Regional Perspectives on World Development Report 1995 JOBS, POVERTY, AND WORKING CONDITIONS IN SOUTH Asu' Regional Perspectives on World Development Report 1995 JOBS, POVERTY, AND WORKING CONDITIONS IN SOUTH Asu THE WORLD BANK WASHINGTON, D.C. © 1995 The International Bank for Reconstruction and Development / The World Bank 1818 H Street, N W, Washington, D. C. 20433, U.S.A. All rights reserved Manufactured in the United States ofAmerica FirstprintingAugust 1995 This report has been prepared by the staff of the World Bank. The judgments expressed do not necessarily reflect the views of the Board of Executive Directors or the governments they represent. Editing, layout, andproduction by American Writing Corporation ISBN 0-8213-3344-5 ISSN 1020-3648 Contents Foreword v 1 The Development Challenge 1 Growth, investment, and labor welfare 2 Human development 4 2 The Impact of International Integration on Workers 6 Labor migration 6 International trade 6 International capital flows 7 3 Domestic Labor Policies 9 Rural and informal labor markets 9 Setting workplace standards 10 The role of labor unions 12 Government's role as employer 14 Dealing with income insecurity 15 4 Lowering the Temporary Costs of Transition 17 The speed of transformation 17 Dealing with the social costs of transition 18 5 The Outlook for South Asian Workers 19 References 20 This report was prepared in conjunction with World Development Report 1995: Workers in an Integrating World. It was written by Hafez Ghanem under the direction of Michael Walton. Meta de Coquereaumont and Vince McCullough edited the report. Christian Perez laid out the text. 'v Foreword W orld Development Report 1995: Workers in an indicates that countries that have opened to world markets, Integrating World deals with labor and employ- expanded exports, and attracted foreign capital have experienced ment, issues that are important for South Asia. rapid increases in real wages. However, some workers can be hurt Expanding employment and increasing the remuneration of if they are stuck in declining activities and lack the flexibility to workers are crucial for poverty elimination, which is the over- change. Restricting trade is an inefficient way of dealingwith this arching objective of all countries in the region. This summary problem. A better strategy is to improve workers' skills or sup- presents the key messages of World Development Report 1995 as port their transition to new jobs. they apply to the South Asian economies. Does the strategy of market-based development imply no South Asian workers have made some gains over the past thirty role for governments in the labor market? No. Governments years, but growth has been slow, poverty is still pervasive, and need to develop labor policies that define the rights of employ- social and human indicators are too low. This performance reflects ers, workers, and labor unions and the framework for collective a development strategy that turned out to be biased against labor. bargaining and the setdement of disputes. There are also cases High protection and inward orientation failed to achieve rapid where interventions are needed to complement informal and growth in industrial employment, productivity, and wages. Most market solutions and protect vulnerable workers. But interven- workers remained in the rural and informal sectors, where they tions that favor a few relatively well-off workers at the expense are underemployed and poorly paid. Except for Sri Lanka, South of those who operate in the rural and informal sectors should be Asian countries did not invest adequately in their workers to equip avoided. them with the skills needed to better compete in the world mar- A consensus is gradually being built around a vision of a more ket and raise their living standards. dynamic South Asian economy, based on private initiatives and Faced with these outcomes, the countries of the region have with stronger ties to the global economy. How should the tran- changed development strategies. Reform programs focus on sition to this new growth path be managed so as to minimize trade policies, the financial sector, investment regulations, taxa- social costs and losses to workers? This report emphasizes the tion, and public enterprises. The objectives are to raise private importance of credibility and of softening the impact of transi- investment, reduce reliance on the public sector, and promote tions on workers. Governments gain credibility by adhering to exports. Liberalization should enable the region's economies to a consistent plan that sets out the main direction of reform. grow at rates closer to those in East Asia. Will the change in Government programs that compensate workers who are hurt development strategy benefit labor? Yes. Market-based develop- in the initial phases of reforms are often necessary for social rea- ment, which encourages firms and workers to invest in physical sons, as well as to ensure support for reforms. capital, new technologies, and skills, is the best way to raise labor's living standards. Changes in the global economy render this policy shift even more pressing. International flows of goods, services, capital, and people bring new opportunities and challenges for most work- J eph ood ers. South Asia's labor stands to benefit from greater integration ce President in the world economy. Evidence from the past two decades South Asia Region v CHAPTER 1 The Development ChaIlenge M ore than one-sixth (17.5 percent) of the world's labor sustained poverty relief and reduction are the overarching objec- force is in South Asia. For the purposes of this report, tive of economic policies in the region. the region consists of three big and three smaller How can poverty be reduced? The answer is simple: by gen- countries. India, with almost 900 million people, is the second erating more productive jobs and investing in human develop- largest country in the world; Pakistan (123 million) and ment. The means of getting there is less straightforward. Low Bangladesh (115 million) are the seventh and eighth biggest. employment and low labor productiviry are the main labor mar- Nepal (21 million), Sri Lanka (18 million), and Bhutan (2 mil- ket problems facing the region. Low employment can take the lion) aresignificantlysmaller. Despitethehugedifferencesinsize, form of high chronic unemployment (as in Sri Lanka, where all six countries have low incomes, high population densities almost 14 percent of the labor force is unemployed) or high (except Bhutan), relatively low rates of urbanization, and poor underemployment (as in Pakistan, Bangladesh, and Nepal, health and education indicators (except Sri Lanka; Table 1). where about 15 percent, 43 percent, and 45 percent of the labor The development challenge facing South Asia is formidable. force are not working as many hours as they would like). Low Poverty is pervasive, and many South Asians face hunger and labor productivity implies low wages. Productivity differences deprivation. Look at consumption. By this measure, South Asia partly explain why skilled industrial workers in Bombay earn 74 is the poorest region in the world. In 1990 almost 59 percent of percent less than their counterparts in Jakarta, and yet the population consumed less than $30 a month (in terms of Indonesian products remain competitive. Productive jobs for the purchasing power parity). The equivalent share of the popula- underemployed or unemployed and the more than 7 million new tion was 53 percent in Sub-Saharan Africa, 28 percent in Latin entrants into the labor force each year would be the most effec- America, and 15 percent in East Asia. Mean consumption in tive poverty reduction program for South Asia. 1990 (also in purchasing power parity terms) was less than $35 Most developing countries are moving toward market a month, compared with a developing country average of about economies, international markets are opening up, and goods. $67. Poverty is also reflected in social indicators. Average life capital, and ideas flow more easily around the world. This report expectancy at birth in South Asia is sixty years, compared with evaluates how the changing shape of the world economy and dif- an average of sixty-four years for low- and middle-income coun- ferent policy choices by South Asian governments can affect the tries. Adult literacy is 46 percent (the low- and middle-income quantity and quality of jobs and so the living standard of che 430 country average is 67 percent). It is no surprise, then, that million workers in the region. It concludes that: Low incomes, high population densities, and poor social indicators are typical of South Asian countries Table 1. Health and education indicators in South Asian economies, 1993 GDP per capita Population density Urban population Life expectancy Literacy {percentage Country (U.S. dollars) (per square kilometer) (percentage of total) (years) of adult population) Bhutan 180 32 6 48 38 Nepal 190 147 13 54 26 Bangladesh 220 800 17 56 35 India 300 273 26 61 52 Pakistan 430 154 34 62 35 Sri Lanka 600 271 22 72 88 Source: World Bank data. I - o la S, r o V E R T Y, A^ " D W O R K I DI E OS N D I T I4N 0 S 5 • A market-friendly development strategy that encourages capita GNP growth of 4 percent a year. This led to a rise in wage investment, human development, and growth is critical in employment, with a dramatic increase in industry and services improving labor market outcomes. and a decline in self-employment. In 1957 one in two employ- * Integration with the world economy, through a reduction in ees worked on plantations; by 1989 wage employment had trade barriers and greater capital mobility, would provide a host tripled, yet only one in ten workers was engaged in plantation of new opportunities for South Asian workers. agriculture. * Labor policies should complement, rather than substitute for, Second, growth also raises the returns to work. Again, con- market mechanisms. Policies should be based on the respect of sider Ghana and Malaysia. Average real wages in manufacturing labor's right to bargain collectively in a competitive environ- in Ghana collapsed; by 1984 they had plunged to 13 percent of ment and avoid special privileges to small groups of workers at their level a decade earlier. Agricultural wages also fell sharply. the expense of the majority, who are in the rural and informal By contrast, real wages in Malaysian manufacturing have grown sectors. steadily, by 3.4 percent a year since 1973. Rural returns to labor * The relative stability and large size of the agrarian sectors in have followed, with plantation wages doubling between 1971 South Asian economies provide flexibility in the pace of struc- and 1992. The sectoral transformation of employment intensi- tural reforms, but reform agendas need to be credible and need fied the gains from wage growth made by Malaysian labor. to deal with the legitimate concerns of workers who may lose Between 1957 and 1989 the share of the work force in agricul- in the short run. ture fell from 58 percent to 26 percent. Most entrants to the labor force joined the modern industrial and service economy, Growth, investment, and labor welfare where average wages were