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Serving Sri Lanka

This web log is a news and views blog. The primary aim is to provide an avenue for the expression and collection of ideas on sustainable, fair, and just, grassroot level development. Some of the topics that the blog will specifically address are: poverty reduction, rural development, educational issues, social empowerment, post-Tsunami relief and reconstruction, livelihood development, environmental conservation and bio-diversity. 

Friday, November 25, 2005

Alternative approach for employment and sustainable development

Daily Mirror: 17/11/2005" By Prof. J.A. Karunaratne

The current situation in the labour market with relatively high youth unemployment and underemployment makes one of the main political, economic and social issues of contemporary Sri Lanka. As it is the economically disenfranchised who for the most part are inclined towards committing criminal offences, there are some who make the connection between economic disenfranchisement and criminality. There are even those who make the connection between widening ethnic divide, ethnic conflicts and economic depravity.

It is perhaps for this reason that the contemporary politicians of Sri Lanka have vowed to remedy the evil of unemployment. But it is not the politicians of one particular ideological persuasion or another that have vowed to remedy this problem. When and if they become elected to the good office of the land the presidential candidates of every different persuasion have vowed to remedy this problem.

But the high prevalence of unemployment does not constitute itself as the only aspect of the labour market problems for concern. The high prevalence of underemployment (to work less than eight hours a day and/or to earn less than sufficient to help the individual worker concerned maintain a decent standard of living) is also a major issue for concern. Then the absence of sustainable economic growth that pertains with labour market situation too makes it a major issue for concern. Further the warped distribution of income also is a major issue for concerns.

Hence it is not fully correct to consider the prevalent situation in the labour market to concern only with unemployment situation in the country. As a matter of fact the prevalent situation in the labour market of Sri Lanka concerns predominantly with (1) equitable distribution of income, (2) growth of output, (3) sustainable growth of the economy, and (4) political and social stability. Thus the prevalent situation in the labour market of the country concerns every aspect of the economy and every individual of the country.

Therefore, it should be correct that the politicians of Sri Lanka have undertaken to tackle at least some of the most pressing labour market issues i.e. youth unemployment of Sri Lanka. Therefore, one is not at conflict with politicians about their intensions in tackling the labour market problems.

One may, however, question the modes and methods that these politicians use in resolving these labour market problems. One may ask how sustainable are the solutions sought by these politicians to the labour market problems. One may question what ramifications that these solutions give to other realms of the economy.

The purpose in here, therefore, is to outline some of the follies that pertain with some means and methods proposed by some legislators, and propose some alternative approaches to the problems in the labour market.

In view of assuaging the harshest repercussions of youth unemployment for the individuals concerned and for the economy, the legislators of Sri Lanka have undertaken to expand public sector employment so as to be able to absorb the unemployed youth into the public sector. It has already allocated tens of thousands of jobs in benefit of the unemployed youth of Sri Lanka.

It has also vowed to allocate several thousands jobs more with similar intensions.

But these modes and methods of resolving the labour market problems are far from safe and appropriate. When the largest number of the economies of the world, particularly those that are referred to as the ‘transition economies’ as well as some of the developing economies including India and Malaysia are downsizing their public sector activities in favour of the private sectors of each of these individual countries, Sri Lanka is hastening in the opposite direction.

Both in terms of the share of the Gross Domestic Production (GDP) consumed by the public sector as well as in terms of real employment, the public sector of Sri Lanka has, over the past year, been expanding rapidly. This constitutes the first anomaly.Secondly, according to available economic literature any expansion in public sector through expansion in public sector employment is bound to stimulate the demand for goods and services over and beyond the capacity in the economy for expanding the supply thus yielding for inflation. Predictably therefore the inflation of Sri Lanka has over the past year been galloping fast.

But growth in inflation renders ramifications for equitable distribution of income as well as (through Fisher hypothesis) for the rates of interest on loans. For example, if inflation was at 15%, the rate of interest on bank loans (commercial bank interest rates) would have jumped to a level over and above 15%.

Thus with galloping inflation, the incomes are going to be distributed unevenly between the wage earning and contractual work force, on the one hand, and the propertied class of people, on the other. Then at the same time as the interest rate on bank loans runs high as inflation pushes up the interest rates, the indigenous investment level is going to decline to a corresponding degree. Hence at long stretch, any expansion in the public sector would have caused decline in private sector growth. Consequently decline in private sector would have caused decline in private sector employment. Much of the private sector economic activities would be ‘crowded out’ by growth of the public sector.

Thus expansion of the public sector through, inter alia, allocation of job opportunities in favour of the unemployment youth would not have yielded much desired sustainable economic growth.

The state that seeks to guarantee sustainable economic growth with equitable income distribution should have considered an alternative economic formula, instead. (1) It should have held the interest rates on bank loans low by holding the inflationary pressures down. (2) It should have developed the infrastructure with, amongst other things, the increased tax income that it earns from growing private sector and from foreign aid. (3) It should have reduced prevailing fraud and corruption and improved on the essential institutional facilities that could develop the private sector employment and the entrepreneurial activities.

Then the state should have given the opportunities for the unemployed and underemployed youth to secure themselves apprenticeship opportunities in the private sector of the economy where they could have secured themselves the appropriate experiences with the help of which they could have increased their private income at the same time as they would have contributed to growth in output both in terms of quality and quantity. This has been the employment and development model followed by most of the progressive moderate governments of the world including those of Scandinavia.

The state would have found it acceptable to help the unemployed and underemployed youth secure themselves apprenticeship opportunities in the private sector by way of offering those private sector enterprises that are forthcoming in this endeavour with tax holidays or other wage subsidies.

Such a measure would not have contributed to galloping inflation that warps the income distribution. Lower rate of inflation would have given correspondingly lower rate of interest on bank loans which in its turn would have helped the expansion of private sector investment activities and which in its turn would have improved the rate of employment and organic and sustainable development of the economy.

In resolving the most pressing problem of the decade, namely, the youth unemployment and underemployment, the next president must embrace a pragmatic and rational approach.

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