . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82 4.9 The time required to register a business varies widely across East Asia Pacific . . . . . . 86 4.10 Several indicators of the business environment have improved substantially across East Asia Pacific . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87 x CONTENTS 5.1 East Asia Pacific has the third highest average regional life expectancy. . . . . . . . . . . . 96 5.2 Most girls and boys complete primary school in East Asia Pacific economies . . . . . . . 97 5.3 East Asia Pacific has made the largest gains in secondary enrollment, but lags behind in tertiary schooling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97 5.4 East Asian economies spend less on education and health care than countries at similar income levels, while Pacific island countries spend relatively more on health care . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98 5.5 Private tertiary institutions play an important role in some countries . . . . . . . . . . . . . 98 5.6 School enrollment does not guarantee learning . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99 5.7 Skill building starts early, involves many inputs, and continues throughout life . . . . 100 5.8 Stunting threatens the foundational skills of 20–60 percent of children in many East Asia Pacific economies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101 5.9 Both the amount and quality of education are inadequate in Lao PDR . . . . . . . . . . . 101 5.10 Technical and vocational education and training programs are a large part of education systems in several East Asian countries . . . . . . . . . . . . . . . . . . . . . . . . . . . 102 5.11 Social sciences may be oversupplied in Cambodia, Lao PDR, and other countries . . . . 103 5.12 Cognitive, behavioral, and technical skills are all important to employers . . . . . . . . 104 5.13 Routine work is declining in Malaysia and the Philippines . . . . . . . . . . . . . . . . . . . . 105 5.14 Employers in Indonesia report higher standards of quality and more intense competition as key drivers of the demand for skills . . . . . . . . . . . . . . . . . . . . . . . . . . 105 5.15 Education wage premiums have increased or held steady in the face of rising supply . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 106 5.16 Spending on preventive and public health is relatively low . . . . . . . . . . . . . . . . . . . . . 108 5.17 Spending on early childhood education is relatively low . . . . . . . . . . . . . . . . . . . . . . 109 5.18 More than a third of recent employment vacancies in Yunnan, China, went unfi lled . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110 5.19 Employers cite lack of skills among applicants as a top reason for persistent vacancies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110 5.20 Vacancies for skilled workers in East Asian countries remain unfilled longer than in most other regions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112 5.21 Alternative policy actions respond to different skills challenges . . . . . . . . . . . . . . . . 117 6.1 Minimum wages are highest in Cambodia, Indonesia, and the Philippines . . . . . . . 128 6.2 Some countries in East Asia Pacific have similar levels of restriction to southern Europe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 129 6.3 Firms face the highest severance costs in China, Indonesia, and Lao PDR . . . . . . . . 131 6.4 The highest labor tax wedge is in Malaysia, and the lowest is in Cambodia . . . . . . . 140 6.5 The largest portion of the tax wedge is employers’ contributions to social insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 140 6.6 Unionization in East Asia Pacific is low, accounting for the level of development . . . 144 6.7 Other than in China, union membership has been declining in East Asia Pacific . . . 145 6.8 The predicted impact of labor market policies from textbook models is well known . . . 146 6.9 Firms in East Asia Pacific are less likely to report that labor regulations are a constraint on their growth, even where the labor code is restrictive . . . . . . . . . . . . 147 6.10 A large share of workers are earning less than the minimum wage . . . . . . . . . . . . . . 148 6.11 The relationship between the level of minimum wages and employment is weak . . . 150 6.12 Minimum wages can have an impact on earnings, even for informal workers . . . . . . 152 6.13 In East Asia Pacific countries, restrictive employment protection is associated with higher unemployment among women and youth . . . . . . . . . . . . . . . . . . . . . . . . . . . . 153 6.14 In East Asia Pacific countries, restrictive employment protection is associated with higher self-employment, particularly among working women . . . . . . . . . . . . . . . . . . 154 CONTENTS xi 6.15 A larger tax wedge is associated with lower levels of employment . . . . . . . . . . . . . . . 156 6.16 A larger tax wedge is associated with higher levels of unemployment . . . . . . . . . . . . 157 6.17 Many countries in East Asia Pacific combine highly restrictive levels of labor regulation with low institutional capacity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 158 7.1 Seven countries in East Asia Pacific are still agrarian. . . . . . . . . . . . . . . . . . . . . . . . . 175 7.2 Most people in East Asia Pacific live in countries that are urbanizing rapidly . . . . . . 176 7.3 The challenge facing most governments in East Asia Pacific is how to manage the transition from mainly agrarian to urban economies . . . . . . . . . . . . . . . . . . . . . . . . . 177 7.4 When urbanization is well advanced, a significant share of working people should be formalizing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 179 7.5 Formalization is not an inevitable outcome of an urbanizing economy . . . . . . . . . . . 180 7.6 East Asia Pacific is on the verge of rapid population aging. . . . . . . . . . . . . . . . . . . . . 181 7.7 The constraints on growth from a large informal economy are dangerous as countries age . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 182 7.8 The problem of high youth unemployment is less acute than in other regions, but still a concern in Indonesia, Mongolia, and the Philippines . . . . . . . . . . . . . . . . . . . 183 7.9 The gap between youth and overall unemployment is highest in Indonesia, Mongolia, and the Philippines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 184 7.10 Low levels of formalization combine with high youth unemployment to prejudice the longer-term prospects of young people and constrain growth . . . . . . . . . . . . . . . 184 7.11 Many economies in East Asia Pacific depend heavily on mineral exports . . . . . . . . . 187 8.1 Pacific island countries have not transitioned to export-led manufacturing and services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 201 8.2 Pacific island countries have lower rates of growth and are less urbanized than the rest of East Asia Pacific . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 202 B8.1.1 The majority of Pacific Islanders are engaged in some form of work, many in informal employment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 203 8.3 Women are less likely than men to participate in the labor force . . . . . . . . . . . . . . . . 204 8.4 Pacific island countries have very young populations . . . . . . . . . . . . . . . . . . . . . . . . . 204 8.5 Rapid growth in the number of youth is expected over the coming years . . . . . . . . . 205 B8.2.1 Small Pacific island countries face a complex and overlapping range of challenges requiring a range of priorities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 206 8.6 Costs to start a business are higher in many Pacific island countries . . . . . . . . . . . . . 207 8.7 The time required to start a business is burdensome in Pacific island countries . . . . . 208 B8.3.1 Labor market regulation is not especially restrictive in Pacific island countries . . . . . 209 8.8 Pacifi c island countries are unique in their combination of smallness and isolation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 210 8.9 The costs of smallness and isolation undermine competitiveness in transformational industries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 210 B8.4.1 Shipping costs remained relatively stable, while air transport costs have risen substantially over the past decade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 211 8.10 Remittances are very significant for some Pacific island economies . . . . . . . . . . . . . . 213 8.11 Remittances support imports, consumption, and living standards. . . . . . . . . . . . . . . 214 8.12 Migrants to high-income countries make up a substantial portion of Pacific working people. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 215 8.13 Demographic differences suggest mutual gains from mobility for receiving and sending countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 216 B8.6.1 Remittances could grow signifi cantly with expanded seasonal work opportunities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 217 8.14 Immigration policies in Australia favor guest workers from high-income countries . . . . 218 xii CONTENTS 8.15 Pacific seasonal workers account for a small proportion of temporary work visas in New Zealand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 218 8.16 Pacific populations remain largely rural . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 222 8.17 And this will continue despite urbanization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 223 8.18 Urbanization is associated with improved human development . . . . . . . . . . . . . . . . 223 8.19 Access to sanitation in rural areas is not as good as in urban areas . . . . . . . . . . . . . . 224 8.20 Access to water in rural areas is not as good as in urban areas . . . . . . . . . . . . . . . . . 224 8.21 Slow growth is not preventing urbanization in some Pacific island countries . . . . . . 225 B8.9.1 Rapid urbanization in the Solomon Islands is accompanied by risks . . . . . . . . . . . . . 227 8.22 Government in Pacific island countries is large . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 228 8.23 Public service employment is substantial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 228 B8.10.1 In small Pacific island countries, public expenditure and economic growth move in tandem . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 229 8.24 Government is bigger in smaller countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 230 8.25 Tourism to the Pacific island countries is expected to keep growing . . . . . . . . . . . . . 233 B9.1.1 Good jobs for development benefit society as well as individuals. . . . . . . . . . . . . . . . 244 9.1 Employment strategies consist of actions at each level of the policy pyramid . . . . . . 246 Tables 1.1 Growth has had a positive impact on employment since 2001 . . . . . . . . . . . . . . . . . . . 11 2.1 Internal migration has been a defi ning force of employment in East Asia Pacific . . . . . 27 4.1 Economies in East Asia Pacific with lower inflation also have low unemployment . . . 68 4.2 Several central banks in East Asia Pacific have adopted inflation targeting, but few include detailed labor market analysis in their annual reports . . . . . . . . . . . . . . . . . . . 69 4.3 East Asia’s fi nancial crisis motivated a move to greater exchange rate flexibility . . . . . 70 4.4 De facto classification of exchange rate arrangements, 2011 . . . . . . . . . . . . . . . . . . . . 72 4.5 China and Korea led in the volume of fiscal stimulus during the crisis . . . . . . . . . . . . 75 4.6 Stimulus packages were heavily weighted toward infrastructure investment . . . . . . . . 76 4.7 Self-reported tax evasion appears to vary little across different ways of working . . . . 78 4.8 Direct taxes have been declining in many East Asia Pacific economies . . . . . . . . . . . . 79 4.9 The current structure of taxation in East Asia Pacific is not as burdensome as it is elsewhere . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80 4.10 Taxes are not frequently reported as a constraint on businesses in East Asia Pacifi c . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81 4.11 East Asia Pacific lives up to its reputation as a business-friendly region, but several obstacles constrain enterprises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83 4.12 People in East Asia Pacific have relatively good access to finance, but with strong variation across economies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84 4A.1 Tax revenue by type of tax and various employment indicators in East Asia Pacific economies, 2011 or latest year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89 5.1 Gaps in creativity, information technology, and leadership skills are the most common across East Asia, severity of skills gaps, by type of skills, as reported by employers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107 5.2 A range of failures explains gaps in technical and advanced cognitive and behavioral skills . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111 5.3 Few Indonesian fi rms recruit widely for vacancies . . . . . . . . . . . . . . . . . . . . . . . . . . . 112 5.4 Most Indonesians rely on private net works to fi nd employment . . . . . . . . . . . . . . . . 112 B5.3.1 SABER–WfD assesses a country’s policies and institutions for workforce development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115 CONTENTS xiii 6.1 Employment interventions are still rare in East Asia Pacific . . . . . . . . . . . . . . . . . . . . 135 6.2 Unemployment insurance is still rare in East Asia Pacific countries . . . . . . . . . . . . . . 136 6.3 Unions came late to East Asia Pacific . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 142 6.4 Unionization is lower in most East Asia Pacific economies than in other regions . . . 143 6.5 Outside of China, the number of labor unions has also been declining . . . . . . . . . . . 143 6A.1 Summary of minimum wage systems in selected East Asia Pacific countries . . . . . . . 159 6A.2 Summary of regulations for dismissal of permanent workers . . . . . . . . . . . . . . . . . . 161 6A.3 Fixed-term contract regulations in East Asian countries . . . . . . . . . . . . . . . . . . . . . . 161 6A.4 Informal work, conditional correlations using basic specification . . . . . . . . . . . . . . . 162 6A.5 Vulnerable employment, conditional correlations using fi xed-effect estimation . . . . 162 6A.6 Self-employment, conditional correlations using fi xed-effect estimation . . . . . . . . . . 164 7.1 WDR 2013 presents eight country types to identify priority challenges. . . . . . . . . . . 173 7.2 Countries in East Asia Pacific are more likely to be mapped to more than one category and tend to cluster in four types: Agrarian, urbanizing, resource rich, and small island state . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 174 7.3 Small populations and limited land constrain growth and the demand for work . . . 188 Foreword T here is no better way to lift people out also helped many countries sustain high of poverty than productive employ- growth rates and protect jobs during the ment. For the majority of people, recent global financial crisis. skills and the ability to work are their most But challenges remain. Economic growth valuable assets. In the past two decades, in the region is moderating. Labor’s share of the East Asia Pacific region has brought gross national output has declined in some people out of poverty and to middle-class countries. Further productivity gains have status faster than any other region at any been handicapped by shortages in basic other time. From 1990 to 2011, the region’s skills in Cambodia, Lao PDR, and several share of global economic output rose from Pacific island countries, as well as gaps in 6.7 percent to 17.4 percent, and the share advanced skills across the region’s labor force. of people in extreme poverty dropped from Inequality rose in countries such as Indonesia 56 percent of the population to 12.5 percent. and Lao PDR. Some countries face high youth East Asia Pacific At Work offers a system- unemployment rates. Across the region, more atic review of the employment landscape in than 30 percent of people ages 15–24 are not the East Asia Pacific region. Many countries employed or receiving education or training. in East Asia Pacific enjoy a favorable environ- Meanwhile, a still pervasive informal ment for growth and employment creation: economy constrains countries’ productive Price stability, low public debt, low taxa- potential and hurts household welfare. tion, and increased integration in the world To keep the region on the right track, economy have expanded job opportunities, this report recommends that countries look while widespread access to basic health and beyond the labor market and further improve education has nurtured the human capital the fundamentals. Clearly the region is not people need to fi nd work. These strong fun- uniform, and specific policies will vary across damentals have paid off: Labor force par- countries. But some general conclusions can ticipation is high, and labor productivity rose be drawn. Drawing on an extensive review of faster than in other regions in the past two empirical evidence, the report observes that decades. Rising earnings from work were the the most important policies are those that main driver of poverty reduction in countries ensure price stability, encourage investment across the region. The strong fundamentals and innovation, and support a regulatory xv xvi FOREWORD framework that enables small and medium- lower labor taxes, and encourage businesses size enterprises, which employ most people in to become formal. the region. The recommendations proposed should Further, governments should pay close appeal to policy makers, as many countries attention to how labor policies affect workers are formalizing their labor markets, and on the ground. For example, several coun- workers in the region are becoming more tries have established employment protec- demanding. I hope this report will contrib- tion regulations on par with the southern ute to the debate on employment strategies European countries, which force many and provide them with policy options that people into informal employment. In addi- will boost productivity and people’s living tion, labor regulation and social protection conditions. should not favor any particular sector, loca- tion, or profession. And finally, modest, non- Axel van Trotsenburg contributory unemployment benefits financed Regional Vice President by general revenues, for example, could help East Asia Pacific Region employers avoid costly severance schemes, The World Bank Acknowledgments T his report was prepared by a team We are thankful to our peer reviewers— drawn from the Poverty Reduction Omar Arias, Martin Rama, and Carolina and E conomic Management, Sanchez-Paramo—for their detailed com- Human Development, and Finance and ments on early drafts and for their advice. Private Sector Development departments of The team benefited tremendously from the World Bank’s East Asia Pacific Regional extensive consultations with World Bank Office. The team was led by Truman Pack- staff held in Bangkok in May 2012 and ard and Trang Van Nguyen and comprised March 2013. Participants at these con- Melissa Adelman, Thomas Bowen, Ximena sultations included Vivi Alatas, Christian del Carpio, Jennifer Golan, Tobias Haque, Bodewig, Karl Kendrick Tiu Chua, Gabriel Alexander Krauss, and Ahmed Rostom. Demombynes, Iene Muliati, Yuko Okamura, Mee Jung Kim, David Knight, Nataliya Cristobal R idao - Cano, Frederico Gil Mylenko, and Laura Pabon provided sub- Sanders, Lars Sondergaard, Rogier Van Den stantive inputs. Background papers for Brink, and Dewen Wang. During the prepa- the report were written by Reena Badiani, ration of the report, the team also received Ximena del Carpio, Reno Dewina, Jennifer insightful comments and extensive technical Golan, Marek Hanusch, Darian Naidoo, advice from Ahmad Ahsan, Rita Almeida, Laura Pabon, Maria-Antonia Remeyni, Rosa A lonso, X iaoya n L ia ng, Kev i n and Trang Van Nguyen. Mildred Gon- Macdonald, Andrew Mason, Philip O’Keefe, salvez, Sarah Harrison, and Kris Mcdonall Vivek Suri, Prateek Tandon, and Ekaterina provided invaluable research and produc- Vostroknutova. Jesse Doyle and Stephen tion support. Howes provided extensive comments on the The work was conducted under the guid- sections of the report covering the Pacific ance of Bert Hofman, Sudhir Shetty, and island countries. The World Bank team Xiaoqing Yu. The team is grateful for their managing the International Income and Dis- ongoing support as well as for guidance pro- tribution Database (I2D2), Kathleen Beegle vided by other members of the Bank’s East and Claudio Montenegro, provided critical Asia Pacific regional management, including access to data and support throughout the Jehan Arulpragasam, Shubham Chaudhuri, development of the report. Denise Bergeron, and Philip O’Keefe. Susan Graham, and Patricia Katayama from xvii xviii ACKNOWLEDGMENTS the Publishing and Knowledge division of Experts Meeting on the challenges and External and Corporate Relations provided opportunities for ASEAN employers in Bali valuable support in the design and publica- in November 2013; the Club de Madrid tion of the report. A nnual Conference Jobs for Inclusive The team also gained from feedback on Growth: A Call to the G-20 held at Coolum preliminary fi ndings and messages through B each in December 2013; the public presentations at the Asian Development discussion forum “Improving Well-Being for Bank’s International Skills Forum in Manila All” at the Center for Strategic and Interna- in December 2012; the Employment- tional Studies in Jakarta; and discussions Centered Development Strategies Senior with the International Labour Organization Policy Forum in Seoul in March 2013; subregional office for East Asia and the the International Labour Organization’s Pacific in Bangkok in January 2014. About the Authors Truman Packard is a lead economist and Her work focuses on the areas of poverty sector coordinator for the World Bank’s and inequality, labor, social protection, Human Development Program in the Pacific education, health, and gender and devel- Islands, Papua New Guinea, and Timor- opment. She is one of the lead authors of Leste. He co-led the report team. His this report and is co-author of other World work has focused primarily on the impact Bank regional publications, including on of social insurance—including pensions, gender and migration. She holds a PhD in unemployment insurance, disability ben- economics from the Massachusetts Institute efits, and fi nancial protection from adverse of Technology. health events—on household labor supply decisions, saving behavior, and risk man- Melissa Adelman is an economist in the agement. Since 1997 he has been a part of Poverty Reduction and Economic Man- World Bank teams providing fi nancial and agement Unit of the East Asia and Pacific analytical assistance to governments seek- Regional Office of the World Bank. She ing to improve the coverage and efficiency of was lead author of chapter 5 of the report education, health, and social protection sys- on human capital. Her work focuses on tems in Latin America and the Caribbean, the analysis of poverty and its causes at the in East Asia, and from 2006 to 2011 in regional level and in the Pacific island coun- Central and Eastern Europe. He also served tries. She earned her PhD in economics from as deputy director of the World Develop- Harvard University. ment Report 2009: Reshaping Economic Geography and is a member of the World Thomas Bowen is a consultant in the East Bank’s Safety Nets Global Expert Team. Asia and Pacific Human Development He holds a PhD in economics from the Department, focusing primarily on social University of Oxford. protection and labor, poverty, and vulner- ability. He was lead author of chapter 7 of Trang Van Nguyen is a senior economist the report, which identifies country-specific in the Poverty Reduction and Equity Team in priority employment challenges. He was for- the East Asia and Pacific Regional Office of merly a research analyst for the World Devel- the World Bank. She co-led the report team. opment Report 2013: Jobs. He holds an MA xix xx ABOUT THE AUTHORS in international relations and economics Depa r t ment of the E ast A sia Pacific from the Johns Hopkins University, School of Regional Office of the World Bank. She Advanced International Studies. provided analytical input on the demand for labor and human capital from the pri- Ximena del Carpio is a senior economist in vate sector, used throughout the report. the Human Development Department of the She works mainly on monitoring fi nancial East Asia and Pacific Regional Office of the sectors in countries of the East Asia Pacific World Bank. She led the stock-taking of region, covering a wide area of topics deal- labor market institutions, regulations, and ing with fi nancial access and fi nancial sec- interventions in chapter 6. She has designed tor reform. She holds an MA from the Johns and led analytical and advisory assistance Hopkins University, School of Advanced on social protection and labor issues in Latin International Studies. America and the Caribbean and in East Asia Pacific countries, including recent reports on Alexander Krauss is an economist and social minimum wage policies in ASEAN coun- scientist working in the Poverty Reduc- tries and policy reports on minimum wages, tion and Economic Management Unit for migration, and skills in Malaysia. She holds the East Asia Pacific Regional Office of the a PhD in economics from the University of World Bank. He wrote chapter 4 on policy Southern California. fundamentals as well as the comparative analysis of labor unions in East Asia Pacific Jennifer Golan was an economist in the and other regions in chapter 6. He has spent Poverty Reduction and Equity Team in the the last seven years conducting analytical East Asia and Pacific Regional Office of and policy work related to labor markets, the World Bank before recently becoming human development, social safety nets, and a lecturer in development economics at the poverty and social impact analysis. He holds University of Manchester. She led the analy- a PhD in development economics from the sis of employment and development trans- University of Leipzig. formations in chapter 3. Her work at the World Bank involved the analysis of micro- Ahmed Rostom is a financial sector spe- data for the East Asia Pacific regional pov- cialist in the Finance and Private Sector erty monitoring system as well as analytical Development Department of the East Asia tasks related to gender and social protec- Pacific Regional Office of the World Bank. tion. She holds a PhD in economics from the He led the analysis of demand for labor University of Manchester. and human capital from the private sector that features throughout the report. His Tobias Haque is an economist in the Pacific duties included conducting analysis, post- Islands Country Management Unit of the implementation monitoring, and evaluation World Bank and part of the Poverty Reduc- for fi nancial sector projects as well as moni- tion and Economic Management Team. toring and surveillance of macrofinance He wrote chapter 8 on the Pacific island trends and developments in the region. countries. Based in Suva, Fiji, he works He also worked with the team on devising with governments across the Pacifi c advis- programs related to developing regulatory ing on economic policy and public fi nancial frameworks and reforming fi nancial systems management reforms. He holds an MA in in the region. He holds a MS in econom- political economy from the University of ics from Cairo University and a MS in eco- Auckland. nomics and social policy analysis from the University of York; he is in the final stages of Mee Jung Kim is an analyst in international his PhD in economics at George Washington economics and international relations in the University in the fields of quantitative eco- Finance and Private Sector Development nomics, international trade, and fi nance. Executive Summary The contribution of work to growth and the most diverse regions in the world. The household well-being is a growing concern challenges to sustaining well-being from in East Asia Pacific. The labor share of work are just as diverse. Countries that are gross domestic product (GDP) in several still mainly agrarian should focus on raising countries in the region has been declining. agricultural productivity. Rapidly urban- Specifi c problems include high youth inac- izing countries should address the critical tivity and unemployment, rising inequal- need for good urban planning. The Pacifi c ity, and binding skills shortages. A key island countries should provide young underlying issue is widespread economic people with the human capital they need to informality, which increases household vul- succeed abroad as migrant workers. nerability to shocks, limits the tax base, and constrains innovation and the productivity of firms and the economy as a whole. Infor- The triumph of work for mality is both a consequence of relatively well-being stringent labor regulations and a reason for their widespread evasion. Key compo- Economic development in East Asia Pacific is nents of the appropriate policy response a triumph of working people. The region has include macroeconomic stability and a experienced industrialization, urbanization, regulatory framework that encourages, in and economic diversification at historically particular, the growth of small and medium unprecedented rates. In the last two decades, enterprises where most people in East Asia rapid changes boosted agricultural output Pacifi c work. It is also critical to “formal- and triggered large movements of people ize” more work, in order to increase the to towns and cities and into work in facto- coverage of essential work-risk and social ries and firms, raising factor productivity protection and to sustain growth. To this in most of the region. The concentration end, policies should encourage mobility of working people and enterprises boosted of labor and human capital and not favor output in fast-growing cities. Countries some forms of employment (for instance, that were low income a generation ago suc- full-time wage employment in manufactur- cessfully integrated into the global value ing) over others. East Asia Pacific is one of chain, exploiting their labor cost advantage. xxi xxii EXECUTIVE SUMMARY In 1990, the region held about one-third from rural farms to urban factories, village of the world’s labor force. Leveraging this institutions and community property rights comparative advantage, developing East broke down, and extended family structures Asia Pacific countries’ share of global GDP weakened. But these changes neither created grew from 7 percent during 1990 –92 to significant political debate nor catalyzed 17 percent during 2009–11. social tension because so many people were Sound policies and good economic insti- moving out of poverty and into the urban tutions have encouraged private sector–led middle class, against a backdrop of fast growth, stimulated demand for work, and growth. In that sense, as argued in the World enhanced resilience. Price stability, low public Development Report 2013: Jobs (hereafter debt, and relatively light taxation in many referred to as WDR 2013; World Bank 2012), parts of the region encouraged business and work has been the conduit connecting and investment. Widespread access to adequate enabling three critical development trans- health and education ensured a strong foun- formations: productivity gains, improve- dation of human capital. Given these strong ments in living standards, and greater social fundamentals and increasing integration with cohesion —which are collectively referred to the global economy, East Asia Pacific was able here as advances in “well-being.” For much to sustain high growth rates and maintain its of their recent history, East Asia Pacific coun- resilience during the global financial crisis of tries have managed to achieve these three 2008–10. Some East Asia Pacific countries development transformations in tandem. continued to generate employment in 2009 and 2010, in contrast to the job losses experi- Rising challenges to well-being enced by most countries in Central and East- ern Europe and to the muted employment from work growth in other developing regions. Against the backdrop of these impres- Sustained high rates of economic growth sive gains, the share of wages in GDP has have been necessary, though not sufficient, declined in many East Asia Pacific countries, to ensure well-being from work. Growth and expectations and aspirations of work- has improved employment outcomes, fueled ing people are shifting. In the last few years, gains in living standards, and mitigated the news headlines have started to change. social tensions. The rise in labor productiv- Among the usual articles about growth, pro- ity in East Asia Pacific during the 1990s and ductivity, and poverty reduction are stories 2000s was far greater than in Latin America, of a very different character. Since 2009, Eastern Europe, and the countries of the reports of discontent among Chinese factory Organisation for Economic Co-operation workers protesting poor working conditions and Development (OECD). China’s three- have become more frequent. There have been fold and Vietnam’s almost twofold growth growing instances of strikes in Indonesia, in labor productivity since 2000 are par- a twofold increase of “wildcat” strikes in ticularly impressive. Households reaped the Vietnam during 2011, and frequent clashes benefits of greater productivity in higher between garment factory workers and police earnings: rising labor income accounted for in Cambodia. These reports seem at odds more than 40 percent of poverty reduction with the widely accepted narrative of the in the late 2000s in several East Asia Pacific region’s rise, and they signal rising demand countries (figure 1). The share of the region’s for government action to sustain household population living in extreme poverty (that is, and social well-being from work. on less than US$1.25 a day) declined by more Widespread economic informality — than half since 1990, from the highest level work and other transactions in unregulated across all regions to among the lowest. Work- and untaxed markets—is critical to under- ing people experienced stark changes in their standing the growing concerns about work lives within a generation, as work shifted and well-being, despite the region’s successes. EXECUTIVE SUMMARY xxiii The exact dimensions of the informal econ- FIGURE 1 Income from work explains a large share of the omy are difficult to measure, because only reduction in poverty proxies are available. As a region, East Asia Pacific has the second-highest share of the Decomposition of poverty changes into different components 150 labor force working outside of wage and salaried employment, surpassed only by 100 countries in Sub-Saharan Africa. A large 50 Percentage portion of this activity in agrarian countries like the Lao People’s Democratic Republic, 0 Cambodia, and Papua New Guinea reflects –50 “structural informality,” since many people still work in subsistence or small-shareholder –100 farming. This type of informal work typi- –150 cally decreases with structural changes that Cambodia Thailand Philippines Mongolia Vietnam Timor-Leste reduce employment in agriculture. However, Nonlabor Nonfarm in all middle-income countries, even those Farm Share of adults with large manufacturing and services sec- Wage Share of working adults tors, a persistent share of the labor force con- tinues to work beyond the reach of taxation, Sources: Estimates based on the Cambodia Socio-Economic Survey (2007, 2010); Thailand House- regulation, and protection. This informal hold Socio-Economic Survey (2006, 2009); Philippines Family Income and Expenditure Survey work (whether measured as nonfarm self- (2006, 2009); Vietnam Living Standards Measurement Survey (2004, 2010); Mongolia Household Socio-Economic Survey (2007/08, 2011); and Timor-Leste Survey of Living Standards (2001, 2007). employment, people working without a labor contract, people working in microenterprises with five or fewer workers, or the segment The high levels of informal work in East of the workforce that fails to contribute to Asia Pacific are both a consequence of rela- social insurance) is higher in many East Asia tively stringent labor and social protection Pacific countries than in other countries at policies and a reason for their widespread similar income levels (figure 2). evasion. Overall, the history of state inter- High levels of informal work in East Asia vention in labor and social protection pol- Pacific are not harmful per se, but they may icy in East Asia Pacific is modest relative to have undesirable side effects. The informal that of countries in other regions. Govern- economy provides a living to many who ments started regulating their labor market would otherwise be destitute. And, across much later in East Asia Pacific than in Latin the region, many informal workers and America and Central and Eastern Europe enterprises are well integrated into domes- and provide fewer social programs. But sev- tic, regional, and international production eral governments in emerging East Asia have chains. Often, the output of the informal recently stepped into this arena of policy economy is either consumed by formal sec- making with levels of intervention similar to tor factories and firms as an intermediate those found in Southern European countries input or is consumed by people who them- (figure 3). For instance, formal employment selves work in or provide services to the for- protection legislation is highly restrictive in mal economy. The problem arises when the Indonesia, where workers whose employment prevalence of informal economic activity is regulated enjoy more protection than work- constrains innovation and productivity, when ers in France, Greece, or Portugal, and only the tax base is so small that governments find slightly less protection than workers in Spain. it difficult to provide public goods and ser- In China, workers in regulated employment vices, and when working informally limits are more difficult to dismiss than workers households’ options for managing shocks to in Belgium and Italy. In the Philippines, as a their well-being or makes it more difficult for result of labor regulation, the average statu- them to seize opportunities. tory minimum wage, relative to the value xxiv EXECUTIVE SUMMARY FIGURE 2 Informal forms of work are more common in East Asia Pacific than in other countries at similar levels of development a. Own account and unpaid family workers as a b. Share of the labor force contributing 100 share of the labor force, 2010 100 to a pension plan, latest year Japan 90 Lao PDR 90 Australia 80 80 Korea, Rep. Vanuatu 70 Timor-Leste 70 Cambodia Vietnam 60 Indonesia 60 Percent Percent Mongolia Malaysia 50 Tonga Thailand 50 Philippines Mongolia 40 40 Fiji China 30 30 Malaysia Korea, Rep. Philippines 20 Vietnam Thailand 20 Japan Cambodia 10 Singapore 10 Indonesia Timor-Leste New Zealand Australia Papua New Guinea 0 0 Lao PDR 500 10,500 20,500 30,500 40,500 50,500 60,500 70,500 80,500 500 1,000 2,000 4,000 8,000 16,000 32,000 64,000 Income per capita PPP (2005 international $) GDP per capita 2010 (2005 US$) World East Asia Pacific islands East Asia Pacific Middle East and North Africa Europe and Central Asia South Asia OECD countries Sub-Saharan Africa Latin America and the Caribbean Sources: World Bank Pensions Database (2013) and World Development Indicators. Note: PPP = purchasing power parity. added per worker, exceeds the level in 90 low-skilled people, women, youth, and recent percent of countries in the world.1 Cambodia entrants into the labor market. and Indonesia are not far behind. The prejudicial impact of labor regulation Even labor regulations set at reasonable on the forms of work that are prevalent in levels but poorly implemented can aggravate most East Asia Pacific countries is a growing the market failures they were designed to problem that creates both segmentation and overcome. Evidence is mixed on the impact exclusion. The extent of informal activity is of minimum wages and employment protec- positively associated with levels of employ- tion legislation on employment outcomes ment protection and labor taxation. In China, across countries. Set at reasonable levels, the 2008 Labor Contract Law attempted to these regulations have been found to have expand social insurance coverage, financing a negligible impact in countries with strong it through increased payroll taxes. This was institutions and higher administrative capac- associated with a lower probability of local ity. However, even where labor regulations employed residents’ being protected (Giles, have a limited impact on overall employment, Wang, and Park 2013). unemployment, and wages, they have distri- butional consequences that favor prime-age Louder and more frequent calls men in full-time dependent, salaried employ- ment at the expense of women, young people, for action and people in part-time work and self- Questions about the links between work employment. For instance, minimum wages and well-being have begun to surface in in the Association of Southeast Asian Nations East Asia Pacific with greater frequency and (ASEAN) member countries disproportion- urgency. This is to be expected since most ally reduce the employment opportunities of East Asia Pacific countries, including the EXECUTIVE SUMMARY xxv most populous (China and Indonesia), are FIGURE 3 Some countries in East Asia Pacific have now at a development stage where the three restrictions on dismissal similar to those in countries transformations propelled by work (gains in Southern Europe in productivity, living standards, and social Employment protection, 2008–10 cohesion) are no longer happening at simi- lar rates. Some countries experience direct United States Singaporea threats to social cohesion, specifically from Canada high youth unemployment and inactivity, United Kingdom Malaysiaa as well as high and rising income and con- New Zealand sumption inequality. Ireland Australia For the region as a whole, more than Brunei Darussalam 30 percent of people ages 15–24 are not in Japan employment, education, or training. Fiji, Switzerland Mongoliaa Indonesia, the Philippines, Tuvalu, and Van- Korea, Rep. uatu have among the highest rates of youth Denmark Slovak Republic inactivity in the world (figure 4). High levels Czech Republic of youth inactivity have been linked to vio- Hungary Sweden lence and eroding social cohesion, provid- Netherlands ing a strong motivation for governments to Finland Thailanda pay closer attention to the opportunities for Lao PDRa youth to work or build human capital. Even Cambodiaa Poland where violence is not yet a concern, high rates Austria of disengagement among youth can have Philippinesa Vietnama a lasting impact on their future economic Germany prospects and ultimately limit the productive Iceland potential of a country as a whole. Italy Belgium While the region’s economic success has Luxembourg been accompanied by gains in average living Norway Chinaa standards, growing skill premiums have led France to rising inequality—for instance, in China, Portugal Greece Indonesia, and Lao PDR. 2 Rising skill pre- Indonesiaa miums in many parts of the region raise Spain Mexico concerns among policy makers about widen- Turkey ing income disparities and the risk of social polarization. ASEAN+ But the threats to well-being from work OECD-30 are wider ranging: The growing challenges ECA to social cohesion are linked to a general 0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 slowing of economic growth in the region. Employment Protection Legislation (EPL) Index The challenges are more pronounced in Protection of permanent workers against countries where productivity and living stan- (individual) dismissal dards have been lagging for some time. For Regulation on temporary forms instance, despite recent economic growth, of employment the Philippines has experienced much slower Specific requirements for collective poverty reduction than its neighbors, reflect- dismissal ing the low productivity of most forms of employment created by the economy. Many Sources: Estimates based on country labor codes and latest available for OECD countries from www.oecd.org. economies, including Cambodia, Indonesia, Note: Scores range from 0 (least stringent) to 6 (most restrictive). OECD average includes a sample of Lao PDR, and the Philippines, need to 30 countries; values refer to 2010. Europe and Central Asia values are for 2007 and reflect only a total (with no breakdown by category). find ways to create and sustain productive a. ASEAN+ countries. xxvi EXECUTIVE SUMMARY FIGURE 4 Youth inactivity is high in some of the Pacific work, amid more difficult global economic island countries, Indonesia, and the Philippines prospects and more intense competition. Countries can ill afford to ignore what Youth (ages 15–24) not employed or in education or training, circa 2010 appear to be increasingly restrictive business Cambodia environments.3 Vietnam In addition, skills shortages in the labor Lao PDR Mozambique force in many East Asia Pacific countries are Slovak Republic becoming a binding constraint. Skill gaps Thailand threaten growth when health and education Lithuania systems and the existing labor force adjust China Ecuador too slowly to keep pace with fast-evolving Nepal demand, and when incentives for people to Poland invest in skills, and firms to choose technolo- Tanzania Czech Republic gies are distorted by outdated policies. Short- Pakistan ages of basic skills in Cambodia, Lao PDR, Paraguay and several Pacific island countries, as well Honduras India as gaps in advanced skills across the region’s Estonia labor force, are motivating governments to Panama pay more attention to health, education, and Romania Peru training systems (figure 5). Moderating rates Latvia of economic growth and slower gains in liv- Brazil ing standards than many in the region have Malaysia Belgium come to expect over the last two decades Costa Rica have led to louder and more frequent calls for Hungary governments to become more active to ensure Portugal El Salvador sustained and more widespread well-being Mongolia from work. Dominican Republic For these reasons, the discussion of well- Uruguay Colombia being from work is pushing to the political Sri Lanka forefront and, if ignored, could threaten the Argentina social contract. In contrast to the history of Timor-Leste today’s high-income countries, the rapid eco- Bolivia Greece nomic changes in emerging East Asia Pacific Papua New Guinea countries have not been accompanied by the Bulgaria development of social and civic institutions to Indonesia West Bank and Gaza accommodate the interest of different groups Spain and classes. As a result, many countries Fiji now face the difficult challenges of slowing Philippines Italy growth, increasing inequality, and an unprec- Turkey edented pace of structural transformation Serbia without the support of strong formal civic, Mauritania Botswana labor, and social welfare institutions. House- Mauritius holds and governments in the region are Vanuatu beginning to question how policies can ensure Tuvalu that work continues to improve well-being 0 10 20 30 40 50 60 70 80 90 100 through higher productivity, rising living Percent standards, and greater social cohesion. The Young men Young women development trajectories of East Asia’s high- income success stories also included periods Source: World Bank 2012, Core Statistical Tables, based on the World Bank’s International Income Distribution Database (I2D2). when similar calls for “inclusive growth” and EXECUTIVE SUMMARY xxvii FIGURE 5 Employers cite lack of skills among applicants as the top reason for persistent vacancies a. Yunnan, China, STEP 2011: Reasons cited for difficulty b. Lao PDR, STEP 2012: Reasons cited in filling positions (technicians and associate professionals) for difficulty in filling positions Applicants Applicants lacked lacked required skills required skills Applicants Applicants expected expected higher wages higher wages Applicants did No or few not like working applicants conditions No or few Applicants did applicants not like working conditions 0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 % of respondents % of respondents Technician Professional Source: Liang and Chen 2013, based on the Skills Towards Employability and Productivity (STEP) employer survey. “jobs strategies” were heard. But the answers capital development, policy makers should that made sense for those countries at the take into account all forms of economic time may not be viable today in a far more units (from farms to microenterprises, integrated, rules-based global economy. SMEs to corporations) as well as all forms of work (wage and nonwage, full time and part time) that exist in the region. Policy How can policy sustain well- makers should be alert to laws and regula- being from work in East Asia tions that intentionally or unintentionally influence fi rms’ decisions about how much Pacific? capital or labor to employ or households’ The most powerful policies to sustain well- decisions about where and how much labor being from work reach far beyond the labor to supply. A policy stance that biases fi rms’ market and aim to establish sound funda- and households’ decisions will result in mentals. The most important are those that structural imbalances: too much capital and ensure price stability and maintain a fi scal not enough labor in one part of the economy stance that encourages investment and inno- or vice versa. These imbalances can become vation and a regulatory framework for fac- embedded economically and politically and tor and product markets that encourages hinder countries’ ability to adjust, evolve, enterprise, particularly in the small and and grow. medium enterprises (SMEs), where most With sound fundamentals in place, as people in East Asia Pacific work. In setting policy makers turn their attention to the mar- the fundamentals of macroeconomic pol- ket for labor and human capital and to social icy, the business environment, and human protection, they should pay closer attention to xxviii EXECUTIVE SUMMARY the many ways in which people in East Asia policy makers can apply to identify their Pacific work to earn a living. Governments particular challenges in maximizing well- stepping into this still relatively new arena being from work and with which they can of policy making do not have to respond to prioritize public investments. The typology increasing calls for intervention with policies takes account of countries’ levels of devel- that were designed and evolved in very differ- opment, demography, natural endowments, ent contexts. The prevailing models of labor and political circumstances, and it helps regulation and social protection developed in policy makers to determine which of these countries where full-time salaried employ- factors are dominant in shaping the oppor- ment was the most common way to work tunities for and constraints on the demand and during periods in their history when men for and supply of labor and human capi- were by far the largest group in the work tal. The eight country types are agrarian, force. Indeed, the evidence, including from conflict-affected, formalizing, high youth East Asia Pacific, shows that these mod- unemployment, resource-rich, small island els benefit prime-age men in full-time wage state, urbanizing, and aging (figure 6). employment at the expense of other working This typology of challenges to well-being people. from work offers new and useful insights. Policy makers should focus on measures First, it demonstrates how diverse the region that favor all working people, even if they is, in that East Asia Pacific countries can be work for themselves or hire others to work mapped to at least one of all eight types. for them. In principle, labor regulation and There is no single dominant set of chal- social protection should benefit all working lenges, as there is in other emerging market people and their dependents, and not favor regions.4 Second, most countries can rea- any sector, location, or manner of economic sonably be mapped to more than one type, engagement. For instance, the new emphasis reflecting the dynamism of the region. Third, in several Scandinavian countries on protect- setting aside the types determined by natu- ing people rather than jobs is a way of pro- ral endowments (such as the small Pacific viding protection against labor market risks, island states and “resource-rich” economies), without tying this protection to where or how most East Asia Pacific countries are “agrar- a person works. A national system of mod- ian” or “urbanizing.” Indeed, given the stage est, noncontributory unemployment benefits, of development of the region’s population fi nanced by general revenues, could relieve giants, most people in East Asia Pacific live employers of costly severance schemes, lower and work in the “agrarian” or “urbaniz- the distortionary impact of labor taxes, and ing” contexts. This is important because, as provide some incentive for workers currently stressed in the WDR 2013, when countries without any protection to register their work are (or are close to) urbanizing, all three and businesses. In several countries, govern- development transformations tend to happen ments are already experimenting with delink- at a similar pace: productivity and wages are ing financial protection and risk pooling for increasing, living standards are rising, and health from where and how people work. social cohesion is greater, as more people Thailand’s universal health coverage model is move out of poverty and closer to middle- the most successful example of this approach class prosperity. But when countries have and is credited with extending both coverage substantially urbanized, one or more of the and usage. transformations can start to lag. This story Governments also have a role in mak- is unfolding in the region now, prompting ing and sustaining investments in public demand for policy action. goods and in capturing opportunities to Applying the typology to East Asia increase well-being from work that would Pacific countries suggests the following remain unexploited if left purely to market guidance regarding the most salient policy incentives. WDR 2013 offers a typology that challenges. EXECUTIVE SUMMARY xxix FIGURE 6 Countries can be classified into eight types by their specific challenges, although most countries in East Asia Pacific fall into more than one type a. Types and defining characteristics Agrarian Majority of the population lives in rural areas Conflict- Livelihoods altered by war and violence affected Urbanizing Agricultural modernization and rural-urban migration rapidly taking place Resource-rich Extractive industries make a substantial contribution to exports Small islands Size of population doesn’t support economies of scale or specialization High youth Youth unemployment rates and idleness rates at unusually high levels unemployment Formalizing An urban middle class and a large share of informal employment coexist Aging Rapidly increasing old-age dependency ratios b. Plausible mapping of East Asia Pacific countries Agrarian Cambodia, Lao PDR, Myanmar, Papua New Guinea, Thailand, Timor-Leste, Vietnam Conflict- Timor-Leste, Solomon Islands affected Urbanizing China, Indonesia, Lao, PDR, Malaysia, Mongolia, Philippines, Vietnam Myanmar, Mongolia, Papua New Guinea, Lao PDR, Timor-Leste, Indonesia Resource-rich Fiji, Kiribati, Marshall Islands, Micronesia (Fed. Sts.), Palau, Samoa, Solomon Islands, Small islands Tonga, Tuvalu, Vanuatu High youth unemployment Indonesia, Mongolia, Philippines Formalizing China, Malaysia, Mongolia, Philippines Aging China, Indonesia, Thailand, Vietnam Source: Based on World Bank 2012. Small island countries small size makes it almost impossible to achieve economies of scale. Moreover, the In small island countries, employment cre- Pacific island countries are particularly con- ation led by private enterprise is signifi- strained by great distances, which conspire cantly constrained by small and dispersed against their gaining competitiveness even populations. Outside of niche sectors, xxx EXECUTIVE SUMMARY in activities where endowments would oth- services. The most notorious example in the erwise give them a comparative advantage. region is China’s hukou; whereas Vietnam’s Given these constraints, policy makers have experience in the 1990s and the fi rst decade to focus on preparing young people with of the twenty-first century is an often- the human capital they will need to succeed cited example of success. The danger to be abroad as migrant workers. In doing so, ser- avoided is urbanization despite policy rather vice provision itself can become a force for than enabled by policy, characterized by employment creation when populations are efforts to discourage people from moving, dispersed on difficult-to-reach islands. And unproductive use of land, people migrating while the Pacific island countries are too in search of better health and education ser- constrained by economic geography to com- vices, cities unprepared for fast population pete in manufacturing, and fi nd it difficult growth, and rapid divergence in living stan- to process their natural resources for export, dards between town and country. managing the exploitation of these resources and tourism nevertheless offers opportuni- Urbanizing economies ties for work. Also, as improvements in information and communication technology For countries that are rapidly urbanizing bring the islands closer to distant markets, (particularly China, Indonesia, Mongolia, opportunities for work in call centers and the Philippines, and Vietnam), the policy other business services may become more priority is to make cities work better. Some- readily available. Again, it would be wise to what counterintuitively in a discussion of invest in human capital to prepare people to well-being from work, the factor market that take advantage of these opportunities. policy makers should pay the greatest atten- tion to is the market for land. Since land is the least mobile factor of production, good Agrarian economies urban planning becomes the key to increas- For countries that are still mainly agrarian ing the flexibility and efficiency of land use. (particularly Cambodia, Lao PDR, Myan- Urban planning becomes the area of policy mar, Papua New Guinea, and Timor-Leste), with the greatest impact on the incentives of the policy priority to increase well-being fi rms in towns and cities to form, to grow, to from work is to raise agricultural productiv- move up the value chain, and thus to create ity, in order to free labor and human capital and sustain demand for labor and human to work in rural off-farm enterprises and capital. Also important are urban transpor- eventually to migrate to towns and cities. tation infrastructure and service provision, The instruments to increase agricultural pro- to ensure that growing cities with plenty ductivity and facilitate the structural transi- of skilled people foster economies from tion are land reform, agricultural extension agglomeration rather than incur burden- programs, price deregulation, rural infra- some costs from congestion. The examples structure, and good-quality education and of both Japan and the Republic of Korea are health services. Ignoring such measures will instructive in this regard. result in low productivity and persistently high poverty, as discussed in the Philip- Formalizing economies pines Development Report 2013: Creating More and Better Jobs (World Bank 2013). In several countries where urbanization is To sustain well-being from work, govern- already well advanced (including China, ments should identify and remove policies Malaysia, Mongolia, and Vietnam), govern- and programs that create implicit or explicit ments are also facing the challenges of “for- restrictions that keep working people from malizing” more work, in part to increase the moving off the farm and into rural non- coverage of essential work-risk and social farm industry or urban manufacturing and protection, but also to lift constraints on EXECUTIVE SUMMARY xxxi productivity. The key is to avoid forming the arenas of labor and social protection, is or entrenching a policy and regulatory short relative to that of countries in Latin framework that creates labor market segmen- America and Central Europe. As a result, tation. Segmentation can be caused by differ- the costs of transitioning from a biased ences in how income from different sources stance (that favors certain factors of produc- is taxed; by rules for providing credit that tion, sectors of activity, or ways of working explicitly or implicitly exclude self-employed over others) to a policy stance that favors all people and small businesses, as well as busi- working people are likely to be much lower nesses owned by women; by differences in in East Asia Pacific. For instance, while the types of work that are recognized in the Latin American and Central European gov- labor code and the types that have no legal ernments might fi nd it appealing to provide recognition or accommodation; and espe- “noncontributory” forms of social protec- cially by how nonwage social protection ben- tion, instead of those fi nanced by employer efits are designed and financed. Models of and worker contributions, the transition labor regulation and social protection that costs of such a shift may be hard to afford tie eligibility to certain places, industries, and for already heavily indebted governments. forms of work and that are financed by man- In contrast, East Asia Pacific governments datory contributions from employees and face limited “legacy costs,” fiscally as well as employers create segmentation. In most low- politically: there are relatively fewer vested and middle-income countries, this segmenta- interests and social protection “sacred cows” tion is further aggravated by institutional and in the region. administrative weaknesses. The typical result On the flip side, the risks of ignoring is the exclusion and disenfranchisement of or aggravating biases in the current pol- many working people from social protection icy framework are higher for countries in and labor institutions. To avoid segmenta- East Asia Pacific due to their rapidly shift- tion, policies in the areas of macroeconomics, ing demography. The pace of this demo- business regulation, human capital develop- graphic wave is likely to pick up in a couple ment, and labor and social protection should of years and roll over the region faster than take into account all forms of economic pro- it has over any other. In China the statis- duction and all forms of work in the region. tics authorities reported the first ever con- Doing so will encourage factor mobility and traction of the working-age population in efficient factor allocation, helping countries 2012. Korea already has the lowest popula- to make the difficult transition out of middle- tion replacement rates in the world. And if income status. the average longevity of people in Japan is a suitable benchmark, many people in East Asia can expect to live very long lives. Yet “Business as usual” is not an at the margin, most policy models currently in place in the region are likely to discour- option age longer working lives, constrain the pro- East Asia Pacific faces a future of moderat- ductivity of older people, deprive all working ing rates of economic growth and pressure to people of the foundational skills they need to respond to rising threats to well-being from easily re-skill throughout their lives, or dis- work. Not taking action will increasingly courage formal forms of work that appeal threaten social cohesion, constrain produc- to the elderly (part-time, irregular hours). tivity, and limit gains in living standards. Structural discouragements of longer work- Policy makers in East Asia Pacific have ing lives in East Asia Pacific are nowhere greater opportunity to respond appropriately near as bad as they are in Latin America than their counterparts in other regions. The or Southern and Central Europe, where it good news is that the history of policy inter- often pays to withdraw from the labor force ventions in East Asia Pacific, particularly in at an early age. Today, people in East Asian xxxii EXECUTIVE SUMMARY countries work longer into old age because avoid segmentation : cleavages in factor they do not have any other choice. But this markets that impede competition, impair is a poor, residual outcome rather than the labor mobility, and limit the coverage of intended consequence of a coherent employ- essential work risk and social protection. ment strategy. Better policy fundamentals, Segmentation is caused mainly by intended labor and social protection institutions, and and unintended biases in countries’ policy proactive measures targeted at older people frameworks, including differences in how could create stronger incentives for people income from different sources is taxed, rules to remain productive longer. Across the for providing credit that explicitly or implic- region—particularly in the Pacific island itly exclude self-employed people, design countries that, despite a “younger” demo- and fi nancing of nonwage social protection graphic profile, face a health and financial benefits, and recognition of only some types burden of noncommunicable diseases similar of work in the labor code. to that of much “older” countries—greater Avoiding and eliminating biases and seg- emphasis on better nutrition and prevention mentation from factor markets are essen- is likely to lengthen productive working lives tial if the countries of East Asia Pacific are and ease the burden of health care costs. to grow in wealth before they have to face While preparing for the onset of aging, the far more difficult challenges of an aging several governments in the region are also economy. This is the current quandary of sev- facing the challenges of “formalizing” eral middle-income countries in Central and more work, in part to increase the cover- Southern Europe and in the Southern Cone age of social protection, but also to sustain of Latin America that became old before they productivity and increase the tax base for became rich. Their example should strike a fi nancing public goods (figure 7). As shown note of caution for policy makers in East Asia in chapter 7, in the region’s most populous Pacific countries, where the average age of countries, the majority of people will soon the labor force and the share of elderly in the live in towns and cities. The key principle population are already rising quickly. for policy making in these countries is to FIGURE 7 The constraints on growth from a large informal Notes economy are a danger as countries age 1. For instance, it is much higher than in Belgium and France, and than in high-income coun- Overlapping aging and formalizing challenges 2010 tries in the region, such as Australia and New Zealand. Share of pension contributors in the labor force, 2010 (%) 100 2. The Gini coefficient of consumption inequal- Aging threshold Australia Japan ity in China increased from approximately 90 35 percent in the mid-1990s to 42 percent in the 80 Korea, Rep. mid-to-late 2000s. Among salaried workers Formalizing 70 upper in Indonesia, annual wage increases between threshold 1999 and 2003 amounted to 9.3 percent for 60 Malaysia nonpoor employees, but only 6 percent for 50 Mongolia poor and near-poor employees. 40 3. In the World Bank’s Ease of Doing Business 30 China ranking, Indonesia (ranked 120), the Philippines Thailand Formalizing Philippines (108), and Cambodia (137) score 20 Vietnam lower threshold poorly. China (96) and Vietnam (99) score Indonesia 10 Timor-Leste moderately. Papua New Guinea Lao CambodiaPDR 4. For instance, the dominant challenge in Europe 0 0 5 10 15 20 25 30 35 40 45 and Central Asia is mostly aging; in Latin Old-age dependency ratio, 2010 America and the Caribbean it is mostly formal- izing; and in the Middle East and North Africa Sources: World Bank Pension Database 2013; United Nations Population Division. it is mostly high youth unemployment. EXECUTIVE SUMMARY xxxiii References Transformation and Social Harmony in Yunnan, China. Directions in Development Giles, John, Dewen Wang, and Albert Park. Series. Washington, DC: World Bank. 2 013 . “ E x p a n d i n g S o c i a l I n s u r a n c e World Bank. 2012. World Development Report Coverage in Urban China.” Policy Research 2013: Jobs. Washington, DC: World Bank. Wo r k i n g P a p e r 6 4 9 7, Wo r l d B a n k , http://hdl.handle.net/10986/11843. Washington, DC. ———. 2013. Philippines Development Report Liang, Xiaoyan, and Shuang Chen. 2013. 2013: Creating More and Better Jobs. Manila: Developing Skills for Economic World Bank. Abbreviations ASEAN Association of Southeast Asian Nations EPL employment protection legislation EU European Union GDP gross national product I2D2 International Income Distribution Database ILO International Labour Organization NPA New People’s Army OAD old age dependency OECD Organisation for Economic Co-operation and Development PIC Pacific island country PISA Program for International Student Assessment RSE recognized seasonal employer SABER-WfD Systems Approach for Better Education Results–Workforce Development SAR Special Administrative Region SEWA Self Employed Women’s Association SME small and medium enterprise STEP Skills Towards Employment and Productivity TFP total factor productivity TVET technical and vocational education training UCS Universal Coverage Scheme UN United Nations WDR World Development Report ISO 3166 country or economy abbreviations AUS Australia CHN China FJI Fiji FSM Federated States of Micronesia HKG Hong Kong SAR, China IDN Indonesia xxxv xxxvi ABBRE VIATIONS JPN Japan KHM Cambodia KIR Kiribati KOR Republic of Korea LAO Lao People’s Democratic Republic MHL Marshall Islands MYS Malaysia NZL New Zealand PHL Philippines PICs Pacific island countries PLW Palau PNG Papua New Guinea PRK Democratic Republic of Korea PYF French Polynesia SGP Singapore SLB Solomon Islands THA Thailand TLS Timor-Leste TON Tonga TUV Tuvalu TWN Taiwan, China VNM Vietnam VUT Vanuatu WSM Samoa Introduction and Road Map 1 East Asia Pacific is like no other region in unfettered markets all foster opportunities ways that strongly affect the supply of and for advancement through work that peo- demand for labor and human capital and ple in other regions regard with envy. In the well-being that people gain from work. East Asia Pacific, work has brought more people out of poverty and closer to middle- T alent, skills, and the ability to work class prosperity faster during the past three are people’s most important assets. decades than in any other place and at any The majority of people realize the other time. value of these assets in the labor market, Nevertheless, working people in many whether they sell their time to others or parts of the region feel some of the same pursue their own enterprise. Work is often pressures and face some of the same chal- the channel through which the benefits of lenges as their peers elsewhere. The region economic growth spread and living stan- has the second highest share of workers dards improve. This has been especially outside of wage and salaried employment evident since 1990, as the share of the and consequently beyond the reach of most world’s population living in poverty has forms of regulation and formal protection. declined by half. The prospects of working In this regard, East Asia Pacific is surpassed people in East Asia Pacific are better than only by Sub-Saharan Africa. In some East those of many living elsewhere. The flow Asia Pacific economies, youth inactivity of goods and services within the region, and unemployment are growing problems, integration with the global economy, most starkly apparent in Indonesia, the price stability, rule of law, and relatively Philippines, and the Pacific island countries. Economists are more familiar and comfortable with the term “welfare.” Although “welfare” and “well- being” are synonyms, the latter is more typically associated with safety or psychological comfort than with the outcomes discussed in this report—economic development, material living standards, and social cohe- sion. In discussions of work, welfare is often used too narrowly in reference to social protection programs. Further, there is considerable evidence that individuals and communities draw benefits from their work that are neither strictly pecuniary nor a function of economic growth, many of which contribute to social cohesion and, in turn, to development. 1 2 E A S T A S I A PAC I F I C AT W O R K As rising indexes of inequality in several East Second, the report contributes to what Asia Pacific economies show, these challenges is still a relatively small body of empirical are starting to threaten the viability of work evidence showing the impact of policies as a means of advancement and a channel on employment in East Asia Pacific and through which economic growth can be proposing options for reform. With some shared broadly. In addition, after more than notable exceptions (Betcherman and Islam two decades of rapid development, people in 2001), there are still fewer policy reports on the region are beginning to experience mod- labor markets, work, and development with erating economic growth, often coupled with a regional scope in East Asia Pacific than in lagging productivity and slower gains in liv- Europe, Latin America and the Caribbean, ing standards than they have come to expect. the Middle East and North Africa, or As a result, governments across the region are South Asia. beginning to hear louder and more frequent Third, in covering geography that extends calls for action to sustain the well-being— from China to Tuvalu, the report takes that is, the individual and social gains—that closer account of the region’s diversity. East people can expect from their work. Asia Pacific economies differ considerably East Asia Pacific At Work examines in their size, natural endowments, demogra- the changing world of work in a diverse, phy, political institutions, and stage of eco- dynamic region and proposes how policy nomic development. In several, most people can support inclusive growth by creating still live in rural areas and work in subsis- a more enabling environment for working tence or small-scale agriculture; in others, people. The report is motivated by and ben- rural-urban migration has been taking place efits from the spotlight shone on work and rapidly. In several, urbanization is already development by the World Development well advanced, and an ever-growing concen- Report 2013: Jobs (henceforth WDR 2013; tration of working people in cities is creating World Bank 2012c). Like the WDR 2013, pressure on governments to broaden social this report is about a much broader variety protection and bring more economic activ- of forms of work than is typically under- ity into the regulated “formal” economy. stood by the word “jobs,” including farm In many parts of the region, the labor force employment, unpaid family work in house- is aging, particularly in the most populous hold market enterprises, self-employment, countries—China, Indonesia, Thailand, and and casual labor. We use the more inclusive Vietnam. In contrast, the labor force in most term “work” instead of “jobs” throughout of the Pacific island countries is still very this report to reflect a broader range of mar- young, but the small size and remoteness ket activities than just full-time, salaried of these countries present a host of unique employment. We apply the conceptual and challenges to work as an effective channel of analytical tools presented in the WDR 2013 development. Appreciating the exceptional to East Asia Pacific economies in order to diversity of East Asia Pacific is essential to draw additional inferences and guidance for understanding the challenges to sustaining policy makers in the region. the gains from work and to crafting policies This report adds value to the discussion to address these challenges. initiated by the WDR 2013 in three specific In this chapter, we open the report by ways. First, it grapples with issues that are acknowledging how East Asia Pacific is like of greatest urgency in East Asia Pacific. The no other region in ways that strongly affect economic and demographic changes in this work. Those who have spent time reading region, as well as the nascent engagement of and writing about the economies of East its governments in labor regulation and social Asia Pacific in the past 30 years have grown protection, affect the demand for and supply used to superlatives, with good reason. The of work in ways that are distinct from those region’s dynamic context of economic and in countries elsewhere. social change has had undeniable impacts INTRODUCTION AND ROAD MAP 3 on the demand for and supply of labor and particularly East Asia, from other, mainly human capital. The first section of this low- and middle-income-country, regions in chapter shows that several important factors setting the environment for work. These con- set the region apart in shaping the context textual factors have facilitated the fast pace of for work, including its sustained high growth structural change and influenced the returns and fast-rising prosperity. to labor and human capital. The first factor is Our discussion then turns to the question, deeper economic integration with the global Has growth in East Asia Pacific been “job- economy. Another is sustained high growth less”? With the highest rates of participation that has accelerated the pace of development. in market employment and the lowest rates The third is economic resilience through the of open unemployment, the question may period of global financial crisis and economic seem odd. Nonetheless, evidence from our contraction of 2008–10. Finally, although own analysis and that done by others shows growth in the region has not been especially that the relationship between employment volatile—with the exception of growth in the and changes in output is not straightforward Pacific island countries—the entire region and cannot be taken for granted. But claims faces higher risks from natural disasters of so-called “jobless growth” are just as over- than countries elsewhere and has borne a blown and simplistic as complacency about heavier economic burden from these disas- what markets can achieve when left to their ters. These contextual factors shape not only own devices. Although not sufficient, eco- the speed of structural transformation and nomic growth, as a derived demand, is nec- what most people do to earn a living, but essary to sustain the demand for work. That also the relative returns to labor and human conclusion allows us in the chapters that capital, the skills profile required to maintain follow to examine the quality of work and productivity, and the vulnerability of work- whether and how it contributes to people’s ing people to shocks. We turn to each of these well-being. contextual factors in turn. Finally, this chapter closes with a “road Economic growth in the region is char- map” of the report. We have divided the nine acterized by a greater degree of export ori- chapters into three parts. The first (chapters entation and openness to world trade than 1, 2, and 3) describes the context: what is elsewhere. This has been true for so long unique about East Asia Pacific, how diverse that it is rarely questioned. Figure 1.1 shows are the profiles of households and firms how merchandise trade as a share of global within the region, and how is the contribution gross domestic product (GDP) has been rising of work to well-being changing. The second in almost every region of the world. But in part (chapters 4, 5, and 6) reviews policy and East Asia Pacific, the levels of economic inte- takes stock of the prevailing models in East gration measured by this statistic have been Asia Pacific and how they affect the prospects higher, around 50–60 percent, than in other of and outcomes for working people. The low-income and emerging-market regions. third part (chapters 7, 8, and 9) looks at the This level of global integration has remained policies that governments in East Asia Pacific high throughout the last two decades. And to economies may wish to consider to sustain a much greater extent than in other regions, the transformative impact of work, even as integration with the global economy rests on growth in the region begins to moderate. integration between East Asian economies and the flow of trade in intermediate goods (Gill and Kharas 2007). The context for work in East Asia The East Asian economies have sustained higher rates of economic growth for much Pacific longer periods than other regions that have Several interrelated contextual factors dif- experienced spurts of high growth, result- ferentiate the East Asia Pacific region, ing in fast-rising living standards. At average 4 E A S T A S I A PAC I F I C AT W O R K FIGURE 1.1 Countries in East Asia Pacific have sustained higher levels of global integration longer than other developing regions Merchandise trade as a percentage of GDP 100 90 80 70 60 Percent 50 40 30 20 10 0 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2011 East Asia Pacific Pacific Island States Europe and Central Asia Latin America and the Caribbean Sub-Saharan Africa Middle East and North Africa South Asia Lower middle-income countries Middle-income countries Source: World Bank 2013c. annual GDP growth of more than 9 percent average annual GDP growth during the first between 1990 and 2011, East Asia far sur- decade of the twenty-first century was close passed other regions. Average annual growth to 10 percent in China, it was close to zero was almost 4 percentage points higher than in several small Pacific island countries. As the averages for lower- and middle-income shown in figure 1.2, the growth rate was countries (figure 1.2). What is more, eco- much lower in the Pacific island small states, nomic growth in the region outside the Pacific at 3 percent, than in East Asia. Furthermore, island countries was not particularly volatile: economic growth in the Pacific was signifi- the volatility of GDP growth, measured by cantly more volatile and, in this regard, was the standard deviation of average annual eco- similar to growth in Latin America and the nomic growth during 1990–2011, was lower Caribbean and in Sub-Saharan Africa. than in any other developing-country group. Economies in East Asia Pacific showed As a result, the region’s share of world output considerable economic resilience through and its share of output growth both increased the period of the global financial crisis and substantially (figure 1.3). East Asia Pacific’s economic contraction of 2008–10. Perhaps share of global GDP rose from 6.7 percent in reflecting hard-learned lessons during the 1990–92 to 17.4 percent in 2009–11. region’s crisis in the late 1990s, some econ- But it is important to note the diversity omies in East Asia continued to generate of experience in East Asia Pacific, which employment even during the global eco- has large differences in the rate of economic nomic slowdown and contraction of 2009 and social progress. For example, although and 2010, although with a substantial INTRODUCTION AND ROAD MAP 5 FIGURE 1.2 East Asia’s high growth has been relatively stable a. GDP growth, 1990–2011 b. Volatility of GDP growth, 1990–2011 East Asia Pacific East Asia Pacific Pacific Island States Pacific Island States Europe and Central Asia Europe and Central Asia Latin America and the Caribbean Latin America and the Caribbean Middle East and North Africa Middle East and North Africa South Asia South Asia Sub-Saharan Africa Sub-Saharan Africa Lower middle-income countries Lower middle-income countries Middle-income countries Middle-income countries 0 1 2 3 4 5 6 7 8 9 10 0 1 2 3 4 5 6 7 8 9 10 Average annual % Standard deviation (% points) Source: World Bank 2013c. FIGURE 1.3 East Asia Pacific’s share in world output and growth has risen rapidly a. Share of global GDP by group of countries b. Contribution to global GDP growth by group of countries 100 3.0 Percent (PPP, constant 2005 int'l $) Percent (PPP, constant 2005 int'l $) 90 2.5 80 2.0 70 60 1.5 50 1.0 40 0.5 30 0 20 10 –0.5 0 –1.0 1990–92 2009–11 1990–92 2009–11 East Asia Pacific Europe and Central Asia Latin America and the Caribbean Middle East and North Africa South Asia Sub-Saharan Africa High-income countries World GDP growth Source: World Bank 2013c. downward adjustment in earnings (as shown part-time work, and from jobs in firms and in figures 1.4 and 1.5). This adjustment took factories in cities to work on farms in rural place in part because working people shifted areas. Amid the more recent slowdown in from registered, regulated work to unreg- growth, unemployment has remained steady istered, “informal” contracts, from full- to in East Asia Pacific economies, relative to the 6 E A S T A S I A PAC I F I C AT W O R K FIGURE 1.4 East Asia Pacific did not experience large contractions rises seen elsewhere (figures 1.6 and 1.7). In in employment during the crisis the recovery period, East Asia Pacific con- tinues to remain resilient despite a perilous Changes in employment during crisis and recovery global economic context: developing East Asia Pacific, excluding China, is expected to Latin America and grow 5.7 percent in 2013, up from 4.6 percent the Caribbean (9) in 2011 (World Bank 2013a). Despite a positive outlook, the context in Middle East and which firms demand and households supply North Africa (3) labor and human capital is not without chal- lenges. For example, in the wake of the global East Asia Pacific (3) financial crisis and economic contraction, the external economic environment continues to Europe and be weak and will be so for the foreseeable Central Asia (14) future. Annual GDP growth in high-income and developing-country markets is expected –2 0 2 4 6 8 to improve only slightly in the period to Percent 2015. With slow recovery of demand from 2008 2009 2010 high-income countries, demand from domestic consumption is becoming more Source: World Bank 2011. important to sustain growth in East Asia Note: Numbers in parentheses refer to the number of countries used to calculate the regional Pacific economies. Indeed, consumption and average. services replaced investment and manufac- turing as the dominant drivers of growth in China for the first time in 2013. As shown FIGURE 1.5 Growth in earnings slowed down during the crisis in figure 1.8, the contribution of domestic demand to year-on-year output growth has increased since 2007 in four members of Real changes in earnings during crisis and recovery the Association of Southeast Asian Nations (ASEAN). In addition, with rising labor costs Sub-Saharan Africa (3) in China, some low-labor-cost production in the global production chain is on the move. For example, garment production is moving East Asia Pacific (2) in greater volume to Bangladesh, Mexico, Morocco, and Turkey. The challenge for the Europe and rest of East Asia is to leverage their com- Central Asia (15) parative advantage in intermediary and final goods trade and to integrate anew into the Latin America and the Caribbean (4) changing global supply chain. In the midst of these shifts in demand –5 0 5 10 15 20 from consumers abroad to consumers at Percent home, economies and working people in East 2008 2009 2010 Asia Pacific face risks that are hard to assess. Economies in the region face significantly higher and increasing disaster risks that Source: World Bank 2011. Note: Numbers in parentheses refer to the number of countries used to calculate the regional impose substantial economic costs. Disasters average. have cost the economies of East Asia Pacific more than US$300 billion since 2000, almost three times the cost to countries in Latin America and the Caribbean (figure 1.9). INTRODUCTION AND ROAD MAP 7 The region incurred 61 percent of global FIGURE 1.6 Unemployment remained low during the crisis losses from disasters in the past 20 years and 40 percent of floods worldwide in the past Changes in annual unemployment 30 years. More than 1.6 billion people in the during crisis and recovery region have been affected by disasters since 2000, as detailed in a recent World Bank Sub-Saharan Africa (7) report (Jha and Stanton-Geddes 2013). Natural disasters disrupt growth and Middle East and demand for work and thus have a dispropor- North Africa (7) tionate impact on poor and lower-income Europe and people who rely on work the most. Natural Central Asia (20) disasters divert government budgets away from essential services and investment and Latin America and the Caribbean (18) thereby lower longer-term growth pros- pects. With rising numbers of people and East Asia Pacific (9) economic assets located in places at risk, losses are likely to rise further. Indeed, with 0 5 10 15 respect to natural disasters, 2011 was the Percent costliest year on record: in the first nine 2008 2009 2010 months, losses in East Asia Pacific amounted to US$259 billion, which was 80 percent of Source: World Bank 2011. the global total. In relative terms, the Pacific Note: Numbers in parentheses refer to the number of countries used to calculate the regional average. island countries are the most affected glob- ally, with average annualized losses esti- mated for Vanuatu and Tonga at 6.6 and 4.4 percent of GDP, respectively (Jha and Stanton-Geddes 2013). FIGURE 1.7 Recovery has been slow A final contextual factor worth men- tioning is in many ways a combination Unemployment rate and a culmination of the previous fac- tors discussed in this section, setting aside South Africa natural disaster risks. In the past 60 years, Colombia many countries came into being as modern nation-states. Through a slow and painful Turkey process of trial and error, governments in Russian Federation these countries have attempted to improve Philippines the lot of their people, sometimes through direct measures aimed at spurring industry Indonesia and employment. But there are still very Brazil few stories of successful economic devel- opment and many stories of failure and Mexico back-sliding. Of the few countries or econ- China omies making the difficult transition from Thailand low- to high-income status, most are in the East Asia Pacific region (figure 1.10). Why 0 5 10 15 20 25 30 should this matter to working people today Percent and to the governments that serve them? 2011 Q2 2011 Q1 2010 Q2 2010 Q1 It matters that Japan; Hong Kong SAR, China; the Republic of Korea; Singapore; Source: World Bank 2011, 2012b. and Taiwan, China succeeded because their Note: Q1 and Q2 refer to the first and second quarters, respectively. 8 E A S T A S I A PAC I F I C AT W O R K FIGURE 1.8 Domestic demand is becoming more important to growth in East Asian economies ASEAN-4 and China: domestic demand, 2007–12 ASEAN-4 contribution to year-on-year growth (%) China contribution to year-on-year growth (%) 12 14 10 12 8 6 10 4 8 2 0 6 –2 4 –4 2 –6 –8 0 2007 2007 2008 2008 2009 2009 2010 2010 2011 2011 2012 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q2 Indonesia Malaysia Philippines Thailand ASEAN-4 China (right axis) Sources: Haver Analytics 2013; China National Bureau of Statistics 2013. FIGURE 1.9 East Asia Pacific faces much higher disaster risks than success shapes the aspirations of people in elsewhere, and it bears the largest share of global losses the region regarding what they expect from themselves and from their governments. Economic costs per hazard by region, 2000–11 Total Has growth in East Asia Pacific Volcano been “jobless”? The sustained high levels of growth in Storm recent decades that have set East Asia Pacific Mass movement apart from other regions are expected to wet have tremendous impacts on work. Has Flood growth indeed put more people to work? Extreme This section examines the empirical rela- temperature tionship between growth and employment Earthquake and, by doing so, sheds light on whether (seismic activity) East Asia Pacific has experienced “jobless Drought growth.” The demand for labor is derived from changes in output. Although eco- 0 100 200 300 nomic growth can affect employment, it US$ (billions) matters less in the medium and long term East Asia Pacific Latin America and the Caribbean than demographic trends and changes in the South Asia Europe and Central Asia population dependency ratio (World Bank Middle East and North Africa Sub-Saharan Africa 2012c). Changes in demography narrow the extent to which macroeconomic poli- Source: CRED 2013. cies and outcomes can affect employment. INTRODUCTION AND ROAD MAP 9 FIGURE 1.10 Few economies rose from low to high income, but among those that did, most are in East Asia Pacific Per capita income relative to the United States, 1960 and 2008 6 Middle income Staying rich to high income 5 Hong Kong SAR, China 2008 per capita income relative to the Singapore Spain Ireland Equatorial Guinea Taiwan, China Japan 4 Korea, Rep. Portugal Israel United States (log of %) Mauritius Puerto Rico Greece 3 China From low income to 2 middle income Middle-income “trap” 1 Low-income “trap” Becoming poor 0 0 1 2 3 4 5 6 1960 per capita income relative to the United States (log of %) Source: World Bank and Development Research Center 2013. In addition, for a region where large sectoral Among the 23 East Asia Pacific economies shifts in labor are a key part of economic with available trend data, 11 experienced no success (discussed further in chapter 3), growth or an actual contraction in employ- looking at growth and overall employment ment per capita over the period 2000–10. can give only a partial picture of the links W hile the employment rate increased between growth and work. strongly from 2000 to 2010 at an average Following the WDR 2013, we examine of 0.5 percent or higher a year in Cambodia the relationship between annual growth of and Macao SAR, China, it dropped an aver- GDP per capita and growth of employment age of −0.5 percent a year in Malaysia. While per capita over the period 2000–10, but for gross employment creation was positive in a larger sample of countries. While there is all economies in the region except Japan, a slight relationship between growth and employment growth kept pace with demo- employment creation in the region, it is sta- graphic forces in about half of the economies. tistically very weak (figure 1.11). As in most For example, in spite of the contraction in regions, the empirical relationship between economic output over the period 2000–10, economic growth and employment creation the Solomon Islands experienced net employ- varies widely across the economies of East ment growth. However, in China, about Asia Pacific. In the first decade of the twenty- 74 million jobs were created over the 2000– first century, growth was clearly associated 10 period, but the average ratio of employ- with a rise in employment more in some parts ment to population contracted over this of the region than in others. period at −0.34 percent annually. The high 10 E A S T A S I A PAC I F I C AT W O R K FIGURE 1.11 The simple correlation between growth and employment is weak a. Annual growth of GDP per capita and the adult b. Annual growth of GDP per capita and the youth employment rate (age 15 and older), 2000–10 employment rate (ages 15–24), 2000–10 3 6 Growth of employment per capita, % Growth of employment per capita, % DZA QAT 2 4 ZWE ZWE MAC 1 NZL AUS SGP KHM 2 MAC SLB FJI PHL MNG AZE 0 TMPTHA LAO VNM KHM BRN PNG JPN TWN IDN CHN GNQ FJI TMP PHL MYS HKG 0 SLB AUS PNG –1 BRN NZL THA LAO JPN IDN MNG VNM CHN –2 SGP –2 y = –0.0001x + 0.002 MYS HKG TWN y = –0.0001x – 0.0052 R2 = 0.0022 –4 R2 = 0.0004 –3 y = 0.0003x – 0.0003 y = 0.0002x – 0.0085 MDA R2 = 0.042 HUN R2 = 0.0018 –4 –6 –6 –4 –2 0 2 4 6 8 10 12 14 16 –6 –4 –2 0 2 4 6 8 10 12 14 16 Growth of GDP per capita, % Growth of GDP per capita, % Other countries East Asia Pacific countries Other countries East Asia Pacific countries Source: Based on World Development Indicators data (World Bank 2013c). Note: Growth of employment per capita reflects growth of the employment-to-population ratio (the proportion of a country’s population that is employed). productivity gains experienced in China crisis in late 2008, unemployment rates in the combined with average annual population East Asia Pacific countries for which quar- growth of 0.6 percent constrained net per terly data are available (China, Indonesia, capita job creation in the country. Republic of the Union of Myanmar, the Similarly, economic slowdown during Philippines, and Thailand) apparently were the global financial crisis adversely affected not affected. People did not stop working employment in some economies but not oth- as a result of macroeconomic shocks; rather ers. Korea; Taiwan, China; Hong Kong SAR, they turned to unregistered and unmonitored China; and Timor-Leste did not experi- “informal” employment. ence a fall in employment during the period However, the elasticity of employment to 2000–07, but they all experienced a decline changes in the size of the economy in East in the wake of the global crisis. This could be Asia Pacific economies shows a stronger posi- explained by their relatively high integration tive relationship. Hanusch (2013) estimates with global markets and thus high vulner- the elasticity of employment to output in ability to the global contraction in demand. eight East Asian economies where employ- Other East Asian economies generally main- ment trend data are collected with suffi- tained low levels of unemployment, even in ciently high frequency. Table 1.1 presents times of economic crisis. Disaggregated quar- the results based on a simple regression of terly data at the national level indicate that the log of the employment rate on the log of in the Philippines, GDP growth fluctuated real GDP, illustrating the percentage change wildly over the 2008–10 period, while the in employment associated with a 1 percent unemployment rate remained very stable and change in output. For the eight economies even fell slightly. Similarly, Indonesia experi- in the 2001–11 sample, the effect of eco- enced a reduction in its unemployment rate, nomic growth on the employment rate was despite large fluctuations in GDP growth about 0.3 percent (median: 0.32), rang- over the past decade. As economic growth ing from 0.22 in the Philippines to 0.42 in contracted at the onset of the global financial Singapore. Employment creation in the INTRODUCTION AND ROAD MAP 11 TABLE 1.1 Growth has had a positive impact on FIGURE 1.12 Growth creates more employment in services than in employment since 2001 other sectors Elasticities of employment to output, 2001–11 Economy Elasticity Elasticity of employment to economic growth, by country groups, 1990–2010 China 0.30 Hong Kong SAR, China 0.36 1.2 Korea, Rep. 0.24 Malaysia 0.39 0.8 0.96 0.81 0.73 Philippines 0.22 0.60 0.54 Singapore 0.42 0.4 0.41 Thailand 0.33 0.11 0.23 0.06 Taiwan, China 0.31 0 Source: Hanusch 2013. –0.4 –0.39 –0.38 wake of economic growth was fast in China, –0.8 Malaysia, and Thailand from 2001 to 2011.1 –1.11 In addition, applying the same method as in –1.2 Europe and Central East Asia Latin America and the Crivelli, Furceri, and Toujas-Bernate (2012) Asia Pacific Caribbean to estimate the employment-output elastic- Total Agriculture Industry Services ity, but to a larger panel of countries, and extending the period of analysis from 1990 to 2010, we find that in East Asia Pacific, the Source: Based on World Development Indicators data (World Bank 2013c). Note: Data are disaggregated by sector for all regions with at least 17 observations out of the average long-run elasticity of employment to 21 years of data—that is, comparisons with other regions are not possible given the limited number GDP growth was 0.23. of observations. The elasticity of employment to output also varies considerably by sector. Figure 1.12 for this report reach the same conclusion: the shows the results from a cross-country panel demand for work is a derived demand. Thus regression of the log of employment, total and while economic growth may not be sufficient by sector, on the log of GDP (in constant 2000 for employment, East Asia Pacific’s high rates U.S. dollars), with employment defined as all of economic growth have certainly been nec- forms of remunerative economic activity. As essary to sustain the improvement in employ- shown in figure 1.12, the services sector expe- ment outcomes. rienced the highest employment elasticity, and agriculture experienced negative elasticity in East Asia Pacific. Similar differences across Road map to the report sectors are found for Europe and Central This chapter has shown that East Asia Asia. With China’s strong growth driving the Pacific is exceptional in many ways, par- East Asia Pacific average, the service sector, ticularly in ways that influence the sup- which is more labor-intensive than industry, ply of and demand for labor and human surpassed industry in its contribution to over- capital and thus the well-being that people all GDP as of early 2013. derive from work. High rates of economic There are three important messages to growth in most East Asia Pacific countries take away from this section. First, the rela- have been important. However, despite tionship between economic growth and undeniable economic progress and favorable employment should not be taken for granted. employment outcomes relative to countries Second, the statistical evidence is mixed and elsewhere, policy makers in the region are can vary according to the tools applied to concerned not only about the quantity but the data that are available. Third, and most also about the quality of work available to important, analyses conducted by others and people. Households and the governments 12 E A S T A S I A PAC I F I C AT W O R K that serve them are starting to question people out of poverty, and contribute to life how policies can ensure that employment satisfaction. Lastly, jobs shape values and continues to improve well-being. Indonesia behavior and affect the distribution of out- has experienced mounting pressure to comes in ways that influence social cohesion. increase earnings from work (World Bank The WDR also proposes a policy pyramid 2012a). The government of the Philippines for governments to structure their thinking has sharpened its focus on creating “better” and responses to the challenges facing work- (higher-paying) jobs (World Bank 2013b). ing people: starting at the base with policy Governments in Vietnam, the Lao People’s “fundamentals” (monetary and fiscal policy, Democratic Republic, and Malaysia are the investment climate, and human capital paying particular attention to raising pro- policies), then labor and social protection ductivity and improving the skills of their policies, and at the top, policy priorities that workforce. In the island countries of the vary widely according to a country’s par- Pacific, which experience very different ticular “jobs challenges.” Readers who are economic forces shaped by formidable geo- familiar with the WDR 2013 will recognize graphic constraints, the substantial—even these tools in the structure of this report growing—share of youth in the population (figure 1.13). and the large number of these young people In the remainder of part I of the report, who are not working provide strong moti- chapter 2 presents a broad range of vation for governments to pay increasing descriptive statistics to profile the region’s attention to employment. demography, labor supply, and labor demand. The concerns and pressure on govern- It underscores the diversity in how and where ments to focus on work and well-being are people work. Wage and salaried employ- not surprising. The WDR 2013 argues that ment is only a small segment of employ- jobs are the channel of three critical transfor- ment in emerging economies in the region. mations that drive development: higher pro- In chapter 3, we demonstrate the importance ductivity, rising living standards, and greater of work in bringing about all three develop- social cohesion. In the parlance of the WDR ment transformations—higher productivity, 2013, productivity gains happen through rising living standards, and greater social jobs. Jobs provide earning opportunities, lift cohesion—in the countries of East Asia FIGURE 1.13 The WDR 2013 presents conceptual tools used to structure the arguments of this report a. Jobs and the development transformations b. The policy pyramid DEVELOPMENT PRIORITIES LIVING SOCIAL PRODUCTIVITY STANDARDS COHESION LABOR POLICIES JOBS FUNDAMENTALS Source: World Bank 2012c. INTRODUCTION AND ROAD MAP 13 Pacific in recent decades. Chapter 3 also pre- Finally, chapter 9 closes this report with sents evidence that the contributions of work a call for action, arguing that “business as to well-being in East Asia Pacific are starting usual” is not an option. The chapter points to change: one or more of those transforma- out that whereas governments in East Asia tions is starting to lag. We argue that these Pacific have been slower to intervene in the lags explain the mounting pressure on govern- past (than, for example, governments in Latin ments to become more active in sustaining the America and the Caribbean, South Asia, and well-being that people derive from work. emerging markets in Europe and Central In part II of the report, we take account Asia), the stage of development in which of current policies and examine evidence of most countries in the region find themselves their impact on employment. Reflecting the may make greater intervention necessary bottom two layers of the WDR policy pyra- to surmount the challenges facing working mid, chapters 4, 5, and 6 examine monetary people and to sustain well-being from work. and fiscal policy and the investment climate, The chapter argues, however, that interven- human capital policies, and labor market tion need not take the form of outdated, institutions, regulations, and interventions. imported models from other regions, which These chapters take stock of current poli- tend to favor men in full-time, dependent cies and determine whether, on balance, the employment in the manufacturing sector. framework that governments have put in Intervention can instead support all working place is “pro-employment.” Where available, people in East Asia Pacific, regardless of the we have gathered evidence of the impact that location and sector or how they work, today these policies have on the demand for and and in years to come. supply of labor and human capital. In part III of the report, we discuss policy directions. The three final chapters discuss Note whether governments in East Asia Pacific 1. A study by Ball, Leigh, and Loungani (2013), need “jobs strategies” and what these strat- examining data for the United States since egies might entail to foster a better envi- 1948 and for 20 advanced economies since ronment for work in the region. Chapter 7 1980, finds that Okun’s law has a strong as applies the WDR 2013 “jobs challenges” well as stable relationship in most countries, typology (agrarian, urbanizing, formalizing, which did not vary significantly during the aging, high youth unemployment, resource- global economic recession. The authors argue rich, small islands, conflict-affected) by map- that their estimate of Okun’s law coefficient— ping the economies of East Asia Pacific to that is, the effect of a change of 1 percent in these types using several empirical measures output on the unemployment rate—differs and thresholds to categorize them. In doing largely between countries, in part explained so, the chapter highlights the relatively greater by the characteristics of labor markets other than employment protection legislation. diversity in the East Asia Pacific region com- pared to other low- and middle-income- country regions. In East Asia Pacific, at least References one country can be mapped to every type, and many countries are likely to be mapped to Ball, Laurence, Daniel Leigh, and Prakash more than one type. Chapter 8 delves deeper Loungani. 