almost double those in agriculture. How can South Asia's economies generate the productive jobs South Asia's growth performance in 1970-90 was mixed: not necessary for poverty reduction? By growing faster. Rapid eco- as disappointing as Ghana's or as brilliant as Malaysia's. Real per nomic growth increases demand for labor, creates employment, capita GNP growth in South Asia varied from a high of 3 per- and raises workers' incomes. Countries in the region can accel- cent in India and Pakistan to a low of around 2 percent for erate growth by adopting development strategies that encourage Bangladesh and Nepal. There was no radical transformation in faster accumulation of physical and human capital, as well as the structure of employment. By the early 1990s as much as 63 their efficient use. Fast economic growth normally means dra- percent of India's labor force was in agriculture, which is closer matic changes in employment structure and enormous increases to the situation in Ghana (61 percent) than in Malaysia (26 per- in productivity and real wages. Job opportunities expand in ser- cent). Agriculture's share in production in the other countries in vices and industry as employment in agriculture declines and the region varies from 47 percent for Pakistan to 73 percent for workers move to urban areas and from informal to formal sec- Bangladesh. tors. Those changes occur without specific government inter- Those growth rates have been sufficient to bring about some ventions. In fact, attempts by governments to force the pace by real wage increases in the region's two largest economies. In favoring industry and formal employment, at the expense of agri- 1971-90 real wages in agriculture rose at an annual average of culture and the family farm, have proved an unsustainable and around 2.5 percent in India and 3.0 percent in Pakistan (Figure often counterproductive strategy, slowing economic growth, 1). Urban wages in India grew more slowly. During the same depressing labor demand, and encouraging informalizarion. period real wages in manufacturing rose almost 2 percent annu- ally. Pakistan's urban workers did well, and manufacturing real Economic growth, employment, and wages wages rose by 5 percent a year. Economic growth raises workers' welfare in two ways. First, it In the slower-growing economies, Bangladesh and Sri changes workers' employment status, bringing about a shift from Lanka, the outcome was different. In 1971-90 Bangladesh's real informal to formal. Witness the contrasting experiences of agricultural wages fell by about 1.5 percent a year, and its man- Ghana and Malaysia. Ghana saw prolonged economic decline ufacturing wages by 3.0 percent. In Sri Lanka real agricultural from 1960 to the late 1 980s, when recovery began. Over that wages fell by about I percent a year in the 1 980s and manufac- period, GNP per capita fell by 1.5 percent a year as the work- turing wages by 0.5 percent. This trend, however, seems to be ing-age population doubled from about 3.5 million to 7.8 mil- changing in both countries: data for the 1990s indicate some lion. As a result, the share of the labor force engaged in wage increase in real wages. employment hardly changed-14 percent in 1989, more or less India and Pakistan appear to be on a path that will lead to the same as in 1960. Self-employment in rural and urban areas improved labor market outcomes, but they are proceeding at a continued to absorb more than half the working-age population. much slower pace than the East Asian economies. The situa- Malaysia's economy took off over this same period, with per tion in Bangladesh and Sri Lanka is less promising. Workers in 2 THE DEVEL.oF-MEINT CDHALLENGE Determinants of growth Real agricultural wages grew rapidly in India and How can growth be accelerated to achieve better outcomes for Pakistan, less so in Bangladesh and Sri Lanka labor? By increasing investment in physical and human capital in a competitive environment. Evidence linking economic growth Figure 1. Index of real agricultural wages, 1971-90 to increased accumulation of physical and human capital is over- (1971=100) whelming. At the microeconomic level, accumulation of human 250 Pakistan capital is strongly associated with increases in labor productivity Malaysia .1 and greater individual earning capacities. At an aggregate level, 200 ' -. f growth performance is best in countries that experienced rapid ,- ~ ~ ~ ' '. - - -- :~~ ,---;~~'~~~' ' increases in their stocks of physical and human capital. For exam- 10 ''"' _--' ple, between 1965 and 1990 the high-performing economies of East Asia increased investment from an average of 22 percent to 100 35 percent. They also increased human capital. Over the same 50 Bangladesho period, primary school enrollment rose from 92 to 102 percent, l l l 1 1 and secondary school enrollment from 27 to 37 percent. 197119731975197 1979 1981 1983 198519871In some other countries, however, growth was not as rapid, 9despite high rates of investment. China in the 1970s, the former a. No data available for 1981-82 and 1984-85. Soviet Union, and Tanzania regularly invested more than 20 per- Source: ILO and country sources. cent of GDP but did not experience anything near the impres- sive growth of, say, Korea or Malaysia. Many African countries all four countries would benefit from an acceleration in growth expanded their education systems, substantially raising the aver- that increases the demand for labor, lowers unemployment and age years of schooling of their labor force, but they have seen lit- underemployment, and raises incomes and living standards of tle corresponding aggregate growth. These experiences indicate workers. that in the wrong economic environment accumulation of phys- The relationship between growth and labor market out- ical and human capital may yield unproductive or idle factors. comes can be demonstrated through simulations using data for Massive public investment in inefficient, loss-making enterprises Bangladesh. Underemployment in Bangladesh is estimated as will have little impact on growth, and educated workers will not equivalent to having a quarter of the labor force unemployed. contribute fully to economic development if they are not pro- If real GDP in Bangladesh grows at the historical rate of vided with opportunities to use their skills. Economic policies around 4 percent or so a year, underemployment may rise and must encourage efficient private investment and provide an envi- exceed the equivalent of 30 percent unemployment by 2000. ronment where capital and skills can be used effectively and effi- Under those circumstances wages would continue to fall. ciently to raise income. Much higher growth rates are needed to expand employment Growth in South Asia in 1960-90 was slower thai in any opportunities fast enough to reduce underemployment and other developing region except Sub-Saharan Africa (Table 2). At push wages higher. 4.1 percent, it was similar to growth in OECD countries, which South Asia's poorer performance stems from inefficient use of resources Table 2. GDP growth and its sources, 1960-90 (annual percentage growth) Working-age Total factor Region GDP Capital stock population Human capitalP productivit South Asia 4.1 5.4 2.4 3.2 0.2 East Asia 6.1 6.4 2.5 4.1 1.5 Latin America 4.8 6.0 2.9 2.2 1.0 Sub-Saharan Africa 3.0 5.9 2.7 5.6 -2.1 OECD 3.9 5.3 1.2 0.3 1.3 a. Measured in terms of years of schooling. Source: World Bank staff estimates. 3 J 03 B SV, R v Er--r T-Y, AN N D W O R K I N1 C O N D I T I O N S was 3.9 percent; but the two groups of economies started from global economy. Investing in people can boost the living stan- vastly different bases, and South Asia's working-age population dards of poor households by expanding opportunities, raising grew at double that of OECD countries. productivity, attracting capital investment, and increasing earn- South Asia's lackluster growth is explained by inefficient use ing power. Better health, nutrition, and education also have value of resources and by low levels of accumulation of physical and in their own right, enabling individuals to lead more fulfilling human capital. Changes in total factor productivity-which lives. Investments in human development are often highly com- measures the effects on output of variables other than accumu- plementary. Adequate nutrition and health increase the ability of lation-are used here as a proxy for efficiency improvements. children to learn. And, better-educated individuals tend to have The annual growth in total factor productivity in 1960-90 was better nutrition and hygiene habits, necessary for good health. close to zero-it was 1.5 percent in East Asia but -2.1 percent in Worker productivity and income are clearly related to health. Africa. This may be a reflection of policies that did not encour- Better health services allow workers to live longer and lead more age the efficient allocation of capital and labor to maximize out- productive lives. Nutrition is also important. Lowering protein- put. Present efforts aimed at liberalizing South Asia's economies energy malnutrition and increasing the consumption of and increasing their outward orientation should improve effi- micronutrients (such as iron and iodine) can raise labor produc- ciency, and hence labor incomes. tivity by improving mental and physical abilities. Analyses of Capital stock growth was even slower in South Asia (5.4 per- farm households in Southern India found that increased weight cent a year) than in Africa (5.9 percent), reflecting low invest- for height (a measure of long-term nutritional status) and height ment. In the early 1990s, investment ranged from about 12 alone (a proxy for childhood nutrition) are closely associated with percent in Bangladesh to 23 percent in India and Sri Lanka. greater output per adult worker. Better nutrition early in life These are low when compared with 34 percent in Malaysia and appears to have a quantitative impact on future productivity that 40 percent in Thailand. The average South Asian worker uses is at least as large as that often reported for primary schooling. only $2,513 of capital, compared with a developing country Education is essential for raising individual productivity and average of $13,000 and an industrial country average of hence wages. General education gives children skills that will be $150,000. Under the circumstances, it is not surprising that pro- transferable from job to job and the basic tools necessary for fur- ductivity and wages are relatively low in the region. Increasing ther learning. It augments workers' ability to perform standard the stock of physical capital per worker is essential for raising pro- tasks, to process and use information, and to adopt new tech- ductivity and wages. nologies and production practices. Evidence on the adoption of high-yielding varieties of foodgrains in India illustrates this Human development point. Areas with relatively few farmers with primary schooling South Asia's human capital-measured in years of schooling- at the onset of the Green Revolution experienced less growth grew more slowly than in either East Asia or Sub-Saharan Africa than areas with the same technological