Planning employment and poverty reduction

Rizwanul Islam

Photo: Shafiqul Islam Kajol/Driknews

THE present government of Bangladesh has committed itself to a strategy of planned development rather than ad hoc policies and strategies that are often driven or at least influenced by donors. Of course, planning exercise in a market oriented economy cannot be the same as it used to be in predominantly public sector driven economies. However, even in a market oriented economy, governments need to play an active role by delineating the strategic directions that they would like their respective economies to take. This is particularly the case in developing countries. And in that context, medium term planning assumes importance. The present government deserves to be commended for going back to this approach.

The Planning Commission is currently in the process of finalizing the documents relating to the Sixth Five Year Plan (covering the period 2011-2015). A document spelling out the “strategic directions and policy framework” (henceforth referred to as the Strategy Document) is currently in circulation for comments and suggestions. It may, therefore, be an opportune time for making some observations on development strategies being adopted by the Plan. For that purpose, I shall focus particularly on employment and poverty reduction. The reason for choosing this focus is that despite progress made in reducing poverty, accelerating the rate of poverty reduction for attaining the Millennium Development Goal of halving poverty by 2015 remains a major challenge facing the country, and productive employment is a key instrument for fighting poverty.

Economic Growth and Employment
The Strategy Document of the Planning Commission (mentioned above) recognizes productive employment as “the most potent means of reducing poverty on a sustained basis” and talks about a growth process that would allow “transfer of a large number of workers engaged in low productive employment in agriculture and informal service sectors of the economy to … higher income jobs”. Anyone familiar with the basic theory of development would immediately recognize that the challenge and process of development has been rightly identified. Moreover, the Strategy Document rightly emphasizes on the composition of growth alongside high growth to be important.

The composition of growth, in turn, could be looked at in two stages: first in terms of the relative rates of growth of broad sectors, e.g., agriculture, industry/manufacturing, construction, services, etc. The second stage would be to look at the composition of growth within broad sectors; and that can make a lot of difference to the overall growth and its employment outcome. Anyone familiar with theories of development and successful experiences in countries like Republic of Korea, Malaysia, etc., would know that in order to achieve a quick transfer of labour from sectors characterized by low productivity to those with higher productivity, it would be necessary for the manufacturing sector to grow at much higher rate than overall GDP (the ratio has been roughly 1.6 to 2 in Korea and Malaysia during their period of rapid labour transfer). The record in Bangladesh has not been anything like this. And that is where we need to work.

If a 6% GDP growth is targeted, it would be desirable to aim at 10-12% growth in the manufacturing sector (which is not the case at present). Likewise, if a GDP growth of 8% is targeted, effort would need to be made to attain 12-16% growth in manufacturing. When 1% growth in output is associated with a 0.6% growth in employment, 12% growth in manufacturing output will yield 7.2% growth in employment. Since that would be substantially above the growth of urban labour force, it can be expected that with such a growth rate, there can be a quick transfer of surplus labour from agriculture to manufacturing. And since the latter is characterized by higher productivity, such transfer of labour would be consistent with the strategy of productive employment for poverty reduction.

But it would be essential to go beyond the overall growth of manufacturing sector to the composition of the sector itself. And that's where the importance of labour intensive manufacturing comes. Bangladesh has succeeded in promoting the growth of one such industry (viz., ready-made garments _ RMG); but from the point of view of rapidly transferring the huge surplus labour that exists in the country and achieving high rate of growth mentioned above, that is not enough. The experience of successful industrialization tells us that a number of such industries need to grow simultaneously in order to be able to absorb the available surplus labour. The key question for Bangladesh is: how the success achieved for one industry can be made more broad-based.

There comes the importance of strategies and policies. The conventional approach is to rely on export orientation. Indeed, development and trade theory would support that kind of a strategy. But there is no automaticity between export orientation and broad based growth of labour intensive industries (which I have shown in my recent research). While there are success stories like those of east and south-east Asia, there are also examples of limited success like India and Bangladesh. In India, despite economic reforms and greater export orientation since 1991, the share of labour-intensive industries in total manufacturing output declined between 1990-91 and 2003-04. But in Korea and Malaysia, the share of such industries increased during the early stage of their industrialization (up to 1990). The differences in experience need to be looked at carefully and the strategies and policies could be fine tuned on that basis.

As for policies needed to achieve a higher growth of manufacturing industries in general and of sub-sectors in particular, it would be important to go beyond broad theories and strategies and look at sector specific constraints. The Strategy Document of the Planning Commission does mention a few important elements, e.g., the relative attractiveness of investment in production and other sectors like real estates, stock markets, etc. But it would be important to go into further details and look at sector specific constraints and policies needed to overcome them. In this context, it may be mentioned that export orientation alone need not be the basis of industrialization in a country like Bangladesh which should have a domestic market of reasonable size if the benefits of growth are shared more equitably and incomes of the lower income groups also rise rapidly. With such broad-based growth, demand for a wide variety of goods is likely to increase which can be met from domestic production. In other words, alongside export-oriented industries, there should be demand for domestic market oriented industries as well. Small and medium scale industries may be able to play a particularly important role in that respect. From this point of view, there is a case for walking on two legs as far as industrialization is concerned _ one leg represented by export oriented industries and the other aimed at the domestic market.

