Practical Solutions for Addressing Labor-Related Barriers to Bhutan’s Private Employment Growth November 2017 This note provides practical solutions for addressing the labor-related barriers that impede Bhutan’s private sector employment growth.1 This note’s preparation was Bhutan has a labor force participation rate of more than 60 percent, managed by Massimiliano with approximately 414,000 people currently employed, 42 percent of Santini. The research and writing was carried out whom are female,2 and an unemployment rate of 2.6 percent, which by Anastasiya Denisova is relatively low by international standards. These figures mask pock- and Jasmine Rajbhandary, ets of greater unemployment among certain population subgroups with comments from Syud Amer Ahmed, Omar however, particularly educated urban youth, a group experiencing a Arias, Ana Paula Cusolito, was This note’s preparation 9.4 percent unemployment rate. In addition to being more likely to be Anupa Aryal Pant, Daniel managed by Massimiliano unemployed, these younger workers are also more likely to be work- Reyes, Oleksiy Santini. Sluchynskyy, The research and writ- was Strokova, Victoria ing Mauro carried out by Anas- ing only part-time, with about 1.9 percent of those ages 19 to 24 work- Testaverde, tasiya and Michael Denisova and Jasmine ing fewer than 35 hours per week. Rajbhandary, Trucano. The teamwith comments from Victoria gratefully Strokova, Oleksiy acknowledges Sluchynskyy, the comments Omar Arias, and Mauro advice Bhutan’s working age population is increasing just as the public sector’s absorption Testaverde, Anupa Aryal Pant, provided by reviewers capacity is diminishing, making it more important than ever that the private sector Keiko Inoue, Michael Trucano, Andrew Beath, Keiko Inoue, Ana Paula Cusolito, Syud Amer creates quality jobs. A truly effective employment policy must also address the ability and Ahmed,Robert Palacios. and Daniel Thanks Reyes. of the private sector to access the workforce it needs for growth. to Susan Boulanger for copyediting and Shepherd Inc. for the design. Lastly, the team would like to 1 This note was prepared at the request of Bhutan’s Ministry of Economic Affairs (MoEA), in collabora- thank the World Bank Group tion with the Ministry of Labor and Human Resources (MoLHR). It builds on the recent reports Bhutan’s country office in Thimphu, Labor Market: Towards Gainful and Quality Employment for All (MoLHR and WBG 2016) the Investment Bhutan, for all the support Climate Assessment of Bhutan (Santini, Tran, and Beath 2017), and from additional input from MoLHR. provided. 2 Based on data from the World Development Indicators Database and the Bhutan Labor Force Sur- veys from 2014 and 2015.  1 Practical Solutions for Addressing Labor-Related Barriers to Bhutan’s Private Employment Growth According to the analysis in the Bhutan Enterprise Survey Government of Bhutan (RGoB) has already made impres- (BES) of 2015 (MoLHR and WBG 2016), the main labor- sive investments to strengthen its TEVT programs, some related constraints to private sector employment growth with input from the Japan International Cooperation are: (i) lack of workers with relevant experience and skills, Agency and the United Nations Educational, Scientific, (ii) restrictions on employing non-Bhutanese workers, and Cultural Organization (UNESCO). As of 2014, eight and (iii) lack of interest among Bhutanese workers in pri- Technical Training Institutes (TTIs) operated under the vate sector employment opportunities, which is closely Ministry of Labor and Human Resources (MoLHR), with linked to the low quality of the jobs offered. 1,405 students and 140 instructors (Bhutan 2014a). Private institutions also provided vocational training in computer This note draws on international experience from com- programming, hospitality, and tourism. parable settings and identifies potential solutions to the constraints listed above: (a) improve the popula- Other important steps have also been taken. Under a joint tion’s work skills to better align with market needs and effort by the Ministry of Education (MoE) and MoLHR, for to boost productivity; (b) balance local and foreign example, the Vocational Skills Development Curriculum employment; and (c) increase the attractiveness of pri- (VSDC) for classes IX and X was created and piloted in vate sector jobs by extending critical benefits (primarily five schools located near TTIs.3 MoE, in addition, took the pensions) to its workers. Part A of this note addresses the important step of developing its Vocational Qualifications need to improve the skills of Bhutan’s working popula- Framework in collaboration with UNESCO. tion, focusing on four avenues to create a stronger work- force: expand vocational training to be more responsive Two new government-run training programs were insti- to employers’ needs; strengthen ICT training programs; tuted in 2014 under the Employment Skills Scheme (ESS): develop soft skills training modules at all educational the Youth Employment Skills Initiative (YES), targeting class levels; and improve opportunities for on-the-job train- X and XII job seekers, and the Graduate Skills Program ing. Part B explores employers’ ability to hire workers with (GSP), targeting university grads. Both programs rely on immediately needed skills by accessing foreign labor performance-based contracts (but with slightly different markets (see Santini, Tran, and Beath 2017) and balancing terms) and include skills in both information and commu- the Bhutanese and non-Bhutanese workforces by using nications technology (ICT) and soft skills (such as the ability approaches including occupational shortage lists, exten- to work in teams). As of September 2016, YES has surpassed sion of the minimum wage to non-Bhutanese workers, by more than 10 percent its target of 500 trainees. and a focus on skill and technology transfers from foreign workers. Part C investigates potential ways that a pen- In the formal education system, the Bhutan Education sion system designed to meet the needs of private sector Blueprint 2014–2024 prioritizes dynamic, relevant, and employees can help make private sector positions more contemporary curricula (Bhutan 2014a). Schools’ cur- appealing to Bhutanese workers. ricula have recently been updated to include soft skills, ICT, health, and other contemporary subjects. The Royal University Board, which develops university curricula, has A.  Improve the Skills of also been considering major changes. the Working Population Several approaches can lead to improved skills among 3 Both TEVT (through TTIs) and VSDC address vocational training Bhutan’s working population, including improvements to needs. The difference between the two lies in the ages and education levels of the groups they target, with VSDC addressing the needs of the formal education system and to the technical educa- secondary school students and TEVT addressing the needs of those tion and vocational training (TEVT) programs. The Royal who have completed their secondary education or dropped out. 2  Practical Solutions for Addressing Labor-Related Barriers to Bhutan’s Private Employment Growth Despite these important policy steps, room for improve- the policies developed achieve broader and longer last- ment remains. An assessment of the VSDC pilot in 2014, ing impact. for example, found that it had failed to attract significant numbers of students due to inadequate financing and 1.  Improve the responsiveness of vocational the inability to overcome potential students’ perceptions training to private sector needs that vocational training provided a “second class educa- Two elements are usually required to ensure that job tion” (Bhutan 2014a). Furthermore, a tracer study of TTI training aligns with the needs of the private sector: alumni conducted by MoE found that the TTIs had not adequately equipped their graduates for private sec- ■■ Market-driven selection of trade occupations tor jobs (Bhutan 2012) and that unemployment among ■■ Performance-based contracts for training them was therefore relatively high. Finally, nonfarm pri- providers vate sector firms continued to perceive lack of adequate skills, including both soft skills and computer and other The first element requires either (i) rapid market appraisal technical skills, as an obstacle to growth. or (ii) in-depth market analysis to reveal the trade occu- pations most likely to lead to career growth, or some This note proposes a fourfold approach to better aligning combination of both.5 The programs featured in Table 1 the skills of Bhutanese youth with labor market demand: combine both approaches. (1) further improve the responsiveness of vocational training to private sector market needs;4 (2) strengthen Given that unemployment in Bhutan is particularly high ICT-specific modules in both formal and vocational among educated urban youth (almost 9.5 percent), education; (3) introduce soft skills modules into formal a stronger focus on job skills training that can lead to education and vocational training; and (4) strengthen on- career growth is needed. McKinsey Generation has effec- the-job training modules to ensure workers’ continued tively used this approach with