opportunities but better- (see Table 2). This is particularly disturbing, because East Asia's educated farmers. experience indicates that accumulation of human capital is nec- essary for growth and development. Pervasive poverty accentu- Toward greater human development in South Asia ates the importance of human development in South Asia. From Despite some achievements over the past thirry years, social a national perspective, low levels of human development are indicators in South Asia make grim reading. In India, 40 per- likely to have a negative impact on growth and labor market out- cent of the population have no access to basic health services, comes. For individuals and households, better education and about half the children under five are malnourished and defi- improved health are important ways of getting out of poverty. cient in micronutrient intake, more than a quarter of the pop- Thus the importance of human development in South Asia ulation have no access to potable water, and one in eight cannot be overemphasized. Performance of the social sectors of newborn babies dies before age one. The state of human devel- most countries in the region has been disappointing, with nega- opment is equally depressing in Pakistan, especially in view of tive consequences for worker welfare. To change this situation, its higher per capita income. Pakistan's infanr mortality rate is South Asian governments will need to restructure public expen- 30 percent higher than the average for all low-income countries, ditures in favor of the social sectors and introduce reforms to its adult literacy rate is 25 percentage points lower, and its gross improve the quality of services and the efficiency of delivery. primary and secondary school ratios are not much more than half the average for low-income countries. Pakistan's disadvan- Human development and better outcomesfor labor tage is worse for women than for men. Bangladesh fares little Increasing the skills and capabilities of workers is critical for eco- better. Life expectancy at birth is around fifty-six years, and nomic success in an increasingly integrated and competitive infant mortality is 1 10 per thousand live births compared with 4 T H E Dr- v E L O P M ENT N C H A L L EN G E: 64 per thousand for all developing countries in 1993. Diarrheal Public expenditures on education, health, nutrition, and popu- diseases, acute respiratory infections, and childhood diseases lation programs accounted for a meager 5.2 percent ofGDP (and easily preventable by immunization (tetanus, diphtheria) are 16 percent of all public expenditures) in 1992-93, compared major killers. Bangladesh's education indicators are also dis- with an average of 6.4 percent for low-income countries and 10 couraging: it has low adult literacy (35 percent), a very high rate percent for middle-income countries. By any standard, this level of primary school dropouts (63 percent), and an unsatisfactory is too low. Per capita annual public expenditure on education in enrollment ratio (72 percent). India is about $30, while the average for low-income countries Sri Lanka has achieved a much higher level of human devel- is roughly $80, and per capita expenditure on health $11 or so, opment than its larger neighbors. It has done very well in liter- while the average for low-income countries is around $16. (All acy and other basic education indicators, as well as mortality, comparisons are in purchasing power parity terms.) To attain fertility, and other health indicators. In 1990 Sri Lanka had a lit- average social sector spending norms of low-income countries by eracy rate of 88 percent overall (83 percent for women), com- 2000, India will have to increase its budgetary allocations to these pared with 60 percent for all low-income countries (48 percent sectors by more than 12 percent a year. for women). Its infant mortality was 19 per thousand live births, Even without increased allocations to India's social sectors, compared with 69 per thousand for low-income economies. outcomes would be much better if efficiency were improved Moreover, between 1960 and 1990 education and health indica- through quality inputs and effective delivery. In education, only tors improved at much faster rates than in most other countries. sixty-three of every hundred children who enroll in grade one A recent World Bank study ranked Sri Lanka eighth in a sample reach grade five. Only 37 percent of the age cohort completes of forty-three developing countries in increase in net primary the elementaryschooling cycle. The quality of learning is so poor enrollment and nineteenth of seventy-one countries in decline in that a third of primary school graduates do not attain full numer- infant mortality. The larger South Asian countries could learn acy and literacy. In health, medical supply and personnel short- from Sri Lanka's success, a consequence of its past enlightened ages render many public health facilities almost useless. Some 55 health and education policies. There has been a strong drive by percent of India's primary health centers lack antibiotics, and 46 the public sector to provide basic health services countrywide and percent of the nursing staff cannot properly sterilize a needle. universal primary education to boys and girls alike. Improving the quality of social services requires changes in the Governments in Bangladesh, India, and Pakistan need to way governments act as employers, and reforms of employment, change their spending priorities and reallocate resources to the pay, recruitment, and promotion policies, as well as increases in social sectors. Indian data can be used to illustrate this point. spending on complementary inputs. 5 The Impact of International Integration on Workers C ountries with more open economies and closer links enter the labor market in activities that were previously left to with world markets are generally the faster growers. migrants. Moreover, political and social pressures are pushing Global integration is increasing rapidly, fueled by tech- some host countries into pursuing policies that limit migration. nological change and the continuous fall in communication and But migration is not the only channel through which labor transport costs. In 1978 only a few developing countries, led by can benefit from international integration. South Asian countries the newly industrialized countries of East Asia, were becoming can boost indirect exports of labor in the form of increased deeply integrated in the world market. But conditions have exports of goods and services. And if it is difficult for South Asian changed quickly, and it is expected that by 2000 less than 10 workers to migrate to countries with abundant capital, foreign percent of the world's workers will be sheltered from global investors can be encouraged to bring their capital to South Asia. influences. How will globalization affect South Asian labor? Most work- International trade ers will benefit from international migration, foreign trade, and Increased trade benefits workers in three ways. First, it provides capital flows, but a few, operating in inefficient protected sec- a much larger and generally more stable market for the fruits of tors, will lose. Global integration provides workers with a larger their labor. Domestic markets, especially in countries with low and more stable market to sell their goods. Moreover, those who per capita incomes such as Nepal and Bangladesh, tend to be very lose from greater integration can usually be compensated with- thin and volatile. Exports are the best way to expand production out jeopardizing the benefits that will accrue to the majority of and achieve greater stability in demand. Second, free trade gives workers. workers the choice of the cheapest consumption goods and access to equipment and technology that best complement their skills. Labor migration The rapid industrialization in East Asia was built largely on mas- Migration has had a large impact on South Asian labor markets sive imports of the West's best technologies and machinery. In as many workers sought jobs abroad, especially in Gulf countries. South Asia, Pakistan's leather industry has developed fast and cre- An estimated 1.2 million Pakistanis (4 percent of the labor force), ated thousands of jobs using imported machines and technology. 600,000 Bangladeshis (2 percent), and 300,000 Sri Lankans (4 Third, the global market allows workers to specialize in what they percent) have jobs abroad. The effect on their balance of pay- do best and to upgrade to the production of more valuable prod- ments is stark. Worker remittances represented more than 40 ucts at the speed at which their skills improve rather than at the percent of Bangladesh's export revenues in 1993. For Pakistan the speed at which these goods may come to be demanded at home. figure is 24 percent, for Sri Lanka 22 percent, and for India 14 The newly industrialized countries ofEastAsia started byexport- percent. Workers from South Asia have made tremendous con- ing primary products, then moved on to low-tech manufactures, tributions to economic growth and development in the Gulf and today are shipping increasingly sophisticated industrial region. Indeed, host countries would probably not have grown products. India's entry into the world market for computer soft- as fast without the relatively cheap migrant labor. ware is an example of this upgrading. It is unlikely that migration will increase over the short and Clearly, the statistical correlation between long-term wage medium terms at rates fast enough to have a big impact on South growth and exports is strong. In the past two decades, real wages Asian labor markets. Demand for migrant labor in the Gulf is rose at an annual average of 3 percent in developing countries slowing as economic growth stabilizes and as more nationals where the growth of trade was relatively fast but stagnated in 6 T H E I IMPAC F I Tr-- R A TI O 1 A L I ETE ES R A T-I 0 N. countries where trade expanded least. Increasing exports raise the demand for labor, leading to more jobs and higher incomes for After trade liberalization South Asian workers workers. will take home more pay Most South Asian workers would benefit from free trade. Look at the likely impact of the Uruguay Round, the widest-rang- Figure 2. Impact of the Uruguay Round on real wages ing and most ambitious multilateral trade agreement ever nego- (percentage increase) tiated. With many countries set to relax trade barriers at the same time, the pattern of international supply wll gradually change. China Snapshot estimates of full implementation of the Uruguay Round South Asia = show that the real wages of South Asian workers could rise by Japan around 2 percent (Figure 2). In general, the results indicate that North America workers in labor-abundant economies that specialize in labor- European Union intensive goods-China, and the countries of ASEAN and South Latin America Asia-would benefit from trade liberalization because they could Sub Saharan Af1.ca . 