Coming to the equation between the supply of labour force and employment creation, it would be important to start from a set of consistent figures on labour force growth, the total labour force in the benchmark year (say, 2010-11), and the elasticity of employment with respect to economic growth (the latter expressing the relationship between the rates of employment and output growth). A few observations may be made in this regard.

Assuming that the growth of labour force is 3.3% per annum (which is the figure available from the revised second PRSP document prepared after the present government came to power), the total labour force in 2010-11 would work out to be 55.75 million. Based on the employment elasticity figures used in the revised PRSP 2 document and assuming an annual GDP growth of 6.5%, the annual additional employment works out to be approximately 1.8 million per year. This would be less than the annual addition to the labour force (which currently is about 2 million workers). These, however, are indicative figures. Projections of labour force and employment for the entire plan period will need to be made more carefully.

There are several ways of closing the gap between available labour force and employment created by the economy. First would be to raise the rate of GDP growth. The second would be to increase the job creation capacity of the economy _ for example, by promoting higher growth of more labour intensive sectors. The third way of filling the gap between labour supply and demand would be to find jobs abroad, which already is a major source employment for substantial numbers of Bangladeshi workers.

That brings me to an important element in the labour supply demand equation _ international migration of workers. Given the current situation, the country requires to find jobs abroad for about half a million workers annually in order to ensure that the entire new addition to the labour force is employed and some from the surplus labour pool can be transferred to higher productivity sectors. An effective strategy is needed to achieve that.

But given the uncertainties associated with international migration of workers, it would be desirable to rely more on the first two ways of closing the supply demand gap mentioned above (namely raising output growth and making growth more employment intensive). In that context, growth in the manufacturing sector becomes particularly important. As mentioned earlier in this article, effort would need to be made to achieve double digit growth of this sector. In addition, it would be essential to attain higher growth of more labour intensive sectors, e.g., garments, shoes and other leather products, toys, furniture, electronics, etc. Unfortunately, Bangladesh has not yet seen much of a shift towards labour intensive industries except textiles and clothing. The Sixth Plan needs to develop a strategy for broad-based industrialization along lines suggested above.

At present, the additional employment generated by the manufacturing sector is about 250,000 per year. In order for the country to be able to reduce its dependence on manpower export and to transfer labour from agriculture, this number has to increase substantially. The service sector which is quite heterogeneous and includes a large segment of low productivity activities is capable of adding 700 million or so jobs annually. The target should be to promote the more modern part of this sector for higher growth and employment generation. Appropriate strategies are needed for that to happen.

Photo: Noor Alam/Driknews

Poverty, inequality and social protection
As mentioned at the outset, productive employment provides the key link between economic growth and poverty reduction. It also needs to be recognized that a rise in inequality in the distribution of income can blunt the poverty reducing effect of economic growth. And that is what has been happening in Bangladesh during the past two decades or so. I think it's time to tackle the problem of inequality head on.

From the point of view of accelerating the rate of poverty reduction on a sustained basis, it should be noted that a large segment of the population (many of whom may not be poor) in Bangladesh remain vulnerable to external shocks caused by natural calamities and economic crises of various types, e.g., sharp increases in food prices, and economic downturns. Such shocks affect not only the poor; they often cause what is known as transient poverty _ non-poor people near the borderline falling into poverty. And measures of social protection can play an important role in tackling such transient poverty as well as in helping the poor. In fact, at the international level, there is a growing recognition of the importance of a “basic social floor” below which the poor and the vulnerable should not be allowed to slip. It is probably time for Bangladesh to give some consideration to the building up of a “basic social floor” _ of course, taking into consideration the ground realities of the country.

In that context, it would be important to institute “automatic stabilizers” which can play the role of supporting the poor and vulnerable during a crisis. In developed countries, unemployment insurance and other similar measures play the role of automatic stabilizers. However, given the structure of the economy of Bangladesh (especially the predominance of informal employment), unemployment benefits may be less relevant. In such a situation, a rights-based approach to employment and special programmes for guaranteed employment based on such approach may be useful. Such a programme can also incorporate unemployment benefit in the event of the inability to provide employment. Given the frequency of external shocks and the vulnerability of large segments of the population in the face of such shocks, it has become important to think of such an approach to employment.

One may of course raise the issue of fiscal space needed for such a programme. A recent exercise undertaken jointly by the ILO and BIDS demonstrates that Bangladesh can create the necessary fiscal space for meeting the costs of such a programme from its own resources.

But given the plethora of social safety net programmes that exist in Bangladesh, it would be important to adopt a strategic approach to the issue of social protection and formulate an integrated approach. Such an approach will help economize resources and make implementation easier.

The author, an economist, is former Special Adviser, Employment Sector, International Labour Office, Geneva.