2013. “Okun’s Law: Fit at 50?” Working Paper, International Monetary Fund, into the economic geography of the Pacific Research Department, Washington, DC , island countries; how the challenges faced by January. working people in these countries are unique Betcherman, G., and R. Islam, eds. 2001. East not only in the region, but also in the world Asian Labor Markets and the Economic and what governments concerned about Crisis: Impacts, Responses, and Lessons. employment and well-being in this corner of Washington, DC: World Bank; Geneva: the region can do given these challenges. International Labour Organization. 14 E A S T A S I A PAC I F I C AT W O R K China National Bureau of Statistics. 2013. Jha, Abhas, and Zuzana Stanton-Geddes. 2013. C hi n a N a t i o n a l B u re a u of S t a t i s t i c s: Strong, Safe, and Resilient: A Strategic Policy Statistical Data . Beijing: China National Guide for Disaster Risk Management in East Bureau of Statistics. http://www.stats.gov.cn Asia and the Pacific. Washington, DC: World /english/. Bank. CRED (Centre for Research on the Epidemiology World Bank. 2011. Job Trends 1 (October). of Disasters). 2013. The International Disaster ———. 2012a. Indonesia Economic Quarterly. Database (EM-DAT). Brussels: CRED. http:// Washington, DC: World Bank, December. www.emdat.be/database. ———. 2012b. Job Trends 5 (October). Crivelli, Ernesto, Davide Furceri, and Joël ———. 2012c. World Development Report 2013: Toujas-Bernate. 2012. “Can Policies Affect Jobs. New York: Oxford University Press. Employment Intensity of Growth? A Cross- ———. 2013a. Global Economic Prospects. Country Analysis.” IMF Working Paper Vol. 7. Washington, DC: World Bank, June. 12 /218, I nternational Monetar y Fund, ———. 2013b. Philippines Development Report. Washington, DC. Washington, DC: World Bank. Gill, Indermit, and Homi Kharas. 2007. An ———. 2013c. World Development Indicators. East Asian Renaissance: Ideas for Economic Washington, DC: World Bank. http://ddp Growth. Washington, DC: World Bank. .worldbank.org/ddp/home.do. Hanusch, Marek. 2013. “Jobless Growth? World B a n k a nd D evelopment Re se a rch Okun’s Law in East Asia .” Jour n al of Center. 2013. C hin a 2030 : Building a International Commerce, Economics, and Modern, Harmonious, and Creative Society. Policy 4 (3): 1–14. Washington, DC: World Bank; Beijing: Haver Analytics. 2013. Haver Analytics Database. Development Research Center of the State New York: Haver Analytics. Council, People’s Republic of China. The Demand for and Supply of Labor and Human Capital 2 Economies in East Asia Pacific are especially public sector is substantial. Small firms are an diverse when it comes to where and how important segment of employment creation people work. across the region, albeit with a substantial degree of churning. Only a few of these firms T his chapter brings to bear available grow to sustain increased demand for work. data to show the diverse profiles of On the supply side of work, the region’s labor firms demanding work and individu- force has several distinct features: high rates als and households supplying work in East of participation in markets, including the par- Asia Pacific. Across and within economies ticipation of women in market activities; sub- of the region, we demonstrate the many stantial labor mobility within and between places where people work, from micro and national borders; and adequate access to small firms to large corporations, and the education. Many of those participating in the many ways in which they work, from self- labor force work in the primary sector and employment to wage dependence. Our outside of wage employment. More broadly, description of demography and the supply of work in East Asia Pacific is characterized by and demand for labor and human capital— a high degree of “informality” across several including key characteristics and dynamic measures, explaining the growing concern of trends—also shows how East Asia Pacific households and policy makers in the region differs from other regions and how the econ- not only about how much work is being cre- omies that make up East Asia Pacific vary ated but also about where and how people substantially from one another. are working. On the demand side of work, the private The basic profiles of demand and sup- sector accounts for the majority of employ- ply that are presented in this chapter pro- ment created, as it does in other parts of the vide the foundation for deeper analysis in world. A key exception to this general obser- chapter 3 of the development transforma- vation is employment in the small Pacific tions propelled by work. These profiles are island countries, where demand from the a result of many factors, including growth, 15 16 E A S T A S I A PAC I F I C AT W O R K changes in technology, productive assets, the early 1980s to the early 2000s, China’s the investment climate, and labor policy. private sector employment grew from The policies that shape demand for and 2.3 million workers to 74.7 million. In con- supply of labor and human capital are cov- trast, the volume of employment in state- ered in part II of this report. The diverse owned enterprises dropped from 80 million ways and places in which people work will to 74.6 million (Kanamori and Zhao 2004, have important implications for policy cited in World Bank 2012b). Household to ensure that work continues to increase survey data indicate that, for most econo- productivity, raise living standards, and mies in East Asia Pacific, the share of peo- strengthen social cohesion, a discussion ple working in the public sector is less than taken up in part III. 5 percent. A significant exception to this pattern can be found in some of the small Pacific island countries, covered at length The demand for work: A profile in chapter 8. Within the private sector, the potential for net employment creation varies from firm surveys substantially across firms, depending on the The private sector is the main engine of size and age of the firm as well as the gender employment creation, accounting for of the owner. 90 percent of employment in the world Most working people in East Asia Pacific (World Bank 2012b). The private sector economies earn their living in micro, small, has led employment growth in China, for and medium enterprises.1 Figure 2.1 shows example, by a remarkable margin. From the share of employment by firm size using FIGURE 2.1 The share of employment in small and medium enterprises varies substantially across countries Share of total employment by enterprise size category Vietnam Philippines Fiji Mongolia Samoa Indonesia Lao PDR Vanuatu Tonga 0 10 20 30 40 50 60 70 80 90 100 Percent Employees: 5–19 20–49 50–99 100–249 250–499 500–999 1,000+ Source: Ayyagari, Demirgüç-Kunt, and Maksimovic 2011, based on World Bank enterprise surveys for 2006–10. T H E D E M A N D F O R A N D S U P P LY O F L A B O R A N D H U M A N C A P I TA L 17 the World Bank’s enterprise surveys. These FIGURE 2.2 Micro, small, and medium enterprises surveys include only registered firms with employ a large fraction of the labor force at least five employees. In the Lao People’s Democratic Republic, Tonga, and Vanuatu, Share of manufacturing employment by small enterprises are the major employers, enterprise size category while in Mongolia, small and medium enter- prises (SMEs) with fewer than 100 employees China employ the most people. In Fiji, Indonesia, the Philippines, and Vietnam, large firms account for the majority of employment. But Malaysia even in those economies, total employment is still spread across all types and sizes of firms. Thailand These data do not provide the full pic- ture of demand. Given the frame from Indonesia which their samples are drawn, enterprise surveys do not capture very small, unregis- tered family enterprises. Based on a more Philippines representative sample of firms from firm cen- suses, small businesses account for the bulk 0 10 20 30 40 50 60 70 80 90 100 of employment (figure 2.2). In Indonesia, Percent the Philippines, and Thailand, in particu- lar, most people work in micro, small, and Micro and small Medium Large medium enterprises, defined as having fewer than 200 employees. Source: ADB 2009. Note: The categories are defined slightly differently for Thailand than for Employment also varies by firm age and the other economies. In all economies except Thailand, micro and small whether the owner is a woman or a man. For enterprises employ 1–49 workers (in Thailand, 1–50 workers), medium enterprises employ 50–199 workers (in Thailand, 51–200 workers), and example, firms headed by women in East large enterprises employ 200 or more workers (in Thailand, more than Asia Pacific are, on average, smaller than 200 workers). For China, data are from the 2004 National Economic Census; for Indonesia, the 2006 Economic Census; for Malaysia, the 2005 firms headed by men. Around 33 percent Annual Survey of Manufacturing Industries; for the Philippines, the 2005 of small enterprises in Indonesia are man- Annual Survey of Philippine Business and Industry; and for Thailand, the 2007 Industrial Census. Estimates for Malaysia, the Philippines, aged by women, while only 14 percent of and Thailand impute the number of self-employed by looking at the large and 20 percent of medium firms, differential between data from the labor force survey and data from the enterprise survey or census. respectively, are run by women (World Bank 2012a). In addition, more mature firms account for most employment in East Asia Pacific economies. Figure 2.3 shows the economies of East Asia Pacific happens in share of employment by a firm’s age. In most small firms with fewer than 20 employees economies of the region, firms that are more (Ayyagari, Demirgüç-Kunt, and Maksimovic than 10 years old have at least a 50 percent 2011). SMEs account for the most employ- share of employment. Timor-Leste, where ment creation in those economies with avail- the largest employers are firms less than able data, while large firms account for the two years old, is a notable exception to this most employment destruction (figure 2.4). pattern. More than half of new employment is created T he seg ments of SM E s and young by firms less than six years old. This pattern firms together account for the majority is particularly stark in Indonesia, Timor- of new employment created in East Asia Leste, and Vietnam. Lao PDR, Samoa, and Pacific. Based on the enterprise surveys col- Tonga have experienced a net loss of employ- lected between 2006 and 2010, more than ment driven by the destruction of employ- 70 percent of employment creation in the ment in relatively mature firms (figure 2.5). 18 E A S T A S I A PAC I F I C AT W O R K FIGURE 2.3 Mature firms account for most employment in East Asia Pacific Share of total employment by firm age Philippines Indonesia Mongolia Samoa Fiji Vietnam Lao PDR Micronesia, Fed. Sts. Vanuatu Timor-Leste 0 10 20 30 40 50 60 70 80 90 100 Percent ≤ 2 years 3–5 years 6–10 years 11–20 years 21–50 years 51+ years Source: Ayyagari, Demirgüç-Kunt, and Maksimovic 2011, based on World Bank enterprise surveys 2006–10. These observations need to be taken with an 23 and 24 percent, respectively, grow from important caveat: the data collected by enter- the small to the medium size category. The prise surveys generally do not follow the same Philippines also has an exceptional share of firms over time. As a result, the data include firms that grow from medium to large size: surviving firms but miss firms that have 27 percent. This performance is followed gone out of existence and the employment by Thailand and Vietnam, with 9 and 10 lost in firms that were liquidated between of medium firms, respectively, growing into survey years. This important selection bias large firms. Many of the firms that have in the data makes it difficult to separate the moved from the small to medium category in employment creation of existing SMEs from Lao PDR and the Philippines are in retail and the employment creation of new entrants. wholesale trade. The firms that have moved Yet many firms in the region start and from the medium to large category are mostly remain small. The 2006–09 enterprise sur- in the garment industry in Lao PDR, retail veys show that most registered firms stay and wholesale trade in the Philippines, and in the same size category after three years. auto components in Thailand. Small firms rarely grow into medium and In fact, owners of small firms often have large firms. In East Asia Pacific economies, little intention to grow. Many started their 1.5 percent of small firms, on average, grow business out of necessity and as a substitute to become medium firms, and 3.3 percent of for dependent wage employment rather than medium firms grow to become large firms out of a desire or talent for entrepreneurship. after three years. Firms in the Philippines and The Global Entrepreneurship Monitor recently Vietnam appear exceptional in this regard: surveyed self-employed people in several T H E D E M A N D F O R A N D S U P P LY O F L A B O R A N D H U M A N C A P I TA L 19 countries, including China, Indonesia, the FIGURE 2.4 Small and medium enterprises account for most Republic of Korea, Malaysia, the Philippines, employment creation in East Asia Pacific Singapore, and Thailand. The survey results show that the share of adults who started Employment creation and loss by firm size their own business is high in middle-income economies in East Asia Pacific compared with Vanuatu middle-income countries in other regions. Timor-Leste The share of those who report that they Micronesia, Fed. Sts. started a business out of necessity is also Vietnam high relative to countries elsewhere. In China in 2002, 52 percent of self-employed peo- Philippines ple and employers claimed to be involved Mongolia in entrepreneurship out of necessity. That Indonesia share dropped to 37 percent in 2012 (Global Fiji Entrepreneurship Research Association Samoa 2013). In Vanuatu in 2010, 38 percent of self-employed and employers claimed to have Lao PDR started their enterprise out of necessity, and Tonga only 4 percent expected to add more than five –150 –100 –50 0 50 100 150 employees in the following five years (Global % of total change in employment Entrepreneurship Research Association 2013). Similarly low shares of entrepreneurs Large firms SME in Indonesia, Malaysia, the Philippines, and Thailand expected to expand employment Source: Ayyagari, Demirgüç-Kunt, and Maksimovic 2011, based on World Bank enterprise surveys significantly (figure 2.6). for 2006–10. The lack of strong growth and further employment prospects among micro and small enterprises, despite being an impor- tant segment of the economy, is a reflection FIGURE 2.5 Young firms create more than half of new employment of the business climate (International Finance Corporation 2013). Chapter 4 discusses this topic at length. The most binding constraints Employment creation and loss by firm age on firm growth and demand for employ- Samoa ment vary by country. But some commonly Tonga reported obstacles in East Asia Pacific econ- Lao PDR omies stand out, including lack of access to Vietnam finance, a shortage of people with the right skills, problems with electricity supply, and Vanuatu competition from the informal economy Timor-Leste (International Finance Corporation 2013; Philippines World Bank 2013a). Mongolia Micronesia, Fed. Sts. A profile of the labor force in East Indonesia Asia Pacific: Who is working and –150 –100 –50 0 50 100 150 200 250 % of total change in employment where? ≤ 6 years 6–20 years 20+ years East Asia Pacific’s demography is chang- ing rapidly. Many East Asian econo - Source: Ayyagari, Demirgüç-Kunt, and Maksimovic 2011, based on World Bank enterprise surveys mies will soon cease to benefit from the for 2006–10. 20 E A S T A S I A PAC I F I C AT W O R K FIGURE 2.6 Most new firms in middle-income East Asian “demographic dividend,” a period in most economies do not expect to increase employment countries’ evolution when the share of dependent children and elderly relative to Share of entrepreneurs who expect to add 5 or more employees that of working-age adults is particularly United Arab Emirates low. Fertility rates in most of the econo- Puerto Rico mies making up the East Asia Pacific region Singapore have been falling rapidly, causing their Turkey Hong Kong SAR, China populations to “age” quickly (figure 2.7). Latvia Middle-income economies in East Asia Chile Israel Pacific have the lowest average fertility rate Colombia among countries at this level of develop- Iceland China ment. High-income Korea has the lowest Korea, Rep. fertility rate in the world, at 1.2 births per Czech Republic Ireland woman in 2011. China and Thailand are United States not far off. Croatia Japan The old-age dependency ratio—the ratio Sweden of the population 65 and older to that of Macedonia, FYR Slovenia working age—has been rising steadily in Angola the region, putting increasing pressure on Portugal Denmark the working-age population. In the past Uruguay couple of decades, the share of elderly South Africa Romania people in the population has grown faster Venezuela, RB than in any other low- and middle-income- United Kingdom country region (figure 2.8). High-income Argentina Switzerland Japan, with the highest average life expec- Kazakhstan tancy in the world, offers a preview of what Belgium Norway many countries in the region can expect. Australia These demographic factors shape the size Russian Federation Peru and composition of the labor force and, in Serbia turn, influence employment and productiv- Spain Iran, Islamic Rep. ity in the economy. The rapid demographic Mexico shift is thus an important transition for the Canada Austria region, and we return to it several times in Bosnia and Herzegovina this report because it heavily influences the Finland Egypt, Arab Rep. conclusions and messages for policy mak- Germany ers that are presented in chapter 9. Even in Netherlands Italy the Pacific island countries, many of which France are still “young” and have yet to experience Hungary Ecuador their demographic transition, governments Brazil are worried about rising dependency rates. Bolivia Years of poor nutrition and bad habits have Greece India sparked an epidemic of noncommunicable Thailand “lifestyle” diseases that can have an impact Malaysia Indonesia similar to that of aging on the size and com- Philippines position of the labor force. Jamaica Who is working in East Asia Pacific 0 10 20 30 40 50 60 70 80 economies? Figure 2.9 presents a cross- Percent section of key demographic and labor force participation data for two reasons: first, to Source: Global Enterpreneurship Research Association 2010. show how East Asia Pacific economies as T H E D E M A N D F O R A N D S U P P LY O F L A B O R A N D H U M A N C A P I TA L 21 a group are different from other countries FIGURE 2.7 Falling fertility is driving rapid population aging in and, second, to show how different East many East Asia Pacific economies Asian economies—particularly those in the Pacific—are from each other. Fertility rates in selected East Asia Pacific economies The first important characteristic to note Total fertility rate (average births per woman) 8 is that most people in East Asia Pacific econ- omies still live and work in rural areas. This 7 is particularly apparent for Pacific island 6 countries. The share of the population liv- 5 ing in towns and cities—although grow- 4 ing faster in 1990–2011 than in any other region—remains lower than expected given 3 levels of development (proxied by income per 2 capita). The second important characteristic 1 is that the share of the population participat- 0 ing in the labor force (working or seeking 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2011 work) is higher in most economies of East Asia Pacific than in comparable countries Cambodia China Fiji elsewhere. Economies in East Asia Pacific Indonesia Lao PDR Malaysia have much lower rates of open unemploy- Mongolia Papua New Guinea Philippines ment than other countries at similar income Thailand Timor-Leste Vietnam levels. In the East Asian economies, young people (ages 16–25) are more likely to be eco- Source: World Bank 2013d. nomically active than elsewhere. So are older people (ages 56 and above). Inversely, Pacific FIGURE 2.8 The population is aging faster in East Asia Pacific than island populations are younger and have in other regions lower youth participation rates. We take up the discussion of youth inactivity, unemploy- ment, and the implications for productivity Share of the elderly (age 65 and older) and social cohesion in chapter 3. % of total population Another important distinction of labor 0 2.5 5.0 7.5 10.0 12.5 15.0 supply in East Asia Pacific economies is that women represent a larger share of the East Asia Pacific labor force than in other parts of the world. Pacific island states Malaysia is the notable exception in East Asia and so are a few other countries in the Europe and Central Asia Pacific. Among younger cohorts of the popu- Latin America and lation, labor force participation of women the Caribbean has risen over time. Women are increasingly Sub-Saharan Africa moving out of household work and family- owned enterprises and into nonagricultural Middle East and North Africa employment, and they are migrating to cities Lower-middle-income average for employment opportunities. Yet wage gaps between men and women persist and tend to Middle-income countries widen with age. These gaps can reflect many 0 0.5 1.0 1.5 2.0 2.5 factors, including women’s lower average lev- % point change els of experience caused by gender differences in endowments, career interruptions during 2011 (top axis) 1990–2011 (bottom axis) childbearing years, and occupational and sector segregation (World Bank 2012a). Source: World Bank 2013d. 22 E A S T A S I A PAC I F I C AT W O R K FIGURE 2.9 The labor force in East Asia Pacific relative to the rest of the world is still very rural, participation in labor markets is high, particularly of women, and open unemployment is low a. Urban population b. Labor force participation rates 100 100 90 90 LAO 80 % of total population PLW 80 MMR KHM VNM CHN 70 MYS 70 PNG THA PHL MNG VUT 60 Percent MNG 60 SLB 50 IDN FJI TON IDN KIR CHN 50 PHL WSM MYS 40 MMR VNM THA 40 TLS FJI 30 VUT LAO TON 20 TLS KHM FSM 30 SLB WSM 10 PNG 20 0 10 5 6 7 8 9 10 11 12 5 6 7 8 9 10 11 12 Log of GDP per capita (PPP, 2005 US$) Log of GDP per capita (PPP, 2005 US$) c. Female labor force participation d. Open unemployment 100 40 90 KHM 35 80 LAO VNM 30 CHN PNG 70 THA VUT 25 Percent Percent 60 MNG TON SLB IDN 20 50 PHL WSM MYS FJI 15 40 TLS 30 10 PHL IDN VUT FJI 20 5 VNM MNG CHN MYS PLW KHM LAO TON THA 10 0 5 6 7 8 9 10 11 5.5 6.5 7.5 8.5 9.5 10.5 11.5 Log of GDP per capita (PPP, 2005 US$) Log of GDP per capita (PPP, 2005 US$) Source: World Bank 2013d. The labor force in East Asia Pacific, both Where are people working? The compo- men and women, is relatively well schooled. sition of the labor force is certainly diverse Primary school completion rates are at least both within economies, spanning various 80 percent for both girls and boys in most types of economic engagement, and across economies. The average years of schooling in economies in East Asia Pacific. A large share the adult population have also increased in of the labor force still works in the primary most economies (figure 2.10). These achieve- sectors, specifically agriculture. This ranges ments are a result of favorable economic from about 34 percent in the Philippines to growth and good human development pol- 70 percent in Lao PDR (figure 2.11, panel a). icy in many parts of the region. Expanding Wage and salaried employment is a minor- and deepening access to education, however, ity share of work: less than 40 percent of does not necessarily equate to an adequately working people in low- and lower-middle- skilled labor force. In chapter 5, we present income East Asia Pacific today are in wage evidence of important “gaps” in the abilities employment (figure 2.11, panel b). This share on offer and what employers say they need. remains around 50 percent for the higher- In chapter 5, we also discuss how human middle-income economies of East Asia and capital policies can help to shape the optimal surpasses 70 percent only in Malaysia. investment in skills and the supply of skills in Within countries, the forms of work the labor force. engagement also vary by income. In all of T H E D E M A N D F O R A N D S U P P LY O F L A B O R A N D H U M A N C A P I TA L 23 FIGURE 2.10 Access to schooling and educational the East Asia Pacific economies with avail- attainment have increased substantially in most able data, those in lower income quintiles are East Asia Pacific economies more likely to be engaged in agriculture and less likely to be engaged in dependent wage Average years of schooling in the employment (figure 2.12). For example, the population 15 years and older share in dependent wage employment among Cambodia people in the top income quintile is more China than twice that among people in the bottom Fiji quintile in Cambodia, Lao PDR, Thailand, Indonesia Japan and Solomon Islands. But even among peo- Korea, Rep. ple in the top income quintile, there are still Lao PDR diverse forms of work engagement, with the Malaysia exception of Mongolia. Mongolia Myanmar Agriculture’s share in employment has Papua New Guinea been declining over the past half century, but Philippines the speed of change varies across countries. Thailand The fraction of the region’s workforce in agri- Tonga Vietnam culture fell from approximately 60 percent in 1991 to just above 40 percent in 2008. But 0 2 4 6 8 10 12 14 in the countries where available survey data Years allow us to track changes, the profile of the 1995 2005 2010 labor force by type of economic engagement has remained fairly stable. In East Asia, Source: World Bank 2012b. only Indonesia and the Philippines offer an adequately long time series of comparable FIGURE 2.11 Many people are working in the primary sector and are not dependent on wage employment a. Distribution of employment by sector, circa 2010 b. Distribution of employment by status, circa 2010 Lao PDR Lao PDR Vietnam Papua New Cambodia Guinea Timor-Leste Myanmar Myanmar Cambodia Thailand Timor-Leste Mongolia China Vietnam Indonesia Indonesia Philippines Thailand Papua New Guinea Malaysia Mongolia New Zealand China Korea, Rep. Philippines Japan Australia Malaysia 0 10 20 30 40 50 60 70 80 90 100 0 10 20 30 40 50 60 70 80 90 100 Percent Percent Primary Wage Secondary Unpaid (nonagricultural) Tertiary Employer (nonagricultural) Self-employed (nonagricultural) Agriculture Sources: World Bank 2013b; National Bureau of Statistics of China 2012. 24 E A S T A S I A PAC I F I C AT W O R K FIGURE 2.12 Dependent wage employment is not the dominant form of economic engagement in East Asia Pacific Form of work engagement by income quintile a. Indonesia, 2010 b. Lao PDR, 2008 100 100 Share of working people (%) Share of working people (%) 90 90 80 80 70 70 60 60 50 50 40 40 30 30 20 20 10 10 0 0 1 2 3 4 5 1 2 3 4 5 Income quintile Income quintile c. Philippines, 2009 d. Thailand, 2009 100 100 Share of working people (%) Share of working people (%) 90 90 80 80 70 70 60 60 50 50 40 40 30 30 20 20 10 10 0 0 1 2 3 4 5 1 2 3 4 5 Income quintile Income quintile e. Mongolia, 2009 f. Cambodia, 2007 100 100 Share of working people (%) Share of working people (%) 90 90 80 80 70 70 60 60 50 50 40 40 30 30 20 20 10 10 0 0 1 2 3 4 5 1 2 3 4 5 Income quintile Income quintile g. Vietnam, 2006 h. Solomon Islands, 2005 100 100 Share of working people (%) Share of working people (%) 90 90 80 80 70 70 60 60 50 50 40 40 30 30 20 20 10 10 0 0 1 2 3 4 5 1 2 3 4 5 Income quintile Income quintile Wage Unpaid (nonagricultural) Employer (nonagricultural) Self-employed (nonagricultural) Agriculture Source: World Bank 2013b. T H E D E M A N D F O R A N D S U P P LY O F L A B O R A N D H U M A N C A P I TA L 25 FIGURE 2.13 The distribution of working people by type of engagement has been fairly stable over time in Indonesia and the Philippines a. Indonesia, changing composition of working b. Philippines, changing composition of the working population by engagement type (%) population by engagement type (%) 100 100 90 90 80 80 70 70 60 60 Percent Percent 50 50 40 40 30 30 20 20 10 10 0 0 1993 1998 2003 2008 1997 2001 2005 2009 Wage Unpaid (nonagricultural) Employer (nonagricultural) Self-employed (nonagricultural) Agriculture Source: World Bank 2013b. labor force survey data to shed light on exclusively on agriculture and forestry. workforce dynamics. Figure 2.13 suggests Among poor people, ethnic-majority poor only small increases in the share working in are more diversified in how they work than wage employment and correspondingly small ethnic-minority poor; they engage in low- decreases in the share working in agriculture skill, low-paid, off-farm employment in rural in Indonesia and the Philippines from the areas to supplement farm income (Badiani 1990s to 2010. et al. 2012). In Lao PDR, the Lao-Tai are A closer look at people living in poverty more likely to work outside agriculture, espe- and ethnic minorities, in particular, shows cially when residing in urban areas. All other that the majority are still engaged in agri- ethnic groups work mainly in agriculture, cultural production. The share of people independent of the area of residence. working in agriculture from households The labor force is also notably more in the bottom quintile is particularly high, mobile in East Asia Pacific than in other more than 80 percent in Lao PDR, Papua parts of the world. There has been substan- New Guinea, Timor-Leste, and Vietnam tial labor mobility within economies in the (figure 2.14). Only a very small share of region. With the process of structural trans- the poorest population works in dependent formation, large numbers of people have wage employment. The largest share is in moved from rural areas to towns and cit- Mongolia. Other than in Indonesia, few ies. This movement is reflected in the high people in the bottom quintile of consumption urbanization rates in several East Asian are self-employed and employers. In addition, economies in the past decades. Even today, people from ethnic minorities in Vietnam are internal migrants account for a substantial more likely to be in the bottom consumption share of the population in most East Asian quintile, and their livelihoods depend almost economies. Good and comparable data on 26 E A S T A S I A PAC I F I C AT W O R K FIGURE 2.14 Most people in the poorest households work in agriculture Workers in the bottom expenditure quintile by employment type Cambodia, 2010 Lao PDR, 2008 Mongolia, 2011 Philippines, 2009 Fiji, 2009 Timor-Leste, 2007 Papua New Guinea, 2009 Indonesia, 2010 Thailand, 2010 Vietnam, 2008 0 10 20 30 40 50 60 70 80 90 100 Percent Agriculture Wage and salaried Employer Self-employed Household enterprise Unpaid family Other Source: Estimates based on household surveys. internal migration are scarce since most East Asia Pacific economies when compared of the available measures, such as many in to countries in other parts of the world. As table 2.1, only show interprovince migra- of 2010, East Asia Pacific economies hosted tion and underestimate the extent of peo- approximately 7 million immigrants and ple’s movements. These measures are hard received US$90 billion in remittances from to compare across countries due to differ- up to 21 million emigrants (World Bank ences in the definition of what constitutes 2013c). Pacific island countries like Samoa “internal migration.” and Tonga lead in sending emigrants as a The movement of working people within share of their small populations (figure 2.15). national borders is as important as their The Philippines is probably the best-known movement across international borders. East country for exporting labor. The wide dis- Asia Pacific is both a host to a large number parities in wealth and earnings across low- of immigrants as well as a major exporter and middle-income economies in East Asia of labor to markets elsewhere. This charac- Pacific as well as the impacts of aging and teristic reflects one of the contextual factors labor shortages in high-income East Asian discussed in chapter 1: the relatively greater economies are strong forces pulling intra- degree of regional and global integration of regional migration. Cross-border labor T H E D E M A N D F O R A N D S U P P LY O F L A B O R A N D H U M A N C A P I TA L 27 TABLE 2.1 Internal migration has been a defining force of employment in East Asia Pacific Internal migrants as Country % of the population Year Definition Source China 19.6 2011 Total migration rate: population that China Statistical Yearbook 2012 (National is registered (with hukou) in a town Bureau of Statistics of China 2012) or district other than the one in which they live Indonesia 2.3 2010 Population that is living in a province Indonesia Statistical Yearbook 2012 different from where they lived (BPS 2012) five years ago Vietnam 9.7 2010 Interprovince migration: all moves Statistical Yearbook of Vietnam 2012 across provinces in the calendar year (General Statistics Office of Vietnam 2012) Thailand 2.0 2009 Interprovince migration: in last two 2009 Migration Survey (National years, population that was away Statistical Office 2009) for at least one month at a time or permanently away Mongolia 31.6 2007 Population that ever moved from Shi (2011), analysis of Household (of adult population) “birthplace” Economic and Social Survey of Mongolia 2007/08 Cambodia 12.2 2008 Interprovince migration: population Cambodia General Population Census that ever moved across provinces (2008), online tables (National Institute of Statistics of Cambodia 2008) mobility within the region has become so FIGURE 2.15 Several Pacific island economies important that the Association of Southeast have the highest emigration rates Asian Nations Economic Community has set a goal to liberalize the mobility of skilled Emigration rates, total and among highly workers in member states by 2015. educated populations Finally, and critical to explaining why Indonesia the impact of employment on well-being is such a fast-growing policy concern in the Philippines region despite relatively low rates of open Vietnam unemployment, work in East Asia Pacific is also characterized by a high degree of Kiribati “informality”—that is, work or other trans- Tonga actions in unregulated and untaxed mar- kets. As with the rate of population aging Samoa in East Asia Pacific, we return to this obser- vation repeatedly, and it is the subject of a China “spotlight” prior to chapter 3. Malaysia A large portion of unregistered, untaxed work in countries like Cambodia, Lao PDR, Lao PDR and Papua New Guinea can be thought of Cambodia as structural informality, explained by a large share of the labor force still work- 0 10 20 30 40 50 60 70 80 90 ing in subsistence or small shareholder Percent farming. In most countries, this portion Emigrants as a Emigration rate of tertiary- of the informal economy decreases almost share of the total educated population, 2000 mechanically with economic growth and population, 2010 the structural change out of agriculture. As shown in figure 2.16, the share of Source: World Bank 2011. 28 E A S T A S I A PAC I F I C AT W O R K FIGURE 2.16 “Vulnerable” forms of work are more common in East middle-income regions, surpassed only by Asia Pacific than in other countries at similar levels of development countries in Sub-Saharan Africa. Subsequent parts of this report shed further light on Own-account and unpaid family workers as a informality. Chapter 6, in particular, exam- share of the labor force, 2010 ines the extent to which labor regulations 100 and interventions in some countries intensify 90 LAO informal employment. 80 VUT TLS 70 KHM Note 60 IDNVNM Percent MNG 1. Various definitions of small and medium 50 TON THA 40 PHL enterprises exist. The typical categories FJI include SME100, SME200, and SME250, 30 KOR which correspond to the maximum size 20 MYS JPN thresholds of 100, 200, or 250 employees, 10 NZL SGP respectively. AUS R2 = 0.6873 0 500 10,500 20,500 30,500 40,500 50,500 60,500 70,500 80,500 Income per capita (PPP, 2005 int'l $) References World Pacific East Asia A DB (A si a n D evelopment B a n k). 2 0 09. “Enterprises in Asia: Fostering Dynamism in Source: Estimates based on data from World Bank 2013d. SMEs, Key Indicators for Asia and the Pacific 2009.” ADB, Manila. Ayyagari, Meghana, Aslı Demirgüç-Kunt, and Vojislav Maksimovic. 2011. “Small vs. Young “vulnerable employment” (defined as own- Firms across the World: Contribution to account and unpaid family work) is nega- Employment, Job Creation, and Growth.” tively correlated with income per capita. Policy Research Working Paper 5631, World Also evident in this figure is the fact that Bank, Washington, DC, April. vulnerable forms of work are more com- Badiani, Reena, et al. 2012. Well Begun, Not mon in East Asia Pacific economies than in Yet Done: Vietnam’s Remarkable Progress other countries at similar income levels. on Poverty Reduction and the Emerging Challenges . Hanoi: World Bank. http:// However, setting aside people who are documents.worldbank.org/curated/en/2012/01 self-employed farmers or unpaid workers /17207159/2012-vietnam-poverty-assessment in a family business—what labor econo- -well-begun-not-yet-done-vietnams-remarkable mists sometimes refer to as “residual - pro g re s s - p ove r t y- re du c t ion - e m e r g i n g beneficiaries”—there is a persistent remain- -challenges. der in all middle-income countries that can BPS (Statistics Indonesia). 2012. Statistical vary widely in size. The remaining share of Yearbook of Indonesia. Jakarta: BPS. informal work—whether measured by prox- General Statistics Office of Vietnam. 2012. ies such as nonfarm self-employment, the Statistical Yearbook of Vietnam 2012. Hanoi: share of people working in microenterprises General Statistics Office of Vietnam. with five or fewer workers, or the workforce Global Entrepreneurship Research Association. 2 010 . G E M 2 0 10 G l o b a l R e po r t. that is not contributing for social insurance London: London Business School, Global coverage—is higher in many of the econo- Entrepreneurship Research Association. mies in East Asia Pacific than in other parts http://www.gemconsortium.org /docs/266 of the world at similar levels of income. /gem-2010-global-report. Conversely, the share of the labor force ——— . 2013. GE M 2013 Global Report . in “formal” dependent wage and salaried London: London Business School, Global employment in East Asia Pacific econo- Entrepreneurship Research Association. mies is among the lowest across low- and T H E D E M A N D F O R A N D S U P P LY O F L A B O R A N D H U M A N C A P I TA L 29 http://www.gemconsortium.org/docs/3106 World Bank. 2011. Migration and Remittances /gem-2013-global-report. Factbook 2011. Washington, DC: World Bank. International Finance Corporation. 2013. Jobs: ht t p: //data.worldba n k.org /data- catalog Private Sector Solutions for Development. /migration-and-remittances. Washington, DC: IFC. ——— . 2012a. Toward Gender Equality in East K a n a mor i , Toko sh i , a nd Z h iju n Z h ao. Asia and the Pacific. World Bank East Asia 2004. Private Sector Development in the Pacific Regional Report, Washington DC: People’s Republic of China. Manila: Asian World Bank. Development Bank Institute. ———. 2012b. World Development Report 2013: National Bureau of Statistics of China. 2012. Jobs. Washington, DC: World Bank. China Statistical Yearbook 2012 . Beijing: ———. 2013a. Doing Business 2014. Washington, China Statistics Press. DC: World Bank. National Institute of Statistics of Cambodia. ———. 2013b. I2D2 (International Income and 2008. Cambodia General Population Census. Distribution Database). 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Spotlight 1 Work in the Informal Economy What is the informal economy? “informal economy” was defined as “all economic activities by workers and economic Few of the phenomena that occupy the time units that are not recognized, regulated, or of governments, economists, and others in protected by existing legal or regulatory the business of crafting and executing policy frameworks and non-remunerative work are as ambiguously defined and as difficult undertaken in an income-producing enter- to measure as the “informal economy.” It is prise.” 1 Although this definition seems inherently difficult to observe that which, comprehensive, it can be unwieldy. The by its very nature, people are trying to hide Organisation for Economic Co-operation (Schneider, Buehn, and Montenegro 2010). A and Development (OECD 2004, 2008) form of economic activity that first captured offered a more parsimonious definition: the interest of anthropologists and sociologists the informal economy is “employment or in the 1950s and came under the scrutiny of other economic activity engaged in produc- development economists in the early 1970s ing legal goods and services where one or with a seminal report by the International more of the legal requirements associated Labour Organization (ILO), the informal with employment and production are not economy became a central focus of policy in complied with.” This is a more widely appli- the late 1980s and early 1990s, when sufficient cable definition, although still challenging data became available to show that it was far to measure. more than cottage industry, taxi drivers, and In this report, we use the overarching children selling candy on street corners. term “informal economy” in reference to So what is the informal economy? market-based production of goods and Definitions change according to who is ask- services that are, in essence, legal under ing and what motivates their question. A prevailing laws, but concealed to avoid pay- minister of finance might ask in order to ment of income taxes and social insurance know where and how many untapped sources contributions and to escape product and of additional tax revenue can be found. But factor market regulation. We count as the a minister of labor or the leader of a trade “informal” workforce the self-employed and union might ask in order to have a better idea employers who employ five or fewer work- of where to concentrate efforts to ensure that ers, workers without a written employment the rights and protections of labor market contract, unpaid family workers, and those regulation are upheld. A minister of trade and who do not make social insurance contribu- industry or the head of the local chamber of tions. Data limitations, discussed later in commerce might ask in order to know where this section, rarely allow measurement to be opportunities to expand sales, ensure fairer as precise as definition, however, and force competition, and improve productivity might us to use one observable feature or another lie. A neighbor, frustrated by the time it takes throughout this report. to get his electricity service installed, might want to know who could do the job sooner, faster, and probably for less if paid cash in hand. And from each of these perspectives, Why does it matter? a different definition can be drawn of what Why should policy makers be concerned exactly the informal economy is. about informal employment and the infor- In 2002, at the ninetieth session of the mal economy? People work and do business International Labor Conference, the term outside the confines of social, labor, and 31 32 E A S T A S I A PAC I F I C AT W O R K business regulation for a variety of reasons. Furthermore, firms operating within the Some exit the structures of the formal econ- rules face unfair competition from those omy to escape regulatory costs or to enjoy operating outside the rules. Firms that greater flexibility, while others are excluded operate in the informal economy can be by a lack of opportunities for advancement constrained to a small size to escape detec- and actual barriers to better-protected, tion by the tax authorities and may have higher-productivity jobs (Perry et al. 2007; to forgo a more efficient scale of produc- Packard, Koettl, and Montenegro 2012). tion. And like households where the main But whether they are working informally breadwinner works informally, these infor- because they “exited” or are “excluded” mal firms also have limited access to credit from formal employment, widespread infor- and recourse to legal protection when they mal work and a large informal economy can need it. be treated as evidence of inadequate and Third, there is the problem for society as unsustainable social institutions: the very a whole. A large informal economy imposes institutions the state puts in place to help heavy costs that deteriorate services and households to build, sustain, and protect public goods. This is what economists like their investment in human capital as they to call a “free-rider problem”; in extreme enter the labor market to seek a return on cases, it can corrode civic structures to such this investment. Indeed, a large and growing an extent as to contribute to government informal economy can been seen as the con- failure. As a specific example of this corro- sequence of a mass opting out of institutions sive process, a country’s social “risk pools,” by firms and individuals and “a blunt soci- such as public old age, unemployment, and etal indictment of the quality of the state’s health insurance and the tax and transfer services provision” (Perry et al. 2007). system, become fragmented, inefficient, and Informal employment has long concerned too expensive to remain viable. policy makers for several reasons. What to do about the extent of informal First, there is the problem of the individ- employment and the size of the informal ual and her family. People working infor- economy is a dilemma that has been gain- mally and their dependents face explicit and ing urgency. The forces that accompany implicit barriers to public and privately pro- globalization put a premium on mobility vided insurance instruments for managing and skill renewal. Rapid population aging potentially impoverishing shocks to their will require that people work longer and be income. Even if people are able to manage far more productive. To achieve this, social many risks to their well-being without the institutions have to be more “pro-work,” help of the state, they may find it difficult to encouraging greater participation. As the assess the costs of certain needs accurately, rate of growth moderates, public financial such as their health care or a period of job resources will be increasingly scarce, giving search, or to make sufficient provision for urgency to measures that can significantly losses far in the future, such as adequate and sustainably increase tax revenue. income arrangements when they can no longer work in old age. Nor do people who work informally have easy access to credit How is informal employment or recourse to rights and the legal protec- tions these afford when things go wrong. measured? Second, there is the problem of the firm. It is particularly challenging to measure the In countries with large informal economies, informal economy and informal work in bigger firms are often taxed excessively to East Asia Pacific economies. Microdata from make up for revenue lost to the govern- household and labor force surveys are abun- ment from widespread evasion. This can dant and, for some countries, of excellent discourage investment and hinder growth. quality. These data can be used to identify WORK IN THE INFORMAL ECONOMY 33 employers, people in self-employment, and So-called “vulnerable” employment is people working in a family business with- derived simply by adding people in unpaid out payment. We have used firm surveys to family work to the self-employed. Although identify the demand for labor from smaller also widely available, this variable has the enterprises and compare this with demand added ambiguity of including people who, from larger businesses that are more likely although not receiving wages, may be resid- to be formal. 2 However, none of the sur- ual beneficiaries of family enterprises. If veys we have exploited for this report asks the family business prospers, in most cases respondents the crucial questions required to it is reasonable to assume that they will identify unregulated dependent employment. prosper too. In most low- and middle-income coun- Finally, the share of the workforce not tries in Latin America and the Caribbean contributing to social insurance is the and in Europe and Central Asia, it has now inverse ratio of two aggregate statistics—the become standard in labor force surveys to number of contributors and the economi- ask respondents about (1) the size of the firm cally active population. However, although in which they work (that is, the number of it is a fairly precise measure of people work- people employed), (2) whether they have a ing without the protection of social insur- written labor contract, and (3) whether they ance (at least in countries where access to make contributions to a social insurance protection requires a history of contribu- plan (retirement pensions, health care, or tions), it is not widely available. unemployment insurance) or whether their employer does so on their behalf. The last two are particularly important for identi- Informal employment in East fying people working informally in other- wise formal enterprises. To the best of our Asia Pacific knowledge, in East Asia Pacific, only in Have the economies of East Asia Pacific Indonesia and the Philippines have the sta- been creating more formal than informal tistics authorities included these questions in work in recent years? Figure S1.1 shows their surveys and only in a one-off, special- purpose survey in the latter. Given the limitations of available micro- FIGURE S1.1 Vulnerable employment has remained steady in most data from East Asia Pacific countries, we East Asia Pacific countries use three measures throughout this report as proxies for the extent of informal work: self-employment, “vulnerable” employment, 100 (unpaid family worker + own account) and the share of the labor force not making 90 % of vulnerable employment contributions to social insurance. Each mea- 80 sure has limitations. 70 Not all self-employed people are work- 60 ing in the informal economy. Even if they 50 are a minority, many people who report self- 40 employment as their main form of economic 30 20 activity comply with regulatory and tax 10 requirements. While it is the proxy measure 0 that is most observable and widely available 1995 1997 1999 2001 2003 2005 2007 2009 across countries and over time, the share Indonesia Malaysia Mongolia Philippines of the labor force in self-employment will include people who are not working infor- Thailand Vietnam Cambodia mally according to any of the dimensions dis- cussed above. Source: World Bank 2013a. 34 E A S T A S I A PAC I F I C AT W O R K FIGURE S1.2 Informal employment is higher where governance is weaker a. Government effectiveness and vulnerable employment b. Control of corruption and vulnerable employment 2.5 2.5 NZL SGP AUS SGP 2 AUS 2 NZL Government effectiveness Control of corruption 1.5 JPN 1.5 JPN 1 MYS KOR 1 0.5 0.5 KOR VUT THA TUV MYS 0 TUV FJI PHL IDN VNM 0 TON VUT THA IDN –0.5 –0.5 FJI TON VNM MNG KHM PHL –1 –1 MNG TLS TLS LAO KHM LAO –1.5 –1.5 2 2 R = 0.6336 R = 0.5592 –2 –2 0 10 20 30 40 50 60 70 80 90 100 0 10 20 30 40 50 60 70 80 90 100 Percent Percent c. Rule of law and vulnerable employment d. Regulatory quality and vulnerable employment 2.5 2.5 2 NZL 2 SGP AUS SGP AUS NZL 1.5 TUV JPN 1.5 Regulatory quality 1 JPN 1 KOR MYS KOR Rule of law 0.5 MYS VUT 0.5 TUV THA 0 FJI TON 0 THA MNG PHL MNG IDN KHM –0.5 PHL VNM –0.5 FJI IDN VNM VUT –1 KHM LAO –1 TLS TLS TON LAO –1.5 –1.5 2 2 R = 0.6006 R = 0.5963 –2 –2 0 10 20 30 40 50 60 70 80 90 100 0 10 20 30 40 50 60 70 80 90 100 Percent Percent World East Asia Pacific World trend Sources: Estimates based on data in World Bank 2013a, 2013b. that the share of unpaid family and own- By most proxy measures, the low- and account workers remained fairly stable in middle-income economies of East Asia most economies of the region during the Pacific stand out as places with extensive past decade, except for Mongolia, which informal employment. Only countries in experienced a slight reduction. This is Sub-Saharan Africa tend to show consis- in sharp contrast to low- and middle- tently higher rates of informality, while income countries in Latin America and the those in South Asia may show higher rates Caribbean and in Europe and Central Asia. by some measures. Much of informal work, However, when measured by the share of however, is “structural” informality: it contributors to social insurance, formal reflects a large portion of people still work- work has increased in China, Mongolia, ing in subsistence and small-scale com- and Vietnam (chapter 7). By this same mercial agriculture beyond the reach of measure, there has been little change in regulation and taxation, as well as the speed Indonesia and the Philippines. of migration to towns and cities. While WORK IN THE INFORMAL ECONOMY 35 there are good reasons to expect widespread informal jobs are those where the employ- informality to persist even with urbaniza- ment relationship is not subject to legislation, tion (Ghani and Kanbur 2013), a significant income taxation, social protection, or entitle- portion of the informal sector tends to dis- ment to codified benefits, such as advance notice of dismissal, severance pay, paid annual appear as countries grow in wealth. leave, or sick leave. However, in the chapters of part II we 2. We have not, however, separated firms into present evidence that associates the extent those registered and those not registered, of informal employment with taxation and, which would be the best accepted practice for more evidently, with labor market policies. quantifying demand for work from businesses These factors are important to take into that operate fully in the informal economy. account. But as research from Latin America and Eastern and Southern Europe shows, nei- ther differences in taxation nor differences in References regulation provide a fully satisfactory answer to the question of what drives people into G h a n i , E ja z , a n d R av i K a n b u r. 2 013 . “Urbanization and (In)Formalization.” Policy informal work. What matters just as much Research Working Paper 6374, World Bank, as labor regulation and taxation is the cred- Washington, DC. ibility of the state as provider of services and OECD (Organisation for Economic Co-operation public goods. and Development). 20 04. 20 0 4 OEC D Figure S1.2 shows that vulnerable employ- Employment Outlook. Paris: OECD. ment tends to be higher in countries with ———. 20 0 8. 2 0 0 8 OE C D E m plo y m e n t weaker institutions and governance. Just Outlook. Paris: OECD. as policy makers have to look beyond the Packard, Truman, Johaness Koettl, and Claudio labor market for ways to sustain demand for E. Montenegro. 2012. In from the Shadow: employment, “formalizing” a greater share Int eg rating E urope’s Infor m al L abor. of economic activity can require measures Washington, DC: World Bank. Perry, Guillermo, William F. Maloney, Omar S. to improve governance and the credibility of Arias, Pablo Fajnzylber, Andrew D. Mason, and the state in the eyes of working people. Jaime Saavedra-Chanduvi. 2007. Informality: Exit and Exclusion. World Bank Latin American and Caribbean Regional Study. Notes Washington, DC: World Bank. 1. Informal employment, according to the ILO, Schneider, Friedrich, Andreas Buehn, and Claudio includes own-account workers (self-employed Montenegro. 2010. “Shadow Economies without employees) and employers employed All over the World: New Estimates for in their own informal sector enterprises; 162 Countries from 1999 to 2007.” Policy unpaid family workers, irrespective of whether Research Working Paper 5356, World Bank, they work in formal or informal sector enter- Washington, DC. prises; members of informal producers’ coop- World Ban k. 2013a. World Development eratives; own-account workers engaged in Indicators. Washington, DC: World Bank. the production of goods exclusively for final http://ddp.worldbank.org/ddp/home.do. use by their household; and employees hold- ———. 2013b. World Governance Indicators. ing informal jobs in formal or informal sec- Washington, DC: World Bank. http://info tor enterprises or working in households as .worldb a n k .or g /gove r n a n c e / w g i / i nd ex paid domestic workers. For this last category, .aspx#home. Is Work in East Asia Pacific Transformational? 3 Greater Productivity, Living Standards, and Social Cohesion East Asia Pacific has reached a stage in its employment and growth or by the labor development when productivity gains, supply and demand profiles presented in improved living standards, and greater social chapters 1 and 2. cohesion from work—the so-called “devel- This chapter presents evidence of the three opment transformations”—can no longer be development transformations in East Asia taken for granted. Pacific economies and the role of work in bringing them about. Work has indeed been B y economic convention, growth in an effective channel for economic growth as output generates work since demand well as individual and societal well-being in for labor is derived from demand for the region. During the past 20 years, remark- final goods and services. However, the World able improvements in economic productiv- Development Report 2013: Jobs (World ity, living standards, and social cohesion Bank 2012e; hereafter WDR 2013) argues happened in tandem and reinforced each that, rather than just a product of the demand other in many parts of East Asia Pacific. In for output, jobs also propel the process of many parts of the region, rapid economic development by contributing to three impor- growth was fueled by shifts in the structure tant and interrelated objectives—economic and factors of production to increase agri- growth, poverty reduction, and cohesive cultural output and to support the rise of societies. Toward these ends, people’s work manufacturing and services in towns and can act as a conduit for three transformations cities, accelerating labor productivity. East that drive a country’s development: increas- Asia Pacific’s ongoing and relatively success- ing productivity, improving living standards, ful urbanization process indicates that the and strengthening social cohesion. In reality, three transformations have, on the whole, is work an effective channel for these three been occurring simultaneously. Engagement transformations? Are these gains from work in global markets through light manufactur- always expected in a region with respect- ing exports created substantial opportunities able economic growth like East Asia Pacific? for employment, drawing rural migrants to These questions motivate a deeper discus- towns and cities, creating access to better ser- sion of employment and development than vices, and raising living standards. In many provided by the simple correlations between countries of the region, growth has promoted 37 38 E A S T A S I A PAC I F I C AT W O R K social cohesion, brought more women into of people moving from less productive to market work, benefited people who are poor more productive sectors, such as from farms or living in economically lagging and rural to firms, and labor being combined more areas, and helped to prevent social fragmen- effectively with land and capital. In the early tation. In other words, consistent with the phases of development, a large fraction of arguments in the WDR 2013, greater pro- the population typically works in agricul- ductivity has paved the way for rising living ture, and this sector accounts for a dominant standards and stronger social cohesion. share of economic output. At this stage, the But we also show in this chapter that the share of employment in agriculture usually region is at a stage in its development where exceeds its share in output (World Bank productivity gains, improvements in living 2007). But as productivity in the agricul- standards, and advances in social cohesion ture sector increases and as industry gains can no longer be taken for granted. One or strength, labor is drawn from agriculture and more of the development transformations into industry equipped with more capital, propelled by work are now starting to lag. and overall productivity and gross domestic Some East Asia Pacific countries experience product (GDP) increase. direct threats to social cohesion, while others With a few exceptions, most East Asian struggle to achieve productivity growth, to countries have experienced steady improve- sustain gains in living standards, and to accel- ments in productivity in recent decades, erate poverty reduction. During structural contributing to overall economic growth. transformation, the movements of so many Figure 3.1 demonstrates substantial increases working people, while improving individual in labor productivity throughout the 1990s well-being, have also reshaped the distribu- and 2000s in many countries in the region. tion of welfare and opportunities in soci- China’s threefold productivity growth since ety. Increasing inequality in earnings, rising 2000 was the most impressive, followed by returns to skills, and disparities in well-being Vietnam’s nearly twofold increase. China’s across geography and communities are driv- GDP growth from 1978 to 2007 can be ing rising consumption or income inequal- accounted for primarily by productivity ity in China, Indonesia, the Lao People’s growth, while its pre-1978 growth was mostly Democratic Republic, and Vietnam. Several due to growth in physical and human capi- East Asia Pacific countries now have among tal (Zhu 2012). Labor productivity growth the highest rates of youth unemployment was also notable in Indonesia, Malaysia, and inactivity in the world. These signs raise Mongolia, and Thailand. However, pro- concerns about social cohesion. In addition, ductivity growth only started to take off in moderated growth rates in the region are Cambodia in the mid-2000s. Labor produc- associated with slower gains in living stan- tivity in the Philippines was stagnant until dards than many people have come to expect 2002 and increased the least among East over the past two decades. Emerging imbal- Asian economies over the past 20 years. But ances in the pace of the transformations pose on the whole, the region’s impressive produc- a challenge to well-being from work that East tivity growth was an important determinant Asia Pacific countries cannot afford to ignore. of its output growth. Work has been an effective conduit for productivity gains in East Asia Pacific, nota- Work and productivity bly through people taking up more produc- Economies grow as people become more pro- tive forms of work. This process, when led ductive at what they do. Productivity gains by enhancements in farm productivity, has also happen as less productive work disap- enabled successful structural transformation pears and more productive work is created. and contributed to better paid work and pov- In low-income and lower-middle-income erty reduction in many countries of the region. countries, this process often takes the form Increased farm productivity raised farmers’ I S W O R K I N E A S T A S I A PAC I F I C T R A N S F O R MAT I O N A L? 39 income, promoted downstream agricultural FIGURE 3.1 Labor productivity grew faster in most East Asia businesses, created demand for rural nonfarm Pacific countries than elsewhere services, and released large amounts of labor from agriculture to join urban manufacturing 550 and services. The reallocation of labor across GDP per person employed (1990 = 100) 500 sectors was a significant driver of labor pro- ductivity gains in most of the region. However, 450 as slowing global demand tends to moderate 400 economic growth and as farm-to-firm move- 350 ments decelerate, countries in the region can 300 no longer take for granted the sort of produc- 250 tivity gains they have experienced until now. 200 150 Productivity on farms 100 Across most of the region, agricultural pro- 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 ductivity has increased in recent decades. Cambodia China Indonesia Figure 3.2 shows trends in crop yields (output Malaysia Philippines Thailand per hectare) for six East Asian countries for Vietnam Europe and Latin America which data are available. Growth in land OECD Central Asia and the Caribbean productivity has been especially impressive in China, but much slower in the Philippines. In Source: World Bank 2012a. Cambodia and Lao PDR, farm productivity Note: OECD = Organisation for Economic Co-operation and Development. growth took off at a later stage, resulting in a surge in crop yields starting in 2000. These gains in agricultural productivity increased rural income and helped to reduce poverty in FIGURE 3.2 Crop yields have increased substantially across the the region (as discussed later in this chapter). region Several factors contribute to changes in the productivity of agriculture. Farm size is Output per hectare, 1961–2010 widely viewed as an important correlate, since 9 output per hectare is a combination of out- 8 put per worker (labor productivity) and land 7 per worker. A famous and recurring empiri- Tons per hectare cal observation documented in the literature 6 is the inverse relationship between farm size 5 and productivity. Studies from South Asia 4 and Sub-Saharan Africa find that farm size 3 is inversely related to productivity, imply- 2 ing that an increase in farm size results in a 1 reduction in crop yields (World Bank 2012e). One commonly cited explanation for this 0 1961 1966 1971 1976 1981 1986 1991 1996 2001 2006 2011 relationship is that most farms in low-income countries are household farms that may have China Indonesia Philippines an excess of domestic on-farm labor supply Thailand Cambodia Lao PDR relative to other factor inputs, such as fertil- izer and land, resulting in large household Source: FAO 2013. Note: Crop production comprises cereals, fiber crops, fruits, oil crops, pulses, roots and tubers, tree farms being relatively less productive (World nuts, and vegetables. Bank 2012e). However, this relationship is not always statistically robust. Between 1961 40 E A S T A S I A PAC I F I C AT W O R K and 2000, average farm size decreased in productivity of agriculture in certain con- China and remained constant in Thailand, texts, although there is less evidence of gender while land productivity grew 2.9 percent in being a significant factor in East Asia Pacific China and 2.5 percent in Thailand. However, countries. Within farm households, evidence once differences in soil quality and irrigation from outside the region shows differences in are taken into account, the inverse farm size– yields between land plots controlled by men productivity relationship often breaks down and those controlled by women, with inferior (Fan and Chan-Kang 2005).1 and lower factor inputs on the plots farmed Far more important is the impact that by women (see, for instance, Udry 1996; institutions and public policy can have on Kilic, Palacios-Lopez, and Goldstein 2013; the productivity of agriculture. For instance, Andrews, Golan, and Lay 2013). Evidence agricultural productivity growth from 1978 from East Asia Pacific on gender differences to 1984 in China was driven mostly by in farm productivity is scarce, but findings institutional arrangements and incentives from China suggest that farms managed by for farmers rather than by technological women are as productive as those managed improvements. But after 1984, liberalization by men and that women farmers face no sub- of the sector incentivized the adoption of new stantial differences in the quantity or quality technologies by farmers (Zhu 2012). of land, labor inputs, or access to credit com- Tenancy arrangements and ownership pared to men farmers (de Brauw et al. 2008). rights are fundamental institutions that affect household investments in land and, Structural transformation and as a result, can contribute to agricultural productivity growth productivity. Sharecropping, still a common tenancy arrangement in East Asia Pacific, As agricultural productivity increased, many correlates negatively with productivity East Asian countries experienced large-scale (Ray 1998; Banerjee, Gertler, and Ghatak movements of labor away from agriculture 2002). For instance, Shaban (1999) finds and toward labor-intensive manufacturing differences in input and output intensities and services in towns and cities. Some coun- between plots where households are own- tries in the Pacific have experienced similar ers and those where they are sharecroppers, structural dynamics, but at considerably even after differences in plot characteristics smaller relative volumes. Surplus labor that and irrigation have been taken into account. was freed to move off of more productive Similarly, Jacoby and Mansuri (2009) find farms was pulled into urban manufactur- that yields on sharecropped plots are about ing as part of the export-led growth model 2.3 percent lower, although this difference enabled by increasing global integration. is not statistically significant. In terms of This structural transformation drove pro- land rights, Markussen (2008) finds that ductivity gains in East Asia Pacific, as people plots in Cambodia with legal documenta- moved from less productive to more produc- tion have higher output and sales value tive forms of work and as the agglomeration per hectare. Analyzing the 1993 land law effects of concentrating people and firms in reform in Vietnam, Do and Iyer (2008) find towns and cities took hold (Gill and Kharas that extending the coverage of land titling 2007; World Bank 2008a). increased the cultivation area of long-term A shift of the factors of production away crops as well as the time spent on nonfarm from the primary sector and toward the sec- activities. World Bank (2013b) argues that ondary and tertiary sectors often results in limited access to land by smallholder farmers an overall gain in productivity. The share of in the Philippines has contributed to low agri- the workforce in East Asia Pacific working in cultural productivity and high food prices. agriculture fell from approximately 60 per- The gender of the owner, farmer, or cent in 1991 to slightly over 40 percent in manager of a farm can also matter to the 2008 (World Bank 2013c), reflecting a similar I S W O R K I N E A S T A S I A PAC I F I C T R A N S F O R MAT I O N A L? 41 pattern in low- and middle-income countries countries in East Asia Pacific. This is clearly in other regions. As farming became more illustrated by decomposing overall labor productive, employment in agriculture fell. productivity growth into movements within As productivity rose in manufacturing and and across sectors in 81 countries during the services, more people took up work in these 1999–2008 period (figure 3.4). activities. Figure 3.3 shows the dynamic rela- From 1999 to 2008, labor productivity tionship between employment shares and grew at a faster rate in East Asia Pacific than productivity by sector from 1995 to 2010. in any other region, at 5.3 percent annually. Rising value added in the primary sector is The next fastest was in South Asia and Central correlated with a decline of employment in South East Europe, at 5 percent (figure 3.4). that sector, while the opposite is observed The reallocation of labor across sectors in the secondary and tertiary sectors, where accounted for 2.5 percentage points of annual rising value added is correlated with rising labor productivity growth in East Asia Pacific, employment. The positive relationship is surpassing the other regions both in absolute more significant and visible in the tertiary size and in contribution to overall labor pro- sector than in the secondary sector. Value ductivity growth. In China, labor reallocation added in manufacturing and services goes across sectors accounted for 4.1 percentage hand-in-hand with increased employment in points of the 7.3 percent annual growth in these segments of the economy over time. labor productivity. In Vietnam, it accounted Both within-sector and across-sector for 2.6 percentage points of the 4.2 percent productivity changes were important to annual labor productivity growth. But this overall productivity growth in low- and regional characteristic is not just a story of middle-income countries the world over, China and Vietnam: in two-thirds of the coun- but labor reallocation across sectors was a tries depicted, cross-sectoral movement was a stronger contributor to higher productivity more important driver of labor productivity in East Asia Pacific than in any other region. gains than in other regions, where reallocation In other words, the contribution to overall of labor within sectors was more dominant.2 productivity improvements of people moving The geographic redistribution of work that from one form of work to another was partic- took place as part of the structural transfor- ularly important in the rapid development of mation in many East Asia Pacific countries FIGURE 3.3 Productivity gains in agriculture spurred the shift of labor to higher value-added sectors a. Primary sector b. Secondary sector c. Tertiary sector 100 50 90 90 45 80 Employment share (%) Employment share (%) Employment share (%) 80 40 70 70 35 60 60 30 50 50 25 40 40 20 30 15 30 20 10 20 10 5 10 0 0 0 0 2 4 6 8 10 12 14 0 2 4 6 8 10 12 14 0 2 4 6 8 10 12 14 Log value added in primary sector Log value added in secondary sector Log value added in tertiary sector 1995 2005 2010 Source: Based on World Bank 2012e. Note: Each circle represents a country, and the colors represent different points in time. 42 E A S T A S I A PAC I F I C AT W O R K FIGURE 3.4 Movement of labor across sectors was an important and reduce transportation costs. Growth, driver of productivity growth in East Asia Pacific then, attracts more people and firms and so accelerates the process of agglomeration Labor productivity growth, by source, 1999–2008 (World Bank 2008b). A 10 percent increase in the density of urban employment can increase Central and southeast Europe wages and firm productivity about 0.2 to Latin America and the Caribbean 1 percent, and larger cities produce more Middle East and North Africa innovations per capita (Duranton 2012). Sub-Saharan Africa In East Asia, large volumes of labor migra- South Asia tion into towns and cities led to productivity gains from agglomeration (Gill and Kharas East Asia Pacific 2007; World Bank 2008a). Chinese manufac- China turing became more geographically concen- Vietnam trated, specifically in coastal provinces, as the Mongolia economic transition proceeded (He 2008). In Indonesia Indonesia, economic activity shifted toward Thailand Java-Bali—centering in Jakarta—which was Hong Kong SAR, China the fastest-growing region between 1976 and 2004. Estimates from the Republic of Korea Taiwan, China suggest that firms that moved to a city could Korea, Rep. increase plant output 20–25 percent, while Singapore holding the composition of inputs constant. Malaysia In China, firms are more productive in the Philippines more populated cities (World Bank 2008a), –1 0 1 2 3 4 5 6 7 8 and income per worker rises as cities become larger (Au and Henderson 2006).3 Annual growth (%) East Asia Pacific’s high degree of eco- Cross-sector Within-sector nomic integration creates employment in reallocation changes exporting and foreign-owned firms and, in doing so, is likely to boost overall productiv- Sources: Kucera and Roncolato 2012; World Bank 2012e. ity. Integrating into the global economy can Note: The figure decomposes labor productivity growth in 81 countries over 1999–2008 into changes in productivity due to changes within sectors and reallocation between sectors. Seven sectors are increase firm productivity since the global considered: agriculture, hunting, forestry, and fishing; mining and utilities; manufacturing; construc- market provides scope for economies of scale tion; trade, restaurants, and hotels; transport, storage, and communication; and other services. The regional growth rates are weighted averages, with weights based on a country’s share of regional GDP. and exposes firms to international competi- tion and knowledge (Baldwin and Gu 2004). Evidence from across East Asia Pacific sug- also propelled productivity as people and gests that exporting and foreign-owned firms firms concentrated in urban centers. Location are more productive, without inferring cau- matters for factor productivity, and urban sality (Hallward-Driemeier, Larossi, and “agglomeration economies” have had a sub- Sokoloff 2002). As the share of working peo- stantial role to play in East Asia’s advances ple employed in these firms rose in East Asia (Gill and Kharas 2007; World Bank 2008a, Pacific, so did overall productivity. Using 2008b). Agglomerations can form when manufacturing census data from Indonesia, firms concentrate in the same location, reduc- Amiti and Konings (2007) find that, between ing costs as a result of cheaper labor supply, 1991 and 2001, a 10 percentage point reduc- competition between firms, and knowledge tion in input tariffs was associated with a spillovers, all resulting in higher productivity. 12 percentage point increase in productivity Concentration of people in cities can boost for firms importing inputs, while a reduc- demand for products, provide a pool of labor, tion in output tariffs by the same amount enhance returns on infrastructure investment, increased productivity only 1 to 6 percent. I S W O R K I N E A S T A S I A PAC I F I C T R A N S F O R MAT I O N A L? 43 Using panel data of manufacturing firms col- Firm dynamics and labor productivity lected between 2001 and 2005 in China, Sun Supporting the large-scale structural shifts and Hong (2011) find that, when exporting discussed earlier are firm dynamics that firms increase the ratio of export to sales by involve constant reallocations of capital and one unit, they increase output 2.6 percent. labor. At the firm level, productivity growth While export-led growth and structural involves the creation of more productive forms transformation has spurred tremendous pro- of work as well as the destruction of less ductivity growth in many parts of East Asia productive ones. The structural and spatial Pacific, achieving similar gains in the future changes experienced by most countries of East can be difficult, especially for countries Asia Pacific unleashed “creative destruction” where progress on this front has been slow that was a large part of increased productiv- up until now. For instance, geography and ity in the region. Productivity gains through size constrain opportunities for export-led innovation, while expected to enhance economic growth in the Pacific island coun- growth in the long run, may have positive or tries (see chapter 8 for more details). Evidence negative impacts on employment in the short from the Philippines suggests an “incomplete or medium run. Product innovations usually structural transformation”: stagnant agricul- create new businesses and new employment. ture and manufacturing sectors have led most They may also lead to firms downsizing or of the labor force that migrated from rural exiting in the short term if the new product areas into cities to end up in low-productivity, substitutes existing goods and the new firm informal service sector work (World Bank becomes monopolistic. Process innovations 2013b). Indeed, the contribution of cross- can reduce the amount of labor in immediate sectoral labor reallocation to productivity need. In the East Asia Pacific region, firm- was negligible in the Philippines (figure 3.4). level evidence from China suggests that more In addition, several East Asian countries than half of the growth in value added in the are now at a stage of development where manufacturing sector from 1998 to 2007 they face possible obstacles to sustaining can be attributed to total factor productivity productivity gains from work. Less favor- (TFP) growth stemming from existing firms able global economic prospects, more intense becoming more productive and net firm entry global competition, and eroding labor cost (Brandt, van Biesebroeck, and Zhang 2012). advantages (including the trend toward Evidence from Indonesian manufacturing “re-shoring” and “near-shoring” in textiles census data (1991–2001) suggests that some and other light manufacturing) are likely to creative destruction occurred during the 1998 imply a moderation in export demand and crisis: new firms were relatively more produc- economic growth in East Asia in the com- tive, which helped to mitigate the fall in aggre- ing years. For the East Asian countries that gate productivity. The crisis, however, did not are now substantially urbanized, much of the unequivocally improve the reallocation pro- large productivity gains associated with the cess, causing many productive firms to exit transformation from agriculture to light man- (Hallward-Driemeier and Rijkers 2011). ufacturing has already been realized. It is not Even though most people work in micro, easy to take the next transformational step small, and medium enterprises and most toward higher value-added manufacturing or new employment is created in these firms (as high-skill services (Gill and Kharas 2007). In shown in chapter 2), they are rarely an engine Indonesia, for example, manufacturing firms of productivity growth. Evidence from devel- are finding it difficult to move up the value oped countries indicates that bigger firms chain and innovate, which is constraining are relatively more likely to survive, while the sector’s productivity and competitiveness. many of the small firms created are quickly Stagnating growth in manufacturing is limit- destroyed (Bartelsman, Haltiwanger, and ing the country’s potential to create demand Scarpetta 2004). Data from the Small and for work (World Bank 2012b, 2012c).4 44 E A S T A S I A PAC I F I C AT W O R K Medium Business Administration database in has the highest productivity growth, both Korea suggest that, during the past decades, in East Asia Pacific and in the full sample of the productivity gap between large firms and developing countries. Controlling for firm small and medium enterprises (SMEs) has size, younger firms have relatively higher pro- widened (figure 3.5). ductivity growth. Even in the segment of very Evidence from middle- and low-income small and informal family enterprises not countries is similar. For example, micro, covered by enterprise surveys, firm size and small, and medium enterprises account for age matter for labor productivity. Evidence more than 90 percent of employment, but from the Indonesia Family Life Survey sug- only 36 percent of GDP in the Philippines gests that, among household firms with up to (World Bank 2013b). Using enterprise survey five employees, labor productivity is higher in data from 99 developing countries, Ayyagari, own-account and more mature micro firms Demirgüç-Kunt, and Maksimovic (2011) (figures 3.6 and 3.7), even after controlling for confirm that, although SMEs account for a factors such as industry and household effects large share of employment and (permanent, (Badiani, Golan, and Posadas in progress). full-time) employment creation, this does not Informal, micro firms in East Asia Pacific necessarily translate into productivity growth. often emerge out of necessity rather than Smaller and younger firms exhibit higher entrepreneurship and consequently tend to be employment growth than larger and more less productive than larger, registered formal mature firms. However, the latter segment enterprises. Even though the marginal returns to initial capital investments are expected to be high for low-capital-stock informal enter- FIGURE 3.5 The productivity gap between large and small firms in prises, micro firms do not necessarily real- Korea has widened ize this great growth potential. Using panel data on formal and informal enterprises for Value added, by firm size category 2004 and 2006 in Vietnam, Nguyen and Nordman (2012) find that informal house- 10 hold enterprises have lower value added per Real Korean won/worker (2005 prices) 9 worker, fewer workers, and a lower initial 8 capital stock than formal enterprises. In the 7 Philippines, informality was identified as a 6 major constraint to doing business by enter- 5 prises with 10 to 200 employees (World Bank 4 2013b). As discussed in chapter 2, high levels 3 of self-employment in many middle-income 2 East Asia Pacific countries are more likely 1 to result from working people trying to meet 0 subsistence needs than from transformational 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 entrepreneurship. This phenomenon may Small and medium firms Large firms explain the short life span and low produc- tivity of household micro businesses in many Source: Based on Rostom, Song, and Kim in progress, using the Small and Medium Business Admin- East Asia Pacific countries. istration database in Korea. Note: In manufacturing, SMEs constitute fewer than 300 workers and capital worth W8 billion or less; in mining, construction, and transportation, they constitute fewer than 300 workers and capital worth W3 billion or less; in publication, information and communication, administrative and support Work and living standards service activities, human health and social work activities, and professional scientific and technical activities, they constitute fewer than 300 workers and sales worth W30 billion or less; in agriculture, The productivity gains described above have forestry and fishery, electricity, gas, steam, and waterworks business, wholesale and retail trade, accommodation and food service activities, financial and insurance activities, and arts, entertain- allowed more working people in East Asia ment, and recreation, they constitute fewer than 200 workers and sales worth W20 billion or less; Pacific to improve their welfare in the last two in sewerage, waste management, and remediation activities, education, repair, and other services, they constitute fewer than 100 workers and sales worth W10 billion or less; in real estate, rental, and decades than in any earlier period. The share leasing activities, they constitute fewer than 50 workers and sales worth W5 billion or less. of the region’s population living on less than I S W O R K I N E A S T A S I A PAC I F I C T R A N S F O R MAT I O N A L? 45 US$1.25 a day declined from 56.2 percent in FIGURE 3.6 Among household enterprises, those with fewer 1990 to 12.5 percent in 2010, from one of the workers are more productive highest to among the lowest across develop- ing regions (World Bank 2013c). Impressive Distribution of firm productivity, by number of employees poverty reduction took place not only in 4 China but also in many other countries, including Cambodia, Indonesia, Thailand, and Vietnam. However, the official poverty 3 headcount has remained stagnant at around 26.5 percent in the Philippines since 2003. Density Any slowdown in growth in the future will 2 likely imply slower improvements in living standards than what many people in East 1 Asia have come to expect. From 2000 to 2012, real wages rose in several East Asian countries. Figure 3.8 0 shows this trend for the countries where data 0 5 10 15 0 5 10 15 are available. In Indonesia, the manufactur- 2000 2007 ing real wage rose quickly in the early 2000s, Log of productivity (profits/workers) remained stagnant for several years, and only No employees 1 to 2 employees 3 to 5 employees recently started to rise again. Thailand’s real wages have been very close to their 2001 lev- Source: Based on Badiani, Golan, and Posadas in progress, using the Indonesia Family Life Survey for els during the past decade and only recently 2000 and 2007. started to rise substantially. However, in several other countries, manufacturing real wages have been rising rapidly. In Mongolia, FIGURE 3.7 Among household enterprises, mature firms are more real wage increases have been especially productive rapid since 2006. China and Malaysia saw improvements in the real wage index since Distribution of firm productivity, by firm age 2003 and 2004, respectively. The annual 4 wage of a Chinese urban worker rose from US$1,004 in 1978 to US$5,487 in 2010 (Li et al. 2012), and manufacturers in China 3 expect wages to rise 9.2 percent in 2013 (Narayanan, Lau, and Green 2013). Density Remunerated work is often the most impor- 2 tant factor in determining peoples’ living stan- dards in low- and middle-income countries, 1 for at least three reasons. First, as affirmed in chapter 1, people’s most valuable assets are their talent, skills, and ability to work. In 0 low- and middle-income countries where few 0 5 10 15 0 5 10 15 people are investors and the welfare state is 2000 2007 limited, the main source of household income Log of productivity (profits/workers) is the return on these assets in the form of <3 years 3–6 years paid work. Second, work-related events drive 5–11 years >11 years economic mobility. For example, transitions out of poverty usually take place when family Source: Based on Badiani, Golan, and Posadas in progress, using the Indonesia Family Life Survey for members are able to earn higher income from 2000 and 2007. their current work or from a new occupation. 46 E A S T A S I A PAC I F I C AT W O R K FIGURE 3.8 Real wages have been rising in many East Asian countries Much of the gain in living standards in East Asia Pacific happens through migration for work. Third, living standards and well-being Manufacturing real wage index 300 are measured not just in money. In addition to earnings, several other aspects of having work 250 affect living standards and life satisfaction. Income and consumption are commonly used 200 measures of welfare, but access to services, security, freedom, and life satisfaction also 150 matter and correlate with living in a house- 100 hold in which adult family members have employment. For a detailed discussion of the 50 role of work in life satisfaction, see the WDR 2013 (World Bank 2012e). 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 China (2003 = 100) Indonesia How important is income from work to Malaysia (2004 = 100) Mongolia (2002 = 100) living standards? Thailand (2001 = 100) Base = 100 In East Asia Pacific countries, labor earn- ings are without doubt an important Sources: CEIC 2012; NBS 2011. source of income. Figure 3.9 shows the FIGURE 3.9 Labor earnings are an important source of household income in East Asia Pacific Income from different sources as a share of total income 100 90 80 70 60 Percent 50 40 30 20 10 0 2007 2010 2001 2007 2003 2009 2004 2010 2006 2009 2006 2009 2008 2011 Cambodia Timor-Leste Fiji Vietnam Thailand Philippines Mongolia Wages Farm Nonfarm (business) Transfers Remittances Financial Rent Others Source: Estimates based on various household income and expenditure surveys. I S W O R K I N E A S T A S I A PAC I F I C T R A N S F O R MAT I O N A L? 47 composition of household income by source In fact, in a cross-country study, Ligon and in a selection of East Asia Pacific countries Sadoulet (2011) find that growth of agricul- where detailed data on income are avail- tural income is particularly beneficial for able. Across all countries, labor earnings— increasing the expenditures of the poorest income from the farm, own businesses, households: a 1 percent increase in income and wages—constitute the main source of from agriculture is estimated to increase household income. the expenditure of households in the poor- But there are important differences across est decile by about 1.65 percent. A similar countries in the nature of work and how the increase in nonfarm income does not have characteristics of work change with eco- the same effect. Over time, however, the nomic development. As expected, for coun- share of agriculture in the overall income tries with a large share of the population composition of the poorest group declined, in agriculture, incomes from farm work or except in Timor-Leste (figure 3.11). In other types of self-employment constitute Mongolia, labor income plays a less domi- an important fraction of household income. nant role among the poor than nonlabor Households in more developed and urban- income. Nearly 50 percent of the income of ized economies like the Philippines and the poorest consists of transfers, and their Thailand derive a greater average share of relative weight in the income composition of household income from wages and salaries the poorest households increased in recent than places like Cambodia or Vietnam. years. Over the periods examined, in most coun- Income from work has been an important tries, the composition of household income force for lifting people out of poverty and moved away from farm production and boosting prosperity in East Asia Pacific. But toward wages from dependent employment the channel is not automatic nor can it be (figure 3.9). In Cambodia, the share of taken for granted: many poor people work income from nonfarm businesses rose, while long hours and earn little income, which incomes from wages remained constant. In does not necessarily allow them to escape a resource-rich country with generous social poverty. Nor is work the sole factor in over- welfare like Mongolia, the share of income coming poverty: multiple factors, such as from farm work fell and that of income from changes in household composition, assets, transfers rose. and transfers, can also raise the likelihood Within countries, the share of income of escaping poverty. One way to assess from work varies by gender and across the contribution of labor income to pov- wealth groups. The ratio of women’s and erty reduction is by decomposing changes men’s wages for similar work in the region in poverty by source of income. Badiani ranges from 52 percent in the Republic of et al. (2013) decompose changes in income Korea to 81 percent in Mongolia (World poverty into the contributions of different Bank 2012d). And the type of work and income sources in East Asia Pacific coun- related income differ between the poor and tries. Figure 3.12 presents the results of the the rich, as shown in figure 3.10. For all the decomposition; the sum of contributions countries we were able to analyze, the bot- from wage, farm, and nonfarm work and tom income quintile (the poorest 20 percent) the share of working adults represent the derives a greater fraction of its income from role of work and labor income. Nonlabor farm production, while the top income quin- income includes income from assets, pri- tile (the richest 20 percent) derives a greater vate remittances, public social assistance proportion from wages. In Cambodia, non- or insurance, and other transfers. In all but farm business incomes (more than wages) one of the countries for which there are are a main source of income for the rich- data to conduct the decomposition, income est people, while the poorest people derive from work explains more than 40 percent most of their income from farm production. of the observed reductions in poverty. 48 E A S T A S I A PAC I F I C AT W O R K FIGURE 3.10 People in poor households derive a large share of their income from agriculture Income from different sources as a share of total income, by consumption quintile 100 90 80 70 60 Percent 50 40 30 20 10 0 Q1 Q5 Q1 Q5 Q1 Q5 Q1 Q5 Q1 Q5 Q1 Q5 Q1 Q5 Cambodia Timor-Leste Vietnam Fiji Thailand Philippines Mongolia 2010 2007 2010 2009 2009 2009 2011 Wages Farm Nonfarm (business) Transfers Remittances Financial Rent Others Source: Estimates based on various household income and expenditure surveys. Note: Q = quintile. FIGURE 3.11 The share of earnings from agriculture in overall income of the poorest group has fallen Income from different sources as a share of total income, in the poorest quintile over time 100 90 80 70 60 Percent 50 40 30 20 10 0 2007 2010 2001 2007 2004 2010 2006 2009 2006 2009 2008 2011 Cambodia Timor-Leste Vietnam Thailand Philippines Mongolia Wages Farm Nonfarm (business) Transfers Remittances Financial Rent Others Source: Estimates based on various household income and expenditure surveys. I S W O R K I N E A S T A S I A PAC I F I C T R A N S F O R MAT I O N A L? 49 In Cambodia and Vietnam, in particular, FIGURE 3.12 Income from work explains a large share of reduction changes in labor income contributed to in poverty more than 70 percent of poverty reduction. In Timor-Leste, the loss of labor income Results from a decomposition of poverty changes into from 2001 to 2007 explains almost all of different components the increase in poverty. 