2 2 3 3 4.0 undercut producers in high-cost countries. They should be able to produce and export more, and employment and wages should Source: World Bank staff estimates. rise. Trade liberalization will also bring dynamic gains that are likely to far exceed the one-shot impact. As the experience of the those rents will vanish and the sectors will contract. Eventually, newly industrialized countries of East Asia shows, those able to excess labor from these sectors will be absorbed in booming and expand domestic capacity by accumulating human and physical efficient export industries. But this will take time, and meanwhile capital can grow by moving up the product ladder, shifting from those workers and their families will suffer. Labor, however, tends primary and low-value products into higher-value exports. to be well organized and powerful politically and would likely use Not everybody will gain from more trade. The trend toward its political muscle to try to block reforms. Most reforming gov- increased globalization may hurt two groups of South Asian ernments try to soften the blow and buy those workers' support workers. In the future, those working in export sectors that were for much needed reforms through generous severance pay and receiving preferential treatment from OECD countries must other safety nets. compete with East Asian producers on an equal footing. And workers in heavily protected import-substituting industries may International capital flows see some jobs disappear. International markets can also help finance investments that the Workers in South Asia's booming garments industry, who South Asian economies need to grow faster and generate more have benefited in the past from OECD quotas on imports from jobs. Foreign resource inflows in 1993 represented around 3.5 East Asia, will have to deal with tougher competition. With percent of South Asia's GDP. Historically, most inflows have increasingly competitive world trade, countries that do not keep been official credits or grants. That is changing. In 1993 almost pace with change can be hurt by improvements in the efficiency 26 percent of inflows were foreign direct investment and port- of rival exporters. For example, as China and Viet Nam become folio investment, up from only 9 percent in 1992. Most private more effective exporters of garments, Bangladesh and Sri Lanka flows have been concentrated in India and Pakistan, with little could lose market share, and jobs in those sectors would shrink. going to the smaller economies (Table 3). Even so, foreign To remain competitive, South Asian exporters will have to lower inflows are small compared with other regions. South Asia has costs and raise productivity through skill upgrading, more invest- more than one-sixth of the labor force in developing countries, ment, improved technology, and backward linkages. but it receives only slightly more than I percent of foreign direct As trade is liberalized, the workers who stand to lose the most investment going to those countries. By comparison, in 1993 are those employed in import-substitution industries operating Indonesia received $2,004 million in foreign direct investment, behind protective tariffs. Often, these are in the public sector- Thailand $2,400 million, and Malaysia $4,351 million. steel workers in India, for instance, or textile workers in Economic policies in the region must aim at increasing for- Bangladesh. For decades these workers have been collecting huge eign direct investment. This will accelerate capital formation, but rents-their wages are several times the earnings of workers in it also has two other beneficial effects. Foreign direct investment uncovered sectors. These rents were generated at the expense of usually brings with it new technologies and market access for consumers, who had to pay higher prices and accept goods of rel- exports. And increasing reliance on private sources of foreign atively low quality, and of taxpayers and bank depositors, who financing shifts repayment risks from government to private subsidized loss-making enterprises. With trade liberalization, entrepreneurs. 7 J rO B, r o v E R T Y, A^N D W O3 R K I N4 C O N D IT I- O 1 NS Table 3. Foreign resource flows, 1993 (millions of U.S. dollars) Net foregn CountIy Official debt Grants direct invesbtent Portfolio equity Total India 3,894 560 273 1,840 6,567 Pakistan 1,493 250 347 185 2,275 Bangladesh 344 720 14 0 1,078 Sri Lanka 178 141 195 0 514 Nepal 149 150 6 0 305 Bhutan8 1 40 0 0 41 Total 6,059 1,861 835 2,025 10,780 Share (percent) (56) (17) (8) (19) (100) a. Data are for 1992. Source: World Bank data. How to attract private capital? Minimize production costs favors or incentives to attract external capital and multinational and raise labor skills. South Asian countries with low labor costs corporations, but these measures are not sustainable in the long should normally be able to attract foreign investment and expand run. They distort the economy by discriminating against domes- exports by undercutting more expensive established producers. tic producers. Attracting foreign capital requires more than good Capital is first and foremost looking for good returns. So the key investments. Foreign investors also worry about macroeconomic to a successful capital-attracting strategy is to have the funda- stability and credirworthiness. Prudent fiscal and monetary poli- mentals right-good infrastructure, abundant skills, and social cies, solid links with global markets, and the flexibility to handle and political stability. Many countries have tried granting special external risks are also important for attracting those investors. 8 CHAPTER 3 Domestic Labor Policies long with growth and integration with world markets, South Asia's traditional societies, employers have to respect cer- A domestic labor policies are also important. Government tain norms of justice and avoid exploitation, or face social sanc- labor policies and regulations are often needed to ensure tions. Most informal employment contracts involve some risk the smooth functioning of labor markets, to avoid injustices, and sharing. For example, share-cropping-in which landless peas- to protect vulnerable workers. South Asian governments are ants share output with the landlord-is common in South Asia. heavily involved in formal labor markets. Most South Asian Informal arrangements can also provide income security. Private workers, however, operate in the informal and rural labor mar- saving is an important mechanism for dealing with risks, such as kets, which are beyond the reach of government regulations. unemployment, that are not easily insured against. For the poor The available data may overestimate the importance of reg- with little or no savings, private transfers between households- ulation in formal employment (Table 4). Administrative capac- within extended families or local communities-are often the ity is so weak that labor regulations are not enforced even in large recourse. A study of poor households in India found that 93 per- urban firms that are usually considered part of the modern sec- cent received private transfers, usually from members of their tor. Nevertheless, all governments in the region impose a vast extended families. array of labor laws and regulations ranging from minimum An understanding of the behavior of wages in the rural and wages to laws governing collective bargaining, severance pay, informal markets is crucial for policy analysis. Studies of rural and job security. Governments are also players in the labor mar- markets in India indicate that many social and institutional fac- ket as large employers of civil servants and public sector work- tors enter into the determination of wages, which may explain ers. How do government labor market interventions affect wide variations in wage rates among different villages and the workers' welfare? slow change in wages over time. At the same time, most studies show that real wages respond strongly to changes in demand and Rural and informal labor markets supply, especially over the medium and long terms. Empirical Formal employment can be defined as a contractual relationship work indicates that the rural wage rate is positively associated subject to government laws and regulations. Informal employ- with productivity-increasing factors, such as use of fertilizers, as ment relationships are unregulated. In fact, however, analyses of well as wich factors affecting demand, such as the availability of South Asian labor markets show that there are not two distinct alternative off-farm employment. Higher yields in India's agri- or parallel labor markets but a continuum of markets. At one culture as a result of the Green Revolution, and the resulting extreme are a few large firms and government enterprises to which labor legislation applies fully. At the other extreme are numerous wholly unregulated enterprises and family farms that Most South Asian workers do not benefit from the employ most South Asian workers. In between are small and protection of labor laws medium-size enterprises that, while formally subject to labor regulations, manage to circumvent most. In Pakistan almost the entire rural labor market-which T absorbs 71 percent of the employed labor force-is informal. Rural wage' Manufacturing Roughly 32 percent of rural employment is off-farm but still Wage labor, (domestic wageI (domestic Roughly 32 percent Country (percent) currency/day) currency/day) linked to agriculture. Many off-farm workers are engaged in ser- vices and repairs of agricultural implements, and rural small-scale Bangladesh 25 33 65 India ..19 70 manufacturing is dominated by food and beverage processing. Pakistan 30 33 102 This situation may be changing, however. Surveys of Pakistan's Sri Lanka 47 64 80 rural labor market indicate a rise in nontraditional activities, such .. Not available. as repair of electrical and transport equipment. a. A large proportion of these workers (61 percent in Bangladesh) South Asian societies effectively use informal arrangements are casual day laborers who do not benefit from the full protection of labor laws. to deal with labor market issues, especially those related to the b. For unskilled workers in 1990. uneven power of employers and to risk and income security. In Source: ILO and country sources. 9 D o r s s, POV E R -r T-Y, A, N D W OR R K I N X C OCN D I T I ON S S also large employers, and their policies affect the quality of pub- lic service and may have wider implications for the labor market. Finally, governments also play an important role in reducing income insecurity due to unemployment, disability, or old age. Figure 3. Indices of yields per hectare and real wages Other than basic rights (freedom of association and organi- in India, 1960-90 zation), the most widely discussed workplace standards include (1980=100) bans on child labor, protection for working women and minori- 180 r ties, minimum wages, and health and safety regulations. 