Labor Pains

Good intentions can go awry if they don’t tackle a problem’s roots and long-term conditions. India has launched an ambitious program to feed its poorest citizens, but the costly program will require tax revenue from working citizens, explains Nayan Chanda, YaleGlobal’s editor, in his column for Businessworld. Instead of developing intricate subsidy programs, he urges that India tackle inequality by “clearing the thicket of outdated labour laws,” developing needed skills and creating jobs. Excessive regulation, for example, making it impossible to dismiss an unsuitable employee or requiring detailed paper records, deters investment in manufacturing and job creation. Also, an Asian Development Bank study suggests that “labor market regulations inhibit flexibility of firms engaged in export more than firms serving only the domestic market,” Chanda writes. He concludes that government’s role is not to encourage votes for a few politicians, but to undertake the long-term task of developing sustainable conditions for creation of good jobs. – YaleGlobal

Labor Pains

India’s welfare schemes are fine and moral, but the economy will really get a boost only when there are fewer regulations and more jobs
Nayan Chanda
Monday, September 30, 2013

In launching an ambitious programme to feed 800 million of its poor citizens, India has embarked upon a morally admirable but economically problematic social welfare scheme. To sustain such a humane policy, the country must generate wealth by putting its massive working population to productive work. To achieve that goal, however, India needs a national employment promotion scheme. Not one requiring subsidies for the urban poor and unemployed, but rather one that clears the thicket of outdated labour laws. These rules, in the name of protecting workers, have ensured that labourers do not get a chance to exercise their right to work.

Under the rural work programme, members of poor families have the right to work 100 days a year for a minimum wage. Despite massive corruption in its administration, to say nothing of the sub-standard roads and canals built by such workers, the programme has helped the rural poor and, perhaps, stemmed city-ward migration. It is at its core, however, a classic transfer payment aimed at redistributing wealth. But to build a prosperous society the country needs to generate wealth by creating jobs not making work schemes. 

The transfer policy may be morally right in a deeply unequal society but India has failed to exploit its much-vaunted ‘demographic dividend’. Millions of dollars spent on rural work schemes have provided subsistence and not helped rural poor to develop skills. Also, the failure of the state to build necessary infrastructure and phase out antique laws have discouraged growth in manufacturing, which could absorb 13 million job seekers coming into the market each year. 

Developing countries have traditionally leveraged their working populations in light industry and manufacturing to accumulate capital. Over time, developing skills and value adding have lifted the poor and unskilled into the ranks of middle class. China offers a textbook example of that policy, whereas India presents a worrying counter-example: once the world’s champion textile exporter, India has ceded its place to its South Asian neighbors and China. Manufacturing overall has stalled, with its contribution to the GDP declining from 17 per cent in 1995 to 14 per cent in 2012.

Aside from poor infrastructure and inconsistency in policy, labour laws designed (ironically) to help the workers have instead held back investment in manufacturing. A plethora of laws dating back decades have effectively prevented the “effective provision for securing the right to work,” as provided for by Article 41 of the Indian Constitution. 

Successive amendments to the Industrial Disputes Act (1947) have made it increasingly harder for firms with 100 or more workers to dismiss workers. Among the laws dating back to another era is one that requires factories to maintain paper files — effectively barring the advent of electronic recordkeeping. Such laws deter investors. It is hard to maintain payroll constant while the demand of export market is notoriously volatile. 

Export issues aside, anachronistic labour laws have reduced productivity. In a 2004 study of the impact on Indian states that modified the Industrial Disputes Act in a pro-worker direction, T. Besley and R. Burgess found the result was the opposite of what the legislation intended. Output in the formal sector where regulations applied dropped and that in unregistered or informal manufacturing increased. A recent Asian Development Bank study on the impact of labour market rules in five Asian economies — Bangladesh, Indonesia, Pakistan, the Philippines and Vietnam reached a similar conclusion. It found labor market regulations inhibit flexibility of firms engaged in export more than firms serving only the domestic market.

Free food and subsistence wages for the rural poor may help politicians to get votes. But lifting the economy will require a coordinated government and private initiative to promote conditions for job creation. 

The author is editor-in-chief of YaleGlobal Online, published by the MacMillan Center, Yale University.

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