150 Not all sources of income for work have the same impact on poverty and living 100 standards. The sector of work and the con- straints on entering certain sectors, such as 50 Percent the nonagricultural sector, affect individuals’ future income prospects. In the early years of 0 the structural transformation, work in agri- –50 culture was a key driver of poverty reduc- tion. For example, Glewwe, Gragnolatti, –100 and Zaman (2002) and Ravallion and Chen (2007) show that agricultural productivity –150 gains and land reforms, rural infrastruc- Cambodia Timor-Leste Vietnam Thailand Philippines Mongolia ture improvement, and off-farm activities Wages Farm Nonfarm were important to reducing poverty in the Nonlabor Share of adults Share of working adults 1980s and 1990s in China and Vietnam. Higher farm incomes paved the way for indi- Sources: Estimates based on Cambodia Socio-Economic Survey (2007, 2010), Thailand Household viduals to engage in off-farm employment Socio-Economic Survey (2006, 2009), Philippines Family Income and Expenditure Survey (2006, in China and were associated with the most 2009), Vietnam Living Standards Measurement Survey (2004, 2010), Mongolia Household Socio- Economic Survey (2007–08, 2011), and Timor-Leste Survey of Living Standards (2001, 2007). poverty reduction (de Brauw et al. 2002). Note: Poverty is measured as the fraction of the population with per capita income of less than Evidence from Indonesia shows that ris- US$1.25 a day for all the countries except for Thailand, where it is measured using the US$2.50 poverty line. ing rural incomes between 2001 and 2006 were driven primarily by increased value of agricultural production (Klasen, Priebe, and in poverty reduction. The composition of Rudolf 2010). income in Thailand has been relatively More recent analysis shows that income stable, but the share of transfers in aggre- from different types of work has had dif- gate income nearly doubled during the time ferent effects on welfare. For instance, period and increased in importance for the wage income has been an important con- poor. In Timor-Leste from 2001 to 2007, tributor to poverty reduction in Cambodia the loss of farm income followed the loss of a nd V ie t n a m . I n Mongol i a a nd t he wage income and contributed a large part Philippines, increases in wage income to higher poverty. have also been a key factor for reducing poverty, and the loss of farm incomes has Work and economic mobility had an adverse impact. As observed in figure 3.9, households in the Philippines Work-related choices and events, broadly experienced a small reduction in the share defined, provide opportunities to improve of farm incomes over the period 2006–09. livelihoods in many parts of the world, From 2007 to 2011 in Mongolia, agricul- including East Asia Pacific. In Indonesia, tural production was adversely affected changes in employment of the head of the by severe weather conditions, while social household were important for explain- transfers increased and constituted an ing changes in household income (Fields increasing fraction of the income of the et al. 2003). Using data collected in 1985 poorest. Similar to Mongolia, in Thailand, and 2008 from villages in Central Luzon nonlabor incomes were an important factor and Panay Islands of the Philippines, 50 E A S T A S I A PAC I F I C AT W O R K Matsumoto et al. (2012) find that formal commonly possess better health and edu- wage incomes and overseas remittances cation outcomes since income helps them were the largest component of rising rural to pay for investments in children’s human incomes for those who exited poverty or capital, which strengthens their labor mar- remained nonpoor. Evidence from the 1990s ket prospects in the future. Evidence also in Vietnam suggests that exiting poverty shows that cross-border migration and was related to employment growth in the remittances help to improve consump- export sectors. In rural Vietnam, work- tion, benefit children’s education, and related events accounted for 62 percent of reduce child labor, although counteract- the probability of escaping poverty during ing effects on the family structure can be the 1990s (Inchauste 2012).5 Evidence from non-negligible (World Bank forthcoming). rural Thailand suggests that earning rises as In addition, parents’ form of work can be a result of moving from the farm to the non- a predictor of that of their children. Using farm sector, but also that, in recent years, data from the Vietnam Living Standard there is limited mobility between sectors and Survey 1992/3, Emran and Shilpi (2010) upward mobility within the nonfarm sec- find that having a mother (father) working tor (see box 3.1). Qualitative accounts from in the nonfarm sector increases the likeli- Cambodia, Indonesia, the Philippines, and hood that daughters will participate in the Thailand indicate that finding employment nonfarm sector by 22 percent (7 percent). and starting new businesses are the most fre- Having a father or mother working in the quently offered explanations for households nonfarm sector also is important for pre- moving out of poverty (Narayan, Pritchett, dicting the likelihood that sons will par- and Kapoor 2009). ticipate in the nonfarm sector. The study Adults’ work can also have an impor- also finds that the intergenerational cor- tant impact on the prospects and welfare relation of employment in the agriculture of their children, thereby promoting eco- sector between parents and children can nomic mobility from one generation to be accounted for by factors that are not the next. Children from wealthier families observed, such as preferences. BOX 3.1 Nonfarm labor market dynamics in rural Thailand Combining rural village-level census data and Regression analysis of changes in log real earn- individual-level panel data from rural Thailand, ings controlling for base earnings, individual and Chawanote and Barrett (2013) fi nd that nonfarm household characteristics, and possible employment employers and employees earn more than farmers transitions shows signifi cant gains in earnings for and own-account self-employed in rural Thailand. those who were employed in nonfarm activities and They show that, between 2005 and 2010, occupa- remained as such compared to those who remained tional mobility was relatively limited and tended working on the farm during the whole time interval. to be more downward than upward: individuals Accordingly, transiting from nonfarm employment to were more likely to transit from nonfarm self- farm employment is associated with lower earnings employment to farming than to nonfarm employee for the nonfarm self-employed and employees, while or employer positions. While 28 percent of persons transiting from farming to the nonfarm sector corre- who were nonfarm employers in 2005 were non- lates with higher earnings for farm workers (except farm self-employed in 2010, only 3.3 percent of when transiting into nonfarm self-employment). those who were self-employed in 2005 were non- farm employers in 2010. Source: Chawanote and Barrett 2013. I S W O R K I N E A S T A S I A PAC I F I C T R A N S F O R MAT I O N A L? 51 While work-related choices and events and Development (OECD) defines a cohesive can help people to transition out of pov- society as one that “works toward the well- erty, shocks transmitted through the labor being of all its members” (OECD 2011, cited market can make households vulnerable in World Bank 2012e, 128). Social cohe- and affect their living standards. Shocks sion can be measured in several ways and include the death of a working-age house- is shaped by many factors, including work.6 hold member, a sudden fall in commodity Work creates opportunities and shapes inter- prices that cuts into farmers’ profits, eco- actions between individuals and groups. It nomic downturns, and, for countries heav- affects how people think of themselves and ily reliant on remittances from emigrants, relate to others. Societies thrive where work recessions in migrant-receiving countries. connects people from different groups and The 1997–98 East Asian crisis showed creates opportunities for them to fulfill their how a systemic economic shock can reduce potential. Employment can also provide living standards: this period was the only access to voice. The distribution of employ- halt in an otherwise continuous downward ment and earnings and how people interact trend of extreme poverty in the develop- in the labor market can shape their aspira- ing countries of East Asia Pacific since tions and perception of fairness. Work can 1990. In the more recent global financial influence social cohesion through all of these crisis, as discussed in chapter 1, countries channels. in East Asia Pacific were more resilient Given how broad the concept of social than countries in other regions. Although cohesion is, how it is affected by work will vary employment remained steady, there was widely from country to country. Norms, value still a substantial downward adjustment in systems, and institutions matter (Kilroy 2012). earnings. In some countries, threats to social cohesion Thus while work has been transforma- may arise along the rural-urban divide or tional in reducing poverty and raising the liv- from the marginalization of youth and eth- ing standards of many people in East Asia nic minorities. In other places, the threat may Pacific, the small share of working people come from widespread unemployment leading covered by social protection (see chapter 6) to social unrest and conflict. In many coun- leaves many households without sufficient tries, social cohesion is threatened by high lev- formal insurance against shocks to well- els of welfare inequality—including unequal being transmitted through their work. In access to health, education, and opportunities addition, a moderation of growth rates in for advancement—which limit the extent to several countries of the region is expected which a country’s prosperity is shared. to translate into slower gains in living stan- Work has contributed to social cohesion dards than many people have experienced in East Asia Pacific in recent decades. The over recent decades. region’s remarkable progress in economic growth has led to improvements in the life of many people, including poor people and Work and social cohesion disadvantaged groups, mainly through their What is social cohesion and how is it influ- work. Income from work has risen among enced by work? Social cohesion is a very people in poor households. According to esti- broad and mostly intangible public good, mates using household survey data, the share easier to identify when there is less of it of wages in total income for the poorest quin- or it is missing altogether. The term typi- tile rose 44 percent in Vietnam, 6.5 percent cally refers to the ability of all citizens to in the Philippines, and 3.4 percent in enjoy access to fundamental social and eco- Mongolia. Li et al. (2012) document that the nomic rights without discrimination and annual average wage increases in China from on an equal footing (Jenson 2010). The 1978 to 2010 were broadly shared: wages Organisation for Economic Co-operation increased for both skilled and unskilled 52 E A S T A S I A PAC I F I C AT W O R K workers, for people working in coastal growth. China stands out not only for the and inland areas, and for workers in both exceptionally fast rise in GDP per capita exporting and nonexporting firms. Rural but also for the large decline of 12 percent- residents in many parts of the region bene- age points in the labor share in GDP during fited. Rural migrants were able to find better the 1999–2008 period. Fiji and Papua New work opportunities in towns and cities. And Guinea also show a decline. This statistic the remittances they sent back contributed should be taken with a caveat: it reflects the to improving the welfare and living condi- total compensation to wage and salaried tions of their families as well as investment employees only, as data often do not allow in the next generation. Economic growth and for an accurate measure of self-employment development in the region narrowed gender income. Nonetheless, falling labor shares gaps in several areas, such as access to educa- imply that productivity gains and growth tion and health; as a consequence, women in no longer translate into the same rate of the region are more likely to participate in the pay rises or employment creation in the labor force (World Bank 2012d). formal sector. As new entrants to the labor All the above notwithstanding, evidence market, youths are likely to face more dif- increasingly points to concerns that people ficulty when employment creation is lim- may not be deriving as much well-being ited. Larger benefits accruing to owners from work as they did in the past. Across of capital also often indicate rises in over- the world and in several East Asia Pacific all income inequality, raising concerns for countries, the share of national income that social cohesion. goes to labor rather than to capital has been In the remainder of this section, we argue declining.7 Figure 3.13 plots changes in the that the effect of the transformation of work share of labor in GDP against economic on social cohesion is starting to lag in sev- eral countries, especially (but not only) in the most populous, China and Indonesia. We focus our discussion on two measurable FIGURE 3.13 Share of labor in GDP declined in China and several threats to social cohesion that are a cause for other East Asia Pacific economies concern in those East Asia Pacific countries: youth inactivity and economic inequality. Change in unadjusted labor share, 1999–2008 As discussed in earlier sections, economic 10.00 growth has been the most important deter- Romania Sri Lanka Latvia minant of poverty reduction in East Asia 5.00 Pacific through work. Prior to 1990, this Korea, Rep. New Zealand Mongolia occurred alongside improvements in equality 0.00 Philippines Japan across the region, from Japan, Korea, and Australia Hong Kong SAR, China % change –5.00 Taiwan, China, to Indonesia, Malaysia, Fiji Macao SAR, Papua New GuineaPanama China the Philippines, and Thailand. However, –10.00 Bahrain since 1990, economic growth and poverty China reduction have been accompanied by greater –15.00 Kuwait inequality in a few countries, including China and Indonesia. While some inequality –20.00 of economic outcomes can spur aspirations, 0 20 40 60 80 100 120 140 endeavor, and enterprise, past certain thresh- % change in GDP per capita (constant 2005 US$) olds, high inequality limits the extent to World East Asia Pacific which economic growth will pull people out of poverty. Youth unemployment and inac- Sources: Based on ILO data; World Bank 2013c. tivity contribute to this process. Mounting Note: The unadjusted wage share is simply the total compensation of employees as a percent of GDP. The adjusted wage share adjusts for the self-employed. The period of change for Fiji is 1999–2005; evidence from high-income and emerging- for Mongolia, 2000–08; and for Papua New Guinea, 1999–2006; all others are for 1999–2008. market countries shows that how young I S W O R K I N E A S T A S I A PAC I F I C T R A N S F O R MAT I O N A L? 53 people fare on entry and in their first few FIGURE 3.14 Youth idleness is high in some of the Pacific island years in the labor market can have a lasting countries, Indonesia, and the Philippines impact on their prospects through the rest of their working lives. Empirical evidence Share of youth (ages 15–24) not in employment, of “scarring” from early and extended peri- education, or training, circa 2010 ods of unemployment and underemployment Cambodia make the high and persistent share of young Vietnam Lao PDR people without work, discouraged, and inac- Mozambique tive all the more worrisome. Although not Slovak Republic as acute a problem in the whole of East Asia Thailand Lithuania Pacific as in other regions (an important China point discussed in chapter 7), many gov- Ecuador ernments in the region still consider youth Nepal Poland unemployment and inactivity to be a threat Tanzania to social cohesion. Czech Republic Pakistan Paraguay Honduras Youth unemployment and inactivity India Estonia Youth unemployment and inactivity are Panama high in several East Asia Pacific countries. Romania While open unemployment is generally low Peru Latvia in the region, youth unemployment and the Brazil share of youth not in employment, educa- Malaysia Belgium tion, or training in several Pacific island Costa Rica countries, Indonesia, and the Philippines Hungary stand out, being higher than in countries Portugal El Salvador in Southern Europe and close to the lev- Mongolia els observed in some countries in Europe Dominican Republic and Central Asia (figure 3.14). Low levels Uruguay Colombia of employment among youth can be good Sri Lanka or bad depending on the exact cause. In Argentina some countries, youth unemployment or Timor-Leste Bolivia underemployment is explained more by Greece idleness than by schooling. In others, youth Papua New Guinea Bulgaria spend more time pursuing higher educa- Indonesia tion than entering the market in search of West Bank and Gaza work or more time seeking employment Spain Fiji or between jobs. But because every young Philippines person must find initial employment with Italy limited search skills and little work experi- Turkey Serbia ence, youth unemployment is a higher risk Mauritania than unemployment for other age groups. Botswana Mauritius To the extent that unemployment, extended Vanuatu periods of search for work, or underem- Tuvalu ployment can have long-term, negative 0 10 20 30 40 50 60 70 80 90 100 consequences on the future labor market Percent prospects of young people, there is greater Young men Young women cause for concern. A large body of research, focused mainly Sources: World Bank 2012e, 2013a. on high-income countries, has identified the 54 E A S T A S I A PAC I F I C AT W O R K long-run career impacts of periods of unem- (2004) find that unemployed or inactive ployment and employment in different types youth, lacking identity and social belonging, of work, particularly casual, unregulated are more likely to engage in gangs or crimi- “informal” work. A spell of unemployment nal activities. These threats to social cohe- can increase a person’s chances of being sion and ultimately to stability are at the unemployed in the future and reduce his or forefront of concern in Papua New Guinea, her earnings prospects (Heckman and Borjas the Solomon Islands, Timor-Leste, and else- 1980; Arulampalam, Gregg, and Gregory where. However, the empirical evidence 2001; Arulampalam, Booth, and Taylor linking unemployment and idleness to vio- 2000). This type of “scarring” is commonly lence in East Asia Pacific countries is mixed identified from spells of unemployment (box 3.3). among young people, who are at greatest risk of experiencing long-term consequences Rising inequality of poor outcomes early in their experience of the labor market. For instance, evidence from Inequality is a topic worthy of a report in its the United Kingdom shows that having expe- own right. Many factors underlie the aggre- rienced more than 13 months of unemploy- gate measures of income and consumption ment in their early careers reduces the wages inequality and how these change over time. of prime-age men by 15 percent compared to The discussion in this section is limited to the those who did not experience unemployment linkages between inequality and the labor in their youth (Gregg and Tominey 2005). market. This wage penalty varies in size over time— Alongside the decline in poverty in the from a higher penalty earlier and a lower region, inequality has been on the rise in sev- penalty later in working life. Furthermore, eral East Asia Pacific countries. Figure 3.15 evidence of scarring has expanded to iden- shows relative inequality as measured by tify lasting prejudicial effects from particu- either the consumption or the income- lar types of employment in the first years based Gini coefficients, from the late 1990s of working life, such as self-employment to the late 2000s. The Gini coefficient has (Hyytinen and Rouvinen 2008), contingent risen in China, Indonesia, and Lao PDR (nonpermanent) employment (Yu 2012), and over this period. China’s levels of inequal- employment in the informal sector (Cruces, ity are among the highest in East Asia Ham, and Viollaz 2012). Empirical findings Pacific.8 In China, Fiji, the Philippines, and in developing East Asia Pacific are more lim- Thailand, inequality is now comparable to ited. Recent research focused on Indonesia the levels observed in Latin America and confirms the link between youth unemploy- parts of Africa. Among salaried workers in ment and the prevalence of informal work Indonesia, annual wage increases between and actual segmentation in the labor mar- 1999 and 2003 were 9.3 percent for non- ket. Youth in Indonesia often enter the labor poor workers but only 6 percent for poor market through informal work, which low- and near-poor workers (World Bank 2010). ers their chances of moving out of informal Even in a country like Vietnam with little employment at a later stage in their working noticeable increase in the consumption lives (see box 3.2). Gini, income inequality rose moderately Another concern with high unemploy- between 2004 and 2010 (Badiani et al. ment, youth unemployment, and inactivity, 2012). Although high relative to the rest of particularly in the Pacific island countries, is the region, inequality declined in Fiji, the the potential for an extreme breakdown of Philippines, and Thailand. social cohesion, in the form of violence and In terms of absolute inequality, there are conflict. Lack of work has been linked to stark differences in welfare between rural broader social unrest. Collier and Hoeffler and urban areas and between the poorest I S W O R K I N E A S T A S I A PAC I F I C T R A N S F O R MAT I O N A L? 55 BOX 3.2 Are young people “scarred” from how they enter the labor market? There are understandable reasons why the rate of enter the market in registered dependent employ- market inactivity and unemployment is typically ment in the private or public sector are also likely to higher for young people than for the working-age remain in these forms of work long into their work- population as a whole. Many people between the ing lives. ages of 15 and 24 are still building their human cap- Low likelihood of mobility across sectors and ital. Those who have ventured into the market have types of work is consistent with scarring, but it is less experience looking for work or starting their not in itself evidence of scarring. Differences in abil- own enterprise. If they have never worked before, ity, human capital, and preferences may lead indi- they present a more risky prospect to employers viduals to sort systematically into certain types of or to fi nancial supporters than otherwise similarly work and then to remain in these types of work. qualifi ed applicants for employment or a business Using objective and subjective measures of “job loan. When the number of young people who are quality” (for example, a written employment con- idle—not in employment, education, and training— tract, access to training opportunities, nonpecuni- is significant, there is more pressing cause for ary benefits like housing and meals, reported levels concern. of stress and satisfaction), self-employed sole trad- But even for those young people who overcome ers in Indonesia appear to be in less desirable forms the foreseeable odds and find work, the earliest of work than other working people in the same age experiences in the labor market can have conse- cohort. This is in contrast, for example, to young quences that last long into their working lives. Some government employees and young private sector of the circumstances that shape market entry and employees—34 and 23 percent, respectively, who early work experiences are “systemic”—for exam- work with the security of some type of contract ple, an economic crisis or recession lowering the and 42 and 22 percent, respectively, who receive demand for labor and human capital overall. Others employer-provided training. are “idiosyncratic” obstacles and sometimes reflect While the human capital implications of different preferences. All can have a measurable impact on types of work are not directly observable, the long- the welfare that young people can expect to derive run impact on wages of experience in different types from work in later years and, for this reason, can be of work can be measured. Naidoo, Packard, and important to crafting policy. Auwalin (2014) fi nd that certain forms of work in Recent research on the labor market in Indonesia Indonesia, specifically sole-trader self-employment, shows evidence of the “scarring” effects of young are associated with human capital deterioration— people’s early work experiences. Naidoo, Packard, or at least stagnation—resulting in zero or negative and Auwalin (2014) exploit the panel dimension of returns in later spells of employment. In addition to the Indonesia Family Life Survey extending from the absence of detectable returns to self-employment 1993 to 2007 and find very little mobility across and the lack of training and contracts, the median sectors and types of work over time. Young people wage in 2007 for youth in such work was about who are self-employed sole traders, for example, are Rp 285,000 per month in contrast to government likely to remain in this type of work well into their work and private sector work, for which it was adult life. From 1993 to 2000, 3 percent of 15- to Rp 475,000 and Rp 512,000, respectively. 24-year-old men in the category of self-employed Although far from defi nitive, as evidence grows sole traders (“self-employed without hired staff”) of scarring from how young people enter the labor transitioned to self-employment with hired staff. For market and their early work experience, so does the the period 2000 to 2007, only 2.6 percent of young public policy rationale for early intervention with men made this transition. The rates of transition are employment search and other work-related assis- similarly low for adults and for women. Those who tance programs for young people. 56 E A S T A S I A PAC I F I C AT W O R K BOX 3.3 Unemployment and conflict: Is the link strong in East Asia Pacific countries? Empirical evidence of a relationship between than in nonconfl ict provinces (P145 compared to unemployment and the extreme breakdown of P191). Within conflict provinces, New People’s social cohesion in the form of conflict is lim- Army (NPA) provinces exhibited lower real wages ited and ambiguous. Cross- countr y evidence and higher unemployment and underemployment appears weak (Cramer 2010), and the evidence rates than Muslim provinces. These provinces also using microdata is mixed. For instance, although had higher shares of temporary workers. However, a larger share of unemployed people increases NPA provinces had a higher proportion of workers the likelihood of village-level conflict in Indo- who were earning wages than workers who were nesia, where a “10 percentage point increase in unpaid (49 and 33 percent, respectively, for wage unemployment is associated with a 0.6 percent- earners and 15 and 20 percent, respectively, for age point … increase in the likelihood of confl ict” unpaid workers). The level of industrial work was (Barron, Kaiser, and Pradhan 2004, 22), there is also higher (12 and 7 percent, respectively). Given no clear link using province-level data from the that NPA conflicts have spanned more than six Philippines during the period 1997–2006 (Berman decades and have had signifi cant adverse impacts et al. 2009). on the local business environment, these accounts The relationship between employment out- suggest that recurring episodes of confl ict, even if comes and confl ict is also hard to pin down empiri- not reported in the headlines, can also have sig- cally because the causal links can run in both nificant negative impacts on the quality of work directions— that is, unemployment can fuel frus- (World Bank 2013b). trations that may eventually erupt into violence, Understanding each particular context is cru- or violence can raise risks that discourage the cial to explaining why unemployment is accom- investment and enterprise that create employment. panied by social unrest in some instances, but not Indeed, qualitative accounts from the Philippines in others. As Wietzke and McLeod (2012) argue, suggest that confl icts can influence employment by “Recent histories in the Arab World, North Africa, shaping the context in which entrepreneurs make and some high-income countries suggest that even investment decisions (World Bank 2013b). In 2011, societies with relatively large differences between “confl ict provinces” in the Philippines had a lower groups in the labor market can be remarkably sta- unemployment rate than nonconfl ict provinces, but ble over time, until latent tensions between groups had a higher underemployment rate (23 compared quickly become politically salient as economic or to 17 percent). Also, employment was concentrated political outlooks change. However, whether and in agriculture as opposed to the service sector, and when these tensions actually erupt into conflict the fraction of self-employed and unpaid laborers appear to be driven by a multitude of other factors was higher in conflict than in nonconflict prov- that are harder to predict with the quantitative data inces. Real wages were lower in confl ict provinces and methods available.” and richest parts of the population. The aver- population as a whole, significant gaps in age per capita consumption in urban China welfare between ethnic groups persist. In was at least four times that in rural China in Vietnam, for example, poverty for the Kinh 2008, with a similarly large gap within urban majority is about 10 percent, while poverty areas (NBS 2012). Per capita consumption at for their ethnic-minority counterparts is the ninetieth percentile is four to six times nearly 70 percent—a gap that has been wid- that at the tenth percentile in Indonesia, ening between the two groups (figure 3.17). Mongolia, the Philippines, Thailand, and This gap relates to differences in types of Vietnam (figure 3.16). work. Ethnic minorities in Vietnam depend Even though ethnic minorities have ben- almost exclusively on agriculture and for- efited from the economic success of the estry for their livelihoods. The Kinh poor I S W O R K I N E A S T A S I A PAC I F I C T R A N S F O R MAT I O N A L? 57 have more diversified sources of income, FIGURE 3.15 Inequality has been rising in several countries, with low-skill, low-paid off-farm jobs in including China and Indonesia rural areas supplementing farm income (Badiani et al. 2012). Similarly, ethnic Changes in inequality 1990s to late 2000s minorities in Lao PDR have poorer labor 60 market outcomes. The Lao-Tai/Tai-Kada Gini coefficient in mid to late 2000s 55 ethnic majority and the Chine-Tibet have higher average wages than the other ethnic 50 Cambodia ’04 groups (figure 3.18). The Lao-Tai are also 45 China ’05 Philippines ’06 more likely to work outside agriculture, China ’09 Philippines ’09 40 Vietnam ’02 Thailand ’06 especially when residing in urban areas. All Indonesia ’11 Lao PDR ’08 Thailand ’10 other ethnic groups work mainly in agricul- 35 Indonesia ’05 ture, irrespective of where they live. 30 Cambodia ’09 Should inequality be worrisome? Some Vietnam ’08 periods of rising inequality coincide with 25 Lao PDR ’02 periods of fast economic growth, and, for this 20 reason, greater inequality on its own may not 20 25 30 35 40 45 50 55 60 be problematic. However, a growing body of Gini coefficient in mid to late 1990s evidence shows that high and persistently ris- Africa East Asia Pacific ing levels of inequality can undermine devel- Europe and Central Asia Latin America and the Caribbean opment. Ravallion (2005) shows how high Middle East and North Africa South Asia inequality impedes the potential for poverty reduction, even with rapid economic growth. Source: World Bank 2013c. Balakrishnan, Steinberg, and Syed (2013) Note: The figure shows the Gini coefficients at three points in time: country points lying above the estimate that a 1 percent rise in the Gini coef- 45-degree line imply an increase in inequality from the late 1990s to the labeled year in the late 2000s. ficient directly offsets the beneficial impact of 1 percent economic growth on poverty reduction.9 Globally, income disparity and other manifestations of inequality in welfare FIGURE 3.16 The welfare gap between rich and poor can be are now perceived as one of the most threat- very large ening risks (World Economic Forum 2013). In China, perception surveys show that citi- Ratio of the 90th percentile to the 10th zens consider the wide income disparity in percentile of the consumption distribution the country as undesirable and are concerned Philippines that such gaps can undermine social stability Thailand (Whyte 2010). Vietnam High levels of inequality have the poten- tial to weaken social cohesion. Inequality Mongolia affects people’s expectations about their Indonesia economic mobility, aspirations, and percep- Cambodia tion of fairness, as well as their motivations 0 1 2 3 4 5 6 7 and choices. Inequality can affect welfare directly in places where there are strong Ratio social norms and preferences for equity and can shape political outcomes through Sources: Estimates based on national consumption aggregates from the Vietnam Housing Living Standards Survey (2010), Cambodia Socio-Economic Survey (2011), Mongolia Household demands for redistribution. Inequality Socio-Economic Survey (2011), and Thailand Socio-Economic Survey (2010). Estimates can also impede efficiency and growth. If for Indonesia and the Philippines are for 2009 and 2010 and are from the East Asia Pacific poverty monitoring system. inequality grows to such an extent that it eventually leads to elite groups controlling access to markets and political institutions 58 E A S T A S I A PAC I F I C AT W O R K FIGURE 3.17 The poverty rate among ethnic minorities and the in several countries, such as in Cambodia, majority in Vietnam has fallen over time, but the gap persists China, Mongolia, and Vietnam since the mid-1990s (figure 3.19). In these countries, Poverty headcount, by ethnicity the demand for skills is rising sharply and outstripping the available supply of skills in 90 the workforce, a topic discussed further in 80 chapter 5. 70 Inequality in wages and other labor mar- 60 ket outcomes can result from inequality of opportunity—that is, systematic differences Percent 50 40 due to factors beyond people’s control. The circumstances into which an individual is 30 born, such as location, gender, ethnicity, 20 and parental education, can also influence 10 the opportunities that an individual has 0 early in life and later in the labor market. 1993 1998 2004 2006 2008 2010 Abras et al. (2012) quantify the contribu- Poverty headcount (%) tion of these circumstances to explaining Ethnic minority Kinh/Hoa the observed differences in work opportu- nity (defined as having employment of 20 hours and more) for countries in Europe Source: Badiani et al. 2012. Note: The 2010 poverty rate is constructed based on a new welfare aggregate and is not strictly and Central Asia and Mongolia. Their comparable to earlier years. results attribute a significant share of this inequality in employment opportunity to circumstances beyond an individual’s con- and constraining pluralistic democracy, trol. In Mongolia, it is as high as 50 percent. the process of creative destruction can In most societies, people are content to slow down and even come to a halt, caus- see others succeed—through hard work ing societies to go into decline (Acemoglu and within social norms—as long as they and Robinson 2012). History is punctu- are afforded the same opportunities. But ated by instances of economic and social recent evidence shows discontent among decline that were precipitated by extreme people in many parts of East Asia Pacific inequality and the consequent ability of about certain types of inequality that are elite groups to limit the contestability of perceived as unfair. A study of percep- markets through their control of political tions in China suggests that the average institutions. Chinese citizen is content to see others Income and consumption inequality is succeed based on merit: talent, hard work, closely linked to the labor market. Changes and education. But the same respondents in inequality can arise from changes in the have little tolerance for advancement based distribution of assets and characteristics on connections and unequal opportuni- (endowment effects), changes in the returns ties determined by circumstances such as to assets (price effects), or changes in how gender, family size, and household regis- individuals use these assets in their work tration status (Whyte 2010). Similar per- (occupational choice effects; Bourguignon, ception studies in Mongolia and Vietnam Ferreira, and Lustig 2005). In East Asia suggest that there is widespread accep- Pacific countries, inequality linked to work tance of inequality that arises from “good” is driven mainly by increasing returns to processes: “Those who have talent and skills and differences in labor earnings. luck are conditioned to succeed. Those The wage premium to higher education (rel- who have none just suffer. I heard no ative to primary education) has risen sharply complaint about inequalities. Such [type I S W O R K I N E A S T A S I A PAC I F I C T R A N S F O R MAT I O N A L? 59 FIGURE 3.18 Ethnic minorities in Lao PDR experience poorer labor market outcomes a. Average hourly wage, 15–64 year olds b. Share of 15–64 year olds working in agriculture (main job) 6,000 100 90 5,000 80 70 4,000 Lao kip (KN) 60 Percent 3,000 50 40 2,000 30 20 1,000 10 0 0 Chine-Tibet Lao-Tai Hmong Mon-Khmer Lao-Tai Mon-Khmer Chine-Tibet Hmong Source: Estimates based on Lao PDR Expenditure and Consumption Survey (2007–08). of inequalities] is reasonable” (village cohesion. In this chapter, we have shown cadre group, Cam Hung commune, Hai how, in recent decades, households in much Duong). There is considerably less toler- of East Asia Pacific have experienced these ance for inequality of opportunities aris- three development transformations in tan- ing from “unfair” processes, such as access dem. However, we have also presented evi- to employment through personal con- dence suggesting that this phenomenon could nections: “There are types of illegitimate soon change, with several of the most popu- riches, and we do not accept these types; lous countries in the region reaching a criti- we see them as injustice” (youth group, cal development threshold when economic Chieng Khoa commune, Son La; Badiani growth and welfare gains from work cannot et al. 2012). When this sort of discontent be taken for granted. becomes widespread, the ability of work to In some countries, economic success has create cohesive societies is compromised. been accompanied by rising income and con- sumption inequality. Despite gains in living standards on average, welfare is distributed Conclusion: Do not take the more unevenly than in the past in the popu- transformative role of work for lation “giants” China and Indonesia as well as in Lao PDR. Furthermore, some East Asia granted Pacific countries are now facing challenges Countries in the East Asia Pacific region to building more inclusive societies through have taken advantage of a prospering global people’s access and ability to work, par- economy and, in doing so, have themselves ticularly young people. For the region as a become more prosperous. Their success whole, more than 30 percent of people ages has come about mainly through working 15–24 are not in employment, education, people. Work in East Asia Pacific has been or training. Fiji, Indonesia, the Philippines, the conduit connecting and enabling three Tuvalu, and Vanuatu have among the high- critical and interrelated development trans- est rates of youth inactivity in the world. formations: rising productivity, improving High levels of youth inactivity have been living standards, and strengthening social linked to violence and the erosion of social 60 E A S T A S I A PAC I F I C AT W O R K FIGURE 3.19 Skills premia in labor earnings have risen sharply in many East Asia Pacific countries to benefit many East Asian countries tremendously from global markets is now starting to erode. To face these challenges, governments Estimated return to having tertiary versus primary education need to understand how current policies 1.4 shape the environment for work and how 1.2 they can prejudice or promote productivity growth, living standards, and social cohe- 1 sion. We turn to this discussion in part II of this report. 0.8 Percent 0.6 Notes 0.4 1. See Carletto, Savastano, and Zezza (2011) on how measurement error of land size can 0.2 affect the strength of the inverse farm size– productivity relation. 0 2. Structural change had a different impact 1990s Mid/late 2000s on productivity in East Asia than in Latin Indonesia Philippines Thailand Vietnam America. By decomposing productivity Cambodia China Mongolia growth into within-sector components and structural movements, McMillan and Rodrik (2011) find that structural change was Source: di Gropello and Sakellariou 2010. Note: Estimates are based on an ordinary least squares regression of log wages that controls for “growth-enhancing” in Asia (labor moved basic individual characteristics and industry affiliation for those who work for a wage. The wage from agriculture and other low-productivity premium is expressed as the differential between tertiary and primary returns (relative to no com- activities to high-productivity activities), pleted primary education). but “growth-reducing” in Latin America (people moved from high-productivity to cohesion, providing strong motivation for low-productivity activities), in part explained governments to pay closer attention to the by shrinking manufacturing and expanding, opportunities for youth to work and build informally provided services. their human capital. 3. He (2008) demonstrates a positive rela- What might at first appear as growing tionship between industrial agglomeration (measured as the Gini coefficient of gross challenges to social cohesion are also linked industrial output) and labor productivity in to a general slowing of economic growth China between 1980 and 2004, controlling in the region, which is more pronounced in for capital per worker. countries where productivity and living stan- 4. World Bank (2012b) shows that the level of dards have been lagging for a long time. For export sophistication in the manufacturing example, in the past decade, the Philippines sector in Indonesia rose and converged with experienced much slower poverty reduc- that of other countries in the region until tion than its neighbors, despite respectable 2000, but stagnated in the aftermath of the economic growth. This stagnation in living Asian crisis. standards is linked to the low productiv- 5. This said, Dang and Lanjouw (2012) show ity of most forms of employment created by that the transition of households out of poverty in Vietnam took place predomi- the economy. Many economies, including nantly through working people earning higher Cambodia, Indonesia, Lao PDR, and the income in the same sector of work, rather Philippines, need to find ways to create and than through shifting from farm to nonfarm sustain productive work, amid more difficult work, as in other parts of East Asia Pacific. global economic prospects and more intense 6. See World Bank (2012e) for a further dis- international competition. With rising wages, cussion on measures such as trust and civic the labor cost advantage that has enabled engagement. I S W O R K I N E A S T A S I A PAC I F I C T R A N S F O R MAT I O N A L? 61 7. Increasing research in this area, at least exist- Policy Research Working Paper 5631, World ing evidence in OECD countries, tends to Bank, Washington, DC. argue that globalization and technology have Badiani, Reena, Reno Dewina, Jennifer Golan, benefited capital at the expense of labor. and Trang Nguyen. 2013. “Escaping Poverty 8. According to official estimates, quoted by through Work in East Asia and the Pacific.” Balakrishnan, Steinberg, and Syed (2013), Working Paper, World Bank, Washington, DC. China’s Gini coefficient rose from 37 percent Badiani, Reena, Jennifer Golan, and Josefine in the mid-1990s to 49 percent in 2008. The Posadas. In progress. “Understanding Gender same official sources estimate that the Gini Differentials in Productivity in Non-Farm has since fallen and stood at 47.4 percent in Household Business Enterprises in Indonesia.” 2012. Mimeo, World Bank, Washington, DC. 9. 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York: Oxford University Press. Yu, Wei-hsin. 2012. “Better Off Jobless? Scarring ———. 2008a. Reshaping Economic Geography Effects of Contingent Employment in Japan.” in East Asia, edited by Yukon Huang and Social Forces 90 (3): 735–68. The Fundamentals 4 On the whole—and relative to their peers and sustainable employment creation, but in other emerging- market countries — they are still necessary. governments in East Asia Pacific have got- This chapter examines the extent to which ten the “fundamentals” right, creating an fundamental policies—monetary, fiscal, and enabling environment for both the demand regulatory—currently in place in East Asia for and the supply of labor and human Pacific economies support enterprise and the capital. demand for work. It describes the policy envi- ronment that shapes the economy’s demand A lthough most work arises from pri- for and households’ supply of labor and vate demand, governments play a human capital. It seeks to answer one under- critical part in shaping the market lying question: Are the policy fundamentals for labor and human capital by reducing observed in East Asia Pacific “pro-work”? uncertainty and providing public goods.1 To answer this question, we examine how These include macroeconomic and regula- the macro policy levers are currently set and tory stability, the rule of law, investment in whether the prevailing regulatory models basic infrastructure, and the contestability ensure a competitive climate that attracts of markets. Because firms and households investment and encourages employment. cannot cope with inflation effectively on Further, we discuss whether policies are their own, price stability and a country’s geared toward preventing macroeconomic macroeconomic policy environment are par- imbalances, instability, and crises that can ticularly important. Investment and employ- translate into both lower real earnings and ment creation can be harmed by erratic unemployment. fluctuations in prices or exchange rates, Each of these fundamentals is worthy of onerous tax structures, and restrictive reg- a report in its own right. And a large body ulations on businesses. Thus getting these of theoretical and empirical literature already “fundamentals” right is important to attract exists, much of it illustrating the recent expe- and sustain investment and to minimize—or rience of East Asia Pacific countries. But at least smooth—aggregate fluctuations in beyond a general consensus favoring “sound an economy’s demand for work. Sound fun- outcomes”—price stability, prudence and damentals may not be sufficient for strong predictability in public spending, rule of law, 65 66 E A S T A S I A PAC I F I C AT W O R K and competitive markets—there is probably stimulus packages that, along with more more argument than agreement over the spe- flexible exchange rates, helped to contain the cific policies that governments should put costs of the crisis borne by households. With in place to achieve these outcomes, such as respect to taxation, economies in the region the degree of central bank independence, stand out on the whole as places where firms whether to peg or float the exchange rate, or are not overly burdened by the level of tax the relative intensity of taxes on income or or by the costs of complying with tax obli- profits versus taxes on consumption. History gations. This is in stark contrast to countries is littered with prescriptions and orthodox- in Eastern Europe and in Latin America and ies that, with the test of time, were found the Caribbean. And when it comes to the wanting. And economists have become more business climate, on the whole, governments modest in their admission that it is more have created an encouraging environment important that governments achieve the for enterprise, although access to finance, desired outcomes than how they are achieved. shortages of skills, unfair competition from So to contain the discussion, we have limited informal enterprises, and insufficient and this chapter to monetary and exchange rate unreliable electricity may be unnecessarily policies, spending and taxation, and the reg- constraining growth and demand for labor ulatory environment for businesses. Rather and human capital. than pretend to solve what are welcome and still active debates in the literature and in practice, the chapter highlights the points on Prices and exchange rates each side that are most salient to the demand An economy generally relies on low, stable for and supply of labor and human capital. inflation. Employers require a certain degree With regard to public spending spe- of reliability concerning their investments cifically, this chapter is limited to a general in and returns from the production pro- review of the cyclicality of aggregate net cess. Volatile prices lead to greater risks for spending. Other important aspects of fiscal businesses, influencing their medium- and policy that shape the demand for and sup- longer-term decisions about investment and ply of human capital—such as spending on their demand for human capital. This is true education and health, “active” labor mar- of all sectors: unstable prices influence the ket programs, and government investments decisions that farmers make about which to support sectors of the economy deemed crops to plant, by vendors about what goods strategic— are taken up elsewhere in this and services are most likely to sell, and by report (see chapters 5 and 6 and spotlight 2). larger firms about how many workers to For the sake of brevity, other fundamentals hire for future production. Governments use such as public sector management and gover- monetary policy, wielded by their central nance are treated only tangentially. monetary authorities, to maintain economic Across the region, there has been greater and price stability through, in particu- price stability, with inflation decelerat- lar, interest rates, the money supply, and ing in recent years to low and stable levels. exchange rates. Although achieving price Contributing to stability and reflecting dif- stability through monetary policy is critical ficult lessons from the East Asian financial to sustaining investment and employment, crisis in the late 1990s, exchange rate poli- decisions that are often taken can lower the cies have shifted toward greater flexibility demand for labor and human capital in the among the worst-affected countries. A long short term. track record of fiscal prudence allowed East Economies in East Asia are achieving Asia Pacific economies to react quickly in greater price stability than in the past the recent global fiscal crisis of 2008–10, (figure 4.1). Inflation has decelerated across sustaining support for aggregate demand the region. Even Vietnam, which has strug- and even launching substantial fiscal gled with higher rates of inflation than its THE FUNDAMENTALS 67 neighbors, is showing some recent progress FIGURE 4.1 East Asian economies have achieved price stability in this regard. High inflation distorts price signals, blur- CPI inflation trends before and during the global financial recession ring the link between an asset’s productiv- 35 ity and its price. This can distort investment decisions, leading to either underinvestment 30 due to cautiousness or asset bubbles due to 25 Trends, year on year (%) overconfidence. Savers will demand higher 20 premiums when inflation is high. This can 15 result in an inefficient allocation of resources 10 and further hampers investment. Finally, 5 inflation may provide incentives for inves- tors to put their money in safe but unproduc- 0 tive assets such as gold, reducing economic –5 activity.2 Thus high inflation can reduce long- –10 run economic growth and demand for work Jan Jul Jan Jul Jan Jul Jan Jul Jan Jul Jan 2007 2008 2009 2010 2011 2012 through suboptimal investment, while it can also cause large boom-and-bust cycles by China Indonesia Malaysia Philippines aggravating fluctuations in the business cycle Thailand Vietnam Korea, Rep. (Baer 1967; Campos 1967; Mundell 1971; Dornbusch and Reynoso 1989; Freedman Source: Data derived from IMF 2013b. Note: CPI = consumer price index. and Laxton 2009). A stable inf lation environment can reduce structural unemployment (Freedman and Laxton 2009). Economic growth has that the effect of inflation targeting on the exceeded inflation in most economies in real economy may have been overestimated.4 the East Asia Pacific region, with an aver- Six economies in East Asia Pacific use age inflation rate below 3 percent. In high- inflation targeting to fix their consumer price income countries, inflation beyond 3 percent index (table 4.2). Globally, 28 countries set can be harmful, while in low- and middle- these monetary policy targets (IMF 2012). income countries, inflation above 7–11 per- The four developing economies in East Asia cent can suppress growth (Khan and Senhadji with inflation targets adopted the policy after 2000). 3 Economies where inflation runs the East Asian financial crisis in 1997. While below 3 percent tend to have lower unem- there is evidence that inflation targeting ployment overall as well as lower rates of has helped to reduce inflation (Gerlach and youth unemployment (table 4.1). Tillman 2011), there is little evidence that the Many countries actively target a low policy has significantly improved growth and inflation rate, yet evidence on the impact of employment, relative to economies that have inflation targeting on performance is mixed. not adopted targeting, such as China; Hong Some studies find that inflation targeting Kong SAR, China; Malaysia; and Singapore can help to build institutional credibility and (Naqvi and Rizvi 2010). thus increase long-run growth and reduce Beyond inflation targeting, the argu- economic volatility (IMF 2006; Goncalves ments that central banks need to establish and Salles 2008). Others find that moderate more comprehensive mandates that include rates of inflation (even up to 20 percent or employment promotion are growing stron- more) have no detectable effect on real vari- ger (Epstein and Yeldan 2008; Epstein ables such as growth, investment, foreign 2009). Whether central banks should con- direct investment, or employment (Bruno and sider adopting stronger mandates regarding Easterly 1998; Epstein 2000). Especially in employment raises several technical issues. emerging economies, recent evidence suggests One is how to set a target—for example, 68 E A S T A S I A PAC I F I C AT W O R K TABLE 4.1 Economies in East Asia Pacific with lower inflation also have low unemployment GDP growth rates and unemployment rates, by inflation rates, using 2000–11 averages across East Asia Pacific economies and developing regions Inflation, Youth unemployment consumer prices GDP growth Unemployment (% of total labor force, Economy (annual %) (annual %) (% of total labor force) ages 15–24) −1–2% average annual inflation Japan −0.3 0.8 4.7 9.0 Hong Kong SAR, China 0.5 4.5 5.5 11.6 Brunei Darussalam 0.7 1.5 — — Taiwan, China 1.0 4.1 4.4 11.0 Singapore 1.9 5.9 4.8 8.4 2–3% average annual inflation Macao SAR, China 2.2 12.3 4.8 8.6 Malaysia 2.2 5.0 3.4 10.0a China 2.3 10.2 4.0 — Thailand 2.6 4.0 1.6 5.2 Vanuatu 2.7 3.5 4.6a — 3–5% average annual inflation Korea, Rep. 3.2 4.5 3.6 9.8 Fiji 4.0 1.1 5.9a — Middle East and North Africa 4.4 4.3 12.3a 24.9a Philippines 4.6 4.7 9.3 18.7 East Asia Pacific 4.9 8.9 4.6 — 5–6% average annual inflation Cambodia 5.1 8.0 2.0a 3.4a Latin America and the Caribbean 5.3 3.5 8.3 16.4 Samoa 5.4 3.3 5.0 12.2 7–19% average annual inflation Tonga 7.5 1.3 3.1a 11.9a Papua New Guinea 7.6 3.7 — 5.3 Europe and Central Asia 7.6 5.1 8.9 18.5 Vietnam 7.9 7.1 2.3a 4.9a Indonesia 7.9 5.3 8.8 26.3 Lao PDR 9.1 7.1 1.4a — Mongolia 9.2 7.0 3.4a 20.0a Myanmar 18.7 12.9a — — Source: Based on data from World Bank 2013d. Note: — = not available. Regional averages only reflect developing countries in the region. Inflation is based on consumer prices. a. Reflects the average for less than eight observations over these 12 years. based on overall employment, full employ- analysis of the performance of the labor ment, or a composite measure of employ- market. Yet, as shown in table 4.2, in several ment. A nother is that such a shift in countries in the region, central bank report- policy focus would require collection of ing lacks detailed analysis of employment high- frequency employment data, which trends, even among high-income countries. presents challenges for many countries. Also, This discussion notwithstanding, mon- an employment target may produce policy etary policy can be used effectively to smooth rigidities. For central banks to monitor the fluctuations in the business cycle and to sta- extent to which their objectives are being bilize employment outcomes in the short achieved, it is necessary to have in-depth run. During an economic slowdown or THE FUNDAMENTALS 69 TABLE 4.2 Several central banks in East Asia Pacific have adopted inflation targeting, but few include detailed labor market analysis in their annual reports Central banks’ targeting of inflation and level of reporting on employment across East Asian countries Employment analysis in the latest available Inflation data annual reports of central banks Inflation targeting Inflation rate at 2010 end-of- Target Detailed Country adoption date adoption date year inflation inflation rate None Brief analysis analysis Australia 1993 2.0 2.7 2–3 √ Cambodia n.a. n.a. n.a. n.a. √ China n.a. n.a. n.a. n.a. √ Indonesia 2005 7.4 7.0 5a √ Lao PDR n.a. n.a. n.a. n.a. √ Korea, Rep. 2001 2.9 3.5 3a √ Malaysia n.a. n.a. n.a. n.a. √ New Zealand 1990 3.3 4.0 1–3 √ Philippines 2002 4.5 3.0 4a √ Thailand 2000 0.8 3.1 0.5–3 √ Vietnam n.a. n.a. n.a. n.a. √ Sources: Data for the first four columns are derived from International Monetary Fund calculations, Hammond 2011, and Roger 2010, while data for the last three columns are derived from annual reports of central banks and Bhattacharyya 2012. Note: n.a. = not applicable. Employment analysis refers to the latest available English-language annual report of central banks that are accessible online. While the 2012 annual report of the central bank in Australia lacks an employment analysis, the “maintenance of full employment” in the country is one of the three explicit functions of the Reserve Bank. a. Plus or minus 1. contraction, increasing the money supply and FIGURE 4.2 Although still volatile, interest rates in many East Asia lowering interest rates can help to increase Pacific economies are trending downward employment, as lower financing costs can boost consumption and investment. Indeed, Selected East Asia Pacific economies, 1990–2011 central banks often use monetary policy to 20 counteract short-term fluctuations in the business cycle. There is broad consensus that, 15 Real interest rate (%) while “priming the pump” is often effective in the short run, monetary authorities should do 10 so with great care (Friedman and Schwartz 5 1963; Hossain and Chowdhury 1996). As figure 4.2 shows, real interest rates have been 0 volatile in several East Asia Pacific economies. However, in the years immediately following –5 the Asian financial crisis and the global finan- –10 cial crisis, real interest rates in all of these 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2011 economies fell back to precrisis levels. China Indonesia Korea, Rep. Malaysia Use of exchange rate policy as a monetary Papua New Philippines Thailand Vietnam lever to sustain demand for labor and human Guinea capital grows in importance as a coun- try’s integration with the global economy Source: Based on data from World Bank 2013c. increases. As pointed out in chapter 1, econ- omies in East Asia Pacific have experienced more than others, exchange rate policies have years of sustained global and regional eco- a direct impact on the demand for and supply nomic integration at higher levels than coun- of labor and human capital through several tries in other regions. Thus for this region channels. 70 E A S T A S I A PAC I F I C AT W O R K First, depreciation of a country’s exchange export-oriented sectors more competitive rate decreases the relative price of labor, (Frenkel and Ros 2006; Rodrik 2003). which helps to increase exports and conse- The value of a country’s currency can also quently the labor demand for traded goods move in the opposite direction of exchange that are domestically produced. This can lead rate appreciation. Large increases in foreign to an increase in output and help to increase exchange earnings can cause a currency to employment in the “tradable” sectors. The overvalue, leading to exports that are less boost can spill over to nontradable produc- competitive. Appreciation pressures are a con- tion since the consumption of workers in these stant concern of policy makers in resource- sectors helps to raise demand for nontraded rich countries like Australia, Mongolia, and goods—typically, services—raising employ- Papua New Guinea and in countries where ment overall. This has been East Asia’s expe- foreign assistance accounts for a large share rience through several periods of exchange of the national budget. Surges in foreign rate depreciation (Kim and Yung-Hasiang exchange earnings can also impede labor 2007). Second, movements in exchange rates and export diversification. A fixed exchange alter the relative price of labor and capital. rate regime can—in principle—reduce this When a country’s currency depreciates, the volatility and help to lower inflation, when relative cost of labor falls, making it more pegged to a low-inflation currency. However, attractive at the margin for businesses to raise maintaining price stability requires much the labor intensity of their production. Third, more than exchange rate policy. And because in the medium and longer term, exchange there is little evidence that exchange rate rate depreciation increases economic com- pegs lead to more trade or investment, what petitiveness and raises the potential profit- a country might gain in price stability could ability of businesses since input costs fall come at the cost of longer-term imbalances and demand rises. Through each of these (Obstfeld and Rogoff 1995). channels, exchange rate policy can function Exchange rate policies in countries that as an instrument to boost employment, typi- were deeply affected by the 1997 East Asian cally as part of government’s broader indus- financial crisis shifted toward greater flex- trial policies: similar to tariffs, exchange rate ibility after that crisis (table 4.3). The experi- policies can raise import costs and make ence of some affected East Asian economies demonstrates how costly maintaining rigidly pegged currencies can be, creating vulner- ability to speculative activities. The imbal- ances caused by fixed exchange rates likely TABLE 4.3 East Asia’s financial crisis motivated a move to greater exchange rate flexibility contributed to the crisis (Fischer 2001). The Official exchange rate regimes pre- and post-1997 in East Asian countries affected countries most affected—Indonesia, the by the 1997 financial crisis Republic of Korea, and Thailand—reformed their exchange rate regimes to allow for Economy Time period Type of regime more flexibility. Flexible exchange rates tend Indonesia November 1978–June 1997 Managed floating to be associated with better medium- and July 1997–December 2000 Independently floating long-term growth, particularly in develop- Korea, Rep. March 1980–October 1997 Managed floating ing countries (Rogoff et al. 2003; Levy- November 1997–December 2000 Independently floating Yeyati and Sturzenegger 2003; Levy-Yeyati, Malaysia March 1990–November 1992 Fixed December 1992–September 1998 Managed floating Sturzenegger, and Reggio 2005; Harms and September 1998–December 2000 Pegged arrangement Kretschmann 2009), even if some economies Philippines January 1988–December 2000 Independently floating with managed exchange rates, such as China, Thailand January 1970–June 1997 Fixed have had solid economic and labor market July 1997–December 2000 Independently floating performance. Sources: IMF data derived from several issues of Exchange Arrangements and Exchange Restrictions In an important departure from the trend and based on Hernández and Montiel 2001. in exchange rate policies since 1997, after the THE FUNDAMENTALS 71 financial crisis, Malaysia moved to a pegged relatively unscathed and recovered quickly. arrangement underpinned by capital controls Whereas rigid exchange rate regimes else- (see box 4.1). Following a sustained period where forced labor markets to “quantity of liberalization, some governments reim- adjust” through widespread job losses, East posed capital controls after the shock of the Asian economies experienced mainly a down- East Asian financial crisis to help to manage ward adjustment in earnings. One explana- volatility and avoid contagion from financial tion for this contrasting experience is that shocks (Fischer 2001; Kaplan and Rodrik a large portion of the “blow” of the global 2002). Several governments continue pursu- financial crisis was absorbed by exchange ing some form of exchange rate management rate movements that kept East Asia’s to smooth volatility (World Bank 2012a). exports competitive. This said, exchange rate This is particularly the case of Timor-Leste management—mostly through systematically and many of the small island countries in the undervaluing exchange rates—has been a Pacific (table 4.4). consistent part of the success of some other More recently, some of the East Asian countries in the region, such as China, in pro- economies that made their exchange rates moting sustained labor-intensive growth. more flexible appear to have been well served But trends in long-term real exchange rate by this flexibility during the global financial movements are more revealing and important crisis of 2008–10 (figure 4.3). In contrast than a government’s official exchange rate to other low- and middle-income-country policy. Since 2005, there has been an upward regions, economies in East Asia were left trend among East Asia Pacific economies in BOX 4.1 Capital controls: An alternative for sustaining demand for work? Capital controls—the management of capital flows in and out of a country—are another monetary policy instrument with an impact on the labor market. Malaysia used this tool intensively to manage the impact of the 1997 fi nancial crisis. Restrictions on capital flows were implemented to ensure public resource space for a countercyclical response and to minimize the impact of the fi nancial crisis. The objectives of the capital controls policy included fostering expansionary macroeconomic policy, defend- ing the exchange rate, minimizing capital fl ight, safeguarding foreign exchange reserves, and managing without an International Monetary Fund (IMF) stabilization program (Jenkins 2010). The measures adopted were a policy to halt offshore speculation of the national cur- rency, the ringgit; the need for residents to obtain government approval to export foreign currencies to mitigate speculative capital flows; a requirement to repatriate export profits within half a year from export; and the creation of a one-year prohibition on the export of external portfolio capital. These capital controls, while still controversial among some within the fi nance community, effectively constrained outflows of foreign exchange reserves and currency speculation, without observably deterring foreign direct investment, and accelerated recovery (Jenkins 2010). China’s capital controls also attract substantial criticism. In particular, they may create fear among investors of being “locked in” during a crisis (Edwards 1999). There is some empirical evidence that in East Asia, capital controls deter some foreign direct investment (Asiedu and Lien 2004). Similarly, evidence from Malaysia suggests that capital controls can foster an environment more amenable to corruption and cronyism (Johnson and Mitton 2003). The effect of capital controls on growth and demand for work is thus not always clear. 72 E A S T A S I A PAC I F I C AT W O R K TABLE 4.4 De facto classification of exchange rate arrangements, support growth and productive employ- 2011 ment. With direct influence on demand for Further detailed work, public spending can stimulate aggre- Economy General classification classification gate demand or expand aggregate supply. These “active” policies and the overall fis- Brunei Darussalam Currency board Hard pegs Cambodia Stabilized Soft pegs cal structures with less explicit employment China Crawl-like Soft pegs objectives help to explain how net spending Fiji Conventional peg Soft pegs moves with the economic cycle. With respect Hong Kong SAR, China Currency board Hard pegs to work, the outcomes that policy makers Indonesia Floating Floating regimes seek to achieve are predictability and coun- Japan Free floating Floating regimes tercyclicality of public spending. Households Kiribati No separate legal tender Hard pegs are engaged in a constant struggle to smooth Lao PDR Stabilized Soft pegs their consumption over the ebb and flow of Malaysia Other managed Residual category aggregate demand. An important objective Marshall Islands No separate legal tender Hard pegs of governments’ spending and taxation poli- Micronesia, Fed. Sts. No separate legal tender Hard pegs cies should be to support their efforts. Mongolia Floating Floating regimes Palau No separate legal tender Hard pegs Public sector investments in human capi- Philippines Floating Floating regimes tal programs designed to promote employ- Samoa Conventional peg Soft pegs ment directly as well as countries’ strategic Singapore Other managed Residual category investments are discussed elsewhere in this Solomon Islands Other managed Residual category report (chapters 5 and 6 and spotlight 2). Korea, Rep. Floating Floating regimes In this section, we focus first on the overall Thailand Floating Floating regimes “cyclicality” of spending—that is, whether Timor-Leste No separate legal tender Hard pegs a government sets the spending and revenue Tonga Pegged with horizontal bands Soft pegs “levers” so that it is net spending (if neces- Vanuatu Other managed Residual category sary, running deficits and accumulating debt) Vietnam Stabilized Soft pegs during downturns and contractions and net Source: Data derived from IMF 2012. saving (running budget surpluses, paying Note: The table distinguishes among four major categories: hard pegs (such as exchange arrangements with no separate legal tender and currency board arrangements); soft pegs down debt, and piling up reserves) during (including conventional pegged arrangements, pegged exchange rates within horizontal bands, periods of growth. Second, we analyze the crawling pegs, stabilized arrangements, and crawl-like arrangements); floating regimes (such as floating and free floating); and a residual category, “other managed.” impact of taxation policy on employment. Data reflect the status as of April 30, 2011. I n the Organisation for E conomic Co-operation and Development (OECD) real effective exchange rates—measured as the countries, progressive tax systems with a value of a currency against a weighted average broad base of contributors and unemploy- of several foreign currencies and adjusted for ment insurance schemes act as passive or inflation (figure 4.4). If this trend continues, “automatic” stabilizers. In low- and middle- alternative means will be needed to sustain income countries where taxes are not levied export competitiveness and boost domestic on a similarly broad or diverse base and where consumption to fuel demand for work. coverage of unemployment insurance plans is low (if they exist at all), governments have to be more active to achieve countercyclical fis- Public spending and taxation cal spending. In countries with a large share Fiscal policy can be a powerful tool in the of natural resource exports, countercyclical hands of governments pursuing employ- fiscal policy measures can help to manage the ment goals, often through longer-term public impact of price volatility of minerals and com- investments, especially in human capital modities on aggregate demand and revenues. (discussed in chapter 5), but also through Do countries in the region take these shorter-term spending. Sustained invest- measures to ensure countercyclicality? ments in health and education generally Countercyclical policies can be very effective THE FUNDAMENTALS 73 at compensating reductions in aggregate FIGURE 4.3 Flexible exchange rates helped to absorb the blow of demand and, in doing so, containing unem- the global financial crisis in East Asian economies ployment during a downturn. This is one of the important lessons from the East Asian Change in nominal effective exchange rate, 2010–12 financial crisis (IMF 2009). During the regional crisis, among economies where gross Mongolia domestic product (GDP) contracted the most, Thailand such as Indonesia and Malaysia, govern- ment consumption actually fell. In contrast, Malaysia public spending rose in Brunei Darussalam; Singapore Fiji; Hong Kong SAR, China; Korea; Macao Lao PDR SAR, China; the Philippines; and Thailand. More recently, to manage the contrac- Cambodia tion in the wake of the global financial crisis, Philippines governments in East Asia Pacific were better Taiwan, China positioned to adopt countercyclical spending, including fiscal stimulus. Figure 4.5 shows China trends in general government final consump- Indonesia tion expenditure (as a percent of GDP, a proxy Hong Kong SAR, for fiscal stimulus) and growth over the period China 1990–2011. While GDP growth in nearly Korea, Rep. all East Asia Pacific economies with avail- Vietnam able data fell between 2007 and 2009, lev- els of government consumption expenditure –20 –10 0 10 20 increased, especially between 2008 and 2009. % change In 2009, 32 countries announced eco- Jan–Dec 2010 Jan–Dec 2011 Jan–Feb 2012 nomic stimulus packages, including all G-20 members, accounting for 1.4 percent of global GDP. About 90 percent of the global Source: Data derived from Haver Analytics 2013. stimulus came from G-20 economies. China announced the largest stimulus package as a share of GDP worldwide (Y 4 trillion, equal stabilization and savings mechanisms that to 13 percent of GDP), followed by Saudi governments elsewhere use to achieve coun- Arabia, Malaysia, and then the United States tercyclical fiscal aims. The premier examples (Khatiwada 2009). The magnitude of fiscal from middle-income countries are the stabi- stimulus packages varied widely across East lization funds and fiscal rules employed by Asian economies (table 4.5). Infrastructure many governments in Latin America, albeit spending accounted for more than 60 per- with varying levels of success. Chile’s stabili- cent of the stimulus packages in China, zation fund and fiscal rules have been widely Korea, the Philippines, and Thailand (table acclaimed for smoothing public spending 4.6). However, even though many short- and over the business cycle and effectively sup- medium-term instruments and measures porting aggregate demand and employment. other than infrastructure exist for raising In a country where unemployment insurance aggregate demand, there does not appear to was only introduced in 2002 and covers a have been a clear rationale for the composi- little more than half of working people in any tion of stimulus packages (Doraisami 2011). given year, the stabilization fund and fiscal With the exception of some countries rules are foundational to Chile’s countercycli- in the North Pacific, Timor-Leste, and cal outcomes, particularly its ability to sus- more recently Mongolia, economies in East tain employment in the wake of the global Asia Pacific generally forgo the national financial crisis. 74 E A S T A S I A PAC I F I C AT W O R K FIGURE 4.4 Real effective exchange rates are on the rise across There is an important interplay among East Asia Pacific public revenue structures, incentives for investment, and the demand for as well Trends in real effective exchange rates across East Asia as supply of labor and human capital. Pacific economies, 2000–11 Governments are always looking for ways 140 to broaden their tax base and raise revenue. How earnings are taxed and at what rate can 130 influence incentives, especially corporate tax 120 rates. Similar to price uncertainty, uncer- tainty about taxation can affect the decisions 110 of firms and households. Can the structure of taxation foster higher 100 employment? The theoretical debate tends to revolve around two basic ideas. Advocates of 90 limited taxation claim that entrepreneurs in high-tax countries have less capital for rein- 80 vestment and, by extension, less ability to 2000 2003 2006 2009 2011 grow and increase their demand for work. China Fiji Kiribati Among households, higher direct taxes are Malaysia Papua New Guinea Philippines expected to lower work effort and discour- Samoa Singapore Tonga age the supply of labor and human capital. Higher-taxation advocates, however, argue Source: Data derived from Haver Analytics 2013. that when more revenue flows into govern- ment, greater investment can be made in The economies of East Asia have a much better infrastructure and a more qualified longer track record for sustained, prudent workforce, which makes the broader busi- fiscal policy that creates relatively greater ness environment functional, attracts foreign credibility and instills greater confidence investment, and promotes more inclusive, than countries at similar levels of develop- productive employment. ment in other regions. This, and relatively With no clear theoretical consensus, the fewer instances of resource windfalls of the question can only be answered empirically, sort often experienced by Mexico and the and the evidence from countries around the República Bolivariana de Venezuela, may world is mixed. Scandinavian countries have have lessened the need to institute nondis- both the highest labor force participation cretionary, contingent rules and other policy rates as well as the highest tax revenue as devices. However, this still begs the question a share of GDP. Among 143 countries with of whether, in a downturn, governments in available data, there is no clear relationship East Asia Pacific are adequately prepared, not between changes in a country’s labor force only with savings but also with plans, to step participation rate between 1990 and 2011 up in a timely manner. and either its level of tax revenue as a share Ultimately, the longer track record of rela- of GDP (figure 4.6, panel a) or its share of tive fiscal prudence places several East Asia revenue from taxes on income, profits, and Pacific economies in a much better position capital gains (figure 4.6, panel b). Indeed, than other developing countries to manage the top 20 countries in the world with the shocks using countercyclical policies, such strongest increase in labor force participa- as fiscal stimulus, to sustain demand for tion over these two decades had an aver- labor and human capital. Part of this fiscal age share of tax revenue of 17.9 percent of prudence reflects smaller budgets and high GDP, while the bottom 20 countries with the saving rates across the region. Another part strongest reduction in labor force participa- reflects the structure of taxation. tion had an average share of tax revenue of THE FUNDAMENTALS 75 FIGURE 4.5 East Asian economies were in a better position to adopt countercyclical spending to manage the global financial crisis Trends in GDP growth and general government final consumption expenditure, select East Asian economies, 1990–2011 20 18 16 15 General government consumption (% of GDP) 14 10 12 Annual GDP growth (%) 5 10 0 8 6 –5 4 –10 2 –15 0 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2011 China Indonesia Philippines Thailand East Asia (GDP) (GDP) (GDP) (GDP) Pacific average (GDP) China Indonesia Philippines Thailand East Asia (expenditures) (expenditures) (expenditures) (expenditures) Pacific (expenditures) Source: Based on data derived from World Bank 2013d. Note: General government final consumption expenditure (formerly general government consumption) includes all government current expenditures for purchases of goods and services (including compensation of employees). It also includes most expenditure on national defense and security, but excludes government military expenditures that are part of government capital formation. Once again, the East Asia Pacific average is strongly driven by trends in China. TABLE 4.5 China and Korea led in the volume of fiscal stimulus during the crisis Fiscal stimulus packages in selected East Asian economies Forecasted Ratio of current drop in Ratio of stimulus Ratio of deficit to Ratio of deficit to Ratio of debt to account balance to Country GDPa to GDP, 2008 (%)b GDP, 2008 (%) GDP, 2009 (%) GDP, 2008 (%) GDP, 2008 (%) Indonesia −3.6 1.2 −0.1 −2.1 33 0.2 Malaysia −7.3 10 −4.8 −7.6 42.5 17.6 Philippines −4.6 4.1 −0.9 −2.3 56 2.5 China −2.5 13 −0.4 −3.2 17.6 10.1 Korea, Rep. −6.2 12.8 0.3 −6.5 33 −0.4 Thailandc −10 1.1 −1.1 −6 33.6 −0.1 Sources: Khatiwada 2009; IMF 2013b. a. The difference in the IMF’s GDP forecasts between 2008 and 2009. b. Estimated as the result of implementing the stimulus as announced by national authorities. c. New package of more than 17 percent of GDP over three years. 76 E A S T A S I A PAC I F I C AT W O R K 18.1 percent of GDP. The five economies in Relative to other low- and middle-income- East Asia Pacific where labor force partici- country groupings, East Asia Pacific is a “low- pation fell the most between 1990 and 2011 tax” region. Tax revenue as a share of GDP (China; Hong Kong SAR, China; Lao PDR; is lower than in any other developing-country Malaysia; and Thailand) had an average region, accounting for only 11 percent of share of tax revenue of 12.6 percent of GDP GDP compared, for example, to 15.6 percent over this period, while the five economies in in Eastern Europe and Central Asia and 17.5 the region with the largest increase in labor percent in Middle East and North Africa. force participation (Fiji; Japan; Macao SAR, That revenue from taxation is so low reflects, China; New Zealand; and Singapore) had an in part, the stage in the structural trans- average share of tax revenue of 19.6 percent formation in which most East Asia Pacific of GDP.5 economies find themselves. Subsistence and small-scale commercial agriculture is still a very large segment of the economy in most TABLE 4.6 Stimulus packages were heavily weighted toward countries. The volume of unregistered and infrastructure investment unregulated economic activity constrains Features of fiscal stimulus package: three major items of expenditure what governments can collect in tax revenue. Country Infrastructure Tax breaks Transfers Other Figure 4.7 shows negative correlations between employment in agriculture and tax Indonesia √ √ Waived import revenue across East Asian economies with duties Malaysia Guarantee funds, available data. In an average East Asian equity investment economy with a 10 percentage point smaller Philippines √ √ General increase in share of people employed in agriculture, budget the government collects an average of about China √ Health care reform 6.9 percentage points more in taxes on Korea, Rep. √ √ √ income, profits, and capital gains as a share of Thailand √ √ Education government revenue. Economies in the region Source: Doraisami 2011. with higher shares of “vulnerably employed” FIGURE 4.6 The volume of taxation does not appear to have a strong effect on labor force participation a. Change in labor force participation rate (between b. Change in labor force participation rate (between 1990–2011) by tax revenue as a share of 1990–2011) by share of revenue from taxes on GDP (average 1990–2011) income, profits, and capital gains (average 1990–2011) % of total population ages 15–64 % of total population ages 15–64 20 20 10 10 0 0 –10 –10 –20 –20 –30 y = –0.0017x + 1.6621 –30 y = 0.0577x + 0.3978 –40 R2 = 4E – 06 –40 R2 = 0.0142 0 1 20 30 40 50 0 10 20 30 40 50 60 70 Tax revenue (% GDP) Taxes on income, profits, and captial gains (% revenue) All countries except East Asia Pacific All countries except East Asia Pacific East Asia Pacific East Asia Pacific Source: Based on data from World Bank 2013d. THE FUNDAMENTALS 77 FIGURE 4.7 A large number of people still in agriculture and unregistered forms of work constrains government revenue in many East Asia Pacific economies a. Share of employment in agriculture by share of revenue b. Share of vulnerable employment by share of revenue from taxes on income, profits and capital gains in from taxes on income, profits and capital gains East Asian economies, 2011 or latest year in East Asian economies, 2011 or latest year 80 y = –1.4511x + 74.626 100 y = –1.8066x + 99.785 70 KHM R2 = 0.392 90 LAO R2 = 0.501 KHM % of total employment 80 % of total employment 60 70 50 60 MNG IDN MNG THA THA 40 IDN 50 CHN 30 PHL 40 FJI PHL 30 MYS 20 MYS KOR 20 10 KOR 10 SGP SGP HKG HKG 0 0 0 5 10 15 20 25 30 35 40 45 50 0 5 10 15 20 25 30 35 40 45 50 Taxes on income, profits, and capital Taxes on income, profits, and capital gains (% of revenue) gains (% of revenue) Sources: Data derived from the IMF and the International Labour Organization (ILO); see World Bank 2013c, 2013d. Note: Data reflect the latest year between 2005 and 2011 for all East Asian economies with available data, with the exception of Macao SAR, China, an offshore financial center and tax haven with no control regime for foreign exchange. OECD = Organisation for Economic Co-operation and Development. people (own-account and unpaid family a burden often falling largely on the share of workers; see spotlight 1) tend to raise less the population working in industry and ser- revenue from taxes on income, profits, and vices as well as natural resource exports. capital gains. 6 In East Asia, a decline in a Even those people working mostly in the country’s share of vulnerably employed peo- formal economy report evading taxes. Using ple by 10 percentage points is associated with data derived from the East Asia Barometer an average increase in taxes on income, prof- (2013), table 4.7 shows the reported levels of its, and capital gains as a share of revenue of tax evasion of respondents by their occupa- about 5.5 percentage points. tion. For the survey, respondents’ were asked A dominant commodities sector con- if they “refused to pay taxes or fees to the tributes to more limited tax collection and government” at least once during the last a more volatile pool of public resources in three years. People in all types of occupa- several East Asia Pacific economies. Having tions evade paying taxes. Evasion appears a very high share of total employment in particularly pervasive in Mongolia, the agriculture—for example, in Cambodia, Philippines, and Thailand. Yet the likelihood Vanuatu, and Vietnam, at over 50 percent— that a salaried employee will report tax can contribute to greater volatility in overall evasion is similar to that of people in other economic output (due largely to greater price forms of work. Limited government capac- fluctuations in the agriculture sector) and ity to enforce tax obligations or dissatisfac- therefore greater volatility in tax revenue. tion with public services may be contributing Many workers in these countries are subsis- to tax evasion, regardless of where and how tence farmers and consume most of their out- people are working. put, so they often have no margin of income We now turn to the structure of taxa- above subsistence to make even limited con- tion. East Asia Pacific economies have rela- tributions to tax revenue or to make future tively low tax rates on commercial profits, at investments in human capital. Taxes are an average of 36.2 percent, compared with 78 E A S T A S I A PAC I F I C AT W O R K TABLE 4.7 Self-reported tax evasion appears to vary little across different ways of working % of population who refused to pay taxes or fees to the government one or more times in the past three years within East Asian countries, by main occupation Salaried workers Presently (excluding Presently unemployed unpaid Employers unemployed and not Never Unpaid Purely family and self- but looking looking for worked family property Number of Economy and year Total workers) employed for work work before workers owner observations Indonesia (2006) 5.3 5.5 9.5 0 4.5 10.0 0 — 1,569 Mongolia (2006) 8.2 8.2 7.0 7.5 7.1 12.5 — — 1,201 Philippines (2005) 9.9 9.7 10.9 8.1 10.4 5.0 0 33.6 1,166 Singapore (2006) 1.4 2.0 0 1.4 0 1.8 — — 1,003 Taiwan, China (2006) 4.0 3.9 3.9 11.7 2.2 0 5.3 — 1,544 Thailand (2006) 7.9 8.6 7.3 11.3 7.6 3.7 21.4 1,490 Vietnam (2005) 1.6 0.9 1.5 2.9 3.9 6.7 0 0 1,172 Source: Based on data derived from East Asia Barometer 2013. Note: — = not available. Due to a limited number of observations, data on “purely property owners” should be read with caution. Europe and Central Asia at 41.6 percent and Singapore are actively redistributing the and Latin America and the Caribbean at tax burden mainly from firms (↓ corporate 47.6 percent.7 In several countries, indi- tax) to consumers (↑ indirect tax). vidual income tax rates have declined since From a public finance perspective, diver- 2005 (table 4.8). Corporate tax rates have sifying and broadening the tax base by using also declined in nearly all East Asia Pacific indirect taxes more intensively can help to economies. Indonesia, in particular, has stabilize revenues. From a labor market per- taken substantial steps to reform its tax envi- spective, shifting the mix of taxation instru- ronment and has reduced individual income ments could improve incentives for work. and corporate tax rates more than any other The shift away from income tax to greater East Asian economy.8 Over the past seven taxation of consumption should, all else years, the maximum corporate tax rate fell equal, provide households with greater incen- 8 percentage points in China and Taiwan, tives to supply human capital. To the extent China, and 5 percentage points in Indonesia, that social insurance is financed mainly contributing to a more welcoming environ- from the same sort of tax rather than from ment for foreign investment. mandatory contributions paid by employers, In contrast, indirect taxation, although the shift should create greater incentives for relatively low, is on the rise. In East Asia firms to hire. This discussion is taken up in Pacific economies, on average 29.4 percent of greater detail in chapters 6 and 9. Given that revenue is collected from taxes on the con- the region as a whole has the lowest indi- sumption of goods and services, compared rect tax rates in the world (with consumers to an average of 36.8 percent in Europe in Singapore; Taiwan, China; and Thailand, and Central Asia and 40.1 percent in Latin for example, paying only 7 percent or less in America and the Caribbean. In spite of (or indirect taxes), policy makers in East Asia likely due to) corporate and individual taxes Pacific economies, especially those with fiscal having fallen in many economies in the difficulties, should perhaps consider adjust- region, indirect taxes have been stable and, in ing indirect tax rates upward before raising some cases, have risen. Indirect taxes—such other types of taxes. as value added tax, goods and services tax, More intensive use of indirect taxes, and sales tax—appear to be, in part, com- however, raises concerns about equity and pensating for lower revenues from corporate the well-being of lower-income households. and individual taxes. Fiji, the Philippines, There are trade-offs between income taxes, THE FUNDAMENTALS 79 TABLE 4.8 Direct taxes have been declining in many East Asia Pacific economies Individual income tax, corporate tax, and indirect tax rates in East Asia Pacific economies, 2005–12 Maximum individual Maximum corporate income tax rate tax rate Indirect tax rate Economy 2005 2012 Difference 2005 2012 Difference 2005 2012 Difference Cambodia — — — — 20 — — 10 — China 45 45 0 33 25 −8 17 17 0 Fiji 31 31 0 31 28 −3 12.5 15 2.5 Hong Kong SAR, China 16 15 −1 17.5 16.5 −1 — — — Indonesia 35 30 −5 30 25 −5 10 10 0 Korea, Rep. 35 38 3 27.5 24.2 −3 10 10 0 Macao SAR, China 12 12 0 12 12 0 — — — Malaysia 28 26 −2 28 25 −3 10 10 0 Papua New Guinea 47 42 −5 30 30 0 10 10 0 Philippines 32 32 0 32 30 −2 10 12 2 Samoa — — — 29 27 −2 — 15 — Singapore 21 20 −1 20 17 −3 5 7 2 Taiwan, China 40 40 0 25 17 −8 5 5 0 Thailand 37 37 0 30 30 0 7 7 0 Vanuatu — — — 0 0 0 — 12.5 — Vietnam 40 35 −5 28 25 −3 10 10 0 Regional average Africa 30.2 26.8 −3.4 31 28.9 −2.1 13.7 14.2 0.5 Asia 29.1 34.9 5.8 29.8 23.1 −6.7 12.3 12.2 0.0 European Union 40.1 37.4 −2.7 25.3 22.8 −2.6 19.5 21 1.5 Latin America 31.7 31.8 0.2 29.7 28.3 −1.4 15 12.8 −2.2 Oceania 41 37.8 −3.3 30.6 28.6 −2.0 11.3 12.9 1.7 OECD 41.8 40.6 −1.2 28.5 25.4 −3.1 17.7 18.8 1.0 Global 33 31.8 −1.2 27.9 24.4 −3.5 15.8 15.4 −0.4 Source: Based on data derived from KPMG 2013. Note: — = not available. Data reflect all East Asian economies with available data. For detailed information on a particular economy’s specific tax breakdown, see www.kpmg.com/Global/en/WhatWeDo/Tax/tax-tools-and-resources. which tend to be progressive, and sales or SAR, China; and Singapore have the most value added taxes, which tend to be regres- favorable tax regulation environments in sive, as lower-income groups consume a the region. Vietnam has the least favorable. higher fraction of their disposable income. Firms in Vietnam spend the most time paying Therefore, raising value added taxes or goods their taxes: on average, 941 hours per year and services taxes could be more politically to prepare, file, and pay (or withhold) corpo- difficult if not accompanied by compensat- rate income tax, value added tax, and social ing measures to limit the impact on lower- insurance contributions. Vietnam is followed income households. by the Philippines and then Indonesia. Firms From the standpoint of firms’ incentives, in Indonesia make, on average, the high- the current structure of taxation in the region est total number of tax payments per year is not burdensome. Generally, firms in East (51 payments), compared to their neighbors. Asia Pacific find it easier to pay taxes than Relative to countries in any other region, firms in other developing regions, although East Asia Pacific economies also have, on their experience varies widely from coun- average, the lowest share of firms that identify try to country. The last column of table 4.9 tax administration and tax rates as a major ranks economies on the ease of paying taxes constraint (table 4.10). While this is reas- for firms among 183 economies. Hong Kong suring for the region’s overall business and 80 E A S T A S I A PAC I F I C AT W O R K TABLE 4.9 The current structure of taxation in East Asia Pacific is not as burdensome as it is elsewhere Indicators for the ease of paying taxes, 2010 Paying taxes Payments Time spent Labor tax and (number per (hours per Profit tax contributions Other taxes Total tax rate Global rank for Economy year)a year)b (%)c (%)d (%)e (% profit)f paying taxes Brunei Darussalam 27 96 8.3 8.5 0.0 16.8 20 Cambodia 39 173 18.9 0.1 3.5 22.5 54 China 7 398 5.9 49.6 7.9 63.5 122 Fiji 33 163 28.0 10.2 0.2 38.3 80 Hong Kong SAR, China 3 80 17.6 5.3 0.1 23.0 3 Indonesia 51 266 23.7 10.6 0.1 34.5 131 Kiribati 7 120 23.4 8.5 0.0 31.8 6 Korea, Rep. 12 225 15.1 13.0 1.5 29.7 38 Lao PDR 34 362 24.8 5.6 2.9 33.3 123 Malaysia 13 133 17.0 15.6 1.4 34.0 41 Marshall Islands 21 128 0.0 11.8 53.0 64.9 96 Micronesia, Fed. Sts. 21 128 0.0 6.8 52.0 58.7 92 Mongolia 41 192 10.2 12.4 2.0 24.6 57 Palau 19 128 65.9 6.5 0.5 73.0 97 Papua New Guinea 33 194 22.0 11.7 8.6 42.3 106 Philippines 47 195 21.0 11.3 14.2 46.5 136 Samoa 37 224 11.9 7.0 0.0 18.9 66 Singapore 5 84 6.5 15.9 4.7 27.1 4 Solomon Islands 33 80 14.6 8.5 3.1 26.2 25 Taiwan, China 15 245 13.7 18.4 3.5 35.6 71 Thailand 23 264 28.8 5.7 3.0 37.5 100 Timor-Leste 6 276 0.0 0 0.2 0.2 31 Tonga 20 164 24.3 0 1.4 25.7 29 Vanuatu 31 120 0.0 4.5 3.9 8.4 32 Vietnam 32 941 17.2 22.6 0.3 40.1 151 Regional average East Asia Pacific 25 215 16.8 10.7 6.9 34.5 n.a. Europe and Central Asia 37 302 9.3 21.7 9.5 40.5 n.a. High-income OECD 13 186 15.4 24.0 3.2 42.7 n.a. Latin America and the Caribbean 32 382 19.9 14.6 13.2 47.7 n.a. Middle East and North Africa 21 188 11.3 16.9 4.0 32.2 n.a. South Asia 28 281 18.6 7.7 18.2 44.4 n.a. Sub-Saharan Africa 37 318 18.1 13.5 25.5 57.1 n.a. Source: Data derived from World Bank 2013a. Note: n.a. = not applicable. Data on paying taxes reflect the results from the most recent round of data collection, which was in December 2010, while the rankings for all economies are benchmarked to June 2011. Names of taxes have been standardized; for instance, income tax, profit tax, and tax on company’s income are all classified as corporate income tax. OECD = Organisation for Economic Co-operation and Development. a. The total number of taxes and contributions paid, the method of payment, the frequency of payment, and the number of agencies involved for a standardized case during the second year of operation. b. The time it takes to prepare, file, and pay (or withhold) the corporate income tax, the value added tax, and Social Security contributions (in hours per year). The hours for value added tax include all the value added and sales taxes applicable. The hours for Social Security include all the hours for labor taxes and mandatory contributions in general. c. The amount of taxes on profits paid by the business as a percent of commercial profits. d. The amount of taxes and mandatory contributions on labor paid by the business as a percent of commercial profits. e. The amount of taxes and mandatory contributions paid by the business as a percent of commercial profits that are not already included in the categories of profit or labor taxes. f. The amount of taxes and mandatory contributions payable by the business in the second year of operation, expressed as a percent of commercial profits. For further information on methodology, see http://www.doingbusiness.org/methodology/paying-taxes. THE FUNDAMENTALS 81 TABLE 4.10 Taxes are not frequently reported as a constraint on businesses in East Asia Pacific Firm-level data on whether taxes and regulations are constraints and data on the informal sector in East Asia and Pacific economies Taxation and tax regulations Informal economy % of firms % of firms saying identifying that senior practices of managers competitors % of firms % of firms % of firms % of firms spent the in the competing formally Number of identifying identifying tax most time informal against registered years firm tax rates administration dealing with sector as unregistered when they operated as a major as a major government a major or informal started without formal Economy and year constraint constraint regulations constraint firms operations registration Cambodia (2007) 16.3 14.8 5.6 32.8 — 87.5 0.7 Fiji (2009) 26.6 16.1 4.4 15.1 39.6 93.5 1.1 Indonesia (2009) 4.4 4.8 1.6 14.7 65.1 29.1 2.4 Korea, Rep. (2005) 15.1 9.1 0.1 — — — — Lao PDR (2009) 43.2 24.7 1.2 6.9 12.8 93.5 0.2 Malaysia (2007) 21.4 16.9 7.8 16.2 — 53 0 Micronesia, Fed. Sts. (2009) 22.7 23.9 12.4 11.8 41.1 96.9 0.2 Mongolia (2009) 32.6 9.1 12.1 25.5 43 90.1 2.5 Philippines (2009) 19.5 15.2 9.1 23.7 37.5 97.5 0.5 Samoa (2009) 33.5 19.7 13.9 16.3 63.6 88.4 0.6 Thailand (2006) 36 34.9 0.4 — — — — Timor-Leste (2009) 3.5 2.5 3.8 18.8 66.4 91.8 0.7 Tonga (2009) 16.6 8 6.6 32.4 86.8 93.5 0.3 Vanuatu (2009) 26.6 9.8 7.5 9.7 39.9 88.1 1.3 Vietnam (2009) 6.3 5.3 4.6 14.3 55.6 87.5 1.4 Regional average East Asia Pacific 22.1 14.7 6.5 18.3 50.1 83.9 0.9 Europe and Central Asia 39.5 20.6 10.6 28.5 44.7 96.2 1.1 High-income OECD 29.3 19.7 4.2 22 44.1 99.3 0 Latin America and the Caribbean 35.1 22.7 12.7 30.2 62.3 86.8 1.1 Middle East and North Africa 47.1 34.4 10.8 42.7 50 85.2 0.4 South Asia 24.2 18.8 6.1 21 36.9 89.6 1.1 Sub-Saharan Africa 36.5 26.6 7.5 38.7 65.6 82 0.7 World 34.9 23 9.1 31.7 56.2 87.8 0.9 Source: Data derived from World Bank 2013b. Note: — = not available. Data reflect all East Asia and Pacific economies with available data. Typically, 1,200–1,800 interviews are conducted in larger economies, 360 interviews are conducted in medium-size economies, and 150 interviews are conducted in smaller economies. For information on methodology, see http://www.enterprisesurveys.org /Methodology. tax environment, in countries such as Lao example, paying taxes, dealing with customs PDR and especially Thailand, large shares and completing forms) are the Federated of firms report that administering taxes is a States of Micronesia (12.4 percent of their major constraint to doing business (24.7 and time), Mongolia (12.1 percent), and Samoa 34.9 percent, respectively). The economies (13.9 percent). The countries where firms in the region in which senior managers of reported the highest average number of visits firms spend the most time in a typical week or required meetings with tax officials were dealing with government regulations (for Lao PDR and Mongolia. 82 E A S T A S I A PAC I F I C AT W O R K Overall, deploying a wide range of tax or enables work. Governments play a key instruments over the broadest possible base role in shaping the business environment, is healthy for an economy and for employ- which provides the basic public goods and ment outcomes. The level of taxation but services necessary for the private sector to also the mix of tax instruments vary across conduct operations. These public goods the region, with top economic performers and services range from providing access deploying contrasting revenue measures. Top to financial institutions and administering performers in the region range from China, regulation and licensing to providing infra- with high overall tax rates, to Singapore; structure including electricity and roads. Taiwan, China; Hong Kong SAR, China; The business environment creates the condi- and Macao SAR, China, with overall low tax tions for firms and workers to be functional rates. Despite very different tax levels, all five and keeps investment costs manageable economies experienced unemployment rates (IFC 2012; IMF and World Bank 2012). below 5.5 percent and GDP growth rates The business environment is the background above 4 percent over the period 2000–11. against which customers, producers, dis- tributors, competitors, and, among others, exporters interact. 9 In East Asia Pacific, An enabling environment for performance on business climate indicators enterprise? is mixed, with some of the world’s top per- This section assesses the degree to which formers (Singapore and Korea), but also the a country’s business environment constrains poorest performers (Lao PDR and Timor- Leste) in the world (figure 4.8). The four largest constraints reported by FIGURE 4.8 East Asia Pacific has both the leaders and the laggards businesses in East Asia Pacific are (in order in “ease of doing business” of reported importance) access to finance, an inadequately educated workforce, practices Ease of doing business ranking, 2013 of the informal sector (informal competi- Singapore tion), and insufficient or unreliable supply of Hong Kong SAR, China electricity. Analysis of nationally representa- Korea, Rep. Malaysia tive, firm-level survey data of an economy’s Taiwan, China private sector in table 4.11 illustrates the key Thailand obstacles reported by businesses across all Tonga Brunei Darussalam East Asia Pacific economies that have avail- Samoa able data. These top four obstacles for private Fiji sector businesses are consistent across differ- Vanuatu Mongolia ent firms and economies at different levels of China development. The subsequent discussion out- Solomon Islands lines each of these major obstacles further, Vietnam Palau giving particular emphasis to the reported Philippines top constraint, access to finance. Papua New Guinea Marshall Islands Access to finance is the most frequently Indonesia reported obstacle facing businesses in the Kiribati region. Access to financial services, includ- Cambodia Micronesia, Fed. Sts. ing savings accounts, credit cards, and Lao PDR loans, facilitates operations and helps firms Timor-Leste to make longer-term plans to expand. Thus Myanmar it can foster economic growth and sus- 0 20 40 60 80 100 120 140 160 180 200 tain demand for human capital. For house- holds, access to financial services can also Source: Data derived from World Bank 2013a. help to smooth consumption and better TABLE 4.11 East Asia Pacific lives up to its reputation as a business-friendly region, but several obstacles constrain enterprises Obstacles to businesses and the extent of their impediment across East Asian and Pacific countries Inad- Practices Crime, Business Customs Access equately of the theft, licensing Tax and trade to educated informal Tax Political and Transpor- and Access adminis- Labor regula- finance workforce sector Electricity rates instability Corruption disorder tation permits to land tration regulations tions Courts Most frequently reported → → → Least frequently reported Economy and year 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Cambodia (2007) 4.9 2.9 9.1 16.6 5.1 16.5 24.1 6.3 2.7 2.8 2.8 1.9 0.8 2.0 1.5 Fiji (2009) 6.3 4.5 5.4 3.9 8.0 44.4 2.5 8.6 1.7 0.6 1.1 1.1 8.8 3.3 0.0 Indonesia (2009) 47.9 4.3 13.7 6.5 1.3 6.9 1.6 3.0 4.3 3.3 3.9 0.4 1.3 1.4 0.2 Lao PDR (2009) 21.2 16.5 4.0 8.9 36.8 0.0 0.2 0.1 2.8 0.5 6.8 0.6 0.0 1.5 0.3 Malaysia (2007) 7.2 33.6 0.0 0.0 0.0 0.7 11.1 2.2 0.0 15.2 2.3 17.9 4.8 5.0 0.0 Micronesia, Fed. Sts. (2009) 8.1 25.2 4.5 15.8 9.7 0.0 1.6 1.6 12.6 4.8 4.8 6.5 4.8 0.0 0.0 Mongolia (2009) 30.3 10.2 7.1 3.4 16.0 7.0 4.4 1.1 2.6 6.5 4.5 3.3 0.3 3.1 0.1 Philippines (2009) 14.8 2.6 26.4 11.3 13.0 6.2 4.9 4.4 2.3 5.8 0.8 1.6 1.9 3.8 0.2 Samoa (2009) 13.3 11.6 13.8 8.6 16.9 0.9 1.9 13.8 4.7 1.0 3.9 6.9 1.9 1.0 0.0 Timor-Leste (2009) 12.1 7.8 2.0 36.3 0.0 10.2 6.7 12.7 4.5 3.5 3.6 0.0 0.0 0.7 0.0 Tonga (2009) 7.4 15.5 20.1 1.3 15.6 14.3 17.0 0.3 1.6 0.1 5.4 1.3 0.0 0.0 0.0 Vanuatu (2009) 14.8 13.9 9.5 15.7 4.4 4.2 2.6 14.3 4.9 3.5 1.6 0.9 8.0 1.5 0.0 Vietnam (2009) 24.7 10.2 19.3 4.3 3.5 0.4 3.3 1.0 13.3 1.4 6.9 6.3 0.9 4.2 0.3 Regional average East Asia Pacific 16.4 12.2 10.4 10.2 10.0 8.6 6.3 5.3 4.5 3.8 3.7 3.7 2.6 2.1 0.2 World average 16.4 7.8 11.0 14.0 10.6 8.4 6.7 5.3 3.2 3.0 3.3 3.2 2.6 3.4 1.0 Source: Based on data derived from World Bank 2013b. Note: Data reflect the shares of firms that report each of the 15 obstacles as the major constraint (these shares add up to 100%). Year reflects the latest survey year. The enterprise survey is answered by business owners and top managers. Sometimes the survey respondent calls company accountants and human resource managers into the interview to answer questions in the sales and labor sections of the survey. Typically, 1,200 and 1,800 interviews are conducted in larger economies, 360 interviews are conducted in medium-size economies, and 150 interviews are conducted in smaller economies. For more information on methodology, see http://www.enterprisesurveys.org/Methodology. 