160 5- 140 - 120 - Banning child labor 100 . All countries in the region have laws outlawing child labor. Yet 80- 60 _ u lS | 4 l | | | millions of children under the age of fifteen are working in South 40 Asia. Some child labor is considered more harmful than others. L20 Most working children are unpaid helpers on the family farm, a 0 1960 1965 1970 1975 1980 1985 1990 practice unlikely to be condemned provided children continue EDReal wage U output per hectare to attend school. There is, however, a minority of child laborers Source: Ravallion and Datt 1994. engaged in casual wage work in urban areas-making carpets, for instance, or garments. Most people think of these children when increase in the demand for labor, were associated with a sharp rise they hear the term "child labor," evoking disturbing images rem- in real rural wages (Figure 3). iniscent of the "dark, satanic mills" of the industrial revolution. Clearly, agricultural policies are important in improving the Child labor has to be understood before policies can be welfare of most informal workers. These include those employed designed to eliminate it. High rates of child labor are clearly off-farm as well as those directly involved in agriculture, since the linked to poverty and underdevelopment and to the poor qual- demand for their products depends on agricultural incomes. East ity or availability of education. Children in poor families work Asia's experience provides useful lessons. Labor in these because the family needs the extra income, especially if the par- economies was well served by development strategies that sup- ents' major source of revenue is uncertain. Surveys in rural India ported agriculture-initially the major labor-intensive sector- show that poor households, with no savings or current assets and through relatively light taxation, investments in rural unable to borrow, need to use child labor to minimize risks by infrastructure, and in some cases land reforms that supported reducing the potential impact of a parent's loss of a job or a failed family farming. harvest on the family farm. Moreover, when the education sys- tem is costly and ill-prepared to provide children with marketable Setting workplace standards skills, parents take their children out of school and direct them Informal employment arrangements are intrinsically limited. to jobs in the informal sector. They break down as the size of enterprises increases and as the The Indian state of Kerala shows how improved education communal links between workers and employers weaken. facilities can lessen the problem of child labor. In 1992 around 25 Although most South Asian workers are in rural and informal percent of the budget in Kerala went to education-compared sectors and not often directly affected by regulations, there are withanaverageofl7percentforotherlndian states. School reten- two reasons why appropriate labor regulations are needed. First, tion through fifth grade is 100 percent of pupils entering first formalization is important for development and growth, so labor grade, and the state's literacy rare is twice the national rate. market policies that discourage the expansion of the formal sec- Anthropological research in a Kerala fishing village indicates that tor should be avoided. Second, labor policies could have an indi- school attendance does not eliminate child labor, but it does pre- rect impact on informal workers by affecting their access to vent the worst excesses found elsewhere in India. This research better-paying formal jobs. Moreover, some labor policies, such as found that poor village children attend school but continue to public works programs, could have a direct effect on informal work part-time to help support their families. Their paid out-of- workers. school activities typically include looking after smaller children, Governments intervene in the labor market by setting work- foraging, petty trading, domestic chores, and fishing. place standards (such as minimum wages or maximum hours of National legislation and international conventions banning work). They pass laws that define workers' and employers' basic child labor have symbolic value as an expression of society's desire rights and the framework for collective bargaining, wage deter- to eradicate this practice. But they cannot deliver results unless mination. and dispute setclement. South Asian governments are accompanied by measures to shift incentives away from child 10 D O M E ST I C L AD ^ o R r o L I c I E S labor and toward education. The most important ways for gov- disadvantaged workers. It is facing difficulties, however, as other ernments to help are to provide a safety net to protect the poor, groups also demand preferential treatment, a common problem to broaden opportunities for quality education, and gradually to with affirmative action programs. Bangladeshi law reserves 15 expand the institutional capacity to enforce bans. percent of government positions for women, but the law appears to be inoperative. Women occupy only 6 percent of those jobs, Protecting women and ethnic minorities although unemployment among educated women is around 17 Children are not the only vulnerable group needing protection percent, compared with 2.3 percent for men. in South Asian labor markets. Governments also intervene to protect women and ethnic minorities. Protection takes two Setting minimum wages forms: maternity benefits and other privileges for working Sri Lanka's legislation is representative of minimum wage policies women, and antidiscrimination regulations to ensure equal in the region. Sectoral minimum wages are set by tripartite wages access to formal jobs. boards that determine minimum wages for each skill level in the All countries in the region have standards relating to mater- different sectors of the formal economy. Typically, members ofthe nity protection and night work. By raising the cost to employers, board are chosen from among employers in the sector, trade union however, these standards effectively discourage the hiring of representatives, and officials of the Ministry of Labor. women. They are also difficult to enforce even in the small for- Minimum wage legislation remains one of the hottest topics mal sector and can sometimes have perverse effects. For exam- in the debate on government-mandated labor standards around pie, some garment manufacturers in Bangladesh hire young the world. Proponents believe that appropriately applied legisla- women only on a daily, casual basis to avoid maternity benefits, tion can raise the income of the most poverty-stricken workers and a survey of female garment workers found that few of them at little cost in unemployment. They view minimum wages as a knew that they had a legal right to paid maternity leave. desirable way to redistribute income. Opponents argue that min- Yet Bangladeshi garment workers are much better off than imum wages worsen income distribution. By raising production theywere before getting jobs in the modern sector. Although low costs in the formal sector, they reduce employment. More work- by formal sector standards, their wages are more than double ers are forced to seek jobs in the unregulated informal sector, what they could earn in the informal sector or in rural areas. pushingthewagesoftheworkingpoorbelowtheirpreviouslevel. Perhaps more important. having a stable source of income has It is unlikely that increases in minimum wages in South Asia entirely changed women's status within the household. Female could have a positive impact on income distribution. As in most rural workers in Bangladesh work 5 to 30 percent longer hours developing countries, minimum wages in the region are already than do men, because they have household responsibilities in too high relative to national income and to other wages in the addition to their work in the fields. These women rarely have a economy. So even a small increase in the minimum would have say in the allocation of household expenditures. Their situation a negative impact on employment and income distribution. The changes dramatically when they ger work in the garment sector. relative level of the minimum wage tends to be higher in poorer Surveys indicate that the husbands of garment workers con- countries and to fall as national income rises (Figure 4). For tribute 1.3 to 3.7 hours a day to household work, and that 57 example, while some of the sectoral minimum wages are more percent of female garment workers determine how their wages than 2.5 times per capita GNP in Bangladesh, the minimum are spent. It appears, therefore, that women gain much more wage is only a quarter of per capita GNP in Canada. When from better access to modern sector jobs than from special stan- enforced, minimum wages in South Asia affect only a small dards to protect those who already have employment. group of urban formal sector workers who earn much more than To provide women with special benefits without raising the the less-favored majority that operate in the informal and rural cost of hiring them and discouraging employment, some coun- sectors. Sometimes differences are extreme: for instance, an iron tries finance maternity benefits from the government budget. and steel worker in India earns 8.4 times the rural wage. But this approach may be problematic in South Asia. In South Asian countries, minimum wages are difficult to Administration requirements are high, and there are risks of enforce even in the formal sector, where firms find many ways of abuse. Moreover, a general revenue-financed scheme would avoiding them. Empirical work in Bangladesh and Sri Lanka sug- partly finance benefits for formal sector women at the cost of gests a great deal of formal-sector wage flexibility, despite the min- poorer men and women in rural and informal work. imum wage regulations. The inability to enforce minimum wages Antidiscrimination policies usually aim at protecting ethnic is not specific to South Asia. For instance, household surveys in minorities and women. India has a program favoring the employ- Mexico indicate that 16 percent of full-time male workers and 66 ment of scheduled castes in the public sector, which appears to percent of female workers were paid below the minimum wage in be achieving its objective of providing greater opportunities to 1988. In Morocco half the firms surveyed in 1986 paid unskilled 11 J r3 D 9 , R I V E R T Y, A N D W a R K I 1-4 G CD N D I T I O N S workers might not. Even if workers are aware, they may accept _TrT T .T- dangerous jobs or hazardous working conditions because there is _ 1 . no alternative employment. Then, legislation may be necessary to prevent workers from consciously doing harm to themselves by Figure 4. Relative level of minimum wage declines as accepting dangerous work. Legislated standards are also defended income rises on the grounds that there are externalities to the risks that work- (logarithms) ers take-for example, when the costs of medical treatment for Minimum wage/GNP per capita those who are injured or fall ill are subsidized by others (such as 0.4 taxpayers). As with minimum wages, however, enforcing health and safety standards is difficult, unless monitoring is carried out 0.2 by civic organizations or by trade unions. 