Fluid labour market must for growth acceleration

LAHORE: Steady foreign inflows and comfortable macroeconomic indicators have renewed the hopes of accelerated growth but it will not be sustainable unless the labour market is made flexible and investment barriers are removed.

With over two million people being added to the ranks of the unemployed every year, Pakistan would not be able to sustain its economic growth and achieve its objective of generating employment unless it undertakes measures to initiate significant labour market reforms. A flexible labour market enables an enterprise to adjust to fluctuations in the economy and to the increase or decrease in consumer demand for their services and products. A company's flexibility depends on several factors: work hours, cross-training, wages, location, and the adaptability of its labour force. The fewer regulations a company has governing its labour force, the greater its flexibility.

Labour market flexibility is a difficult social and political negotiation. Though the economy had grown in the past with a relatively inflexible labour market, this does not imply that inflexibility should continue in the labour markets. An economy can only really grow to its full potential, if there are flexible labour markets to respond swiftly or adequately to changed demand conditions.

Currently there are two extremes under which the labour force operates in Pakistan. In the thriving informal sector they have no labour rights; but in the organised manufacturing sector the workers enjoy numerous protections and the employee has to reach a compromise to get the work done. Both the extremes impede growth. A fair system would be to give a free hand to the employee in hiring and firing as is practiced in developed economies. The emphasis should be on increasing the productivity of the workers.

Regulatory procedures that investors must follow in establishing and operating new businesses are among the most important barriers to investment in Pakistan. These procedures include registering businesses, administering taxes, obtaining investment approvals, business licenses, intellectual property, access to land and long-term leases, construction and building permits, customs clearances, and utility hook-ups.

These barriers raise production costs; reduce entrepreneurship, market entry and business expansion; and weaken competitive forces. Administrative barriers are seen as one reason for large informal sectors in Pakistan, since the costs of formalising are higher than the gain in productivity from entering the formal sector.

Reducing these barriers does not require rocket science. Strategies to remedy administrative barriers have been developed in many countries, including the use of transparency measures, regulatory reforms, efficiency reforms such as one-stop shops, and increasing use of e-government and information technology solutions. The successful strategies should be applied in Pakistan.

The government planners should look at specialised solutions and principles which are now well accepted in specific areas, such as customs reform and trade facilitation.

Cumbersome legalities are impeding investment. Legal framework is sometimes confusing, inconsistent and difficult to comply with. In other cases, it opens opportunities for arbitrary interpretation of rules and corruption. Penalties for breaking the law are usually negligible and therefore do not act as a significant deterrent.

These effects are compounded by the lack of state capacity to prevent, detect and enforce the law. Funding and staffing of monitoring and enforcement agencies is inadequate. Full legal property rights are uncommon. Political and economic vested interests heavily influence state recruitment and promotion, negatively affecting performance and integrity.

Communication and coordination between various government agencies are poor. Current energy crisis is because the ministers of water and power, finance and petroleum are not on the same wavelength. Poor detection, the difficulty of prosecuting offences, corruption and lenient penalties for forest crime, and other governance limitations, all create substantial incentives to operating in illegal ways.  

Economic laws in Pakistan are very weak, and the need is that each legislative advisory programme was be based on sound economic analysis, with background papers readily available for technocrats and others to study and critique. Moreover, summaries should be written in clear language and stated in terms of the country’s general interests, as opposed to the interests of one particular group, such as business or labour. In addition, the summaries should be printed and disseminated to a broad audience; where possible, arrangements should be made with the media in order to provide even wider coverage.

In many countries, bureaucracies represent formidable obstacles to reform. In their attempt to affect public policy, business organisations should try to influence government personnel, as well as legislators.