a target population simi- ability to adopt new technologies and operate at maxi- lar to Bhutan’s. The McKinsey Generation targets trade mum productivity. occupations in a given market structure that studies have shown are most likely to lead to a career progres- This note discusses skills shortages at a very broad level. sion in a company or industry. In Mexico, for example, Further policy development regarding the job skills of McKinsey Generation chooses cashiers for their training Bhutanese youth would benefit from an in-depth assess- because cashiers are highly likely to eventually become ment of the specific skills required. Currently available store managers. McKinsey Generation also includes trade data at the national level indicates that employers iden- occupations that, with further education, can lead to skill tify shortage of skills as a constraint (MoLHR and World upgrades (for example, nurses, nursing assistants, or MRI Bank 2016), but for a skills development policy to succeed technicians). In other words, the focus of the training is in the long term, a firm understanding of what skills are not just on giving participants a job; it is also intended to missing (for example, technical, socio-emotional, or cog- give them careers. nitive) is essential. A comprehensive assessment of the skills demanded by Bhutan’s employers will help govern- Most importantly, because Generation carefully selects ment officials to better align the formal education and trainees and prepares them for long-term positions, 75 to training systems with real demand, thus ensuring that 84 percent of employers (depending on the country and 4 Universities can also play a role in upgrading workforce skills and should be encouraged to do so. This note, however, focuses on the 5 For advanced OECD economies, in-depth studies also identify skills TEVT system (which is more likely to fall under the MoLHR mandate) needed for long-term economic growth, given technological progress and leaves the discussion of changes in formal tertiary education for and automation. See http://www.skillsforemployment.org/KSP/en/ future consideration. Details/?dn=WCMSTEST4_171460).  3 Practical Solutions for Addressing Labor-Related Barriers to Bhutan’s Private Employment Growth Table 1: Examples of Skill-Building Interventions with Strong Market Links Intervention Location Target Group Content Outcomes Key Relevant Features Adolescent Girls Nepal Urban and Short-term technical 20% increase Progressive payment Employment semi-urban and business skills in likelihood of structure in performance- Initiativea youth ages training employment based contracts 16–24 from disadvantaged 20% increase in hours backgrounds employed 45–82% increase in monthly earningsd McKinsey Spain, Kenya, Unemployed Short-term technical 90% placement Focus on positive return Generationb USA, Mexico, youth in skills training rate with about on investment for both India targeted 80% of graduates employers and students countries retaining their jobs three months after Selection of occupations placement that can lead to long-term career development and 4–6 times increase in growth income 94–100% of employers willing to hire a Generation grad again Apprenticeship Brazil Urban youth Long-term on-the- 5% increase in Financed by firms Programc (14–24), both job training with probability of being receiving government tax in and out of additional classroom employed in the long exemptions for having school instruction term (2–3 years after apprentice workers the program) Added flexibility in 2% increase in hourly terminating contract wage apprentices in cases of nonperformance Notes: a Chakravarty, Lundberg, Danchev, and Zenker 2016. b Jaffer and Mourshed 2017; Mourshed 2015. c Corseuil et al. 2012. d The 2010 cohort had an increase in monthly earnings of 45–67 percent; the 2011 cohort had an increase in monthly earning of 67–82 percent. industry) attest that they do, in fact, save money on hiring usually three to six months after trainees complete the and training by using Generation graduates. Participants program) a percentage of the total fee due to them. After are trained only for positions that firms find essential, and verification of the trainees’ wage employment or income thus the firms are willing to contribute financially, some generating activities, the balance of the fee is paid. providing up to 30 percent of training costs. This model thus not only helps to defy the myth of a “second class” This method is employed by both the YES and the GSP education, it also introduces beneficial cost sharing. programs in Bhutan. YES reserves 100 percent of the pro- vider’s payment until trainees are successfully placed in An approach not followed by Generation but still useful in jobs, and GSP splits the payment into two tranches of aligning training with private sector needs is the perfor- 50 percent, with the first portion disbursed regardless of mance-based contract. In most cases, these agreements placement success. involve withholding from the training institution (for 4  Practical Solutions for Addressing Labor-Related Barriers to Bhutan’s Private Employment Growth Box 1: Selectivity and Potential Weaknesses of Performance-Based Contracts Training efforts face an inherent trade-off between the provider’s alumni. Potential collusion can be addressed either desire to increase the reach of skill-building programs and by (i) creating a system in which training is partially financed the need for such programs to signal to potential employers by the prospective employers needing the labor, with cost the high quality of their trainees and curriculum. To result incentives for hiring trainees from vulnerable backgrounds; in long-term wage increases, all else being equal, course or (ii) creating a system in which training is partially financed completion certificates must clearly represent to employ- by a private labor intermediary, who is then responsible for ers the programs’ quality standards and its trainees’ abili- the trainee’s job placement. ties. Similarly, any national certification program should be Finally, if trainees receive training free of charge, or receive demanding enough to attest to the certificate holder’s fit- a stipend for taking the training, collusion can be further ness to perform the particular trade. For this reason, selec- perpetuated because alumni will not be invested in receiving tion of trainees based on their abilities remains important. higher earnings post-completion. They will have no incen- It is this criterion that has helped ensure the success of AGEI tives to inform relevant authorities or other prospective par- and Generation as compared to programs not using thorough ticipants about concerns over the quality of the training (no selection processes. reputational effects) or to complain about low-quality train- In addition, while performance-based contracts for training ing or collusion between training providers and employers. providers create incentives to tailor training to the current Thus, selectively awarding training stipends (based on need needs of the labor market, such contracts may also facili- and ability) or substituting stipends for subsidized training tate collusion between training providers and employers. For loans could be a first step toward reducing potential collu- example, in return for a share of the provider’s fee for trainee sion between training institutions and the private sector. placement, firms might employ (or register as employed) a Performance-based contracts are a promising tool, but is essential to ensuring that training conducted under more attention should be given to their structure to these contracts achieves the desired outcomes. ensure their enforceability and to create appropriate incentives to encourage trainers to take on the riskier The structure of the performance-based contracts used in trainees. The more restrictive the performance-based the Adolescent Girls Employment Initiative (AGEI) in Nepal contract, the more likely it will lead to negative effects provides a good example of a well-conducted implemen- in terms of trainee selection. If 100 percent of payment tation that successfully addresses these concerns. More depends on trainees’ employment at a specified time specifically, AGEI demonstrates that combining a results- after training, for example, the provider will likely be hesi- based system with a progressive incentive scheme can tant to enroll hard-to-place students (such as those fac- ensure that training providers capable of working with ing prejudice due to gender, caste, or economic status). vulnerable groups will opt to do so. At the same time, the In addition, the more weight such contracts place on the alternative approach of offering a bonus based on place- employment outcome, the more difficult it might be to ment outcome, as opposed to withholding a part of the attract training providers (and subsequently to enforce payment, is gaining some traction, particularly in training the contract in cases of nonperformance). The timing programs in Eastern Europe and Central Asia. specified for employment verification matters as well, because training providers and employers may collude