0.0 --- The role of labor unions -0.2- * Trade unions are key players in South Asia's labor markets. They * * have a long history of contributing to political, social, and eco- -0.4- nomic development. They were, for example, at the forefront of -0.6 _ | * E * " 2 the movement seeking independence for India. More recently, 3.0 3.2 3.4 3.6 3.8 4.0 4.2 4.4 they have been active supporters for democratization in GNP per capita Bangladesh and Pakistan. Unions and workers' collective action Source: World Bank data. can also have positive socioeconomic effects. The Nari Mukti Samity, a women's group bringing together paddy laborers in workers below minimum wages. Few nations outside the OECD Bahadurpur in Bangladesh, shows how worker organization can area have the administrative capacity to police minimum-wage improve the lot of the rural poor. In 1989 women workers in the regulations. This is especially so when minimum wages are set so area were paid about 40 percent less than men. Supported by high as to discourage hiring, which creates strong incentives for mens groups, womens organizations stopped working during the employers and workers alike to ignore the regulations. Employers busy transplanting season and demanded equal pay for equal clearly benefit from a lower minimum that reduces costs. Workers work. The landlords agreed to the demands and three years later will also gain as long as the wage being offered is above what they continue to pay equal wages determined by annual collective could earn in informal-sector activities. agreements. There are, however, some serious misgivings about labor Setting health and safety standards unions in South Asia. The unions represent the interests of a Since most South Asian workers operate in rural and informal very small proportion of relatively better-off workers (Figure 5). markets, dealing with their health and safety concerns is a prior- ity for many governments and civic organizations. The informal nature of labor arrangements in those markets, however, renders labor legislation useless. Attempts at improving health and safety conditions for agricultural and informal workers may be more successful if implemented through general policies aimed at the overall environment within which they work. For example, the Figure 5. Percentage of unionized workers use of dangerous chemicals in agriculture is usually best controlled Sri Lanka by regulations covering the import or production of pesticides and India fertilizers. Similarly, efforts at providing drinking water in rural Bangladesh [ areas and improving sanitary conditions in villages and urban Pakistan slums could have a profound impact on the welfare of most work- Nepal ers in low- and middle-income countries. Denmark ______1___E____,__v____l_ i_V____i_____*_ Health and safety interventions in the formal sector are not as United Kingdom IFrance important as interventions in rural areas in terms of the number State of workers affected. Nevertheless, almost all countries legislate U S minimum safety and health standards, usually justified on the 0 10 20 30 40 50 60 grounds that employers will be aware of workplace dangers, but Source: ILO data. 12 D O M E S T I C L A B O R P O L I C I E S They are also overpoliticized and fragmented. In Bangladesh, capture economic rents and will ally themselves politically with India, and Pakistan less than 4 percent of workers are union- employers and politicians who promise to perpetuate those ized. Because of the organization of plantation workers, union rents. Witness coal miners in Indiawho have been shielded from coverage is higher in Sri Lanka (around 30 percent), but gen- competition ever since the government takeover of the industry erally unions are not representative of most working men and in 1973. The highly unionized coal workers exert political pres- women in South Asia. Nevertheless, they are an important sure to obtain wage increases that are unrelated to productivity political force, because they are organized in large urban cen- and market realities, without regard to the country's economic ters and can exert pressure on government through agitation interests and development objectives. In the decade after 1973, and unrest. miners' nominal wage increases matched inflation in most years, Union activities are sometimes seen as benefiting their rela- but real wages jumped noticeably in the years just before tively small membership at the expense of poorer informal and national elections (Figure 6). In a competitive environment coal rural workers. The higher wages unions obtain for members miners would have had to moderate wage demands or face mine either reduce business profits or get passed on to consumers in closures and job losses. the form of higher prices. This leads unionized firms to hire fewer The structure of union organization and the coverage of col- workers, increasing the supply of labor to the unorganized sector lective agreements condition union behavior. Labor regulations and depressing wages there. in many countries also place a high value on pluralism in the There is a long tradition of ties between political parties and labor movement and on the rights of individual workers, includ- labor unions in South Asia, and weak, fragmented, highly politi- ing their right not to join a union. This is often considered an cized unions appear to be a characteristic of industrial relations extension of the basic human right of freedom of association, but in most of the region. A 1969 report of the Indian National it has important economic implications. Competition between Commission of Labor recognized the seriousness of the problem. free trade unions in a pluralist setting limits the ability of any Most disruptions in large public enterprises in Bangladesh over single labor organization to exert pressure on workers and the past few years-including incidents at the Bangladesh employers. Machine-Tool Factory in Joydepbur, textile mills of BTMC in Except in countries where all workers are unionized, collec- Tongi, and Adamjee Jute Mills at Adamjee Nagar-were caused tive bargaining at the enterprise level is an appropriate frame- by interunion rivalries. Disruptions in the workplace due to work for achieving positive economic effects. The union's unions' political activities are hardly conducive to investment ability to impose monopolistic wage increases is tempered by and growth. the strong competitive pressures on the firm from the product Politicized unions are also viewed as obstructionists that wield market, yet the union can still act as a participatory organiza- their political power against socially important economic reforms tion for the workers. that may hurt their members. India's unions continue to criticize the government's recent liberalization efforts, despite the appar- ent successes since 1991. The unions have organized nationwide Real wages of Indian coal miners often jump general strikes to oppose the commercialization of state enter- before national elections prises and industrial restructuring aimed in part at increasing India's outward orientation. India's unions are propping up that Figure 6. Year-on-year change in real wages of part of the economy most in need of reform. Indian coal miners, 1972-85 The challenge facing policymakers is to create an environ- (percent) ment that minimizes trade unions' negative effects and encour- 70 ages them to increase positive contributions to growth and 60 equity. Such an environment will usually include competitive 50 product markets and regulatory and institutional frameworks 40 . designed to ensure trade union pluralism. Legislation in many 30 countries also seeks to support collective bargaining in the pri- 20 . . vate and public sectors. 10 Competitive product markets limit the ability of unions to ° -0- - --------= - act as monopolists and obtain overly high wages for members. -10 N ,, Cl Raising wages would force unionized firms out of business - a) unless higher wages could be justified by increased productiv- Election years: 1974. 1977. 1980, 1984. ity. In less competitive environments, unions will attempt to Source: Banerji and Sabot 1994. 13 J o El s, P o V rs R T Y, A N4D W O R K I N O G C O N D I T-I 01 O 5S Although many unions may represent workers in a single pri- health and education. This requires a review of policies on the vate sector enterprise, only one can act as the "collective bar- size of the civil service, remuneration, recruitment and promo- gaining agent." Regulations also specify rules for the election of tion, and funding for materials and supplies. this agent at regular intervals from among all unions in the enter- The poor provision of essential public services is endemic to prise. This solution, however, has not been very effective because many developing countries, and South Asia is no exception. of interunion rivalries. Demoralized school teachers do not provide students with a high- Industrial relations in South Asia's public enterprises need quality education. Doctors trying to supplement inadequate pub- to be restructured and depoliticized. Public sector workers are lic salaries are unavailable for poor patients. Why are public allowed to form unions but cannot bargain collectively with employees, especially in developing countries, so likely to be inef- managers on wages and working conditions. In most countries, ficient? Most of the answers lie in the special character of public salaries and wages of civil servants and public employees are service. Measuring the quality and quantity of public service pro- based on recommendations of government-appointed commis- vision is difficult-as is evaluating workers on the basis of per- sions. This has not stopped public workers from going on ille- sonal achievements. Providers of public services such as health gal strikes to exert political pressure on the government to raise care and education are encumbered by multiple objectives (ensur- wages and salaries. ing equity, addressing poverty) that their private counterparts The present system has helped strengthen the links between may not face. And like other street-level bureaucracies-the labor unions and political parties, especially since the public sec- police force, courts, agricultural extension, and irrigation-these tor represents around a third of formal employment in the region workers cannot be directly and continuously supervised because and more than half of union workers are in public enterprises. they interact with the public on a daily, individual basis. Because of the direct involvement of central governments in wage Consider the experience of primary education in Bangladesh. setting and restrictions on collective bargaining, trade unions are T he government is committed to improving the quality of edu- unable to pursue their objectives through the normal machinery cation and has increased budgetary allocations for the sector. The of industrial relations. They depend on central government, and full impact of higher expenditures on service delivery is yet to be hence on politicians, and the multiplicity of political parties is felt, however, partly because of administrative weaknesses. Lack naturally reflected in the structure of the labor movement. The of qualified teachers is a big impediment. Teacher-pupil contact relative efficiency of different parties in satisfying union demands time in Bangladesh's primary schools rarely exceeds ninety min- explains why unions affiliated with the ruling party tend to dom- utes a day, compared with