83 84 E A S T A S I A PAC I F I C AT W O R K manage times of unemployment. In short, make payments, and cope with risks. The better-functioning financial markets facili- region also ranks well internationally accord- tate the use of resources more productively: ing to the share of people who have received the more inclusive a financial system is, the a loan from a financial institution in the past better and the more broadly it can mobi- year (8.6 percent). lize savings that can then be translated into However, in some economies in the investments that support overall economic region less than a quarter of adults 15 years growth and work. A large body of empirical or older have an account at a formal finan- evidence shows that access to finance is one cial institution—for example, Vietnam of the most important drivers of economic (21.4 percent), Indonesia (19.6 percent), and growth (see, for example, Levine 2005; Beck Cambodia (3.7 percent). Only 51.5 percent 2008; Hanusch 2011). of firms in Indonesia have a checking or sav- Compared to other developing regions, ings account, the lowest rate in the region people in East Asia Pacific have relatively among economies with available data (based good access to financial institutions, but with on World Bank’s enterprise survey data). strong variation across economies. East Asia Moreover, despite good access to bank Pacific economies rank fairly well interna- accounts, the region’s coverage of credit cards tionally in providing access to bank accounts is far lower than that of Latin America and at formal financial institutions (table 4.12). the Caribbean and Eastern Europe. Part of About 55 percent of adults in the region have the problem of financial inclusion is that few a bank account, allowing them to save, lend, countries have credit registries that provide TABLE 4.12 People in East Asia Pacific have relatively good access to finance, but with strong variation across economies Indicators of financial inclusion across East Asia Pacific, 2011, % of respondents age 15+ Received a Received a Have an Saved at a loan from loan from Have account at Have used financial Saved any a financial a private a a formal an account institution money in institution lender in Received any credit financial to receive in the past the past in the past the past loan in the Economy card institution wages year year year year past year Cambodia 0.1 3.7 1.1 0.8 31.0 19.5 12.8 59.5 China 8.2 63.8 18.7 32.1 38.4 7.3 1.1 29.4 Hong Kong SAR, China 58.1 88.7 48.7 42.8 59.0 7.9 2.1 27.7 Indonesia 0.5 19.6 7.7 15.3 40.5 8.5 2.0 49.1 Korea, Rep. 56.4 93.0 49.4 46.9 64.5 16.6 0.6 32.5 Lao PDR 3.1 26.8 3.0 19.4 54.5 18.1 4.9 32.5 Malaysia 11.9 66.2 26.3 35.4 51.0 11.2 2.2 32.5 Mongolia 1.9 77.7 29.4 23.2 33.5 24.8 5.0 45.8 Philippines 3.2 26.6 8.5 14.7 45.5 10.5 12.7 58.1 Singapore 37.3 98.2 52.5 58.4 60.9 10.0 1.7 32.7 Taiwan, China 45.9 87.3 41.8 45.7 58.1 9.6 1.7 24.0 Thailand 4.5 72.7 33.5 42.8 60.0 19.4 2.3 27.2 Vietnam 1.2 21.4 5.8 7.7 35.3 16.2 3.0 43.9 Regional average East Asia Pacific 6.6 54.9 16.9 28.4 39.8 8.6 1.9 33.8 Europe and Central Asia 16.2 44.9 27.3 7.0 20.4 7.7 1.5 39.5 Latin America and the Caribbean 18.4 39.3 20.2 9.7 26.0 7.9 2.5 25.4 Middle East and North Africa 2.4 17.7 6.0 4.5 20.0 5.1 4.7 41.8 Sub-Saharan Africa 2.9 24.0 9.9 14.2 40.2 4.8 5.4 46.8 Source: World Bank 2013c, based on nationally representative survey data. Note: Data for a region only reflect developing countries in that region. THE FUNDAMENTALS 85 a history of debtors’ creditworthiness (World informally, beyond the reach of regulation Bank 2012b). and taxation. Just over half (50.1 percent) of Access to finance is particularly important firms in the region reported that they com- for small and medium enterprises (SMEs), pete against unregistered enterprises, while whose revenues can be episodic and which 18.3 percent of firms in the region identified are often constrained in their ability to the practices of competitors in the informal raise financial resources. Globally, access economy as a major constraint. Cambodia to finance is not only the leading constraint has the highest share, at 32.8 percent. High reported by firms but also a challenge that levels of informality not only deprive the gov- particularly affects smaller firms in low- ernment of tax revenue but also can lower and middle-income countries. While SMEs standards and weaken the regulation of are not always the key drivers of economic products and services that these businesses growth in every country, a vibrant SME sec- provide. tor is a common characteristic of dynamic Access to electricity is the next most fre- economies. SMEs tend to be a source of quently reported constraint to firms and demand for labor and human capital in East their expansion. As many as 10.2 percent of Asia Pacific (see chapter 2).10 When it comes firms in East Asia Pacific identified insuffi- to access to credit for SMEs, the region has cient electricity as a major constraint to their the best (Malaysia) and the second worst businesses, with this share ranging from 1.3 (Palau) performers. The Pacific island states percent in Tonga to 36.3 percent in Timor- rank especially poorly on this indicator. Leste, based on calculations of enterprise There remains much scope for improving survey data. Firms in the region reported an the rules for obtaining credit and extending average of 2.5 electrical outages in a typi- financial inclusion. cal month. Ensuring a reliable and afford- Skills shortages are the second most press- able flow of electricity enables businesses ing constraint to doing business (table 4.11). to produce more added-value products, Global evidence shows that this constraint is helps to free up time from household tasks, particularly binding for large firms or firms in and, especially in rural areas, can increase more developed countries. Within the region, the number of women in the labor market the largest shares of firms identifying an (Dinkelman 2011). inadequately educated workforce as a major Although not among the top reported constraint are in the Pacific, particularly obstacles to enterprises, transportation con- Malaysia (33.6 percent) and the Federated straints caused by critical infrastructure gaps States of Micronesia (25.2 percent), while also pose problems, particularly in countries the lowest are in Cambodia (2.9 percent) with adverse geographic conditions. Anybody and the Philippines (2.6 percent). These who has experienced traffic in Jakarta or “gaps” between the skills that firms say Manila is likely to agree. One in five firms or they need and what they are able to find more in Mongolia, Thailand, Timor-Leste, exist the world over, and they are often the Vanuatu, and Samoa report transportation sign of dynamic, growing, and diversifying as a major constraint. Infrastructure gaps economies. However, where they persist, a in these countries constrain access to mar- country’s growth and employment poten- kets. Within areas of poor public provision tial may be constrained by outdated institu- of basic infrastructure, large firms at times tions. A deeper discussion of how countries’ construct roads for their own needs, acquire human capital supply systems perform and generators, and build water wells. These are where and why they fall short is taken up in examples of firms’ resilience and their mak- chapter 5. ing up for the failures of government, rather The third most important obstacle than coordinated partnership between pub- reported by businesses in the region is the lic and private sector. This type of private competition they face from firms operating effort is not the most cost-effective means of 86 E A S T A S I A PAC I F I C AT W O R K providing basic infrastructure services or the is reported as the seventh most impor- most equitable, as small firms often do not tant obstacle to enterprise in the region have the minimum resources needed to make (Hallward-Driemeier, K hun-Jush, and such investments (IMF and World Bank Pritchett 2010). Corruption is reported to 2012). be very high in Cambodia and Papua New Much like the rate of taxation and costs Guinea, while Hong Kong SAR, China; and of compliance, regulation does not appear Singapore have some of the lowest reported to discourage business activity in the region. levels, according to the World Governance Small shares of firms report that business Indicators (World Bank 2013e). licensing and permits (3.8 percent), labor The time required for businesses to regulations (2.6 percent), and customs acquire licenses and permits is an obstacle and trade regulations (2.1 percent) present that, although not in the top-ranked prob- obstacles. Nonetheless, since different firms lems reported by firms, presents unnecessary within the same country report different constraints to business in several South East experiences with the time needed to receive Asian economies. On the whole, East Asia their license or to comply with certain regu- Pacific lags behind the global average in the lations, this could explain why corruption “number of days required to register a firm,” measured as the median duration that incor- poration lawyers report is needed to finalize FIGURE 4.9 The time required to register a business varies widely the process with minimum follow-up and no across East Asia Pacific extra payments. Some countries are particu- larly lagging, with an average waiting time of Number of days required to register a firm, 2012 two and a half months or more to register a firm in Brunei Darussalam, Cambodia, Lao Hong Kong SAR, China 3 Singapore 3 PDR, and Timor-Leste. Such extended peri- Malaysia 6 ods of time may discourage business activity Samoa 9 and stand in stark contrast to the experience Solomon Islands 9 Taiwan, China 10 in many of the higher-performing economies Mongolia 12 in the region (figure 4.9). Micronesia, Fed. Sts. 16 Key indicators of the business environ- Tonga 16 Marshall Islands 17 ment in the region have improved markedly Palau 28 over the past decade. Figure 4.10 illustrates Thailand 29 these trends. Without attributing causality, China 33 Vietnam 34 economies in which unemployment rates Vanuatu 35 have fallen more than 2 percent since 2003— Philippines 36 Hong Kong SAR, China; Indonesia; and the Papua New Guinea 51 Fiji Philippines—all improved their business cli- 58 Cambodia 85 mate during this period by reducing the total Lao PDR 92 number of days required to start a business, Timor-Leste 94 the number of days needed to comply with all Brunei Darussalam 101 OECD 12 procedures to export goods, and the total tax Europe and Central Asia 14 rate as a share of commercial profits. South Asia 19 Sub-Saharan Africa 34 East Asia Pacific 36 Latin America and the Caribbean 53 Are the “fundamentals” in East 0 20 40 60 80 100 120 Asia Pacific pro-work? The state plays a critical role in enabling Source: Data derived from World Bank 2013a. Note: Data collection for this survey round was completed in June 2012. OECD = Organisation for employment. It shapes the overall environ- Economic Co-operation and Development. ment within which firms operate and can THE FUNDAMENTALS 87 FIGURE 4.10 Several indicators of the business environment have improved substantially across East Asia Pacific Trends in selected business environment indicators across East Asia Pacific, 2003–12 Number of days to start business/number of days to 80 export goods/total tax rate (% of profit) 70 60 50 40 30 20 10 0 2003 2005 2007 2009 2011 2012 2003 2012 2003 2005 2011 2007 2009 2011 2012 2003 2005 2007 2009 2011 2012 2003 2005 2009 2011 2012 2003 2005 2007 2009 2011 2005 2007 2012 2009 2007 China Fiji Hong Kong Indonesia Malaysia Mongolia SAR, China Number of days to start business/number of days to 80 export goods/total tax rate (% of profit) 70 60 50 40 30 20 10 0 2003 2005 2007 2009 2011 2012 2003 2005 2007 2009 2011 2012 2003 2005 2007 2009 2011 2012 2003 2005 2007 2009 2011 2012 2003 2005 2007 2009 2011 2012 2003 2005 2007 2009 2011 2012 Philippines Singapore Taiwan, China Thailand Tonga Vietnam Number of days to start a business Number of days to export goods Total tax rate (% of profit) Source: Illustration based on data derived from World Bank 2013a. Note: In Indonesia, the number of days to start a business dropped from 168 to 105 days between 2003 and 2007. As a significant outlier, Indonesia was omitted from the figure to allow for a consistent display of data. Data were not included on other important indicators of investment climate such as the number of days to get electricity (given that the number of days in most countries did not change over this period) and access to credit rankings (given the lack of data for many years across all countries). adopt policies to mitigate macro shocks and Public policies affecting a country’s infla- address market imperfections. It can also tion, exchange rates, and cyclicality of pub- adopt more proactive policies to improve the lic spending can influence fluctuations in environment for enterprise. Macroeconomic employment and the business cycle, as the policy administrators—including minis- private sector demands a certain degree of tries of finance, central bankers, and the stability concerning returns and decisions respective regulatory agencies—can, there- about savings and investments. fore, be not only guardians of macro sta- While monetary policy can be useful for bility but also facilitators of employment. smoothing business cycle fluctuations and 88 E A S T A S I A PAC I F I C AT W O R K stabilizing labor market outcomes in the resources to where they will most effec- short run, it does not directly offer long- tively sustain demand and employment. term policy prescriptions. In terms of infla- Greater stability and countercyclicality tion targeting, some evidence exists on the could be achieved through a broader and effect of existing measures on inflation, but more diversified tax base. In terms of tax limited evidence is available of their effect policy reforms, some governments in the on growth and employment. Whereas many region have begun to redistribute the tax East Asian governments might have suc- burden mainly by reducing tax rates on firm ceeded in promoting export-led growth and profits (but also, to a lesser extent, on indi- employment by fixing their currencies at vidual incomes) and by increasing indirect low exchange rates, this strategy ultimately tax rates. There is likely space for policy came at too high a cost for some countries, makers to continue this trend in most coun- resulting in imbalances and vulnerability to tries in the region, as indirect tax rates are speculation that they could not withstand. currently some of the lowest in the world. Exchange rate policies among the most Tax reforms aimed at increasing value added affected countries largely shifted toward taxes or goods and services taxes will, how- greater flexibility after the 1997 financial ever, be difficult, particularly in countries crisis, while several countries also adopted without redistributional social protection inflation targets to gain the confidence of policies. markets. China, of course, is an important Firm-level survey data reveal that the exception to this trend, with a nonconvert- business environment and the demand ible currency that many argue is underval- for labor and human capital are generally ued. Some countries, especially many Pacific encouraging. In the region, performance on island states, maintain hard-pegged regimes. the indicators of overall business climate is, The question is not whether or not to peg or however, mixed, with some of the top per- float, but rather what combination of mon- formers (Korea and Singapore) but also the etary and exchange rate policies is going to poorest performers (Lao PDR and Timor- help governments to achieve flexibility with Leste) in the world. Yet fewer firms in the credibility. region complain about taxation, restrictive When it comes to the demand for and labor regulation, costs of dealing with gov- supply of labor and human capital, the ernment, or corruption. This sets economies fiscal outcomes that count are predict- in East Asia Pacific quite apart from other ability and countercyclicality of spend- low- and middle-income countries. But the ing to help households in their day-to-day favorable business environment is fragile, efforts to smooth consumption. Yet fiscal requiring the close care of policy makers to policies linked to employment goals can be maintain. designed not only to expand aggregate sup- The four most frequently reported con- ply but also to stimulate aggregate demand. straints on businesses in East Asia Pacific are Countercyclical policies and large-scale limited access to finance, an inadequately stimulus packages can have critical effects educated workforce, unfair competition from by compensating for reductions in aggre- firms in the informal economy, and insuffi- gate demand and sustaining demand for cient and unreliable electricity. Governments work in the short term. Economies in East can play a critical role in removing these Asia Pacific performed well in contain- constraints and therefore in promoting an ing the costs to households of the global enabling business environment that makes financial crisis. Arguably, there is room the conditions for firms and workers func- for further precautionary preparation and tional and allows firms to invest, expand, mitigation policies to reduce the extent of and increase their demand for labor and discretion and to speed the flow of public human capital. Annex 4A Supplementary data for chapter 4 TABLE 4A.1 Tax revenue by type of tax and various employment indicators in East Asia Pacific economies, 2011 or latest year % of tax revenue % of total revenue % of commercial profits Customs Taxes on Taxes on Taxes on Other Tax and other income, goods income, Taxes on taxes revenue import Taxes on profits, and and profits, and international Other Labor tax and Profit payable by Total tax Economy (% of GDP) duties exports capital gains services capital gains trade taxes contributions tax businesses rate Cambodia 10.1 21.8 2.5 16.8 34.5 9.9 14.3 0.1 0.1 18.9 3.5 22.5 China 10.5 4.2 −25.2 27.8 58.9 24.6 3.7 1.2 49.6 5.9 7.9 63.5 Fiji 23.2 16.9 0.7 35.8 40.9 32.5 15.9 1.4 10.2 28.0 0.2 38.3 Hong Kong SAR, China 12.8 0.6 58.6 8.6 36.2 0.4 16.6 5.3 17.6 0.1 23.0 Indonesia 10.9 3.5 2.8 50.6 29.4 36.5 2.0 4.1 10.6 23.7 0.1 34.5 Kiribati 8.5 23.4 0.0 31.8 Korea, Rep. 15.2 6.0 42.0 26.7 28.1 4.0 8.0 13.0 15.1 1.5 29.7 Lao PDR 12.7 10.8 0.8 21.1 41.9 13.4 7.3 0.6 5.6 24.8 2.9 33.3 Macao SAR, China 34.7 — — 4.1 88.6 3.9 — 1.6 — — — — Malaysia 14.3 1.8 1.7 66.5 16.7 45.6 2.4 3.9 15.6 17.0 1.4 34.0 Marshall Islands 11.8 0.0 53.0 64.9 Micronesia, Fed. Sts. 6.8 0.0 52.0 58.7 Mongolia 22.7 10.1 0.0 42.6 28.5 27.1 6.4 1.6 12.4 10.2 2.0 24.6 Myanmar 3.9 3.9 43.3 30.7 25.2 2.3 — — — — — Palau — — — — — — — — 6.5 65.9 0.5 73.0 Papua New Guinea — — — — — — — — 11.7 22.0 8.6 42.3 Philippines 12.1 23.7 44.7 28.6 40.5 21.5 5.9 11.3 21.0 14.2 46.5 Samoa — — — — — — — — 7.0 11.9 0.0 18.9 Singapore 13.8 0.1 44.6 26.2 34.0 0.0 16.0 15.9 6.5 4.7 27.1 Solomon Islands — — — — — — — — 8.5 14.6 3.1 26.2 Taiwan, China — — — — — — — — 18.4 13.7 3.5 35.6 Thailand 16.0 5.7 0.0 42.3 40.2 33.2 4.5 0.6 5.7 28.8 3.0 37.5 Tonga — — — — — — — — 0.0 24.3 1.4 25.7 Vanuatu — — — — — — — — 4.5 0.0 3.9 8.4 Vietnam — — — — — — — — 22.6 17.2 0.3 40.1 table continued next page 89 90 TABLE 4A.1 Tax revenue by type of tax and various employment indicators in East Asia and Pacific economies, 2011 or latest year (continued) % of tax revenue % of total revenue % of commercial profits Customs Taxes on Taxes on Taxes on Other Tax and other income, goods income, Taxes on taxes revenue import Taxes on profits, and and profits, and international Other Labor tax and Profit payable by Total tax Economy (% of GDP) duties exports capital gains services capital gains trade taxes contributions tax businesses rate Regional average East Asia Pacific (all 11.5 — — — 28.6 — 4.0 1.6 11.1 17.9 6.3 35.3 income levels) East Asia Pacific 11.0 — — — 29.4 — 6.4 0.8 10.5 17.9 7.9 36.2 Europe and Central 15.6 — — — 36.8 — 2.5 0.1 22.2 9.2 10.2 41.6 Asia Latin America and — — — 40.1 — 4.0 1.8 15.4 19.8 12.5 47.6 the Caribbean Middle East and 17.5 — — — 31.4 — 6.0 2.8 19.1 15.5 6.0 40.6 North Africa Sub-Saharan Africa 15.7 — — — — 13.2 18.5 25.6 57.3 World (all income 14.2 — — — 32.4 — 3.9 1.7 16.2 16.0 12.6 44.8 levels) Sources: Data from IMF 2013a and ILO data files; see World Bank 2013c, 2013d. Note: — = not available. Data reflect the latest year between 2011 and 2005 for all East Asian countries with available data. Taxes on income, profits, and capital gains are levied on the actual or presumptive net income of individuals, on the profits of corporations and enterprises, and on capital gains, whether realized or not, on land, securities, and other assets; intragovernmental payments were eliminated in consolidation. For detailed definitions of other indicators employed, see http://data.worldbank.org/. Regional data refer only to the average for developing countries in the region—that is, not all countries, unless otherwise indicated. THE FUNDAMENTALS 91 Notes 7. Regional data presented here refer only to the average for developing countries in the 1. An important exception to the first assertion region—that is, no high-income countries are in this sentence can be found in the Pacific included. island countries, where the public sector is 8. Indonesia’s parliament adopted a new income a significant provider of employment, dis- tax law in late 2008, which established a sin- cussed in chapter 8. gle income tax rate for corporate taxpayers 2. However, some economists argue that keep- and permanent establishments and replaced ing a looser rein on inflation in the shorter the previous progressive tax rates. The mea- term could help both indebted consumers sure was widely praised by the country’s pri- and governments to meet their obligations vate sector (Asia Law and Practice 2008). and at the same time support consumption. 9. For an in-depth discussion on the importance These arguments are less important in East of a solid business climate for development, Asia Pacific given the region’s high level see World Bank (2004). of saving and solid track record of fiscal 10. Access to finance is also important to prudence. households’ supply of labor and human 3. However, higher unemployment can weaken capital. Households borrow partly for the collective bargaining power of workers, non-business-related purposes, especially constraining wage demands. Thus higher consumption, yet access to credit also allows unemployment weakens pressure on wages, them to improve their productivity by invest- which translates into lower inflation. The ing in health and education. This, in turn, negative empirical relationship between can help them to find or improve employ- unemployment and inflation is described by ment opportunities (FDIC 2009; Demirgüç- the so-called Phillips Curve (Phillips 1958). Kunt and Klapper 2012). Recent experience in East Asia and elsewhere disputes this relationship. 4. 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Husain, Ashoka “Threshold Effects in the Relationship Mody, Robin Brooks, and Nienke Oomes. between Inflation and Growth.” IMF Working 20 03. “Evolution a nd Performa nce of Paper 00/110, International Monetary Fund, Exchange Rate Regimes.” IMF Working Washington, DC. Paper 243, International Monetary Fund, Khatiwada, Sameer. 2009. Stimulus Packages to Washington, DC. Counter Global Economic Crisis: A Review. World Bank. 2004. World Development Report International Institute for Labor Studies 20 05: A Better Investment Climate for Discussion Paper 196. Geneva: ILO. Everyone. New York: Oxford University Press. Kim, Yoonbai, and Ying Yung-Hasiang. 2007. ———. 2012a. Modern Jobs: Malaysia Economic “A n Empirical Assessment of Currency Monitor, April 2012. Washington, DC: World Valuation in East Asian Countries.” Journal Bank. of International Money and Finance 26 (2): ———. 2012b. World Development Report 2013: 265–83. Jobs. Washington, DC: World Bank. KPMG. 2013. Global Tax Rates Tables. New ——— . 2013a. Doing Business Database. York: K PMG International. http://www Washington, DC: World Bank. http://www .kpmg.com/GLOBAL/EN/SERVICES/TAX .doingbusiness.org/. 94 E A S T A S I A PAC I F I C AT W O R K ———. 2013b. Enterprise Surveys Database. ht t p: //data.worldba n k.org /data- catalog Washington, DC: World Bank. http://www /world-development-indicators. .enterprisesurveys.org/data. ———. 2013e. World Governance Indicators ———. 2013c. Global Financial Development Database. Washington, DC: World Bank. Database. Washington, DC: World Bank. ht t p: //data.worldba n k.org /data- catalog ———. 2013d. World Development Indicators /worldwide-governance-indicators. Database. Washington, DC: World Bank. Building Human Capital 5 Despite some progress in East Asia Pacific, through work, which are discussed in governments’ current investments in human chapter 3. At the individual level, workers capital are skewed away from the founda- with greater human capital are likely to earn tional health and education services that more and enjoy improved living standards. build the most valuable skills in dynamic Improved nutrition, particularly early in life, economies. can directly increase earnings later in life (Behrman and Rosenzweig 2001; Hoddinott H uman capital, in the form of indi- et al. 2008). Private returns to every addi- viduals’ health, talent, knowledge, tional year of schooling are estimated at and other productive attributes, 10 percent, on average, around the world, contributes to economic growth and employ- with even higher rates in less developed ment creation. Economies with more human countries (Barro and Lee 2012; Montenegro capital are more likely to grow faster through and Patrinos 2012).1 At the aggregate level, higher productivity, greater innovation, and labor productivity has risen faster in East successful adaptation of new knowledge Asia than in any other region since 1999, and (Warsh 2006). One of the most robust pre- investments in human capital have played dictors of gross domestic product (GDP) an important part in fueling this growth growth across countries is the quality of edu- (Chansarn 2010; Kucera and Roncolato cation, as indicated, for example, by scores 2012). However, as argued in chapter 3, these on international standardized tests taken by trends have been uneven across and within secondary school students (Hanushek and countries, and unequal opportunities to Woessman 2009; Jimenez, Nguyen, and build, maintain, and protect the human capi- Patrinos 2012). In addition, workers’ health tal that people need to succeed in the labor influences their availability to work and their market may threaten social cohesion. productivity at work. Poor health has nega- People in East Asia Pacific have enjoyed tive impacts on GDP growth through lost substantial improvements in health outcomes labor productivity and the costs of treatment and in educational attainment, but indicators (Abegunde et al. 2007). of these successes are only indirect measures Human capital directly enables the three of their human capital. Across the region, development transformations that occur most people complete basic education and 95 96 E A S T A S I A PAC I F I C AT W O R K enjoy longer life expectancy than in previous labor market and existing workers adjust generations. While some of the lower-income their skills. Only in an economy in perpet- countries in the region continue to struggle ual equilibrium, producing the same goods with low levels of educational attainment, and services and cut off from technological many countries are now turning to the chal- advances in the rest of the world, would the lenge of expanding higher education and skills sought by employers always be readily capabilities for the labor market. Education, available. This explains why, in today’s glo- health, and work experience can all contrib- balized economy, employers in almost every ute to skills—the specific competencies that country report a shortage of skills to be a individuals can productively apply to their constraint on the growth of their businesses. work. However, just because more children Thus it is not the existence of skills gaps that are going to school does not necessarily mean should be a worry, but rather which gaps that they are learning and building skills, are found and how persistently they remain. which are much harder to observe directly. Gaps in foundational skills are particularly This chapter examines the supply of and inefficient, and gaps in all types of skills can demand for skills in the region and provides hamper growth when they are too wide and a conceptual framework for understanding too persistent. Governments have an impor- “skills gaps,” specifically their causes and tant role to play in filling skills gaps when the broad implications for policy. When should health and education systems and the exist- skills gaps motivate policy intervention? ing labor force are slow to adjust to changing A time lag or gap between the skills that demand or when market failures distort peo- employers seek and workers have to offer is ple’s choice of skills investments and firms’ to be expected in any dynamic economy, as choice of production technology. new workers with different skills enter the The demand for skills is evolving rapidly in East Asia Pacific countries, creating wide and persistent skills gaps—shortfalls in cognitive, FIGURE 5.1 East Asia Pacific has the third highest average regional behavioral, as well as employment-specific life expectancy skills—that may constrain economic growth and the well-being that households can derive 85 from work. Skills development in the region needs to go beyond the focus on technical Average life expectancy at birth (years) 80 and vocational education, a set of education 75 services that provide only a fraction of the 70 skills demanded in these fast-changing econ- 65 omies. Moreover, there are multiple causes of skills gaps, rooted in both the education 60 systems and the labor markets of East Asia 55 Pacific countries. This multiplicity of causes 50 creates an imperative for policy makers to 45 identify the nature of the skills problems they face before designing solutions. 40 1960 1980 1986 1992 1998 2004 2010 East Asia Pacific Europe and Central Asia Progress in health and education OECD Sub-Saharan Africa Countries in the East Asia Pacific region South Asia Middle East and North Africa are highly ranked according to many stan- Latin America and the Caribbean dard indicators of health and education out- comes that are commonly used as measures Source: World Bank 2013g. of human capital. For example, as shown in Note: OECD = Organisation for Economic Co-operation and Development. figure 5.1, the region as a whole now has the BUILDING HUMAN CAPITAL 97 FIGURE 5.2 Most girls and boys complete third highest level of life expectancy globally. primary school in East Asia Pacific economies Schooling attainment has grown substan- tially across East Asia Pacific over the past Primary completion rates several decades: for example, in Indonesia the population had, on average, 34 percent more Mongolia, 2011 schooling in 2010 than in 1995. This improve- Kiribati, ment has also narrowed gender disparities: 2008 Marshall Islands, the majority of both girls and boys—more 2009 than 90 percent in many countries—now Myanmar, attain a basic education (figure 5.2). While 2010 Indonesia, East Asia Pacific has experienced the larg- 2009 est gains in secondary school enrollment, the Fiji, 2011 region still trails behind many other regions Japan, in tertiary schooling (figure 5.3). 2010 Korea, Rep., Countries in the East Asia Pacific region 2010 have achieved these levels of performance Malaysia, without a notably high level of spending on 2005 Lao PDR, health and education, although the public 2011 sector’s role differs substantially across coun- Cambodia, 2011 tries. Figure 5.4 shows spending on health and 0 20 40 60 80 100 120 education as a share of GDP for countries at Percent different income levels. In general, low- and Female Male middle-income countries spend relatively less on education and health as a share of GDP than richer economies. Governments in East Source: World Bank 2013f. FIGURE 5.3 East Asia Pacific has made the largest gains in secondary enrollment, but lags behind in tertiary schooling a. Secondary enrollment b. Tertiary enrollment 120 120 100 100 Gross enrollment ratio Gross enrollment ratio 80 80 60 60 40 40 20 20 0 0 1970 1980 1990 2000 2010 1970 1980 1990 2000 2010 East Asia Pacific Europe and Central Asia OECD Latin America and the Caribbean Middle East and North Africa South Asia Sub-Saharan Africa Source: World Bank 2013f. Note: OECD= Organisation for Economic Co-operation and Development. 98 E A S T A S I A PAC I F I C AT W O R K FIGURE 5.4 East Asian economies spend less on education and health care than countries at similar income levels, while Pacific island countries spend relatively more on health care a. Public expenditure on education, 2008–11 (latest available year) b. Public expenditure on heath care, 2011 12 14 TLS 12 FSM 10 10 8 SLB NZL % of GDP % of GDP 8 KIR PLW NZL JPN 6 VUT MNG 6 WSM AUS AUS PNG MYS 4 LAOFJI THA KOR TON IDN JPN HKG SGP 4 TLS VUT MYS KOR PHL VNM MNGTHA 2 KHM 2 LAO FJI CHN PHL SGP KHM IDN 0 0 0 10 20 30 40 50 60 0 10 20 30 40 50 60 GDP per capita, thousands (2005 PPP US$) GDP per capita, thousands (2005 PPP US$) Sources: World Bank 2013b, 2013f. FIGURE 5.5 Private tertiary institutions play an important role in costly curative care as well as basic services. some countries In higher education, the private sector plays a significant role in some countries, including Tertiary students in private institutions Cambodia, Indonesia, and the Philippines, 120 where more than 50 percent of students attend private institutions, compared to less FJI % of total tertiary enrollment 100 than 20 percent of students in Thailand and KOR Vietnam (figure 5.5). In China, where about 80 JPN 50 percent of the region’s tertiary students PHL SGP 60 IDN reside, more than 80 percent attended public KHM institutions in 2008 (Liu and Wang 2011). TLS MYS 40 MNG Although health and education indicators LAO are readily available, the skills derived from 20 THA VNM NZL human capital that directly affect productivity AUS 0 are harder to observe. Even high levels of edu- 0 10 20 30 40 50 60 cation may be inadequate due to poor quality GDP per capita, thousands (2005 PPP US$) or poor alignment of the skills taught with the skills demanded in the labor market. School Source: World Bank 2013f. systems vary in their ability to produce skills. As an imperfect illustration of this, figure 5.6 Asia, including Cambodia, Indonesia, the shows that the fraction of 15-year-olds who Lao People’s Democratic Republic, and the master an expected competency level, as Philippines, tend to spend less on both health measured in the Program for International and education than other countries at similar Student Assessment (PISA) standardized test, levels of income. Several Pacific island coun- is always lower than the fraction enrolled tries, including Kiribati, the Federated States in school across East Asia. The gap is par- of Micronesia, Samoa, and the Solomon ticularly stark in Indonesia and Thailand. Islands, devote relatively large amounts of In addition, the alignment of education with public spending to health care, often funding what employers need is an area of increasing BUILDING HUMAN CAPITAL 99 FIGURE 5.6 School enrollment does not (b) behavioral/socio-emotional, and (c) tech- guarantee learning nical. Cognitive skills include numeracy, problem solving, verbal communication, PISA 2009 results for EAP economies and memory. Behavioral/socio-emotional skills include teamwork, work effort, reli- Korea, Rep. ability, and discipline. Technical skills are skills required in specific work or for spe- Singapore cific tasks. Shanghai, How are skills formed? Building skills is China a progressive, life-long activity that involves Japan many critical inputs, with the highest returns to investments made at early ages. Figure 5.7 Hong Kong SAR, China provides a schema to summarize the for- Taiwan, mation of different types of skills through China different stages in life. Basic cognitive and Australia behavioral skills, also called “foundational” skills, begin building early on and are influ- Macao SAR, China enced by nutrition, home environment, and quality of schooling. Further schooling and Thailand training, as well as on-the-job learning, build Indonesia both technical skills and advanced cognitive and behavioral skills. Evidence from a wide 0 10 20 30 40 50 60 70 80 90 100 range of countries shows that basic cognitive Percent and behavioral skills acquired early on form 15-year-olds enrolled and able to locate information the critical foundation for future acquisition that needs to be inferred from a text of skills. The malleability of different types 15-year-olds enrolled of skills varies: for example, socio-emotional skills are malleable at least through ado- Source: OECD 2010. lescence (Borghans et al. 2008). However, Note: PISA (Program for International Student Assessment) tests the skills and knowledge of 15-year-old students in three key areas: reading, math, across all categories of skills, the earlier in and science. The results graphed here correspond to attaining level 2 in life investments are made, the more effective overall reading proficiency (out of 7 levels: 1a, 1b, 2, 3, 4, 5, 6). Across the Organisation for Economic Co-operation and Development (OECD), 81.2% they are in forming enduring skills (Heckman of students participating in the 2009 round of PISA attained this level or 2008). This occurs, in part, because future higher. investments, built on solid foundations, will have higher returns (Cunha and Heckman concern, as traditional schooling systems 2007). Therefore, the capacity to learn must face challenges in meeting rapidly evolving be supported from the very earliest ages. demand for different skills. The remainder of this chapter examines skills directly in order to identify the factors that limit the produc- The supply of skills tion of skills demanded in the labor market. While the educational attainment of suc- cessive generations has been rising through- out East Asia Pacific, the ability of health, Supply, demand, and skills gaps education, and training systems to produce What are skills? This chapter builds on skills varies substantially across the region. the rubric created by the World Bank’s Direct measures of skills supply, both for the STEP (Skills Toward Employment and “flow” of new entrants into the labor mar- Productivity) Skills Measurement Project ket and for the “stock” of existing work- to define skills. In STEP, skills are grouped ers, are scarce. However, several indicators, into three broad categories: (a) cognitive, as well as recent surveys of households 100 E A S T A S I A PAC I F I C AT W O R K FIGURE 5.7 Skill building starts early, involves many inputs, and continues throughout life On-the-job Advanced Advanced Advanced Technical skills (job-specific skills) TVET & University “Second chance” programs Basic Secondary Behavioral/socio- Cognitive skills Home environment emotional skills (literacy, critical thinking) Primary (self-control, teamwork) Basic Basic ECD Source: World Bank 2013d. Note: Color gradation represents progress from basic to advanced level of each skill type. Examples of types of skills are provided in parentheses. Basic cog- nitive and behavioral skills are frequently referred to as foundational skills throughout the chapter. ECD = early childhood development; TVET = technical and vocational education and training. and employers across the region, suggest in inhibiting skill formation. In Thailand, that behavioral, cognitive, and technical iodine deficiency is a major cause of relatively skills are inadequate, even among educated low IQ scores among children, found to be 91 workers. on average in 2009 compared to 104 in devel- Nutrition and early life circumstances oped countries (World Bank 2012a). Recent are critical inputs to foundational skills, but legislation in Thailand aims to tackle this many children in East Asia Pacific are not problem by mandating the iodization of all getting off to a good start. Stunting, a mani- salt destined for consumption in the country. festation of chronic malnutrition, afflicts Some countries have a strong and grow- large numbers of children in the region and ing stock of foundational skills, while others is likely to affect the accumulation of skills continue to struggle with the quality of basic throughout their lives. More than 40 per- education. The World Bank’s STEP Skills cent of children under 5 in Cambodia, Lao Measurement Project provides new data on PDR, Papua New Guinea, and Timor-Leste both the supply of and demand for cognitive, are stunted, as shown in figure 5.8. The lack behavioral, and technical skills in labor mar- of particular nutrients also plays a direct role kets around the world. In 2011, household BUILDING HUMAN CAPITAL 101 and employer surveys were carried out in The supply of technical and advanced six countries, including Lao PDR, Vietnam, cognitive and behavioral skills in East Asia and Yunnan Province in China. Figure 5.9 Pacific countries depends on the quality of shows the fraction of individuals achieving their higher education and training pro- each score, on a scale of 1–9, on the basic grams as well as their alignment, that is, how literacy test conducted as part of the STEP household survey. On average, a graduate of primary school in Vietnam scored better on FIGURE 5.8 Stunting threatens the foundational skills of the test than a graduate of secondary school 20–60 percent of children in many East Asia Pacific economies in Lao PDR. Overall, only 67 percent of par- ticipants in Lao PDR passed the literacy test, Stunting in children, 2005–11 (latest year available) while 95 and 99 percent passed in Vietnam 70 and Yunnan, China, respectively (World 60 Bank 2013c, 2013d; Liang and Chen 2013). TLS % of children under age 5 These results suggest that Lao PDR, where 50 LAO school enrollment rates are lower, faces ongo- PNG 40 KHM IDN ing challenges with increasing both access to SLB PHL and quality of education. Many Pacific island 30 VNM countries have even more serious deficits in VUT MNG 20 their stock of foundational skills and ongoing THA MYS challenges to producing skills in their educa- 10 tion systems. For example, in the Solomon CHN 0 Islands, recent surveys have found that the 0 2 4 6 8 10 12 14 16 18 functional literacy rate in the population is GDP per capita, thousands (2005 PPP US$) only about 17 percent, and, although the net primary enrollment rate is 91 percent, only Sources: Global Health Observatory (http://www.who.int/gho); World Bank 2013g. 22 percent of primary students are function- Note: GDP data for the Democratic People’s Republic of Korea are not available, but stunting in ally literate (World Bank 2012e). children under 5 years old was estimated to be 32.4% in 2009. FIGURE 5.9 Both the amount and quality of education are inadequate in Lao PDR a. Vietnam: Literacy test scores b. Lao PDR: Literacy test scores 90 Passing score 90 Passing score 80 80 70 70 % of respondents % of respondents 60 60 50 50 40 40 30 30 20 20 10 10 0 0 1 2 3 4 5 6 7 8 9 1 2 3 4 5 6 7 8 9 Primary or less Secondary Post secondary Source: World Bank 2013c, 2013d. Note: The literacy test designed to assess foundational reading skills was administered to survey respondents as part of the Skills Toward Employability and Productivity household surveys. 102 E A S T A S I A PAC I F I C AT W O R K well-matched programs are to current and students enrolled in engineering and natural future demand of firms. Across most coun- sciences is often much smaller than the frac- tries, the stock of advanced skills is small, as tion enrolled in social sciences in most coun- small shares of the population have tertiary tries, except in Malaysia and Thailand. In degrees. While the flow of college graduates Cambodia, for example, the high share of is increasing quickly, it is still limited: the social science graduates is creating concern regional tertiary gross enrollment ratio is less that the skills needed to fuel Cambodia’s eco- than 30 percent. In addition, the flow of tech- nomic growth—namely, natural sciences— nical and advanced cognitive and behavioral are not being created (World Bank 2012c). skills may not be well aligned with current The most popular fields of study also differ and future demand. Among those enrolled between men and women, contributing to in upper-secondary and tertiary education, possible gender differences in skills attain- several countries in developing East Asia— ment (box 5.1). notably China, Indonesia, and Malaysia— have a large number of students in specialized The demand for skills technical and vocational education and train- ing (TVET; figure 5.10). These students may The demand for skills from employers possess formidable technical skills but insuf- in East Asia Pacific economies goes well ficient advanced cognitive and behavioral beyond technical skills. In most surveys, skills required for work due to the sometimes employers report that cognitive, behav- limited focus of TVET programs. Even the ioral, and technical skills are all impor- supply of technical skills, produced by both tant for their workforce. Evidence of this general education and TVET programs, demand for a broad set of skills is clear may not align with the needs of employ- from survey results in China and Indonesia ers. As figure 5.11 illustrates, the fraction of (figure 5.12). 2 I n I ndonesia, thinking and behavioral skills are considered very important, alongside math. In Yunnan, FIGURE 5.10 Technical and vocational education and training China, many firms say that leadership and programs are a large part of education systems in several East Asian communication skills are as important as countries employment-specific skills. Similarly, pro- fessional workers in Malaysia say that they Students in TVET value a range of skills: computer, presenta- Malaysia tion, problem-solving, and writing skills are all associated with a higher wage premium China (World Bank 2013a). Korea, Rep. Technological advances are rapidly chang- Vietnam ing the mix of skills demanded in the labor markets of both developing and advanced Indonesia economies. Globally, steeply declining costs Thailand for computer processing capacity are driv- Philippines ing skill-intensive technological change, Mongolia whereby the returns to work requiring skills that complement what computers do Cambodia well have increased, while work requir- 0 10 20 30 40 50 60 ing skills that are similar to what comput- Percentage ers do well are disappearing (Autor, Levy, Tertiary Upper secondary and Murnane 2003). Computers substitute for workers in tasks that can be carried out Source: World Bank 2012d. by following an explicit set of rules (which Note: TVET = Technical and vocational education and training. Autor, Levy, and Murnane label “routine” BUILDING HUMAN CAPITAL 103 tasks), while computers complement work- FIGURE 5.11 Social sciences may be oversupplied in Cambodia, ers in problem- solving, communications, Lao PDR, and other countries and complex cognitive activities, as well as in manual activities that cannot be easily char- Tertiary graduates by field acterized by a set of rules (or “non-routine” tasks). Figure 5.13 shows that in Malaysia Cambodia, and the Philippines the share of employment 2007 in non-routine skill-intensive occupations has Indonesia, been rising, while the share in routine skill- 2010 intensive occupations, substitutable by com- puters and computer-operated machinery, Japan, has been declining. 2010 In East Asia, economic transforma- Korea, Rep., tion and global integration are increasing 2009 the demand for an educated workforce and for relevant skills. These trends are Lao PDR, evident from recent skills survey data 2010 from Indonesia and the Philippines. In Malaysia, both countries, the surveys were carried 2010 out in 2008 and included representative samples of several hundred manufactur- Mongolia, ing and service firms in high-growth geo- 2010 graphic regions: 473 firms in Indonesia and Thailand, 300 firms in the Philippines (di Gropello 2010 2010, 2011). Firm managers, as well as employees, were asked about the nature Vietnam, of the business, current and future skill 2010 needs, and local and national supply of 0 10 20 30 40 50 60 70 80 90 100 skills. Survey results show that recent hires in manufacturing and services firms have Percent been mostly workers with secondary or Agriculture Education Engineering General programs tertiary education, especially for export- Health Humanities Science Services ing firms. Across most East Asian firms, Social science, Unspecified higher worker education levels are strongly business, law linked to foreign direct investment, export- ing status, and innovative activity (Almeida Source: World Bank 2013f. 2009). 3 More than 95 percent of manu- facturing and services firms in Indonesia report expecting their demand for skills to Skills gaps increase in the next 10 years (di Gropello and Sakellariou 2010). Figure 5.14 shows What are skills gaps? Skills gaps are defined that higher standards and increased com- differently for foundational skills versus petition are the top reasons given for the technical and advanced skills. Because foun- higher demand for worker skills. Similar dational skills (basic cognitive and basic forces appear to be at work around the behavioral skills) such as literacy improve world: GDP per capita and the intensity people’s well-being, they have intrinsic value of non-routine cognitive skills used in the and are development goals in their own labor force are positively correlated, both right. Gaps are therefore defined relative to in a cross-section of countries and within universal possession of these foundational countries over time (Aedo et al. 2013). skills. Even when they are not pure public 104 E A S T A S I A PAC I F I C AT W O R K BOX 5.1 Gender differences in education and skills attainment Gender gaps in education in East Asia Pacific coun- Thailand, and Vietnam, even though the reverse tends tries have narrowed substantially since the 1990s to be true for completion of general secondary educa- and, in some cases, have even been reversed. In pri- tion (Cambodia experiences the opposite pattern). In mary and secondary schools, the enrollment of girls tertiary education, women tend to sort into very differ- and boys is roughly on par across countries. This ent fields of study than men. For example, many young is true even at the tertiary level. In many countries, women in Indonesia, Thailand, and Vietnam choose including China, Malaysia, Mongolia, the Philippines, education over law and engineering, even though and Thailand, girls and women have higher enroll- the returns in terms of earnings are not as high. The ment rates than boys and men at both the secondary choice reflects social norms, curriculum, expecta- and tertiary levels. Girls in Indonesia, Malaysia, the tions about the labor market, and other factors. With Philippines, and Thailand also tend to outperform regard to behavioral skills, research in the United boys on international standardized tests of reading, States has found that girls display better behavior and math, and sciences. socio-emotional abilities than boys from an early age, However, women may still have very different mar- affecting grades and school progression (Jacob 2002; ketable skills than men for several reasons. On tech- Cornwell, Mustard, and Van Parys 2013). nical skills, women’s completion rates in vocational training are lower than men’s in Indonesia, Mongolia, Source: World Bank 2012f. FIGURE 5.12 Cognitive, behavioral, and technical skills are all important to employers a. Indonesia: Firms that cite skills as b. Yunnan, China: Firms that cite skills as the most very important for workforce important when considering new employees Leadership skills Thinking skills Job-specific technical skills Communication skills Behavioral skills Foreign language Literacy Basic math and Numeracy literacy Creative and critical thinking Problem Computer skills solving Teamwork Ability to work independently English skills Time management 0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0 0.05 0.1 0.15 0.2 0.25 0.3 0.35 0.4 0.45 Share of firms (%) Share of firms (%) Managers and professionals Skilled workers Sources: di Gropello 2010; Liang and Chen 2013. BUILDING HUMAN CAPITAL 105 goods (in the classical sense), the externali- FIGURE 5.13 Routine work is declining in Malaysia and the ties from these foundational skills for soci- Philippines eties are so large that they merit public financing to minimize gaps as far as pos- 0.25 0.53 sible. For technical and advanced cognitive Share of total employment (%) and behavioral skills, gaps are defined by 0.20 0.52 the relative difference between supply and demand. Specifically, a gap exists when 0.15 0.51 the supply of skills is not enough to meet demand. High demand would drive up 0.10 0.50 wages and employment for workers with the right skills or particular sets of skills.4 0.05 0.49 Workers without the demanded skills would experience higher rates of unemployment, 0 0.48 while some jobs would go unfilled because 2001 2002 2003 2004 2005 2006 2007 2008 of a lack of appropriately skilled workers. Nonroutine manual Nonroutine cognitive The detailed data on worker characteris- Agriculture, armed services, and other Routine (right axis) tics and experiences in the labor force that are needed to identify skills gaps directly are limited in East Asia Pacific and many other Source: ILO 2013b. Note: Occupations are categorized according to Jaimovich and Siu 2012; ILO 2013a. regions. In addition, many skills are inher- ently difficult to measure precisely, such as FIGURE 5.14 Employers in Indonesia report higher standards of behavioral skills. Therefore, in this chapter quality and more intense competition as key drivers of the demand we rely on evidence of education shortfalls for skills and employer opinions to infer the existence and nature of skills gaps. The supply of skilled workers may be Higher quality inadequate to meet the demand for skills standards for products for three reasons: inadequate quantity, poor quality, or misalignment. In some coun- More competitive business environment tries, the quantity of educated workers may be scarce relative to employer needs, as evi- Higher supply denced by quickly rising returns to educa- of skilled workers tion. While demand for educated workers cannot be observed directly, it can be inferred New homegrown by observing the evolution of labor mar- technology ket returns to education with simultaneous Change in workplace changes in supply (Katz and Murphy 1992).5 organization In the handful of East Asian countries where data are available—for example, Cambodia, New technology the Philippines, and Vietnam—wage premi- imported from abroad ums have increased or held steady in the face of rising supply (figure 5.15). These simulta- Higher export orientation neous increases in supply and returns suggest that demand for educated workers has grown 0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1.0 in pace with or even faster than supply. Share of firms (%) Across countries, employers take issue Nonexporters Exporters with the skills of the existing workforce and, which is perhaps a greater concern, with the skills of new graduates. In Malaysia Source: di Gropello 2010. 106 E A S T A S I A PAC I F I C AT W O R K FIGURE 5.15 Education wage premiums have increased or held steady in the face of rising supply a. Wage returns relative to primary education b. Supply of educated workers Cambodia, Philippines, 1997–2007 1988–2006 China, Thailand, 1999–2005 1990–2004 Vietnam, Indonesia, 1992–2006 1994–2007 Philippines, Vietnam, 1988–2006 1992–2006 Thailand, Cambodia, 1990–2004 1997–2007 Indonesia, China, 1994–2007 1999–2005 –50 0 50 100 150 200 250 –50 0 50 100 150 200 250 % change % change Secondary Tertiary Source: di Gropello and Sakellariou 2010. (and many other countries), export-oriented the right levels and types of skills they need and innovating firms are more likely to com- (World Bank 2013c). plain about an inadequate stock of skills in Cognitive and behavioral skills are just as the workforce, consistent with the earlier much of an issue as technical skills for many discussion of the impacts of globalization on employers. While policy makers often focus the demand for skills (World Bank 2013e). on expanding TVET to address skills gaps, Employers also complain about the flow of the challenges are much broader and relate new skills. For example, in a recent survey to both general and technical vocational edu- of employers regarding the education and cation. When queried, employers complain skills of their staff and the workforce overall, that their staff lack a range of skills, includ- 76 percent of Cambodian employers claimed ing many cognitive and behavioral skills. For that new graduates are not equipped with example, employers complain about severe the right set of skills (World Bank 2012c). skills gaps in creativity and leadership, but In Vietnam, nearly 50 percent of employers less severe gaps in technical skills (table 5.1). assert that the education system does not In addition, the performance of TVET gradu- produce the skills required to meet the needs ates compared to general graduates varies by of their workplace (World Bank 2013d). occupation and country and is likely linked Employer perceptions of TVET and general to the quality of training and breadth of skills higher education graduates are often simi- taught (World Bank 2012d). In Indonesia, larly negative. In Lao PDR, 40–60 percent of secondary TVET students score significantly employers said that neither system produces less well on national standardized tests than BUILDING HUMAN CAPITAL 107 TABLE 5.1 Gaps in creativity, information technology, and leadership skills are the most common across East Asia, severity of skills gaps, by type of skills, as reported by employers Information Problem Work Technical Numeracy/ Country Creativity technology English Leadership Communication solving attitude skills literacy Mongolia Philippines Indonesia Thailand Malaysia Source: World Bank 2012d. Note: Data come from various employer surveys and are not perfectly comparable. Darker shades indicate more severe skills gaps. general secondary students, suggesting that costs of investment equaled their marginal some other cognitive skills may be lower return from the labor market, and this level (Chen 2009). However, in many countries, of investment would be socially optimal if TVET is considered an inferior option for the individual’s private return and cost were students, making it difficult to compare the identical to the return and cost for society. In quality of the systems. the real world, this does not happen for sev- eral reasons. First, incentives are imperfect. Parents may be unaware of the importance Why do skills gaps exist and of early investments in the development of persist? their children or, even if aware, be unable to Several types of failures in both education finance these investments. Second, individ- and training systems as well as labor markets ual acquisition of foundational skills benefits lead to the skills gaps observed in East Asia society by making individuals more engaged Pacific countries. Skills gaps are “a symp- and responsible citizens and better parents tom of many diseases.” Gaps in foundational as well as by potentially increasing the over- skills are largely due to government failure all level of productivity and growth in the to ensure that all citizens have adequate economy (Moretti 2006; Oreopoulos and nutrition, quality basic health, and basic Salvanes 2011). To the extent that individu- education. Gaps in technical and advanced als do not take these benefits into account cognitive and behavioral skills can be a result when making investment decisions, govern- of both government and market failures. This ment funding can increase the efficiency of section discusses a conceptual framework investment in foundational skills.6 In addi- for understanding the production and use of tion, basic cognitive and behavioral skills are skills and within this framework, highlights the foundation on which advanced and tech- available evidence of failures leading to skills nical skills are built. These factors provide gaps in the region. Understanding these fail- the rationale for government involvement in ures can enable East Asia Pacific countries to building foundational skills through public address skills gaps effectively. funding of early childhood development and primary and secondary education. However, across East Asia Pacific, many Failures in producing foundational governments do not put sufficient emphasis cognitive and behavioral skills on or make adequate investments in produc- Without government interventions, invest- ing foundational skills. Spending on child ments in foundational skills are unlikely to nutrition and primary health care is often be optimal. With perfect incentives, indi- insufficient to provide the foundation for viduals and their families would invest in good health and learning for all children skills up to the point where their marginal and for sustained health and productivity for 108 E A S T A S I A PAC I F I C AT W O R K adults later in life. As shown in figure 5.16, primary health care early in life are irrevers- the share of total health expenditures spent ible, with few second chances to correct these on preventive care is low across low-, middle-, deficits (Naudeau et al. 2011). People who and high-income countries in the region. This incur these deficits early in life struggle to pattern of spending does not in itself reveal a maintain good health during their learning skewed policy stance and, to a degree, sim- and working years. ply reflects the higher relative cost of second- Similarly, in education, public spending on ary and tertiary health care, (particularly in early childhood programs is relatively low, the Pacific island countries, which spend a and existing investments are sometimes inef- lot sending patients abroad for treatment). fective. Most countries use less than 5 per- However, the point remains: most countries cent of overall public spending in education in the region underinvest in nutrition and in for preprimary schooling, except Mongolia, preventive and primary care. Many of the New Zealand (a globally recognized leader in negative effects of malnutrition and lack of early child development and education), and Thailand (figure 5.17). Even at the primary level, where governments spend large shares of their education budgets, inappropriate FIGURE 5.16 Spending on preventive care and organizational arrangements, weak systems, public health is relatively low and low capacity can limit the effective- ness of spending. For example, the Solomon Australia Islands spends about 25 percent of its govern- ment budget on education, and about half Fiji of this goes toward primary education. Yet Micronesia, high absenteeism and low teacher quality, Fed. Sts. poor management, and other challenges limit Japan the production of skills from this spending (World Bank 2012e). In Cambodia, where Korea, Rep. only 3.8 percent of adults had completed secondary education in 2007, a shortage of Malaysia teachers and limited facilities contribute to Mongolia low quality and low attainment (World Bank 2010). Similar challenges exist in Lao PDR, Taiwan, China where only about 49 percent of the country’s villages have a “complete” primary school Thailand offering instruction in all five primary grades Vanuatu (McLaughlin 2011). Effective “second-chance” programs to Vietnam complement the formal school system can help to fill the gaps in foundational skills. 0 10 20 30 40 50 60 70 80 90 100 Those who leave the schooling system before Percent gaining foundational skills, including literacy Curative and rehabilitative care and numeracy, face difficulty in acquiring Long-term nursing care technical skills and more advanced cognitive Pharmaceuticals and medical durables and behavioral skills. This issue is significant Ancillary services, admin, and other in many countries of East Asia Pacific, where Prevention and public health services large numbers of youth drop out of school before completing full courses of secondary Sources: Department of Health and Social Affairs 2010; Hyoung-sun and education and sometimes even before com- Rannan-Eliya 2010. Note: Data come from national health accounts and include public and pleting primary education. For example, in private spending. Indonesia, about 1 million dropouts from BUILDING HUMAN CAPITAL 109 the formal education system enter the gov- FIGURE 5.17 Spending on early childhood ernment’s equivalency system every year (di education is relatively low Gropello and Sakellariou 2010). However, evaluating the effectiveness of these second- Australia, chance systems is difficult due to the limited 2009 information collected on their performance Cambodia, or the outcomes of their participants. 2010 Even when basic education systems are Fiji, 2011 strong and of good quality, the changing Hong Kong SAR, demand for skills in the labor market is cre- China, 2011 ating new challenges to pedagogical empha- Indonesia, sis and curriculum content. For example, 2010 creative problem solving is a cognitive skill Japan, increasingly required in workplaces under- 2010 going rapid technological change (Levy Korea, Rep., 2009 2010). Yet education systems in East Asia Malaysia, Pacific countries often emphasize memo- 2010 rization. For example, Vietnam, a coun- Mongolia, try with nearly universal primary school 2011 enrollment and very high secondary school New Zealand, enrollment, faces this challenge in the kind 2010 of cognitive skills its education system pro- Philippines, 2009 duces. Fifth graders do well on math prob- Solomon Islands, lems requiring the application of known 2009 rules, but they falter when required to apply Thailand, the same mathematical principles to new 2010 contexts (World Bank 2013d). Vanuatu, 2008 0 10 20 30 40 50 60 70 80 90 100 Failures in producing technical Percent skills and advanced cognitive and behavioral skills Pre-primary Primary Secondary Tertiary When do gaps in technical and advanced skills merit policy intervention? While Source: World Bank 2013f. gaps in foundational skills should ide- ally be addressed wherever they are found, gaps in technical and advanced cognitive the region (see chapter 3). Firms across the and behavioral skills are to be expected in region cite an inadequately educated work- any dynamic economy, as demand evolves force as the second most important obsta- quickly. But these gaps are inefficient when cle to their operations (see chapter 4). In they are too wide and persistent, and they Yunnan Province, China, recent labor force can hamper employment growth when the data show that the majority of employment skills of new workers flowing into the labor vacancies are going unfilled (figure 5.18). market and the adjustment of the stock of Several factors play a role in unemployment skills of existing workers are inadequate. and unfilled vacancies. Employers in China Skills gaps may constrain employ- and Lao PDR cite applicant dissatisfaction ment in East Asia Pacific. In Indonesia, the with the wages they are offered and with Philippines, and several Pacific island coun- working conditions, suggesting that work- tries, youth unemployment and inactivity ers have high reservation wages or expect rates are high relative to those in the rest of higher returns to their investments and wait 110 E A S T A S I A PAC I F I C AT W O R K FIGURE 5.18 More than a third of recent employment vacancies in for better-paying employment. But the data Yunnan, China, went unfilled also indicate that a lack of skills is clearly an important reason for difficulties in filling Yunnan, China: Quarterly labor force data, 2010–11 vacancies (figure 5.19). Employer perceptions may be due to both a true lack of skills in 250 the labor market or difficulties in matching jobs with the right job seekers. A conceptual 200 framework for understanding the underlying causes of skills gaps is necessary in order to Thousands 150 identify effective policies to narrow them. Gaps in advanced and technical skills 100 arise and persist from a range of market failures, which justify the need for govern- 50 ment involvement, as well as from failures of government itself.7 Market failures can be 0 grouped into four broad categories: failures Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 in labor markets, credit markets, and coor- 2010 2011 dination, and limitations in decision mak- No. of openings No. of applicants No. of applicants hired ing.8 Table 5.2 provides some detail on the nature of these failures as well as the govern- Source: Liang and Chen 2013. ment failures that can compound them. In reality, countries are often faced with several FIGURE 5.19 Employers cite lack of skills among applicants as a top reason for persistent vacancies a. Yunnan, China, STEP 2011: Reasons cited for difficulty b. Lao PDR, STEP 2012: Reasons cited in filling positions (technicians and associate professionals) for difficulty in filling positions Applicants Applicants lacked lacked required skills required skills Applicants Applicants expected expected higher wages higher wages Applicants did No or few not like working applicants conditions No or few Applicants did applicants not like working conditions 0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 % of respondents % of respondents Technician Professional Sources: Liang and Chen 2013; World Bank 2013c. Note: Data come from the Skills Toward Employability and Productivity employer survey. BUILDING HUMAN CAPITAL 111 TABLE 5.2 A range of failures explains gaps in technical and advanced cognitive and behavioral skills Failure Description Labor markets Imperfect competition for worker skills; costly search and limited information for both workers and firms Credit markets Inability of individuals to access adequate credit to fund skill acquisition; inability of firms to access adequate credit to fund training Decision making Missing information on market returns or the quality of education and training providers; high discounting of the future Coordination Employer use of low-skill technologies because high-skill workers are not available; worker failure to invest in skills because jobs are not available Government Weak policy-making process; inappropriate institutional arrangements; limited information Source: Adapted from Almeida, Behrman, and Robalino 2012. BOX 5.2 Skills poaching and matching in imperfect labor markets Poaching externalities arise because most of the skills set of skills. The negotiated wage will depend in that individuals acquire are valuable to more than part on the relative bargaining power of fi rms and one prospective employer. With limited competition workers. Specifi cally, the more bargaining power between fi rms for workers with particular skills, nei- a firm has, the lower the wage will be for any ther workers nor fi rms can fully capture the returns given skill and the less a worker will invest in that to investments in skills because a future employer skill. Several factors can influence fi rms’ bargain- could benefit from these investments by “poaching” ing power, including the number of competing job the worker. seekers and the fi rms’ alternatives, such as using a Matching externalities arise from the time, lower-skill technology. effort, and limited information that characterize More broadly than these two specific externalities, many workers’ search for employment and fi rms’ any characteristics of the labor market that reduce search for workers. When workers and fi rms fi nd the expected value of skill investments for workers or each other, some bargaining over wages occurs, fi rms may contribute to skills gaps. because only limited information is usually avail- able on the market rates for a worker’s particular Sources: Burdett and Smith 1996; Stevens 1996. of these failures simultaneously and to vary- if technical and advanced cognitive and ing degrees. But considering each separately behavioral skills have substantial positive clarifies both the underlying challenges and, externalities, as discussed earlier. However, as elaborated in the next section, the implica- actual labor markets are far from perfect, tions for public policy. due to many factors, including the costs of searching for vacancies and for workers and labor market regulations. Two important Labor market failures externalities for skills investment are cre- Two important labor market externalities ated by these deviations: “poaching” and can lead to underinvestment in skills. In a “matching” externalities (see box 5.2). perfectly competitive labor market, firms Labor market imperfections in East Asia compete for workers, who are able to cap- Pacific economies play a role in creating ture their full marginal product and thus skills gaps. Vacancies for skilled workers have the incentive to invest in skills to their are open longer in East Asia Pacific than in privately optimal level.9 This level of invest- any other region except for Latin America ment may still be below the social optimum (Almeida and Jesus Filho 2011). It takes close 112 E A S T A S I A PAC I F I C AT W O R K FIGURE 5.20 Vacancies for skilled workers in East Asian countries TABLE 5.3 Few Indonesian firms recruit widely remain unfilled longer than in most other regions for vacancies % of firms using 7 Method of filling vacancies the method Private network 80 6 Employee recommendation 50 5 Newspaper ad 30 Notice posted outside of firm 20 4 Weeks Internal promotion 20 Internet 10 3 Private employment service 10 2 Recruiter 10 Contact with schools 10 1 Job fair or contact with schools 1 0 Public employment service 1 Skilled Unskilled Weighted average Source: di Gropello 2010. Latin America East Asia Middle East Eastern Europe Africa South Asia TABLE 5.4 Most Indonesians rely on private Source: Almeida and Jesus Filho 2011. Note: Data are from World Bank enterprise surveys 2002–05. East Asia includes Cambodia, China, networks to find employment Indonesia, Thailand, and Vietnam. Method of finding % of workers using employment the method to five weeks on average to fill the position for Private network 47 a skilled employee (figure 5.20). These long Employer recommendation 36 durations may exist in part because employ- Newspaper ad 17 ment seekers and firms with openings have Vacancy notice 16 difficulty finding each other. In Indonesia, Job fair or school 9 for example, only 10 percent of firms use a Internet 8 Internal promotion 8 private employment service or a recruiter, and Employment service 4 only 30 percent use newspaper ads. Similarly, 16–17 percent of workers use newspaper Source: di Gropello 2010. ads and vacancy notices to find work, and only 4 percent use employment services. The majority of firms and workers rely on private and advanced cognitive and behavioral networks and recommendations when search- skills. Lenders may lack information on the ing for candidates and vacancies, respectively creditworthiness of potential borrowers and (tables 5.3 and 5.4). These recruitment and on the expected returns to their skills invest- employment search practices likely limit the ments. For relatively expensive education or pool of qualified candidates identified by training that pays off slowly over time, loans firms, increasing their perceptions of skills are too risky for traditional private lenders gaps. In addition, they may reduce workers’ unless potential borrowers have collateral, expectations of finding a good job and there- which individuals and small firms often lack fore their incentive to invest in skills. in low- and middle-income countries. Across East Asia Pacific, where student fees represent an increasingly large share Credit market failures of education financing, governments have In many developing countries, individuals responded to this market failure by creating and firms are often unable to borrow enough loan and scholarship programs. However, the money to finance investments in technical costs of higher education remain particularly BUILDING HUMAN CAPITAL 113 burdensome for many families (World Bank (di Gropello 2011). Challenges to full imple- 2012d). In China, for example, average mentation of qualification systems include university payments (including tuition and resistance from universities and other insti- living costs) net of grants, loans, and work tutions that fear losing autonomy and com- study still amount to 30 percent of average plications in coordinating effectively across household income (Ma 2010). Government government departments, independent bod- student loan programs exist in several coun- ies, education and training providers, and tries, including China, Malaysia, Mongolia, employers (APEC 2009). Thailand, and Vietnam. However, they Even when information is adequate, indi- have a limited effect on increasing access viduals can still make poor skills investment for lower-income students: because alloca- decisions. Impatience or an undervaluing of tion and eligibility for these programs is not the lifetime returns to skills can lead some granted on the basis of needs, the programs to drop out of school or training too early. cover a small proportion of students and have Financial pressures and the low quality of relatively short payback periods of 6 or 10 instruction are also common causes for early years (World Bank 2012d). school leaving. While most countries have A lack of access to finance may also limit some form of second-chance system, invest- some firms’ investment in worker skills, par- ing later in life is more difficult, as some ticularly for small or informal firms. Training skills become less malleable, while personal programs can be costly to purchase or set responsibilities to family and work increase. up in-house, potentially limiting the ability Social norms and family pressures can of small firms to invest in skills, even when also exert a strong influence on the types of it may be profitable to do so. For example, skills that individuals choose to acquire, par- 58 percent of Filipino firms and 34 percent of ticularly when information about the labor Indonesian firms cited poor access to finance market and the quality of training is limited. as a reason for not providing formal training A 2008 survey in Cambodia found that only (di Gropello 2010, 2011). 1 in 5 graduating secondary students based their decision about what to study on the labor market, while 7 in 10 followed their Information and decision-making parents’ advice (World Bank 2012d). Without failures systematic collection of data on labor mar- Individuals face a scarcity of information ket demand, students’ ability to make good when making decisions about investments investment decisions will be limited. For in skills. Prospective students often have example, while the returns to postsecond- little information about the relative labor ary TVET are nearly equal to the returns market returns to different types of tech- to university education, only 17 percent of nical skills when deciding on a course of Cambodian students express an interest in study. In addition, the quality of education enrolling in TVET (World Bank 2012c). and training institutions, particularly in the private sector, can be difficult to deter- Coordination failures mine without reliable accreditation systems. In East Asia Pacific, very few countries Coordination failures occur when firms have national qualification frameworks benefit from workers investing in skills, and in place; even in those that do, many chal- workers benefit from firms demanding more lenges remain. For example, independent skills in ways that cannot be compensated accreditation bodies exist in the Philippines, through the market mechanism due to exter- where about 70 percent of all higher educa- nalities. Two types of externalities can cause tion institutions are private. However, as of coordination failures, based on the level 2007, more than 80 percent of higher educa- of skills involved: innovation and vacancy tion institutions had no accredited programs externalities. Innovation externalities occur 114 E A S T A S I A PAC I F I C AT W O R K when workers’ advanced technical skills governments is the difficulty of building facilitate the adoption or generation of higher-order skills on weak foundations. new technologies, which, in turn, increase In several East Asia Pacific countries, foun- firms’ success. However, firms requiring dational skills are not strong. As a conse- such high-level skills are less likely to enter quence, only a limited number of people in markets where few workers possess such the workforce can attain advanced skills, skills, and workers are less likely to invest regardless of the volume of public spending in these skills because they see few employ- directed toward higher education. There ment opportunities (Almeida, Behrman, and are inequitable consequences to the cur- Robalino 2012). Vacancy externalities occur rent challenge as well: in countries like the when workers’ medium-level technical skills Solomon Islands, where only a small share make firms more productive, but firms do of the student population is able to read not hire workers with these skills because to the standard required to complete sec- they are scarce and can demand relatively ondary school—more likely to be students high wages. Due to a lack of employment from better-off households—public spend- opportunities, workers do not invest in such ing on tertiary education is likely to be very skills. regressive. This challenge underscores the Some countries in East Asia may be facing importance of high-quality government- skills gaps due in part to coordination fail- financed formation of foundational skills ures. In Malaysia and the Philippines, where at early ages for both economic growth and large shares of skilled workers migrate inter- equity. nationally, individuals may choose to invest In addition, policy-making processes and in skills that meet the needs of the exter- institutional arrangements within govern- nal labor market rather than in skills that ment often limit policy makers’ ability to are demanded domestically (World Bank set an integrated strategy for skills develop- 2012b). Because the skills they would need ment. Responsibility for the various steps in are relatively scarce, firms in these countries the process of skills development is usually may find it more profitable to use lower-skill divided across multiple ministries, creating technologies. The Cambodian tourism indus- obstacles to effective communication and try provides an example of vacancy exter- cooperation. For example, in Malaysia, 10 nalities. Tourism employers complain that federal ministries and agencies play a role in low-level workers lack behavioral and for- the ownership, funding, operation, or regu- eign language skills that would make firms lation of TVET institutes (Bin Omar 2013). more productive. Only about 12 percent of Such complex institutional arrangements cre- the labor force is able to speak a language ate numerous challenges to building skills, other than Khmer. However, employers and Malaysia is implementing a comprehen- likely find it more profitable to use workers sive human capital framework to address without these skills, because workers with these challenges. them are scarce and thus expensive to hire Inappropriate institutional arrange- (World Bank 2010). ments between public administration and service providers, combined with excessive regulation and limited information, also Government failures constrain governments’ ability to correct The many market failures contributing to market failures. Governments frequently gaps in technical and advanced cognitive fail to give service providers, public or pri- and behavioral skills provide strong moti- vate, sufficient autonomy or accountabil- vation for government action. However, as ity, limiting their ability and incentives to with basic education, governments often improve performance (World Bank 2012d). fall short of achieving the outcomes they Accountability requires information on the want. The most difficult challenge facing outcomes of individual schools, universities, BUILDING HUMAN CAPITAL 115 and training centers—such as graduation Malaysia’s “emerging/established” ranking, rates, certification exam pass rates, and and Singapore’s “established/advanced” employment rates of recent graduates. This performance. type of information is often neither collected Lastly, governments often need to collect nor reported. To give indicative evidence of more information about the labor market if government failures, a standardized assess- they are to play an effective role in higher ment of the public policy environment for education and TVET, in particular. As pro- skills development is available for a handful viders, funders, or regulators of institutions of East Asia Pacific countries. The Systems that produce technical skills, governments Approach for Better Education Results– often have insufficient knowledge of the cur- Workforce Development (SABER–Wf D) rent state of the labor market and of expected scores countries’ policies and institutions for changes. This challenge is especially stark in workforce development, including institu- East Asia, where economies grow and change tional arrangements and accountability, on quickly, resulting in constantly evolving a scale moving from “latent,” “emerging,” demand for skills. Without updated informa- and “established” to “advanced” (box 5.3). tion on employment trends, effective over- Vietnam’s policy environment is on the sight of programs and institutions producing “emerging” end of the scale, trailing behind technical work-specific skills is limited. BOX 5.3 The Systems Approach for Better Education Results–Workforce Development SABER-WfD is a new diagnostic tool for assess- Each dimension is underpinned by nine policy ing government policies and institutions for goals, which are defi ned by three tangible policy workforce development relative to international actions per goal. Data to assess each policy action good practice. Countries are assessed on three are gathered from interviews with credible infor- dimensions: mants as well as documentary sources, and scores for each dimension are calculated on a scale from 1. Strategic framework, which pertains to policies one to four (corresponding to latent, emerging, that set the direction for workforce development established, and advanced). and define its authorizing environment Countries that achieve advanced scores have 2. System oversight, which relates to the “rules of the largely overcome the government failures in build- game” (including funding regimes) that guide the ing skills discussed in this chapter. SABER–WfD functioning of the system is currently being carried out around the world 3. Service delivery, which concerns the provision of in countries at different levels of development. To training services to equip individuals with market- date, the results of six countries are available, as and job-relevant skills. shown in table B5.3.1. TABLE B5.3.1 SABER–WfD assesses a country’s policies and institutions for workforce development Country and year Strategic framework System oversight Service delivery Ireland, 2000 Advanced Established Advanced Korea, Rep., 2010 Advanced Advanced Established Malaysia, 2010 Established Established Established Singapore, 2010 Advanced Established Advanced Uganda, 2011 Emerging Latent Latent Vietnam Emerging Emerging Emerging Sources: World Bank 2012g, 2013e. 116 E A S T A S I A PAC I F I C AT W O R K Policy priorities and examples of of technical skills demanded. General pro- grams can often have the opposite shortcom- success in skills development ing, by not focusing enough on producing The preceding sections have provided evi- strong technical skills. The focus in all types dence of skills gaps in East Asia Pacific of education and training programs therefore countries and of the need for governments needs to shift to providing the full set of skills both to mitigate market failures and to demanded by employers. improve their own performance in order to The chapter also has shown that the pol- fill those gaps. Gaps in foundational skills icy focus needs to go beyond addressing the persist in several countries in the region, supply side to improving the functioning of despite greater access to health and educa- the markets for skills production and the tion services. In these countries, govern- signals they receive from the labor market. ments’ policy priority should be to ensure Some market failures, including in education adequate financing and high-quality pro- systems and labor markets, cause skills gaps vision of nutrition, basic health, and basic and provide a strong motivation for govern- education services. Whether governments ment action. However, governments often provide these services directly, oversee pri- lack information about market demand, par- vate provision, or use a combination of ticularly in technical skills, and this problem public and private provision is of less impor- becomes more severe the faster an economy tance than whether households have infor- grows and changes. Therefore, rather than mation and access to good-quality services focusing on direct public provision of tech- to ensure the right investment at the earli- nical and advanced cognitive and behavioral est possible age. The foundation of basic skills, governments could focus instead on cognitive and behavioral skills has impor- collecting and disseminating labor market tant social benefits; without it, efforts to information, acting as effective regulators of build more advanced skills and increase education and training institutions, and sub- the productive capacity of the labor force sidizing demand with financing that enables are limited in their effectiveness. However, individuals to make more nimble choices as the effects of investments in foundational returns from the labor market shift for cer- skills take many years to be realized, as they tain skills.10 affect the flow of new skills into the labor Because skills gaps arise and persist for market with a long lag. Governments must many reasons, addressing the particular set assess the trade-offs between these long- of challenges a country faces warrants dif- term efforts and investments with more ferent policy actions. Figure 5.21 lays out immediate returns. a framework for the broad priority actions To address gaps in technical and advanced required: generate and disseminate informa- cognitive and behavioral skills, the policy tion, align incentives, and increase capacity. focus needs to go beyond the expansion of These three areas address the problems of technical vocational education to ensuring information, incentives, and capacity identi- the efficient production of in-demand skills fied as the cause of the disconnects in higher throughout the secondary and postsecond- education that, in turn, fail to produce ary education and training system. The evi- the skills demanded (World Bank 2012d). dence presented in this chapter suggests that Figure 5.21 also gives examples of specific the rapidly evolving demand for skills in East policy actions to address the market and Asia Pacific countries creates gaps in all types government failures discussed in the chapter, of skills—cognitive, behavioral, as well as but many more potential solutions are likely technical. TVET programs tend to focus too available, depending on the nature of the fail- narrowly on employment-specific skills at the ure faced and the broader country context. expense of broader cognitive and behavioral Several economies in East Asia Pacific skills and sometimes do not provide the level have become global leaders in producing BUILDING HUMAN CAPITAL 117 FIGURE 5.21 Alternative policy actions respond to different skills challenges Generate and Align incentives Increase capacity disseminate information Labor markets • Create and manage appropriate • Enforce apprenticeship • Facilitate recruiting links labor market information contracts between between schools/training systems firms and workers centers and firms Credit markets • Collect earnings data in labor • Provide guarantees or other • Expand public student loan market information systems incentives to private banks programs Decision making • Collect data on school and • Subsidize opportunity and • Provide counseling and support training provider performance other costs of education and services to youth at risk of and disseminate to students training to make staying in dropping out and families school easier Coordination • Facilitate information flows • Subsidize worker training and • Facilitate firm opportunities between firms and schools/ firm upgrading/technology to support schools/training training centers on current and adoption in specific sectors centers with instructors, expected demand materials, or facilities Government • Collect and utilize data to • Hold providers accountable for • Improve institutional evaluate school and training performance through funding arrangements to provide provider performance mechanisms or other incentives sufficient autonomy at all levels • Make providers accountable • Deliver needed support to to students through voucher teachers and administrators at systems school level the skills required to fuel economic growth, a quality assurance system for tertiary edu- and their experiences provide valuable exam- cation, combining compulsory disclosure of ples of success. In the 1960s and 1970s, the information about operations and perfor- Republic of Korea; Singapore; and Taiwan, mance with a public-private accreditation China, overcame the coordination failures system (Jones 2013). Information generated common to low- and middle-income coun- from this system, including graduation and tries by effectively aligning the incentives of employment rates, is disseminated to the households, employers, and training provid- public through a well-used public website, ers. Governments in all three places pursued and high-performing education institutions strategic plans that created demand for high- are rewarded with grants. In addition, rec- skilled labor and subsidized the technical ognizing the burden that the high costs of training to meet this demand. A ready supply tertiary education impose on families, Korea of high-skilled labor subsequently spurred the is expanding its needs-based student loan growth of the technology-intensive sectors program to increase the capacity of individu- that are the engine of these economies today als to build technical and advanced cognitive (Ashton et al. 2002; Almeida, Behrman, and and behavioral skills. These initiatives pro- Robalino 2012). mote accountability and competition among Recent experiences with generating and education and training providers on impor- disseminating information and increas- tant outcomes and enable students and their ing capacity in Korea provide examples of families to make better choices. promising approaches to addressing multi- However, critical to the success of poli- ple failures. Since 2008, Korea has built up cies for skills production in Korea and 118 E A S T A S I A PAC I F I C AT W O R K other high-income East Asian economies worker education, likely due to specialization was developing a foundation of good nutri- in low-skilled manufacturing (Almeida 2009). tion and strong basic health and education. 4. A specific set of skills can be thought of as In each of these countries, governments defining an occupation. 5. Katz and Murphy’s approach is a relative went to great lengths to ensure the broad- one—for example, the supply of highly edu- est possible access to foundational human cated workers relative to that of less edu- capital investments and high standards of cated workers and the relative wage premium quality. Without this foundation, attempts between the two groups. to build higher-order skills in a signifi- 6. Investments have social returns at all levels cant share of the workforce could not have of skills, and the size of social returns relative succeeded. to private returns of education is an area of Many other countries in the region, and ongoing research (Topel 2004). around the world, are taking this lesson 7. In addition to the market and government seriously and are successfully closing their failures discussed, another factor for consid- skills gaps. In the Philippines, for example, eration in the undersupply of advanced skills is the role of institutions of higher education a large elementary school reform program, in producing research and innovation. For the Third Elementary Education Project, tar- example, universities and research institutes geted government failures in the provision often produce basic research that increases of foundational skills through measures fundamental knowledge in a field and research to increase capacity and align incentives. that is highly valuable but too expensive for From 2000 to 2006, the program provided individual firms to undertake. Such research teachers with training, devolved manage- and innovation can ultimately contribute to ment to schools, increased the distribution of productivity and competitiveness and to eco- school supplies, and deployed several other nomic growth (World Bank 2012d). measures to improve quality. These mea- 8. The conceptual aspects of the discussion sures were implemented effectively and not that follows draw heavily from Almeida, Behrman, and Robalino (2012). only raised test scores, but also increased 9. Conversely, in a monopoly, a firm could cap- the educational attainment of girls and their ture all the returns to workers’ skills and eventual labor market earnings (Yamauchi would therefore be incentivized to invest. and Liu 2012).11 10. Several European countries, including the Netherlands, Norway, and more recently Hungary and Romania, have successfully Notes generated and disseminated information 1. Private returns are measured as increases in through tracer studies of university gradu- individuals’ earnings. On average, returns ates. Tracer studies track graduates and are larger for women than for men, and in interview them at one or multiple points after recent years, the returns to tertiary schooling graduation on a range of subjects, primar- have been higher than the returns to primary ily to gauge their labor market experiences or secondary schooling (Montenegro and (Sondergaard and Murthi 2012). Ideally, such Patrinos 2012). studies would track all graduates, as they 2. Surveys differ substantially across countries, do in the Netherlands, or a representative making comparisons difficult. In addition, sample of graduates. This information could surveys often focus on a subset of all employ- help to address multiple failures by provid- ers, such as formal employers with a mini- ing both potential students and governments mum number of employees or employers in with information on the performance of edu- urban areas. These restrictions mean that cation and training providers and trends in survey results are not fully representative of the labor market. the demand for labor skills, but they do iden- 11. In the Philippines, the returns to education tify the fastest-growing sectors in countries. are higher for women than for men, and the 3. China is an exception to this finding, where program results are in line with these existing exporting status is correlated with lower gender differences. 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Toward Gender Equality in East “School Quality, Labor Markets, and Human Asia and the Pacific. Washington, DC: World Capital Investment: Long-Term Impacts of Bank. an Early Stage Education Intervention in the ——— . 2012g. “Workforce Development– Philippines.” Policy Research Working Paper SABER Country Reports: Ireland, Uganda, 6247, World Bank, Washington, DC. Labor Market Regulations, Interventions, and Institutions 6 Although relative newcomers to labor Institutions are the condoned structures, market regulation and social protection, norms, and agreed procedures by which many East Asia Pacific governments are interested parties exert their influence and becoming more activist, but they are mov- make and carry out decisions that shape ing in the wrong direction. regulations and interventions. In the labor market, the best example of an institution is I n this chapter, we turn to labor mar- the space afforded in the legal code of many ket policies, including social protection countries for collective bargaining. But from risks to earnings from work. If institutions can also refer more expansively there is a stereotype of how governments to the conventions of a pluralist, representa- in East Asia Pacific approach policy in this tive democracy that influence the demand area, it is characterized by high flexibility for and supply of labor and human capital. and scant protection. The analysis in this Labor market regulations and interven- chapter shows how weak that stereotype tions are formulated according to each coun- has become. We distinguish between labor try’s institutions in an attempt to address regulations , interventions , and institu- market imperfections, such as uneven power tions . The distinctions are much more between those who seek and those who sell than semantic and are important to under- labor and human capital, information fail- stand how each influences the demand for ures on all sides, and limited or weak insur- and supply of labor and human capital. ance to mitigate the risks to household Regulations set the legal parameters of well-being from loss of work. The 2013 employment, in the form of minimum wages World Development Report: Jobs (hereaf- or restrictions on dismissal, and imply costs ter referred to as WDR 2013; World Bank to employers and workers. Interventions 2012b) argues that in most countries—as are deployed by the state to make up for well as in the academic literature—the debate market shortcomings, such as the inability about these structures absorbs more time and of private financial markets to insure the is far more heated than their actual impact risk of unemployment. The costs of inter- on efficiency outcomes (market participation, ventions are borne by all taxpayers whether employment, unemployment, and earnings) they participate in the labor market or not. would seem to merit. 