to The Employment Fund (an implementing partner for the employ trainees until the verification date has passed but AGEI program) used a differential pricing mechanism then let them go. Finally, to be completely effective, the that awarded higher incentives to service providers that performance-based contract must clearly define what agreed to train (and place) individuals from groups con- is meant by quality employment or employment at the sidered more disadvantaged according to established time of verification; shared understanding of these terms vulnerability criteria. The highest incentive was awarded  5 Practical Solutions for Addressing Labor-Related Barriers to Bhutan’s Private Employment Growth for training and placing the most disadvantaged (such as Ghana, and successful projects implemented in both highly vulnerable women, widows, ex-combatants, and countries are described in this section. disabled women), and incentives gradually decreased for less prioritized groups (AGI 2016). In addition to encour- Santini, Tran, and Beath (2017) identify ICT as a sector aging training providers to take on those at higher risk with high growth potential. Bhutan currently has a high of failing to achieve the desired employment outcome, level of ICT development, and the country is strategi- higher fees for vulnerable target groups enabled training cally placed to further deepen the ICT expertise of its providers to expend more resources to help them. labor force through partnerships among academia and the public and private sectors, and through incorpora- Where the tax system functions well and is strongly tion of specialized and general ICT training into its for- enforced, tax breaks to firms can serve as incentives mal schooling programs. As an initial step, Bhutan might for providing on-the-job training programs for stu- capitalize on technology transfer through public-private dents in classroom technical training programs. A well-­ partnerships with foreign universities and private sector documented case using this approach comes from companies at the tertiary and technical education levels. Brazil, where it was combined with relaxation of restric- This approach was taken by Singapore’s Industrial Train- tions on firing temporary workers from trainee programs. ing Board (ITB; now the Institute of Technical Education This approach helps better align skills training with pri- (ITE), by Hyderabad’s International Institute for Informa- vate sector needs. In terms of long-term employment tion Technology (IIIT), and by similar entities in Malaysia of targeted youth in the private sector, however, results and Bangladesh (see Table 2). have been mixed. Trainees’ probability of employment increased in the long term (measured as 24 months after The government’s initial provision of financial incen- program completion), and their earnings improved by a tives for participation can help mitigate the associated few percentage points compared to a control group, but risks for both Bhutanese and non-Bhutanese universities. on the other hand, no evidence shows that apprentices Similarly, initial government investment would support remained employed by the formal sector longer than did procurement of and continuous upgrades to the equip- regular temporary workers. Thus, although it is an inter- ment needed by the targeted universities. IIIT in Hyder- esting model, it should serve only as a starting point for abad, as intended under the model’s design, successfully developing plans based on employer-financed training used government financing at the initial stages before for new workers. becoming self-sustaining. The key to this transition was building strong incentives to align training and research 2.  Introduce and strengthen ICT-specific with the needs of the private sector companies. ITB in training modules in formal and vocational Singapore also successfully graduated from government education financing. Bhutan’s Education Blueprint and the iSherig ICT plan focus on specialized education in information and com- The model of a close partnership between academia and munication technology and on incorporating ICT into the private sector could be used to grow the domestic classrooms (Bhutan 2014b). This note suggests building venture capital industry too. Armenia’s E-Society and on this foundation to further strengthen Bhutan’s ICT Innovation for Competitiveness Project ensured this out- capacity, which can be particularly beneficial for Bhutan come through a venture capital fund model that allowed since its geography presents challenges to engaging in for growth in both domestic ICT capacity and the local non-ICT exports. For example, growth of ICT as a main venture and ICT consumer markets. export sector was a key objective for both Armenia and 6  Practical Solutions for Addressing Labor-Related Barriers to Bhutan’s Private Employment Growth Table 2: Examples of Interventions Aimed at Increasing ICT Skills Intervention Location Content Outcomes Key Relevant Features Industrial Singapore Industry-led training advisory Tata's precision engineering Close collaboration with Training Board committees plant established in Singapore both academia (for example, (ITB)a following its partnership with Carnegie Mellon University) ITB and the private sector Government/private sector partnerships for attracting IT businesses The Hyderabad, Industry-specific institute Corporate-specific training Initial state support for an International India and recruitment (IBM, Signal industry-oriented university, Institute of Tree, Motorola, Oracle, Dell, with the goal of becoming self- Information GE, and Satyam) sustaining Technology (IIIT)b Partnership with firms to offer company-specific training e-Ghana Projectc Ghana ICT project with a component 4,300 additional jobs created Ecosystem approach focused on development of in the ICT and IT-enabled skills needed for business- services (ITES) sector Close link between ICT skills process offshoring and business needs (through 8,700 people employed by ICT start-up incubation) and ITES sectors at project closure E-Society and Armenia Support for technology 7,495 more people employed Focus on fostering domestic Innovation for entrepreneurs throughout the by ICT/ITES sectors IT entrepreneurship, including Competitiveness incubation cycle start-up financing Projectd 350–400 direct jobs created, of which 220–250 are IT/ITES Expansion of domestic specialist jobs Internet services consumer base by providing training for elderly population Notes: a Sudan et al. 2010. b Ibid. c World Bank 2015b. d World Bank 2016a. The e-Ghana Project focused primarily on developing 3.  Introduce soft skills modules in formal ICT capacity for business-process offshoring, which high- education and vocation training lights the importance of considering the ICT ecosystem Employers cite the lack of job-specific socio-emotional as a whole. Working with regulations, standards, skills, skills as at least a moderate obstacle to their operations, businesses, and Internet service providers can ensure the and the importance of socio-emotional skills will continue connectivity essential for successful domestic ICT entre- to grow as mechanization increases (World Bank 2016d). preneurship. Because of the trade-off with project com- Many employers report needing workers with greater plexity, however, thorough gap analysis should precede leadership and teamwork skills, and 35 to 40 percent of evaluation of and changes to the ICT ecosystem.  7 Practical Solutions for Addressing Labor-Related Barriers to Bhutan’s Private Employment Growth Future Workforce Current Workforce Technical Technical Socio-emotional Socio-emotional Job-relevant Cognitive Job-relevant ICT Socio-emotional ICT Occupation-specific ICT New skills? Cognitive New skills? What skills? Socio-emotional For whom? Infants Children and youth Young and mature adults Intervention? Education & Training Short- & Long-Term Training Goal? Creativity, innovation, citizenship, employment . . . Employment, firm productivity, technology diffusion . . . Figure 1: Skill Development Throughout the Lifecycle Source: Arias, Roseth, and Valerio 2016. the nonfarm private sector firms surveyed in BES 2015 introduce soft skills training at various educational stages. reported insufficient problem solving, critical thinking, Three promising interventions are Construye T (Villase- or leadership skills among their employees. In addition, nor 2015) in Mexico, Girls First (Leventhal et al. 2015) in employers at one-fourth of firms surveyed found employ- India, and McKinsey Generation globally, all of which ees’ teamwork skills to be below their requirements make innovative use of online technology, a participatory (MoLHR and WBG 2016). Like ICT skills, socio-emotional approach, and skills reinforcement through continued skills should be taught at various education levels (see supervision and mentorship (see Table 3). Figure 1). A recent work by Guerra, Modecki and Cun- nigham (2015) provides a thorough mapping between The use of online technology makes wide-reaching inter- various socio-emotional skills and stage of life.6 This sec- ventions cost effective and can be particularly useful in tion