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August 11, 2019

Inflexible labour market discourages foreign investors


August 11, 2019

LAHORE: Pakistan’s economy has grown in the past with relatively inflexible labour market, but in the 21st century economy, the country needs accelerated industrial growth and flexible labour markets to ease unemployment pressures.

Labour reforms are overdue in Pakistan as its rating under the labour affairs has been among the lowest in the last decade in all World Bank reports on cost of doing business.

The labour laws are very rigid in Pakistan and punitive for the businesses as well.

However, employers openly flaunt these laws as the implementation of laws is very weak and redress of complaints takes ages. Inflexible labour laws are among the top reasons that impede foreign investment.

The other impediments are inconsistent government policies, open violation of Intellectual Property Rights and lack of government writ to implement the environment laws in letter and spirit. Corruption of course is another major factor. We wonder that despite having a very open investment policy, foreign investors refrain from coming to Pakistan.

When the foreign investors study the labour laws, they find that at least on paper, laws are unduly protecting even unproductive labour.

When they visit Pakistan they do observe that these laws are flouted openly by the local investors while the regulators look the other way. However, since most of them come from developed economies, they cannot think of violating any laws.

Thus, they end up looking for investment opportunities in other economies where labour laws are flexible.

This perhaps was the reason that most of the foreign investment that came to Pakistan was either on the basis of heavy protection, tax relief or guaranteed rate of return on investment.

The PTA plant of ICI was established on heavy protection from imports for 10 years. Sir Pervaiz of United Kingdom established the cement plant on guaranteed supply of gas (when it was not available to other cement plants) and exemption from sales tax for a specified period.

All independent power producers are operating their generators on guaranteed purchase of power produced by them at a rate that assures them return of 17 percent on their investment in dollar terms. If the government fails to buy electricity, it has to pay capacity charges to the IPPs all of which goes into their pockets without running their plants. The UK cement investment created havoc in the cement industry as at that time it enjoyed dual advantage of cheap energy and 15 percent waiver on sales tax.

All these and other such investments have cost the economy dearly.

We are out of the blended textile market because of 10 year PTA protection enjoyed by ICI. The polyester fibre cost in Pakistan was higher than global rates that prevented the industry from producing blended products (cotton blended with manmade fibre).

The use of cotton in Pakistani textiles is 70 percent and manmade fibre 30 percent. Globally it is reverse depriving us of a large chunk of the global textile market.

Pakistan is in dire need of industrial investment to create jobs as job absorption in agriculture is diminishing due to increased mechanisation, putting pressure on the industry to absorb two-three million workforce every year.

Pakistan would not be able to sustain viable economic growth to achieve its objective of generating employment unless it undertakes measures to boost investment. Significant employment growth is not going to take place without significant labour market reforms. Labour market flexibility is difficult both socially and politically.

The naïve workers think that inflexible labour laws protect their employment, while in reality it is not so. Despite all these protective laws they are openly exploited and denied their right.

There is no harm in officially allowing the employer to remove an employee by paying one month’s severance pay. Currently, despite law, the employees are removed without any severance pay and can do nothing. The economy will never improve on isolated reforms. It needs a package of reforms that provide level playing field to all besides addressing the concerns of foreign investors on environment, labour laws and IPR.

Over 63 percent of Pakistan’s population is in the working age group of 15-60 years. The ratio is expected to rise till 2022 before slowly tapering off. We need to plan for them to take Pakistan on a sustainable growth path.