123 124 E A S T A S I A PAC I F I C AT W O R K In this chapter, we examine whether this and France and more generous than in high- broad conclusion also applies to the coun- income East Asia Pacific countries with stat- tries of East Asia Pacific. We devote much utory minimum wages, such as Australia and of the chapter to taking stock of regulations, New Zealand. interventions, and institutions in the region While restrictions on dismissal and wage as well as to measuring how they compare regulation are being loosened in most mid- with similar structures in other countries. dle- and high-income countries in other We have applied measurement tools from the regions, regulation in East Asia Pacific is Jobs Study of the Organisation for Economic moving in the opposite direction. The regula- Co-operation and Development (OECD) to tory framework in East Asia Pacific countries low- and middle-income countries in East is becoming more restrictive. And as more Asia (OECD 1994).1 While plenty of alterna- people seek work in the manufacturing and tive measures are available, 2 this application services sectors, as governments become bet- provides helpful insights. For in choosing ter able to enforce regulations, and as firms their labor market and social protection poli- find it harder to evade, these extreme levels cies, most countries in the region have elected of regulation in the labor code will become models crafted for labor markets in Europe, more binding constraints. Indeed, for a seg- codified late in that continent’s industrial ment of firms in many East Asia Pacific revolution or in the interwar period (the economies that are already too large to minimum wage’s origins in New Zealand, evade detection—many of them international notwithstanding). companies—onerous levels of regulation are The discussion in this chapter focuses a problem and, for many, a source of unfair mainly on labor regulations, interven- competition from smaller rivals that can still tions, and institutions in the Association of ignore the rules and hire informally. Southeast Asian Nations (ASEAN) group of But do the laws on the books matter? After countries as well as China and Mongolia. taking stock of de jure structures, we review Where available, evidence from additional the evidence of de facto outcomes gathered for countries in East Asia Pacific is also brought this and companion regional reports recently to bear. Comparable measures of regula- published by the World Bank and elsewhere. tion drawn from the labor codes of these The evidence gathered for this report shows countries show that the average level of that, while labor policies may indeed still employment protection in East Asia is actu- have a limited impact on employment, unem- ally higher than the OECD average and that ployment, and wages, they have distribu- there are notable outliers like Indonesia, tional consequences that favor prime-age where workers whose employment is regu- men at the expense of women, young people, lated enjoy more protection than workers in and those who work part time or in self- France, Greece, or Portugal and only a little employment. For example, rising minimum less protection than workers in Spain. In wages in Indonesia disproportionally lower China, workers in regulated employment are the employment opportunities of women de jure more difficult to dismiss than work- with fewer skills, young workers, and recent ers in Belgium and Italy. Similarly, reflect- entrants to the labor market. In Thailand, ing only what is codified in labor laws, the increases in the minimum wage have had Philippines has the highest average statu- an adverse impact on the employment pros- tory minimum wage in the region, followed pects of women, low-skilled workers, and by Cambodia and Indonesia. When ranked elderly working people. In Vietnam, women by the ratio of the minimum wage to value are more likely than men to be earning at lev- added per worker, the average statutory els close to the minimum wage. This makes minimum wage in the Philippines is among working women in Vietnam more vulnerable the highest in the world. Indeed, by this than men to changes in the minimum wage. measure, it is much higher than in Belgium We argue that this uneven impact should LABOR MARKE T REGULATIONS, INTER VENTIONS, AND INSTITUTIONS 125 come as no surprise, since the prevailing representing working people in dialogue with models of labor market regulation and inter- the government and employers and failing to ventions were conceived in parts of the world represent the voices and views of the majority and during periods in history when prime- who do not work in dependent wage relation- age men in full-time, dependent employment ships. An analogous concern can be raised made up the largest group of working people. about employers’ associations. Labor market The evidence we have gathered from institutions that only allow the participation countries in East Asia Pacific and elsewhere of a narrow group of stakeholders—whether indicates that, particularly for women, labor unions on the supply side or indus- younger workers, self-employed people, and try associations on the demand side—can people who either have to or prefer to work become fiefdoms where selected interests part time, overly constricting policies can become entrenched and where decisions are create more damaging distortions than the taken that make labor and human capital market failures they were designed to cor- markets less rather than more contestable, rect. The biased impact of prevailing models threatening productivity and sustained well- of labor regulations and social protection on being from work. forms of work that are prevalent in most East Asia Pacific countries is a growing problem that creates both segmentation and exclu- Regulations sion from the labor force altogether. Evidence Regulations set the legal parameters of gathered for this and companion World Bank employment, including minimum wages, reports shows a positive association between employment protection legislation (EPL), the levels of employment protection, social and regulations on the movement of people. insurance contributions, and other taxes on We deal with each in turn.3 labor and the extent of informal economic activity. For example, in China, the attempt Minimum wages with the 2008 Labor Contract Law to expand coverage of social insurance financed Minimum wages have become a nearly from payroll taxes was associated with a universal instrument of labor market regula- lower probability that certain workers were tion and are applied in more than 90 percent protected (Giles, Wang, and Park 2013). of International Labour Organization These unintended consequences can be (ILO) member countries (ILO 2012). Most even more damaging in places where, due countries in East Asia Pacific have adopted to limited government capacity, regulations a statutory wage policy. However, East are applied only to certain sectors of the Asia’s low- and middle-income countries economy or are poorly enforced. Similarly, are “latecomers” to labor market regula- even when reasonably designed, poorly tion when compared to countries in other administered, and narrowly applied, regula- regions. The governments in Latin America tions and interventions can aggravate rather adopted European models of labor mar- than correct inequitable outcomes, all at a ket regulation, including minimum wages, cost to taxpayers. in the 1920s and 1930s.4 As they became In addition, this chapter looks at why independent, many of the former colonies organized labor is less powerful in East in South Asia, the Middle East, and Africa Asian countries than in countries at a simi- retained regulations that were applied lar level of development in Latin America mainly to public sector employment and and the Caribbean and Central and Eastern in urban, industrial sectors of production. Europe. For a few countries where the power The details of the minimum wage policies of unions is already high or rapidly increas- in the countries reviewed here are presented ing (such as Indonesia and the Philippines), in table 6A.1 in the annex to this chapter. unions may be exercising a monopoly in The Philippines was the first country in East 126 E A S T A S I A PAC I F I C AT W O R K Asia Pacific to implement a national mini- and Wilkinson 2009). A companion World mum wage in 1951. After the Second World Bank report on minimum wage policies War, Burma, Malaysia, and other colonies (World Bank 2013b) shows that countries in established wage legislation similar to that East Asia Pacific differ greatly in the goals of Great Britain, but coverage was mini- they want to achieve when establishing or mal (Starr 1993). Almost a quarter century modifying their minimum wage regulation. would pass before another government in Countries can be sorted by these objectives East Asia Pacific would decide to regulate into three groups: the first group seeks to wages. reduce poverty and inequality by increas- Indonesia instituted a minimum wage in ing the earnings of low-income workers the early 1970s for people working in the (Devereux 2005), the second seeks to promote urban manufacturing sector. Thailand intro- productivity growth, and the third seeks to duced a minimum wage in 1972 for Bangkok address efficiency issues in the labor market to and the metropolitan area. In 1974, nation- improve outcomes for employers and workers. wide enforcement began, and minimum wage A notable feature of minimum wage rates were established for Bangkok and the regulation in East Asia Pacific countries is metropolitan area, 38 large provinces, and that the level of minimum wages typically the remaining provinces. Vietnam set a mini- varies widely across provinces and districts mum wage for foreign companies in 1992; and often between economic sectors. Prior to however, over time it also established a mini- 2012, only Lao PDR and Mongolia had a sin- mum wage for domestic firms. In 2011, the gle national minimum wage. All of the other government eliminated discrepancies in the countries reviewed have different minimum rates and set one common rate for foreign wages at the subnational and sectoral lev- companies and national private companies. els. Cambodia has three national minimum More recently, the level was made uniform wage rates for workers in the garment sec- for all of the private sector. China passed tor based on occupational level (apprentice, the first legislation allowing states to enact probationary, and regular levels). Although a minimum wage policy in 1993. Regulation the Cambodian Labor Law includes some was further strengthened in 2004. Mongolia provisions for the establishment of minimum introduced a procedure for determining min- wages in all sectors, minimum wages are only imum wages for employees in state-owned set for the garment sector. and joint stock enterprises in 1995. In 1998, Myanmar has national sector-specific coverage was extended to the private sec- minimum wage rates for employees in public tor. Cambodia adopted a minimum wage service and the rice-milling, cheroot-rolling, policy in 1997 after promulgating the first and cigar-rolling industries. In Indonesia, Labor Law. In the Lao People’s Democratic minimum wage levels are set for each prov- Republic, a minimum wage was introduced ince and may be further set for districts and for the private sector in 2006. Although economic sectors.5 In China, minimum wage Malaysia did not have an active minimum rates exist for each of the 33 provinces. In wage in 2010, a minimum wage act was the Philippines, there are multiple regulated passed in 2011, and the policy came into minimum wage levels as well, varying by effect in January 2013. Although Singapore region, province, and sector. Within regions, is the only country in ASEAN without a rates may also be set for different provinces statutory minimum wage, the Ministry of or localities and for different sectors: non- Manpower makes recommendations for agricultural, agricultural, and retail and wage adjustments. service. In Vietnam, rates vary according to Wage regulation typically is outlined in location and employer. Prior to 2011, basic legislation that gives legal force to the terms rates in Vietnam were set for four broad of agreements negotiated among employ- regions. Within each region, rates were set ers, trade unions, and employees (Deakin separately for private domestic firms and for LABOR MARKE T REGULATIONS, INTER VENTIONS, AND INSTITUTIONS 127 foreign companies. Currently, four regional have enacted dramatic increases, with little rates apply to workers employed in the private observable relationship to changes in worker sector, and one national rate applies to public productivity (World Bank 2013b). sector workers. Thailand used to have about Among the countries reviewed in this 32 minimum wage levels, varying by prov- chapter, Thailand had the lowest level of inces and sector, but in 2011, the government monthly minimum wage in 2011 relative to proposed a unified minimum wage rate of the country’s gross domestic product (GDP) B 300 across the country. per capita. This changed with enactment of a In most cases, minimum wage levels are single national minimum wage level in 2012. set by the national government after consulta- Most Indonesian provinces had similarly tions with a tripartite body, with the required low minimum wage levels, until changes representation of employers, workers, and made recently. In 2008, the real value of the government. I n Cambodia, Malaysia, minimum wage for most ASEAN countries Mongol ia, Mya n ma r, T ha i la nd , a nd fell in the wake of a sharp rise in inflation. Vietnam, the national government and a tri- In response to growing pressure from cer- partite body has a critical role in setting the tain groups of workers and the increasing minimum wage level.6 However, in practice frequency of strikes since 2011, the govern- it is unclear how balanced the tripartite body ments of Cambodia, Lao PDR, Indonesia, really is, making it difficult to ascertain the and Thailand enacted substantial increases in level of consultation that takes place in the their minimum wage levels. adjustment process. In Indonesia, China, and The Philippines has the highest minimum the Philippines, minimum wages are set by wage, especially relative to the average wage. regional governments in consultation with In 2012, the Philippines had an average tripartite committees. Only in Lao PDR is national minimum wage set above the nine- the minimum wage set unilaterally by the tieth percentile of countries in the world, national government. In Indonesia, the 2003 ranked by the ratio of the minimum wage to Manpower Law established that minimum value added per worker.9 In figure 6.1, the wage levels were the responsibility of regional dot indicates that the level in some regions governments following recommendations of the country is even higher (or tougher), from the provincial wage councils.7 In China, while the bar shows the average for all the departments of labor and social security regions. The measure in figure 6.1 is a syn- of provinces, autonomous regions, or munici- thetic index reflecting what is in the labor palities set the rates in consultation with codes of the countries included rather than the regional trade unions and federations what people are actually being paid on of enterprises. In the Philippines, minimum average. wages are set by regional tripartite wage and productivity boards.8 We take up this discus- Employment protection legislation sion again in the section on institutions. Across much of the region, the average A second widespread form of labor mar- level of minimum wage relative to average ket regulation, employment protection and median wages and as a proportion of legislation restricts the ability of employ- value added per worker varies significantly. ers to dismiss workers. An EPL index for Few countries in the region have main- ASEAN countries, China, and Mongolia tained the level of minimum wages consis- compares some of the most critical employ- tent with their codified wage adjustment ment costs that employers face in these formulas. Some countries (or regions within countries. The index ranges from 0 to 6, these countries) have made minimal adjust- with 0 being the least restrictive and 6 being ments, allowing the value of the minimum the most restrictive legislation. Figure 6.2 wage to fall with respect to productivity or compares economies in East Asia Pacific to deteriorate with inflation. Other countries with OECD countries and gives the average 128 E A S T A S I A PAC I F I C AT W O R K FIGURE 6.1 Minimum wages are highest in Cambodia, Indonesia, and the Philippines a. Ratio of the minimum wage to average wage b. Ratio of the minimum wage to median wage Philippines, Philippines, 2010 2010 Cambodia, Cambodia, 2009 2009 Indonesia, Thailand, 2010 2009 Thailand, Indonesia, 2009 Mongolia, 2010 2009 Vietnam, Vietnam, 2008 2008 Mongolia, China, 2009 2010 Lao PDR, Lao PDR, 2008 2008 Turkey New Zealand France France New Zealand Slovenia Portugal Australia Slovenia Ireland Belarus Israel Netherlands Australia Israel Latvia Latvia Belgium Canada Greece Portugal Ireland United Kingdom Hungary Turkey Netherlands Lithuania United Kingdom Poland Slovak Republic Slovak Republic Lithuania Hungary Romania Spain Poland Estonia Spain Luxembourg Canada Korea, Rep. Estonia Greece Luxembourg Japan Romania Korea, Rep. Czech Republic United States United States Japan Mexico Czech Republic 0 10 20 30 40 50 60 70 80 90 100 0 10 20 30 40 50 60 70 80 90 100 Percent Percent Toughness ratio using the highest minimum wage Source: World Bank 2013b. Note: Average wage corresponds to the average wage of employees working in sectors covered by the minimum wage laws. LABOR MARKE T REGULATIONS, INTER VENTIONS, AND INSTITUTIONS 129 for Europe and Central Asia. The average FIGURE 6.2 Some countries in East Asia Pacific have similar levels level of restriction from EPL in the ASEAN of restriction to southern Europe countries (1.8) is slightly lower for the period 2009–10 than the average for OECD Employment Protection Legislation Index, 2008–10 countries (1.9). There is, however, signifi- United States cant variation in how restrictive employ- Singaporea ment protection is, ranging from as low as Canada United Kingdom 0.59 in Singapore to 2.79 in Indonesia. Malaysiaa On the whole, countries in East Asia New Zealand Pacific do not have especially tight restric- Ireland tions on dismissal. The levels of employment Australia Brunei Darussalam protection are consistent with the low fre- Japan quency with which firms report labor market Switzerland regulation to be an obstacle to their growth Mongoliaa Korea, Rep. (presented in chapter 4). However, China, Denmark Indonesia, the Philippines, and Vietnam Slovak Republic stand out for having the most restrictive Czech Republic employment protection regulation. In the Hungary Sweden Philippines and Vietnam, much of the strin- Netherlands gency reflected in the index stems from Finland regulations on the dismissal of permanent Thailanda Lao PDRa workers and the hiring of workers on fixed- Cambodiaa term contracts. At the other end of the spec- Poland trum, employers in Malaysia and Singapore Austria are the least restricted by employment protec- Philippinesa Vietnama tion regulation. Germany Many high- and middle-income countries Iceland have relaxed their employment protection Italy Belgium regulation over the past 20 years.10 Reforms Luxembourg have generally entailed extending the maxi- Norway mum length of fixed-term contracts, allow- Chinaa ing renewals of fixed-term contracts, and France Portugal encouraging firms to contract from tempo- Greece rary work agencies. Restrictions in high- Indonesiaa income countries have been eased further by Spain Mexico modifying severance payment, shortening Turkey notice periods, and reducing requirements for ASEAN+ collective dismissals (ILO 2012). Similarly, OECD-30 countries in Eastern Europe and Central Europe and Central Asia Asia and in Sub-Saharan Africa have made 0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 employment regulation more flexible with EPL index the hope that more flexibility will lead to Specific requirements Regulation on temporary increased investment and employment. for collective dismissal forms of employment In East Asia Pacific, however, changes Protection of permanent workers against (individual) dismissal in employment protection have generally increased the restrictions on firms, and where Source: Estimates for the Association of Southeast Asian Nations (ASEAN), China, and Mongolia are governments were not actively regulating derived using country labor codes. Measures for the Organisation for Economic Co-operation and the labor market, they have stepped in with Development (OECD) member countries are the latest available on at www.oecd.org. Notes: Score ranges from 0 (least stringent) to 6 (most restrictive). OECD average includes a sample regulation on the more restrictive end of the of 30 countries, and figures are for 2010. Europe and Central Asia figures are for 2007. scale. Indonesia, for instance, reformed labor a. ASEAN+ countries. 130 E A S T A S I A PAC I F I C AT W O R K regulation with passage of the Manpower are obligated to notify a third party, typi- Law (Act no. 13) in 2003, which tightened cally workers’ representatives, before mak- labor regulation by increasing the amount of ing a worker redundant. Further, in Brunei mandated severance payments and restricting Darussalam, Indonesia, and Lao PDR, the use of temporary employment (that is, employers are not allowed to lay off work- fixed-term contracts and subcontract- ers without permission from the appointed ing). China adopted a Labor Contract Law government agency. All of the countries in January 2008, which made significant reviewed, except Malaysia, allow reinstate- changes to the 1994 Labor Law and increased ment after unfair dismissal. worker protection. The new law was passed Legal allowances for using temporary in response to recurrent problems of labor contracts and contracting additional work- abuse and violations of worker rights.11 ers from temporary agencies are common- Employment protection regulation typically place. The use of temporary or “fixed-term” includes dismissal costs for regular workers, contracts provides flexibility by allowing rules about the use of temporary workers, and employers to hire without incurring some fixed-term contracts. Tables 6A.2 and 6A.3 of the costs for hiring permanent workers. in the annex to this chapter provide details With this type of contract, in theory, employ- drawn from the labor codes of each country ers can adjust their labor input with fluctua- reviewed. Dismissal costs mainly take the form tions in market demand. They can also use of severance pay.12 In East Asia, Indonesia and the extended trial period to gauge the work- Lao PDR have the highest dismissal costs in ers’ productivity level and decide whether to the form of severance pay. In Indonesia, the hire the worker permanently. However, there 2003 Manpower Law increased severance are also disadvantages. For example, employ- pay for workers with three or more years of ers have less incentive to invest in the human service and established an additional 15 per- capital of workers on shorter, fixed-term con- cent of severance pay as a gratuity payment tracts (Nielen and Schiersch 2012). in compensation for the loss of housing and Many European countries introduced health care benefits. Employers in Indonesia fixed-term contracts to reduce high levels of and Lao PDR must pay the equivalent of seven unemployment in the mid-1980s. Previously, months of full wages to dismiss a worker the labor code of most European countries with four years of tenure. The dismissal costs restricted the use of fixed-term contracts, but for workers with longer tenure rises steeply; such contracts have become far more com- for instance, a worker with 20 years of ser- mon. Powerful unions have, however, con- vice receives an average severance payment strained the extent of liberalization, leading equal to 36 months of wages in Lao PDR and to “two-tier” labor markets particularly in 25 months of wages in Indonesia (figure 6.3). Southern Europe (see box 6.1).13 Among the This is six times more in severance than what East Asia Pacific countries reviewed, about the labor code in the average OECD country half have put in place restrictions on the requires for a dismissed worker with 20 years use of temporary work: Brunei Darussalam, of service. Indonesia, Mongolia, the Philippines, and The statutory notice periods in the East Thailand all restrict the use of fixed-term Asia Pacific countries reviewed are typi- contracts. Cambodia, China, Lao PDR, cally between 1 to 1.5 months for a worker Malaysia, Singapore, and Vietnam have leg- with four years of tenure, which is about the islation enabling employers to use fixed-term same length as in OECD countries. Although contracts for permanent tasks, although the most countries do not have onerous proce- level of flexibility varies. Few countries in dures and requirements for dismissing work- East Asia Pacific limit the duration of these ers, there are some exceptions. In Brunei contracts or restrict the number of times they Darussalam, Cambodia, China, Indonesia, can be renewed. Lao PDR, Malaysia, and Lao PDR, and the Philippines, employers Singapore are the most flexible. Indonesia LABOR MARKE T REGULATIONS, INTER VENTIONS, AND INSTITUTIONS 131 FIGURE 6.3 Firms face the highest severance costs in China, Indonesia, and Lao PDR a. Severance pay for tenure of 4 years, in monthly wages b. Severance pay for tenure of 20 years, in monthly wages Lao PDR 7 Lao PDR 36 Indonesia 7 Indonesia 25 Thailand 6 China 20 China 4 Vietnam 20 Vietnam 4 Philippines 20 Philippines 4 Malaysia 13 Brunei 2 Thailand 10 Darussalam Malaysia 2 Cambodia 6 Cambodia 2 Mongolia 1 Mongolia 1 Brunei Darussalam Singapore Singapore 0 2 4 6 8 0 10 20 30 40 Number of months Number of months Source: Estimates based on the labor code in each country. BOX 6.1 Temporary contracts and labor flexibility: A cautionary note on partial reforms Spain had the highest incidence of temporary Temporary contracts have both positive and contracts prior to the global financial crisis and adverse effects. They can help to make labor mar- little possibility of workers moving from temporary kets more dynamic. Bover and Gomez (2004) fi nd to regular employment. In 1984, a two-tier EPL that in Spain, exit rates from unemployment into reform liberalized the use of temporary contracts, temporary contracts were 10 times higher than after which temporary jobs rose dramatically, from exit rates into permanent contracts between 1987 11 percent of total employment in 1983 to about and 1994. Bentolila, Dolado, and Jimeno (2008) 35 percent in 1995 (Guell and Petrongolo 2007). fi nd that they helped to decrease long-term unem- Most European Union (EU) member states that ployment, especially in periods of high growth. introduced partial EPL reforms have seen an increase Temporary contracts can help firms to evaluate in temporary employment since the mid-1980s. In workers’ suitability and be a stepping stone to more contrast, countries that long had less stringent regu- permanent employment. Temporary contracts can lations for permanent contracts—like Denmark, Ire- also absorb shocks, protecting fi rms from fluctua- land, and the United Kingdom—did not experience tions in demand by avoiding costly adjustments to the same increase in temporary employment. their core labor force. Younger people are more likely to be employed However, segmentation arises when there is little with a temporary contract. In most EU member possibility of movement from temporary to open- states, 40 percent of young people (ages 15–39) are ended contracts. Where employment protection for on temporary contracts, especially those under 25. workers on open-ended contracts remains restric- The share of temporary employment among workers tive and the employment benefits protected are rela- 15–24 ranges from more than 50 percent in France, tively generous, fi rms can use temporary contracts Germany, Poland, Slovenia, and Spain to less than to reduce labor costs by substituting permanent 20 percent in Bulgaria, the Czech Republic, Latvia, with temporary workers. These incentives can lead Lithuania, Romania, the Slovak Republic, and the to exclusion and adversely affect productivity and United Kingdom. investment in skills. Boeri and Garibaldi (2007) continued 132 E A S T A S I A PAC I F I C AT W O R K BOX 6.1 (continued) find that the share of temporary workers in Italy reforms might also have reduced the income of low- had a large negative impact on fi rm-level productiv- wage earners, which declined 16–22 percent over ity growth. Rising employment in the aftermath of the last decade. two-tier EPL reforms led to falling labor produc- Eu rop e’s ex p er ienc e h as b e en sh a red by tivity by decreasing the marginal returns to labor. high-income countries in East Asia Pacific that Although the partial liberalization of EPL in Spain have strict employment protection. Duality or and Italy led to an increase in turnover, a reduc- segmentation has emerged in Japan and the Repub- tion in long-term unemployment, and an increase lic of Korea, where the share of “non-regular” in employment, it was also associated with a fall in workers accounts for about a third of the work- investment in fi rm-specific skills and a decrease in force. Because non-regular workers are typically labor productivity. unable to convert their contracts to more perma- Germany’s experience has been much better, as nent forms of employment, there is now a clear deregulation of EPL was accompanied by reforms division between “insiders” and “outsiders,” simi- to social protection benefits. Prior to the reforms in lar to that found in labor markets in Southern 2004, Germany had average annual unemployment European countries. Deregulation in Japan and rates of almost 10 percent, compared to 5 percent Korea was motivated by the need to increase labor in the United States. By 2004, almost 4.5 million market flexibility. But in both countries, strong Germans were unemployed. Less skilled and older interests limited the extent of deregulation. Com- workers had higher unemployment rates; vocational pared with similarly qualified regular workers, school graduates and high school dropouts had “non- regular” workers typically earn much less, unemployment rates of about 18 percent. Imple- have stagnant earnings, and do not have access to mented between 2003 and 2005, the reforms mod- the same protection. ernized public employment services and social wel- These experiences with liberalization raise sev- fare centers, modified existing labor programs, and eral questions. First, given the difficulty of compre- introduced new ones. They changed the institutional hensive labor reforms, does a partial liberalization and legal framework for the rights and responsi- targeted at some groups or sectors work? Second, bilities of the unemployed and the benefi ciaries of do allowances in the labor code for more fl exible social assistance. But, as with other parts of Europe, forms of employment lead to a “two-tier” market employment protection was reduced for only certain and a legally sanctioned underclass? Third, do flex- segments of the labor market. ible and temporary forms of employment serve as a Germany’s reforms helped to reduce unemploy- step toward advancement, or are people who enter ment dramatically. Despite the crisis, the unem- through a fixed-term or part-time job scarred in ployment rate in Germany remained low. Many ways that limit their future options? of the newly introduced part-time and temporary jobs have served as a bridge to regular jobs. But the Sources: Gill and Raiser 2012; Gill, Koettl, and Packard 2013. is the most restrictive: people on fixed-term downsizing, and redundancies. The most contracts are prohibited from filling roles restrictive additional regulations on mass deemed permanent; for roles deemed tem- redundancies are found in Cambodia, China, porary, the duration of a fixed-term contract and Vietnam. In Cambodia, employers must cannot exceed three years (two years and a notify the labor authorities and workers’ rep- single year renewal). This period was recently resentatives in writing of the circumstances for shortened from five years. layoffs and receive guidance on how to mini- Turning to the final element of employment mize the effects of the reduction. Dismissed protection measured in figure 6.2, few East workers have priority to be rehired for the Asia Pacific countries regulate additional pro- same position within two years. tective measures for collective dismissals or In China, the Labor Contract Law defines large-volume layoffs as part of retrenchment, collective dismissals as layoffs involving LABOR MARKE T REGULATIONS, INTER VENTIONS, AND INSTITUTIONS 133 more than 20 employees or at least 10 per- observed, initially to great economic ben- cent of the total number of employees in a efit. Following the communist accession firm. Collective dismissals are only permit- to power in 1949, the Chinese government ted when an employer is adjusting its business sought to stimulate industrialization through operations or has run into serious operational policies that encouraged rapid urbanization. difficulties. Employers are required to notify Households were given incentives to move to and consult with labor unions and employ- cities, and rural workers responded en masse. ees about the dismissal 30 days in advance, As a result, by 1953, the urban population of consider their opinions, and submit a work- China had grown by a third, to 78 million force layoff plan to the labor administrative people. department. If an employer that has gone Seemingly in response to the larger through this process is able to hire again than expected flow from rural areas, the within six months, its former employees government quickly attempted to stem the have to be given preferential consideration. tide, establishing departments that central- In Vietnam, the law does not specify the ized hiring in 1953 and soon after instituting number or percentage of laid-off employees restrictions on travel and rationing grain in that constitute a “collective” dismissal. The cities. But these measures failed to slow the provision applies to any layoffs resulting outflow of rural workers significantly, and from technological change or organizational by the late 1950s, the population pressure on restructuring. Employers must engage in con- cities grew to such an extent that the govern- sultations with labor unions and an execu- ment mobilized millions to move back to the tive committee to formulate specific criteria countryside. But with the Great Leap Forward (business requirements, seniority, skill, fam- (1958–60), the government abandoned all ily conditions) for dismissals. attempts to control the flow of labor and again sought to accelerate industrial develop- ment, motivating another surge of workers to Regulation on the movement of people China’s cities. By 1960, China’s urban popu- Although movement of people across borders lation had doubled from that in 1949. is more likely to capture news headlines, the In the early 1980s, the government became largest movement of people seeking work particularly preoccupied with the speed of happens within countries.14 As discussed urbanization. Although rural-to-urban migra- in earlier chapters, this has been especially tion was responsible for only 20 percent of the true in East Asia Pacific and, as shown in growth of China’s cities from 1949 to 1980, the chapters that follow, is still under way. mounting evidence of burdened infrastructure Voluntary internal migration from rural and services in the “megacities” of Beijing and areas to cities has been gaining importance Shanghai concentrated the attention of policy since the mid-1970s. This shift is especially makers on movement from rural areas. notable in the urbanizing economies of South The government regulated the flow of and East Asia, with the rapid rise of manu- workers largely through the household reg- facturing and services. In China, with the istration system of “hukou,” which is based easing of residency restrictions, the migration on four tenets: migration, especially to urban of population from rural areas to cities in the areas, should be allowed only if compatible past 30 years has been the largest movement with economic development, rural-to-urban of people in the world. migration must be strictly controlled, move- Indeed, attempts by China to channel the ment between settlements of similar popula- flow and settlement of its people provide tion size need not be controlled, and flows a useful synopsis of the regulation of labor from larger to smaller settlements or between migration. In the second half of the twenti- rural areas should be encouraged. Under eth century, China undertook some of the the hukou, each individual has an official most active internal migration policies ever place of residence. People are allowed to 134 E A S T A S I A PAC I F I C AT W O R K work legally, receive social security benefits in recent years, but the majority of people including health coverage, and access food crossing borders are still men. rations only in their place of residence. A Cross-border migration in East Asia change can be granted only by permission, Pacific is mostly economically motivated similar to a local authority granting a visa. and still flows largely to high-income OECD But some forms of legal temporary migration countries. However, the wide disparities in are allowed to meet shifts in labor demand. wealth and earnings across low- and middle- As the government’s preoccupation with the income countries in East Asia Pacific attract size of China’s cities and the pace of urban migrants from within the region. As emerg- growth has changed, the hukou has been ing economies in East Asia Pacific continue to tightened or loosened. Despite the controls, grow rapidly, the movement of people across lax enforcement has allowed large flows of the region’s borders is likely to increase. A migrant workers to settle in cities under conservative estimate is that 7 million cross- “temporary” status. Indeed, in the last 30 border migrants from East Asia Pacific coun- years, the labor force needed to fuel China’s tries are working within the region (World spectacular growth has relied on temporary Bank 2013a). migrants, who are permanent de facto. High-income countries like the Republic Today the surge of people from rural of Korea and Singapore depend on foreign areas is ebbing. Yet one in five rural work- workers to fill labor shortage gaps. As these ers migrates, and migrant labor accounts countries and the region’s upper-middle- for a third of urban employment. China’s income countries age, labor shortages will industries are in constant demand of low- grow. Labor and skills gaps, discussed in the cost labor, which has become very difficult previous chapter, will also be a persistent to find. Recognizing the growth dividend product of rapid growth and provide fur- from allowing labor to flow, the government ther incentive for people from lower-income has been loosening the hukou in recent years countries to emigrate for work. In Malaysia and is even facilitating migration. Migration and Thailand, the local labor force is largely restrictions have declined, the labor market skilled, but the economy still requires low- has become more efficient, and decisions skilled workers to work in the growing labor- regarding mobility have become much more intensive segments of the manufacturing responsive to economic factors. Beginning sector (namely, electronics, textiles, nonme- with pilots in selected municipalities, tallic, and mineral industries). Conversely, in migrants from rural areas will receive access Indonesia and Lao PDR, gaps at the higher to health and social protection services; skill level compel domestic and foreign com- training, labor market information, and job panies to recruit professionals and managers search assistance; and recourse to protection from Thailand and Vietnam. in case of employer abuse and exploitation. Economic opportunities and large pro- International migration, defined as the spective earnings differentials are a product movement of people across national borders, of East Asia Pacific’s particular mix of eco- has important economic, social, and political nomic integration, high growth, and aging implications that influence regulation of the populations. The inflow of foreign workers labor market. The number of people moving to middle-income countries in the region is across borders, both legally and illegally, has no longer considered a temporary phenom- been rising steadily in the last five decades, enon. The ASEAN regional block provides especially from countries in East Asia Pacific. a case in point: economic integration has According to recent estimates of cross-border led to increased interest in the movement of migration, emigrants from East Asia Pacific human capital across borders. To that end, countries total 21.7 million people (World the ASEAN Economic Community has set Bank 2013a). The flows out of East Asia the mobility of skilled workers as a goal for Pacific countries have included more women 2015. The rising volume of movement across LABOR MARKE T REGULATIONS, INTER VENTIONS, AND INSTITUTIONS 135 borders has compelled many East Asia Pacific assistance and “passive” unemployment ben- countries to establish well-defined regula- efits and other forms of social insurance— tions on immigration. Recent liberalization are relatively rare in East Asia Pacific of the movement of labor across borders countries (table 6.1). Spending on social pro- takes the form of bilateral labor agreements. tection programs tends to be concentrated Destination countries like Malaysia, on social insurance and then mainly on Singapore, and to an extent Thailand have retirement pensions (ADB 2013). The man- had to design comprehensive labor migra- date to contribute to finance these interven- tion management systems aligned with their tions can be perceived as a tax on employers long-term economic goals. In Malaysia, or on workers who would otherwise save unemployment affects mainly youth, espe- less or who do not consider the promise of cially unskilled youth. For this reason, social insurance benefits to be credible. The Malaysia currently limits (or makes more expected impact of this tax on the incen- costly) the inflow of low-skilled immigrants. tives to hire or informalize labor is relatively But like many other countries around the straightforward: all else equal, a higher tax world, Malaysia faces shortages of skilled wedge should lower employment or increase workers, so it also has initiatives to attract the extent of informal employment. But the well-educated foreigners. Several features of expected impact of active and passive labor immigration policy from high-income coun- market programs is more ambiguous. tries in East Asia Pacific are influencing the By their intended purpose, active pro- new policies of middle-income destination grams that improve workers’ human capital countries like Malaysia and Thailand. For or eliminate some of the information asym- instance, Australia uses a quota system that metries that delay and frustrate “matching” is publicly announced every year as part of in the labor market should lower the extent the federal budget process. The objective is of unemployment. Active programs might to limit the number of visas issued for per- also lower the search and training costs of manent residency, while keeping the system firms and so indirectly subsidize employ- highly responsive to economic conditions and ment creation. Passive programs, like unem- the needs of employers. ployment benefits, can remove the urgency of finding new work and improve the qual- ity of matches. However, the effectiveness Interventions of active programs is checkered at best, and Labor market interventions—“active” labor if unemployment benefits are overly gener- market programs like training and job search ous or poorly designed, they can perversely TABLE 6.1 Employment interventions are still rare in East Asia Pacific Average annual expenditure (US$ purchasing power parity), not including administrative costs, unless otherwise noted Unemployment Ratio of employment Ratio of employment benefits and active Public All social All social interventions to interventions to all Region labor programs works insurance protection social insurance (%) social protection (%) East Asia Pacifica 0.7 16.6 16,862.3 21,390.7 0.1 0.1 Europe and Central Asia 4,211.4 — 145,732.0 173,506.0 2.9 2.4 Latin America and the Caribbean — 24.7 241,520.0 270,627.0 0.0 0.0 Middle East and North Africa — 29.1 448.7 622.7 6.5 4.7 South Asia — — 3,117.6 5,003.5 0.0 0.0 Sub-Saharan Africa — 7.1 1,799.2 3,216.4 0.4 0.2 Sources: World Bank 2013c. Note: — = not available in a uniform way. a. Numbers are not likely to capture recent increases in spending as part of stimulus programs. 136 E A S T A S I A PAC I F I C AT W O R K lower peoples’ motivation to look for and of previous income replaced by insurance accept employment. benefits) are similar (40–75 percent) to those in OECD countries. In Vietnam, the monthly benefit is equivalent to 60 percent of the “Passive” programs average earnings in the six months before Social insurance plans to cover labor market unemployment. In Thailand, the benefit level risks are relatively rare in East Asia Pacific depends on the reason for becoming unem- countries. In middle- and upper-middle- ployed. If unemployment is involuntary, the income countries of Europe and Central Asia laid-off worker receives 50 percent of his or and Latin America, they are a prominent her previous daily wage (average daily wage tool in the state’s social protection arsenal. in the highest paid three months during the Unemployment benefits protect individuals nine months before unemployment). Unlike against the risks to their consumption from other countries, in China the program has a job loss for a period of job search. Only three flat benefit level set by the local authorities, of the countries reviewed for this report— which should be higher than the local public China, Thailand, and Vietnam—have intro- assistance benefit, but lower than the local duced unemployment insurance schemes. minimum wage. China, for instance, introduced an unemploy- In China and Vietnam, the duration of ment insurance program in 1986 following benefits varies according to the worker’s the start of economic reform, while Thailand years of contributions. In China, a worker and Vietnam introduced unemployment pro- who contributed for less than 5 years may grams in 2004 and 2009, respectively. receive benefits for up to 12 months, a worker Table 6. 2 des crib es t he level a nd who contributed for 5 to 10 years may receive duration of unemployment benefits for benefits for up to 18 months, and a person China, Thailand, and Vietnam and the who contributed for more than 10 years conditions required to qualify for benefits. may receive benefits for up to 24 months. Unemploy ment insu rance benefits in In Vietnam, the duration of benefits ranges Thailand and Vietnam are as generous as they from 3 months for a worker who contributed are in many high-income countries. The ben- for 12–36 months to 12 months for a worker efit levels or replacement rates (the portion who contributed for 144 months. TABLE 6.2 Unemployment insurance is still rare in East Asia Pacific countries Main features of unemployment insurance in Thailand, China, and Vietnam Average unemployment Unemployment insurance Country benefit benefit duration (months) Qualifying conditions Thailand 50 percent of the average 6 months in any 1 year 6-month contribution within 15 months daily wage in the highest paid before unemployment 3 months during the 9 months before unemployment; the maximum daily benefit is B 250 China Flat benefit level set by the local 12–24 months, depending Maximum of 1 year with less than 5 years authorities; higher than the local on applicant’s years of of contributions; maximum of 1.5 years public assistance benefit, but contribution with 5 or more but less than 10 years of lower than the local minimum contributions; maximum of 2 years with wage 10 or more years of contributions Vietnam 60 percent of the average 3–12 months, varying by 3 months with 12–35 months of monthly earnings in the contribution contributions; 6 months with 36–71 months 6 months before unemployment of contributions; 9 months with 72–143 months of contributions; 12 months with 144 months of contributions or more LABOR MARKE T REGULATIONS, INTER VENTIONS, AND INSTITUTIONS 137 “Active” programs business. To address the problem of unem- ployed urban workers, Cambodia imple- Labor-intensive public works and other mented a cash-for-training program that “active” labor market programs—targeted provides vocational training in agriculture, training programs (covered in the previous industry, and mechanics. Lao PDR experi- chapter), wage subsidies, and employment mented with food-for-training, with a par- search assistance—are also rare in low- ticular focus on women. Again, as in the and middle-income East Asia Pacific coun- case of unemployment insurance, the overall tries, when compared to their prevalence in effectiveness of active labor market policies Latin America and especially in Europe and in reaching poor and otherwise vulnerable Central Asia, where they are the mainstay of people has been limited, since many of these formal social protection policy. programs are only able to reach people who Prior to the East Asian crisis of 1997–98, have lost registered forms of work (World labor market programs only existed in the Bank 2012a). high-income countries of the region. In the Labor-intensive public works programs, wake of that crisis, governments rapidly however, do not have the same design limi- deployed a broad arsenal of programs, with tations. Public works programs can be effec- varying degrees of effectiveness. Low levels tive at reaching people who have lost work of registered and verifiable job losses, gen- or whose small businesses have gone under erally incomplete and poor-quality admin- even if work was unregistered and infor- istrative data, and the rush to mobilize mal. Public works programs are a preferred limited the ability of governments to target instrument in countries where most employ- active programs effectively. Benefits were set ment cannot be verified legally or where at high levels relative to average wages and employment information systems are poor or the lost earnings of the neediest households, have only partial coverage of the workforce. which hindered the self-targeting features of This is mainly because of their self-targeting public works (Betcherman and Islam 2001). features, specifically a cash (or in-kind) “sti- Nevertheless, the experience of responding pend” amount set at low levels with respect to extensive unemployment in the wake of to market wages for low-skilled labor, a full- the East Asian crisis left governments in the time work requirement, and relatively diffi- region a lot wiser. cult work (see box 6.2). Building on their experience in the late In general, public works programs have 1990s, some countries in East Asia Pacific played a smaller role in the nascent social pro- are using active labor market policies as tection systems in East Asia Pacific countries part of their permanent arsenal of interven- than in other developing-country regions. tions to help households to mitigate employ- In East Asia Pacific, public works programs ment risks. This stood governments in good have taken the form of cash- and food-for- stead during the global financial crisis of work schemes, as in Cambodia and Lao 2009–10. In response to the crisis, Malaysia PDR. In other countries, they are offered in was quick to provide subsidized training a traditional manner similar to that of India’s and monetary incentives for employers to National Rural Employment Guarantee or encourage worker retention and rehiring Argentina’s Jefes y Jefas de Hogar. In China, of retrenched workers. Thailand devoted the government has encouraged the use of significant stimulus funds to an intensive public works and public works community vocational training program that aimed systems as a means of providing retrenched to train 500,000 unemployed, soon to be workers with employment opportuni- unemployed, and new graduates during ties. According to the All-China Women’s 2009–10, providing one month of training Federation, around 40 percent of laid-off and three-month cash allowances to help women, who accounted for more than half individuals to find employment or start a of the country’s unemployed in 2002, found 138 E A S T A S I A PAC I F I C AT W O R K BOX 6.2 Can public works act as social insurance for informal workers? The risk of losses from unemployment is generally als have lost (that is, whether registered employment, not considered “insurable” by markets since it can informal jobs, or self-employment), these structures be highly systemic—that is, when unemployment can function as a social insurance instrument (that strikes, say in a crisis or recession, a large number of is, a public risk-pooling intervention). Indeed, if individuals in the risk pool are affected. Since there correctly structured, they can be the form of social are typically not enough “winners” to compensate insurance that is most likely to reach workers who “losers” from the employment shock, it becomes lose employment in the informal sector or the self- too expensive for insurers to cover losses. However, employed whose businesses fail in a downturn (Rav- protecting household earnings is important, both allion and Galasso 2004). for social as well as for efficiency reasons: earnings The program wage or stipend is the critical protection can help households to cope in the wake parameter that directly determines whether public of a shock to income, but also help to improve the works programs succeed as earnings insurance for matching of employment with those seeking work by informal workers. Setting the program wage cor- removing an element of urgency from their search. rectly is critical to ensuring that protection reaches For this reason, governments help to correct this those who need it most, is readily available in an market failure by providing or mandating earnings economic downturn, and does not introduce damag- insurance instruments, including risk pooling at the ing distortions when labor markets recover. fi rm level in the form of severance programs or at The most effective way to ensure that public the individual level in the form of pay-as-you-go sys- works programs provide reliable and sustainable tems of unemployment insurance and even systems earnings protection to households that are at great- based on individual savings accounts underpinned est risk is to pay program wages below the statutory by minimum benefit guarantees. minimum wage and ensure that the work is rela- However, in economies where large segments tively undesirable to the individual. However, many of the labor force are self-employed or work infor- governments make the mistake of setting program mally, providing earnings insurance through any of wages at the minimum wage level, well above the these traditional devices is institutionally diffi cult market-clearing wage for unskilled manual labor. and can even lead to regressive subsidies to relatively Offering above-market wages imposes three separate well-off “formal” workers. What is more, fi nancing economic costs. They attract more workers to public social insurance structures from payroll contribu- programs than really need assistance, pay workers tions draws a sharp distinction between the protec- more than they would otherwise accept, and crowd tion enjoyed by workers with a legal contract and out private employment. As many governments have that of those without, including the self-employed. discovered, if public employment programs offer (or This distinction can create segmentation and obsta- subsidize) above-market wages, the fi scal costs of cles to labor mobility. these programs can rise unless protection is rationed. To surmount these problems and protect earn- But this places government in the uncomfortable ings, governments in many middle- and lower- position of working through quantities rather than income countries offer labor-intensive public works through prices and hinders the program’s ability to or “cash-for-work” programs (Subbarao 1997). protect households. Where governments pay statu- These programs featured prominently in the govern- tory minimum wages, they are forced to ration the ment responses to the sharp rise in unemployment number of hours and work days offered to contain in upper-middle income Central European countries costs. In effect, this forgoes self-targeting forms of in 2009 and 2010 (Azam, Ferre, and Ajwad 2012). earnings protection for relatively expensive (in terms Since public works programs are fi nanced directly of above-market wage costs) forms of income assis- from general revenues and typically do not discrimi- tance with limited coverage that is vulnerable to rent nate according to the type of employment individu- seeking (Subbarao et al. 2013). LABOR MARKE T REGULATIONS, INTER VENTIONS, AND INSTITUTIONS 139 employment in community positions in their performance and, whether because of infla- neighborhoods. tion or corruption, few workers believe they In several countries in East Asia Pacific will ever benefit from these interventions. If that have experienced violence and remain the tax wedge is large and net wages are too fragile ostensibly due to high rates of youth low, workers may be discouraged from partic- unemployment and inactivity, governments ipating in the regulated part of the labor mar- have deployed labor-intensive public works ket, finding outside options—unemployment to restore stability and put young people or unregistered, informal work—more attrac- on a path to employability through train- tive. Similarly, because taxes increase the ing and apprenticeships. Such is the case in costs of employing someone, they can dis- Papua New Guinea, the Solomon Islands, courage employers from hiring. and Timor-Leste. In the Solomon Islands, the The tax wedge on labor provides a mea- Rapid Employment Program has been cred- sure of the extent to which the social pro- ited with helping to bring stability to Honiara tection and tax systems can discourage after troubles threatened to pull the country employment. It is calculated as the differ- apart. As the Solomon Islands moves from ence between the salary costs of a worker to stabilization back to the path of develop- the employer and the amount of net income ment, the program is expected to keep help- that workers receive (“take-home pay”), ing young people to gain skills and find work. expressed as a percentage of the total labor cost. These estimates differ considerably from the statutory tax rates on income discussed Labor tax wedges in chapter 4. This is because the tax wedge Interventions are, by design, financed mainly is calculated taking into account the circum- by mandatory contributions from employers stances of a representative worker, including and workers. We have discussed the relative what the labor code requires them to pay in scarcity of unemployment insurance and mandatory contributions for employment active labor market programs in East Asia programs and social insurance.15 Pacific countries (World Bank 2012a; ADB Figure 6.4 presents the tax wedge for 2013). Yet the mandatory contributions paid selected East Asia Pacific and OECD coun- by formal workers and employers are sub- tries. The tax wedge is significantly lower in stantial. This would appear incongruent but the East Asian (averaging 23 percent) than for the provisions that many governments in the OECD (37 percent) and the European in the region have made to allow contrib- Union (41 percent) countries. Countries dif- uting workers to access their mandatory fer greatly in the overall labor taxes, ranging retirement savings in the event of a house- from a low of 8.2 percent in Cambodia to a hold shock, such as loss of work. Indeed, high of 36.8 percent in Malaysia. Between these provisions have acted as financial 2002 and 2010, the average tax wedge for self-insurance for many people—albeit still the region16 increased 4 percentage points, only the minority of people in registered, rising in all countries except China, where it formal work—in lieu of explicit arrange- decreased 1.2 percentage points. ments to mitigate the risk of unemployment Cambodia, Indonesia, and Thailand have (Betcherman and Islam 2001). the lowest tax wedges among the East Asia If workers and employers assign little value Pacific countries reviewed. The smaller tax to these interventions, the mandate to con- wedge in Cambodia reflects the absence of a tribute creates a “tax wedge” between the statutory social security tax, something that cost of labor to a firm and the take-home will change soon.17 In Indonesia and Thailand, pay of employees. The size of this wedge can the smaller tax wedges reflect the fact that influence both the demand for and supply workers earning average wages are exempted of labor. The impact on incentives is greater from paying taxes.18 Malaysia has the high- where government has a poor track record of est tax wedge—above 35 percent—which is 140 E A S T A S I A PAC I F I C AT W O R K FIGURE 6.4 The highest labor tax wedge is in Malaysia, and the similar to the levels observed for Luxembourg lowest is in Cambodia and Norway. Malaysia has a relatively higher level of taxation on personal income for work- Tax wedge on labor for OECD and ASEAN+ countries, 2010 ers earning the average wage (16 percent Belgium of the average gross salary) as well as high France mandatory contributions to social security Germany (22 percent of the average gross salary). Austria Social insurance contributions account for Italy the largest portion of the tax wedge in East Hungary Sweden Asia Pacific countries (figure 6.5). In most Finland countries, employers pay the majority of Slovenia these contributions (with notable exceptions). Czech Republic China imposes the highest social insurance Estonia Spain contributions among the countries reviewed; Denmark it represents 22 percent of the total labor cost Greece for a worker (or 29 percent of the gross salary). Netherlands Slovak Republic FIGURE 6.5 The largest portion of the tax wedge Turkey is employers’ contributions to social insurance Portugal Norway Malaysia Composition of the tax wedge on labor for OECD and Luxembourg ASEAN+ countries, 2010 Poland Iceland Malaysia Singapore United Kingdom Singapore Mongolia Mongolia China Canada China United States Japan Vietnam Vietnam Philippines Australia Ireland Myanmar Philippines Lao PDR Myanmar Switzerland Brunei Darussalam Korea, Rep. Israel Thailand Lao PDR Indonesia New Zealand Brunei Darussalam Cambodia Mexico Thailand ASEAN+ Indonesia OECD-34 Cambodia Chile 0 5 10 15 20 25 30 35 40 ASEAN+ % of labor costs OECD-34 Employer social security contributions OECD-EU 21 Employee social security contributions 0 10 20 30 40 50 60 % of labor costs Income tax Sources: Estimates for Association of Southeast Asian Nations (ASEAN), China, and Mongolia are Source: Estimates for Association of Southeast Asian Nations (ASEAN), derived using countries’ tax regulations; KPMG 2012; OECD 2012. China, and Mongolia are derived using countries’ tax regulations; Note: Unweighted average for ASEAN+ and OECD. KPMG 2012; OECD 2012. LABOR MARKE T REGULATIONS, INTER VENTIONS, AND INSTITUTIONS 141 Singapore, in contrast, imposes most of the America and Central Europe also experi- tax burden for social insurance on workers, enced periods of authoritarian rule, these who contribute 17 percent of the total labor often followed significant periods of pluralist cost for social insurance, while employers pay democracy in which organized labor gained only 13 percent. At the margin, and all else a secure footing, from which it often played equal, a larger share of contributions paid by a key part in overthrowing dictatorships. In workers should more closely link eventual contrast, pluralist democracy is a relatively benefits and contributions, lowering the pure new phenomenon in East Asia Pacific. tax element of the wedge between labor taxes In the East Asia Pacific countries with and take-home pay. The extent to which the longer histories of democracy, the politiciza- statutory allocation of mandatory contribu- tion of labor movements is blamed for their tions between employers or workers actually weakness. Links between trade unions and matters will vary greatly, but will depend pri- political parties, which often formed out of marily on how workers value the benefits that a liberation struggle and fight against dicta- these contributions finance. torship in several East Asia Pacific countries, detracted from their mandate of representing the rights of workers. This led to trade union Institutions: Organized labor in leadership that is government selected, con- servative, and dynastic (Traub-Merz 2002). East Asia Pacific Indeed, the politicization and co-option of Although it is impossible to isolate institu- unions by authorities in several East Asia tions that have an impact on the labor mar- Pacific countries is often offered as an expla- ket from those that shape other social and nation for their weakness. Some argue that economic interactions, one in particular is Chinese labor unions are carrying out the directly relevant to the discussion in this conflicting functions of protecting workers’ chapter: collective bargaining and organized rights, on the one hand, and acting as “a labor. As with labor policies generally and transmission belt” between the party and the regulation specifically, the advent of orga- working masses, on the other (Cooney 2011). nized labor and collective bargaining came Alternative explanations tie the later rise later to countries in East Asia Pacific than to and relative weakness of organized labor to countries in other regions (table 6.3). A large a much later urbanization and industrializa- body of historical, sociological, and political tion in most of East Asia Pacific countries science literature has been written in which compared to countries in Latin America and various hypotheses for this late advent are Central Europe. In mainly rural agrarian put forward and debated. economies, the labor force is still living in rela- Some writers contend that the relatively tively disbursed settlements, engaged in subsis- greater importance of hierarchy and fealty tence or small-scale commercial agriculture. in East Asian societies has prevented the In these settings it is more difficult to distin- adversarial model of organized labor and guish who is a worker or a tenant and who is collective bargaining from taking hold. But an employer or a landowner. But even where this explanation is disputed with examples these lines are clearly drawn, the transaction of labor unions gaining membership and costs of organizing and coordinating are much influence in similarly hierarchical and famil- greater for working people in rural areas than ial cultures in Latin America and Central for working people in towns and cities. Europe (Minns and Tierney 2003).19 Some The more compelling explanations for historians and political scientists claim that relatively weaker labor unions in East Asia longer periods of authoritarian government Pacific countries take account of the form in and political repression in East Asia Pacific which industrialization has taken place, while are a more plausible explanation for weaker acknowledging all of the explanations sum- labor unions. And while countries in Latin marized above. The structural transformation 142 E A S T A S I A PAC I F I C AT W O R K TABLE 6.3 Unions came late to East Asia Pacific Ratification year of the ILO Freedom of Association and Protection of the Right to Organize Convention (C 87) and Right to Organize and Collective Bargaining Convention (C 98) East Asia Pacific Latin America and the Caribbean Europe and Central Asia Economy C 87 C 98 Country C 87 C 98 Country C 87 C 98 Australia 1973 1973 Argentina 1960 1956 Albania 1957 1957 Brunei Darussalam — — Belize 1983 1983 Armenia 2006 2003 Cambodia 1999 1999 Brazil — 1952 Azerbaijan 1992 1992 China — — Chile 1999 1999 Belarus 1956 1956 Fiji 2002 1974 Colombia 1976 1976 Bosnia and Herzegovina 1993 1993 Indonesia 1998 1957 Costa Rica 1960 1960 Bulgaria 1959 1959 Japan 1965 1953 Dominican Republic 1956 1953 Croatia 1991 1991 Kiribati 2000 2000 Ecuador 1967 1959 Czech Republic 1993 1993 Korea, Rep. — — El Salvador 2006 2006 Estonia 1994 1994 Lao PDR — — Guatemala 1952 1952 Georgia 1999 1993 Malaysia — 1961 Guyana 1967 1966 Hungary 1957 1957 Marshall Islands — — Honduras 1956 1956 Kazakhstan 2000 2001 Mongolia 1969 1969 Mexico 1950 — Kyrgyz Republic 1992 1992 Myanmar 1955 — Nicaragua 1967 1967 Latvia 1992 1992 New Zealand — 2003 Panama 1958 1966 Lithuania 1994 1994 Palau — — Paraguay 1962 1966 Moldova 1996 1996 Papua New Guinea 2000 1976 Peru 1960 1964 Montenegro 2006 2006 Philippines 1953 1953 Suriname 1976 1996 Poland 1957 1957 Samoa 2008 2008 Uruguay 1954 1954 Romania 1957 1958 Singapore — 1965 Venezuela, RB 1982 1968 Russian Federation 1956 1956 Solomon Islands 2012 2012 Serbia 2000 2000 Thailand — — Slovak Republic 1993 1993 Timor-Leste 2009 2009 Slovenia 1992 1992 Tuvalu — — Tajikistan 1993 1993 Vanuatu 2006 2006 Macedonia, FYR 1991 1991 Vietnam — — Turkey 1993 1952 Ukraine 1956 1956 Uzbekistan — 1992 Source: Data derived from ILO (http://www.ilo.org/dyn/normlex/en/f?p=1000:10011:0::NO:10011:P10011_DISPLAY_BY,P10011_CONVENTION_TYPE_CODE:3,F). Note: — = not a signatory. ILO = International Labour Organization. Historically, it can be very difficult at a national level to identify specific years in which labor unions were first established and gained momentum. From a legal perspective, it is easier to find the year in which countries ratified the ILO Freedom of Association and Protection of the Right to Organize Convention from 1948 (C 87) and the ILO Right to Organize and Collective Bargaining Convention from 1949 (C 98). In theory, ratifying these conventions allows labor unions the legal right to form, bargain, and exercise voice. Some East Asia Pacific countries have not yet adopted either of these conventions, including China and Vietnam, where “wild cat” labor union strikes are a growing phenomenon. Generally, countries in East Asia adopted them in the 1990s and 2000s, while countries in Latin America adopted them in the 1950s and 1960s. Thus the legal space for labor to organize was granted significantly later in East Asia Pacific countries than in countries in Latin America. The restrictions of Soviet communism confound further extrapolation to Eastern Europe and Central Asia. in most East Asia Pacific countries shifted encouraged heavier industries requiring a rel- employment out of agriculture and into light atively skilled workforce. A relatively higher- industry for export-led growth (Deyo 1989). skilled workforce had more incentives to Growing light-industry factories attracted organize and negotiate protection and higher low-skilled, low-wage workers with few returns on their relatively greater investments advancement opportunities, little employ- in human capital. This theory also helps to ment security, high turnover, and hence explain the contrasting experience of Korea, low commitment to firms, places of work, where the growth of heavy industry was and unions. In the Latin American coun- accompanied by much stronger labor unions tries, import-substituting industrialization than in other East Asia Pacific countries. LABOR MARKE T REGULATIONS, INTER VENTIONS, AND INSTITUTIONS 143 The extent of unionization (union density) However, more workers are members of in the economies of East Asia Pacific today is unions in Taiwan, China, than in any coun- lower than in other parts of the world (table tries in the Southern Cone of Latin America 6.4). But it is difficult to draw a general pro- (table 6.5). As in other regions, member- file. The Philippines, which is culturally and ship in trade unions has been declining institutionally similar to Latin America, has (figure 6.6). China is a notable exception to rates of unionization similar to Argentina. this trend (figure 6.7). TABLE 6.4 Unionization is lower in most East Asia Pacific economies than in other regions Union density (union members as a % of the labor force) in selected countries of East Asia, Latin America, and European Central Asia East Asia Pacific Latin America and the Caribbean Europe and Central Asia Union Union Union Economy density Year Country density Year Country density Year Australia 20 2006 Argentina 28.9 2002 Albania 20 2006 China 90.3 2000 Bolivia 25 2006 Bulgaria 16 2001 Hong Kong SAR, China 22.1 2002 Brazil 18.1 2002 Czech Republic 14 2004 Indonesia 14 2005 Chile 12 2001 Estonia 11 2005 Japan 18.7 2005 Costa Rica 15 2002 Georgia 80 2005 Korea, Rep. 10.3 2005 Ecuador 12 2002 Hungary 17 2004 Malaysia 17.5 2000 El Salvador 5.3 2003 Kazakhstan 31 2002 New Zealand 21.1 2004 Honduras 14 2003 Latvia 16 2006 Philippines 26.8 2002 Mexico 13 2001 Lithuania 14 2006 Singapore 18.5 2006 Panama 11 2005 Macedonia, FYR 75 2006 Taiwan, China 38.3 2003 Peru 5 2002 Moldova 80 2005 Thailand 3.3 2006 Uruguay 15.9 2000 Poland 16 2006 Romania 30 2005 Russian Federation 45 2003 Slovak Republic 30 2004 Slovenia 45 2004 Tajikistan 90 2006 Sources: Data derived from OECD 2010; Hall-Jones 2010; Johnson 2004. TABLE 6.5 Outside of China, the number of labor unions has also been declining Trends in the number of trade unions in East Asia Pacific economies Earliest and latest year of data Economy Time period Earliest year Latest year % change over time Australia 1980–95 325 142 −56 China 1980–2010 376,000 1,976,000 426 Hong Kong SAR, China 1989–2011 439 788 80 Japan 1980–2009 72,693 56,347 −23 Korea, Rep. 1980–2008 2,618 4,886 87 Malaysia 1980–2010 391 690 77 New Zealand 1992–2011 58 145 150 Singapore 1980–2010 83 65 −22 Taiwan, China 1987–2010 2,510 4,924 96 Source: Estimates based on data derived from ILO (http://laborsta.ilo.org/xls_data_E.html). Note: The Philippines was omitted due to lack of comparability as a result of the new calculation methodology applied in the early 2000s. 144 E A S T A S I A PAC I F I C AT W O R K FIGURE 6.6 Unionization in East Asia Pacific is low, accounting for of grassroots mobilization. The bargains the level of development that labor unions strike for members can come at the cost of unrepresented workers. Union density across East Asian Pacific countries, compared with However, labor unions in high-income coun- Latin America and Europe and Central Asia tries with large, fast-changing service sectors 100 have begun to reach out enthusiastically to TJK working people with more heterogeneous 90 CHN 80 GEO profiles. In East Asia Pacific, migrant labor MDA MKD 70 organizations and associations sponsored by Union density (%) 60 nongovernmental organizations in Indonesia 50 and Hong Kong SAR, China, are a part of SVN this trend and are providing a wider seg- 40 TWN 30 PHL ment of working people with opportunities HKG 20 NZL AUS to engage in labor institutions (Ford 2004; MYS 10 KOR JPN see box 6.3). THA 0 0 5 10 15 20 25 30 35 GDP per capita, thousands (constant 2005 PPP, int'l $) The impact of labor policy on East Asia Pacific Latin America and the Caribbean work and earnings Europe and Central Asia The textbook predictions of how regulations, Sources: Estimates based on GDP per capita, derived from World Bank 2013c, combined with union like a minimum wage and restrictions on density data derived from OECD 2010; Hall-Jones 2010; Johnson 2004. dismissals, create a wedge between the cost Note: Union density is defined as the percent of union members among paid dependent employ- of labor and what people take home are well ment. Data on union density are provided for the most recent year between 2000 and 2010, match- ing data on GDP per capita for the same year. Singapore was omitted because it is an outlier with known and actively debated. A large litera- GDP per capita of about US$48,000 in 2006. ture has been produced applying the text- book models in countries where most people A key factor that has sapped the strength work beyond the reach of regulation and of organized labor in many countries, par- taxes in the informal economy (figure 6.8; ticularly in East Asia Pacific, is the tendency Perry et al . 2007; Packard, Koettl, and of labor unions to be narrowly aligned with Montenegro 2012). Tables 6A.4 through sectors where dependent, full-time work is A6.6 in the annex to this chapter present the dominant form of engagement. The inclu- simple conditional correlations between sion of groups that mobilize people in other aggregate (country-level) measures of infor- forms of work—like India’s Self Employed mal work and labor policies. These are Women’s Association and, globally, the interacted with measures of governance and Service Employees International Union—is administrative capacity. In East Asia Pacific, still uncommon in the organized labor move- as in other regions, a mixed picture emerges ments of most countries in East Asia Pacific. from these simple correlations using aggre- The growth of organized labor in many gate data that sometimes challenge what the East Asia Pacific nations is also significantly textbook theories predict. hindered by the reluctance of unions to recog- “Segmentation” of the labor market can nize migrant workers and workers employed happen when a floor is imposed on wages— in services and in the “private” (domestic) either from a legislated minimum wage or sphere (Ford 2004). Labor unions around from the strength of labor institutions, such the world are facing a similar existential as a collective bargaining process and the threat. People in self-employment, irregular power of labor unions in that process, that employment, and migrant work, particu- forces a wedge between the earnings of larly working women, are often overlooked workers not covered by these arrangements by organized labor as a significant source and those that are. The traditional models LABOR MARKE T REGULATIONS, INTER VENTIONS, AND INSTITUTIONS 145 predict that a minimum wage increases labor FIGURE 6.7 Other than in China, union membership has been costs for firms and prevents them from declining in East Asia Pacific offering formal employment to workers whose marginal productivity does not exceed Union density in East Asia Pacific economies the minimum. The effect will be stronger for 100 workers with the lowest marginal produc- 90 tivity, especially younger, less experienced Share of total paid dependent 80 workers. “Priced out” of formal employment, 70 they can join those genuinely unemployed, employment (%) take informal employment, or seek formal 60 work while working informally. Workers 50 who remain formally employed—those with 40 higher marginal labor productivity—benefit 30 from higher earnings. 20 Elaborations in the literature, however, 10 reveal more ambiguity about the effect of 0 regulations and interventions. A minimum 1980 1986 1992 1998 2004 2011 Australia China Hong Kong SAR, China wage might motivate workers to increase Japan Korea, Rep. Malaysia productivity in the “efficient wages” frame- New Zealand Philippines Singapore work (Rebitzer and Taylor 1995; Manning Taiwan, China 1995) or persuade job seekers and some waiting outside the labor market to hold out Source: Data derived from ILO (http://laborsta.ilo.org/xls_data_E.html). for a formal job even if plenty of informal Note: The figure includes all years and all East Asia Pacific economies for which data on trade union employment is on offer. To the extent that membership are available. The drop in union membership in the Philippines in 2001 was due to multiple counting of membership (company workers being captured in the statistics of several employers have to report to the tax authori- competing unions) and the inclusion of inactive unions (inactive union names remaining on the ties at least the portion of their wage bill registry list), which together inflate the country’s statistics on unionism before 2001. After 2000, efforts were made to capture the real number of unions and union membership, for example, by equivalent to some multiple of the minimum distinguishing between active and inactive unions (Ofreneo and Hernandez 2011). wage, raising the minimum might in some circumstances force “formalization” at the also slow productivity growth if it forces firms margin of transactions and inputs to their to keep unproductive workers. Employers that production process. are unable to change their workforce to keep There is even less agreement on the effects up with new technology or otherwise align it of employment protection legislation on with changing needs could soon find them- outcomes. EPL can reduce flows into, but selves at a competitive disadvantage.20 also out of, unemployment. EPL reduces The impact of interventions like unem- turnover and increases average tenure. But ployment benefits is also ambiguous. On the it can also slow new employment if restric- one hand, unemployment benefits improve tions on dismissing workers make employ- the quality of matches between employers ers wary of taking on someone new. These and workers. Workers who are covered by restrictions increase the attraction of using benefits are able to search for a new job with fixed-term contracts; past a certain threshold greater care, facilitating a more efficient job- they can cause employers to hire informally. matching process (Boeri and van Ours 2008). For instance, in the face of waning demand, If the quality of matching between firms EPL will reduce layoffs, but if firms’ ability and workers improves, structural unemploy- to adjust has been too constrained, even when ment can fall. On the other hand, insurance demand rises again, employers might pause benefits may give unemployed workers a rea- knowing they could face high dismissal costs son to search with less effort and intent than should demand drop again. While EPL can they otherwise would have and to turn down encourage employers to invest in training to available work. If the level of unemployment make their workers more productive, it can benefits is high or the maximum duration of 146 E A S T A S I A PAC I F I C AT W O R K BOX 6.3 Do trade unions have a hand in monetary stability? Central banks are not the sole administrators effect erodes the real money supply, thus impeding of inflation. Trade unions also influence price credit and economic growth. A central bank can developments in the macroeconomy as their bar- avert an economic downturn through an accommo- gaining on wages is reflected in product prices and dative monetary policy at the cost of higher infl a- thus inflation in the goods market. While it is often tion. It can also aggravate a downturn by tightening assumed that labor unions are only concerned with the money supply further to tackle inflation. employee benefits and employment levels, they may In conditions when unions are more concerned also favor low infl ation, as high levels can under- about unemployment than inflation, a conserva- mine real wages. Even though central banks are tive, independent central bank is welfare improv- concerned largely with reducing inflation, some ing. The credible threat to tighten the money sup- monetary authorities have mandates to reduce infla- ply to keep infl ation in check can discipline unions tion and promote employment, while others are not in their wage demands and thus stabilize infl ation free to target inflation at the cost of other policy and employment. However, when unions care priorities. The competing interests and preferences about infl ation or internalize the cost of their wage for infl ation and unemployment, among both trade demands on the economy (as is often the case in unions and central banks, and their interplay can centralized bargaining systems), the central bank have important effects on employment levels. can be more accommodative. Yet most studies on Wage bargaining can have two potential effects these interconnected relationships are based largely on prices and employment (Coricelli, Cukierman, on developed economies. While the degree of cen- and Dalmazz 2006). The relative price effect works tral bank independence differs largely across East through goods substitution. Employers pass higher Asia, unionization is generally low in the region. negotiated nominal wages on to consumers through It is thus unclear to what extent central bank product prices. This reduces demand for the product independence and unionization matter more for and for labor in the sector. Second, the real balance employment in East Asia. FIGURE 6.8 The predicted impact of labor market policies from textbook models is well known a. Wage rigidity arising from a legislated b. Increase in taxes on wages minimum wage or power of labor unions in the regulated sector Wage I Wage F Wage I Wage F WFM Wt WF WI WF W’I W’F DF DI DF DI D’F LI LF LI LF L’I L’F L’I L’F Source: Adapted from Perry et al. 2007. Note: In panel a, a two-sector model, the size of the formal labor force is shown by LF and the informal labor force is shown by LI. Imposition of a minimum wage (or the power of unions representing formal workers) pushes the formal wage from WF to WFM, causing LF to contract to L’F and LI to expand to L’I. All else equal, similarly qualified workers would prefer employment in L’F. In panel b, restrictions on dismissal or higher taxes on labor shift the demand curve for formal labor, causing LF to contract to L’F, and LI to expand to L’I. LABOR MARKE T REGULATIONS, INTER VENTIONS, AND INSTITUTIONS 147 benefits is long, the urgency of finding new be one of the best explanations as to why work is diminished. This moral hazard can employers in East Asia Pacific countries do lower the intensity of job search and lengthen not identify labor regulation, interventions, spells of unemployment (Mortensen 1977). and institutions as binding constraints on Most reviews of empirical evidence of the their growth. As mentioned in chapter 4, impact of labor market policies reflect these countries in East Asia Pacific have the lowest ambiguities in economic theory. Trying to share of firms reporting that regulations like identify the impact of any of these measures minimum wages and other labor laws are a is made more difficult by obvious differ- “major” or “severe” obstacle to their opera- ences in what a country mandates and what tion and growth. Employers in countries with firms and households practice. Despite what very rigid regulations, such as Indonesia, Lao the labor code and social protection laws PDR, and Vietnam, are far less likely to iden- say, these are partially and poorly enforced tify labor regulation as a major or severe con- in many low- and middle-income countries. straint to doing business (figure 6.9).21 Actual restrictions on the choices of firms High levels of unregulated work in and individuals are, in most cases, far less East Asia Pacific—variously referred to binding than what the laws intend. This may as “informal” or “vulnerable,” including FIGURE 6.9 Firms in East Asia Pacific are less likely to report that labor regulations are a constraint on their growth, even where the labor code is restrictive a. Firms identifying labor regulations b. Firms identifying labor regulations as as a constraint by region a constraint by country Thailand, Latin America and 50.7 22.2 2006 the Caribbean Mongolia, 49.0 2009 Europe and Central Asia 11.4 Malaysia, 47.6 2007 Cambodia, Middle East and 43.7 10.7 2007 North Africa Philippines, 39.8 2009 Africa 8.4 Indonesia, 29.7 2009 Vietnam, 28.6 South Asia 7.4 2009 Lao PDR, 11.7 2009 East Asia Pacific 5.6 East Asia 38.9 Pacific-8 0 5 10 15 20 25 0 10 20 30 40 50 60 Percent Percent Minor/moderate Major/severe Source: World Bank investment climate surveys. Note: East Asia Pacific-8 is the average of the eight East Asia Pacific countries. 148 E A S T A S I A PAC I F I C AT W O R K self-employment, as discussed in spotlight 2012). In Cambodia, for instance, the law 1—are likely to be both a result of regula- mandates that all workers in the garment tions and interventions as well as a reason sector must be paid at or above the mini- why restrictions in the labor code are not mum wage. However, the mean level of wage broadly observed in practice. In most low- compliance at the firm level in the sector is and middle-income countries, including those only around 80 percent. Nearly 20 percent of of East Asia Pacific, limited compliance com- workers in the apparel sector earn less than bines with low levels of enforcement capacity the minimum wage. Noncompliance rates in government (Caraway 2008). And while in Indonesia and Thailand are estimated to economic theory may be ambiguous about the be as high as 30 percent. Noncompliance impact of regulation and interventions when in Vietnam is estimated at about 10 percent they are perfectly applied, there is greater (World Bank 2013b). consensus that the effects of partial or poor So what does the available empirical enforcement will be negative (Betcherman evidence show? Figure 6.10 presents the FIGURE 6.10 A large share of workers are earning less than the minimum wage a. Philippines b. Indonesia c. Cambodia 0.6 0.6 2.0 1.5 0.4 0.4 Density Density Density 1.0 0.2 0.2 0.5 0 0 0 2 4 6 8 10 10 12 14 16 10 11 12 13 14 15 Log of wages, kernel = epanechnikov, Log of wages, kernel = epanechnikov, Log of wages, kernel = epanechnikov, bandwidth = 0.0830 bandwidth = 0.0860 bandwidth = 0.0557 d. Lao PDR e. Thailand f. Mongolia 0.5 0.8 0.8 0.4 0.6 0.6 0.3 Density Density Density 0.4 0.4 0.2 0.2 0.2 0.1 0 0 0 9 10 12 14 16 18 2 4 6 8 10 2 4 6 8 10 Log of wages Log of wages, kernel = epanechnikov, Log of wages, kernel = epanechnikov, bandwidth = 0.0757 bandwidth = 0.0742 Kernel density estimate Source: World Bank 2013a. Note: The red line corresponds to the minimum wage. LABOR MARKE T REGULATIONS, INTER VENTIONS, AND INSTITUTIONS 149 distribution of earnings in six East Asian employment to workers with low marginal countries. There is a clear clustering around labor productivity.23 the vertical national minimum wage line The evidence from research in East Asia (taken as the average statutory minimum Pacific where a large informal economy in wage level) in three of the six countries. In most countries introduces greater discretion Indonesia, the Philippines, and Thailand, for firms and workers shows more significant a large share of working people are earn- negative effects, particularly on workers in ing wages below the statutory minimum smaller firms. Much of the rigorous empiri- levels. About 51 percent of workers in the cal work is from Indonesia, where good data Philippines report making less than the and relatively frequent changes and variation minimum wage. In Indonesia and Thailand, in how minimum wages are applied across around 36 and 37 percent of workers are the country offer opportunities to study the earning less than the minimum wage, respec- impact of this policy in detail. Alatas and tively. However, the steep slopes as the curves Cameron (2008) study the effects of changes approach the minimum wage line (in the case in the minimum wage in Indonesia between of the Philippines, a sharp, horizontal rise) 1990 and 1996, prior to the East Asian cri- indicate that, for a significant portion of sis, on the employment of production work- workers, the minimum wage is binding. The ers in clothing, textiles, footwear, and leather steeper the approach of the distribution curve firms in greater Jakarta. They find a nega- to the minimum wage line, the more likely it tive employment impact on people working is that increases in the minimum wage will in small firms, but not on people working in lead to dismissals or the informalization of large firms. Similarly, Harrison and Scorse employment contracts for those earning close (2010) find that a 10 percent increase in the to the minimum. real minimum wage in Indonesia reduces Whether the introduction of— or an the employment of production workers by increase in—statutory minimum wages has a an average of 1.2 percent in foreign-owned, positive or a negative effect on earnings and exporting firms in the textiles, footwear, and productivity rests largely on whether work- apparel sectors. 24 They also find evidence ers with lower marginal labor productivity of reduced investment, falling profits, and remain employed. If, after the introduction a greater likelihood that smaller registered of or increase in minimum wages, these (formal) firms will go out of business. More people can find or remain in work that pays recent analysis of the Indonesian manufactur- the minimum, the impact is likely to be posi- ing sector covering the period 1993 to 2006 tive.22 Figure 6.11 suggests only a weak rela- also finds that minimum wage increases have tionship between higher minimum wages a clear and consistently negative employment and employment. The reported correlations impact on small firms, but a limited impact are not statistically significant, and there are on employment in large firms. However, too few observations and high dispersion in since there are many more small firms, the the data for proper inferences to be made. Yet aggregate effect of rising minimum wages in the ambiguous picture is consistent with find- Indonesia’s manufacturing sector is to lower ings of more rigorous empirical studies from formal employment (Del Carpio, Nguyen, middle- and high-income countries around and Wang 2012).25 the world, indicating that, when statistically In the Philippines, Del Carpio, Margolis, significant, the effects of minimum wages on and Okamura (2013) find that increases in aggregate employment are negative but only the real minimum wage had negligible effects very modest (Betcherman 2012; World Bank on overall employment, owing to limited 2013a). Where a positive impact on employ- coverage of the regulation and high rates of ment is found, it can usually be explained noncompliance. However, in sectors of the by stronger enforcement capacity or fewer Philippine economy with high coverage and options for employers to offer unregulated compliance, Lanzona (2012) finds negative 150 E A S T A S I A PAC I F I C AT W O R K FIGURE 6.11 The relationship between the level of minimum wages and employment is weak a. Employment rate, total b. Employment rate, male 80 KHM 90 LAO VNM KHM 70 THA 80 CHN LAO VNM THA IDN CHN Percent Percent IDN PHL 60 PHL 70 MNG 50 60 MNG 40 50 0.2 0.4 0.6 0.8 0.2 0.4 0.6 0.8 Ratio of the minimum wage to average wage, Ratio of the minimum wage to average wage, correlation: 0.2291 for OECD/–0.25 for EAP correlation: 0.0223 for OECD/–0.16 for EAP c. Employment rate, female d. Employment rate, youths 80 80 KHM LAO KHM 70 VNM 70 LAO VNM CHN CHN THA 60 60 Percent Percent THA 50 MNG 50 IDN IDN PHL PHL 40 40 MNG 30 30 0.2 0.4 0.6 0.8 0.2 0.4 0.6 0.8 Ratio of the minimum wage to average wage, Ratio of the minimum wage to average wage, correlation: 0.3642 for OECD/–0.43 for EAP correlation: 0.3831* for OECD/–0.25 for EAP OECD East Asia Pacific Source: Estimates based on World Development Indicators and countries’ labor codes. Note: Employment rates are averages between 2008 and 2010. *** p<0.01, ** p<0.05, * p<0.1 effects on employment. A 10 percent increase turn, offsets the corresponding destruction of in the minimum wage in manufacturing formal jobs and yields a net increase in total reduces formal employment in the sector employment. Lower overall employment in by up to 8 percent (World Bank 2013a). In the wake of a minimum wage increase is con- Vietnam, where minimum wages are high rel- centrated largely among labor-intensive firms ative to average wages, Del Carpio, Nguyen, with unskilled or less-skilled workers (Del and Wang (2013) find that an increase in the Carpio, Nguyen, and Wang 2012). minimum wage causes a reduction in formal Where administrative and enforcement employment. Again in Indonesia, Comola capacity is stronger and compliance is more and de Mello (2011) find that an increase widespread, the introduction of a minimum in the relative minimum wage (minimum- wage could have positive effects on both for- to-mean wage ratio) is associated with an mal employment and output. More work- increase in informal employment, which, in ers would be willing to work at the higher LABOR MARKE T REGULATIONS, INTER VENTIONS, AND INSTITUTIONS 151 wage, and employers would still make prof- Although the impact of minimum wages its and be willing to hire. This was the case on overall employment can vary widely, the in Malaysia and Hong Kong SAR, China, negative impact on employment—in the form prior to the introduction of minimum wage of higher unemployment among women policies in 2010 and 2011–12 (World Bank and younger workers—is found more con- 2009). Thus the extent of coverage and com- sistently across countries. Rising minimum pliance with minimum wage policies is a wages in Indonesia disproportionally lower critical determinant of their overall impact the employment opportunities of women on employment and earnings. As discussed with low skills, younger workers, and recent earlier, if a large proportion of workers are entrants to the labor market (Del Carpio, not subject to minimum wages—whether Nguyen, and Wang 2012). In several coun- due to legal exemptions or low compliance— tries in East Asia Pacific, women generally minimum wage adjustments will likely have bear a higher burden of employment losses limited impact on overall employment. than men. In Thailand, increases in the mini- An additional complication in predict- mum wage level have had an adverse impact ing the outcomes of a minimum wage policy on the employment of women, low-skilled arises where there is a greater degree of workers, and elderly workers (Del Carpio, integration and higher mobility of factors Messina, and Sanz-de-Galdeano 2013). In between the formal and informal economy. Vietnam, men are more likely to earn higher In countries with very competitive factor wages than women and are less likely to be markets, where the distinction between for- working for less than the minimum wage. mal and informal is defined mainly by com- Women are more likely to be earning at lev- pliance with taxes and entitlements to social els close to (below and above) the minimum benefits but little else and where employers wage level. This makes working women are competing to attract workers, a statutory in Vietnam more vulnerable than men to minimum wage can inform the negotiation changes in the minimum wage level (Nguyen, of informal labor contracts. A statutory Nguyen, and Wang 2013).27 minimum wage in these contexts can have The gender impacts of minimum wages a signaling or “lighthouse” effect (Neri, can also differ by type of worker, as illus- Gonzaga, and Camargo 2000). Set at levels trated again by research from Indonesia. For reasonably related to workers’ productivity, people in nonproduction employment—that the minimum wage has an impact on the is, those not directly involved in the firm’s earnings distribution of all workers in depen- production, such as cleaners, guards, and dent employment. 26 Looking again at the caterers—a rise in the minimum wage dis- distribution of earnings around the statutory proportionately hurts women. A 10 percent minimum wage, in figure 6.12, the reported increase in the minimum wage leads to a 0.6 earnings of agricultural workers are added to 0.7 percent decline in the employment of separately as a proxy for informal depen- women nonproduction workers in small dent labor. Unfortunately, no better variable firms (Del Carpio, Nguyen, and Wang 2013). for identifying informal wage employees is Turning to other labor regulations, a available in these labor market surveys. The review of evidence from around the world earnings of agricultural workers appear to indicates that employment protection has be affected by the statutory minimum wage, only a modest effect, lowering employ- as indicated by the clustering of reported ment, raising unemployment, and motivat- earnings around the vertical line. This is true ing people to work informally (Betcherman even in countries where statutory minimum 2012; Nickell 1997; Boeri and van Ours wages are limited to contracts in certain sec- 2008; Sanchez 2010). However, like the tors, like Cambodia, where the minimum impact of minimum wage regulation in East wage policy informs only contracts in the Asia Pacific countries, employment protection garment sector. measures have a consistently negative impact 152 E A S T A S I A PAC I F I C AT W O R K FIGURE 6.12 Minimum wages can have an impact on earnings, even for informal workers a. Philippines b. Indonesia c. Cambodia 1.5 0.6 2.0 1.5 1.0 0.4 Density Density Density 1.0 0.5 0.2 0.5 0 0 0 2 4 6 8 10 10 12 14 16 5 10 15 20 Log of wages Log of wages Log of wages d. Lao PDR e. Thailand f. Mongolia 0.5 0.8 1.0 0.4 0.8 0.6 0.3 0.6 Density Density Density 0.4 0.2 0.4 0.2 0.1 0.2 0 0 0 9 10 12 14 16 18 1 2 4 6 8 10 9 10 11 12 13 14 15 Log of wages Log of wages Log of wages Nonagricultural workers Agricultural workers Source: Estimates based on labor market survey microdata in the International Income Distribution Database (I2D2) of the World Bank. Note: The red line corresponds to the minimum wage. on young people and women. Indeed, in the and Pages 2004). Poor or partial enforcement countries for which empirical work has been of EPL is likely to aggravate these biases. cited in this chapter, it is difficult to separate Restrictive employment protection reg- the impact of employment protection from ulations are often associated with lower that of the minimum wage. But whereas the employment of young workers, women, new prejudicial impact of minimum wages may be entrants to the labor market, and unskilled determined more by poor or partial enforce- workers (OECD 2004; Heckman and Pages ment, even where perfectly enforced, employ- 2004; Perry et al. 2007; Packard, Koettl, and ment protection measures are biased against Montenegro 2012). These groups tend to be younger people and those who might prefer among the first to be laid off when labor costs or require part-time employment (Heckman rise or to be blocked from entry altogether LABOR MARKE T REGULATIONS, INTER VENTIONS, AND INSTITUTIONS 153 (Lustig and McLeod 1996). In figure 6.13, women into self-employment in East Asia the correlations between EPL and unemploy- Pacific countries. If self-employment is used ment become much stronger and statistically as a proxy for informal work, this finding significant for women and young people. could indicate that when employers are faced And there is clearer evidence of EPL creat- with higher potential costs, they hire fewer ing segmentation, possibly forcing men and workers formally and, as a result, many FIGURE 6.13 In East Asia Pacific countries, restrictive employment protection is associated with higher unemployment among women and youth a. Employment rate, total b. Employment rate, male 20 15 15 10 Percent Percent 10 PHL IDN PHL IDN 5 5 SGP SGP CHN MYS MYS VNM THA KHM THA KHM 0 0 0 1 2 3 4 0 1 2 3 4 Overall EPL strictness, 2010, Overall EPL strictness, 2010, correlation: 0.25 correlation: 0.16 c. Employment rate, female d. Employment rate, youths 20 40 15 30 IDN Percent Percent 10 20 IDN PHL PHL SGP SGP MYS 5 10 MYS THA KHM KHM THA 0 0 0 1 2 3 4 0 1 2 3 4 Overall EPL strictness, 2010, Overall EPL strictness, 2010, correlation: 0.4052** correlation: 0.3725** OECD East Asia Pacific Source: World Development Indicators and countries’ labor codes. Employment protection legislation (EPL) estimates for the Organisation for Economic Co-operation and Development (OECD) are the latest available on www.oecd.org. Note: Unemployment rates are averages between 2008 and 2010. ** p<0.05 154 E A S T A S I A PAC I F I C AT W O R K workers, typically those with lower skills, when labor costs are too high and enforce- are forced to work informally (figure 6.14). ment of regulations is weak. More rigorous In other words, employment protection regu- evidence from countries around the world lation potentially encourages firms to shift is consistent: more restrictive EPL raises workers from formal to informal contracts the share of self-employment and decreases FIGURE 6.14 In East Asia Pacific countries, restrictive employment protection is associated with higher self-employment, particularly among working women a. Self-employment rate, total b. Self-employment rate, male 80 80 KHM KHM IDN IDN 60 MNG 60 MNG THA THA PHL PHL Percent Percent 40 40 MYS MYS 20 20 SGP SGP 0 0 0 1 2 3 4 0 1 2 3 4 Overall EPL strictness, 2010, Overall EPL strictness, 2010, correlation: 0.2029 for OECD/0.808** for EAP correlation: 0.1409 for OECD/0.7929** for EAP c. Self-employment rate, female 80 KHM IDN 60 THA MNG PHL Percent 40 20 MYS SGP 0 0 1 2 3 4 Overall EPL strictness, 2010, correlation: 0.2384 for OECD/0.82** for EAP OECD East Asia Pacific Source: Estimates using World Development Indicators and countries’ labor codes. Note: Self-employment rates are averages between 2008 and 2010. ** p<0.05 LABOR MARKE T REGULATIONS, INTER VENTIONS, AND INSTITUTIONS 155 dependent employment in low- and middle- Labor Contract Law to expand coverage of income countries.28 social insurance financed from payroll taxes Finally, turning to interventions, most led to a lower probability that certain workers empirical work focuses on the impact of the were covered (Giles, Wang, and Park 2013). labor tax wedge on outcomes, since this is a composite (though incomplete) measure of the costs of interventions to employers and Conclusions workers. Interventions are financed by gov- Labor regulations, interventions, and the ernments either through earmarked revenues institutions from which they emerge are from mandatory contributions or through intended to address the imperfections that general taxation. In most countries, firms exist in labor markets in the form of inad- and workers are expected to bear some, if not equate information, uneven bargaining all, of the costs of interventions. The labor power, and insufficient insurance against code can be explicit about what share of work-related risks. The effects of these mandatory contributions is borne by employ- policies on the creation and destruction of ers and what share by workers, but in prac- employment—and ultimately on people’s tice, which party bears the actual costs is well-being—have long been debated in determined mostly by the value that workers Europe, the Americas, and elsewhere. There attach to benefit promises. This is a critical is consensus that at very restrictive levels, dimension to consider and one that is even regulations on earnings and dismissal cre- more contingent on the state’s credibility ate damaging distortions of their own rather and track record of performance. If workers than correcting market imperfections. value the benefits of interventions like unem- The WDR 2013 argues that the relatively ployment insurance, disability protection, modest impact of labor regulations and and pensions and believe that benefits will interventions on the level of employment be available when they are needed, they are and wages does not merit the heated tones more likely to consider mandatory contribu- of the debate surrounding these measures. tions as part of their compensation package The report points out that most countries rather than as a tax. The opposite also holds. are avoiding extremes of too little and too This reconciles the apparent paradox of high much regulation and have placed themselves labor tax wedges and enviable labor market on a “plateau” between these two extreme outcomes in Northern Europe, with those in “cliffs.” On this plateau, labor policies have Southern and Central Europe where labor a modest impact on efficiency outcomes taxes are often lower, but employment out- (employment, unemployment, and earnings). comes are particularly poor (Packard, Koettl, However, even on this plateau, labor policies and Montenegro 2012; World Bank 2012a). tend to redistribute gains toward prime-age In East Asia Pacific countries, a higher men at the expense of women, young peo- labor tax wedge is associated with higher ple, those who need or prefer to work part unemployment rates as well as lower employ- time, and self-employed people. This finding ment rates (figures 6.15 and 6.16). The nega- should come as no surprise, since the pre- tive and significant correlation between the vailing models of labor regulation and inter- size of the labor tax wedge and employment ventions that are most often deployed today remains when considering only women and were first conceived in countries and during youth, but, in contrast to labor regulations, periods in history when men working in full- it appears weaker. With respect to unemploy- time, dependent employment were the largest ment, however, there is a stronger association group in the labor force. between the size of the labor tax wedge and The experience of countries in East Asia higher unemployment among women and Pacific with labor market and social protec- youth. In China, with by far the largest labor tion policies is short compared with that of market in the region, passage of the 2008 countries in other regions. The higher-income 156 E A S T A S I A PAC I F I C AT W O R K FIGURE 6.15 A larger tax wedge is associated with lower levels of employment a. Employment rate, total b. Employment rate, male KHM 90 80 LAO KHM VNM 70 THA CHN 80 THA LAO VNM CHN IDN MYS Percent PHL Percent IDN SGP SGP 60 MYS 70 PHL MNG 50 60 MNG 40 50 0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.0 0.1 0.2 0.3 0.4 0.5 0.6 Tax wedge, 2010, Tax wedge, 2010, correlation: –0.6350*** correlation: –0.707*** c. Employment rate, female d. Employment rate, youths 80 70 KHM KHM LAO VNM 60 LAO 70 VNMCHN THA CHN 50 Percent 60 Percent THA SGP 40 IDN 50 MNG PHL IDN PHL SGPMYS MNG MYS 30 40 20 30 0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.1 0.2 0.3 0.4 0.5 0.6 Tax wedge, 2010, Tax wedge, 2010, correlation: –0.5039*** correlation: –0.3689*** OECD East Asia Pacific Source: Estimates using World Development Indicators, and countries’ labor and tax codes. Note: Employment to working-age population rates are averages between 2008 and 2010. *** p<0.01 East Asian countries (Japan, Korea, and is more restrictive than in OECD countries. Singapore) exhibit more modest levels of And in contrast to middle- and high-income regulation and protection, similar to those countries elsewhere, recent changes in regu- in Australia, Great Britain, New Zealand, lation in East Asia have been toward greater and North America. However, although gov- restrictions. ernments in many low- and middle-income In East Asia, employment protection countries in the region have stepped into this legislation is most restrictive in Indonesia, area of policy making much later than their where workers whose employment is regu- peers in Latin America and Central Europe, lated by the labor code enjoy more protec- they have done so with an orientation similar tion than workers in France, Greece, or to that taken in several Southern European Portugal and only a little less than work- countries. A simple reading of the labor codes ers in Spain. Regulation on dismissal is also in several East Asia Pacific countries reveals relatively restrictive in China and Lao PDR. that in several cases, employment regulation With high levels of structural informality LABOR MARKE T REGULATIONS, INTER VENTIONS, AND INSTITUTIONS 157 FIGURE 6.16 A larger tax wedge is associated with higher levels of unemployment a. Unemployment rate, total b. Unemployment rate, male 20 15 15 10 MNG Percent Percent 10 PHL MNG IDN IDN PHL 5 SGP 5 SGP MYS CHN MYS KHM LAO VNM LAO KHM 0 THA 0 THA 0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.0 0.1 0.2 0.3 0.4 0.5 0.6 Tax wedge, 2010, Tax wedge, 2010, correlation: 0.40** correlation: 0.36** c. Unemployment rate, female d. Unemployment rate, youths 20 40 15 30 Percent Percent IDN 10 20 IDN PHL PHL MNG MNG SGP SGP MYS 5 10 LAO MYS KHM THA LAO THA KHM 0 0 0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.0 0.1 0.2 0.3 0.4 0.5 0.6 Tax wedge, 2010, Tax wedge, 2010, correlation: 0.4124** correlation: 0.4106** OECD East Asia Pacific Source: Estimates using countries’ labor and tax codes. Note: Unemployment rates are averages between 2008 and 2010. ** p<0.05 and widespread avoidance of labor regula- overcome, creating segmentation and social tion in the manufacturing and service sectors, exclusion. restrictive regulations on paper may have lit- For firms that are too large to evade— tle impact on outcomes. Indeed, the relatively many of them international companies— restrictive orientation of the labor code in onerous levels of regulation are already emerging East Asian economies has probably a problem and a source of unfair com- had only minor impact thus far, relative to the petition from smaller rivals that can still impact of structural change on employment. ignore the rules and hire informally. As However, this should not be a reason for com- more people in East Asia Pacific seek work placency. These countries also tend to have in the manufacturing and services sectors, relatively low levels of institutional develop- as governments improve their capacity to ment (figure 6.17). When combined with poor enforce regulations, and as firms find it implementation and enforcement capacity, harder to evade, restrictive regulations in even reasonable labor policies can aggravate the labor code could become more binding the market failures they were designed to constraints on well-being from work. 158 E A S T A S I A PAC I F I C AT W O R K FIGURE 6.17 Many countries in East Asia Pacific combine highly restrictive levels of labor regulation with low institutional capacity EPL and world governance indicators, 2005 and 2010, OECD and East Asia Pacific 4 3.0 PRT ESP PRT IDN GRC FRA GRC ESP CHN NOR 3 2.5 FRA NOR PHL BEL DEU SWE IDN VNM ITA PHL VNM ITA BEL DEU SWE NLD AUT FIN NLD 2.0 KHM CZE KHM AUT FIN SVK KOR HUN EPL KOR EPL 2 THA CZE DNK LAO THA DNK LAO SVK HUN SGP CHE MNG JPN AUS 1.5 MNG SGP CHE CHN JPN AUS NZL NZL 1 MYS GBR CAN MYS 1.0 GBR CAN USA USA 0 0.5 10 20 40 60 80 100 10 20 40 60 80 100 World governance indicators, 2005 World governance indicators, 2010 OECD East Asia Pacific Source: Estimates based on countries’ labor codes and World Bank 2013d for World Governance Indicators. Note: The World Governance Indicators include various indicators such as voice, accountability, governance, corruption, regulatory quality, violence, and rule of law. Annex 6A Supplementary Tables TABLE 6A.1 Summary of minimum wage systems in selected East Asia Pacific countries Country and year Government entity responsible Levels at which minimum wages are of introduction for setting minimum wages determined Coverage Frequency of adjustments Indonesia (early Regional governments, following Province, which may set separate rates Applies only to workers employed by No specific provision in the law, but 1970s) recommendations from the provincial or for districts and for economic sectors firms and intended to be applied solely in practice adjusted once a year district wage council to workers with less than a year’s service Thailand (1972) Ministry of Labor, based on Regional and for sector and All full-time workers on a daily base, Annual adjustment, but not followed recommendations from the National occupation; in practice, rates are only regardless of nationality in practice Wage Commission, the provincial set for provinces; 31 geographically minimum wage subcommittees, and the differentiated minimum wages are set subcommittee on technical affairs and by decentralized committees in the review 76 provinces and Bangkok Cambodia (1997) Ministry of Labor, after receipt of Rates set only for the garment sector; Set only for workers in the textile, No scheduled frequency of recommendations made by the Labor three levels of minimum wages, garment, and shoe-sewing sector adjustment identified; adjusted from Advisory Committee depending on the worker’s experience time to time in accordance with the (apprentice, probationary, and regular evolution of economic conditions levels) and the cost of living Lao PDR (2006) National government National Applies to all employees and employers No scheduled frequency of who carry out activities in labor units; adjustment identified; last update also applies to persons working under was in 2009 written contracts for employment of three months or more; excludes civil servants Philippines (1951) At the regional level by regional By region as well as by industry All workers and employees in the private No provision in the law for the tripartite wage and productivity boards; (agriculture and nonagriculture) sector frequency of adjustment; changes the National Wages and Productivity occur every year or even every 17 Commission reviews each of the regional months minimum wage rates Vietnam (1992) The government (that is, Ministry of Set for four regions; different minimum All employees and employers in all No specific time period for Labor, War Invalids, and Social Affairs) wages for different types of enterprises: sectors of the economy and in all adjustment; ministry has the in consultation with the Vietnam domestic and foreign owned forms of ownership discretion to vary rates from time General Confederation of Labor and the to time representatives of employers Myanmar (1948) The president, following Set at the sectoral level (public sector All workers except those employed No provision in the law for recommendations from the Minimum workers and workers in rice-milling, on a casual basis frequency of adjustment Wage Council cigar-rolling, and cheroot-rolling industries) (continued) 159 160 TABLE 6A.1 Summary of minimum wage systems in selected East Asia Pacific countries (continued) Country and year Government entity responsible Levels at which minimum wages are of introduction for setting minimum wages determined Coverage Frequency of adjustments Malaysia (2012)a National government, after consultations Regional (for peninsular Malaysia and Private sector workers Not applicable with the National Wage Consultative for Sabah, Sarawak, and Labuan) Council Mongolia (1995) Government, after taking account of National Domestic business entities or Adjusted at least once a year proposals of national organizations organizations and citizens of Mongolia, representing employers’ and workers’ foreign citizens, or stateless persons interests China (1993) Local government, with each province, Set for each province, region, Enterprises, private nonenterprise entities, Adjusted at least once every two municipality, or region setting its own autonomous region, and municipality individual industrial and commercial years minimum wage in accordance with its and for sectors households with employees (the own local conditions employing entities), and laborers who have formed a labor relationship with them a. Malaysia’s first minimum wage will come into effect in January 2013. LABOR MARKE T REGULATIONS, INTER VENTIONS, AND INSTITUTIONS 161 TABLE 6A.2 Summary of regulations for dismissal of permanent workers Compensation following Notice period Length of trial unfair dismissal (worker (4 years tenure, period (maximum, with 20 years tenure, Possibility of Country Notification procedures months) months) months) reinstatement Brunei Consent of the commissioner is 0.5 <60 0 Yes Darussalam necessary for termination Cambodia Notification to the labor 1 <3 0 Yes inspector is necessary Indonesia Approval from the institution 1 <3 0 Yes for the settlement of industrial relations disputes Lao PDR Approval from the labor 1–1.5, depending 1–2 48 Yes authority on workers’ skills Malaysia Written statement is enough 1.5 <24 0 No, specified in the law Philippines Not known 1 6 0 Yes Singapore Written statement is enough 0.5 Not specified in the law 0 Yes Thailand Written statement is enough 1.0 Not specified in the law 0 Yes Vietnam Written statement is enough 1.5 1–2 20 Yes China Notice must be given in writing, 1 6 40 Yes and the labor union notified of the reason in advance Mongolia Written statement is enough 1 6 0 Yes Sources: Countries’ labor regulation; International Labour Organization’s Employment Protection Legislation Database (http://www.ilo.org/dyn/eplex/termmain.home). TABLE 6A.3 Fixed-term contract regulations in East Asian countries Maximum number Maximum cumulative Valid reason for use of of successive fixed- duration of successive Country fixed-term contract term contracts fixed-term contracts Temporary working agencies Brunei For specific time and type of work No limitation No limitation Need a license, but no limitations on Darussalam the type of employment Cambodia No limitation No limitation 24 months No limitation China No limitation 2 10 years Placement of workers from temporary agencies apply to temporary, ancillary, and substitute positions Indonesia Fixed-term contracts are prohibited 2 36 months Need a license; allowed to contract for permanent work; allowed for workers for auxiliary service activities temporary, time-bound (that is, work or activities that are related only that can be completed within three indirectly to production years), seasonal, or experimental work Lao PDR No limitation No limitation No limitation Not regulated Malaysia No limitation No limitation No limitation No restrictions Mongolia For a specified term for temporary No limitation No limitation Not regulated replacement of worker, seasonal, or temporary work; probationary or training period for apprentices Philippines Fixed-term contracts prohibited for No limitation No limitation Do not need to register; no limitations permanent work; allowed for specific on the work that can be performed, but projects the secretary of labor and employment may, by appropriate regulations, restrict or prohibit the contracting out of labor to protect workers (continued) 162 E A S T A S I A PAC I F I C AT W O R K TABLE 6A.3 Fixed-term contract regulations in East Asian countries (continued) Maximum number Maximum cumulative Valid reason for use of of successive fixed- duration of successive Country fixed-term contract term contracts fixed-term contracts Temporary working agencies Singapore No limitation No limitation No limitation Need a license Thailand Fixed-term contracts prohibited for No limitation 24 months No limit permanent work; allowed for specific projects or for occasional work or for seasonal jobs Vietnam No limitation 2 72 months Not regulated, but fixed-term contract regulation applies Sources: Countries’ labor regulation; International Labour Organization’s Employment Protection Legislation Database (http://www.ilo.org/dyn/eplex/termmain.home). TABLE 6A.4 Informal work, conditional correlations using basic specification Vulnerable employment Self-employment Variable OLS (1) FE (2) RE (3) OLS (1) FE (2) RE (3) Tax wedge −0.444*** −0.449*** −0.444*** −0.627*** −0.632*** −0.627*** (0.154) (0.134) (0.134) (0.136) (0.136) (0.136) EPL 2.042 2.107 2.042 4.307* 4.358** 4.307** (2.434) (1.811) (1.820) (2.394) (1.783) (1.785) Union density 0.0947 0.0874 0.0947* 0.0139 0.00827 0.0139 (0.0782) (0.0542) (0.0543) (0.0849) (0.0546) (0.0545) Min. Wage : Av. Wage 0.0426 0.0332 0.0426 0.00830 0.00121 0.00830 (0.0688) (0.0618) (0.0618) (0.0765) (0.0628) (0.0625) Log of GDP per capita −12.06*** −12.14*** −12.06*** −12.72*** −12.80*** −12.72*** (1.777) (1.324) (1.330) (1.817) (1.345) (1.345) Inflation 0.0334 0.0498 0.0334 −0.00462 0.0111 −0.00462 (0.244) (0.244) (0.245) (0.238) (0.248) (0.248) Constant 142.9*** 144.0*** 142.9*** 154.4*** 155.5*** 154.4*** (20.18) (14.60) (14.66) (20.73) (14.92) (14.91) Observations 96 96 96 97 97 97 R2 0.630 0.637 0.682 0.648 0.653 0.719 Number of period 2 2 2 2 Note: OLS = ordinary least squares; FE = fixed effects; RE = random effects. Robust standard errors in parentheses. OLS with cluster robust standard errors (clustering on countries). *** p<0.01, ** p<0.05, * p<0.1 TABLE 6A.5 Vulnerable employment, conditional correlations using fixed-effect estimation Variable (1) (2) (3) (4) (5) (6) (7) Tax wedge (tw) −0.450*** −0.578*** −0.570*** −0.590*** −0.553*** 1.426 −1.455 (0.132) (0.140) (0.142) (0.189) (0.132) (1.401) (2.668) EPL (epl) 1.958 1.020 37.90*** −2.196 0.472 1.790 −6.312 (1.765) (2.224) (13.38) (3.065) (2.190) (2.302) (30.68) Union density (ud) 0.0891* 0.0289 −0.0124 0.0487 −1.325*** 0.00721 −1.363* (0.0527) (0.0583) (0.0590) (0.0911) (0.449) (0.0591) (0.764) Minimum wage: average wage (mw) 0.0348 −0.00520 −0.0447 −0.0308 −0.0476 −0.0317 −0.875 (0.0610) (0.0647) (0.0653) (1.520) (0.0625) (0.0630) (1.591) Log of GDP per capita −12.23*** −7.911*** −8.782*** −9.452** −7.152*** −6.374*** −13.57** (1.155) (2.129) (2.093) (3.848) (2.193) (2.256) (5.044) Government effectiveness −6.846** −21.36** −3.429 −12.91*** −15.28 −37.23 (3.057) (8.257) (15.97) (4.623) (9.496) (29.35) (continued) LABOR MARKE T REGULATIONS, INTER VENTIONS, AND INSTITUTIONS 163 TABLE 6A.5 Vulnerable employment, conditional correlations using fixed-effect estimation (continued) Variable (1) (2) (3) (4) (5) (6) (7) Investment Freedom −0.135 0.113 −0.0401 −0.503*** −0.360 −0.517 (0.0967) (0.275) (0.590) (0.173) (0.328) (0.877) Trade Freedom 0.187 0.215 0.0370 0.435* 0.237 0.462 (0.251) (0.243) (0.394) (0.244) (0.242) (0.379) Business Freedom 0.154 0.866 0.750 0.240 0.632 1.256 (0.150) (0.526) (0.730) (0.250) (0.514) (1.260) Fiscal Freedom −0.118 0.227 −0.793 −0.384* 0.850 −1.888 (0.120) (0.321) (0.810) (0.213) (0.525) (1.378) epl*Government Effective 6.828* 4.455 (3.798) (7.080) epl*Trade Freedom −0.131 −0.333 (0.127) (0.244) epl*Business Freedom −0.309 0.406 (0.231) (0.374) epl*Fiscal Freedom −0.152 −0.0952 (0.146) (0.365) mw*Government Effective −0.193 −0.0698 (0.396) (0.427) mw*Trade Freedom −0.00205 (0.0149) mw*Business Freedom −0.0105 −0.0218 (0.0177) (0.0169) mw*Fiscal Freedom 0.00942 0.0195 (0.0213) (0.0222) mw*Investment Freedom 0.00845 (0.0157) ud*Government Effective 0.0927 0.239 (0.102) (0.234) ud*Trade Freedom 0.0124*** (0.00443) ud*Business Freedom −0.00163 −0.00638 (0.00587) (0.0109) ud*Fiscal Freedom 0.00967** 0.00837 (0.00450) (0.0110) ud*Investment Freedom 0.0222*** (0.00807) tw*Government Effective 0.246 0.674 (0.267) (0.534) tw*Trade Freedom 0.00570 (0.00928) tw*Business Freedom −0.0125 −0.0201 (0.0141) (0.0202) tw*Fiscal Freedom −0.0232 0.0297 (0.0139) (0.0300) tw*Investment Freedom −0.00307 (0.0148) Constant 145.4*** 109.5*** 35.40 154.1* 123.5*** 6.951 254.3* (12.82) (28.03) (37.96) (80.57) (30.69) (56.03) (129.8) Observations 97 92 92 60 92 92 60 R2 0.636 0.685 0.726 0.749 0.738 0.725 0.876 Number of period 2 2 2 2 2 2 2 *** p<0.01, ** p<0.05, * p<0.1 164 E A S T A S I A PAC I F I C AT W O R K TABLE 6A.6 Self-employment, conditional correlations using fixed-effect estimation Variable (1) (2) (3) (4) (5) (6) (7) Tax wedge (tw) −0.585*** −0.619*** −0.651*** −0.570*** −0.590*** 2.341* −3.639 (0.128) (0.139) (0.138) (0.183) (0.127) (1.374) (2.655) EPL (epl) 3.387** 1.327 44.13*** 1.367 0.625 2.413 18.94 (1.654) (2.107) (12.87) (2.803) (2.022) (2.165) (30.21) Union density (ud) 0.0266 −0.0283 −0.0498 0.0475 −1.746*** −0.0641 −1.674** (0.0505) (0.0566) (0.0558) (0.0892) (0.432) (0.0572) (0.727) Min. Wage : Av. Wage (mw) 0.0163 −0.0246 −0.0424 −1.196 −0.0823 −0.0560 −1.008 (0.0587) (0.0637) (0.0630) (1.469) (0.0599) (0.0616) (1.504) Log of GDP per capita −11.56*** −9.856*** −10.19*** −11.11*** −8.878*** −8.787*** −11.97** (1.109) (2.089) (2.010) (3.859) (2.108) (2.201) (5.053) Government Effectiveness −7.501** −12.94 −10.44 −12.60*** −14.45 −48.27* (2.948) (7.796) (15.97) (4.395) (9.284) (27.60) Investment Freedom −0.0250 0.134 −0.0171 −0.431** −0.173 −0.270 (0.0959) (0.266) (0.594) (0.166) (0.322) (0.874) Trade Freedom 0.177 0.182 0.0196 0.441* 0.235 0.450 (0.248) (0.235) (0.394) (0.235) (0.237) (0.381) Business Freedom 0.149 0.567 0.321 0.156 0.725 0.900 (0.149) (0.494) (0.701) (0.240) (0.505) (1.188) Fiscal Freedom −0.262** 0.472 −1.125 −0.602*** 1.002* −2.494* (0.117) (0.301) (0.812) (0.203) (0.514) (1.315) epl*Government Effective 2.033 −0.157 (3.621) (6.973) epl*Trade Freedom −0.0745 −0.361 (0.123) (0.246) epl*Business Freedom −0.187 0.482 (0.217) (0.353) epl*Fiscal Freedom −0.355** −0.430 (0.139) (0.367) mw*Government Effective 0.0233 0.143 (0.392) (0.410) mw*Trade Freedom −0.00124 (0.0150) mw*Business Freedom 2.98e-05 −0.0174 (0.0170) (0.0165) mw*Fiscal Freedom 0.0176 0.0209 (0.0213) (0.0218) ud*Government Effective 0.0568 0.306 (0.0978) (0.228) ud*Trade Freedom 0.0138*** (0.00426) ud*Business Freedom 0.000691 −0.000946 (0.00563) (0.0110) ud*Fiscal Freedom 0.0114** 0.0112 (0.00434) (0.0108) tw*Government Effective 0.201 0.875 (0.263) (0.519) tw*Trade Freedom 0.00317 (0.00912) tw*Business Freedom −0.0148 −0.0256 (0.0138) (0.0201) (continued) LABOR MARKE T REGULATIONS, INTER VENTIONS, AND INSTITUTIONS 165 TABLE 6A.6 Self-employment, conditional correlations using fixed-effect estimation (continued) Variable (1) (2) (3) (4) (5) (6) (7) tw*Fiscal Freedom −0.0317** 0.0579* (0.0137) (0.0294) tw*Investment Freedom 0.00274 (0.0148) ud*Investment Freedom 0.0168** (0.00805) mw*Investment Freedom 0.00616 (0.0158) Constant 145.6*** 138.3*** 51.86 208.4** 162.6*** 5.892 289.6** (12.37) (27.79) (36.70) (80.23) (29.63) (55.11) (119.3) Observations 99 94 94 62 94 94 62 R2 0.642 0.674 0.728 0.739 0.743 0.719 0.868 Number of period 2 2 2 2 2 2 2 *** p<0.01, ** p<0.05, * p<0.1 Notes Costa Rica (1943), Uruguay (1943), and Colombia (1945) soon followed. 