pre­sents a range of examples of how to incorporate countries with challenging terrain and difficult to reach socio-­ emotional skills training into children’s and adoles- areas. Construye T, implemented by the United Nations cents’ formal schooling and postgraduates’ ongoing tech- Development Programme (UNDP) and the Mexican nical training. Both approaches are relevant for Bhutan. Ministry of Education, successfully uses webinars, online training, and other online resources to improve both Given how recently skill improvement programs have the quality of teaching and the psychological climate in focused on socio-emotional training, evidence about schools. Construye T trains teachers from participating successful interventions is scarce. Despite the need for schools to incorporate socio-emotional skills into the further rigorous impact evaluations, however, some curriculum using easily accessible 15-minute lessons. In ongoing projects provide good examples of how best to just one year, the project reached 2.6 million students in 4,000 schools, and participants have viewed it positively 6 See Guerra, Modecki, and Cunningham (2015) for a mapping of (Villasenor 2015). the ages and contexts in which various socio-emotional skill subsets develop. The paper uses as its base a list of the socio-emotional skills that employers value, classified into eight subgroups, and then relies Based on learning from these programs, the partici- on psychological research (drawing from the concepts of psychosocial patory approach seems to be the key for success in and neurobiological readiness and age-appropriate contexts) to arrive emotional training. Construye T offers brief online socio-­ at the mapping. 8  Practical Solutions for Addressing Labor-Related Barriers to Bhutan’s Private Employment Growth Table 3: Examples of Interventions to Build Socio-Emotional Skills Intervention Location Target Group Content Outcomes Key Relevant Features Construye Ta Mexico School students, Web-based tool for 2.6 million students in Online technology used teachers, and incorporating socio- 4,000 schools reached to improve socio- principals emotional training into within one year of emotional skills regular classroom lessons program initiation Girls Firstb India Adolescent girls Long-term participatory Improved emotional Curriculum designed (attending school) socio-emotional skills resilience, self-efficacy, to be culturally flexible training and socio-emotional and scalable, while the assets framework (session sequence/length, topics, Significant long-term pedagogy) remains improvement in three constant key aspects: depression, anxiety, and social well- Methodology relies on being participatory approach, support group formation, and practice and role play Notes: a Villasenor 2015. Also see https://blogs.iadb.org/education/2015/04/15/social-emotional-skills/ and http://s3award.com/campaign/ detail/4756 for further description of program and results. b Leventhal et al. 2015. training modules, which are introduced by participating McKinsey Generation stands out in this regard because teachers. Girls First uses a structured modality in which a prior to deploying its training program in a new location, skill is explained, practiced, and then discussed in a group it assesses each occupation it will address to identify the setting. McKinsey Generation conveys socio-emotional specific skills, termed “breaking points,” most relevant to it skills through role play, which many Generation alumni (Mourshed 2015). have anecdotally reported finding beneficial (Generation 2017). 4.  Strengthen on-the-job training and technical support provided to SMEs Follow-up and mentorship are other key elements The productivity of Bhutanese workers improved of these three programs. Construye T includes socio-­ between 2009 and 2015 and is now one of the highest emotional training continuously throughout the years in the region (see Figure 2). Recent research indicates, of formal education. Formation of peer support groups, however, that Bhutanese firms still face constraints in leading to ongoing discussion and sharing of experience hiring workers with the right skills and experience for and advice, is central to the Girls First program (Leventhal their needs.7 Nearly 60 percent of manufacturing firms, et al. 2015). McKinsey Generation supports its trainees for example, reported as a significant constraint to their through formal mentorship programs and postgradua- operations the limited availability of workers with previ- tion check-ins. ous industry experience. Similarly, close to 40 percent of small- and medium-sized firms saw lack of skilled work- The further success and relevance of socio-emotional ers as a constraint to their operations (compared to only skills programs for participants’ future employment about 23 percent of large firms) (MoLHR and WBG 2016). will depend on accurate assessments of the soft skills most critical to effective performance in the specific 7 For a more nuanced discussion of worker productivity, see Santini, occupations for which trainees are preparing. The Tran, and Beath 2017.  9 Practical Solutions for Addressing Labor-Related Barriers to Bhutan’s Private Employment Growth These concerns could easily be addressed by strengthen- 2.3 5.1 ing on-the-job training programs for existing employees. 18.3 Such programs allow firm owners to hone the skillsets of 1.2 their employees to ensure they match their requirements; 3.2 1.2 they also contribute to the companies’ ability to upgrade 10.8 technology. This in turn can help increase the attractive- 0.4 ness of private sector employment. 0.7 0 5 10 15 20 Levels of on-the-job training in Bhutan are currently low, Median value added (in US $1,000) per worker which may be explained by the need to improve pro- Bhutan 2009 Bhutan 2015 Botswana 2010 gram design and financing. Skills at multiple employment Costanca 2010 India 2014 LaoPDR 2012 Mauritius 2009 Nepal 2009 Nepal 2013 levels should be addressed, including helping managers to build their own skills in fostering teamwork and profes- Use 2010 prices sionalism (Santini, Tran, and Beath 2017). Only 14 percent Figure 2: Median Value Added of a Bhutanese Worker of Bhutan’s firms offer worker training, a rate significantly between 2009 and 2015 below the regional average. Nearly 80 percent of firms Source: Santini, Tran, and Beath 2017. not offering training report not needing it. Yet many of these same firms complain about the inadequate skill levels of their existing employees. This puzzle might be explained by the inadequate supply of on-the-job training Table 4: Examples of On-the-Job Training Programs for Existing Employees Intervention Country Target Group Content Outcomes Key Relevant Features Manufacturing United SMEs paying into Public-private 2,654 jobs created or Menu of public-private Extension States of the Unemployment partnership providing retained partnership funding Partnership America Insurance System and customized business options (MEP)a that pay the Employer needs assessment and Training Tax on-site training Training Republic SMEs SME associations More than 80 percent SME-wide mandatory Consortium of Korea providing needs increase in worker levy (TC) Pilotb assessments and productivity facilitating necessary Utilization of training for member Increased use of economies of scale SMEs machinery by SMEs to address firms’ HR and reduced waste and constraints defective products Skills Ghana Semi-skilled and skilled Training partially 60 percent increase Demand-driven Development workers in formal financed by the in productivity of training with the clear Fund (SDF) sector firms and firm government and participating firms goal of increasing (Window 1)c associations provided to formal productivity firms on a competitive 62 percent of basisa firms adopted new technologies Notes: a Jones et al. (forthcoming). b Lee 2009. c World Bank 2016b. 10  Practical Solutions for Addressing Labor-Related Barriers to Bhutan’s Private Employment Growth programs or by the perception that existing on-the-job consortiums of 30 to 50 SMEs to which the Chamber of training brings low returns. Disseminating information on Commerce, in collaboration with the Ministry of Employ- examples of relatively successful training programs could ment and Labor and training experts, provides seconded help mitigate these concerns. A few effective programs training managers and technical assistance. The SMEs are outlined and discussed in Table 4. thus gain access to a training manager, a resource they could not otherwise afford. In addition, when enough While the potential benefits for both employers and SMEs in the same sector have similar training needs, TC employees are great, on-the-job training for existing enables them to tap into economies of scale. Experience employees has not been rigorously evaluated. It also with expanding the TC model, however, indicates that remains underutilized, particularly among less success- the consortiums should not grow too large and that the ful firms and those not focused on export (Saraf 2017). member firms should, to the extent possible, come from One explanation may be that on-the-job training in com- the same industry. petitive