international norms of around four to inate the labor movement. five hours and a national target of two hours. The situation is Reducing the role of central governments in the labor market aggravated by irregular teacher attendance. Surveys show that as is the key to strengthening and depoliticizing the labor move- many as half the teachers are absent at a time, and it is not ment. This can be achieved in two ways. First, privatization of uncommon for schools to have a single teacher for more than a state enterprises would automatically reduce government's wage- hundred children at different grade levels. (The international setting role. Second, for enterprises that remain in the public norm is one teacher for thirty pupils.) domain, wage determination needs to be decentralized. This Public wage and employment policies must reflect market implies greater autonomy for enterprise managers, within a hard realities. International experience indicates that government budget constraint, and extensive use of decentralized collective wage and employment policies are often at least partially respon- bargaining. Unions would have a nonpolitical means of pursu- sible for such problems as lack of qualified public workers and ing their objectives, and politicians would be less able to influ- widespread absenteeism. Many governments have let the size of ence managerial decisionmaking at the plant level. For this che public service balloon, while limited resources have pushed strategy to succeed, governments will need to impose a hard bud- real remuneration far below what a market-determined wage get constraint on public enterprise management. If the costs of would have been. In some countries low pay has reduced the loy- collective agreements are borne by taxpayers (through budgetary alty and dedication of many civil servants and lowered the incen- subsidies), the financial system (through loans that are often not tives for talented and honest workers to move to or stay in public repaid), or consumers (through higher prices), management and jobs. Salary compression has made matters even worse. The unions may end up colluding and agreeing on unrealistic wage salaries of professional and skilled staff were allowed to fall more settlements. quickly in real terms than the earnings of those in lower grades. not because of any market evaluation of experience or education Government's role as employer but because it was politically easier for governments. These South Asian governments need to improve their performance as changes in relative pay had significant consequences for the hir- employers of civil servants who provide public goods, such as ing, retention, and performance of senior civil servants and che 14 D O M E S T I C L_A r o 0R P O L I C I E S most skilled employees and, hence, for the productivity of those and formal mechanisms are used to reduce these risks. Income under their supervision. transfers between households and assistance from the extended Cutbacks in spending on materials and supplies also con- family are the most common informal ways of easing the impact tributed to the deterioration in the quality of services. Civil ser- of sharp falls in income. In the formal sector, contracts between vants cannot perform well if they are not provided with the tools workers and employers almost always have an insurance element. to do the job. For example, many public hospitals in South Asia Private strategies for providing income security do have sig- have excellent physicians but lack medicines and surgical sup- nificant limitations, however. Households may be unable to bor- plies. Witness Pakistan's primary health care system. People avoid row to cover temporary declines in labor income. Community going to Pakistan's public hospitals because they lack adequate support mechanisms break down when there is a community- or medicines, equipment, and supplies. Although a majority of the economy-wide shock and weaken with urbanization and the population is within reasonable reach of a public health facility, diminishing importance ofthe extended family. Private insurance only 21 percent of patients first consult such a facility. Even very markets for unemployment, disability, and old age are limited or poor patients first consult a private service provider in 75 percent absent, in part because of perverse incentive effects such as adverse of cases. selection (only those likely to need insurance purchase it) and To be fully effective in increasing the quality of services, moral hazard (once insured, individuals are more likely to adopt reforms must include policy changes to ensure that the right peo- behavior that results in their reaping the insurance benefits). ple are selected for government jobs, and that employees are These limitations imply that governments may have a role to rewarded for hard work and held fully accountable for their play in the provision of income security. In South Asia, govern- actions. One way of attracting the best employees is to combine ments provide income security to informal and rural workers good salaries with objective, merit-based selection procedures, through public works programs and other safety nets. such as entrance examinations and interviews. In this area India Interventions in the formal sector are in the form of job security does well. University graduates are recruited into officer ranks by regulations and severance pay. national and state public service commissions that interview can- Public works programs are widely used in the region to com- didates and design examinations for different government plement private efforts that help the unemployed poor, provided departments. Although the large number of applicants means they are willing to work for low wages. These schemes are espe- that some interviews take less than five minutes, using the exam- cially appropriate during major recessions, when other job ination and interview procedure nonetheless adds a merit-based opportunities are unavailable. They are also well suited for rural element to recruitment. areas in the slack season and can have a secondary benefit of Civil servants also need to be rewarded for their achievements building or maintaining important infrastructure assets. The and held accountable for failures. One powerful way of motivat- level of wages can determine the success of such programs in tar- ing workers is to link promotion to performance. The Indian geting the needy. Wages need to be set low enough so that only civil service is typical. Promotion within the officer cadre is based the truly needy will accept the job. High wages may attract bet- solely on seniority. Officers are recruited in batches, and within ter-offworkers and, given limited budgets, lead to fewer jobs for each batch seniority is determined by the rank assigned by the the truly destitute. Consider the experience of the Maharashtra public service commission on the basis of the initial examination program in India, which seeks to guarantee employment on and interview. Officers retain this seniority ranking for the rest demand. In its initial fifteen years the program maintained of their careers, and it is rare for an officer to be promoted out of wages on a par with prevailing wages for unskilled casual agri- order. By contrast, promotion in the Korean civil service is based cultural labor. But in 1988 wages increased sharply, in line with on a formula that weighs both length of service and individual the doubling of the staturory minimum wage. In the year after merit. Merit is judged by subjective and objective criteria-test the wage increase, the program was no longer able to guarantee scores from training courses, performance assessments by super- employment. visors, and other factors, including awards and special prizes for Although effective in dealing with unemployment and sea- outstanding job performance or forother forms of public service. sonality, public works programs can do little for disabled or older workers. People incapable of manual labor, often among the Dealing with income insecurity hard-core poor, cannot benefit from these programs. Hence, Public and private sector workers and their families worry about public works need to be supplemented by other types of public the consequences of drops in labor income, whether due to transfers and by non-work-related social safety nets. Bangladesh's unemployment, disability, or old age. South Asian societies are Vulnerable Groups Development Program is an example of a suc- concerned about income declines that push people into poverty cessful intervention of this type in rural areas. It supplies grain to or deepen poverty for those who are already poor. Both informal about half a million rural women and children and relies on local 15 J o3 c S, r- o V Er R T Y, AN1.1 D W O3 R K I 1` G C O N D I T I ON 1 S leaders to identify the needy. Targeting is also improved by focus- basis or rely on subcontracting to circumvent these rules. India's ing the program's activities on at-risk regions. situation is similar. An econometric study estimated that India's Governments devote a large part of their efforts to providing job security regulations reduced formal employment in thirty- income security for formal workers. Because unemployment five industries by 18 percent. benefits are complicated to administer, job security regulations Since unemployment benefits are complex to administer and and severance pay are used instead in South Asia. Job security leg- job security legislation discourages formal employment, many islation is often designed to discourage arbitrary dismissals by countries try to address the real concerns of formal-sector work- establishing a liability for employers who fire workers without ers by requiring firms to make lump-sum severance payments. In just cause. Excessive job security, however, can discourage hiring. Bangladesh severance payments are set at two months' basic wage Sri Lanka's job security regulations may be doing just that. In for each year of service. If set too high, severance payments dis- addition to requiring employers to pay severance wages and con- courage hiring, driving employers and workers to rely on fixed- tribute to provident funds, Sri Lanka's laws restrict a firm's abil- term or daily contracts to avoid the severance pay requirement. ity to lay off workers. Firms with more than fifteen workers may If set too low, severance pay will not provide socially desirable not lay off workers on nondisciplinary grounds without their income security. There is no magic formula for determining the written consent. Firms usually must make large severance pay- appropriate level of job security and severance pay, and govern- ments, beyond what is required by law, to obtain this consent. ments will need to rely as much as possible on consultations and Not surprisingly, many firms hire workers on a casual or daily bargaining with trade unions and employers. 