1. The resulting indicators and measures have 5. Several provinces have set sector minimum been used to track trends in labor market wages for agriculture, mining, manufactur- policy in subsequent Employment Outlook ing, utilities, forestry, and rubber industries. reports (OECD 1997, 2004, 2006, 2007). 6. In Thailand and Vietnam, regional rates are 2. A rich set of labor market policy indicators set at the central level by the Ministry of is available from the World Bank’s Doing Labor after consultations with the represen- Business Database, Employing Workers. tatives of employers and employees. 3. It would be difficult to separate our discus- 7. The wage council consists of government, sion of regulations completely from that of entrepreneurs, and labor organization rep- institutions—the norms and structures from resentatives. which regulations and interventions emerge. 8. Each of the 16 regions in the Philippines has For this reason, this section also includes its own regional board. Before 1989, mini- some description of collective bargaining; a mum wages in the Philippines were set nation- more analytical discussion of labor institu- ally by Congress. However, since 1989, with tions is taken up later in the chapter. enactment of the Wage Rationalization Act/ 4. Latin American countries were among the the Republic Act no. 6727, minimum wages first developing countries to adopt labor are established at the regional level. codes and to institute minimum wages. 9. In the East Asia Pacific region, only Fiji, the Beginning in the mid-1930s and especially Federated States of Micronesia, the Solomon during the 1940s, minimum wage legisla- Islands, and Vanuatu have higher relative min- tion was adopted in most of Latin America. imum wages, and all these ratios are within This process was associated with the prom- 5 percentage points of each other. See the ulgation of comprehensive labor codes, 2013 Doing Business, Employing Workers, which became common in Latin America in Database (http://www.doingbusiness.org the 1930s. In some cases, the introduction /~/media/GIAWB/Doing percent 20Business of labor codes was preceded by constitu- /Documents/Miscellaneous/EWI-DB2013 tional provisions that laid the basis for the -data.ashx). regulation of workers’ rights. Labor legisla- 10. Most high-income OECD countries relaxed tion in Latin America first appeared in Chile their employment protection regulations and Mexico in the early 1930s. Mexico was in the last two decades, mainly by easing the first country to establish a minimum the restrictions on temporary employment wage policy (1931), and Brazil (1938), (OECD 2004; World Bank 2012a). 166 E A S T A S I A PAC I F I C AT W O R K 11. The law passed after the slave labor scandal Pacific countries rank “practices of the in the coal mines of Shanxi and Henan prov- informal sector” as a pressing problem, inces. The government was concerned that which could reflect the competition from these gross violations of workers’ rights, not firms able to evade regulation and thus gain to mention the resulting strikes, would neg- market advantage. atively affect social stability and economic 22. If a mandatory floor on wages can create development. incentives for firms to increase the output of 12. This is due, in part, to the difficulty of their workers by investing in training or new administering national income protection technology, the aggregate impact on produc- plans (Vodopivec 2006). tivity can be positive. 13. In Germany, the share of workers with 23. Although theory predicts that minimum fixed-term contracts rose from 30 percent wages are likely to hurt the chances of in 2000 to 45 percent in 2010 (Nielen and young people, the slightly positive relation- Schiersch 2012). ship between the minimum wage and youth 14. In this section, we focus on internal migra- employment for OECD countries (bottom tion. Labor migration across borders is dis- right-hand quadrant of figure 6.11) is also cussed in much greater detail in a compan- consistent with a few studies attributing this ion regional report (World Bank 2013a). positive outcome to well-enforced minimum 15. The tax wedge constructed for the ASEAN wages attracting younger people with low countries, China, and Mongolia reflect the labor productivity into work. wages for single individuals, without chil- 24. Islam and Nazara (2000), Suryahadi et al. dren, living in urban areas and earning the (2003), and Pratomo (2011) also find nega- average wage in service and manufactur- tive effects of minimum wages on overall ing industries (OECD 2012). The tax rates employment and earnings in Indonesia. and social insurance contributions are pre- 25. Also in Indonesia, Rama (2001) finds a neg- scribed by a country’s laws and regulations ative employment effect among firms with and therefore differ for each country. 20 or fewer workers, but a positive effect for 16. Excluding Lao PDR and Singapore, for medium and large firms. which data on taxes are not available for 26. The statutory minimum wage helped several 2002. countries to narrow the gap between formal 17. In Cambodia, a new law has been prepared, and informal wages, by providing a clear stipulating that social security contributions signal of what the market wage rate for for civil servants will be shared between similar skill sets should be and changing the the government (18 percent) and workers equilibrium efficiency wage in (at least parts (6 percent). of) the informal sector (Dinkelman and 18. In these countries, generous allowances are Ranchhod 2012). Recent studies have found provided by law, substantially reducing the evidence of this lighthouse effect in Brazil taxable income of average wage workers. and Ghana (Boeri, Garibaldi, and Ribeiro 19. Deyo (1989, 5) argues that the Confucian cul- 2010). Gindling and Terrell (2007) also find tural explanation holding that “values of hier- that, in Costa Rica, increases in the mini- archy, cooperation, industriousness, pater- mum wage narrow the wage gap between nalism, and the subordination of individual formal and informal sectors. They argue to state” does not account for other regions that an increase in the minimum wage raises where labor unions are strong and also hold wages not only in the urban formal sector strong cultural values of “authoritarian acqui- (large urban enterprises) but also across all escence,” such as Iberian corporatism in Latin workers covered and not covered by mini- America. mum wage legislation (likely in small urban 20. This constraint can be offset if firms become enterprises, large rural enterprises, and more selective with the new hires and if they small rural enterprises). In other words, the are encouraged to invest more in worker minimum wage functions as a signal to the training (Boeri and van Ours 2008). entire labor market. 21. This said, the impact of stringent labor regu- 27. When the data are disaggregated by demo- lation may be showing up in other responses graphic groups, similar findings are observed to firm surveys. 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Priority Policy Challenges to Well-being from Work 7 in East Asia Pacific Priorities vary widely across countries in most likely to balance the needs of enter- East Asia Pacific, but most people live prise with those of working people. These in countries where sustaining well-being elements of policy are essential to sustaining from work will require that cities be better the demand for and supply of human capital managed and that the barriers that cause in any country. In chapters 4, 5, and 6, we segmentation in the market for labor and assessed the performance of governments in human capital be removed. East Asia Pacific countries in ensuring that they are in place. T he demand for and supply of labor But, growth, although necessary, is nei- and human capital need to be not only ther sufficient to sustain demand for labor sustained but also stoked. The World and human capital nor enough to encourage Development Report, 2013: Jobs (hereaf- adequate supply. And while the labor code ter referred to as WDR 2013; World Bank can shape outcomes, even the best designed 2012) claims that 600 million jobs will have and implemented institutions, regulations, to be created in the next 15 years simply to and interventions will only get a country so maintain current levels of employment. For far. More is required of policy makers, par- this reason, policy makers everywhere are ticularly to sustain the types of work that are worried about the relatively slow pace at most likely to transform countries along the which the market for labor and human capi- three dimensions of development discussed tal is recovering after the sharp contraction in the WDR 2013 and in chapter 3—namely, in 2009 and 2010. While the economies of productivity, living standards, and social East Asia Pacific fared far better than most cohesion. and enjoy much lower rates of unemploy- These additional priority challenges vary ment, similar concerns dwell on the minds of widely from country to country, and even in policy makers in the region, increasing their the same country they can change dramati- appetite for policy guidance. In part II of this cally over time. As the WDR explains, “The report, we discussed the importance of sound types of jobs that can contribute the most to fundamentals, of policies that encourage for- development depend on the country context. mation of the right human capital, and of the Jobs that connect the economy to the world institutions, regulations, and interventions may matter the most in some situations; in 171 172 E A S T A S I A PAC I F I C AT W O R K others, the biggest payoff may be for jobs that Chapter 3 also points out that it is impor- reduce poverty or defuse conflict” (World tant not to take the transformative nature Bank 2012, 17). This important assertion of work for granted, given mounting evi- notwithstanding, the WDR 2013 offers a dence that some of the transformations typology that policy makers can apply to may be starting to lag. In this chapter, we identify and prioritize their particular policy show that, on close inspection, signifi- challenges and the steps they can take toward cant imbalances are apparent in the pace overcoming them.1 of productivity gains, changes in living This chapter applies the W DR “jobs standards, and social cohesion. In mainly challenges” typology using observable data agrarian economies like Cambodia or the to categorize East Asia Pacific economies. Lao People’s Democratic Republic, labor By doing so, it sheds light on the implica- productivity in agriculture remains too tions of these challenges for setting policy low and so do living standards. In urban- priorities. The exercise is controversial, but, izing economies like Indonesia and the we believe, also yields important insights. Philippines, growing congestion and poor In categorizing the countries of East Asia land management are undermining the Pacific, the chapter highlights two impor- productivity gains from agglomeration. In tant features that set the region apart from small island nations, idle youth feel frus- other low- and middle-income-country trated and could become increasingly dis- regions. The first feature is diversity: East engaged. In resource-rich countries like Asia Pacific countries can be found in Mongolia and Papua New Guinea, some almost all eight categories of the WDR’s forms of employment are hugely produc- typology, in contrast to countries in Latin tive, but there are too few of them and America and the Caribbean, emerging there is a temptation to use the natural Europe, the Middle East and North Africa, resource bounty to subsidize employment and South Asia, where countries tend to creation for the rest. In formalizing coun- cluster in one or two types. This should tries like China and potentially Indonesia, come as no surprise. After all, the East Asia rigid regulatory models tried in Europe and Pacific region encompasses China, an eco- Latin America are being adopted at a time nomic powerhouse and home to 1.3 billion when productivity gains are bound to come people, as well as Tuvalu, a remote island from firm-to-firm employment transitions country of just 10,000 people. The second rather than from rural-to-urban movement. feature that sets the region apart from And in societies bound to age quickly, like others is dynamism: because of the pace of Thailand and Vietnam, mechanisms to rec- change over the last 30 years, many East oncile long working lives with protection Asia Pacific economies can fit into more in old age are missing almost altogether. than one category. To capture this unprec- Although we have done our best to edented pace of change, the chapter takes appeal to data in categorizing East Asia the WDR’s categorization a step further by Pacific countries, our application of the considering the importance of countries’ typology is ultimately subjective. The cat- transitions from one category to another. egorization exercise is intended neither to Of particular importance to the conclu- constitute a definitive diagnosis nor to pro- sions of this report are the critical economic duce a conclusive set of prescriptions about transitions from “agrarian” to “urbaniz- which policies should be prioritized. We ing,” “urbanizing” to “formalizing,” and expect as many readers to disagree with “formalizing” to “aging.” how countries have been categorized as to As argued in chapter 3, the three devel- agree. This exercise is only useful if it pro- opment transformations associated with vides clues to policy makers about where work have for the most part unfolded at a the most important challenges to boost- similar pace in East Asia Pacific countries. ing work may lie. If the chapter provokes P R I O R I T Y P O L I C Y C H A L L E N G E S TO W E L L - B E I N G F R O M W O R K I N E A S T A S I A PAC I F I C 173 debate about which challenges are the Pacific into these types. We apply empirical most pressing, then it will have served “thresholds” to the data to sort countries its purpose. Given the unique geographic into categories. The thresholds are poten- constraints of Pacific Island countries, the tially the source of most contention in this discussion here is followed by a chapter chapter in that how they are chosen deter- focused specifically on the formidable chal- mines which challenges countries could pri- lenges that they face. oritize. We have used the same data-driven formulation of the WDR’s typology. Indeed, most of the data sources and thresholds The “jobs challenges” typology are the same as those used in the WDR’s The “jobs challenges” typology presented analysis. 2 in the 2013 WDR starts with four broad This process is intended to be insightful categories: a country’s level of develop- and stimulating rather than definitive or ment , demog raphy, i nst it ut ions , a nd conclusive. The thresholds are determined natural endowments. The last of these by assessing the global distribution of data, categories is substantially different from but legitimate alternatives could just as eas- the rest, in that the term “natural endow- ily yield a different distribution of countries ments” is less likely to present a con- into the eight categories. 3 We are not mak- tinuum along which a country can move. ing this point to undermine the exercise: For example, a country can move from a indeed, the outcomes of the mapping have lower to a higher level of development or been assessed at length with supporting from one demographic profile to another. data and appear both robust to alternative Nat u ra l endow ments — pa r t icu la rly a thresholds as well as persuasive. Rather, we country’s geography—are relatively fixed. want to acknowledge that the process of This presents the immediate possibility of placing countries into “types” will always overlap (for example, a country with high be controversial, open to differences in inter- levels of youth unemployment can also be pretation and dispute. The chapter seeks to resource rich and conflict affected, a small exploit this inevitability to achieve deeper island state can also be rapidly urbanizing, insights. and so forth). From these four broad cat- Obviously many countries are facing egories, eight specific “country types” are not just one but several challenges. As the drawn (table 7.1). WDR stresses, “These criteria [used to cat- We use data (some presented in earlier egorize countries] are not mutually exclu- chapters) to map the countries of East Asia sive” (World Bank 2012, 190). By applying TABLE 7.1 WDR 2013 presents eight country types to identify priority challenges The “jobs challenges” typology, by level of development, demography, institutions, and natural endowments. Broad category Specific type Dominant, defining feature Level of development 1. Agrarian Majority of the population living in rural areas 2. Urbanizing Agricultural modernization and rural-urban migration rapidly taking place 3. Formalizing An urban middle class coexisting with a large share of informal employment Demography 4. Aging Rapidly increasing old-age dependency ratios 5. High youth unemployment Youth unemployment and idleness rates at unusually high levels Institutions 6. Conflict affected Livelihoods altered by war and violence Natural endowments 7. Resource rich Extractive industries are a substantial share of exports 8. Small island state Islands with less than 1 million in population Source: World Bank 2012, ch. 6. 174 E A S T A S I A PAC I F I C AT W O R K the empirical thresholds, it is clear that Country categorization by level most countries in East Asia Pacific map to of development more than one category (table 7.2). Fast- changing Vietnam can be mapped to four. Level of development encompasses agrarian, Compared to other regions, East Asia urbanizing, and formalizing economies. We Pacific countries are more heavily repre- discuss each in turn. sented in three categories: urbanizing, resource rich, and small island states. The Agrarian last clearly reflects the large number of sov- ereign countries in the Pacific, which are An agrarian economy is one in which the discussed at length in the next chapter. In majority of the population still lives in rural contrast, countries in emerging Europe and areas, where work consists mainly of subsis- Central Asia are more likely to cluster into tence and small-scale commercial farming the categories of aging and formalizing. and related industries. A country is con- Countries in South Asia and in the Middle sidered agrarian if 60 percent or more of East and North Africa are more likely to the population is living in rural areas. As cluster in the categories of agrarian and shown on figure 7.1, panel a, seven coun- high youth unemployment, respectively. In tries in East Asia Pacific qualify as agrar- Latin America and the Caribbean, coun- ian according to that criterion: Cambodia, tries cluster in the category of formalizing. Lao PDR, Myanmar, Papua New Guinea, Argentina, Brazil, Chile, and Uruguay also Thailand, Timor-Leste, and Vietnam. In the qualify as aging. figure, the size of the sphere corresponds TABLE 7.2 Countries in East Asia Pacific are more likely to be mapped to more than one category and tend to cluster in four types: Agrarian, urbanizing, resource rich, and small island state High youth Small island Conflict Country Agrarian Urbanizing Formalizing Aging unemployment Resource rich state affected Cambodia ¸ China ¸ ¸ ¸ Fiji ¸ Indonesia ¸ ¸ ¸ ¸ Kiribati ¸ Lao PDR ¸ ¸ ¸ Malaysia ¸ ¸ Marshall Islands ¸ Micronesia, Fed. Sts. ¸ Mongolia ¸ ¸ ¸ ¸ Myanmar ¸ ¸ Palau ¸ Papua New Guinea ¸ ¸ Philippines ¸ ¸ Samoa ¸ Solmon Islands ¸ Thailand ¸ ¸ Timor-Leste ¸ ¸ Tonga ¸ Tuvalu ¸ Vanuatu ¸ Vietnam ¸ ¸ ¸ ¸ P R I O R I T Y P O L I C Y C H A L L E N G E S TO W E L L - B E I N G F R O M W O R K I N E A S T A S I A PAC I F I C 175 FIGURE 7.1 Seven countries in East Asia Pacific are still agrarian a. People living in rural East Asia Pacific, b. People living in rural areas of the world, by income level and population size, 2010 by income level, 2010 90 PNG 90 PNG 80 KHM 80 KHM TLS TLS LAO Share of population (%) Share of population (%) 70 VNM THA Agrarian 70 MMR VNM THA 60 MMR threshold 60% 60 LAO PHL 50 PHL CHN 50 IDN CHN 40 IDN 40 30 MNG 30 MNG MYS MYS 20 KOR 20 NZL AUS 10 JPN 10 0 0 1 2 4 8 16 32 0.5 1 2 4 8 16 32 64 GDP per capita (2005 $), thousands GDP per capita (2005 $), thousands East Asia Pacific Europe and Central Asia Latin America and the Middle East and North Caribbean Africa South Asia Sub-Saharan Africa OECD Source: Based on data from World Bank 2013c. Note: Spheres = total population in 2010; OECD = Organisation for Economic Co-operation and Development. to the population of each country. This is much as growth originating in the rest of an important dimension of analysis that the economy (World Bank 2007, 30). Yet in is employed throughout this chapter, as it many countries in this category, lack of land allows a quick determination not only of tenure and limited use of fertilizers and other where countries are mapped, but also of technology mean that farming is still taking where most people in the region are mapped. place at a relatively unproductive level, with Figure 7.1, panel b, includes countries from significant resources devoted simply to pro- other regions to convey a sense of how the ducing goods for household consumption countries of East Asia Pacific compare. (Gollin et al. 2002). The priority challenge Countries in Sub-Saharan Africa and South to boosting well-being from work in mainly Asia still have a large share of their popula- agrarian economies is to raise the produc- tion living in rural areas. tivity of agriculture. Gains made in labor In mainly agrarian contexts, increasing productivity in agriculture release labor and the productivity of agriculture can have a human capital from the land to engage in off- significant impact on a country’s develop- farm rural employment. This move is even- ment, as discussed in chapter 3. Indeed, tually compounded by the pull of wages in the International Food Policy Research towns and cities. Institute has found that, among 42 develop- Other than in Lao PDR and Vietnam, ing countries over 1981–2003, growth in in the past 10 years there has been very gross domestic product (GDP) of 1 percent little movement of people to towns and cit- originating in agriculture was associated ies in most of the East Asia Pacific coun- with an increase in the expenditures of the tries categorized as still mainly agrarian. three poorest deciles of at least 2.5 times as This has clearly been the case in Myanmar, 176 E A S T A S I A PAC I F I C AT W O R K Papua New Guinea, and Timor-Leste. This three development transformations. The relatively static picture suggests that these challenge for governments is to stay ahead of countries will remain mainly agrarian in the the urbanization process, in order to avoid medium term. exclusion and urban poverty and to mini- mize the costs of congestion so that migrants contribute to agglomeration economies. The Urbanizing arena for governments to prioritize action As discussed in earlier chapters, many coun- is in urban planning and management—in tries in East Asia Pacific have been urban- particular, to ensure connectivity, transpor- izing at an unprecedented speed. Indeed, tation infrastructure, linkages, and well- evidence in earlier chapters shows that the functioning land markets. recent pace of urbanization has been much Figure 7.2, panel a, shows the change in faster in East Asia Pacific than in any other the share of each country’s population living region. As an abundance of unskilled labor in urban areas over a 10-year period. The fig- released from farming and nonfarm rural ure distinguishes which countries are urban- industry moves to towns and cities, govern- izing (a flow concept) from those that are ments face the challenge of quickly integrat- already mainly urban (a measure of stock). ing migrants into the urban economy. In To be considered urbanizing, 60 percent or the course of urbanization, countries typi- less of the country’s population had to be cally pass through an important develop- living in urban areas in 2000 and the share mental juncture at which the participation of population in urban areas had to have of women in work outside the home begins risen 4.5 percentage points or more between to rise significantly. This compounds the 2000 and 2010. By these criteria, seven positive effect that urbanization has on all East Asia Pacific countries are categorized FIGURE 7.2 Most people in East Asia Pacific live in countries that are urbanizing rapidly a. Change in the number of people living in urban East Asia b. Change in the number of people living in urban areas Pacific, 2000–10, by income and population, in 2010 of the world, 2000–10, by income in 2010 16 15 CHN % change in share of population % change in share of population 14 13 CHN 11 LAO MNG 12 MYS MNG LAO 9 10 MYS 7 PHL IDN 8 IDN VNM PHL 5 MMR 6 VNM Urbanizing threshold 4.5% 3 TLS KHM THA 4 1 TLS MMR KHM 2 THA PNG –1 0 –3 PNG –2 –5 0 20 40 60 80 100 120 140 160 180 0.5 1 2 4 8 16 32 Change in GDP per capita (2005 $), 2000–10 Log/GDP per capita, 2010 (2005 $), thousands East Asia Pacific Europe and Central Asia Latin America and Middle East and North Africa the Caribbean South Asia Sub-Saharan Africa Source: Based on data from World Bank 2013c. Note: Spheres = total population in 2010. P R I O R I T Y P O L I C Y C H A L L E N G E S TO W E L L - B E I N G F R O M W O R K I N E A S T A S I A PAC I F I C 177 as urbanizing: China, Indonesia, Lao PDR, As may already be apparent, Lao PDR and Malaysia, Mongolia, the Philippines, and Vietnam are categorized as being both agrar- Vietnam. 4 As the size of each country’s ian and urbanizing. Figure 7.3 illustrates how sphere makes plain, most people in East Asia the challenges of agrarian and urbanizing Pacific work in countries that are urbaniz- countries overlap. Countries in the top left- ing. This is not to say that most people are hand quadrant of the figure are still mainly working in urban areas, but that they are liv- agrarian, but not yet urbanizing at a signifi- ing in countries where the process of urban- cant pace. For these countries, increasing ization is happening fastest. This empirical the productivity of agriculture may remain point is critical to the conclusions and rec- a policy priority for long a while. Countries ommendations made in the final chapter of that achieve this show a definitive move to this report. the right quadrant where, like Vietnam, they Within the fast-growing East Asian cit- begin to urbanize in earnest. These coun- ies, factor markets are deepening, produc- tries will continue to face the challenge of ers are accessing inputs with greater ease, improving agricultural productivity, even as industry can expand in new directions they facilitate the integration of migrants into thanks to innovation, and firms can find towns and cities. ever-narrower niches of specialization as The history of agricultural development well as achieve valuable and powerful scale and urbanization in the Philippines provides economies (Yusuf and Saich 2008, 19). an example of what can happen when this But none of these dynamics is inevitable. process is not facilitated or when it is distorted Bad policy can still constrain the forces of with unclear land tenure and uneven provi- demand for and supply of labor and human sion of services, particularly in rural areas. capital that urbanization should unleash. This year’s Philippines Development Report As anybody who has been stuck in a traffic jam in Manila or Jakarta can attest, urban planning is too often ignored, particularly FIGURE 7.3 The challenge facing most governments in East Asia investment in connective transportation Pacific is how to manage the transition from mainly agrarian to infrastructure. urban economies T ha i la nd is a n u nusua l out l ier i n figure 7.2. It has among the highest income per capita among middle-income countries Overlapping agrarian and urbanizing challenges: in East Asia Pacific, and yet the pace of Rural population share, urban population share, and population size urbanization is sluggish: the second slow- 90 Urbanizing threshold % population living in rural areas, 2010 PNG est of all the countries in the region over 80 KHM the 10-year period. This is perhaps, in part, 70 TLS VNM Agrarian THA LAO threshold an artifact of measurement and differences 60 MMR in rural-urban classifications from country PHL CHN 50 to country, even in data sets with uniform 40 IDN indicators like the World Bank’s World MNG Development Indicators. During the same 30 MYS 10-year period, Thailand was shedding 20 agricultural employment, and employment 10 in services increased by nearly the same 0 amount as in its neighbors. This observation –2 0 2 4 6 8 10 12 14 16 suggests that either Thailand’s urbanization % change in the share of total population living in is underreported or policies are encourag- urban areas, 2000–10 ing movement from farming into nonfarm industry in rural areas rather than migration Source: Based on data from World Bank 2013c. from rural areas to towns and cities. Note: Spheres = total population in 2010. 178 E A S T A S I A PAC I F I C AT W O R K details that, despite a head start in manu- move from a centralized to a more market-led facturing compared to its neighbors, the economy came rapid increases in agricultural Philippines has failed to industrialize fully productivity. Policies were enacted to ensure (World Bank 2013a, 3). Instead, the share more even delivery of human capital across of manufacturing in GDP has stagnated at the country and to foster employment outside around 25 percent since 1960. The share of of agriculture. Vietnam has since reduced its manufacturing employment in total employ- poverty rate at an unprecedented pace and ment rose barely 10 percent. The report moved from low-income, least-developed argues that the Philippines “missed cru- status to lower-middle-income status (World cial steps in the structural transformation Bank 2012). process”—namely, ensuring substantive Countries in the bottom right-hand quad- improvements in agricultural productivity, rant of figure 7.3 are urbanizing fastest. With developing a rural nonfarm economy, and work being created primarily in the second- facilitating the rise of manufacturing in towns ary (manufacturing) and tertiary (services) and cities. The Philippines example shows the sectors, policy makers in these countries will importance of meeting agrarian challenges, be concerned with sustaining agglomera- even as the process of urbanization gets under tion and mitigating the ever-present threat of way. Critical to facilitating urbanization is congestion, including to the environment. ensuring that rural areas benefit from good- However, as with the blurred line between quality services to build the human capital agrarian and urbanizing countries, countries of people likely to stay in farming and rural where urbanization is already advanced also industry as well as that of aspiring migrants. face overlapping challenges. The report argues that, because successive governments ignored rural service delivery at Formalizing critical stages of development, the quality of migration was compromised. When migrants Countries in the formalizing category, like have low levels of human capital on arrival in China and Indonesia, typically already have towns and cities, they are only able to take up large and mature urban centers. Yet the pace low-skilled employment, usually low-skilled of urbanization can result in a significant services. “The service sector has been the share of employment being concentrated in largest employer since 1997. However, more the informal economy. Indeed, rather than than three-quarters of the service sector is expect urbanization to lead mechanically to composed of low-wage or low-skilled jobs greater formalization, agglomeration econo- … and there has been no corresponding sig- mies may be far more suited to and better nificant increase in productivity in the service serve the smaller, more nimble, and special- sector” (World Bank 2013a, 3). ized economic units commonly observed Vietnam’s history provides a more posi- in the informal sector (Ghani and Kanbur tive example of how countries can manage 2013). The challenge in such a context is to the transition from a mainly agrarian to an ensure access to protection and opportuni- urbanizing economy. In 1993, 79 percent of ties so that informality does not become a Vietnam’s population lived in rural areas, source of segmentation. Structures that cre- 70 percent of working people were engaged ate barriers between the informal and for- in agriculture, and the poverty rate stood mal economy constrain the movement of at 58 percent. Between 2000 and 2010, capital and labor, limit productivity, impose Vietnam’s share of employment in agriculture a ceiling on living standards for many, and, fell 13.6 percent, and employment in industry in doing so, corrode social cohesion. and services rose 7.8 and 5.9 percent, respec- The varying dimensions and definitions tively. The share of the population living in of “informal employment” and the “infor- rural areas was 9 percentage points lower mal economy” have been discussed in ear- in 2010 than in 1993. Alongside Vietnam’s lier parts of the report. For the purposes of P R I O R I T Y P O L I C Y C H A L L E N G E S TO W E L L - B E I N G F R O M W O R K I N E A S T A S I A PAC I F I C 179 categorizing countries in this chapter, we what in most countries can become an use a single proxy indicator of the extent important driver of segmentation. In the of formal employment: coverage of social Philippines, however, where social protec- insurance, taken as the share of the labor tion is still based mainly on contributions, force contributing to a pension plan. To stagnating levels of participation raise be defined as formalizing, a country has to greater concern for segmentation (figure 7.4, have had a significant (20 percent or more) panel a). and growing share of the labor force actively Vietnam only recently broke above the sig- contributing to a pension plan during the nificance threshold of 20 percent. However, last decade. 5 As figure 7.4 shows, only four it has had the strongest expansion in the countries in East Asia Pacific are categorized share of formal employment in the region. as formalizing: China, Malaysia, Mongolia, Despite what remains a relatively low share and Vietnam. of contributors compared to the other for- Both the Philippines and Thailand have malizing countries, the rapid pace of expan- “significant” shares of their labor force con- sion is encouraging. tributing to pensions. However, the time- Cambodia, Lao PDR, Papua New Guinea, series trends show that there has been almost and Timor-Leste appear to be firmly agrar- no growth in the share of contributors in ian economies, with neither a significant recent years. Lack of formalization by this nor a growing share of workers in formal measure might be of particular concern in employment. But in most of these countries, rapidly aging Thailand; however, that coun- the extent of informal employment is still try’s decision to offer health coverage on a structural rather than based on incentives “noncontributory” or “universal” basis has and institutions that create segmentation provided wider protection and eliminated and exclusion. Of much greater concern is FIGURE 7.4 When urbanization is well advanced, a significant share of working people should be formalizing a. Share of the labor force in East Asia Pacific b. Share of the labor force that contributes to pensions worldwide, that contributes to pensions by income level 90 100 JPN 80 90 KOR AUS 70 80 Share of labor force (%) Share of labor force (%) 60 70 60 50 MYS 50 MNG 40 40 30 CHN 30 PHL THA 20 20 VNM 10 10 TLS VNM PNG 0 0 KHM LAO 2000 2003 2006 2010 0.5 1 2 4 8 16 32 64 Korea, Rep. Malaysia Mongolia GDP per capita, 2010 (2005 $), thousands China Philippines Thailand East Asia Pacific Europe and Central Asia Vietnam Indonesia Timor-Leste OECD Latin America and Papua New Guinea Lao PDR Cambodia Middle East and North Africa the Caribbean Sub-Saharan Africa South Asia Sources: Based on data from World Bank 2013b, 2013c. Note: Data are from 2010 or latest year. The dashed lines in part a represent missing values in the time series. OECD = Organisation for Economic Co-operation and Development. 180 E A S T A S I A PAC I F I C AT W O R K Indonesia, a country that is among the fast- against the cost of health care may alleviate est urbanizing, but that has levels of pension some of the concern raised by the mapping coverage comparable to those of Timor- in figure 7.5. Leste. The extent and persistence of the Countries in the bottom right-hand informal economy in Indonesia are far less quadrant, like Indonesia and Lao PDR, likely to be structural and more likely to be are urbanizing quickly, but they do not yet based on incentives to evade as well as on have a significant level of formal employ- institutions that create segmentation and ment. The Philippines appears in the top exclusion. right-hand quadrant above the significance As with the analysis of overlapping threshold for formalizing, but the lack of agrarian and urbanizing challenges, the expansion of pension contributors raises dual categorization of urbanizing and for- concerns for the quality of its urbanization malizing countries offers helpful insights. and suggests that segmentation is unneces- In figure 7.5, the orange spheres indicate sarily constraining the potential agglomera- the countries that have “growing” shares tion economies. of pension contributors in the labor force, Countries in the top right-hand quadrant while the threshold indicates the “signifi- with orange spheres are both urbanizing and cance” level. In the bottom left-hand quad- formalizing—that is, they have a level of for- rant are the agrarian economies that are mal employment that is both significant and neither significantly urbanizing nor for- growing. However, this is not a cause for malizing. Thailand straddles an interesting complacency. The challenges of urbaniza- line—beneath the urbanizing threshold and tion require continuous attention; with the above the formalizing threshold—but lacks exception of Malaysia, most of these formal- significant growth in the share of contribu- izing countries in East Asia Pacific still have tors to pensions in the formalizing time relatively low shares of contributors when series. Again, Thailand’s decision to extend compared to many of the countries in Latin coverage of essential protection at least America and emerging Europe (figure 7.4b). The challenges of an already urbanized, formalizing economy are new to countries FIGURE 7.5 Formalization is not an inevitable outcome of an in East Asia Pacific. This is another impor- urbanizing economy tant point influencing the conclusions of this report. These new challenges indicate Overlapping urbanizing and formalizing challenges: Pension that the prevailing model that has served the contributors in labor force plus a changing urban population, 2000–10 region so well may need updating. But as 60 newcomers to facing these challenges, coun- Urbanizing threshold % of pension contributors in labor force tries in East Asia are less constrained in how MYS 50 they choose to respond. MNG 40 CHN 30 Country categorization by PHL THA VNM Formalizing threshold demographics 20 In addition to the particular challenges IDN 10 TLS faced by countries according to their level PNG KHM LAO of development, the WDR’s typology also 0 contends that a country’s priority challenge –2 0 2 4 6 8 10 12 14 16 for sustaining well-being from work may be % change of total population living in urban areas, 2000–10 primarily demographic in nature. That is, a country could be aging or could have very Sources: Based on data from World Bank 2013b, 2013c. high youth unemployment. P R I O R I T Y P O L I C Y C H A L L E N G E S TO W E L L - B E I N G F R O M W O R K I N E A S T A S I A PAC I F I C 181 Aging Figure 7.6 shows the old-age dependency (OAD) ratio for countries in East Asia Aging economies face the specter of a Pacific. To be classified as aging, a country shrinking working-age population, made needs to have an old-age dependency ratio more foreboding by the costs of caring of 8 percent or more in 2010, based on the for the elderly. Fewer and fewer people of global distribution. Four countries are cat- working age must generate enough output egorized as aging by this measure: China, and income to meet the needs of a grow- Indonesia, Thailand, and Vietnam. ing elderly population. The policy challenge By 2015, United Nations (UN) projec- with respect to work is to ensure that more tions suggest that most of the countries in people are productive for as long as they East Asia Pacific will begin to see a signifi- can be and that the most productive retire cant increase in their dependency ratios, with at later ages. Extending coverage of social the OAD projections showing a steeper tra- insurance is another challenge, with fewer jectory in the years that follow. Those coun- workers having to cover the costs of pen- tries categorized as aging in 2010 (OAD of at sions and health care. FIGURE 7.6 East Asia Pacific is on the verge of rapid population aging Old-age dependency ratio in East Asia Pacific plus UN projections (medium variant) 128 64 Old-age dependency ratio 32 16 8 4 2010 2015 2020 2025 2030 2035 2040 2045 2050 % change of total population living in urban areas, 2000–10 Japan Korea, Rep. Thailand China New Zealand Australia Vietnam Indonesia Myanmar Malaysia Mongolia Cambodia Lao PDR Philippines Papua New Guinea Timor-Leste Source: United Nations Population Division. Note: Dependency ratio = population older than age 64 relative to the population ages 15–64. 182 E A S T A S I A PAC I F I C AT W O R K least 8 percent) are already showing the fast- wealth than Japan. This, indeed, is a key est increase in OAD ratios in the world. The point where aging is concerned. Most coun- high-income countries of East Asia Pacific, tries grappling with the onset of aging including Australia, Japan, the Republic of achieved higher levels of wealth before they Korea, and New Zealand, are also included did so. Facing the challenges of aging before on figure 7.6 for illustrative purposes. Japan’s becoming very wealthy—for example, in level of old-age dependence (35 percent) in almost all the countries of emerging Europe 2010 is visually underemphasized by the and in the Southern Cone of Latin America— logarithmic scale on the vertical axis. Japan’s makes the task for policy makers far more OAD ratio is 16 percentage points higher difficult. Middle-income East Asian coun- than the second highest OAD ratio in the tries approaching rapid population aging region: that of Australia, at 19 percent. are in greater danger of growing old before The challenge for the four aging economies they get rich simply because of the speed of in emerging East Asia will be relatively acute, the oncoming demographic wave. Figure 7.7 with China and Thailand reaching OAD shows three dimensions of this problem. In ratios by 2045 equivalent to the Japanese this figure, the spheres represent income per ratio in 2010. Vietnam will reach that point capita in 2010 rather than population, as in in 2050 and in the same year is expected to earlier figures. be on par with Australia and New Zealand. Pictured in the top right-hand quadrant Indeed, aging in East Asia Pacific countries of the figure are three high-income East is occurring at a much faster pace than it Asia Pacific countries: Australia, Japan, and did in North America, Western Europe, and Korea. Their income per capita spheres are Northeast Asia (East-West Center 2002, 94). large, and, according to the World Bank In addition, the low- and middle-income Pension Database, they are firmly formal- countries of East Asia will have to meet the ized, with more than 75 percent of their labor challenges of aging at much lower levels of force contributing to pensions. While facing acute aging challenges, they are relatively wealthy and thus better able to manage the FIGURE 7.7 The constraints on growth from a large informal costs of caring for their elderly, albeit with economy are dangerous as countries age some struggle. However, emerging East Asia Pacific countries are coming to experience aging Overlapping aging and formalizing challenges: Pension contributors with much lower levels of income and in the labor force, by old-age dependency ratio and income level, 2010 social insurance coverage. Relative to their Aging % of pension contributors in the labor force 100 Organisation for Economic Co-operation threshold JPN 90 AUS and Development (OECD) neighbors, rap- 80 KOR idly aging China, Indonesia, Thailand, and Formalizing upper threshold 70 Vietnam have significantly lower levels of 60 income per capita. Yet their OAD ratios are MYS 50 increasing at pace. Furthermore, Thailand, MNG 40 with a formalization rate that has been stag- CHN 30 PHL VNM THA nant at 23 percent of the workforce dur- Formalizing lower threshold 20 ing the last decade, appears unprepared TLS IDN 10 PNG LAO to care for its growing elderly population. 0 KHM And China is only just over that formaliz- 0 5 10 15 20 25 30 35 40 45 ing threshold. Conversely, Malaysia appears Old-age dependency ratio, 2010 to be in a stronger position to contend with this demographic transition. At 7.3 percent, Sources: World Bank 2013b; United Nations Population Division. Malaysia is not significantly aging yet, but, as Note: Dependency ratio = population older than age 64 relative to the population ages 15–64. an upper-middle income country, its income P R I O R I T Y P O L I C Y C H A L L E N G E S TO W E L L - B E I N G F R O M W O R K I N E A S T A S I A PAC I F I C 183 per capita is significantly higher than that of experience into later ages. A large portion of China, Indonesia, Thailand, and Vietnam. unemployed young people can also contrib- At 54 percent, a majority of Malaysia’s labor ute to crime and political fragility. force is actively contributing to pensions. In earlier chapters, youth unemployment Although our proxy for formalization in this and inactivity were shown to be a concern chapter is related directly to the coverage of in Indonesia, the Philippines, and some of systems to care for the elderly, the more fun- the Pacific island countries. In this chapter, damental danger of a small formal economy in order to assess whether countries have comes from the potential for segmentation: “high” youth unemployment rates, we con- getting stuck at levels of low productivity and structed the WDR 2013’s youth bulge index: low growth, while the process of aging moves the number of employed youth multiplied by relentlessly onward. the youth unemployment rate (latest year) and divided by the total population in 2010. Figure 7.8 shows that, relative to the rest of High youth unemployment the world, countries in East Asia Pacific have At the opposite end of the demographic scale relatively fewer unemployed young people. are countries with large youth cohorts and This contrasts sharply with the countries of high youth unemployment and disengage- the Middle East and North Africa. Three ment rates. As discussed in earlier chapters, notable exceptions stand out: Indonesia, the high youth unemployment with a large youth Philippines, as shown before, and Mongolia. “bulge” in the population puts downward Indonesia and the Philippines also stand out pressure on earnings and can prejudice the in the ranking of countries by measures of outcomes that members of the youth cohort youth idleness, presented in chapter 3. FIGURE 7.8 The problem of high youth unemployment is less acute than in other regions, but still a concern in Indonesia, Mongolia, and the Philippines a. High youth unemployment in East Asia Pacific b. High youth unemployment worldwide 2.0 4.0 1.8 3.5 1.6 IDN 3.0 Youth bulge index Youth bulge index 1.4 PHL MNG NZL 2.5 1.2 High youth unemployment threshold (1.0) 1.0 AUS 2.0 IDN 0.8 KHM MYS 1.5 PHL MNG 0.6 PNG VNM 1.0 0.4 KOR JPN 0.5 KHM VNM 0.2 THA PNG MYS THA 0 0 1 2 4 8 16 32 64 0.5 1 2 4 8 16 32 64 Log/GDP per capita, 2010 (2005 $), thousands Log/GDP per capita, 2010 (2005 $), thousands East Asia Pacific Europe and Central Asia OECD Latin America and the Caribbean Middle East and North Africa Sub-Saharan Africa South Asia Source: Based on data in World Bank 2013c. Note: Youth bulge index = number of employed youth multiplied by the youth unemployment rate (latest year), divided by the total population in 2010. Bubble size = youth bulge (population ages 15–24 relative to ages 15–64); OECD = Organisation for Economic Co-operation and Development. 184 E A S T A S I A PAC I F I C AT W O R K FIGURE 7.9 The gap between youth and overall unemployment is Youth unemployment and idleness are still highest in Indonesia, Mongolia, and the Philippines a worry for many governments in East Asia Pacific, even if on a global scale the challenge Ratio of the youth unemployment rate to the appears more acute elsewhere. Alternate mea- regular unemployment rate sures of the relative challenge facing young 50 people may do a better job of explaining Youth unemployment rate, ages 15–24 45 why. Figure 7.9 shows how youth unemploy- 40 ment compares to overall unemployment in a MNG 35 IDN large sample of countries, including those in 30 East Asia Pacific. The 45° line and the global 25 MYS regression line emphasize that youth unem- 20 ployment typically is higher than unemploy- PHL 15 NZL ment in the general population and that the KOR 10 AUS two rates are strongly, positively correlated. JPN 5 VNM Concern arises when the youth unemploy- THA 0 KHM ment rate deviates substantially from the 0 5 10 15 20 25 30 35 40 45 50 overall unemployment rate. Mongolia has a relatively large youth bulge (size of the Unemployment rate, latest year sphere) and a youth unemployment rate of 20 percent, which far outstrips the overall Source: World Bank 2013c. unemployment rate of 3.3 percent. This is Note: Size of the sphere reflects the youth bulge index. also true of Indonesia, with a youth unem- ployment rate of 22.2 percent, compared to an overall unemployment rate of 7.1 percent. FIGURE 7.10 Low levels of formalization combine with high youth In these countries, a substantially higher unemployment to prejudice the longer-term prospects of young youth unemployment rate does not simply people and constrain growth reflect higher overall unemployment; rather it is the product of specific barriers to employ- ment opportunities faced by young people. Overlapping high youth unemployment and formalizing challenges Some of these arise from regulation and how 1.8 Formalizing threshold social protection systems are structured and 1.6 IDN financed, as discussed in chapter 6. High youth 1.4 PHL MNG unemployment With respect to high youth unemploy- ment, a large informal economy intro- Youth bulge index 1.2 threshold duces additional challenges. As indicated in 1.0 AUS figure 7.10, Indonesia—in the top left-hand 0.8 MYS quadrant—has low levels of formal employ- 0.6 KHM PNG VNM ment combined with high youth unem- 0.4 ployment. Having few formal employment KOR JPN 0.2 THA options when they enter the labor market 0 or early in their careers can adversely affect –20 0 20 40 60 80 100 120 the future work prospects of young people Formalizing index (Hyytinen and Rouvinen 2008; Cruces, Ham, and Viollaz 2012). Furthermore, to the extent that a large informal economy reflects Sources: Based on data from World Bank 2013b, 2013c. Note: Sphere size = income per capita, 2010 ($2005). widespread use of outdated technology and constrains productivity, these countries may be poorly positioned to take optimal advan- tage of the relatively large youth cohorts entering the labor market. For these reasons, P R I O R I T Y P O L I C Y C H A L L E N G E S TO W E L L - B E I N G F R O M W O R K I N E A S T A S I A PAC I F I C 185 although many East Asia Pacific countries for labor and human capital. Extractive lie below the 2013 WDR’s global threshold industries necessary to exploit mineral of high youth unemployment, this particular resources rarely create work beyond an ini- challenge to well-being from work cannot be tial construction phase. Two pertinent ref- ignored. erences in the WDR 2013 emphasize this point using countries from the East Asia Pacific region. In Papua New Guinea, the Country categorization by Liquid Natural Gas Project created an ini- endowments tial investment equivalent to 230 percent of GDP and generated some 9,300 jobs in Countries can also be categorized by their the leading construction phase, but failed endowments and physical geography as to retain more than 1,000 people at work resource rich or as small island states. We after completion. Papua New Guinea’s land- discuss each in turn. owner companies are helping to mitigate these risks to employment and to ensure more equitable distribution of welfare from Resource rich resources (box 7.1). In Mongolia, the Oyu Sitting atop a wealth of mineral resources Tolgoi copper mine motivated an investment may seem like a blessing, but it raises press- equivalent to 74 percent of GDP and created ing challenges for the supply of and demand 14,800 jobs during the construction phase. BOX 7.1 Papua New Guinea’s landowner companies: Leveraging the extractive sector for nonextractive employment Papua New Guinea is enjoying a natural resource mineral and energy wealth. This extraction funds boom. However, the pitfalls that turn a resource the country’s imports and much of the budgets of bounty into a resource curse are well documented national and many provincial governments. But for countries in Latin America, Africa, Europe, and many of the richest deposits are in remote areas Central Asia, and Papua New Guinea has the oppor- where treacherous terrain makes outside access tunity to learn from past mistakes. Papua New diffi cult and services such as public health clinics, Guinea’s landowner companies provide an example schools, or security unreliable. of government, international companies, and stake- The government has the legal right to purchase holders working together to spread the welfare ben- equity holdings in resource projects, up to limits efits from natural resource extraction and create defined in legislation. These equity holdings gen- employment even beyond the extraction sectors. erate dividend streams for the government, which Family groups hold traditional ownership of the allocates a portion to traditional landowners. vast majority of Papua New Guinea’s land mass. The allocation is set in legislation—for example, These ownership claims tend to be hereditary, pass- the government may purchase up to 22.5 percent ing through the clan structure and following an of the equity of a petroleum project and allocate area’s tribal lines. They refl ect farming and living 2 percentage points to traditional landowners. practices that can extend back generations. In addition, resource developers are required The government of Papua New Guinea holds to develop domestic supply capacity and human formal legal ownership of the nation’s subsurface skills. Resource investments are required to include resources. This legal ownership is the basis of agree- national material and labor content plans, and ments between the government and resource compa- many resource companies include such plans within nies to develop and market the country’s enormous their corporate social responsibility commitments. continued 186 E A S T A S I A PAC I F I C AT W O R K BOX 7.1 (continued) Many landowner groups seek to use these require- of the country’s traditional institutions and natural ments to negotiate contracts to supply services to resource wealth. the project. The government supports this process A half-dozen landowner companies combine these through a national framework agreement for nego- skills. For example, Anitua unites the landowner tiations and a specifi c agency to support the nego- companies of the six clans around Newcrest’s large tiation process. This agency, the Minerals Resource gold mine on the Lihir group of islands plus the local Development Corporation, organizes forums that government’s business arm. Out of its catering con- bring traditional landowners, resource developers, tracts with the mine, it developed National Catering and government agencies together to develop Services, which in the mid-2000s started tendering benefit-sharing arrangements. It also assists land- for other contracts—some at mine construction sites owner groups to form landowner companies. but also outside of the resource sector. Key to the Landowner companies represent traditional success of entrepreneurial landowner companies has titles and claims, distribute payments, and enter been separating their social roles from their business into contracts. They are incorporated under Papua activities and their solid governance of both. New Guinea’s Corporations Law, and an internal The larger landowner companies are more constitution determines various aspects of their exposed to a downturn in the global economy than operations. the less ambitious companies. Some are clearly Most landowner fi rms distribute revenue shares preparing for this uncertainty. For example, Star among members of their particular clan. Many Mountain is investing heavily in technical training invest some of these revenues in assets (such as real colleges and developing capacity in mining services, estate) or businesses that generate ongoing income ahead of the decline at Ok Tedi, the key mine associ- for the landowners. Some create employment ated with the company. opportunities for their shareholders by fi lling the In sum, a handful of landowner companies have service contract provisions of the benefi t- sharing used the government’s input requirements to build contracts. These contracts are usually for low- diversified, growing enterprises. Most have lim- skilled ancillary services, such as providing security ited their objectives to extracting and distributing (paying local groups to protect the mine site, equip- revenues from a one-off project, while some have ment, and workforce) or labor for civil works; they failed even to ensure that their members receive the may also be for catering and camp maintenance or benefits they are due. Far-sighted business vision logistics. and skilled leadership distinguish the most suc- A few landowner companies have built com- cessful companies from the rest. These companies mercial enterprises supplying similar services to represent a means of building diversifi ed domestic customers under one umbrella. These larger busi- services and upstream sectors, providing a path for nesses tend to collect several landowner companies thousands to transition into work and the modern connected to the same resource project. They then cash economy. But, as the recent surge in demand manage the commercial businesses via separate but passes, they will need to become more competitive if wholly owned companies. These “entrepreneurial this structure is to remain viable. landowner companies” are emerging as a model for Papua New Guinea to develop a diversified, job- Source: Contributed by Timothy Bulman, World Bank country economist for intensive, and modern domestic service sector out Papua New Guinea. But the mine retained fewer than 4,000 Mineral resources can also account for a workers after construction was complete. large share of export revenue, attracting large Furthermore, the benefits of mining sec- flows of foreign exchange that can induce tor employment for reducing poverty are inflation and “Dutch-disease” effects, caus- debated. Work in the mining sector in Lao ing the currency to appreciate and harming PDR has had a limited impact on reducing the competitiveness of other industries that poverty and raising living standards.6 employ large numbers of people. The best P R I O R I T Y P O L I C Y C H A L L E N G E S TO W E L L - B E I N G F R O M W O R K I N E A S T A S I A PAC I F I C 187 forms of work to further the development also falls into this category. 8 Among the transformations in these contexts are those high-income countries of East Asia Pacific, that grow the economy outside of the extrac- Australia alone is categorized as resource tive industries sector and that diversify the rich, and indeed, in 2012 and 2013, the export base. Resource-rich countries can also country has lost employment in steel and car look to generate fiscal windfalls by impos- production as well as in tourism and the wine ing higher taxes and royalty revenues on the industry, even as overall unemployment has extractive industries in order to spend fiscal remained at a low 5.5 percent. resources on pro-poor, pro-employment ini- Figure 7.11, panel a, illustrates that as tiatives in areas like education, health, elec- many low- and middle-income countries in trification, and connective transportation East Asia Pacific are categorized as resource infrastructure. rich as those that are not. Figure 7.11, For figure 7.11, data from the World panel b, emphasizes just how important Integrated Trade Solution Database on the this category and its challenges are in East share of minerals in total exports, 2005–10, Asia Pacific. Although a larger number of were used to assign countries to the resource- Sub-Saharan African countries and as many rich category.7 A country is categorized as Latin American countries can also be found “resource rich” if the portion of minerals in in the resource-rich category, both regions its exports is 20 percent or higher. By this have many more countries overall than East criterion, figure 7.11, panel a, highlights Asia Pacific. However, relative to their num- five East Asia Pacific countries that are cat- ber, addressing the challenge of resource egorized as resource rich: Indonesia, Lao riches is particularly important to sustain- PDR, Myanmar, Mongolia, and Papua New ing the demand for work in East Asia Pacific Guinea. Although not shown, Timor-Leste countries. FIGURE 7.11 Many economies in East Asia Pacific depend heavily on mineral exports a. Share of exported minerals in East Asia Pacific by b. Share of exported minerals worldwide by income level income level and population size and population size 70 90 Share of exported minerals (%), Share of exported minerals (%), MMR 60 80 PNG MNG 50 70 LAO MMR mean 2005–10 mean 2005–10 AUS 60 40 PNG LAO 50 MNG IDN 30 AUS Resource-rich threshold (20%) 40 20 VNM 30 IDN 10 PHL CHN MYS 20 VNM NZL 0 JPN NZL KHM THA KOR 10 MYS JPN KHM PHL CHN THA KOR –10 0 0 5 10 15 20 25 30 35 0.5 1 2 4 8 16 32 64 Log/GDP per capita, 2010 (2005 $), thousands Log/GDP per capita, 2010 (2005 $), thousands East Asia Pacific Europe and Central Asia OECD Latin America and the Caribbean Middle East and North Africa South Asia Sub-Saharan Africa Sources: Based on data from World Bank 2013c, 2013d. Note: OECD = Organisation for Economic Co-operation and Development. 188 E A S T A S I A PAC I F I C AT W O R K Small island states with a population of less than 10,000, has a land mass of just 30 square kilometers. Fiji, The challenge of raising and sustaining the with some 18,000 square kilometers more demand for and supply of human capital in landmass than Tuvalu, is divided across in small islands states is presented by geo- 332 islands. Kiribati, one of the most remote graphic limits to productivity and growth. and geographically dispersed countries in the Small island countries have a limited and world, has a landmass of 810 square kilo- fragmented landmass and—as is especially meters, consisting of 33 islands spread over challenging for the Pacific islands—are 3.5 million square kilometers of ocean—an remote from large markets. These limita- area larger than India. tions are relatively immovable restraints The challenges of East Asia Pacific’s small on growth. The priority in such settings island states are particularly acute and press- is to foster emigration. In doing so, work- ing, even if they are experienced by less than ers access larger economic centers, cheaper 2.5 million people. These challenges are inputs, and more investment, allowing taken up in much greater detail in the next them to earn higher incomes. Crucial for chapter of this report. the development of small island economies is that these higher wages translate into remittances. The typology sets an upper limit on what Country categorization by could be considered a small island state. To institutional factors qualify, an island country needs to have a pop- Lastly, the WDR’s typology contends that ulation of less than 1 million. Consequently, a country’s priority may be based on the Papua New Guinea and Timor-Leste— weakness of its institutions, with specific defined as island nations by the UN list of reference to conflict-affected countries. The small island developing states—do not fall challenge for these countries is severe and into this category. Table 7.3 presents data on focuses on the promised gains of social cohe- the populations of the small island states in sion by demobilizing former combatants and the region in 2010. The population figures are reintegrating their displaced populations shown alongside data on land mass. Tuvalu, through productive work. East Asia Pacific does not have many conflict-affected coun- tries, in the way that this category shapes TABLE 7.3 Small populations and limited land constrain growth and thinking about employment in the Middle the demand for work East and Africa. However, as touched on Small island in chapter 3, the Solomon Islands, Timor- state Land area (sq. km) Population, total, 2011 Leste, and parts of the Philippines provide Papua New Guinea 452,860 7,013,829 the exceptions. Timor-Leste 14,870 1,175,880 To define this category, the WDR drew on Fiji 18,270 868,406 two sources of information. First, any coun- Solomon Islands 27,990 552,267 try in the Uppsala Conflict Data Program Vanuatu 12,190 245,619 database that had at least 1,000 battle deaths Samoa 2,830 183,874 in an “internal or internationalized internal Micronesia, Fed. Sts. 700 111,542 conflict” in 2010 (the latest available year) is Tonga 720 104,509 categorized as conflict affected. Second, any Kiribati 810 101,093 country included in the 2012 World Bank Marshall Islands 180 54,816 fragility list that had UN peacekeeping and Palau 460 20,609 Tuvalu 30 9,847 peace-building missions was also categorized as conflict affected. By at least one of these Total 64,180 2,252,282 criteria, Timor-Leste could be categorized Source: UN list of small island states. as a conflict-affected country, and it is the P R I O R I T Y P O L I C Y C H A L L E N G E S TO W E L L - B E I N G F R O M W O R K I N E A S T A S I A PAC I F I C 189 only such country in the region. That said, all three development transformations, with the UN peacekeeping force has since left only a minimal need for policy interventions. Timor-Leste, indicating that the country’s However, at a critical point when urbaniza- primary challenges to increasing well-being tion is already well advanced, one or more of from work in the coming years lie in increas- the three development transformations can ing the productivity of agriculture and rural start to lag. In East Asia Pacific countries, nonagriculture industry and in managing the the evidence presented in chapter 3 suggests potential volatility of its enormous petroleum that these lags are indeed starting to appear wealth. in China and Indonesia. In the Philippines, lagging productivity gains and a slower rise in living standards have been apparent lon- Implications for policy makers ger. When these lags appear or become sig- nificant, people can begin to question the concerned about work extent to which work is still a conduit of Setting aside for the time being the chal- well-being—whether economic growth is lenges faced by small—and more impor- sufficiently inclusive—and to demand that tant, distant —Pacific Island countries, governments adopt employment strategies. which we return to in chapter 8, and those Notably, the development trajectories of East of resource-rich countries (Indonesia, Asia’s high-income successes—Japan, Korea, Mongolia, Myanmar, Papua New Guinea, Singapore, and others—all included periods and Timor-Leste), most countries in the East calling for “jobs strategies.” But the answers Asia Pacific region are agrarian or urban- that made sense for those countries at the izing. Indeed, as shown by the size of the time may not be viable today, as we discuss spheres in figure 7.1, most people in the East in spotlight 2. Asia Pacific region are living and working For countries that are still mainly agrarian, in mainly agrarian and rapidly urbaniz- the priority policy challenge is to increase the ing contexts. This is an important insight productivity of agriculture and to free labor because, according to the WDR 2013, when to work in rural off-farm enterprise and even- countries are (or are close to) urbanizing, all tually migrate to towns and cities. The policy three development transformations tend to instruments for increasing agricultural pro- happen in tandem: productivity and wages ductivity and facilitating the structural tran- are increasing, living standards are rising, sition are land reform, agricultural extension and as more people move out of poverty and programs, deregulation of prices, rural infra- into the urban middle class, there is greater structure, and good-quality education and social cohesion. Chapter 3 presents a large health services for building human capital. body of evidence showing how all three Policies and programs that create implicit development transformations have unfolded or explicit restrictions to labor moving off in East Asia Pacific countries. the farm and into nonfarm industry in rural As shown in the previous section, most areas or manufacturing and services in cities people in East Asia Pacific are now or soon will be the main obstacles to sustaining the will be living and working in countries that supply of and demand for labor and human are nearing the end of the structural transi- capital. Government action should enable as tion from agrarian to urbanizing econo- fluid a structural transition as possible. The mies. During the transition from agrarian WDR showcases Vietnam’s experience in to urbanizing—which in East Asia has gen- the 1990s and the first decade of the twenty- erally coincided with lower fertility and the first century as an example of success. The emergence of the demographic dividend—the danger to be avoided is urbanization in spite economic forces released by the large-scale of rather than enabled by policy. This pro- movement of people from rural farms to cess is characterized by unproductive use of urban firms are so powerful that they propel land, migration in search of better health and 190 E A S T A S I A PAC I F I C AT W O R K education services, cities unprepared for fast providing credit that explicitly or implicitly population growth, and rapid divergence in exclude self-employed people; by the types of living standards between town and country. work that are recognized in the labor code This is the history of the notably less success- and those that are not; and by how nonwage ful transformation of the Philippines. social protection benefits are designed and For countries that are already rapidly financed. Models of labor regulation and urbanizing, the priority policy challenge is social protection that tie eligibility to certain to make cities work. Somewhat counterin- forms of work and are financed from man- tuitively in a discussion about work, the fac- datory contributions from employees and tor market that policy makers should pay employers create segmentation by design, the greatest attention to is the market for even when they are administered perfectly. In land. Since land is the least mobile factor most low- and middle-income countries, seg- of production, good urban planning, land mentation by design is aggravated by weak registration and titling, liberalization, and institutional and administrative capacity. appropriate taxation are the key instru- Avoiding and eliminating segmentation of ments to increase the flexibility of land use. factor markets is essential if countries of East Urban planning is the area of policy making Asia Pacific are to grow in wealth before they with the greatest impact on the incentives of have to face the more difficult challenges of firms in towns and cities to form, to grow, an aging economy. This is the current quan- to move up the value chain, and thus to cre- dary of many middle-income countries in ate and sustain employment. Also important Central Europe and the Southern Cone of are planning and management of connective Latin America that got old before they got urban infrastructure and service provision. rich. Their example should strike a strong Providing adequate connective transportation note of caution for policy makers in East Asia infrastructure and services (water, sanitation, Pacific countries where the average age of the health, and education) can ensure that grow- labor force and the share of the elderly in the ing cities with plenty of skilled people foster population are rising quickly. economies from agglomeration rather than incur burdensome costs from congestion. Korea’s example is instructive in this regard Notes and provides valuable guidance for policy makers in fast-urbanizing countries of East 1. For an in-depth discussion of the typology and its implications for policy, see World Asia Pacific. Bank (2012, ch. 6, 190–216). For countries where most people live in 2. The notes highlight the instances where the cities and a rising share of economic activ- analysis in this chapter differs significantly ity is formalizing, the priority challenge lies from that undertaken by WDR 2013. in avoiding the formation or entrenchment 3. Regions in which countries crowd into one of a policy and regulatory environment that country type may heavily influence the global causes segmentation. Segmentation cre- distribution of data in each case. For exam- ates the problem of cleavages in factor mar- ple, the prevalence of agrarian countries in kets that impede competition, impair labor Sub-Saharan Africa means that a threshold mobility, and limit the coverage of essential based on a global distribution may not be the work-risk and social protection. In this way, perfect device for identifying which countries in East Asia Pacific are primarily agrarian. segmentation creates unnecessary constraints 4. High-income countries are excluded by virtue on a country’s productivity, rations gains of the lower bound being less than 60 percent in living standards to connected groups, urbanized in 2000. and in so doing threatens social cohesion. 5. The indicator “pension contributors as a Segmentation of the factor markets can share of the labor force” is available in the be caused by differences in how income World Bank’s Pension Database (World Bank from different sources is taxed; by rules for 2013b). This indicator is the proxy used by P R I O R I T Y P O L I C Y C H A L L E N G E S TO W E L L - B E I N G F R O M W O R K I N E A S T A S I A PAC I F I C 191 the WDR typology—a one-year measure of and carried out by the Center for Distributive, active contributors to pensions as a share Labor, and Social Studies, University of La of the labor force and thresholds that are Plata. greater than or equal to 25 percent and less East-West Center. 2002. Asia’s Aging Population: than or equal to 75 percent. Additional data The Future of Population in Asia. Honolulu: collected for this report have made available East-West Center. more data points for East Asia Pacific coun- G h a n i , E ja z , a n d R av i K a n b u r. 2 013 . tries than were available in the WDR sample. “Urbanization and (In)Formalization.” Policy This has allowed us to assess the increase in Research Working Paper 6374, World Bank, the share of formal employment over time. Washington, DC. 6. “[In Lao PDR] direct gains from employment Gollin, Douglas, et al. 2002. “The Role of did not significantly contribute to overall Agriculture in Development.” American poverty reduction … even though poverty Economic Review 92 (2): 160–64. among mining sector employees fell by more Hyytinen, Ari, and Petri Rouvinen. 2008. than 23 percentage points between 2003 and “The Labour Market Consequences of Self- 2008 … Because of its small share in overall Employment Spells: European Evidence.” employment, the mining sector’s total con- Labour Economics 15 (2): 246–71. tribution to poverty reduction was less than World Bank. 2007. The World Development 0.1 percent out of the 6 percent nationwide Report 2008: Agriculture for Development. reduction achieved in that same period” New York: Oxford University Press. (World Bank 2010, 17). ———. 2010. Lao Development Report: Natural 7. Data were also collected on net exports of Resource M an age ment for S ustain able minerals in order to see if this had any sig- Development. Washington, DC: World Bank. nificant impact on the countries that were ———. 2012. The World Development Report deemed to be resource rich and on the dual 2013: Jobs. New York: Oxford University challenges of job creation and Dutch disease. Press. It did not change the categorization—all were ———. 2013a. “E xecutive Su m ma r y.” I n also net exporters. Philippines Development Report 2013: 8. For Timor-Leste, alternative World Bank Creating More and Better Jobs. Draft. sources were used. Washington, DC: World Bank. ———. 2013b. World Bank Pension Database. Washington, DC: World Bank. ———. 2013c. World Development Indicators References Database. Washington, DC: World Bank. Cruces, Guillermo, Andrés Ham, and Mariana ———. 2013d. World Integrated Trade Solution Viollaz. 2012. “Scarring Effects of Youth (WITS) Database. Washington, DC: World Unemployment and Informality: Evidence Bank. from Argentina and Brazil.” Paper for the Yusuf, Shahid, and Tony Saich. 2008. China project “Mercados laborales el crecimiento Urba n i z e s: C o n se q u e n c e s , S t ra t eg i e s , inclusivo en América Latina” supported by the and Policies. Directions in Development. International Development Research Centre Washington, DC: World Bank. Spotlight 2 Past Jobs Strategies in East Asia: Could They Work Today? What exactly are employment— activity. As discussed in detail in earlier chapters, many policies directly or indirectly or jobs—strategies? affect the supply of and demand for labor Few participants in the debates about inclu- and human capital, either by design or col- sive growth policies can agree on where laterally. Some governments find it effective to draw the boundaries of employment or to package monetary, fiscal, and economic “jobs strategies.” To some, the concept refers policy measures in a single strategy, which narrowly to the set of regulations and direct helps them to coordinate the actions they interventions in the labor market that aim to take and demonstrates their commitment to improve employment outcomes. Discussed improving employment outcomes. A broad in chapter 6, they range from employment employment strategy can also include gov- protection regulations and wage policies to ernment interventions in the product and passive and active labor market programs. factor markets that directly affect employ- For example, the European Employment ment outcomes. Indeed, many governments Strategy is a legal mechanism designed go so far as to design and deploy policies to coordinate employment policies in the that support certain industries or areas of European Union member states. This strat- production that they consider to be strate- egy set out annual employment guidelines gic and aligned with national goals. Jobs and emphasized priority areas for action strategies that are embedded in this sort over the period 2008–10, including raising of “industrial policy” will often explic- the employability of the labor force through itly promote sectors that the government training, changing regulations to make the thinks have the most potential to create labor market more flexible, and strengthen- employment. ing structures that provide working people Successful examples of past strategies in with income security (Goetschy 1999).1 East Asia indicate that employment or jobs Other common examples are national strategies should be a complement rather youth employment strategies or national than a substitute for sound fundamentals action plans that specifically aim to curb and institutions. In fact, they may not differ youth unemployment—involving a set of much in content from a growth or “inclusive measures such as skills building, passive and growth” strategy, other than an explicit active labor market programs, and support focus on employment outcomes. The World for prospective young entrepreneurs (UN Development Report 2013: Jobs (World 2007). Employment strategies that focus Bank 2012) argues that, when measures even more narrowly on skills development to boost and sustain economic growth are range from manpower planning—setting designed to capture the external “spillovers” targets, based on forecasts, for building and social value of work, there is little need specific technical skills—to more fluid and for a separate, stand-alone jobs strategy. integrated approaches to workforce develop- However, in some circumstances where these ment, discussed in chapter 5. external, social benefits of work are not ade- However, employment strategies are quately accounted for by decision makers, typically cast more broadly and encompass not identified, or not fully realized, a sepa- actions across a wide range of government rate strategy may be warranted to assess and 193 194 E A S T A S I A PAC I F I C AT W O R K remove constraints on creating employment foster private sector–led manufacturing and and sustaining well-being from work. to boost employment. In the period 1960–65, an import substitution phase of industrializa- tion, the government concentrated on process- East Asia’s experience with ing industries such as petroleum refinement; processing of food, wood, and rubber; the employment strategies garment industry; assembly of electronic The East Asian Tigers—Hong Kong SAR, products; and ship repair. Singapore moved China; the Republic of Korea; Singapore; to a development model led by exports and and Taiwan, China—achieved high-income foreign direct investment in 1965. During status and fairly inclusive growth over the period 1979–90, in reaction to the spread the past several decades, sometimes in the of low-cost manufacturing across Southeast course of a single generation (World Bank Asia, Singapore supported industrial upgrad- 1993; Gill and Kharas 2007). At important ing to higher value-added activities and points in their development, most adopted increased the demand for high-skilled labor. explicit jobs strategies, designed and admin- This strategy involved, for example, improv- istered from the top to achieve national ing the base of education and skills as well objectives and either embedded in or sepa- as promoting high-tech manufacturing. The rate from growth strategies and industrial objective of raising employment outcomes policy. For example, Taiwan, China, intro- was folded into the objective of spurring eco- duced preferential policies for “strategic nomic growth. Over this period, Singapore industries” in the 1980s, mainly mechani- transitioned from assembling to produc- cal products, information technology, and ing electronics and became a services hub consumer electronics (Yang 1993). Korea for transport, trade, communications, and and Singapore followed a similar course, finance (Siow Yue 2005). for varying sectors and to varying degrees. In its early stages of development, the However, their strategies—considered by Korean government adopted national devel- many as the most successful examples of opment planning with explicit industrial industrial policy—also included and ben- and employment strategies. Korea supported efited from the necessary work of building and protected young, emerging industries sound “fundamentals,” including property with preferential credit and import quo- rights, basic education, infrastructure, and tas, among other measures. Starting in the openness to trade and global competition. early 1960s with low-technology manufac- Singapore’s development strategies since turing goods, Korea subsequently targeted the 1950s, while featuring strong state the iron and steel industry as well as petro- intervention to promote competitiveness in chemical products in the late 1960s to early targeted industries and to raise employment 1970s. By the end of the 1970s, the policy outcomes and living standards, also built on focus shifted to naval construction, capital solid fundamentals. Singapore’s industrial goods, durable consumer goods, and chemi- strategy featured the following core compo- cal products. In the 1980s and 1990s, the nents: strong institutions, orientation toward government supported electronics industries free trade and foreign direct investment, (Ray 1997). In addition, Korea engaged in infrastructure and education investments, intensive manpower planning to link edu- and solid macroeconomic stability. After the cation, training, and development of the country shifted from colonial rule to self- labor force to the requirements of its grow- government in 1959, it needed to tackle high ing industries. With forecasts of industrial unemployment and rising ethnic tensions. and sector needs for human resources based The focus on jobs in the government’s on medium- to long-term macroeconomic strategy was explicit as well as urgent. An plans, human resource development policies Industrial Promotion Board was created to supported technical vocational education PA S T J O B S S T R AT E G I E S I N E A S T A S I A: CO U L D T H E Y W O R K TO DAY? 195 and training as well as university training. scale economies, coordination failures, and What is frequently overlooked, however, is information externalities. Several policy that these policies had strong foundations in approaches have furthered the thinking on prior investments that ensured basic educa- industrial policy. Proponents of the New tion for all, starting in the 1960s and con- Structural Economics argue that planners tinuing in the 1970s. and administrators in a country should China has also employed various forms analyze other countries with similar endow- of industrial policy with the implicit and ments but slightly higher levels of income to explicit objective of increasing productive identify and target industries with a solid employment and raising well-being. Since export history and potential (Lin 2012). economic liberalization began under Deng Another approach is to promote public- Xiaoping in the 1970s, China’s industrializa- private partnerships for tackling coordina- tion has featured industrial policy programs tion failures and facilitating the exchange of (Heilmann and Shih 2013), but these have information between the public and private benefited from massive investment in infra- sectors. Finally, several researchers propose structure and trade logistics. China’s special fostering spillovers of productive knowledge economic zones and preferential treatment to support the development of industry with for the targeted sectors dominating those higher knowledge content and greater value zones drew large amounts of labor from added (Cimoli, Dosi, and Stiglitz 2009). rural agriculture to light manufacturing in Skeptics of industrial policy argue that the coastal areas. In addition to mobilizing most low- and middle-income-country gov- labor, China’s success is the result of tremen- ernments lack the information and capacity dous capital investments that provided the to “pick winners”—to identify and capture necessary underpinnings for fast economic knowledge spillovers or to exploit dynamic growth. To sustain capital investment, the scale economies in certain industries. Chinese government made intense use of Another challenge is the need for govern- directed credit, allocating credit through ments to be able to monitor and learn from state-owned or private banks, and financial their experimentation, in order to know when repression in the banking system, depressing to shift resources from old to new industries. commercial interest rates so that central and And there is the danger that vested economic local governments could borrow at low rates interests will exert political power: few low- to invest in capital projects (Huang 2012a, and middle-income governments that have 2012b, 2012c). China’s stellar growth has engaged actively in industrial policy in the reignited discussion about industrial policy past have been able to withdraw protection that had been largely discredited in the 1980s easily from industries in which the country (Lin 2012). no longer has a comparative advantage. Thus industrial policy can be not only costly, but also politically risky for many countries with Are these strategies viable low state capacity and weak governance, for emerging East Asia Pacific given the high potential for rent seeking and locked investment in unproductive activities countries now? (Krueger 1974). Jobs strategies in many East Asian countries Experiences with industrial policy in other have been embedded mainly in broader parts of the world—often deployed with industrial policies. The benefits of indus- explicit employment objectives—have been trial policy are hotly debated in theory and more sobering than the story of East Asia’s mixed in practice. Proponents of a princi- now high-income countries. Within East pal role of the state base their arguments Asia Pacific, critics often point to mistakes on three forms of externalities and market in Japan’s history of industrial policy, such failures: knowledge spillovers and dynamic as when the government discouraged Honda 196 E A S T A S I A PAC I F I C AT W O R K from entering the automobile industry and capacity to design and implement them Sony from entering consumer electronics. effectively, transparently, and flexibly. The However, examples outside the region, governments of China, Korea, and Singapore such as the track record of import substitu- have all developed very high levels of capac- tion in Latin America up to the 1980s and ity not only to identify target sectors and India’s protected industrial groups prior to industries for preferential policy but also trade liberalization in the 1990s, featured to jump-start and implement these policies, overall slow economic growth and high fis- which requires the creation and destruc- cal costs, frequently in the form of subsidies tion of specific industries and continual captured by interest groups. Such strategies restructuring of the economy. The low- and created costly distortions and hampered middle-income countries of East Asia Pacific, broad-based improvements in employment however, have weaker institutions and gover- outcomes; they did not correct the market nance. Attempting to replicate past top-down failures or address the externalities for which strategies with limited capacity and informa- they were designed. Some argue that these tion raises the risk of government failures unsuccessful experiences were due to poor and rent seeking and can exacerbate the very design and implementation rather than the market failures that policies are intended to idea of industrial policy per se, but many correct. In addition, jobs strategies embed- would agree that setting the right institutions ded in top-down industrial policy were is a key element in any inclusive growth and typically pursued in East Asian countries by jobs strategy. In countries with weak politi- authoritarian regimes, aside from Singapore. cal institutions, industrial policy measures Top-down industrial policy may be more dif- are likely to result in large misallocations and ficult to undertake in a pluralistic democracy inefficiencies (Beck 2008). In Pakistan, for of the sort found in Indonesia, Malaysia, the example, directed credit helps to boost the Philippines, and Thailand today. performance of small exporters but has little Policy makers in the emerging economies impact on the performance of larger export- of East Asia Pacific operate in a very differ- ers. Yet large exporters, usually companies ent world from two or three decades ago. with political clout, are the main benefactors Today’s global policy environment provides of cheaper loans (Zia 2008). opportunities and tendencies to influence Even some of the policies that have served national economic policies through multilat- the Chinese economy well in the past, such eral, regional, and bilateral agreements. For as directed credit and interest rate ceilings, example, many of East Asia Pacific’s devel- have been less positive elsewhere and may oping countries are now members of the not be appropriate for China any longer. World Trade Organization and, in principle, Financial repression is no longer a sustain- subject to its restrictions on export subsidies able strategy to achieve high income, contrib- and rules on intellectual property rights, uting to inflated asset prices, property price among others. Moreover, the potential costs bubbles, and a large shadow banking system. of government failures in implementing the As the Chinese private sector becomes more sort of employment strategies and industrial sophisticated, deregulating interest rates will policies that might have been successful in become an imperative for the private sector the past are likely on the rise with increas- to respond adequately to growing demand ing global and regional integration. The fast (Huang 2012a, 2012b, 2012c). pace of globalization intensifies competition Should the employment strategies that in the product and factor markets, making worked in the past be attractive options for it increasingly costly to interfere unneces- emerging East Asia Pacific countries now? sarily with households’ and firms’ incen- The kind of national development strategies tives and responses to market signals. In the described earlier are unlikely to succeed with- East Asian economies with rapidly evolving out sufficient information and institutional demand for work, “top-down” approaches PA S T J O B S S T R AT E G I E S I N E A S T A S I A: CO U L D T H E Y W O R K TO DAY? 197 like past forms of targeted sectors and man- policy—with and without an explicit employ- power planning could become too rigid, ment objective—may not be viable options adjust too slowly, and overemphasize tech- in today’s more globalized, rules-based, nical skills over foundational cognitive and and fast-changing economic environment. behavioral skills, a danger discussed in Instead, the useful lesson to take away is the chapter 5. need to set the right fundamentals, institu- Korea is notable for the changing nature tions, and factor market policies. Priority of its jobs strategy. Leipziger and Petri public investments will build on those funda- (1993) argue that in the early 1990s, Korea’s mentals, releasing constraints on the creation industrial policy had not kept pace with the of employment that propels productivity, enormous political, economic, domestic, and improves living standards, and strengthens international changes taking place, leading to social cohesion. increased conflicts between government and business and confusion in economic policy making—for example, policies toward con- Note glomerates (chaebols). In 1996, Korea aban- 1. See also http://www.eurofound.europa.eu/areas doned the top-down industrial policy and /industrialrelations/dictionary/definitions development planning that it had adopted /europeanemploymentstrategy.htm. with much vigor. Skills development involved much less central manpower planning and a more integrated and comprehensive system References to support the quality and market relevance Beck, Thorsten. 