South Asias rigid labour laws play spoilsport for manufacturing sector, says World Bank

Written by Sajan C Kumar | Chennai | Updated: Oct 23 2009, 04:19am hrs
Rigid labour laws are having an adverse impact on the manufacturing sector as the sector comprises relatively small firms when compared to other economies of similar size, says a World Bank report Accelerating Growth and Job Creation in South Asia. The World Bank has developed an index, ranging from zero to 100, based on how hard it is to let go workers, where zero denotes the easiest and 100 the hardest. India scores 90 on this scale while Bangladesh and Pakistan score 20 and 30, respectively, and Bhutan scores zero.

The report finds that labour has been underutilised in manufacturing firms in the formal sector in India and given the amount of capital used by firms, their productivity, and the cost of labour, the firms are employing less labour than they would employ if they faced no hiring and firing costs. While the growth rate of value addition in services in the country was comparable to that in China, it was about 10 percentage points higher than that in any other country. In stark contrast, the growth rate of value addition in manufacturing in India was only about half of that in China and Vietnam, and quite a bit lower than that in Pakistan.

The report underlines the fact that a key regulatory weakness of South Asia was that the rigid labour laws protect workers rather than jobs. South Asia has one of the most restrictive sets of labour regulations in the world. As per the global perspective on the restriction of hiring and firing workers, India and Sri Lanka have been rated very restrictively. Average severance pay was 75 weeks in South Asia compared to 33 and 63 weeks in other parts of the world.

According to the report, labour mobility was the natural mechanism for promoting faster and inclusive growth regionally and globally. In the case of South Asia, remittances were almost twice as large as private debt and portfolio equity, three times as large as foreign direct investment, and seven times as large as official development assistance. It was estimated that over 22 million people, or 1.5% of the South Asian population, live outside their country of birth. Intra-regional migration was the largest share of international migration movement in South Asia, while high-income non-OECD and high-income OECD countries were the second and third largest destinations.

In 2007, the top recipient countries of recorded remittances in South Asia were India ($27 billion), Bangladesh ($6.4 billion), and Pakistan ($6.1 billion), collectively making the South Asian region the third largest regional recipient of remittances. As a percentage of GDP, remittances were most important for Nepal and Bangladesh. Migration contributes to the movement of surplus labour from rural to urban areas, from lagging to leading sectors, and from lagging to leading regions. This promotes higher productivity, wages, and inclusive growth.

The report says that the flow of resources and products to areas where demand and prices were higher, allows more efficient use and higher incomes. In India, inequality was emerging between the populous northern and interior states where there were few jobs, and the coastal states that were creating more jobs but face labour shortage, due to low labour mobility.

The parallel number is dramatically lower for China, Turkey, Mexico, and other large developing countries. Among the factors that inhibit labour mobility are internal distances, poor infrastructure, cultural factors, poor education, and location-specific safety net programmes such as rural employment guarantee schemes in India, which prevent migrant workers from using safety nets in states where they were not born. Given the positive role of migration and remittances in reducing inequality and poverty, policy efforts should focus on removing restrictions on migration and to lower the cost of sending remittance by facilitating money transfer through official channels.

Commenting on the nature of the working class, the report says South Asia has a young population and the lowest female participation rate in the labour force. While the demographic dividend would result in more workers entering the labour force in the future, more than 150 million people is likely to enter the prime working age population over the next decade. Significantly, labour supply growth has been 2.3% per annum in South Asia, above the global average of 1.8%. The increased bulge within the labour force can contribute to additional growth; so will the increased female participation in the labour force.