16 CHAPTER 4 Lowering the Temporary Costs o Transition D evelopment strategies of the past that stressed the share of the economy. That was not the case in Russia. And public sector and import substitution and that pro- because China had a far larger informal agricultural sector than vided special privileges and protection to a small group more heavily industrialized Russia, it had experienced less misal- of workers have not delivered results. As are most developing location of resources. nations and the economies of Eastern Europe and Central Asia, These different initial conditions constrain both the path of the economies of South Asia are undergoing a deep transforma- transition and the strategic choices open to policymakers. China's tion toward greater openness and market orientation. Some large rural supply potential gave a powerful initial spurt to growth workers will experience temporary losses as jobs are destroyed and allowed a gradual transition. Lacking such supply potential, and as once-protected wages and benefits adjust to market reali- the countries of Central and Eastern Europe and the former ties. South Asian countries are in a better position than most Soviet Union had to reform their state sectors and accept the other countries undergoing this transformation. They do not destruction of state employment rather than postpone reforms face severe macroeconomic imbalances. The modern sectors that as China did. As a general proposition. initial conditions are were protected and need reforms are a small proportion of the more advantageous when labor and capital are highly mobile and overall economy, which remains primarily agrarian and market where there are viable sectors wich a strong supply potential. oriented. And they have not experienced massive political and South Asian economies bear a greater resemblance to China institutional upheavals. How fast should reforms be imple- than to Russia. The industrial sector, which has the most distor- mented? And, how can the social costs associated with the tran- tions, is a small part of the economy-only 25 to 27 percent of sition be minimized? GDP in India, Pakistan, and Sri Lanka, and 18 percent in Bangladesh and Nepal (Table 5). The large agrarian markets The speed of transfornation could be an important source of growth and help absorb some Should reform be gradual, with slow destruction of unviable jobs, of the labor that will need to leave inefficient industrial sectors. or rapid? From labor's perspective, the ideal is to phase out jobs Moreover, South Asian economies are not facing severe macro- only as new jobs are created, and thus to minimize the drop in economic imbalances or balance of payments and debt crises. labor demand. This strategy of gradual transformarion has been Hence, they are not under pressure to act swiftly to a-hieve equi- used successfully by China, which chose to protect unviable jobs librium and can afford to implement reforms gradually. to avoid social and political difficulties. Many Latin American Gradual does not, however, mean a stop-and-go reform path countries and post-centrally planned economies chose to trans- that is hostage to interest group pressures. No adjustment can form their economies more quickly. succeed without a credible commitment to move away from an Initial conditions can exert a powerful influence on the scope old, undesirable equilibrium to a new one, following a basic plan and pace of reform. The pace of job destruction, for example, that sets out the main direction of reform. The essential compo- can be managed only if the protected sector is small relative to nents of such a plan are straightforward: greater reliance on mar- the rest of the economy. Similarly, a gradualist approach to ket forces, redefinition of the role of government, a stable reform is easier in an economy that starts from macroeconomic macroeconomic framework, and increasing integration with the equilibrium than in one plagued by high inflation or shortages world economy through open trade. In South Asia credibility of foreign exchange. A comparison of China and Russia illus- depends on dealing with the public enterprise problem. Large trates the difference that initial conditions make. China chose a public enterprise losses have important budgetary implications. two-track approach: it continued state control of existing enter- and public enterprise debts are a constraint on financial sector prises while permitting a new, nonstate sector to emerge largely reform. Moreover. in some sectors che existence of large, ineffi- outside of government control. This strategy was possible cient public enterprises that receive special treatment and pro- because the inefficient state sector accounted for a relatively small tection discourages private investment. 17 J o B S, P E v E R T Y, At .D W O R K I N G c DN D`I4 T I D N S I FVMMI, IZ14U11111 I Table 5. Conditions affecting the pace of transition, 1993 Share of industry Average Inflation Resenres (months Debt to GDP Debt service ratio Country in GDP (percent) (1980-931 of imports) (percent) (percent) India 27 8.7 3.6 29.1 28.0 Sri Lanka 26 11.1 2.9 41.9 10.1 Pakistan 25 7.4 1.4 39.1 24.7 Bangladesh 18 8.6 5.5 31.1 13.5 Nepal 18 9.5 6.8 25.6 9.0 Note: Debt is calculated in present value terms. Source: World Bank data. A credible and sustainable reform program also requires that of retraining can improve its effectiveness. Chile shows that a sys- government, capital, and labor perceive a common interest. tem based on distributing vouchers to targeted groups, allowing Because unions in South Asia represent workers who were rela- them to buy training services in a competitive market, can work tively privileged before the transition, they are a vocal force particularly well. By contrast, special credit programs in Sub- against economic modernization. Gaining organized labor's sup- Saharan Africa and Latin America have rarely brought benefits. port is crucial. Making the long-term gains of reform explicit can In the industrial countries these schemes have been shown to be help. So can mechanisms that precommit the government to fol- of interest only to a small subgroup of the unemployed (about 3 low through with the reforms and prevent it from reneging on percent) and have had significant displacement effects. its promises. Public works can serve as a bridge between jobs during peri- ods of major change, although they do not improve the long- Dealing with the social costs of transition term prospects of participants. Such schemes have been used Regardless of the pace of reforms, the major changes needed successfully as antipoverty measures in rural South Asia- in South Asia will have profound effects on some workers. Maharashtra or food-for-work programs in Bangladesh and Governments could play an important role in softening this Nepal. In periods of massive transition they could also be impact. In times of major transitions, workers, especially those extended to urban areas, as in Chile in the 1980s. used to job security, fear losing their jobs and bear significant Boosting transfers to workers displaced during transition can psychic costs. In South Asia workers in public enterprises, who also help. Permanent income security mechanisms-unem- enjoyed an implicit lifetime employment guarantee, are impor- ployment insurance and severance pay-may be inadequate in tant losers. Workers in agriculture and in the emerging export transitions because of huge (though temporary) increases in the sectors will generally gain. Government policies to support number of unemployed or in the number of households in those who lose their jobs have often involved retraining, support poverty. Governments may also be concerned about losing pol it- for business startups, public works, and transfers to laid-off ical support for reforms if income falls too much, especially workers. among the politically influential. Many countries have adopted Retraining schemes seem to work differently for different special provisions to deal with public workers who lose their jobs groups of workers in different countries, though in general expe- during transitions, including higher than normal severance pay. rience with retraining and support for business startups is not Clearly, the decision on the level of this compensation has to be very encouraging. Strengthening the private sector as a provider based on social, political, and budgetary considerations. 18 CHAPTER 5 The Outlook for South Asian Workers A re the countries of South Asia poised for an East encouraging private saving and investment (raising investment's Asia-style take off and engagement in the international share of GDP to at least 26 percent) and promoting exports economy, or will their transition stall? At present South (which need to rise by almost 9 percent a year in real terms). Asia is weakly integrated into international trade. Workers have Concomitantly, governments should ensure that labor market seen average incomes rise slowly with labor productivity. The interventions benefit all workers, not just the lucky few with accumulation of capital and skills has also been steady though modern sector jobs. The benefits to South Asian workers from slow. But industrial labor absorprion has been weak, and agri- good domestic and international policies could be enormous. culture remains overregulated. The liberalization of agriculture Projections under assumptions of high investment and export and the takeoff in manufacturing must go hand in hand. In the growth show real wages increasing at more than 5 percent a year absence of a strong pull of labor demand from manufacturing, and the incidence of poverty falling rapidly. Good choices by gov- there is a real risk of rising inequalities and stalled reforms. ernments, in the domestic and international realms, can lead to Government policies could help workers seize the new oppor- advances in the incomes of all workers, can address both their tunities provided by the global economy and minimize the risk rights and their concerns, and can help bring back into the fold of a stalled transition. In South Asia policies should aim at those who are unable to keep up or adjust on their own. 19 References Bibliographic note Prrwes, Menahem. 1995. "Unemployment in Sri Lanka: This paper draws on the World Bank's World Development Sources and Solutions." World Bank, South Asia Region, Report 1995: Workers in an Integrating World (New York: Washington, D.C. Oxford University Press, 1995). Additional data for South Ravallion, Martin, and Gaurav Datt. 1994. "Growth and Asia were obtained from national statistical sources, from Poverty in Rural India." World Bank, Policy Research World Bank data collected for poverty assessments and pub- Department, Washington, D.C. lic expenditure reviews, and from the papers and reports listed World Bank. 1989. "Pakistan: Employment Issues and Prospects." below. World Bank, South Asia Region, Washington, D.C. - . 1993. "Bangladesh: Implementing Structural Reform." References World Bank, South Asia Region, Washington, D.C. Dickens, William, and Kevin Lang. 1991. "An Analysis of the . 1995a. India: Recent Economic Developments and Nature of Unemployment in Sri Lanka." NBER Working Prospects. A World Bank Country Study. Washington, D.C. Paper 3777. National Bureau of Economic Research, - . 1995b. "Sri Lanka: Poverry Assessment." World Cambridge, Mass. 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