2008. “Policy Choices for an of education and to form closer partnerships Efficient and Inclusive Financial System.” In between the skills-supply structures and the Secured Transactions Reform and Access to private sector (Kim 2002). The government Credit, edited by Frederique Dahan and John recently shifted to a focused, market-led Simpson. Cheltenham: Edward Elgar. employment strategy. In 2010, Korea adopted Cimoli, Mario, Giovanni Dosi, and Joseph an employment strategy with the objective S t ig l it z . 2 0 09. I n d u s t r i a l Pol i c y a n d of increasing the employment rate of the Development: The Political Economy of working-age population to 70 percent by Capabilities Accumulation. Oxford: Oxford 2020. The new employment strategy has four University Press. main components: (1) “employment-friendly” Gill, Indermet, and Jomi Kharas. 2007. East Asian Renaissance. Washington, DC: World economic and industrial policies; (2) labor Bank. regulation reform to improve flexibility and Goetschy, Janine. 1999. “The European Strategy fairness; (3) skills development and mea- from A msterdam to Stockholm: Has It sures to increase the labor force participation Reached Its Cruising Speed?” Industrial of women, youth, and older workers; and Relations Journal 32 (5): 401–18. (4) active labor market programs to facilitate Heilmann, Sebastian, and Lea Shih. 2013. the transition from welfare to work (World “The Rise of Industrial Policy in China, Bank 2012). 1978 –2012 .” Working Paper, Harvard- History offers useful lessons. The expe- Yenching Institute, Cambridge, MA. rience of today’s high-income East Asian Huang, Yukon. 2012a. “In the Middle Kingdom’s countries suggests that whatever employment Shadow.” Wall Street Journal, March 26. ———. 2012b. “The Stimulus China Really strategy is adopted to address market failures Needs.” Wall Street Journal, June 13. needs to complement rather than substitute ———. 2012c. “Time for China to Give up for sound fundamentals and institutions. As Financial Repression.” Financial Times , tempting as it may be for emerging East Asia May 2. Pacific countries to strive to replicate past Kim, Gwang-Jo. 2002. “Education Policies strategies of its high-income neighbors, their and Reform in South Korea.” In Secondary earlier forms of rigid, top-down industrial Education in Africa: Strategies for Renewal, 198 E A S T A S I A PAC I F I C AT W O R K e d i t e d b y L aw r e n c e M a s t r i , 2 9 – 4 0 . Putting Commitment into Action.” United Washington, DC: World Bank. Nations, New York. http://www.un.org/esa Krueger, Anne O. 1974. “The Political Economy /socdev/social/documents/National.Action. of the Rent-Seeking Society.” American Plans.2007.pdf. Economic Review 64 (3): 291–303. World Bank. 1993. The East Asian Miracle: Leipziger, Danny, and Peter Petri. 1993. “Korean E c on o mic G row th an d Public Polic y . Industrial Policy: Legacies of the Past and Washington, DC: World Bank. Directions for the Future.” Discussion Paper ———. 2012. World Development Report 197, World Bank, Washington, DC. 2013: Jobs. New York: Oxford University Lin, Justin. 2012. New Structural Economics: A Press. Framework for Rethinking Development and Yang, Ya-Hwei. 1993. “Government Policy and Policy. Washington, DC: World Bank. Strategic Industries: The Case of Taiwan.” In Ray, Debraj. 1997. Economía del desarrollo. Trade and Protectionism, NBER East Asia Barcelona: Antoni Bosch. Seminar on Economics, vol. 2, edited by Siow Yue, Chia. 2005. The Singapore Model Takatoshi Ito and Anne Krueger. Chicago: of Industrial Policy: Past Evolution and University of Chicago Press. Current Thinking. Washington, DC: Inter- Zia, Bilal. 2008. “Export Incentives, Financial American Development Bank; Manila: Asian Constraints, and the (Mis)Allocation of Credit: Development Bank Institute. Micro-Level Evidence from Subsidized Export U N ( Un ited Nations). 20 07. “Review of Loans.” Journal of Financial Economics National Action Plans on Youth Employment: 27 (2): 498–527. Well-being from Work in the Pacific Island Countries 8 In the Pacific island countries, which are Palau, Samoa, the Solomon Islands, Tonga, small and far from world markets, labor Tuvalu, and Vanuatu. Economic growth and mobility represents the most significant and diversification have been very limited in these substantial opportunity for overcoming countries because of the barriers imposed by geographic constraints on employment. smallness and distance, and these barriers will not be overcome quickly. Policy tweaks T his chapter presents a brief overview to the business environment aimed at fos- of employment challenges in small tering the emergence of an export-oriented Pacific island countries (PICs) and private sector are unlikely to be effective in offers recommendations for addressing them. generating substantial expansion of employ- It is very different in nature from the rest of ment opportunities. The challenge for policy the report in the sense that it is a self-con- makers is therefore to think about how to tained piece. The Pacific island countries are meet employment challenges within the for- not only very different from the rest of the midable constraints imposed by geography. East Asia Pacific region but also unique in Slow economic growth, rapid population the world. Therefore, to be useful, a coherent growth, and accelerating urbanization mean discussion of work in these countries requires that employment creation is a pressing prior- its own space to describe the context, ana- ity for small Pacific island countries.1 The lyze employment outcomes, and recommend appropriate employment strategy will vary policies. between these countries, given their diversity We begin with an assumption that, due to in size, location, natural resource endow- realities of economic geography, small PICs ments, and demographics. Nevertheless, the are unlikely to follow the employment trajec- chapter proposes five priorities that are likely tory of fast-growing East Asian economies. to be broadly applicable to this unique group Given the particular challenges and oppor- of countries. tunities facing these countries, discussion in First, stakeholders’ expectations about this chapter relates to the Pacific island states the trajectory of development will need to with populations of significantly less than be realistic. Due to inherent geographic 1 million, including Kiribati, the Marshall obstacles, PICs are unlikely to experience Islands, the Federated States of Micronesia, export-driven development and associated 199 200 E A S T A S I A PAC I F I C AT W O R K employment creation on the scale seen in the concentration of economic opportunities broader East Asia Pacific region. While busi- in urban areas. This will require (1) move- ness environment reforms can open up new ment away from policies aimed at prevent- opportunities for private sector development ing urbanization, such as inadequate legal and employment creation, such measures protection for recent arrivals in urban areas, are unlikely to spur sufficient work to meet underprovision of peri-urban services and emerging demands even in the best possible infrastructure, and production subsidies for business environment. Employment strate- rural areas; (2) sufficient public investment gies must therefore include less conventional in infrastructure links between agricultural policy options and focus on areas where PICs areas and urban areas; (3) improved land have established strengths and advantages. administration and increased investment in Second, the volume of international labor services in urban areas; and (4) interventions mobility should be increased through the ero- to assist agricultural productivity and sup- sion of regulatory barriers and investment in port rural services and standards of living. transferable human capital. PICs will never Fourth, productive public spending can be able to achieve the scale and integration be used as a mechanism for creating new seen in larger regional economies. The great- employment opportunities. Large public sec- est potential for work is therefore through the tors in PICs are often a source of concern, movement of Pacific Islanders to areas where with public sector employment thought to employment opportunities are concentrated. exist at the expense of increased private sec- The priority for policy is to provide people tor employment. In reality, the scope for pri- from PICs with access to work wherever it vate sector–led employment creation is often exists. Echoing the conclusions of earlier constrained by geography. Public sectors, World Bank reports (Luthria 2006), this will while large relative to the size of the econ- require both changes in the immigration poli- omy, remain small in absolute terms and with cies of the nearest large economies and care- regard to diseconomies of scale in adminis- ful investment in internationally transferable tration and service delivery. Public sector human capital by small PIC governments. employment is therefore likely to continue to Third, governments can work to harness provide a substantial share of work in PICs. the positive potential of urbanization through Policy attention can usefully focus on ensur- investment in improved rural services, con- ing that such employment is productive and nective infrastructure, and improved urban sustainable rather than on reducing the num- administration. Urbanization is a reality in ber of public sector jobs. Private participation most PICs and one that should be enthusias- can provide incentives for efficient delivery of tically embraced. Urbanization accompanies public services, but needs to be approached development, allowing the realization of scale carefully and selectively. Broader public sec- economies, greater thickness in markets, and tor reforms to ensure efficiency and effective- increased specialization. Urbanization driven ness need to continue. Donor agencies and by these positive economic benefits should be governments can work to ensure that devel- facilitated. But urbanization occurring as a opment expenditure supports the creation of result of poor services in rural areas, conflict, local employment opportunities. food insecurity, or land shortages simply Finally, policies can ensure that natural leads to congestion and urban unemploy- resource industries provide a sustainable ment, delivering few economic benefits and source of employment creation. Natural placing pressure on social cohesion. Policies resource industries can flourish in PICs should not be biased toward employment in despite higher cost structures. But work in either urban or rural areas, but rather should natural resource industries is often unsus- seek to ensure acceptable standards of living tainable and contributes little to living stan- across all communities and allow individuals dards. Judgments about policy interventions to respond as they choose to the inevitable to create employment within these industries W E L L - B E I N G F R O M W O R K I N T H E PAC I F I C I S L A N D CO U N T R I E S 201 should consider the quality and sustainabil- only 38 percent. Real exports from East ity of the work they are likely to create. PICs Asia Pacific as a whole have increased by might often benefit most from converting a factor of nine since 1990, while exports rents from natural resource industries into from these Pacific island countries are only improved infrastructure, services, and human about twice their 1990 value (figure 8.1). capital, rather than seeking to create direct The percentage of the population living in large-scale employment in those industries cities in the average small PIC is about the through implicit or explicit subsidization. same as the percentage of the population liv- In the remaining sections of this chapter, ing in cities in East Asia in 1960, and the we present an overview of work in the Pacific scale of urbanization since 1990 has been and a summary of emerging employment chal- significantly less (figure 8.2). lenges. We then provide recommendations for Official statistics are scarce, providing an dealing with these challenges. In the final sec- incomplete picture of employment and work tion, we summarize policy conclusions. in small Pacific island countries. Little data on employment are available beyond that which are collected from household income Employment challenges of the and expenditure surveys and censuses. There are important inconsistencies in the defini- small Pacific island countries tions used in available surveys across coun- The Pacific island countries are following tries, leading to large variation in reported an employment trajectory different from labor force participation and unemployment the rest of the region. As shown in the early rates that do not reflect underlying economic chapters of this report, much of East Asia or social realities. Pacific has enjoyed rapid economic growth Some employment patterns are common and economy-wide increases in productivity across most PICs. A small number of Pacific in recent years, driven by the large emerging Islanders have formal employment, most of economies of East Asia. This has occurred which is in cities and much of which is in the with an explosion of work opportunities in higher-productivity manufacturing and ser- FIGURE 8.1 Pacific island countries have not transitioned to vice sectors, often globally integrated and export-led manufacturing and services focused on exporting and almost entirely in urban areas. This transformation has fed on itself, with productivity gains from agglom- Real export values, Pacific island countries and East Asia Pacific eration and increasing wage incomes fueling 1,000 domestic demand. In short, export-driven 900 structural transitions of East Asian econo- 800 mies have contributed to creating employ- 700 Index (1990 = 100) ment and boosting the well-being that 600 people get from work. The experience of 500 East Asia, however, has not been the experi- 400 ence of most Pacific island countries. There 300 is little sign in PICs of the broader economic 200 changes that are transforming much of the 100 region. Access to regular paid work is lim- 0 ited, and labor productivity remains almost 1990 1994 1998 2002 2006 2010 static. Real gross domestic product (GDP) Kiribati Solomon Islands Tonga Vanuatu per capita has increased 650 percent for the East Asia Pacific (developing) Samoa East Asia Pacific region since 1982, but for the larger of the economies discussed in this chapter, output per person has increased Source: World Development Indicators. 202 E A S T A S I A PAC I F I C AT W O R K FIGURE 8.2 Pacific island countries have lower rates of growth of positions within the formal economy. and are less urbanized than the rest of East Asia Pacific Women’s economic activity tends to be con- centrated in the informal sector, especially in Urbanization and growth, Pacific island countries and East Asia Pacific agriculture (UNESCAP 2007). While data 600 constraints preclude extensive analysis, it is % change in real GDP per capita since 1990 CHN clear that women have access to a narrower 500 range of employment opportunities than men and often lack access to higher-paid work. 400 This imposes costs on the economy, with EAP analysis from the broader East Asia Pacific 300 region suggesting that eliminating barriers to VNM 200 women’s participation in certain sectors and THA occupations could improve labor productiv- 100 WSM TUV IDN MYS ity by up to 25 percent for some countries TON RMI VUT (UNESCAP 2007). 0 FSM SLB KIR FJI Growing youth populations put pressure –5 0 5 10 15 20 25 30 on the economy to generate enough work. % change in share of population living in urban areas since 1990 High fertility rates are driving rapid popula- East Asia Pacific Small Pacific island countries tion growth in several PICs, with the Pacific population expected to double over the next Source: World Development Indicators. 28 years. PICs also face a youth bulge: 54 per- cent of the population is below the age of public sector (box 8.1). Most Pacific Islanders 24—a higher proportion than in East Asia, engage in some combination of agricul- all developing countries, and the world. The ture, subsistence activities and cash or bar- number of people between the ages of 0 and ter exchange, and informal small-business 14 substantially exceeds the proportion of activity, either as part-time employees or as the population between the ages of 14 and business owners. In cities, many individu- 25, and the number of working-age youth is als are employed on a part-time or casual expected to grow quickly over the next decade basis by small businesses operating infor- (figures 8.4 and 8.5). Previous research by mally, while many others generate income the World Bank has shown that it will be a through a range of informal and part-time challenge for the private sector to generate own-business trading opportunities, such as enough new jobs to meet expected increases operating a temporary retail stall or selling in labor supply. Formal employment opportu- products in the town market. Many Pacific nities are already limited relative to the labor Islanders move between agricultural produc- force in many PICs. Recent estimates from tion for exchange, subsistence agriculture, the International Labour Organization (ILO) and informal small-business activities and suggest that the percentage of men between cannot easily be assigned to a single employ- 20 and 24 years of age who are not engaged ment category. Those with formal employ- in productive activities (defined as “paid or ment may also engage in agricultural or unpaid activity that contributes to their per- subsistence activities at various times to gen- sonal livelihood or that of their family and erate additional cash income or meet various community as a whole”) is as high as 58 per- social obligations.2 cent in Kiribati, 44 percent in the Marshall Work patterns vary strongly by gender Islands, and 46 percent in Samoa (ILO 2013). (figure 8.3). Across Pacific island countries, Other factors will also affect the demand men dominate paid employment outside for work. Social services have achieved of agriculture, with approximately half as remarkable success in improving health and many women accessing these opportunities. education outcomes across small Pacific In Melanesia, women occupy only a third countries in recent decades. At the same W E L L - B E I N G F R O M W O R K I N T H E PAC I F I C I S L A N D CO U N T R I E S 203 BOX 8.1 Where is the work? Based on data from the National Provident Funds the Solomon Islands to nearly 80 percent in of Kiribati, the Solomon Islands, and Vanuatu, fig- Kiribati. Given that the vast majority of Pacifi c ure B8.1.1 shows employment shares in the formal Islanders are engaged in some form of work, private sector, the public sector, and various forms the dominance of informal employment, includ- of informal employment. ing agriculture for exchange, is also clear from A large share of formal employment is in the size of the working-age population without the public sector, ranging from 30 percent in formal work. FIGURE B8.1.1 The majority of Pacific islanders are engaged in some form of work, many in informal employment Kiribati Solomon Islands Vanuatu 0 10 20 30 40 50 60 70 80 90 100 % of working age population Public sector Other formal employment Informal employment Sources: National Provident Fund and census data. time, the spread of telecommunications and opportunities. While global trends sug- mass media has fueled aspirations for higher gest that agriculture-based livelihoods are living standards and increased awareness of becoming less desirable, they may also be the wider world. Relatively better-educated becoming more difficult. In some coun- and healthier people are more likely to have tries, including Kiribati and the Solomon aspirations beyond village-based and family- Islands, rural population growth is placing oriented agricultural and fishing activities. pressure on subsistence systems, leading to The pressure associated with these grow- falling productivity and crop yields (Reddy ing aspirations is already spilling over into 2007). Pressure on subsistence systems may higher rates of urban migration as young become an additional driver of urban migra- people seek cash incomes and broader oppor- tion and demand for alternative employment tunities. It is likely to be felt most acutely in opportunities. countries with currently low levels of emigra- Small Pacific island countries face a clus- tion and limited formal sector employment ter of overlapping employment challenges 204 E A S T A S I A PAC I F I C AT W O R K FIGURE 8.3 Women are less likely than men to participate in the (box 8.2). Without the opportunities gener- labor force ated by rapid economic transformation, PICs face several challenges to creating employ- 90 ment. Many have rapidly growing popula- tions of young people who are unlikely to be 80 satisfied with the limited opportunities for Labor force participation (%) 70 self-advancement offered by agricultural sub- 60 sistence. Some small PICs are already facing the related challenge of rapid urbanization and 50 are struggling to generate work for growing 40 urban populations. Some have emerged from 30 conflict and face ongoing conflict pressures, 20 with the accompanying need to maintain access to opportunities and ensure their care- 10 ful distribution between groups and regions. 0 Several countries are struggling to ensure Samoa Solomon Islands Tonga Vanuatu sustainable benefits from extractive resource Female Male industries, including encouraging the develop- ment of ancillary industries, diversification, Source: World Development Indicators. and sustainable employment generation. FIGURE 8.4 Pacific island countries have very young populations 16 14 12 10 % of population 8 6 4 2 0 0–4 5–9 10–14 15–19 20–24 25–29 30–34 35–39 40–44 45–49 50–54 55–59 60–64 65–69 70–74 75–79 80+ Age band (years) Eastern Asia Micronesia, Fed. Sts Samoa Solomon Islands Southeastern Asia Tonga Vanuatu World Source: United Nations Department of Economic and Social Affairs. W E L L - B E I N G F R O M W O R K I N T H E PAC I F I C I S L A N D CO U N T R I E S 205 Governments and donors are concerned FIGURE 8.5 Rapid growth in the number of youth is expected over about the quality and quantity of employment the coming years available to Pacific Islanders. Governments and donors in PICs and elsewhere have previ- Expected growth of 15–24 age cohort by 2020 ously implemented policies to support employ- ment creation in specific geographic locations or sectors, based on prior assumptions about Palau what “good” employment is. Often, policies have sought to support employment in rural Tuvalu areas over employment in urban areas; work within the local economy over work in larger markets; private sector employment over Kiribati public sector employment; and employment within specific natural resource industries, Micronesia, Fed. Sts. through concessions or subsidies. Results of this approach have mostly been unsatis- Nauru factory, with underlying economic realities derailing well-intentioned plans. As discussed in the World Development Report 2013; Jobs Vanuatu (hereafter referred to as WDR 2013), and in prior chapters of this report, the employment Marshall Islands strategies that are most likely to succeed focus on ensuring that work raises living standards, Samoa drives greater productivity, and contributes to greater social cohesion, regardless of the geo- graphic location or sector where that work Tonga takes place. Solomon Islands Five employment priorities for 0 20 40 60 80 100 120 Pacific island countries Percent In this section we present five employment priorities for PICs. The applicability of these Source: Adapted from Bedford 2012. priorities varies across countries accord- ing to size, location, demographic profile, natural resource endowments, and nature of existing economic activities. No single associated employment creation of the scale strategy will be appropriate for all countries. and nature seen in much of the East Asia Nonetheless, shared geographic character- Pacific region, even with the best possible istics suggest some shared challenges and business environment. Employment strate- some potential common solutions. gies need to include less conventional policy options and focus on areas where Pacific countries have established strengths and Trajectory of development advantages. Priority 1 Set realistic expectations about • Countries of relevance. All Pacific island the trajectory of development countries, especially those where popula- tions are very small and dispersed. • Summary. Due to inherent geographic obsta- • Living standards. Forces of economic cles, Pacific island countries are unlikely to geography mean that Pacific island coun- experience export-driven development and tries are unlikely to see rapid improvements 206 E A S T A S I A PAC I F I C AT W O R K BOX 8.2 Pacific island countries face overlapping employment challenges The World Development Report 2013: Jobs (here- these industries can lead to uneven and unsustain- after WDR 2013; World Bank 2012c) explicitly able development and squeeze out growth in other recognizes that different employment challenges parts of the economy. The Solomon Islands remains will require different policy responses, discussed at a postconfl ict country and faces continued confl ict length in chapter 7. Small Pacifi c island countries pressures arising partly from uneven distribution of face a complex and overlapping range of challenges, economic opportunities, including the concentra- including at least five of the challenges specifically tion of formal sector employment in the capital city, identifi ed in the WDR 2013. Figure B8.2.1 shows Honiara. Urbanization continues to generate pres- the challenges relevant to PICs and the associated sures for small Pacific island countries like Kiribati, priorities for policy makers identifi ed in the WDR the Marshall Islands, the Solomon Islands, and 2013. These priorities are elaborated in the recom- Vanuatu, with the pace of growth in urban popula- mendations of this chapter. tions outstripping the pace of employment creation All small island countries face inherent barri- and feeding concerns regarding youth unemploy- ers of scale and distance, which can preclude the ment and associated social problems. These prob- development of manufacturing and service indus- lems are exacerbated by very large and growing tries associated with high-productivity, better-paid youth populations in many PICs, especially in work. Many countries in the region are endowed Melanesia. with natural resources, in the form of mineral deposits, forests, and fisheries. The development of Source: World Bank 2012c. FIGURE B8.2.1 Small Pacific island countries face a complex and overlapping range of challenges requiring a range of priorities Small Pacific island countries Conflict-affected Small island Resource-rich Urbanizing High youth Challenges economies nations countries economies unemployment Jobs not Jobs providing Jobs connected Jobs supporting Jobs not leading Jobs integrating allocated on the Priorities alternatives to global export to excessive rural migrants basis of to confrontation markets diversification congestion connections in living standards from private sector • Social cohesion. Social cohesion can be employment creation. Alternative means undermined by unrealistic expectations of supporting higher living standards regarding the prospects for economic and through work are required. employment growth. • Productivity. Scale and concentration are vital for productivity. Small, dispersed, Export-driven, private sector develop- and distant populations face inherent lim- ment is unlikely to be the answer to employ- its to productivity that need to be reflected ment challenges facing small Pacific island in employment strategies. countries. A common message in reports W E L L - B E I N G F R O M W O R K I N T H E PAC I F I C I S L A N D CO U N T R I E S 207 regarding economic growth or employ- FIGURE 8.6 Costs to start a business are higher in many Pacific ment creation in PICs is the importance of island countries reforms aimed at improving the environ- ment for the private sector. Improving the Cost to start a business business environment can deliver important benefits to small Pacific island countries. A Thailand legal and regulatory framework that sup- ports investment and the sound functioning Samoa of factor markets can facilitate the creation of employment within businesses supplying Tonga local markets or in niche export industries. Continued investment in reforms to reduce Cambodia the costs of doing business therefore remains an important priority, especially for coun- Malaysia tries where compliance costs facing busi- nesses are out of line with regional or global Marshall norms (figures 8.6 and 8.7 and box 8.3). It Islands is important, however, not to overstate the Indonesia likely impact of such reforms on employment creation. Due to inherent geographic obsta- cles, PICs are unlikely to experience the scale Philippines of export-driven development and associated employment growth seen in much of the East Kiribati Asia Pacific region under any regulatory or policy setting. Fiji The formidable geographic challenges of Solomon smallness and distance impose costs. The Islands small PICs discussed in this chapter are among the world’s 50 smallest countries. Vanuatu Smallness makes it hard for businesses to Micronesia, achieve economies of scale. With relatively Fed. Sts. few domestic businesses, firms find it difficult to outsource upward and downward through 0 20 40 60 80 100 120 140 160 the supply chain. Firms also experience less % GNI per capita exposure to positive knowledge externalities, as they are unable to observe the practices Source: Doing Business Indicators 2013. of other firms in the same industry and lack access to a pool of workers with experience in different firms. In other small countries, firms overcome some of the costs of small- (figures 8.8 and 8.9). Recent quantitative ness by trading internationally. But PICs research has investigated just how signifi- are also some of the most isolated countries cant the costs arising from small scale and in the world, when measured using a vari- remoteness might be for countries like those ety of economic measures.3 Great distances in the Pacific (Yang et al. 2012; Tumbarello, increase the costs of exporting and the price Cabezon, and Wu 2013). Winters and of imported inputs. Martins (2004) find that capital would earn The combined impacts of smallness and negative returns if it were invested in export distance on cost are sufficient to under- manufacturing in nearly all of the Pacific mine competitiveness of the industries that island economies. Even if wages were zero in have supported growth in larger economies most Pacific countries, total costs would still 208 E A S T A S I A PAC I F I C AT W O R K FIGURE 8.7 The time required to start a business is burdensome in production, reflecting higher local cost Pacific island countries structures. Economic activity and employ- ment have occurred in areas where inevitably Days needed to start a business higher costs do not undermine viability and local activity does not face direct interna- Malaysia tional competition (World Bank 2011). These areas include (1) public services and infra- Samoa structure, which account for a large share of formal employment; (2) nontradable pri- Micronesia, vate sector goods and services, often focused Fed. Sts. on meeting demand from the public sector or public sector employees; and (3) natural Tonga resource industries, including tourism, where Marshall rents can be generated despite higher cost Islands structures. Although the economic drivers in small PICs are different from those in larger Thailand economies, they have served PICs very well in lifting incomes and living standards well Kiribati above those in many larger and less isolated developing economies. Philippines The geographic forces that determine what work is available in PICs will remain signifi- Vanuatu cant over time. Contrary to the East Asian Solomon experience of diversification, PICs might Islands expect further concentration in traditional areas as preferential access arrangements for Cambodia key export industries are removed, trade and investment are liberalized, and transport and Indonesia communication links are improved. Loss of preferential access will mean that PICs face Fiji the full impacts of higher costs in manufac- turing and services for export, while eco- 0 10 20 30 40 50 nomic integration will reduce barriers to competition from imports. As global eco- Source: Doing Business Indicators 2013. nomic activity becomes more and more con- centrated and the benefits of agglomeration exceed world prices both in manufacturing in large urban centers increase, the scale dis- and also in a service industry such as tourism. advantages faced by PICs will become rela- Constraints of geography have been tively more significant. consistently reflected in the structure and Employment strategies will need to be fea- performance of small PIC economies. The sible within the constraints imposed by geog- economies of small PICs have remained raphy. The extent of employment creation dependent on aid, remittances, and natural from improvements in the business environ- resource industries (Bertram and Watters ment should not be overstated. Even under 1985). Large structural current account defi- the best possible business environment, it is cits have continued for all but a few natural not clear that the private sector would be able resource–rich Pacific countries. Growth in to generate significant employment through consumption, fueled by aid and remittances, export-driven growth, due to the cost dis- has been met almost entirely by increased advantages of geography (box 8.4). This is imports rather than increased domestic not, however, reason for pessimism. Policy W E L L - B E I N G F R O M W O R K I N T H E PAC I F I C I S L A N D CO U N T R I E S 209 BOX 8.3 Is labor regulation “off the plateau” in Pacific island countries? Very limited data are available on labor market poli- market policies (see chapter 6 of this report). These cies and their impacts on PICs. The Labor Freedom data suggest, however, that labor regulation in PICs Index—a component of the Heritage Foundation’s is not unusually restrictive (figure B8.3.1). Four of Index of Economic Freedom—ranks the restric- seven PICs included in the index are among the 25 tiveness of labor regulations from an employer per- countries with the least restrictive policies. Only spective, using data collected through the World Vanuatu is among the “more restrictive” half of Bank’s Doing Business survey. Reaching any fi rm countries covered by the index. On the basis of this conclusions regarding labor regulation in PICs evidence, it seems unlikely that overly prescriptive would require better information, as labor regula- labor regulation is a primary constraint on private tions imposed on fi rms are just one element of labor sector growth and productivity in most PICs. FIGURE B8.3.1 Labor market regulation is not especially restrictive in Pacific island countries Labor freedom index, all countries 100 90 80 70 60 50 40 30 20 10 0 Tonga Kiribati Micronesia, Fed. Sts. Samoa Solomon Islands Vanuatu Source: Heritage Foundation Labor Freedom Index. options are available that build on Pacific employment opportunities even across island countries’ existing strengths, despite national boundaries. This will require inherent geographic constraints. both changes in the immigration policies of the large regional economies and careful investment in internationally transferable Labor mobility human capital. Priority 2 Improve international labor • C ountries of rele vance . A ll Pacific mobility through the erosion of regulatory island countries, especially those where barriers and investment in transferable population growth is rapid and current human capital access to international labor markets is limited. • Summary. Geographic realities will con- • Living standards. Overseas employment strain work opportunities in Pacific island opportunities have been shown to support countries. Governments and donors can higher living standards for migrant work- facilitate access of Pacific Islanders to ers and their families. 210 E A S T A S I A PAC I F I C AT W O R K FIGURE 8.8 Pacific island countries are unique in their • Social cohesion . Labor mobility can combination of smallness and isolation reduce pressures arising from youth unem- ployment and defuse contests over access Size and isolation by country group to economic opportunities. 11 Labor mobility represents the most sig- GDP weighted distance, km (thousands) nificant and substantial opportunity for TON VUT 9 WSM FJI overcoming geographic constraints to TUV SLB KIR TLS employment in the PICs. A key lesson from MHL PLW FSM the World Development Report 2009: 7 Reshaping Economic Geography (World Bank 2008) is that productivity is associated with scale, density, and concentration. The 5 geographic location of a worker is an impor- tant determinant of that worker’s productiv- ity and, therefore, income. Even within the 3 1 thousand 1 billion same densely populated industrial country, Population a worker in a large city typically earns more than a worker with identical experience and World Pacific island countries Caribbean countries skills in a smaller city because of the produc- tivity benefits associated with scale, special- ization, and knowledge spillovers (Venables FIGURE 8.9 The costs of smallness and isolation undermine 2006). Work in small PIC economies, with competitiveness in transformational industries small, dispersed populations and located thousands of kilometers from global centers 70 of production, is likely to remain, on aver- age, substantially less economically produc- 60 Cost of production (%) relative to tive, and therefore less well paid, than work 50 in larger, better integrated economies. GDP a medium economy per capita of Australia is now around 20 40 times that of Vanuatu and 40 times that of the Solomon Islands. Living and working in 30 nearby Australia and New Zealand provides 20 a range and depth of economic opportunity far beyond what is likely to be available in 10 small Pacific economies for the foreseeable 0 future, given low rates of growth and limited Electronic assembly Clothing Hotels and tourism opportunities for economic diversification (box 8.5; World Bank 2011). A key opportu- Small economy Very small economy (4 million people) (200,000 people) nity for improving the living standards and Threshold (1.6 million people) Micro economy (12,000 people) productivity of PIC workers is to provide improved access to employment opportuni- ties in places that do not face the same con- Source: Adapted from Winters and Martins 2004. straints of smallness and isolation. A growing body of evidence demonstrates that improved • Productivity. Mobility allows labor to flow labor mobility for Pacific Islanders would to areas where it can be employed most provide benefits to migrants, their families, productively. Labor mobility can encour- sending countries, and receiving countries. age investment in human capital, benefit- Migrants and their families benefit ing both sending and receiving countries. from labor mobility. The attractiveness of W E L L - B E I N G F R O M W O R K I N T H E PAC I F I C I S L A N D CO U N T R I E S 211 BOX 8.4 Are the costs of distance declining? Advances in technology might be expected to have kilometers would cease at a distance of 9,000 kilo- reduced the costs of transport over time, mitigating meters. Because costs of distance are so important, the disadvantages faced by PICs in accessing inter- around 23 percent of global trade occurs across a national export markets and reducing the cost of shared land border between countries. This propor- imported inputs. A trend of falling transport costs tion has been constant for several decades. Hummels might suggest new export and economic develop- (2007) provides a detailed analysis of air and ship ment opportunities for PICs and a decline in the sig- freight costs over time. He fi nds that, despite inno- nificance of geography in constraining employment vations including containerization and introduc- creation in the private sector. Unfortunately, avail- tion of the jet engine, there has been no significant able evidence suggests that geographic proximity reduction in shipping costs (as a proportion of the remains a primary determinant of trade links and value of products shipped) since the 1950s, while air shows no signifi cant reduction in costs of distance transport costs have actually increased substantially over time. over the past decade (figure B8.4.1). Cost trends Analysis from economic “gravity models” shows have been driven by higher fuel costs, with oil price that even in the current age of globalization, 90 per- increases more than offsetting the cost reductions cent of the trade that occurs over a distance of 1,000 associated with new technologies. FIGURE B8.4.1 Shipping costs remained relatively stable, while air transport costs have risen substantially over the past decade a. Liner price index b. Trends in airline costs 250 3.0 0.30 Share of operating expenses (%) Cost index (2,000 = 100) 2.5 0.25 200 2.0 0.20 Index 150 1.5 0.15 100 1.0 0.10 50 0.5 0 1954 1964 1974 1984 1994 2004 19 1 19 3 19 1 19 3 19 1 20 3 20 1 20 3 1 –Q –Q –Q –Q –Q –Q –Q –Q –Q 88 90 92 94 96 98 00 02 04 With GDP deflator 19 With traded goods price deflator Composite cost index Fuel cost index Fuel share in operating expenses Sources: Venables 2006; Hummels 2007; Yang et al. 2012. migration is reflected in large proportions population in migrant-receiving countries, of the working-age population of some migrants generally foresee broader educa- PICs now living abroad. While social and tional and economic opportunities for their economic indicators for recent migrants to children, even for those whose own immedi- these countries can lag those of the broader ate opportunities are limited. Recent analyses 212 E A S T A S I A PAC I F I C AT W O R K BOX 8.5 Labor mobility arrangements in Australia and New Zealand affect development outcomes in Pacific island countries New Zealand, Australian, and U.S. migration poli- granted residence-class visas in New Zealand cies continue to have an important impact on labor each year. The cap includes principal applicants, mobility and broader development outcomes in PICs. partners, and dependent children. Applicants Increases in Pacific populations living in New Zealand must meet English language proficiency standards and Australia have fueled remittance flows, offset and have a “suitable offer of employment” that population growth, and expanded economic opportu- provides a salary equal to a specified minimum nities. Since 1971, the Pacific-born population of New income requirement (currently NZ$31,500). This Zealand and Australia has increased from 46,000 to scheme is also oversubscribed, despite offer-of- more than 250,000, with around 140,000 in New employment requirements. Zealand and 110,000 in Australia (Bedford 2012). • Recognized seasonal employer (RSE) scheme. The growth in Pacific-born populations has occurred Under this scheme, up to 8,000 PIC workers can be through very different channels, reflecting divergent hired on a part-time basis by New Zealand farmers policy approaches to Pacific migration. in the horticulture and viticulture industry. Alongside its country-neutral points-based immi- gration schemes, New Zealand has maintained a In contrast to New Zealand, Australia has very range of special access arrangements for PICs. These limited special labor access for Pacific island coun- are targeted toward those countries that have the tries. Consequently, three times more Pacific island- strongest constitutional or historical links to New ers migrated to New Zealand than to Australia Zealand. Such arrangements include the following between 2003 and 2007, despite Australia’s much measures: larger population and economy (Bedford 2012). Nearly all Pacifi c-born workers in Australia either • Special citizenship relationships. The populations qualified for entry through country-neutral schemes of the Cook Islands, Niue, and Tokelau have full (including large numbers of relatively highly edu- New Zealand citizenship and associated rights to cated Fijians, following recent coups) or traveled to work in New Zealand. Australia after acquiring New Zealand citizenship • The Samoan quota. New Zealand allocates through the Trans-Tasman Travel Arrangement, residence visas, by ballot, to 1,100 Samoans which allows free movement of Australian and between the ages of 18 and 45 each year. Successful New Zealand citizens across both countries. A very primary applicants must obtain an offer of work small number of Pacific-born workers have accessed in New Zealand before immigration is approved. employment opportunities in Australia through the The scheme is typically oversubscribed, partly due recent pilot of the Pacific seasonal worker scheme, to the number of places taken up by secondary which operates on a basis similar to New Zealand’s applicants, who are included within the quota RSE scheme. Places within the scheme were lim- cap. Over the past three years, 1,201 out of ited to 2,500 over the four years from 2008 to 19,326 registrations were drawn from the ballot, 2012, and only around 1,600 places were offered representing odds of around 6 percent (Gibson, due to low uptake by employers (Reed et al. 2011). McKenzie, and Stillman 2011, 11). Participation has increased slowly, with around 710 • The Pacific access category. Under the Pacific visas being issued under the scheme during the fi rst access category, 250 citizens of Tonga, 75 citizens half of FY2013/14, and the cap is still unlikely to be of Tuvalu, and 75 citizens of Kiribati can be reached. of the recognized seasonal employer (RSE) overseas, demonstrate the benefits to fami- scheme, which provides short-term access lies in sending countries of both short-term to New Zealand labor opportunities, pri- and permanent migration (McKenzie and marily in horticulture, and broader survey Gibson 2010; Gibson, McKenzie, and data of families with members working Stillman 2011; Luthria et al. 2006; Gibson W E L L - B E I N G F R O M W O R K I N T H E PAC I F I C I S L A N D CO U N T R I E S 213 and McKenzie 2011). Households in PICs residents on study and work opportuni- with family members working overseas expe- ties, and 20 percent providing sponsorships rience the following improvements: for Tongan residents seeking work overseas (Gibson and McKenzie 2010). Diaspora • Higher per capita incomes over compara- tourism resulting from large emigrant popu- tor groups, driven by remittances lations is also an important benefit to send- • Increased subjective economic welfare, ing countries, accounting for a large share with households reporting that they ben- of tourism industries in Pacific countries, efited from labor mobility opportunities with 40 percent of arrivals in Samoa from • Improved ownership of assets, including New Zealand visiting friends and relatives radios, ovens, and DVD players (Scheyvens and Russell 2009). Remittance • Higher rates of financial inclusion and flows clearly can reduce income inequality savings, including a greater likelihood of and create new opportunities for the dis- holding a bank account advantaged. Remittances from long-term • Improved educational attainment, with migrants have been shown to reduce dispari- school attendance rates shown to have ties in income between households in Fiji and increased, and broader evidence of a posi- Tonga, while participants in New Zealand’s tive impact of remittances on primary and seasonal employer scheme are typically from tertiary educational attainment, likely due to poorer rural households in Tonga (Luthria improved affordability with higher incomes. et al. 2006; Gibson and McKenzie 2009).4 Remittances provide an important and Labor mobility provides economy-wide relatively stable source of foreign exchange. benefits to migrant-sending countries. Remittances provide a substantial propor- Remittance-receiving households benefit the tion of foreign exchange receipts in several broader economy through increased invest- PICs, increasing imports and consumption ment in business activities (McKenzie and (see figures 8.10 and 8.11). While some PICs Gibson 2010). Opportunities for migration have been heavily affected by the decline in can also generate incentives for increased human capital development, which can potentially offset any loss of human capital FIGURE 8.10 Remittances are very significant for some Pacific experienced by sending countries. Recent island economies evidence from Fiji demonstrates that the expectation of migration opportunities gen- Remittances as a share of GDP erated an increase in the level of tertiary edu- cation of Fijians, with the stock of Fijians 35 with tertiary education remaining within Fiji 30 also increasing (Chand and Clemens 2008). Available evidence from small countries sug- 25 gests that the benefits to sending countries from the emigration of high-performing stu- 20 Percent dents and academics—including remittances 15 and knowledge transfer—generally outweigh the costs, especially when high rates of return 10 migration are taken into account (Gibson and 5 McKenzie 2010, 2013). Knowledge transfer is particularly significant, with 13 percent 0 of expatriate Tongans from a sample of aca- Solomon Vanuatu Kiribati Samoa Tonga demic high achievers providing advice to the Islands Tongan government while overseas, more than 50 percent providing advice to Tongan Source: Estimates based on data from country authorities. 214 E A S T A S I A PAC I F I C AT W O R K FIGURE 8.11 Remittances support imports, consumption, and of unskilled labor during the construction living standards boom following the Christchurch earth- quake have led the local business community Foreign exchange receipts by source to call for increased migration opportuni- ties. 6 Recent labor shortages in Australia, 120 where Pacific-born workers currently consti- tute a negligible proportion of migrants and 100 the total workforce, have also led to appeals 80 from the business community for increased temporary work arrangements from develop- Percent 60 ing countries (Earl 2012). Differences in the supply of and demand 40 for labor across countries present oppor- tunities for mutual benefits from mobil- 20 ity (Bedford 2012). The net economic gains from labor mobility have been long estab- 0 lished in the economic literature (World Micronesia, Kiribati Tonga Samoa Vanuatu Solomon Bank 2006; Walmsley, Ahmed, and Parsons Fed. Sts. Islands 2005). Recent evaluations have demonstrated ODA Remittances Exports how businesses have benefited from reli- able and relatively low-cost labor provided Source: Estimates based on data from country authorities. through New Zealand’s RSE scheme at the Note: ODA = official development assistance. micro level (Department of Labour 2010). The benefits of labor mobility will increase remittances during the recent global eco- further as demographic trends lead to a scar- nomic crisis, over the longer term, remit- city of young workers in the larger regional tances tend to provide a more dependable economies. source of foreign exchange than the natural Distribution of opportunities could be bet- resource industries or donor aid flows on ter matched with development needs. Many which small PICs typically rely.5 PICs already enjoy relatively easy access to Demographic shifts are creating oppor- larger labor markets, including the North tunities for greater mutual benefit from Pacific countries with access to the U.S. labor mobility (figures 8.12 and 8.13). Patterns market. Samoa and Tonga have strong his- of demographic change vary between coun- torical ties with New Zealand, and preferen- tries in the Pacific region. While some PICs tial access to the New Zealand labor market have large and growing youth popula- has translated, through step migration, into tions, the populations of the larger regional large populations in Australia. Partly because economies are aging and likely to decline of migration opportunities and their large over coming decades. The larger regional Australian and New Zealand populations, economies face impending labor shortages Samoa and Tonga have some of the best devel- that could partially be met by Pacific labor. opment outcomes in the Pacific. Strong edu- Permanent migration to New Zealand dur- cation outcomes and transport links support ing fiscal 2010–11 was below planned levels participation in seasonal worker schemes, by 9,000 places, even as the Samoan quota with Samoa and Tonga accounting for 50 per- and Pacific access entries remained over- cent of participants in the first seasons of the subscribed (Department of Labour 2013). New Zealand scheme and more than 80 per- In fiscal 2011–12, net permanent and long- cent of participants in the Australian scheme. term migration to New Zealand was nega- Other Pacific countries, where domestic eco- tive for the first time in more than a decade nomic opportunities are most constrained (Department of Labour 2013). Shortages by smallness and isolation (Tuvalu) or where W E L L - B E I N G F R O M W O R K I N T H E PAC I F I C I S L A N D CO U N T R I E S 215 incomes are lowest (Kiribati and the Solomon FIGURE 8.12 Migrants to high-income countries make up a Islands), tend to have less access to short-term substantial portion of Pacific working people and permanent migration opportunities and are constrained in their participation in sea- Migrants in Australia, New Zealand, and the United States sonal schemes by costs of transport and insti- 90 tutional weaknesses. 80 % of sending-country population Greater policy effort on the part of receiv- ing countries is required to expand access. 70 Opportunities for labor mobility are heavily 60 constrained by the immigration policies of 50 large neighboring countries, such as Australia 40 and New Zealand. These same neighboring 30 countries allocate a large proportion of their 20 overseas development budgets to the Pacific region with the stated aim of improving eco- 10 nomic opportunities and living standards 0 in the region. Increased policy coherence Micronesia, Samoaa Palau Marshall Tonga Fed. Sts. Islands between aid and immigration policies would see a large expansion in temporary and per- Source: Adapted from Bedford 2012. manent labor mobility opportunities avail- Note: Opportunities for permanent labor mobility are greatest for Polynesian countries. able to Pacific people. This would not only a. Samoa excludes the U.S. diaspora due to inability to isolate American Samoa in census data. represent a very cost-effective development intervention, but also bring economic ben- efits to those receiving countries, especially as their populations age. Achieving the great- Australia and New Zealand can be dem- est mutual benefits from emerging demo- onstrated by the relatively small number graphic transitions will require more action of seasonal workers arriving from Pacific from large economies in the region on several countries, compared to the number of fronts: job opportunities available to citizens of much wealthier countries through “work- • Expansion and improvement of tempo- ing holiday” visa schemes (figures 8.14 rary worker schemes. Efforts to expand and 8.15). Expansion of the successful participation in the seasonal worker New Zealand scheme and improvements schemes could bring substantial benefits to the Australian scheme could generate to PICs. Seasonal schemes currently make development impacts that are significant only a small contribution to overall remit- at the macroeconomic scale. tance flows to Pacific countries. Samoa • Increased permanent migration. While and Tonga alone receive around US$270 seasonal schemes could provide impor- million a year in remittances from per- tant opportunities for generating remit- manent migrants, compared to around tances, evidence demonstrates the broader US$30 million a year in remittances from range of benefits accruing to Pacific island seasonal workers in Australia and New countries from access to permanent labor. Zealand. If Australia were to offer as many Such benefits include skills and knowledge seasonal worker places as New Zealand transfer, increased tourism receipts, and relative to its population, however, total huge improvements in living standards remittances from seasonal workers in the for permanent migrants. Under any sce- scheme could reach 10 percent of the GDP nario, seasonal schemes will not close of participating countries or 60 percent of the very large gap in incomes between their current aid flows (see box 8.6). Scope large regional economies and small to expand seasonal worker schemes in both Pacific islands. The best opportunities for 216 E A S T A S I A PAC I F I C AT W O R K FIGURE 8.13 Demographic differences suggest mutual gains from workers tend to dominate in the sectors mobility for receiving and sending countries best suited to seasonal work schemes— such as agriculture and horticulture— Expected growth in youth population (ages 15–35) posing challenges for greater participation by women. Permanent migration must therefore remain a key focus of policy Tonga attention. Allocations for New Zealand’s existing Pacific Access category could be expanded and a broader range of coun- Australia tries could be offered a dedicated quota (as provided to Samoa). Australia could consider the introduction of similar New Zealand quota or lottery-based permanent access schemes. A modest start-point would be the introduction of an Australian Pacific Micronesia, Fed. Sts. Access category visa, with 2,000 per- manent visas offered per year to immi- grants from small PICs, based on the New Samoa Zealand Pacific Access category alloca- tions adjusted for Australia’s larger popu- lation size.7 Another important priority Solomon Islands is to develop processes through which seasonal workers can transition to more permanent visas. Vanuatu • Reorientation of mobility links. With the exception of high Vanuatu participa- –0.5 0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 tion in the New Zealand seasonal worker % change scheme, existing labor mobility arrange- 2005–10 2010–20 2020–30 ments deliver greatest benefit to the Pacific countries where incomes are highest and Source: Adapted from Bedford 2012. development outcomes are strongest. Note: Population pressures are building in Melanesia, while the working-age population is declining To boost well-being from work, further in nearby large economies. expansion of both seasonal and perma- nent labor mobility arrangements should be targeted toward countries such as improved productivity and incomes for Kiribati and the Solomon Islands, where many Pacific Islanders will be to move domestic economic prospects and mobil- to where greater opportunities exist. ity opportunities are heavily constrained Seasonal schemes must be viewed as a and challenges from growing youth popu- complement to, rather than a substitute lations and accelerating urbanization are for, increased permanent labor mobil- most severe. Increased participation of ity. Seasonal schemes are appropriate these countries in seasonal schemes would only to certain industries, and not those, likely require further country-specific such as elderly care and construction, donor subsidization of training and trans- where demand is likely to be greatest over port costs. coming decades. Seasonal work schemes require intensive involvement of sending Improving and expanding seasonal labor and receiving governments and therefore mobility opportunities for Pacific Islanders impose administrative costs with sustain- offers immediate benefits without any sig- able gains less easily assured. Finally, male nificant costs. Large policy shifts toward W E L L - B E I N G F R O M W O R K I N T H E PAC I F I C I S L A N D CO U N T R I E S 217 BOX 8.6 An expanded seasonal worker scheme has potential benefits Existing data from seasonal worker schemes in • All places are offered to citizens of small Pacific New Zealand and Australia can be used to model island countries currently participating in the the potential impacts of an expanded scheme. As a scheme (Kiribati, Samoa, the Solomon Islands, starting point, we assume that the number of sea- Tonga, Tuvalu, and Vanuatu). sonal workers to New Zealand remains constant at • Wages increase at a rate of 3 percent a year, allowing around 8,000 a year, while Australia expands its economy-wide total factor productivity growth scheme to provide an equivalent number of places and labor productivity improvements associated relative to population (roughly 40,000 places, by with repeated participation in the scheme. 2025). We make the following assumptions: Given these assumptions, total remittances from • Workers work an average of 20 weeks a year the Australian and New Zealand schemes could • Workers remit the same proportion of income reach US$390 million by 2025 (in 2013 U.S. dol- as in the New Zealand scheme and under the lars), equivalent to 10 percent of GDP of currently Australian pilot, allowing for deductions and participating small Pacific island countries or 60 worker spending percent of their total aid flows (figure B8.6.1). These • Places offered in Australia increase to 8,000 in estimates rely heavily on an expansion of participa- 2014 and then grow 30 percent annually until tion of Kiribati and the Solomon Islands within the the target of 40,000 places is reached (equal to 30 scheme, which will be required to avoid a damag- percent of the number of current working holiday ingly large, accelerated drain of human capital from visas issued annually) Samoa, Tonga, and Vanuatu. FIGURE B8.6.1 Remittances could grow significantly with expanded seasonal work opportunities Possible growth in seasonal worker remittances 70 60 50 Percent 40 30 20 10 0 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 Remittance from seasonal workers (% of ODA) Remittance from seasonal workers (% of GDP) Note: ODA = official development assistance. increased permanent labor mobility also offer immigrant workers; expanding low-skilled clear mutual benefits, but will require some immigration while avoiding the displacement balancing of several important objectives: of opportunities for low-skilled New Zealand protecting labor rights while ensuring access and Australian workers; and expanding to employment for relatively low-skilled migration opportunities to lower-skilled 218 E A S T A S I A PAC I F I C AT W O R K FIGURE 8.14 Immigration policies in Australia favor guest workers and less-educated Pacific Islanders while from high-income countries ensuring that these workers have adequate skills for employment within Australian and Australia visa approvals, FY 2011/12 New Zealand businesses. New Zealand and 45 Australia both have demonstrated strong 40 commitment to improving development out- comes in neighboring Pacific countries over 35 recent decades. Improved labor access for 30 Pacific workers offers one of the most effec- Thousands 25 tive means of achieving this objective and can 20 help to address growing labor shortages as 15 the Australian and New Zealand populations age (box 8.7). 10 Policy action is also needed from govern- 5 ments in sending countries. Within Pacific 0 island countries, continued investment is United Korea, Ireland Germany Taiwan, Total needed to build human capital through both Kingdom Rep. China pilot health and education, so that working-age Working holiday Seasonal workers Pacific Islanders have the capacity to take advantage of the overseas opportunities that Source: Department of Immigration and Citizenship 2012. Note: The number of working holiday visas approved in Australia and New Zealand demonstrates are available. This is an immediate priority in potential to expand seasonal worker opportunities. the “compact countries” of the North Pacific, where—despite populations having access to the U.S. labor market—remittance flows and development impacts have so far been lim- FIGURE 8.15 Pacific seasonal workers account for a small ited because migrants can only access very proportion of temporary work visas in New Zealand low-paying work (Connell and Brown 2005). As argued in chapter 5, basic numeracy, lit- New Zealand temporary visa approvals, FY 2011/12 eracy, and behavioral skills are transferable across work types and countries and should 45 continue to receive strong emphasis within 40 human development strategies. More spe- 35 cifically, PIC governments could ensure that 30 some qualifications are recognized interna- Thousands 25 tionally, through the adoption of Australian, 20 New Zealand, or U.S. education standards. 15 The Kiribati Institute of Technology, for 10 example, now offers a curriculum and quali- fications fully aligned with those of Technical 5 and Further Education Australia, while inter- 0 national accreditation has been achieved by Working Family Essential Study Specific Seasonal Work to Other holiday skills to work purposes work residence the Marine Training Centre, allowing gradu- visas or event scheme ates to access a wide range of international opportunities. Policies should be designed to improve Source: Department of Labour 2013. Note: The number of working holiday visas approved in Australia and New Zealand demonstrates opportunities for women. Women have lim- potential to expand seasonal worker opportunities. ited access to labor mobility options. The majority of participants in the Australian and New Zealand seasonal worker schemes are men, exacerbating gender differences in W E L L - B E I N G F R O M W O R K I N T H E PAC I F I C I S L A N D CO U N T R I E S 219 BOX 8.7 Seasonal worker schemes in New Zealand and Australia are an important opportunity to expand work opportunities for Pacific people New Zealand’s seasonal labor scheme was launched in the program has resulted in better-quality and in 2007, allowing 5,000 workers to fill positions more productive workers and a more stable work- for 7 months over an 11-month period in the horti- force than in previous years. culture and viticulture industries. Kiribati, Samoa, • The scheme benefits worker-sending families. Tonga, Tuvalu, and Vanuatu were selected for Research carried out in Tonga and Vanuatu found special assistance in mobilizing workers, but the that participating in the RSE scheme has a large and scheme is open to all Pacific Island Forum member statistically significant positive impact on household countries other than Fiji. A “New Zealander fi rst” income per capita. Household expenditure per principle is applied, under which vacancies have to capita also increases with participation in the RSE be lodged with government agencies responsible for scheme in Tonga. Substantial, statistically significant social welfare benefits so that available opportuni- increases in subjective well-being were identified, ties are offered to local employment seekers before along with positive impacts on housing quality and they are offered to migrant workers. Pacific workers higher ownership rates of durable assets. can be hired directly by employers, through agents, • The scheme increases incomes of workers. The or through a prescreened “work-ready pool” admin- median after-tax income earned in New Zealand, istered by government agencies. Demand has been as reported by seasonal migrants, is approximately strong, with the number of workers in the “work- $NZ12,000, several times the income per capita of ready pool” far outstripping the number of available those not participating in the scheme (approximately places. Since its introduction, 24,600 workers have $NZ1,400 in Tonga and $NZ2,500 in Vanuatu). participated in the scheme (with annual quotas of 5,000 –8,000 workers). More than half of work- With the New Zealand scheme considered “one ers return at least once, and 23 percent of workers of the most effective development policies evaluated have participated in all four seasons, suggesting to date,” there is a clear case to expand the num- that the scheme can provide a sustainable source of ber of available places, including through expan- income. Knowledge of and access to the scheme are sion into additional sectors where domestic labor uneven, with the majority of workers from Tonga shortages are present or emerging (Mackenzie and and Vanuatu. Gibson 2010). The scheme has been subject to several evalu- The Australian seasonal worker scheme was ations (Department of Labour 2010; McKenzie introduced following completion of a pilot scheme and Gibson 2010; Mer wood 2012; Research in 2012. An evaluation of the scheme’s develop- New Zealand 2012). The following are the key ment impacts found significant benefits for the small fi ndings: number of participating households in Tonga, with incomes per household increasing almost 40 per- • The scheme benefi ts employers. Employers rate cent. Evaluations have also shown productivity ben- Pacific RSE workers higher than all other groups efits for participating farmers (Leith and Davidson of employees for their dependability, enthusiasm 2013). But the scheme operates at a much smaller while working, and productivity. Specifically, scale than the New Zealand scheme and has been Pacifi c RSE workers are viewed as signifi cantly subject to various implementation problems. During more dependable, productive, and enthusias- the pilot, 2,300 places were offered, but only 1,600 tic than all other categories of seasonal worker. of these were actually fi lled. The number of workers Many employers (86 percent) believe that return- recruited was around 100 a month in 2012, about ing workers are “much more productive” than half of the cap and a third of the number hired those in the initial season. Almost all employers under the New Zealand program. (93 percent) believe that the benefi ts of partici- The largest constraint to uptake is the absence pating in the scheme outweigh the costs. At least of labor shortages in targeted sectors of agricul- 95 percent of employers agree that participation ture and horticulture. Such labor shortages have continued 220 E A S T A S I A PAC I F I C AT W O R K BOX 8.7 (continued) historically been very significant. But, in 2006, widespread use of illegal labor in the agriculture and reforms were implemented under which primar- horticultural sectors; (b) investing in promotion of ily European “backpackers” on working holiday the scheme to potential employers; (c) reducing the visas are offered one-year visa extensions subject minimum number of employment hours in order to to working for three months or more in the agri- ensure a good balance between flexibility to employ- culture or horticulture sectors. These reforms—and ers and certainty to workers; (d) requiring employers the associated increase in supply of farm labor from to meet a lower proportion of travel costs (given the backpackers—are reported to have almost entirely differential in minimum wages between Australia eliminated previously pressing labor shortages. The and New Zealand, most workers under the scheme continued prevalence of illegal labor in the horticul- would have the capacity to meet a larger proportion ture industry also undermines demand for seasonal of transport costs); and (e) reviewing reporting and workers. Additional factors constraining growth paperwork requirements to reduce transaction costs of the scheme include (a) lack of knowledge of the that are frequently cited as a major constraint to scheme among potential employers (a recent review participation. found that around half of farmers have simply not For both the New Zealand and Australian heard of the scheme) and (b) perceptions that the schemes, future work could also focus on oppor- scheme involves high transaction costs and red tape tunities to expand the participation of small PICs (Howes and Hay 2012). where domestic employment opportunities are Australia has recently decided to expand the most constrained and participation in seasonal scheme, opening opportunities in additional sec- schemes has so far been limited (such as Kiribati, tors, including tourism, and placing a higher cap on the Solomon Islands, and Tuvalu). In these cases, the total number of participants. However, uptake further investment could be made in two important in new sectors has also been very low, and signifi - areas. First, donor agencies could do more to sup- cant reforms of the scheme and broader policy set- port training and vetting of potential participants tings are needed if it is to achieve the same success to ensure that participating workers are able to meet as the New Zealand program. The fi rst priority is to the productivity expectations of farmers and other address the existing policy distortion that encourages employers. This would maximize the likelihood backpackers to work for short periods in the agri- of repeated participation and ensure that seasonal culture and horticulture sectors in order to access workers from that country build a good reputation a visa extension. Options include simply removing among potential employers. Second, donor agen- this offer of extension to backpackers, offering it to cies could consider subsidizing the transport costs those who work in a different or broader range of for those participating from more remote PICs. This sectors, or making Pacific Islanders eligible for the would address an important existing cost wedge same visa class (that is, the working holiday maker that disadvantages some of the small PICs with visa). Additional priorities include (a) addressing the greatest need. access to paid work. Such disparities arise members of the household (Connell and primarily because of disproportionate male Brown 2005). Broadening seasonal work representation in the pool of workers nomi- opportunities in sectors such as hospitality nated for potential selection by recruitment would be likely to create new opportunities agencies and authorities within Pacific island for women. Expansion of permanent migra- countries. Such gender disparities may be tion schemes may also have positive gender of particular concern given evidence that impacts. Evidence from Fiji and Tonga sug- women migrants remit a greater proportion gests that equivalent numbers of men and of their income more regularly and are more women are able to access long-term and likely to send remittances to other women permanent migration opportunities (Luthria W E L L - B E I N G F R O M W O R K I N T H E PAC I F I C I S L A N D CO U N T R I E S 221 et al. 2006). Family access provisions under and urban unemployment, delivering few preferential New Zealand schemes allow economic benefits and placing pressure spouses to access the New Zealand labor on social cohesion. Policies should not be market, regardless of the gender of the pri- biased toward jobs in either urban or rural mary applicant, ensuring rough gender areas, but rather seek to ensure acceptable balance. Ensuring equitable access to edu- standards of living across all communities cational opportunities for women (including and allow individuals to respond as they support for dependent family members for choose to the concentration of economic scholarship recipients), increasing women’s opportunities in urban areas. participation in seasonal schemes (including • Countries of relevance. Rapidly urban- through addressing constraints to uptake in izing Pacific island countries, includ- new sectors), expanding permanent migra- ing Kiribati, the Marshall Islands, the tion opportunities for families, and closely Solomon Islands, and Vanuatu. monitoring the impacts on women of the • Living standards. Access to paid employ- long-term absence of males from households ment is, and will likely remain, concen- participating in seasonal schemes are impor- trated in urban areas. People should be free tant priorities. to seek the broader opportunities available International assistance is needed to sup- in cities. But adequate living standards, port the policy and institutional improve- involving access to adequate services, must ments required for increased international be maintained in rural areas. mobility of Pacific Islanders. Institutions with • Productivity. Population concentration responsibility for negotiating international allows specialization and some economies labor arrangements need to be strength- of scale. Urbanization therefore presents ened. Financial and technical support con- an important opportunity for productiv- tinues to be needed for agencies facilitating ity growth. Subsidizing work in particular the participation of workers in regional or places is an inefficient use of resources and global schemes, such as divisions within PIC undermines the potential benefits of con- foreign ministries responsible for selecting centration for private sector development. workers for participation in Australia’s and • Social cohesion. Poorly managed urban- New Zealand’s seasonal worker schemes. ization can weaken social cohesion. Public Finally, ongoing aid assistance for all levels investment should be prioritized toward of education—including provision of tertiary improving urban administration and ser- scholarships—can provide a major boost vices rather than preventing urbanization to prospects for increased labor mobility from occurring. through seasonal and permanent schemes. Urbanization is an important phenom- enon for employment in the Pacific. Pacific Urbanization cities are growing very rapidly. Measured as Priority 3 Make the most of urbanization the percentage growth of urban populations, through investment in rural services, Kiribati, the Solomon Islands, and Vanuatu connective infrastructure, and improved are urbanizing at similar rates as the rapidly urban administration growing East Asian economies (figures 8.16 and 8.17).8 Even in countries where recorded • Summary. Urbanization brings employment rates of urban growth are slower, urbaniza- benefits if it allows the realization of scale tion is frequently cited as a major policy issue. economies, greater thickness in markets, A challenge for policy makers is to ensure and increased specialization. But urbaniza- that the potential benefits of urbanization tion occurring as a result of poor services can be realized while minimizing the costs. in rural areas, conflict, food insecurity, or Urbanization can be an engine of growth land shortages simply leads to congestion and employment opportunities. It is typically 222 E A S T A S I A PAC I F I C AT W O R K FIGURE 8.16 Pacific populations remain largely rural provision of services for local markets, includ- ing the public sector, lie in a more urbanized future. Urbanization also offers governments Malaysia the chance to provide services and infrastruc- ture at efficient scale—reducing the costs Marshall Islands associated with serving disbursed and inac- Fiji cessible rural populations—and facilitating World important improvements in quality and cov- Indonesia erage. Many Pacific Islanders demonstrate a strong revealed preference for urban life, Tuvalu which provides improved access to earning China opportunities, relief from the insecurity and East Asia Pacific (developing) physical labor associated with rural subsis- Kiribati tence, access to consumer goods and services, and the prospect of upward social mobility. Thailand Urbanization in PICs is not always hap- Vietnam pening for the right reasons. People who Vanuatu are moving to cities are not always doing so Tonga because they expect more productive and better-paid work. Rather, urbanization is Micronesia, Fed. Sts. also being fueled by a lack of adequate ser- Solomon Islands vices and declining living standards in rural Samoa areas (figures 8.19 and 8.20). For these rea- sons, some PICs face an unusual combination 0 10 20 30 40 50 60 70 80 90 of slow economic growth and rapid urban- Share of population that is rural (%) ization (figure 8.21). Even when relatively broad coverage is achieved in rural areas, the quality of services typically lags far behind Source: United Nations Department of Economic and Social Affairs. what is available in urban areas. Inadequate services are compounded by poor agricul- tural productivity. Agricultural production in PICs remains concentrated around small- associated with higher incomes, improved holder subsistence production, with market- service quality and coverage, lower fertility ing options often constrained by insufficient rates leading to slower population growth, scale, poor transport links between islands more integration with global markets, and or regions, limited access to finance, and diversification leading to broader economic lack of knowledge and training on agricul- opportunities (World Bank 2008; United tural production techniques. Subsistence Nations Center for Human Settlements 1994; farming in rural areas is often only weakly see figure 8.18). Urbanization in PICs can linked to food markets in urban areas, with provide an engine for employment creation. PICs heavily reliant on food imports despite Increased urban populations offer businesses large agriculture sectors. There is little evi- the opportunity to integrate into supply dence of any significant increase in agri- chains, thicker labor and input markets, and cultural productivity in PICs over recent larger markets for goods and services. While decades, while population growth has placed prospects for export-driven diversification pressure on agricultural subsistence systems into manufacturing and service exports are in some areas. likely to remain limited even in the largest Potential benefits are in danger of being Pacific island cities, the best prospects for outweighed by a range of social and eco- expanding private sector opportunities in the nomic costs. Rather than moving into W E L L - B E I N G F R O M W O R K I N T H E PAC I F I C I S L A N D CO U N T R I E S 223 productive work that spurs economic growth FIGURE 8.17 And this will continue despite urbanization and finances increased service delivery, many urban arrivals face limited prospects and sim- Rural population by region ply add to the burden on overstretched urban 100 services and infrastructure. Urbanization in PICs is therefore often associated with a 90 higher risk of poverty, high youth unemploy- 80 ment, and frustrated aspirations for social 70 mobility, feeding into increased rates of sub- 60 Percent stance abuse, crime, and loss of social cohe- 50 sion (Allen and others 2013). The breakdown 40 in family structures and informal social 30 safety net systems as young people move 20 to cities has led to unprecedented levels of inequality and crime. These dangers are fre- 10 quently cited in analyses of Pacific urbaniza- 0 tion and are reflected in available statistics Pacific Africa Asia World Europe Latin America and on crime and violence (Connell 2011; ADB the Caribbean 2012a; United Nations Office on Drugs and Crime data from Storey 2003). 1960 2000 2050 The right reforms can facilitate both urban and rural development (box 8.8). Source: United Nations Department of Economic and Social Affairs. Policy discussions of urbanization in PICs often pose an artificial choice between rural and urban employment. Obvious problems of urbanization, accompanied by stagnation FIGURE 8.18 Urbanization is associated with improved human development in rural livelihoods, have fostered opposi- tion to urbanization and fed perceptions that economic development in urban centers is Urbanization and economic growth, 1991–2011 occurring at the cost of development in rural areas. Common complaints include the ineq- 12 uitable concentration of public and private sector employment in urban areas, the loss of 10 human capital in rural areas as working-age CHN Annual % GDP growth people move to cities, and growing dispari- 8 EAP ties in access to services and infrastructure between urban and rural areas. But economic 6 VNM development is not a zero-sum game, and urban development does not have to impose 4 MYS THA IDN costs on rural areas. Urbanization can pro- WSM vide a pathway to employment for many if it 2 TUV TON occurs for the right reasons. With appropri- FSM RMI FIJ KIR VUT SLB ate linkages between urban and rural areas, 0 0 0.5 1 1.5 2 2.5 3 3.5 4 4.5 5 economic opportunities in urban areas can Annual % growth in urban population support improvements in rural standards of living. At the same time, reasonable services and living standards in rural areas can ensure Source: World Development Indicators. that urbanization is driven by opportunity rather than desperation and leads to good outcomes. Focusing on the following policy 224 E A S T A S I A PAC I F I C AT W O R K FIGURE 8.19 Access to sanitation in rural areas is not as good as in intended to slow or prevent urbanization urban areas and redistribute economic production to rural areas. Examples include (a) the Access to improved sanitation explicit or implicit subsidization of eco- nomic activities in rural areas (including 100 production subsidies and government 90 investment in production facilities); (b) 80 deliberate underinvestment in provision of 70 % of population urban services and infrastructure to grow- 60 ing urban populations (especially in squat- 50 ter settlements where recent arrivals are 40 concentrated); (c) absence of measures by 30 which squatters can acquire formal land 20 rights; and (d) destruction of residential 10 and commercial properties in settlement 0 areas by state or municipal authorities. Fiji Kiribati Marshall Micronesia, Solomon Vanuatu Islands Fed. Sts. Islands Such measures have destroyed jobs and seldom fostered sustainable economic Rural Urban growth in rural areas or arrested the pace of urbanization. Source: World Development Indicators. • Provide adequate basic services across all communities. Urbanization fueled by FIGURE 8.20 Access to water in rural areas is not as good as in uneven access to services leads to the con- urban areas gestion of urban facilities and excess sup- ply of low-skilled labor in urban areas. Relatively large aid flows to PICs provide Access to an improved water source an opportunity to finance a basic stan- 100 dard of services in all communities, allow- 90 ing migration decisions to be based on 80 economic opportunities and preferences 70 rather than basic service needs. % of population 60 • Invest in connective infrastructure. Rural 50 areas can share the benefits of increased 40 employment opportunities and improved 30 service delivery in urban areas if people, 20 goods, and information can move freely 10 and at reasonable cost. Infrastructure 0 links between capitals and other areas of Fiji Kiribati Marshall Micronesia Solomon Vanuatu concentrated population are vital to facili- Islands Islands tate the supply of urban markets by rural Rural Urban producers. Subsidization of transport links can facilitate access of rural people Source: World Development Indicators. to urban services, reducing urbanization motivated by the desire to access services. areas may increase the likelihood of comple- Good-quality, low-cost, and reliable trans- mentary urban and rural development: port can also allow people to take advan- tage of work opportunities on a short-term • Avoid policies to prevent urbanization. basis, as they arise, allowing reversibility In several PICs, policies have been dis- and reducing the risks facing persons seek- cussed or implemented that are explicitly ing urban jobs. W E L L - B E I N G F R O M W O R K I N T H E PAC I F I C I S L A N D CO U N T R I E S 225 • Facilitate efficient use of urban land. FIGURE 8.21 Slow growth is not preventing urbanization in some Lack of access to land and dysfunction Pacific island countries in land markets often undermine living standards and private sector development Urbanization and human development, small countries in urban areas. It is important to ensure that housing is available to new arriv- 180 Human development index, low = good als in urban areas and that land is allo- 160 cated to its most efficient use. Measures 140 that provide formal recognition of land- ownership and transactions in squatter 120 areas can provide vital security to new 100 migrants and facilitate improved access 80 to finance when property rights over 60 land can be used as collateral. Reforms 40 to land administration in urban areas, 20 where land has typically been alienated 0 from traditional ownership, can often be 0 20 40 60 80 100 120 implemented without undermining col- Urban population (%) lective land ownership systems in rural areas (AusAID 2008). Sources: United Nations Development Programme and World Development Indicators. Urbanization gains can be increased through urban investments that take account of the needs of women. Research Gains, however, are often constrained by from the region demonstrates that women household work requirements limiting the stand to benefit from improved services and time available for broader economic partici- access to income generation opportunities pation. Infrastructure that meets the trans- resulting from urbanization, supporting port needs of women can free up women’s broader economic and development gains. time for new economic activities, as can BOX 8.8 A copra subsidy scheme intended to support rural development in Kiribati is costly and inefficient Kiribati has one of the most widely dispersed popu- But with volatile world copra prices, inefficiencies lations in the world. While nearly half of the popula- in processing, and high transport costs, the scheme is tion of 100,000 lives in and around the urban center imposing increasingly unaffordable costs on govern- of South Tarawa, the other half is distributed across ment. There is an economic loss of more than US$1 for 20 islands spread across 3.5 million square kilo- every kilogram of copra produced in the outer islands, meters of ocean. Since independence, the govern- with total costs of the scheme reaching nearly 5 per- ment has operated a copra subsidy scheme, through cent of GDP. The scheme is also regressive, as food which inhabitants of outer islands can sell copra to and basic needs poverty is concentrated in urban areas. a state-owned enterprise at a regulated price. Copra Government is working with the World Bank to reform production has become the primary source of cash the scheme. Difficult trade-offs will need to be made income for many communities in the outer islands, between subsidizing rural livelihoods to avoid urban- and the scheme is explicitly intended to protect live- ization pressures and redirecting available resources lihoods and reduce urbanization pressures in the into more efficient investments in urban services and outer islands. infrastructure links that may encourage urbanization. 226 E A S T A S I A PAC I F I C AT W O R K good coverage of sanitation and water ser- The public sector provides a large share vices. Adequate public investment in laws of cash employment in many Pacific island and institutions to prevent crime and sexual countries (figures 8.22 and 8.23). PICs face exploitation can also facilitate women’s par- challenges in meeting the high fixed costs asso- ticipation in a broader range of economic ciated with a fully functioning sovereign gov- activities (box 8.9). ernment. Because there are large economies of scale in operating the various institutions required for governance and service delivery, Public spending the costs of government are high relative to Priority 4 Ensure that public spending the size of the economy. At the same time, delivers efficient services and creates barriers of geography prevent rapid employ- employment ment growth in export-oriented manufactur- ing and services. Consequently, public sector • Summary. Public sectors in Pacific island employment is likely to continue to represent countries are often viewed as a source of a large share of total formal and cash-earning concern, with public sector employment employment, especially for the smallest PICs. thought to exist at the expense of private Given the continued importance of the public sector employment. In reality, scope for sector, an important challenge for PICs is to private sector–led employment creation is ensure that public sector jobs are good jobs, often constrained by geography, and pub- both for public servants and for society. lic sectors, while large relative to the size The benefits of public sector employment of the economy, remain small in absolute are broad and widely shared. Public sector terms. This is especially true when disec- salaries are often well above average levels onomies of scale in administration and ser- of income. Recent analysis suggests that the vice delivery are taken into account. Policy average public servant earns around 5 times attention can usefully focus on improving GDP per capita in Kiribati and around 2.8 the quality of public sector jobs, regarding times GDP per capita in Tonga, compared what they provide for civil servants and to global norms of about 1.2 times. In both society, rather than on reducing public sec- countries, public service salaries are also tor employment. higher than average private sector salaries. • Countries of relevance. All Pacific island Benefits of public sector employment also countries, especially those where popula- include training opportunities, international tions are very small and employment is travel, and opportunities to form global net- concentrated in the public sector. works that would be very unusual in most • Living standards. Public servants tend to private sector employment. Given strong enjoy higher living standards, with salaries social pressures for sharing wealth, the ben- often supporting larger family and com- efits from higher pay and broader opportu- munity networks. nities are often widely shared, with every • Productivity. Incentives for effort and public sector job often supporting the living skills acquisition are sometimes blunted in standards of a wider family group or commu- the public sector. Selective use of private nity. Training and networking opportunities participation and continued public sector available to public sector employees are often reform have the potential to achieve pro- a key gateway to international labor market ductivity gains. opportunities and much higher standards of • Social cohesion. Social cohesion would be living, sometimes via scholarships and fur- strengthened if appointments in the public ther higher education. sector were based on merit and employ- Public sectors in PICs experience the same ment opportunities were distributed equi- incentive problems as public sectors in the tably among social groups and geographic rest of the developing world. Given the extent areas. to which their economy-wide resources are W E L L - B E I N G F R O M W O R K I N T H E PAC I F I C I S L A N D CO U N T R I E S 227 BOX 8.9 Unmanaged urbanization increases poverty and weakens social cohesion in the Solomon Islands The squatter settlements of Honiara illustrate many is widespread, especially among youth; in a recent of the issues associated with rapid urbanization in survey, 67 percent of youth residing in the squatter PICs. Evidence from the national census and the settlement of White River reported that they had no “people’s survey” commissioned by the regional regular source of cash employment and were look- peacekeeping and reconstruction force reflect the ing for work. These dynamics have led to declines in risks associated with rapid urbanization driven social cohesion, including higher levels of crime and partly by uneven access to services (figure B8.9.1). violence and dissatisfaction with the performance of These surveys show that persons living in urban police and government. areas not only have far greater access to paid There is little evidence of significant return employment than persons living in rural areas, but migration to rural areas, and challenges in urban also far greater access to services and infrastructure. areas need to be addressed. Improved administra- As Solomon Islanders move to access both economic tion, improved services, and better infrastructure opportunities and better services, the population in urban areas might allow Solomon Islanders to of Honiara has grown at around 5 percent a year. continue to seek the economic opportunities asso- Weak land administration has led to inflexible land ciated with urbanization without facing such severe use, contributing to housing shortages and forcing declines in living standards and social cohesion. many immigrants to live in squatter settlements Increased investment in rural services might reduce located outside the formal town boundaries and the incentives for migration for those with little with limited access to services and infrastructure. prospect of fi nding employment. With urbanization being driven by both economic opportunities and the desire to access services, labor Sources: World Bank 2010a; Regional Assistance Mission to Solomon Islands supply has outgrown demand. Underemployment people’s survey 2011; Solomon Islands National Statistics Office. FIGURE B8.9.1 Rapid urbanization in the Solomon Islands is accompanied by risks a. Responses from RAMSI people's survey b. Responses from 2009 national census 90 90 80 80 70 70 60 60 Percent 50 50 Percent 40 40 30 30 20 20 10 10 0 0 Victim of Do not believe Do not think There has been My current Housing Access to waste Share of Rank: Share of crime within the police treat government more dishonesty financial quality and energy labor force Literacy rate adults with household people fairly and performing and misuse of situation worse in paid work of adult post-primary in past year with respect well power in past than two years women education year ago Provinces Honiara Honiara settlements Provincial urban Honiara Rural Sources: Data from the Regional Assistance Mission to Solomon Islands (RAMSI) people’s survey, 2011; national census, 2009. 228 E A S T A S I A PAC I F I C AT W O R K FIGURE 8.22 Government in Pacific island FIGURE 8.23 Public service employment is countries is large substantial Government expenditure Payroll Kiribati Marshall Islands Kiribati Solomon Islands Samoa Tonga Tonga Vietnam Vanuatu Malaysia Vanuatu Fiji Solomon Islands Thailand Timor-Leste Marshall Islands Lao PDR China Palau Indonesia Philippines Caribbean Cambodia islands Myanmar Small island 0 10 20 30 40 50 60 70 80 90 100 developing states % of GDP 0 10 20 30 40 50 60 70 % of recurrent government expenditure Source: Estimates based on data from country authorities. Source: Estimates based on data from country authorities. invested in the public sector, efficiency in pub- lic administration and in the delivery of public employment opportunities in PICs. Well- services is especially important. Good public paid jobs in large public sectors can come at sector jobs would provide strong incentives a cost to the private sector, with businesses for human capital development and produc- facing higher taxes to support bloated gov- tivity, while also supporting adequate liv- ernments and increased public sector compe- ing standards for public sector workers and tition for labor and associated wage inflation. their families. Public services in Pacific island However, it is not clear that the public sector countries, however, face common challenges, is crowding out the private sector in PICs. including limited accountability, weak per- First, a large proportion of government rev- formance management systems, and severe enues typically comes from natural resource capacity constraints that impede the delivery royalties and aid. Government spending often of core government outputs and functions supplements domestic demand, with public (ADB 2010b). The severity of these challenges servants supporting the emergence of private varies across countries, but public sector sector service economies, especially in capital employment, while providing benefits for pub- cities. For some countries, economic growth lic sector employees and their families, often has closely tracked growth in public spend- does not have as positive an impact on society ing, with changes in public sector demand as it could (ADB 2010b). These issues often exerting a determining influence on private lead to calls to reduce government spending sector performance (see box 8.10). and the role of government in the economy.9 Second, given sluggish growth, reliance There is little evidence that simply reduc- on natural resource industries, and the pre- ing public spending would lead to improved dominance of agricultural work, it is not W E L L - B E I N G F R O M W O R K I N T H E PAC I F I C I S L A N D CO U N T R I E S 229 BOX 8.10 Public sector expenditure supports economic growth in Vanuatu and the Marshall Islands T he recent ex periences of Va nuat u a nd t he FIGURE B8.10.1 In small Pacific island countries, Marshall Islands illustrate the potential for pub- public expenditure and economic growth move in lic expenditure and public employment to “crowd tandem in” private sector activity, supporting broader eco- nomic growth. a. Growth and public expenditure in Vanuatu In Vanuatu, tourism-based private sector growth 8 30 during the previous decade drove a rapid increase 6 in government revenues. This revenue growth sup- 20 4 ported rapid increases in government expenditure 10 and employment (an increase in real wage expen- 2 Percent Percent diture of more than 50 percent), with changes in 0 0 aggregate economic growth, tourism arrivals, and –2 –10 government spending closely aligned. With many –4 tourism operations weakly integrated into local sup- –20 –6 ply chains, growth of public expenditure through increased tax revenues supported a broader expan- –8 –30 sion of paid employment opportunities both within 1997 2000 2003 2006 2010 the public sector and in private sector businesses b. Growth and public expenditure in Marshall Islands supplying goods and services to public servants and government entities. 