industries by default becomes a public good, because trained employees may leave for better positions Finally, firms investing in worker training—often involving at competitor firms. All three of the programs in Table 4 periods of worker absence from the workplace—must therefore have in common public or public-private part- be confident that the training will yield post-training nership financing, relying on specific tax revenue with, in productivity increases sufficient to justify the short-term some cases, matching grants from the companies.8 One productivity loss. The approach taken by SDF in Ghana financing solution, therefore, would be to create employ- reassures employers by giving firms a clear vision of ment training funds financed by a training tax in sectors how specific training translates into higher productivity. with a high proportion of formal firms paying labor taxes Although firms in all three programs described in Table 4 or contributing to employment insurance. This model is experienced increased productivity and technological used by the Manufacturing Extension Program (MEP) in upgrades, SDF is the only model that put on-the-job the United States and by the Training Consortium (TC) training at the forefront. Program in the Republic of Korea. The high degree of formalization of nonfarm private sector firms in Bhutan could make this financing approach workable. The MEP B.  Balance Local and program also offers a range of public-private financing Foreign Employment tailored to each client’s training needs and the level of expense required to meet them. Reform of regulations regarding foreign labor could ease constraints on firms’ operations. To preserve RGoB’s objec- Bhutanese SMEs are most affected by the lack of skilled tive of self-reliance, as outlined in the Eleventh Five Year workers, and these firms are also less likely to have the Plan, local and foreign employment should be balanced, capacity to hire a human resources training manager especially where foreign employment can help address or to benefit from the economies of scale that larger labor and skills shortages or promote technological trans- companies enjoy. Korea’s TC program provides a useful fer (Bhutan 2013). example of an effective response to this issue. The TC Pro- gram (financed by a training tax) encourages creation of As of June 30, 2015, Bhutan had a total of 44,744 for- eign workers, including hydropower workers, more than 8 The only exception is the Ghana program, which depends on donor 90 percent of whom were from India (Bhutan 2015). That funding that subsequently could be replaced by government financ- number approached the government-approved ceiling ing. In the case of Bhutan, this expenditure can also be supported by the increased government revenue from hydropower using the social of 45,000 foreign workers and represented about 10 per- welfare fund model employed by Chile, Mongolia, and Norway. cent of the labor force at the time (Bhutan 2015). BES  11 Practical Solutions for Addressing Labor-Related Barriers to Bhutan’s Private Employment Growth 2015 indicates that 30 percent of nonfarm private sector private sector firms from getting timely access to the workers were not Bhutanese citizens. workers they need for growth. Yet BES 2015 also shows that almost 20 percent of non- BES 2015 suggests that foreign workers are largely com- farm private sector firms find restrictive immigration rules plementary to the Bhutanese workforce. Foreign work- at least a moderate obstacle to their operations (MoLHR ers, for example, tend to be less educated and to work and WBG 2016), and in the manufacturing sector, a quar- for lower wages than do the generally more educated ter of the firms found restrictions on immigration inhib- Bhutanese workers. The government takes measures to iting. In terms of firm size, almost half of the medium further ensure complementarity between the Bhutanese enterprises (49 percent) and more than a half of the and foreign workforces, including permanently closing large enterprises (54 percent) reported that immigration some occupations to non-Bhutanese workers and only restrictions were at least a moderate obstacle. Further- allowing firms to hire non-Bhutanese workers if advertis- more, current regulations restricting foreign recruitment ing for qualified Bhutanese workers failed to find any. are likely hurting foreign firms in sectors with high growth potential, such as tourism and ICT, by limiting their ability Worker protection minimum wage regulations currently to secure necessary skilled labor.9 apply only to Bhutanese workers, making foreign workers automatically much cheaper. Paying lower wages to for- As mentioned, a quota on the number of foreign work- eign workers benefits Bhutanese employers, but it can also ers helps protect Bhutanese workers from competition negatively affect the growth of minimum wages for Bhuta- with cheaper foreign labor. This quota, established and nese workers, allow survival of low productivity enterprises, enforced by the MoLHR, is not skill-level specific (Santini, and discourage employers from looking for less labor- Tran, and Beath 2017) however, and it is not distributed intensive production alternatives, such as mechanization. evenly across all employers in Bhutan. The permitted number of foreign workers is higher for companies con- This note proposes three main approaches to ensuring tracted on government projects, for example. A construc- that foreign employment is used to address labor short- tion company working on a government project can pay ages and to effect technological transfer: (i) use a skill- up to 30 percent of its total wage expense to foreign specific occupational shortage list to simplify the process workers, while a company working on residential or per- of hiring foreign workers where necessary; (ii) extend sonal construction can pay no more than 5 or 12 percent the minimum wage to foreign workers to prevent wage of all wage expense to foreign workers. In addition, due to suppression and to ensure the technological upgrading quotas favoring government and international projects, and competitiveness of Bhutanese businesses employ- the smaller businesses likely most in need of low-skilled ing foreign workers; and (iii) focus on skill and technology foreign workers may not have access to them. Because transfer by hiring highly skilled foreign workers and using the quota is not skill-level specific, it also hinders firms in “twinning” and “secondment” programs. (Secondment is some sectors, such as ICT and tourism, from hiring essen- a temporary assignment of a member of one organiza- tial skilled foreign labor (Santini, Tran, and Beath). Finally, tion to another to provide training and share experience however well considered foreign worker quotas may [Cunningham, Dawes, and Bennet 2004]. Twinning refers be, if they are not updated frequently, they can impede to collaborative pairing of world-class institutions with institutions in the developing world to exchange knowl- 9 Santini, Tran, and Beath (2017) find that while foreign investment regulations prescribe greater flexibility for foreign firms, such policies edge and strengthen the capacity of the latter.) seem not to have been applied. Investors, rather, indicate that they are subject to the standard regulations and thereby limited in recruiting skilled foreign labor. 12  Practical Solutions for Addressing Labor-Related Barriers to Bhutan’s Private Employment Growth 1. Use occupational shortage lists to ensure necessary investment in education and training. Skills- complementarity of foreign workers based lists encourage both the government and the private sector to consider labor alternatives, such as Use of evidence- and validation-based systems to deter- mechanization, and they reduce the risk that low-skilled mine areas of labor shortages that cannot be filled with migrant laborers will slow down the speed of technologi- local workers can improve the process for hiring foreign cal upgrading (Testaverde et al. 2017). At the same time, workers (see Table 5). The advantages of using shortage skill-specific quotas enable firms (both Bhutanese and lists, as compared to the current system, include the fol- foreign owned) to quickly access necessary high-skilled lowing: (i) shortage lists signal transparency in the migra- talent from abroad. tion process and assure citizens that migrants do not threaten their jobs; (ii) lists improve process efficiency, Effective use of this approach depends on data availabil- especially if they are regularly updated and provide labor- ity and the strength of labor-market monitoring systems. market test exemptions; and (iii) lists can accommodate At a minimum, regularly updated sources for the follow- broader economic and social objectives. Shortage lists ing information are needed: (i) employment and jobs are usually publicly accessible, making the recruitment (derived from labor-force and industry surveys); (ii) wage process more transparent for both domestic and foreign trends (from the same sources); and (iii) vacancies (tracked workers. In addition, some countries, such as the United based on applications submitted for review to the