7 25 In the Marshall Islands, under renewed arrange- 6 20 ments for fi scal transfers from the United States, 5 15 public expenditures grew at an annual average rate 4 of 12 percent between fi scal 2003 and fi scal 2007. 3 10 Percent Percent Employment in the public sector added 507 jobs, 2 5 growing at an annual average rate of 6 percent over 1 0 the period. Expansion in public spending fueled 0 growth of 1.9 percent in this period, peaking at –5 –1 3 percent in 2007. With the fl attening off of pub- –2 –10 lic expenditure, growth fell during 2008 and 2009, but recovered during 2010 and 2011 partly due to –3 –15 the impact of new publicly funded infrastructure 2000 2003 2006 2009 2011 projects. Public expenditure was the dominant Real growth driver of both employment creation, inside and Real change in government expenditure (right axis) outside the public sector, and economic growth in an economy with limited alternative prospects Source: Estimates based on data from country authorities. (figure B8.10.1). clear that public sector workers could find or specialized staff often reflect a legitimate employment acceptable to them in the private attempt to retain the vital skills required to sector if the size of government were sub- undertake key government functions in the stantially reduced. For many jobs, competi- context of a very narrow pool of appropri- tion for labor between the public and private ately educated professionals and competition sectors is not always apparent. In some cases, from overseas employers, nongovernmental higher public sector salaries for more senior organizations, and donor agencies. Recent 230 E A S T A S I A PAC I F I C AT W O R K reviews of the experience of public sector Outsourcing and privatization should be reforms in the Pacific cast serious doubt on approached cautiously, but they can some- the assumption that the private sector will times bring benefits. Outsourcing the deliv- necessarily absorb retrenched public employ- ery of services and privatizing government ees in the context of widespread redundan- agencies that can operate on a commercial cies (ADB 2009a; Collins and Warrington basis are often seen as an effective means 1997). The large-scale retrenchment of pub- of overcoming the agency problems associ- lic sector workers in the Cook Islands and ated with public sector delivery of services. the Marshall Islands led to the emigration of The profit motive and competition can qualified workers rather than their absorp- sharpen the incentives for productivity, feed- tion into the private sector. ing through into better services at lower cost. Finally, public sector spending and pub- Privatizing state-owned enterprises that were lic service numbers may need to be large, competing directly with the private sector relative to very small economies and popu- in Kiribati, Samoa, and other PICs has led lations, to ensure the delivery of vital ser- to the expansion of employment opportuni- vices (Brown 2010). Cross-country evidence ties and improvements in services, as inef- shows that small countries tend to have ficiencies associated with poor public sector larger public sectors and more public sec- management have been eliminated (ADB tor employment, reflecting diseconomies of 2011). Restructuring the road transport sec- scale in service delivery and administration tor in Samoa to allow the outsourcing of road (figure 8.24). Reducing the capacity of gov- maintenance has facilitated the emergence ernments to hire and retain enough people of several efficient and well-run private sec- to carry out all the necessary functions of tor firms that provide both employment and government and provide the public goods vastly improved services to government. But required for successful private sector activity privatization and outsourcing in the absence is likely to have an adverse impact on living of a competitive market environment can standards, employment creation, and pro- also undermine service delivery and employ- ductivity (World Bank 2011). ment creation. Inadequately regulated pri- vate monopolies are no better than public monopolies at expanding access to services and are more likely to involve loss of local FIGURE 8.24 Government is bigger in smaller countries employment and expatriation of monopoly rents. Efficient delivery of outsourced gov- Population and government expenditure ernment services relies on competition for contracts and effective monitoring of delivery 70 by government agencies. While outsourcing 60 and privatization continue to provide impor- tant opportunities for increasing work in 50 the delivery of public services, these oppor- % of GDP 40 tunities need to be pursued carefully, taking 30 account of the following: 20 • The economic significance of efficiency 10 benefits that could be achieved through the introduction of private participation 0 • The impacts on living standards and social 5 100 2,000 40,000 8,00,000 cohesion arising from associated public Log, population (thousands) sector employment losses, especially in the context of limited private sector employ- Source: World Development Indicators. ment opportunities W E L L - B E I N G F R O M W O R K I N T H E PAC I F I C I S L A N D CO U N T R I E S 231 • The capacity of government to monitor priority to align public sector incentives bet- and enforce contractual or regulatory ter with efficient service delivery, along with arrangements effectively to realize any public sector pay scales and merit-based pro- potential benefits of private participation. motions that generate substantial incentives for skills development and productivity on Basic public sector management systems behalf of individual public servants. Ensuring are important. Given constraints on the range merit-based appointment and promotion in of government functions that can be delivered the public sector is also vital, given the likely effectively by the private sector, dramatic continued importance of the public sector as reductions in the size of the public sector and a source of employment. Recent experiences public service are unlikely in PICs over the during the Arab Spring indicate the extent to medium term. Because of this, basic systems which frustrations regarding nepotism and for public sector management, performance, inequality in the distribution of public sector and accountability need to be improved opportunities can undermine social cohesion further. Performance-based budgeting and and fuel conflict (World Bank 2010b, 2012a). performance-based pay are likely to be too Donors can support increased local capacity intensive for effective implementa- employment in the delivery of projects tion in PICs over the medium term and to (box 8.11). With a substantial proportion require institutional underpinnings that are of public expenditure in small PICs being seldom present. Public financial manage- financed by overseas development assistance, ment systems that improve transparency and donors can also contribute to local employ- encourage public dialogue regarding the use ment creation by increasing the participation of resources may represent a useful initial of local vendors and labor in project delivery. BOX 8.11 Outsourcing aid? Experience with involving local private sector fi rms • Ensure that contracts are offered at a size and scope in the delivery of aid projects in PICs suggests that that facilitate local participation. While not always such arrangements are not always easy, but can pro- feasible, dividing work into smaller contracts may vide long-term benefits both through better proj- provide more opportunities for local firms. ects and the creation of employment opportunities. • Move beyond a single-project perspective when Donors could consider the following lessons: considering the participation of local firms. Putting the time and effort into engaging local firms may not • Actively build, rather than expect the spontane- look appealing for the purposes of any one project. ous emergence of, a private sector able to meet But if gains can be expanded and capitalized on donor needs. This means providing a sustained by subsequent projects—through lower costs and source of demand to keep growing fi rms in busi- better-quality delivery—the cost-benefit equation is ness as their capacity improves. likely to look more favorable. It is therefore vital • Do more to advertise procurement opportunities that decisions made at the project level take into and streamline procurement processes. Pacific firms account the potential for broader benefits. are not likely to come across donor procurement • Make trade-offs between project-level efficiency and opportunities as they are currently advertised. broader social and economic benefits. Involvement Ensuring local awareness of opportunities is an of local contractors may sometimes delay projects important priority. Donors could also ensure that and force compromises on quality relative to bidding processes are not too complicated for reliance on international contractors. These costs capacity-constrained Pacific firms or could provide need to be traded off systematically against broader direct assistance in preparing tender documents. development benefits when decisions are made. 232 E A S T A S I A PAC I F I C AT W O R K Donors could introduce preferences in their Natural resource opportunities, including procurement processes for businesses using tourism, attract investment to areas where local labor or produce. Donors could also resources and attractions are located rather make greater use of general and sector budget than to where business costs are low. High support, with expenditure of this kind typi- business costs in PICs do not, therefore, cally having a larger impact on local employ- preclude investment, as economic rent can ment than project financing. be earned from the exploitation of natural resources even given the high costs associ- ated with distance. This is reflected in Pacific Natural resource industries island countries’ historically high reliance Priority 5 Generate sustainable employment on fisheries, minerals, forestry, and tourism from natural resource industries for foreign exchange and income. With rapid growth in international tourism arrivals pro- • Summary. Natural resource extraction is jected over coming decades, a large share of often seen as an easy source of new employ- global stocks of certain fish species located ment. In reality, employment in natural in Pacific waters, and ongoing discoveries of resource industries in the Pacific is often new mineral wealth in the region, PICs will unsustainable, of poor quality, and reliant continue to attract the attention of natural on implicit or explicit subsidies. Countries resource investors (figure 8.25). with natural resource endowments should Policy makers and the public often want support employment creation in natural to see substantial direct employment created resource industries based on careful con- from natural resource endowments, given sideration of the likely quality of associated growing populations. Sometimes, govern- work, taking careful account of the oppor- ments have considered or pursued mandates tunity costs of the implicit and explicit sub- for local employment creation as a negoti- sidies often required. ated condition of resource access or have • Countries of relevance. Pacific island provided tax exemptions or subsidies to countries with natural resource endow- encourage tourism investments expected to ments, including fi sheries, minerals, and bring employment. The labor intensity of forestry. extractive natural resource industries is typi- • Living standards. Natural resource indus- cally very low. Work with higher pay and tries have a poor record of delivering productivity within natural resource indus- sustainable improvements in living stan- tries is often highly specialized and tends to dards in the region. The most sustainable be performed by expatriates rather than local improvements may come from investing labor. Because PICs lack economies of scale, rents from these activities in areas that there are limited opportunities for develop- open new employment opportunities in ment of ancillary industries around natural other sectors, locally or internationally. resources, and natural resource industries are • Productivity. Investing rents from natural not typically integrated into local chains of resource industries into improved service production. It is generally cheaper for natural delivery and human capital can avoid the resource investors to process products over- problems of low-productivity employment seas than to develop local production chains, in natural resource industries. given high operating costs and skill shortages. • Social cohesion . Social cohesion can The forestry industry in the Solomon Islands, be undermined by geographically con- for example, which has contributed double- centrated, short-term natural resource– figure shares of GDP and government reve- related employment. Public investment nues for several decades, employs only around of natural resource rents can provide 5,000 unskilled workers, mostly at wage rates broader and more equitably distributed below the national minimum established opportunities. for all other industries (World Bank 2010a). W E L L - B E I N G F R O M W O R K I N T H E PAC I F I C I S L A N D CO U N T R I E S 233 Nearly all processing is undertaken offshore, FIGURE 8.25 Tourism to the Pacific island countries is expected to and forestry methods are purely extrac- keep growing tive, with very little local investment. Pacific tuna fishery resources are among the larg- a. Global tourism arrival projections est in the world and generate more than 10 percent of government revenue for four PICs. 2,000 But onshore processing and value added have 1,800 been difficult to establish, with employment 1,600 in the industry contracting in the years since 1,400 independence (Gillett 2009). 1,200 Millions The need to subsidize tourism investment 1,000 reflects pressures of regional and global tax 800 competition. In contrast to extractive indus- 600 tries, tourism is relatively labor intensive, 400 hires a large percentage of local workers, 200 and can be better integrated into local sup- 0 World Advanced Emerging Asia and ply chains with broader economic impacts economies economies the Pacific (Scheyvens and Russell 2009). For this rea- 1980 1995 2010 2020 2030 son, tourism investment is often attractive, with several PIC governments offering tax b. International tourism arrivals concessions for tourism investors. This has 400 fueled “tax competition” in the region, with governments competing to offer the most 350 favorable tax or investment incentive package 300 to international investors, despite high fiscal Thousands 250 costs and limited evidence that such conces- 200 sions exert a determining influence on invest- ment decisions (James 2009). 150 While tourism has been proven to generate 100 employment that is reasonably sustainable 50 and can open the doors to broader oppor- tunities in Pacific countries, work based 0 on extractive natural resource industries is 2007 2008 2009 2010 2011 often short term and limited to the lifespan Palau Samoa Tonga Vanuatu of extractive activities. Creating unsustain- able employment creates risks of lower living Source: World Tourism Organization. standards and pressures on social cohesion when natural resources are exhausted and employment opportunities cease. Work based on extractive natural resource indus- Gender discrimination limits the role of tries also tends to be geographically con- women in fisheries in many Pacific island centrated around the location of resources. countries, due to prevailing cultural divisions Such concentration can lead to rapid growth of labor (Novakzec, Mitchell, and Veitayaki in inequality, rapid internal migration, 2005). As a result, access to economic and a corresponding emergence of conflict opportunities around the tuna industry is pressures—a possibility illustrated by natural strongly gendered in favor of men (Barclay resource development in Papua New Guinea and Cartwright 2007). Fishing, logging, and (Collier and Hoeffler 2004). mining activities have been associated with Employment in natural resource indus- increased sexual abuse and exploitation in tries can have negative impacts on women. Pacific island countries (Herbert 2007). 234 E A S T A S I A PAC I F I C AT W O R K More generally, cross-country evidence the costs of associated economic inefficien- suggests that reliance on natural resource cies in the form of lower royalties, access industries reduces and discourages female payments, or profit taxes. As an alternative labor force participation, which reduces to mandating or subsidizing direct employ- women’s political influence (Ross 2008; ment creation in natural resource industries, World Bank 2012b). The historical reliance PICs could support overall employment in of PICs on natural resource industries may other ways: directly (through sustainable help to explain, at least in part, slow prog- increases in public employment) or indirectly ress toward gender equality, particularly (through investment in the human capital, with respect to voice and influence in society infrastructure, and social services that can (World Bank 2012a). support new economic opportunities in a Decisions to subsidize employment cre- broad range of sectors, locally and overseas). ation in natural resource industries and Therefore, policy makers have to consider tourism should be informed by careful anal- carefully the full explicit and implicit costs ysis of the opportunity costs of alternative and benefits of subsidizing employment in public investments (box 8.12). Ultimately, natural resource industries and take account the public bears the costs of tax conces- of alternative employment-creating invest- sions and employment creation mandates. ments that potentially could be financed with Concessions lead directly to forgone tax these resources (box 8.13). This requires the revenue. Mandating job creation for natural following: resource industries is only required if such jobs are not efficiently undertaken locally, • Careful long-term costing of employ- and government will likely have to meet ment creation concession agreements for BOX 8.12 Employment in fisheries or employment supported by fisheries revenues? The fisheries industry in the Pacific is a good exam- coordinated controls on access, implementation of ple of the pressures faced by government to create the vessel day scheme has allowed parties to the work in natural resource industries. Nauru Agreement to generate signifi cantly higher For several decades, Pacific island countries have license fees and improve data collection, strength- been working to conserve fi sh stocks and increase ening the prospects for sustainable management license revenues through coordinated control of of the resource. Estimates based on limited public access to fi sheries resources. Substantial progress data suggest that the value of a fishing day may have has been made in recent years through the estab- increased from around US$1,350 in 2004 to more lishment of a vessel day scheme by eight Pacific than US$5,000 due to the impacts of the scheme countries with the most signifi cant tuna resources (Havice 2013). (Kiribati, the Marshall Islands, the Federated States Progress toward maximizing license revenues, of Micronesia, Nauru, Palau, Papua New Guinea, however, is being slowed by a countervailing trend the Solomon Islands, and Tuvalu). Under this toward granting special access rights or discounted scheme, participating countries are allocated a fi xed licenses to foreign fishing firms that commit to number of “vessel days,” through which rights to supporting domestic economic development and undertake any fishing activity are allocated to purse employment (typically through offloading, provi- seiner vessels for a 24-hour period. Vessel days can sioning, infrastructure investments, and employ- be traded between countries, with the total number ment of crew). Such discounted access arrangements of vessel days issued under the scheme nominally are sometimes accompanied by tax concessions and equivalent to total effort in 2008. By imposing various forms of subsidization to fi shery operators. continued W E L L - B E I N G F R O M W O R K I N T H E PAC I F I C I S L A N D CO U N T R I E S 235 BOX 8.12 (continued) The number of vessels operating under such arrange- As a result, the primary beneficiaries have been for- ments increased from 16 in 2001 to 53 by mid- eign fishing companies. 2012, contributing an 18 percent increase in total Pacific island countries with the greatest fisheries purse seiner business between 2004 and 2010. PIC resources now face a difficult decision between grant- governments are often of the view that the employ- ing further discounted licenses guaranteeing onshore ment and direct economic impacts of such arrange- economic and employment impacts and ensuring the ments are worth more than the corresponding loss best possible price for each license sold. The former of license fees and revenues. However, policy deci- option may lead to greater short-term employment in sions to grant special access or discounted licenses fisheries (dependent on varying degrees of subsidiza- have seldom been informed by detailed analysis of tion). The latter may provide a more sustainable and the costs and benefits. Revenue costs have not been substantial stream of revenues with which to fi nance fully calculated. Expected employment creation has public investments for broader employment growth. sometimes not been realized. Dividends from gov- Whatever option is pursued, PICs will need to assess ernment shares in joint venture companies have not accurately the full costs and benefits of different been forthcoming due to poor accounting practices. options before making potentially costly decisions. BOX 8.13 Regulatory requirements for extractive industries to support overall employment creation Sound regulatory and public finance frameworks compliance cannot be monitored and enforced. are indispensable if extractive natural resource Specialist capacity may also be required in tax industries are to support employment creation in departments to ensure that investors are complying small PICs. International and regional experience with local tax rules. Some of this capacity is likely illustrates both the importance and the difficulty of to need to be sourced from donors or regional establishing basic systems to ensure sound invest- facilities, given the shortage of local specialists. ment of natural resource revenues. Building such • Appropriate measures for managing revenue frameworks represents a key priority for small PICs flows to government. Increases in government that face particular capacity and political economy revenue from natural resource activities will only challenges. Priorities include the following: deliver benefits if they are managed and used wisely. Policies are needed to ensure that revenue • Policies and legislation governing royalties and inflows do not fuel unsustainable and short- taxation. Good regulations and policies can term growth in expenditure, but rather allow for ensure that a fair share of benefits from natu- sustainable improvements in infrastructure and ral resource industries flows to government and services, such as health and education. Strong basic resource owners. Licensing and tax provisions public finance management systems are required need to be specifi ed in the law, and appropriate to ensure that revenues are allocated to areas regulations and legislation need to be drafted and where investment can facilitate the creation of passed. sustainable employment. Such areas might include • Strong capacity in natural resource agencies and tax connective infrastructure between urban and rural departments. Ministries responsible for regulating areas, improved administration and services in natural resource industries need capacity to ensure urban centers, improved extension services for that policies and regulations are well designed and agriculture, and investments in education and implemented. There is no point in having good health to open local and international employment policies or fair benefit-sharing arrangements if opportunities for Pacific island workers. 236 E A S T A S I A PAC I F I C AT W O R K tourism or access arrangements for extrac- potential for new market opportunities in tive industries prior to making decisions population concentrations—can often out- • A good understanding of the likely impacts weigh the costs. Second, although improving of employment created by these measures conditions for the private sector is important, on productivity, living standards, and realism is needed regarding the likely extent social cohesion of private sector growth and employment • Comparison of these benefits against creation, especially following any large-scale employment creation or other public pol- public sector retrenchment. PICs face inher- icy goals that could be achieved through ent difficulties of geography, which private alternative public investments financed sector firms often cite as the primary con- from forgone tax or royalty revenues straint on growth by private sector firms. • Careful design of concession or employ- Limited financial and human capacity is ment mandate schemes to ensure that they available to provide all of the institutional, incentivize new investment and employ- infrastructure, and regulatory needs of glob- ment creation rather than reward investors ally competitive export sectors. Finally, the for activities that would have occurred in employment that is associated with natural the absence of subsidies resource endowments is seldom sustainable, • Close monitoring of the effectiveness of and the subsidies provided for employment subsidies and concessions and compliance creation in these sectors could often have of investors with employment creation been put to better use creating employment requirements to ensure that expected ben- in other areas. efits are being realized. The most appropriate employment strat- egy will vary even between Pacific island countries, as will the importance of various Conclusions options and opportunities. However, strate- Pacific island countries will follow a dif- gies should take account of the following ferent path to improving employment realities. outcomes. Population growth and rapid Pacific Islanders have proven adept at tak- urbanization are causing understandable ing advantage of economic opportunities, concern in the context of weak histori- wherever they exist, and converting these cal growth and a shortage of cash-earning opportunities into widely shared improve- employment opportunities. Common policy ments in living standards. Facilitating inter- prescriptions and responses tend to involve a nal and international mobility is likely to be combination of efforts (a) to stem urbaniza- more successful in improving employment tion by subsidizing private sector activities than encouraging people to remain in areas in rural areas, (b) to improve the broad busi- where, by accidents of history and geogra- ness environment, often including retrench- phy, opportunities are inevitably limited. To ment of the public sector, in the hope of ensure that the benefits of urbanization are attracting investment and facilitating private shared widely, it is important to invest in sector employment creation, and (c) to spur infrastructure to connect urban and rural employment in natural resource industries, areas and to provide agricultural producers including tourism, often through implicit or with the tools to take advantage of increased explicit subsidization. But these strategies market opportunities accompanying the should be considered carefully and imple- growth of concentrated urban populations. mented selectively. Public sectors in Pacific island countries First, international experience shows very have achieved impressive improvements in limited success with policy interventions social indicators over recent decades, and aimed at stemming urbanization. If well employment created in delivering these managed, the benefits of urbanization— improvements can be socially and eco- economies of scale in service delivery and nomically valuable. But it is important W E L L - B E I N G F R O M W O R K I N T H E PAC I F I C I S L A N D CO U N T R I E S 237 to strengthen the incentives to use public and living standards for people from these resources efficiently. This can sometimes be countries, wherever they might be living achieved through carefully considered and and working, and to use that information to selective involvement of the private sector, establish targets and monitor progress. but continued progress with public sector reforms is also vital. Natural resource industries, which can Notes flourish despite higher cost structures in PICs, offer employment opportunities. But 1. Because of the specific set of challenges facing improvement in employment supported by the smaller independent Pacific countries, we restrict our analysis to countries with popu- natural resource industries does not have lations of significantly less than 1 million, to involve the creation of jobs within those therefore excluding Fiji, Papua New Guinea, industries. Natural resource industries have and Timor-Leste. a poor track record of delivering substan- 2. Strong institutions of informal reciprocity tial increases in sustainable jobs. But well- within kinship groups mean that a broad regulated natural resource industries can range of social considerations influence par- generate sustainable flows of revenue to sup- ticipation in economic activities and the distri- port employment in the delivery of public ser- bution of benefits. Labor (or goods and other vices and opportunities for better local and services) may be provided in return for access international employment through improve- to various common-pool resources with- ments in human capital. out immediate or direct cash compensation. Wages from a single individual with a regular Economic growth is not sufficient to cre- formal sector job are often shared widely and ate employment or to sustain well-being from support living standards across family groups. work. A key question posed in the WDR 2013 See Attahir (2002) and Curry (1999). is whether a “job strategy” is any different 3. The average Pacific island country is 11,456 from a “growth strategy.” In PICs, growth— kilometers from any other randomly selected in itself—is not a sufficient goal, considering country weighted by rest-of-the world GDP, the role of work in supporting productivity compared to 8,103 kilometers for small gains, higher living standards, and improved countries in the Caribbean. The countries social cohesion. Labor mobility offers the that Pacific island countries trade with are best employment prospects for many Pacific typically smaller and more distant than the Islanders. But the output produced by Pacific trade partners of other small states, especially Caribbean countries, which have easy access Islanders working overseas is not recorded to the large U.S. market. in GDP statistics at home. The remittances 4. Ni-Vanuatu participating in the New that they send home to their families fuel the Zealand seasonal worker scheme, in con- consumption of imports and improve living trast, tend to be from wealthier households standards but have a negligible impact on but are still unlikely to have access to over- GDP growth. Efficiency improvements in seas labor markets through any other avail- public sector work are notoriously difficult to able channels (McKenzie, Garcia-Martinez, capture in GDP accounts, and the associated and Winters 2008). improvements in social indicators are not 5. Although remittance flows typically fluctuate reflected. Natural resource extraction tends as the composition of and economic condi- to have a similar impact on growth regard- tions facing remitting migrant populations change, evidence shows no secular decline in less of whether it is sustainably managed the amount remitted by Pacific migrants over or employs the local population. Overall, time, although smaller amounts are remit- in PICs, the factors that influence GDP are ted less regularly by second- and third- gen- very different from those that influence liv- eration migrants (Brown 1998; Connell and ing standards and well-being from work. A Brown 2005). key priority is to develop better information 6. “Desperate Need for Unskilled Workers in on employment, economic opportunities, New Zealand,” PacNews Biz, January 8, 2013. 238 E A S T A S I A PAC I F I C AT W O R K 7. Australia has traditionally opposed such Reconciling Customary Land Tenure and country-based allocations in favor of points- Development in the Pacific . Canberra: based, country-neutral allocation systems. AusAID. New Zealand, however, has managed to offer Barclay, Kate, and Ian Cartwright. 2007. preferential access to Pacific Islanders for many Capturing Wealth from Tuna: Case Studies decades without significantly undermining the from the Pacific. Canberra: Asia Pacific Press. integrity of its broader points-based system. Bedford, Richard. 2012. “Population Movement 8. Recorded growth in urban populations may in the Pacific: A Perspective on Future understate the pace of urbanization in many Prospects.” Department of Labour, Labour PICs. 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What Determines It?” IMF Working Paper “W hen Comparative Advantage Is Not WP/13/104, International Monetary Fund, Enough: Business Costs in Small Remote Washington, DC. A Region at a Crossroads 9 Slowing productivity gains, more modest repeated throughout 2010 by several desper- advances in living standards, and rising ate people protesting what they claimed were inequality in some countries indicate that unreasonable work requirements for meager governments in East Asia Pacific will need pay became a cause for concern. In the year to intervene to sustain well-being from that followed, news from Indonesia reported work, but in order to prepare for the onset several strikes by mining unions involving of aging, they should do so in ways that sup- thousands of workers and one at Freeport port all working people, regardless of where that led to the death of at least three people. or how they work. And a wave of reports from Vietnam charted a doubling in the number of illegal “wild- I n the past few years, the news headlines cat” strikes in 2011. From May through from countries in East Asia Pacific have July 2013, reports of clashes between strik- started to change. The exclamations and ing garment factory workers and police in superlatives about growth and productiv- Cambodia appeared in the press almost daily. ity that the world has gotten accustomed to What were once rare accounts of worker reading are still there. And China’s eventual discontent and mobilization from East Asia economic supremacy has been foretold so fre- Pacific countries are becoming more fre- quently by the press and pundits on television quent. Images of demonstrating workers that that most of the public now takes it as a fore- might have emerged from time to time dur- gone conclusion, even as the country’s annual ing the 1980s and 1990s from Seoul or Busan growth rate is slowing. Yet squeezed between are today more likely to be transmitted from the usual applauding coverage have started to places like Chengtu, Ho Chi Minh City, Hue, appear stories of a very different character, Kompong Speu, Longhua, and Surabaya. seemingly at odds with the widely accepted These new headlines out of East Asia Pacific narrative of the region’s rise. suggest that countries in the region are When reports emerged in 2009 that a approaching a critical development threshold worker at a Chinese factory committed sui- and that, to sustain the gains from employ- cide in despair and protest against poor ment and enterprise, more will be required working conditions, the incident was as unex- of policy makers than quick-fix measures pected as it was tragic. That this act was then to appease growing demands for higher pay 241 242 E A S T A S I A PAC I F I C AT W O R K and fewer hours. When considered along- Many economies in the region, including side appreciating exchange rates, rising real Cambodia, the Lao People’s Democratic wages, the “near-shoring” of manufacturing Republic, Indonesia, and the Philippines, back to Mexico, Morocco, and Turkey, and have to find ways to create and sustain pro- even the “re-shoring” of certain industries ductive work amid more difficult global to high-income countries, these reports may economic prospects and more intense inter- indicate that, with respect to the well-being national competition. that they derive from work, people in East Furthermore, despite the region’s long- Asia Pacific are at a crossroads. standing reputation for welcoming invest- In this concluding chapter of the report, ment and enabling enterprise, several we address two questions: Do the emerging countries still have relatively restrictive busi- economies of East Asia Pacific need employ- ness environments. Cambodia, Indonesia, ment strategies? What might such strategies Lao PDR, the Philippines, and Timor- entail? Just a few years ago, many govern- Leste still fare poorly in the global Doing ments in the developing countries of East Asia Business rankings, while China, Mongolia, Pacific would not have asked these questions: and Vietnam rank only moderately (World their economies have been growing quickly, Bank 2013a). Limited access to finance and workers’ prospects have been better than and financial services is the most frequently in many other parts of the world. Improving reported obstacle keeping businesses in East well-being through better employment out- Asia Pacific from expanding and creating comes has not been a core concern of policy more employment. Although new small and makers in the region in quite the same way medium enterprises are an important engine as it has long worried governments in Latin of employment creation, they are particularly America and the Caribbean, in Central and constrained in their ability to find financing Southern Europe, and more recently, in many for expansion. countries in the Middle East and North In addition, skills shortages and mis- Africa and South Asia. But that has begun to matches in many East Asia Pacific countries change. are becoming a binding constraint on further This report has shown that many countries gains in productivity and living standards. in the East Asia Pacific region— certainly the Skills gaps threaten growth when health and most populous countries—are fast approach- education systems and the labor force adjust ing a critical development threshold where slowly to fast-evolving demands. This is espe- the well-being that people derive from work cially the case in countries where incentives cannot be taken for granted. Youth inactivity for people to invest in skills are distorted by and unemployment, rising income, and con- programs driven mainly by centralized plan- sumption inequality in some countries are ning and government supply rather than mar- putting pressure on social cohesion. But what ket demand. Even shortages of basic skills appear at first mainly as challenges to social such as functional literacy and numeracy are cohesion are also linked to a general slowing a problem in Cambodia, Lao PDR, and sev- of economic growth in the region, which is eral Pacific island countries. more pronounced in countries where pro- Slowing gains in productivity, more mod- ductivity and living standards have been lag- est advances in living standards, and rising ging for a long time. For example, in the past inequality in some East Asia Pacific countries decade, the Philippines experienced much indicate that governments will need to inter- slower poverty reduction than its neighbors, vene to sustain well-being from work. These despite respectable economic growth. This changes are made all the more urgent by the stagnant improvement in living standards rapid pace at which the populations of most is linked to slower employment creation East Asia Pacific countries are aging. Business and the low productivity of most work cre- as usual is not an option. This chapter argues ated by that economy (World Bank 2013a). that, in order to sustain well-being from work A REGION AT A CROSSROADS 243 and prepare for the onset of rapid population working people (Gill and Kharas 2007). aging, governments stand a better chance of In the parlance of the World Development increasing productivity, raising living stan- Report 2013: Jobs (hereafter referred to as dards, and promoting greater social cohesion WDR 2013), and as shown empirically in if they adopt employment strategies that sup- chapter 7, the middle-income East Asian port all working people, regardless of where countries, in particular, have reached a point or how they work. in their structural transformation—out of mainly “agrarian” economies and well into “urbanization”—at which gains in productiv- What should an employment ity, living standards, and social cohesion are no longer achieved at the same pace. The evi- strategy set out to achieve? dence presented in earlier chapters shows how Governments in countries around the world lags are starting to appear in the pace of all are rushing to piece together strategies not three transformations, although to different only to boost employment, but also to cre- degrees and in some countries more acutely ate “better jobs.” As is the case elsewhere, than in others. At this point in the develop- in East Asia Pacific countries, there is little ment trajectory of most countries, policy agreement on what “better” means exactly makers are forced to accept that, although (box 9.1), but there is a commonly held necessary, growth is no longer sufficient and intuition that, despite relatively high rates of may need a helping hand. The unprecedented participation in the labor market, high lev- speed of population aging in East Asia Pacific els of employment, and low rates of unem- countries may motivate policy makers in the ployment, current labor market outcomes in region to offer more than just one. East Asia Pacific are no longer good enough. Governments in East Asia Pacific’s emerg- Several observers of development in the ing economies have been slower to inter- region have warned that East Asia Pacific vene in markets to influence employment countries entering middle-income status outcomes than their peers in other low- could get caught in a “trap” in which rising and middle-income countries, preferring labor costs could threaten competitiveness, instead to set a broad course of export-led productivity could stagnate, and more mod- growth and to let markets function more erate rates of growth would benefit fewer or less unfettered. However, the emerging BOX 9.1 Decent? Better? What are “good jobs for development”? Households and governments are no longer con- frighten many people, it may be an essential aspect tent with “more jobs.” With increasing frequency, of earning a living for others. And although many calls are heard for “better jobs.” This can make like to leave the rigors of saving and investing for economists uncomfortable: surely whether a job retirement to their employer or the government, oth- is “better” is in the eye of the proverbial beholder ers look on the mandate to save for retirement as or, more precisely, a person who accepted work of an affront to their liberty and intelligence, prefer- her own free will. For example, whereas one per- ring instead to invest and insure for old age on their son may not have enough work in a week, another own. However, in countries and contexts where might welcome the flexibility of working part-time, markets are missing or function poorly, institutions irregular hours. While the episodic income and are weak, and “free will” is an elastic concept— sometimes fluid nature of owning a business may where access to opportunities for advancement continued 244 E A S T A S I A PAC I F I C AT W O R K BOX 9.1 (continued) through individual merit and enterprise are not as conditions enjoyed by individuals. The broader abundant and may be skewed by personal connec- social contributions or costs of work also need to be tions and affi liation to a class, religion, or tribe— considered. this is all too glib a dismissal. According to the WDR 2013, a decent, better, So what is “better”? Will the things that make or “good job for development” provides suffi cient work better for some make it better for all? Arriving income to improve standards of living, while also at a defi nition of “better” employment that will be contributing to economy-wide productivity growth satisfactory to everybody would be a formidable and social cohesion. In well-functioning market task. For this reason, policy makers, employers, economies, jobs that are good for employees are and civil society took the relatively easier step long often also good for society (figure B9.1.1). Work ago of defi ning at least what work should not be. that provides a high salary but is in an environmen- From this ongoing deliberation emerged the Core tally damaging industry and fi nanced by subsidies Labor Standards, the Declaration on Fundamental might benefit the worker but at the same time dam- Principles and Rights at Work, and other global res- age society and thus should not be considered good. olutions and conventions brokered and monitored Thus the WDR 2013 proposes that “good jobs by the International Labour Organization (ILO) for development” are those that act as conduits for as part of its advocacy for “decent work for all.” higher incomes, greater productivity, and enhanced It is on these Core Labor Standards that the World social cohesion, by maximizing positive internal Development Report 2013: Jobs (W DR 2013; and external benefits. As discussed at length in World Bank 2012) constructs a conceptual frame- chapters 7 and 8, the challenges (constraints) to an work through which policy makers can determine economy creating more work that meets these cri- the quality of work. To give dimension to “better,” teria will vary widely across countries and even in the WDR 2013 refers to the three transformations the same country over time. This is particularly the that drive development, discussed in chapter 3. case in countries that are experiencing fast-paced “Better” work contributes to greater productivity, economic and social change, like those in the East raises living standards, and enhances social cohe- Asia Pacific region. sion. However, the value of employment cannot be measured simply in terms of the wages and working Source: World Bank 2012. FIGURE B9.1.1 Good jobs for development benefit society as well as individuals Urban job connected to a global value chain for a woman Job offering an opportunity to a Agglomeration young person effects Informal job giving chance to Social Global Spillover a poor person identity integration Job in a protected Social value sector using outdated Poverty Gender Sense of fairness technology reduction equality Individual Burden value shifted Individual Environmental value cost A REGION AT A CROSSROADS 245 lags in the three development transforma- a wide array of measures, from market pro- tions have brought the debate about how to tection to directed credit for industries they sustain well-being from work to the politi- identified as strategic. cal forefront and, if ignored, could threaten Do the high-income countries in the region the social contract particularly in the larger offer lessons to their low- and middle-income East Asian countries. In contrast to the his- neighbors? The answer is “yes” and “no.” tory of today’s high-income countries, the Yes, it is appropriate to be concerned that rapid economic changes in the emerging productivity is lagging, that living standards countries of East Asia Pacific have not been might be rising far faster for some people than accompanied by a parallel development of for most people, and that this could threaten social and civic institutions to accommodate social cohesion and stability. Yes, some inter- the interests of different groups and classes. vention is required to help labor, capital, and As discussed in chapter 6, labor unions have land markets to work better for firms and historically been much weaker in East Asia households. No, the strategies employed by Pacific countries than they were in Southern the likes of Japan, Korea, and Singapore in and Central Europe and in Latin American the past may not be as attractive as many countries, even when these were at similar claim them to be, nor may these policies be stages of development. Where organized viable in a far more integrated regional and labor is strong in the region, unions tend to global economy, especially now that coun- represent only a small segment of working tries are part of an international system of people and do not yet represent the interests institutions with increasingly binding rules, of self-employed or many service workers, as as argued in spotlight 2. No, interventions in is happening in South Asian countries and the factor markets and social protection poli- even in the United States. The same can be cies do not have to take the form they have in said for employer associations, which tend to the past and in other regions where the pro- represent the interests of a few large firms, file of working people is very different. The rather than the much broader range of small list is long on both sides. and medium enterprises that provide the bulk In this chapter, we do not propose a single of employment in the region. employment strategy for all the countries of Without strong formal civic, labor, and East Asia Pacific. That is not the purpose of social welfare institutions, many East Asia a regional report. Indeed, in the preceding Pacific governments are now facing the chal- two chapters, even though we have shown lenges of moderating economic growth, erod- how countries in East Asia Pacific can be cat- ing labor cost advantages, and increasing egorized into types and have gained insights inequality in the swelling cities of countries from this categorization about where their where the structural transformation hap- priority employment challenges might lie, pened far faster than anywhere previously. At we have also taken great care to demonstrate a similar point in their development, leaders why each country has unique priority chal- at the helm of East Asia’s present-day, high- lenges and will require its own package of income economies—Japan; the Republic of policies in response. This said, along with Korea; Singapore; and Taiwan, China—also the conceptual diagnostic tools offered by the had to consider whether employment strate- WDR 2013 and used in this report, we add gies would be required to sustain productiv- some broad principles in this chapter to guide ity, raise living standards, and address threats what employment strategies could set out to to social cohesion. At this critical juncture, achieve for policy makers eager to increase leaders in today’s high-income East Asian and sustain well-being from work. countries responded quickly and actively. In an ever more integrated, interdepen- However, most embedded explicit employ- dent global economy, for countries to sus- ment strategies in broader programs of cen- tain productivity gains, ensure rising living tralized industrial policy, which included standards for a broader segment of the 246 E A S T A S I A PAC I F I C AT W O R K population, and increase social cohesion, a these right, governments create a stronger good way for activist governments to start foundation for follow-on actions in the fac- is by eliminating structural biases that can tor markets and for additional efforts to hurt working people and may favor one form address remaining employment challenges. of work over others. In doing so, govern- Finally, these additional special efforts, ments can better identify and correct market which will vary across countries and even in failures as well as take actions to exploit eco- the same country over time, are a comple- nomic and social externalities. To organize ment to and cannot be a substitute for sound the broad policy guidance in this concluding fundamentals and appropriate labor mar- chapter, we return to the three segments of ket institutions. Each segment of the policy the policy pyramid introduced in chapter 1: pyramid in figure 9.1 is accompanied by our fundamentals (covered in chapters 4 and additional interpretation of what an employ- 5 of this report), labor policy (discussed ment strategy in East Asia Pacific countries in chapter 6), and priorities (addressed in should set out to do. chapters 7 and 8). The policy pyramid is reproduced in figure 9.1. This pyramid com- municates three important messages. First, Remove biases that hurt working successful employment strategies entail action across a broad range of policy areas, people not just intervention in the labor market. Policy makers who are worried about Second, strategies should start with close employment outcomes and eager to increase scrutiny of “fundamentals,” since in getting and sustain well-being from work should FIGURE 9.1 Employment strategies consist of actions at each level of the policy pyramid START AT THE BASE Take proactive measures to correct remaining market failures, and capture externalities PRIORITIES and social benefits. Design labor regulation and social protection to accommodate all forms of work, e.g., temporary, part-time, and self LABOR POLICIES employment. Remove biases that influence factor choices to eliminate disincentives for firms to employ labor and human capital. FUNDAMENTALS Source: Adapted from World Bank 2012. A REGION AT A CROSSROADS 247 concern themselves first and foremost with And governments have created a generally ensuring sound fundamentals: namely, mac- encouraging environment for enterprise, roeconomic stability underpinned by prudent although access to finance and skills short- fiscal policies and an attractive environment ages are unnecessarily constraining growth for building human capital, investing, and and demand for labor and human capital in doing business. This is because the forces many parts of China, Indonesia, Vietnam, that fundamentally determine the demand and elsewhere in the region. for and supply of labor and human capital However, governments in the region can are shaped by policy making in arenas other do better for working people. In setting the than the labor market (World Bank 2012; “levers” of monetary and fiscal policy as well Development Committee 2012). The place- as shaping the playing field for enterprise, ment of these fundamentals at the base of the governments should not only strive for low, policy pyramid is intentional. Employment stable inflation, fiscal prudence, and a higher strategies too often consist only of actions ranking in the Doing Business league tables. to regulate and support factor markets and Governments concerned about the quantity sometimes focus even more narrowly on the and quality of employment should set out to labor market. Without sound and strong achieve all of these in a manner that elimi- macroeconomic and human capital founda- nates any explicit or implicit incentives that tions, labor regulation, and social protection, systematically favor one factor of production other measures deployed to correct market over another. Borrowing from well-accepted failures and capture productive and social (if not always applied) principles of taxa- externalities will fall short of their objectives. tion (Furman 2008; Pikkety and Saez 2012), In chapters 4 and 5, we argue that, macroeconomic policies should seek to be although there is considerable variation, the neutral with respect to factors of produc- macroeconomic, business, and human capital tion. For example, all else equal, using one fundamentals in East Asia Pacific are gener- set of revenue instruments more intensively ally sound. Across the region, there has been than another could, at the margin, influ- greater price stability than in the past, with ence firms to invest in an additional unit of inflation decelerating in recent years to low capital instead of an additional unit of labor. and stable levels. Contributing to stabil- For the same rate of inflation, monetary and ity and reflecting difficult lessons from the exchange rate policies might have a similar East Asian financial crisis in the late 1990s, effect unless government intentionally takes exchange rate policies among the worst- a more neutral stance that does not bias the affected countries have shifted toward greater factor choices of firms. flexibility. A long track record of fiscal pru- Similarly, in the face of skills shortages, the dence allowed East Asia Pacific countries to development of human capital should take react quickly in the recent global financial a form that does not implicitly or explicitly and economic crisis, sustaining support for favor, for instance, financing the provision aggregate demand and even launching sub- of certain technical skills over foundational stantial fiscal stimulus packages that, along behavioral and cognitive skills. Public with more flexible exchange rates, helped to resources would be much better invested in contain the costs of the crisis borne by house- building fungible foundational behavioral holds. Countries in the region also stand out and cognitive skills. Close study of skills on the whole as places where basic health and shortages in several dynamic economies, education are widely available. Furthermore, including in East Asia, shows that founda- firms do not seem to be overly burdened tional skills are always in short supply relative either by the level of taxation or by the costs to demand. In response to skills shortages, of complying with tax obligations. This is in governments can do much more than simply stark contrast to countries in Eastern Europe push more resources into technical vocational and in Latin America and the Caribbean. education and training (TVET) programs. 248 E A S T A S I A PAC I F I C AT W O R K More often than not, however, this is their the global economy accelerates the pace of first and only policy response. Many TVET change necessary to boost prosperity. programs are only poorly connected to and informed by markets and struggle to keep up with the pace at which markets shift and Make labor regulation and social grow in complexity. Along with more sup- protection work for all working port for foundational behavioral skills, given the importance of agriculture and rural non- people farm industry as well as the prevalence of With sound fundamentals in place, activ- self-employment in the region, policy makers ist governments will stand on far more solid crafting employment strategies cannot afford ground as they turn their attention to the to ignore measures to augment the produc- labor market. Labor market regulations and tive skills of farmers, owners of nonfarm social protection interventions are formulated enterprises, and entrepreneurs. In the health according to each country’s institutions in an sector, governments can complement these attempt to address market imperfections, human capital investments with more and such as uneven power between those who better-quality early childhood nutrition and seek and those who sell labor and human preventive care. capital, information failures on all sides, and In crafting employment strategies, with limited or weak insurance to mitigate risks respect to fundamentals, policy makers to household well-being from loss of work. should be alert to policies, laws, and regu- As mentioned in chapter 6, the WDR 2013 lations that intentionally or unintentionally concludes that the parameters of labor policy influence firms’ decisions at the margin to should ideally be set at a “plateau” level that engage capital or labor. The fundamentals avoids the extreme “cliffs” of too little pro- are already more neutral in East Asia Pacific tection and too much restriction. countries than in countries elsewhere. For Comparable measures of regulation example, countries in Central Europe over- drawn from the labor codes of East Asia tax earnings from work. Governments in Pacific countries show that the average almost every country undertax land. Self- level of employment protection is actually employed people in most Latin American higher than the Organisation for Economic countries have a hard time registering their Co-operation and Development (OECD) businesses and paying taxes. Globally, country average. The data presented in chap- between 2004 and 2012, the burden of tax- ter 6 also show that there are notable outli- ation shifted away from profits and toward ers like Indonesia, where workers whose labor earnings, and taxes on labor are now employment is regulated enjoy more de jure the largest segment of the total tax rate protection than workers in France, Greece, or (World Bank 2013d). Portugal and only a little less protection than As governments in East Asia Pacific workers in Spain. As sustained high levels of respond to demands for new employment unemployment and informal employment in strategies, they will need to be vigilant several Southern European countries make against these biases. The dangers of a policy plain, these countries have erred on the side stance that biases firms’ decisions one way of too much restriction. In China, workers or the other are structural imbalances: too in regulated employment are de jure more much capital and not enough labor in one difficult to dismiss than workers in Belgium part of the economy, or vice versa. These and Italy. Similarly, reflecting what is codi- imbalances can become embedded econom- fied in labor laws, the Philippines has the ically and even politically. When they do, highest average statutory minimum wage they can create barriers to the productive in the region, followed by Cambodia and process, hinder countries’ ability to adjust, Indonesia. When ranked by the ratio of the evolve, and grow as deeper integration with minimum wage to value added per worker, A REGION AT A CROSSROADS 249 the average statutory minimum wage in the fragile institutions. Even on the plateau, the Philippines is among the highest in the world. prevailing models tend to be biased against In East Asia Pacific countries, restric- working women, young people, and persons tions de jure may not be fully felt de facto outside of full-time dependent work. while many people still work on farms or Does this mean that low- and middle- avoid detection in the informal economy. income countries should not intervene in the In this regard, restrictive labor regulations labor market at all? Absolutely not. Labor are relatively “toothless.” But the body of market imperfections and failures are partic- empirical evidence pointing to problems cre- ularly rife and, as argued in previous sections, ated by overly restrictive labor regulations is cannot be ignored. But there is no good rea- growing, and as urbanization advances, the son for activist governments concerned with risk of partially and poorly enforced policies the inequitable opportunities and outcomes creating barriers to factor mobility is also of labor market imperfections to respond growing. While restrictions on dismissal and with policies designed to benefit prime-age wage regulations are being loosened in most men in full-time employment—the group middle- and high-income countries in other that made up the largest segment of the work- regions, regulations in East Asia Pacific are force at the time when these models were put moving in the opposite direction: the regula- in place in countries elsewhere. When they tory framework in East Asia Pacific countries advance to the middle of the policy pyramid is becoming more restrictive. And as more (figure 9.1), policy makers should craft labor people seek work in the manufacturing and regulation and social protection policies that service sectors, as governments become bet- favor all working people, even if they work ter able to enforce regulations, and as firms part time, work for themselves, or hire others find it harder to evade, these extreme levels to work with them. of regulation in the labor code will become The performance of existing and proposed more binding constraints. labor regulations and social protection pro- Indeed, for a segment of firms in many grams should be evaluated with regard to the East Asia Pacific countries that are already extent to which they serve all working people, too large to evade—many of them interna- not just certain segments, sectors, or types of tional companies—onerous levels of regula- work. As governments in East Asia Pacific get tion are a problem and, for many, a source of ready to respond to ever more frequent calls unfair competition from smaller rivals who for greater activism and intervention, some can still ignore the rules and hire informally. have responded in a manner that favors one These larger, mostly international firms are form of work over another. Greater restric- also the more likely place for employment tions on the use of term contracts and labor that acts as a channel for global knowledge from third-party agencies in Indonesia are transfer and productivity gains. Forcing these cases in point. firms where “good jobs for development” are Examples have emerged of labor and social more likely to be created behind a barrier of protection policies and institutions that sup- restrictive regulation can unnecessarily retard port all working people. The Scandinavian a country’s growth potential. countries’ emphasis on protecting people This said, several East Asia Pacific coun- rather than protecting employment— tries have written their labor codes in a the so-called “flexicurity” approach—is a manner that places them on the WDR’s con- prime example of government activism that ceptual plateau. However, because evidence achieves a relatively unbiased, neutral stance of the modest negative impact of policies set toward managing labor market risks. In sep- at this level comes mainly from upper-middle- arating protection from where or how people income and high-income countries, their work, these measures do not have to com- impact may not be as benign in countries promise the contestability of markets and with less administrative capacity and more efficiency (box 9.2). 250 E A S T A S I A PAC I F I C AT W O R K BOX 9.2 Denmark’s “flexicurity”: Protection does not have to come at the cost of efficiency Social protection policies in some Scandinavian The second component is unemployment insur- countries are famous for “protecting workers, not ance financed from contributions and taxes. jobs.” This general characterization of their labor Membership is voluntary, but it covers around regulation and social protection systems grew from 80 percent of the labor force. Benefits last up to Denmark’s approach to helping households to man- four years, and replacement rates cannot exceed age the risks and opportunities brought by creative 90 percent of wages up to a capped amount. After destruction. The approach shows that when an four years of getting benefits, recipients have to activist government takes a more neutral stance, switch to social assistance, which means a reduc- extending protection to working people does not tion of between 20 and 40 percent of their benefit have to come at the expense of contestable labor income (Andersen and Svarer 2007). markets and efficiency. The new system uses active labor market pro- The Danish labor market is relatively unre- grams like job search assistance and training to stricted, particularly compared with other countries nudge the unemployed back to work. The spend- in the European Union (EU). Every year, one out of ing on these programs is sizable: out of a13 billion five Danes loses his or her employment. But they do spent on labor market programs in 2010, about not lose income security. Unemployment benefits 75 percent was spent on active instruments. replace close to two-thirds of their earnings, and the How well does flexicurity really work? The government helps them to find work. This combina- unemployment rate dropped from 10 percent in tion of flexibility for employers and income security 1993 to 3.3 percent in 2008 before the global fi nan- for workers is called “flexicurity.” The arrange- cial crisis. The incidence of long-term unemploy- ment has been in place since at least the 1970s, but ment (those without work for more than a year) it has evolved over time, principally in the active decreased from a third of total unemployment in component—assistance with retraining and employ- 1994 to a tenth in 2009. Despite liberal fi ring and ment search. And it seems to work well. Between hiring practices, employment has not fluctuated 1995 and 2008, Danish unemployment rates aver- much in response to output variability. aged 4.9 percent, while the rest of the high-income However, there are some important qualifi ca- countries in the EU suffered rates close to 8.5 percent. tions to Denmark’s success. First, although official Danish employment laws have evolved from the unemployment has fallen, there is a gap between “Gent system,” in which unemployment benefits actual unemployment (adding up the unemployed, were paid by labor and trade unions, not the gov- those in “activation,” and early retirees) and offi - ernment. In the 1970s and 1980s, employment rates cial statistics. Second, it is diffi cult to assess how were high, and individuals without jobs got good much of the fall in unemployment is due to fl exi- incomes. The arrangements became too expensive curity on its own. Economic performance matters and were reformed in the 1990s. The new approach too, of course: active labor policies are useless if is sometimes called the “Golden Triangle” because the economy is not growing. Finally, the already it added active labor market programs to fl exible high fiscal burden can become enormous in a hiring and fi ring laws and generous unemployment protracted slowdown. The Danish model costs benefits. 4.5 percent of GDP. And Denmark spent 2.6 of The fi rst component is fl exibility of fi ring and GDP on labor market programs in 2008 (a good hiring. Denmark is resolute in not creating obsta- year prior to the crisis), compared with 1.4 percent cles to the creative destruction process. The OECD for the OECD as a whole, 1.5 for Sweden, 2.2 for employment protection legislation (EPL) index for Finland, and 2.3 for the Netherlands. The Danes Denmark fell from 2.4 in 1983 to 1.5 today; the have fl exicurity because of their history and can OECD average is 1.9. Relatively flexible laws work afford it in part due to high labor force participa- in Denmark because the country has a history of tion rates of 81 percent; the OECD average was self-regulation by employers and unions, going back 71 percent in 2009. to the “September Compromise” of 1899, which set out rules for resolving labor disputes. Sources: Hansen 2010; OECD 2010; Gill and Raiser 2012. A REGION AT A CROSSROADS 251 Is “flexicurity” something countries in benchmarks that prevent exploitation, pro- East Asia Pacific can achieve? Yes, although tect household purchasing power, and ensure with difficulty and adapted to their specific that working people share in the benefits of needs. Most of the countries in the East Asia greater productivity. Minimum wage policies Pacific region have the prerequisite fundamen- should not inadvertently exclude lower-skilled tals, growth, and fiscal discipline. Although people from work or from the benefits of for- a substantial fiscal cost in Denmark, the mal employment. To this end, a country’s approach can be adapted to middle- and low- statutory minimum wage should be set at a income countries. The essential element of level consistent with the productivity of its the approach is government intervention to unskilled workers. Setting the minimum protect the well-being and prospects of work- wage too high encourages noncompliance, ing people with income support and employ- reducing social protection and tax revenues. ment assistance, rather than raising the costs Where it proves necessary to make accom- to firms that need to cut jobs. Although modations for special groups whose average labor market policies have been moving in marginal productivity is lower, such as young the opposite direction of the “flexicurity” people, exemptions to the national minimum model, very restrictive policies or structures could be considered as part of apprentice- that favor one form of work over another are ships or other targeted training programs. still new and are only applied to a small seg- Simplifying and standardizing earnings ment of workers. The key challenge is admin- regulations by moving to a unified national istrative and institutional strengthening to minimum wage can help to improve employ- increase the confidence of people and firms. ment outcomes. Standardized minimum wage In contrast to recent changes in employ- levels—set with reference to the productivity ment protection legislation (EPL), the scrutiny of unskilled workers and adjusted transpar- and debate around minimum wage policies in ently according to clear economic criteria— several East Asian countries in recent years reduce distortions and compliance costs and is an excellent illustration of the important improve predictability for employers. With assessment of policy impacts on all working a national minimum wage set at reasonably people. Although statutory minimum wages low levels, governments are also more likely are relatively recent in several East Asian to see improvements from greater investment countries (compared with other middle- in monitoring and enforcing compliance. income countries, as discussed in chapter 6), Specific interventions designed to pro- multiple statutory levels are imposed in the tect household income and consumption labor codes. This hinders factor mobility, from the risks of unemployment can also be raises enforcement and compliance costs, designed with greater neutrality to favor all and may compromise the credibility of their working people. They need not be organized collective bargaining institutions. Multiple at the firm or sector level, as are severance minimum wages require a thicket of de jure schemes, the most prevalent form of income regulations and an accompanying cadre of protection in East Asia Pacific countries. people engaged in the process of setting the Pooling the risk to income from unemploy- floor on wages in each province or district ment at the firm level is about the most costly and even in different industries in the same and least efficient way to provide people localities. If these seem like intimidating labor with protection. More frequently than not, codes to comply with or even enforce, imag- firm-based severance schemes leave work- ine what they must be like to orchestrate to ers with unpaid promises. But a country ensure that the interests of employers, work- does not have to incur the distortions and ing people, and the public (consumers) are administrative costs of a classic pay-as-you- adequately represented (box 9.3). go unemployment insurance scheme in order In order to better serve working peo- to harness the efficiency of risk pooling at the ple, statutory minimum wages should be national level. A national system of modest, 252 E A S T A S I A PAC I F I C AT W O R K BOX 9.3 A more neutral minimum wage policy? World Bank (2013b) quotes Friedrich Hayek: because many workers are not represented in the “A general fl at minimum-wage law for all industry negotiation. is permissible … I know much better methods of In a system with multiple minimum wages, it can providing a minimum for everybody. But once you be difficult to keep the tripartite process balanced turn from laying down a general minimum for all in many localities, enforce the law once announced, industry, to decreeing particular and different mini- ensure compliance, and avoid further distorting the mum for different industries, then, of course, you labor market. The complexity of managing a mul- make the price mechanism inoperative, because it tilevel system is further exacerbated where enforce- is no longer the price mechanism which will guide ment capacity is low. Because of these dangers, the people between industries and trades.” While Hayek general trend around the world is to move away would not have appreciated being quoted in a report from differentiating wage levels by geography, occu- on minimum wages whatever the context, his argu- pation, and economic sectors and to move toward ment illustrates what we mean by neutrality applied having just one national minimum wage. to a prevalent form of labor market regulation. In Indonesia, recent changes announced by In Indonesia, the Philippines, and other East the government (largely in response to repeated Asian countries, prevailing labor policies allow dif- worker demonstrations) may reduce the level of ferent minimum wages to be in place, varying not minimum wage dispersion in the country in the only by locality, but also by sector. A large body of near future, if the suggested increases made by research from Indonesia and the Philippines shows the government—a rise for Jakarta of 44 percent the ineffi ciency and inequity that minimum wage (equivalent to US$228 a month) and a rise for the regulations impose. rest of the provinces to a uniform level equivalent Like Indonesia and the Philippines, Thailand had to US$208 a month—take effect. However, the size a complex governance structure prior to the unified and speed of the increase could push many people minimum wage of B 300 introduced in 2012. Before into unemployment or the informal economy, par- the national minimum wage was implemented, the ticularly as there have been several recent increases law specified the appointment of the National Wages in the minimum wage and little loosening of regula- Council to recommend wage rates and to ensure that tions on dismissal. proposed wage rates coming from the provinces were In Vietnam, recent reforms have separated the consistent with what “an employee deserves” and common minimum wage used in the domestic pri- “sufficient for an employee’s living.” The provincial vate sector from that used in the public sector and committees deliberated on the adjusted wage rate, gradually unified the minimum wages for the private given their own context and using tripartite delibera- domestic sector and foreign sector. Since October tion, and submitted proposals to the central commit- 2011, domestic and foreign firms have, in effect, tee. The fi nal decision was made by the minister of had the same minimum wage. In Malaysia, the gov- labor based on recommendations from the National ernment chose to implement two distinct minimum Wages Council, provincial committee, and the wages, one for Borneo and one for Peninsula, given Subcommittee on Technical Affairs and Review. The that these geographic areas have very distinct labor country had about 32 minimum wage rates in 2011, markets. ranging from B 221 in Phuket (the province with the Many countries set only one national level for highest cost of living in Thailand) to B 159 in Payao. the minimum wage and allow for a few exceptions The case of Thailand prior to the adoption of the or reductions. The reductions are granted mainly unified minimum wage illustrates the challenge of for particularly low-productivity workers whose ensuring that all three sides in a tripartite system employment opportunities become extremely lim- of governance are well represented and equipped ited when the minimum wage is high. Some of the to negotiate. In Thailand, the pool of worker rep- most common reductions are granted for younger resentatives in the smaller provinces is small. This employees, disabled workers, and apprentices. is a concern for countries where levels of unioniza- In the Republic of Korea, a single minimum wage tion are low and levels of labor informality are high, is applied without any regional or occupational continued A REGION AT A CROSSROADS 253 BOX 9.3 (continued) differences. The law initially included only manu- by the Employment Ordinance; (b) domestic work- facturing establishments and fi rms with more than ers who live in their employers’ household free of 10 employees, but gradually expanded to cover all charge (nearly 280,000 workers, mostly Filipino sectors and fi rms, regardless of size. The minimum and Indonesian); (c) workers who are excluded from wage does not apply to family businesses that hire coverage due to difficulty in calculating their work only family members and domestic employees. It hours given the round-the-clock nature of their also exempts persons working on or owning ships. work and the monetization of other benefits such as Workers who are disabled are exempt from the law, housing, food, medical care, and free travel to their with the Ministry of Labor granting permission on home countries; (d) apprentices registered under the a case-by-case basis. Workers on probation receive Apprenticeship Ordinance; and (e) student interns 90 percent of the hourly minimum wage, while and specifi ed work experience students. Disabled security guards and caretakers receive 80 percent. workers are paid a proportion of the minimum The minimum wage law in Hong Kong SAR, wage, estimated by their degree of productiv- China, applies to every employee whether full ity as assessed in their person-with-disabilities time or part time regardless of nationality or type certifications.a of contract. There are no deductions or exclusions based on a worker’s age or any sectoral differences, Source: World Bank 2013b. mainly to avoid distortions. However, a few excep- a. To avoid the risk of abuse, the right to invoke such an assessment is vested in tions are allowed: (a) people who are not covered the employee rather than the employer. “noncontributory” unemployment benefits, and enable voice for a broader body of work- financed from general revenue, offers the ing people than just those in formal labor largest possible risk pool, relieving employ- unions. Associations of self-employed ers of costly severance schemes and providing workers—for example, India’s Self-Employed some incentive for workers currently with- Women’s Association (SEWA)—are growing out any protection to bring their activities in numbers and bargaining power to protect to the attention of government by register- the rights and working conditions of those ing. Technology has expanded governments’ who work outside of dependent wage employ- ability to monitor and verify sufficiently, so ment (World Bank 2012). But just as labor that it need no longer delegate this burden to market and social protection institutions firms. should be more inclusive on the side of work- In several countries, governments are ing people, they should also be expanded to already experimenting with de-linking finan- represent the interests of employers in small cial protection and risk pooling for health and medium businesses, where most people from where and how people work. They are in East Asia Pacific work. treading ground previously explored by some of East Asia Pacific’s high-income success stories. Thailand’s model of universal health Take proactive measures to coverage is the most successful example of address remaining failures and this approach and is credited not only for extending coverage of financial protection, capture externalities but also for increasing the use of health ser- Even after eliminating biases in policy fun- vices (box 9.4). damentals that could be prejudicing firms’ Finally, institutional structures for collec- factor choices away from labor and human tive representation could be more inclusive capital and establishing labor and social 254 E A S T A S I A PAC I F I C AT W O R K BOX 9.4 Universal health coverage in Thailand: Protecting people no matter where they work Motivated by the vulnerability of a large segment by mandatory employer and worker contributions. of the population working without fi nancial protec- Furthermore, the scheme achieves greater efficiency tion from the costs of health care, Thailand decided from scale by pooling risks and redistributing them to redefi ne “social insurance” to meet this need. In at the national level, rather than at the sector, indus- 2001, the Thai government introduced a national try, or fi rm level. Since most traditional social insur- risk-pooling mechanism that extended protection ance plans are constrained by relatively small risk to people no matter where or how they worked. pools, these efficiency gains are critical to long-term In 2012, the independent Thai Health Insurance fiscal sustainability of the UCS. System Research Office published an evaluation of In its fi rst 10 years, the UCS improved access to this bold departure from the prevailing social insur- health services, increased equity of service use, and ance model to assess the impact of the new scheme prevented medical impoverishment. Between 2003 in its fi rst 10 years (HISRO 2012). and 2010, the number of outpatient visits per mem- Prior to introducing the scheme, up to 30 percent ber per year rose from 2.45 to 3.22, and the num- of the Thai population (or about 18 million people)— ber of hospital admissions per member per year rose mostly people who worked informally beyond from 0.094 to 0.116. Impoverishment—measured by the reach of regulation or taxation—had no health the additional number of nonpoor households falling insurance or access to affordable medical care. below the national poverty line as a result of paying Out-of-pocket payments for health care accounted for medicines and health services—decreased sig- for 33 percent of total health expenditure in 2001. nificantly from 2.71 percent in 2000 to 0.49 percent Out-of-pocket payments for medical care as a share in 2009. As expected, the UCS led to a significant of household income were highest for people liv- increase in government health spending and a marked ing near or below the poverty line. Impoverishment decline in out-of-pocket expenditure. However, the from the costs of health care was common. difference in out-of pocket expenditure between poor Within a year of its launch in 2001, the Universal and wealthy households was eliminated. The Health Coverage Scheme (UCS) extended fi nancial protec- Insurance System Research Office’s (HISRO’s) evalu- tion for the cost of health care to 47 million people, ation found that the UCS increased the equity of pub- or 75 percent of the Thai population, including lic subsidies and that overall health expenditure was those who were previously unprotected. The other very “progressive” or pro-poor. 25 percent of the population were already covered Looking ahead, there are concerns about inequi- by traditional social health insurance plans: the ties in benefits between the UCS and the remaining Civil Servant Medical Benefit Scheme for public traditional social health insurance plans, discour- sector workers and the Social Security Scheme for agement of labor mobility from the plans operat- workers in registered and taxed forms of private ing in parallel, and fiscal sustainability. However, employment. Thailand’s experiment is not without precedent in Thailand’s UCS has three defining features: East Asia Pacific. Both Korea and Taiwan, China, “general-revenue” or budget financing, which preceded Thailand on the path to universal health allows health services to be provided free of charge coverage by breaking with traditional social insurance or for a small payment (a copayment of B 30 or models. Korea gradually expanded coverage from US$0.70 per visit or per admission was initially 9 percent of the population in 1970 to 100 percent enforced, was lifted in 2006, and was reintroduced by the mid-1990s, and Taiwan, China, moved quickly recently); a well-defi ned and comprehensive benefits in the early 1990s with reforms that raised the level package focused on primary care, including preven- of coverage from under 60 percent to full protection tion and health promotion; and a fi xed budget with (Baeza, Montenegro, and Nunez 2002). In both cases, caps on provider payments to control costs. fiscal space created by economic growth, reliance on Critical to the labor market and the welfare of financing models with a much broader base than pay- working people and their families, the UCS achieves roll taxes, and close attention to the composition and prepayment, risk pooling, and redistribution toward eventual harmonization of the state-financed benefits disadvantaged groups—all essential elements of package were critical to their success. effective, even progressive financial protection— without the degree of distortion or exclusion created Sources: Drawing on HISRO 2012; Baeza, Montenegro, and Nunez 2002. A REGION AT A CROSSROADS 255 protection policies as well as the under- island countries are particularly constrained pinning institutions that accommodate all by great distances, which makes them very working people, there will still be market different from the small island countries of failures that leave many people without the Caribbean or Indian Ocean and con- work and underemployed or productive spires against their competitiveness even externalities unexploited. At the top of in activities where endowments should the WDR’s policy pyramid (figure 9.1) are otherwise give them a comparative advan- specific measures to address the remaining tage. While the Pacific island countries are priority challenges. As shown in chapter 7, too constrained by economic geography to for a region as diverse and dynamic as East compete in manufacturing and find it dif- Asia Pacific, these remaining challenges will ficult to process their natural resources for vary widely across countries and in the same export, managing the exploitation of these country over time. Chapters 7 and 8 discuss resources and tourism offer opportunities these challenges and propose responses in for work. As information and communica- depth. In this section, we summarize that tion technology improves and brings the discussion briefly for three categories that islands economically “closer” to distant present the most salient priority challenges markets, the opportunities for work in call in the region and show how addressing them centers and business-processing services may fits the overall approach. become more readily available. Policy mak- Before getting into the details, however, ers should focus on preparing young peo- the key message for policy makers is, “Don’t ple with the human capital they will need start at the top of the pyramid!” Too many to take advantage of these opportunities costly initiatives are launched in countries or to succeed abroad as migrant workers. with the objective of creating employment— Indeed, increasing the volume of migration often under the broader canopies of industrial to work in neighboring large markets— policy or regional development initiatives— particularly Australia, but also Northeast as substitutes for sound fundamentals and Asian countries—is the single most power- appropriate labor and social protection poli- ful measure to boost well-being from work cies. It is indeed important that governments for people from the Pacific island countries. be aware of and target remaining market fail- “Brain drain” is, of course, a concern in ures and unexploited opportunities. But they countries with such small populations, par- should do so with measures that complement ticularly where governments and donors are rather than substitute for the often more dif- paying for the formation of essential skills. ficult, less visible measures that can require However, it is far easier to manage the pros- more time to show results. The most success- pect of brain drain in a context of greater ful industrial policies (Singapore; Korea; and openness and labor mobility than to do so in Taiwan, China) benefited from the difficult, a context of restrictions. To increase human time-consuming work of building sound capital, service provision itself can become a fundamentals such as clear and protected force for employment creation when popu- property rights and universal access to high- lations are dispersed on difficult-to-reach quality basic education. islands. Small island countries Agrarian economies In small island countries, employment cre- For countries that are still mainly agrar- ation led by private enterprise is signifi- ian (particularly Cambodia, Lao PDR, cantly constrained by small and dispersed Myanmar, Papua New Guinea, and Timor- populations. Outside of niche sectors, small Leste), the policy priority for increasing size makes it almost impossible to achieve well-being from work is to raise the produc- scale economies. Moreover, the Pacific tivity of agriculture in order to free labor 256 E A S T A S I A PAC I F I C AT W O R K and human capital to work in rural off- from work, the factor market that policy farm enterprises and eventually to migrate makers should pay the greatest attention to to towns and cities. When policy makers is the market for land. Since land is the least hear the words “employment strategy,” few mobile factor of production, good urban think of boosting the skills and productiv- planning becomes the key to increase the ity of people working in agriculture. This is flexibility, efficiency, and thus the produc- a frequent mistake that can retard and pro- tivity of land use. Urban planning, includ- long the process of structural adjustment. ing urban transportation planning, becomes Most countries that grew from low to middle the area of policy making with the greatest income and beyond did so by first increasing impact on the incentives of firms in towns the productivity of agriculture and rural non- and cities to form, to grow, to move up the farm industry and services. The instruments value chain, and thus to create and sustain for increasing agricultural productivity and demand for labor and human capital. Also facilitating the structural transition are land important are urban infrastructure and ser- reform, agricultural extension programs, vice provision, to ensure that growing cities deregulation of prices, rural infrastructure, create and attract plenty of skilled people to and good-quality education and health ser- foster economies from agglomeration rather vices to build human capital. To sustain than incur burdening costs from conges- well-being from work, governments should tion. Both Japan and Korea’s examples are identify and remove policies and programs instructive in this regard and provide valu- that create implicit or explicit restrictions on able guidance for East Asia Pacific’s policy working people moving off the farm and into makers (World Bank 2008). rural nonfarm industry and to manufactur- When they reach the top of the policy ing and services in cities. China’s hukou is a pyramid shown in figure 9.1, activist govern- notorious example, but across the region, less ments will need to correct remaining market visible, but similarly costly and unjust, con- failures proactively and capture externalities straints on workers’ decisions to move are and social benefits that market forces would also prevalent. Vietnam’s experience in the otherwise avoid. This may involve taking 1990s and the first decade of the twenty-first account of the special requirements of partic- century is an often-cited example of success. ular groups of people (women, young people, The danger to be avoided is urbanization in ethnic minorities, and older people). Even spite of rather than enabled by policy, char- though countries in East Asia Pacific tend to acterized by efforts to discourage people have higher rates of female labor force par- from moving, unproductive use of land, peo- ticipation than elsewhere (Fiji, Malaysia, and ple migrating in search of better health and Timor-Leste are notable exceptions), persis- education services, cities unprepared for fast tent gender gaps in earnings and segregation population growth, and rapid divergence in in economic activity can limit the economic living standards between town and country. and development potential of countries. Also of concern is the disengagement of young people and, as people live longer, the needs of Urbanizing economies older workers. Human resources—whatever For countries that are already rapidly their gender, age, or ethnicity—are too valu- urbanizing (particularly China, Indonesia, able to lie unengaged. And if these groups Mongolia, the Philippines, and Vietnam), were fully economically engaged, they could the policy priority for boosting the quantity fuel further gains in productivity, living stan- and quality of employment is to make cit- dards, and social cohesion. ies work better. Anyone who has suffered a Some of these problems may be the con- long spell in Jakarta or Manila’s traffic will sequence of past biases in a country’s funda- appreciate this argument. Somewhat coun- mentals or factor market policies that require terintuitively in a discussion of well-being corrective action or that have left external A REGION AT A CROSSROADS 257 benefits unexploited. This is the rationale for respond to rising threats to well-being from policy measures to address very high levels of work, why might the general principles pre- youth disengagement and unemployment or sented in figure 9.1 appeal to policy makers substantial gender gaps in access to economic in East Asia Pacific countries in particu- opportunities as well as to improve the incen- lar? As a theoretical construct and descrip- tives and increase the productivity of farm- tion of a general approach, there is nothing ers. These policies address the externalities, especially “East Asian” about what has market failures, and possibly past distortions been described in the previous sections of that are not covered by the neutral policies this chapter. This said, we offer three spe- proposed in the bottom two layers of the pol- cific reasons why the approach will be more icy pyramid. appealing to policy makers in East Asia For example, in a country where most Pacific countries than to their peers in other farmers may have had few real opportuni- regions. Among these lie the priority chal- ties to gain ownership of their land and little lenges to sustaining well-being from work incentive to apply new technology, the out- in formalizing countries, the fourth country come of biased fundamentals will be low type from chapter 7 of particular relevance agricultural productivity. If this is aggravated in East Asia Pacific. by underinvestment in service provision in First, the pursuit of a neutral stance (that rural areas, people will have strong incen- is, neutrality with respect to the factors of tives to migrate to towns and cities for decent production and to the ways in which people schools and health care as well as work. But work), especially when it comes to policy this sort of migration—pushed by low agri- fundamentals, might better appeal to policy cultural output and a lack of rural services— makers’ generally more conservative ori- is more likely to add to congestion than to entation in East Asia Pacific countries than contribute to agglomeration (World Bank activist governments elsewhere. Doing noth- 2008). This is precisely the problem described ing and continuing with business as usual in last year’s Philippine Development Report are not an option. Chapters 3 and 7 and the (World Bank 2013c). introduction to this chapter suggest that the A proactive policy package to increase consequences of a “do nothing” option will land tenure, extend the use of fertilizers, sup- increasingly threaten social cohesion and, as port rural nonfarm industry, and ensure that growth moderates, constrain productivity people in rural areas have adequate schools and limit gains in living standards. Some gov- and health care would be required to undo ernments in the region have started to inter- the damage of past policy biases. Similarly, vene in the arena of labor regulations and proactive measures to encourage more social protection. But policy actions taken to women into market work, to lower the risk of improve employment outcomes by removing scarring among young people, and to encour- structural biases and taking a neutral stance age business to lower the size of their carbon toward all working people would look very footprint are likely to be justifiable, due to different from what these governments have either past policy biases or the externalities been doing. that would otherwise be left uncaptured. Second, because the history of interven- tions in the labor market and social pro- tection in East Asia Pacific countries is Why should this approach to short relative to that of countries in Latin crafting employment strategies America and Southern and Central Europe, appeal to governments in East the costs of transitioning from an argu- ably biased stance that protects only work- Asia Pacific? ers in full-time dependent employment As they face a future of moderating rates to a neutral stance that protects all work- of economic growth, as well as pressure to ing people are likely to be much lower. 258 E A S T A S I A PAC I F I C AT W O R K For example, while technocrats serving labor and social protection institutions, and in Latin American and Central European proactive measures targeted at older people governments might find the idea of pro- could create stronger incentives for people viding low, basic “noncontributory” forms to remain productive longer. Across the of social protection appealing, instead of region— particularly in the Pacific island income-replacement benefits financed from countries that, despite a “younger” demo- employer and worker contributions, their graphic profile, face a health and financial already heavily indebted governments may burden of noncommunicable diseases similar consider the transition costs of such a move to that of much “older” countries—greater to be too high. Low “legacy costs” are an emphasis on better nutrition and prevention advantage that extends from the fiscal to is likely to lengthen productive working lives the political arena: there are fewer social and ease the burden of health care costs. protection “sacred cows” in countries in the While preparing for the onset of aging, East Asia Pacific region. several governments in the region are Third, the risks of ignoring or aggravating also facing the challenges of “formaliz- biases in the current policy framework are ing” more work, in part to increase the higher for countries in East Asia Pacific due to coverage of social protection, but also to their rapidly shifting demography. In chapters sustain productivity and increase the tax 2 and 7, we presented evidence of the speed base for financing public goods. As shown at which the East Asian countries are aging. in chapter 7, in the region’s most populous The pace of this demographic wave is likely countries, the majority of people will soon to pick up in a couple of years and roll over live in towns and cities. The key principle the region faster than it has over any other. for policy making in these countries is to In China, the statistics authorities reported avoid segmentation : cleavages in factor the first ever contraction of the working-age markets that impede competition, impair population in 2012. Korea already has the labor mobility, and limit the coverage of lowest population replacement rates in the essential work risk and social protection. world. And if the average longevity of people Segmentation is caused mainly by intended in Japan is a suitable benchmark, many peo- and unintended biases in countries’ policy ple in East Asia can expect to live very long frameworks, including differences in how lives. Yet at the margin, most policy models income from different sources is taxed, rules currently in place in the region are likely to for providing credit that explicitly or implic- discourage longer working lives, constrain itly exclude self-employed people, design the productivity of older people, deprive all and financing of nonwage social protection working people of the foundational skills benefits, and recognition of only some types they need to easily re-skill throughout their of work in the labor code. lives, or discourage formal forms of work Avoiding and eliminating biases and seg- that appeal to the elderly (part-time, irregu- mentation from factor markets are essential lar hours). Structural discouragements of if countries of East Asia Pacific are to grow in longer working lives in East Asia Pacific are wealth before they have to face the more dif- nowhere near as bad as they are in Latin ficult challenges of an aging economy. This America or Southern and Central Europe, is the current quandary of several middle- where it often pays to withdraw from the income countries in Central and Southern labor force at an early age (Gill, Koettl, and Europe and in the Southern Cone of Latin Packard 2013). Today, people in East Asian America that got old before they got rich. countries work longer into old age because Their example should strike a note of caution they do not have any other choice. But this for policy makers in East Asia Pacific coun- is a poor, residual outcome, rather than the tries, where the average age of the labor force intended consequence of a coherent employ- and the share of elderly in the population are ment strategy. Better policy fundamentals, already rising quickly. A REGION AT A CROSSROADS 259 References European Economic Model. Washington, DC: World Bank. Andersen, Torben M., and Michael Svarer. 2007. 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