Labor Kingdom, use lists to allow firms to skip local advertis- Recruitment Commission). In addition, a mechanism is ing requirements before filling a position with a foreign needed to update the shortage occupations list regularly worker. If lists are regularly updated, they can be the basis so that the system remains responsive to private sector of an agile system that responds quickly to private sector demands. business needs. Another solution, proposed by Santini, Tran, and Beath The process of creating a shortage list provides an oppor- (2017), uses a separate high-skill-specific quota, akin tunity for debate among stakeholders, which can in to H1-B visa system in the United States. This has the turn produce clear signals to the government regarding Table 5: Examples of Use of Skills Shortage Lists Program Country Skill Level Key Relevant Features Consolidated Australia High skilled Focus on skilled migration with a view toward medium- and Sponsored long-term skills and economic growth needs Occupations Lista Shortage United Kingdom High, semi-, and low-skilled Regular updating Occupations Listb Combination of labor market analysis and stakeholder consultations Critical Skills Malaysia High and semi-skilled Regular updating Monitoring Committee (CSC)c Combination of labor market analysis and stakeholder consultations Immediate Skill New Zealand High, semi-, and low-skilled Geographic-area specific Shortage Listd Notes: a http://www.visabureau.com/australia/consolidated-sponsored-occupation-list.aspx. b http://www.visabureau.com/uk/shortage-occupations-list.aspx. c http://www.talentcor.com.my/facts-and-figures/critical-occupations-list. d http://skillshortages.immigration.govt.nz/immediate-skill-shortage-list.pdf.  13 Practical Solutions for Addressing Labor-Related Barriers to Bhutan’s Private Employment Growth significant advantage of not requiring constant updat- actively implemented equal pay in its Employment Per- ing to reflect specific occupation- or skill-specific labor- mit System (EPS), which controls temporary low-skilled market data. Its disadvantage, however, is that the hiring employment. EPS workers in Korea not only receive at process is more time consuming for firms, which must least the local minimum wage, they are also covered show that they cannot hire local workers. In addition, as by several social policies (including pensions, where rel- with any quota system, H1-B is often criticized for limit- evant). This ensures that employers do not hire foreign ing access to foreign skilled labor. In the United States, workers merely as a cheaper alternative to domestic ones. for example, the number of applications from firms sur- passes the allotted number of visas on a regular basis. If In addition, extending minimum wage protection to for- lists of critical occupations are not updated in a timely eign workers lowers the risk that foreign workers will slow way, the system will fail to deliver necessary skills to firms. down the speed of technological upgrading or support inefficient enterprises. If foreign workers are paid at least Both approaches highlight the need to develop a labor- the minimum wage for a given occupation, the hiring market information system (LMIS) capable of aggregat- firm must make the same cost-benefit analysis regarding ing and regularly updating economy-wide information alternative options, such as mechanization, as it would on employment, vacancies, the current labor market pro- when hiring domestic low-skilled workers. In this case, file, and existing skill gaps. Bhutan’s dedicated Labor Mar- the only reason to hire a foreign worker would be the ket Observatory (LMO)10 could use LMIS information to lack of necessary skills among the native population or develop labor market policy; of particular use would be the distaste among native workers for specific occupa- information regarding employment, skills mismatches, tions (in Korea, this includes jobs considered dangerous, and labor migration. Availability of these data would degrading, or dirty). allow the RGoB to address current skill shortages, access foreign labor, and forecast future labor-market needs.11 3. Focus on skill and technological transfer from highly skilled foreign workers and on 2. Extend minimum wage provisions to twinning and secondment programs non-Bhutanese workers to prevent wage In addition to a new foreign worker visa system that suppression allows both Bhutanese and foreign firms to access neces- Extending minimum wage protection to foreign workers, sary high-skilled labor, Bhutan must ensure that it ben- at least partially, ensures that they will not contribute to efits fully from the skill transfer realizable by temporarily wage suppression in low-skilled occupations. While some hiring foreign workers. This objective might not be rel- policy analysts support paying migrants lower wages evant in situations where highly skilled foreign workers than native-born workers, arguing that it decreases labor are recruited to perform one-off projects, but it can be costs for employers and increases competitiveness, the essential when capacity must be developed among the advantages of ensuring that migrant workers receive at local population. least the national minimum wage seem greater. Korea Some programs have successfully managed or aspire to 10 OECD defines LMO as a “technical platform designed to contribute achieve such skill transfers. This note sees such programs to the development of an employment strategy through the provi- as complementary to other reforms that allow private sion of information, evaluation, and comparative research regarding employment policies and labor market trends.” sector firms access to high-skilled foreign talent when 11 See Kuddo (2015) for an in-depth review of LMOs. Use of LMOs needed, and to programs that facilitate skill transfer at the has also been documented for countries such as Chile, Colombia, managerial level (Santini, Tran, and Beath 2017). Never- Egypt, Mongolia, Poland, and Tanzania. For more on Egypt, for exam- ple, see https://www2.giz.de/wbf/4tDx9kw63gma/Establishing%20 theless, despite the relevance of skill transfers for many Regional%20Labour%20Market%20Observatories.pdf. developing and even developed countries, relatively 14  Practical Solutions for Addressing Labor-Related Barriers to Bhutan’s Private Employment Growth Table 6: Examples of Programs Aimed at Skill Transfer between Highly Skilled Foreign Workers and Domestic Workers Intervention Country Content Outcomes Key Relevant Features International Twinning Malawi, Locally led long-term training Malawi: Local leadership and Partnerships for Philippines and technical support 65 percent increase in identification of training improving diagnosis, collaboration with a medical access to treatment needs treatment, and care of hospital/research center in a children with cancer in developed country 60 percent increase in Technical upgrading low-income countriesa survival rates based on assessment of local capacity Philippines: 160 percent increase in access to treatment 30 to 60 percent increase in survival rates Secondment Botswana Government-funded temporary 1,827 workers trained in Locally administered arrangement for hiring of skilled foreign workers laboratory diagnostics training and continuous increasing health care in the health sector day-to-day transfer of sector capacityb 2,111 health workers knowledge trained in diagnosis and treatment of sexually Synchronization of transmitted diseases system upgrades and training of necessary National Cervical Cancer personnel Prevention Program and Office of Strategy Locally identified needs Management for strategic planning and project implementation established High-skilled migrants South Africa Requirement to present a skill N/A; the program has not Use of high-skilled and intra-company transfer plan that outlines how been evaluated immigration not only transfer workersc a high-skilled foreign worker to address short-term will contribute to increased skill shortages but also capacity of South African to address them longer colleagues term through skill transfer Notes: a Hopkins, Burns, and Eden 2013. b Grignon et al. 2014. c Ernst and Young 2015. scant documentation is available on the issue, with most one hand, it requires companies to undertake the useful experience coming from the health sector (see Table 6). exercise of thinking through the skill transfer process in detail instead of merely assuming positive peer effects. South Africa stands out as having formally embraced skill On the other hand, unless the plan is monitored, the transfer when recruiting highly skilled foreign nationals extent of its implementation will remain unclear. In addi- (Ernst and Young 2015). In fact, in May 2014, South Africa tion, this requirement might make it tougher for SMEs, changed its immigration law to require a skill transfer plan with their limited human resources capacity, to hire top as part of the application for permission to hire a highly talent. The effectiveness of the process has not yet been skilled worker. The policy is somewhat controversial. On formally assessed.  15 Practical Solutions for Addressing Labor-Related Barriers to Bhutan’s Private Employment Growth Use of twinning or secondment arrangements is often a A sizeable wage differential exists between public and sector- or even a project-specific option. It could be espe- private sector jobs. However, recent analysis finds the cially useful for Bhutan, since it does not impose any new gap is almost entirely explained by differences in worker regulations on hiring foreign workers. The two programs characteristics, such as education levels (Schmillen 2016). are similar, except secondment allows continuous long- The same analysis shows that the preference for public term presence of a foreign worker on-site for in-depth, sector jobs may be attributable to differences in access day-to-day support, while twinning relies mostly on fre- to pensions and other fringe benefits (such as overtime quent phone or e-mail communication combined with pay; paid leave, including annual, sick, casual, and mater- short, intensive on-site trainings. nity leave; and compensation for work accidents and occupational diseases). In fact, for each of these benefits, The up side to both approaches is that programs can be coverage among public sector workers easily exceeds tailored to specific contexts and needs. In Bhutan, either 95 percent. At the same time, only about 30 percent of could very effectively complement training conducted private sector workers receive pension benefits, overtime abroad.12 Applications of these approaches in the Philip- payments, or compensation for work accidents; about 40 pines, Malawi, the and Botswana provide good examples to 50 percent enjoy paid annual and maternity or pater- of successful interventions for skill transfer in the health nity leaves; and around 60 percent are covered by paid sector. In these cases, capacity building was successful casual and sick leaves (Schmillen 2016). precisely because local needs were identified and on-site training and support were then designed to transfer train- The RGoB has already taken steps toward increasing the ing and skills in the exact technical capacity needed on labor force’s social protection coverage. All employees are the ground (Hopkins, Burns, and Eden 2013). Botswana, supposed to receive a pension or provident fund, accord- in particular, demonstrated successful implementation ing to the Labor and Employment Act of 2007. Currently, of a secondment process, with some initial government however, the National Pension and Provident Fund (NPPF) support, strengthening capacity beyond the originally covers only civil servants, government workers, employ- targeted hospitals (Grignon et al. 2014). ees of government-owned enterprises, and the army.13 Pensions for private sector workers provided by Bhutan C. Extend Pension Royal Insurance Corporation and Bhutan Insurance Ltd reach only 5 percent of the Bhutanese labor force (Bhutan Coverage to Private 2016). Increasing coverage to reach private sector work- Sector Workers ers is a primary objective of the ongoing pension reform, which addresses two key challenges: (i) the extension of the Today, private sector jobs in Bhutan are rarely an aspi- defined contribution scheme to private sector workers; and ration. According to a recent survey of unemployed (ii) the increase in fiscal sustainability of the defined benefit Bhutanese youth, close to 50 percent aspired to public scheme covering public sector workers. The NPPF Policy sector jobs and another 30 percent hoped for jobs in a has been drafted and is scheduled for Cabinet approval state-owned enterprise (MoLHR and UNDP 2014). This before the end of calendar year 2017 (see Bhutan 2017). preference, however, seems driven more by differences in compensation packages for comparable jobs than by A review of best practice social protection systems, in a wage differential. Development of a social protection contexts similar to Bhutan’s, shows that the optimal strategy for private sector workers could help balance the 13 NPPF offers a two-tiered old age protection plan, providing both a attractiveness of public and private sector jobs. monthly income and a lump sum payment to retired members. Tier 1 covers the National Pension Plan, a partially funded, defined benefit scheme. Tier 2 covers the National Provident Fund Plan, a fully funded, 12 See Santini, Tran, and Beath 2017 for a more in-depth discussion of defined contribution scheme under which members receive lump such programs. sum payments of accumulated balances upon retirement. 16  Practical Solutions for Addressing Labor-Related Barriers to Bhutan’s Private Employment Growth policy for expanding pension coverage to private sec- These considerations make the pension policy proposed tor workers should: (i) provide incentives to participate in 2009 by the World Bank to RGoB still relevant (Palacios for both employers and workers without discouraging 2009).14 That policy combined defined contributions and formal employment; (ii) provide guaranteed minimum noncontributory social pension schemes. Table 7 pro- retirement income and rates of return comparable to vides examples of selected countries that have mostly other investments; and (iii) achieve fiscal sustainability. It successfully expanded their pension coverage using should also guarantee an adequate income upon retire- 14 See also Holzmann et al. (2005) for additional background informa- ment to older or poorer workers, across both the public tion and the framework used by the World Bank in its pension reform and the private sectors, who may lack sufficient time to proposals. benefit from the defined contribution scheme. Table 7: Examples of Interventions Aimed at Increasing Pension Coverage Country Content Outcomes Key Relevant Features Indiaa National Pension System (NPS): 14 million subscribers as of Portability of benefits a voluntary, defined contribution December 2016 retirement savings scheme Flexibility in terms of the size and frequency of contributions Central record keeping Kosovo b Three-pillar pension scheme Achieved nearly universal The combination of a universal pension, paid from combining: (i) general revenue coverages from the general revenues rather than a wage tax, coupled financed defined benefit “old- baseline of only about with a sizable funded component age” pension; (ii) mandatory, half the elderly population defined contribution scheme covered under the old Anchoring the universal pension to a real indicator, for formal sector workers;c and scheme such as a poverty level (iii) supplemental individual- and Use of investment in European funds, as the employer-financed options country has no capital markets Chiled Pension scheme consisting of two Decreased poverty among Means-tested social pension to prevent financial categories: elderly after introduction destitution among elderly (1) mandatory 10 percent defined of the means-tested social contribution pillar for formal pension Introduction of state-run pension fund in 2016 workers, and (2) means-tested Elimination of hidden fees in 2016e social pension (introduced in 2008) and top-up for those with insufficient contributions Maldivesf Two-pillar pension system More than 96 percent of Mechanism to allow the government to finance the combined with a platform for elderly Maldivians received switch from defined benefit to defined contribution efficiently administering and some public old-age pension targeting other social protection security benefit in 2014, support compared with less than Portable defined contribution component allows 30 percent in 2007 for movement between public and private sector Notes: a NPS provides a cautionary note in that, despite its numerous desirable features uptake remained low, most likely because the plan did con- sider the saving and behavioral profile of the beneficiaries. b Gubbels, Snelbecker, and Zezulin 2007. c http://www.latimes.com/business/hiltzik/la-fi-hiltzik-chile-social-security-20160812-snap-story.html. d Some sources cite a 1.6 percent decrease in poverty among the elderly after the solidarity means-tested pillar was introduced (see, for example, https://www.forbes.com/sites/pensionresearchcouncil/2015/09/29/chiles-fabled-retirement-system-why-fix-it/#58e5fca91117). Other research finds that by 2011 the solidarity pillar contributed to the 2.4 percent increase in the annual income of targeted households without crowding out of the private sector financing (Behrman et al. 2011). e https://www.economist.com/news/americas/21705850-pioneering-system-now-need-reform-perils-not-saving. f World Bank 2015c.  17 Practical Solutions for Addressing Labor-Related Barriers to Bhutan’s Private Employment Growth a similar combination of contributory schemes and Some examples in Table 7 also show that a centralized noncontributory social pensions and cites features par- ­ record keeping is not only an effective management ticularly relevant for Bhutan given its size, economic fac- technique but also, because it promotes pension scheme tors, and existing pension schemes. portability and reliability, an incentive for increased par- ticipation. With centralized records, each worker has a A pension scheme that provides universal but fiscally sus- unique identifier in the pension database, and a pension tainable pension coverage should offer sufficient incen- account unattached to a specific employer; thus, even tives for participation. This could be achieved in several if workers change employers or switch between formal ways, as illustrated by the schemes presented in Table 7. and informal employment, they can continue to accrue One option is to make contributions tax deductible, as pension benefits. Centralized record keeping also makes is the case in many countries in the Organisation for it easier to ensure that records are reliable, a key require- Economic Co-operation and Development (OECD). This ment of a good pension scheme. From an administra- option could only work as an incentive where a large tive perspective, ensuring the quality of one centralized percentage of individuals pay income tax, however.15 As system is easier than monitoring a myriad of systems an alternative, governments could match contributions associated with multiple schemes. Finally, aggregation up to a certain limit for low income and informal work- of information in one central system also makes it easier ers, as is done in the state of Rajasthan in India (Palacios to provide workers with timely and accurate reports on 2009) and in NPS.16 In addition, accounting for potential the state of their pension savings and plans, which helps seasonality of incomes, and allowing workers to vary their build trust in the system. contribution schedule or amounts can provide additional incentives, since agriculture workers and those with Most importantly, however, the incentives for worker par- unstable incomes need flexibility. Schemes in both India ticipation and guarantees of minimal pension income and Japan (see Table 7) have this feature. must be designed to avoid creating disincentives for firms to offer formal employment contracts. Thus, the At the same time, however, as the example of Chile shows, firm contribution should be voluntary, and preferably tax increasing workers’ understanding of how much and how deductible, as in many OECD countries. Making employer regularly they must contribute to achieve their desired contributions mandatory can lead to a decline in formal level of income in old age is of paramount importance. employment and GDP. For example, a simulation of Chile’s One of the issues facing the Chilean pension system was current mandatory, employer-side 5 percent pension its failure to examine the assumptions it made in promis- contribution demonstrated that it could be perceived as ing workers replacement incomes of 70 percent of their a labor tax and would likely result in a 0.5 percent GDP last wages. The plan assumed that workers would con- decline by 2021 (Santoro 2017). Similarly, noncontribu- tribute, without breaks, at least 10 percent of their income tory social pensions might best be financed not through until age 65, but not all workers did so. Women, for exam- a wage tax (such as the U.S. Social Security scheme), but ple, are likely to take maternity leave at some point in their from a general tax expenditure. For example, Kosovo’s work lives, and the retirement age for women is 60, not decision not to use the wage tax to finance pension 65. The assumed returns and fees were also not explicitly expenditures likely reduced potential negative effects on communicated (Mitchell, Todd, and Bravo 2008). formal employment or hours worked. 15 A large proportion of those targeted by the new pension scheme To be successful and sustainable, contributory pension in Bhutan likely do not. schemes should provide rates of return comparable to 16 Additional experiences setting up matching contribution schemes for pensions in a wide range of countries can be found in Hinz et al. those of other investments (Palacios 2009). To achieve 2014. this result, investment funds should aim to maximize 18  Practical Solutions for Addressing Labor-Related Barriers to Bhutan’s Private Employment Growth gross returns, be mindful of the trade-offs between risk as Bhutan, this consideration would discourage the creation and return, and minimize the cost of asset management of multiple parallel entities for managing various pension and other administrative fees.17 schemes.19 Some countries, like Sweden, have established centralized administration and record keeping in combina- Increasing gross returns, given that Bhutan is a small tion with competitive pension fund investments.20 economy, might require further diversification of the pension fund investment portfolio. Exposure to inter- While the RGoB actively considers introducing noncon- national markets has risks, but it also offers potential tributory social pensions, it might benefit from introduc- gains, given sufficient diversification. Schemes adopted ing a universal social pension approach, and graduating in Kosovo (which relies on investment in European and to a need-based one as the contributory system matures. global funds), Norway (which heavily invests in global Providing universal social pensions with guaranteed mini- markets outside Norway), and Botswana (which relies on mum incomes for all the Bhutanese over a certain age has investment in neighboring South Africa) all serve as good been shown to be less costly than might be anticipated. examples of the benefits of portfolio diversification. Bhu- Specific simulations prepared by the World Bank (Palacios tan’s current policy allows only 10 percent of funds to be 2009) show that providing universal minimum incomes for invested internationally. To the extent possible, therefore, the elderly can cost the government as little as 0.5 to 1 per- pension funds should be exempt from regulations limit- cent of gross domestic product (assuming an eligibility age ing the ability to minimize investment-related risks only of 65 and a benefit of 15 percent of income per capita). through the domestic market, a restriction that will ulti- mately hamper performance. Lastly, regarding fiscal sustainability, the approach pro- posed in the World Bank in 2009 warned against expand- The return performance of pension funds is also subject ing defined contribution occupational pension schemes, to other factors. East Asian countries, many of which have because such undertakings have the potential to signifi- only recently adopted the defined contribution approach cantly increase the government’s liability. This remains to both public and private sector pensions, can serve as a pertinent and it is an essential concern given that, per reference point for other factors affecting returns in such the National Statistics Bureau, declining fertility and ris- schemes, including earnings profiles, participation rates, ing life expectancy will result in doubling the number of and presence of other mandatory schemes.18 older persons nearing retirement age by 2030 (Bhutan 2005), and given that recent analysis of the public sec- On the cost side, pension fund management charges, usu- tor shows that profits from hydropower will peak in the ally in the form of fees, can have a significant effect on net next decade, while social protection needs will continue rates of return from pension investments. To the extent that to expand (World Bank 2015a). Current coverage levels economies of scale matter, especially in a country as small could also make it challenging for the government to address its growing liabilities (Bhutan 2017). 17 See Palacios (2009) for a more in-depth view of the optimal risk profile trade-off between the investment and the amount of choice that should be offered to allow beneficiaries to express their risk 19 See Sluchynskyy (2015) for a more in-depth discussion. Sluchyn- preferences. In addition, selection of a scheme should involve evalu- skyy provides cross-country evidence of economies of scale based ating costs to beneficiaries, such as the cost of maintaining a bank- on a sample of 104 public pension funds from 87 countries and finds ing account (which has been significantly adjusted under the Indian that administrative costs per beneficiary fall by half when moving from NPS scheme, for example) or for accessing the pension funds. If funds 100,000 to 500,000 participants and by another 25 percent with 2 mil- can only be withdrawn through a bank or an ATM, for example, the lion participants. scheme might not be useful in areas with low levels of financial infra- 20 In terms of managing pension fund reserves, Palacios (2002) structure development (as in the case of Uzbekistan). reviews strategies for limiting risks arising when a public entity is 18 For a detailed critical overview of these experiences, and relevant entrusted with managing national pension savings, and he draws les- policy suggestions, see chapter 3 of World Bank 2016c. sons from recent reforms in five OECD countries.  19 Practical Solutions for Addressing Labor-Related Barriers to Bhutan’s Private Employment Growth Bibliography AGI (Adolescent Girls Initiative). 2016. “Resource Guide.” ———. 2016. “Policy Concept Note to Develop National Adolescent Girls Initiative, World Bank, Washington, Pensions and Provident Fund Policy.” Gross National Hap- DC. https://www.s4ye.org/agi/. piness Commission, Ministry of Finance, Thimphu, Bhu- tan. 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