How can South Asia get back on track?

SOUTH ASIA'S PATH TO RESILIENT GROWTH

Ranil M Salgado, Rahul Anand (eds)

South Asia is the youngest and most densely populated region in Asia. The median age of the population is less than 27 years. As a result, the working-age population in the region is projected to increase over the next 20 years. More than 150 million people are expected to enter the South Asia labour force by 2030. This puts an emphasis on labour market reforms that can support job creation.

However, while now is the time to reap the growth benefits from the sizable demographic dividend, the dividend is declining over time (India, Bangladesh and Sri Lanka). India’s under-19 population ratio has already peaked because of declines in fertility rates. As a result, the labour force will now grow more slowly.

Similar patterns hold across South Asia. As a result, the benefits of the potential demographic dividend, including higher potential output, are also declining over time. This calls for some urgency in labour reforms.

Moreover, a back-of-the-envelope estimate on the potential job losses caused by Covid-19 suggests that in the short term, the job-creation rate in the region could temporarily fall from 1.5 percent to between 0 and 0.5 percent. There is also a growing risk that some of these job losses may become permanent because of the scarring effects of the deep recession associated with the pandemic.

Labour market regulations

South Asia’s Labour market regulations and institutions generally do not apply to the large informal sector. For example, in India, up to 90 percent of workers have no written employment contract, especially in the informal sector and among agricultural workers. Informal sector workers in India rarely benefit from union representation, nor from labour laws, except for the minimum wage. They are also unlikely to receive long-term contracts as their formal sector counterparts do. Even if labour market regulations were applicable, as in Nepal, the degree of compliance in the informal sector is unclear.

Minimum wages are unlikely to be a constraint on hiring because they are low—in India lower than in other large emerging market economies, including Brazil and Indonesia. Bangladesh, Nepal and Sri Lanka have a minimum wages board that reviews the minimum wage periodically, including (in Bangladesh) for the garment sector. Pay commissions are also established every few years to review pay and conditions in the public sector, with civil service pay increases approved by the cabinet, sometimes on advice from ad hoc commissions. In India, minimum wages differ by state and are set by state governments.

However, legally enforceable minimum wages are still not universal, with coverage estimated at 66 percent of wage earners.

In the formal sector, collective bargaining rights are supported by the right to strike and also by restrictions on fixed-term employment contracts in some countries, such as India where they can only be used for employment of a temporary nature (although this may be relaxed under the recently approved Industrial Relations Code). However, the extent of collective bargaining and union power is not clear in practice, with trade union membership relatively low as a share of total employment, reflecting that most employment is informal.

Relatively stringent employment protection legislation (EPL) increases the cost of hiring workers in the formal sector. Those in Bangladesh and Sri Lanka appear particularly stringent, with Sri Lanka having the most stringent requirements for dismissal of individual workers, which can only occur if an employee consents or the government approves. Where a group of employees is dismissed for economic reasons, approval must be sought from the government and a decision is required within two months. Severance payments are required for dismissals of those employed for more than five years, at the rate of 14 days of pay for each year of service.

In Bangladesh, the requirements for dismissal are less stringent but severance payments are more generous. The government and the relevant union must be notified but otherwise government approval is not required. Severance payments must be made at the rate of 30 days of pay for each year of service above one year, in cases of redundancy or individual dismissal without reason.

In India, labour laws differ across states, but in a workplace with more than 300 employees, government approval is generally required to dismiss an employee who has been employed for more than one year, while severance payments are similar to those in Sri Lanka.

In India and Bangladesh, there is a ‘last in, first out’ rule for groups of workers dismissed for economic reasons and those dismissed must be given priority in future hiring by the employer. Other countries in the region, including Bhutan, Nepal and Maldives, have no requirements for government notification or severance pay.

Across the region, dismissed employees can bring a legal challenge and seek reinstatement or compensation if their employer has not complied with employment protection laws.

Social protection for workers is limited for both the formal and informal sectors, with no universal unemployment insurance in South Asia and limited coverage of pension schemes, although India and Nepal have made recent reforms to expand coverage. There are also social assistance payments for some older people, such as in Maldives, sometimes subject to means testing, as in Bangladesh.

In India, more than 85 percent of workers have no pension scheme, and less than one quarter of people older than the retirement age receives any pension. A social assistance payment is available for older people in the general public below the poverty line, but it is relatively small (between $3 and $7 per month) for those older than 60 years of age, and only benefits approximately 16 million people.

Around 20 percent of Indians older than 80 years of age are still in employment, according to census data, suggesting that social assistance payments are inadequate.

Before 2017, Nepal had an Employees’ Provident Fund, mostly for civil servants, providing old-age benefits financed mostly by employers. Other social assistance schemes were in place as a safety net, funded by a tax on payrolls. The most generous is the Senior Citizens Allowance, which currently pays 3,000 NPR per month ($25) to all adults older than 65 years (and those older than 60 years from disadvantaged groups/regions). The other four schemes are monthly allowances for some children younger than five years, single widows, disabled persons, and certain indigenous groups.

Other South Asian countries have civil service pensions, contributory savings schemes for the formal private sector and limited social assistance payments as a safety net. In Bhutan, the civil service pension is partially funded on a pay-as-you-go basis from employee contributions. In Bangladesh, all formal sector employees must contribute 7–8 percent of their base salary to a defined contribution provident fund after one year of service, with a matching contribution by their employer, so that accumulated amounts are payable as a lump sum on retirement. Sri Lanka’s Employees’ Provident Fund operates in a similar way. Maldives also has the contributory Maldives Retirement Pension Scheme, although its coverage is unclear.

Bangladesh established a social assistance program for elderly adults in 1998 as a safety net, for those with an annual income of less than $38, which provides a transfer of around $4 every three months. Sri Lanka has a similar social assistance scheme and Maldives provides an old-age basic pension and senior citizens allowance to those older than 65 years of age.

Labour market institutions are not sufficiently supportive of female labour force participation. There is no entitlement to part-time work in South Asian countries, which could be an important driver of higher female labour force participation. Some support to families is provided through childcare facilities. India has made a crèche facility compulsory for establishments with 50 or more employees. Sri Lanka issued guidelines establishing national standards for day care centers in 2017.

Across the region, there are maternity leave entitlements, of varying degrees of generosity. In Sri Lanka and Maldives, employers in the private sector are required to offer 84 and 60 days paid maternity leave, respectively. Nepalese law requires 60 days of paid maternity leave, some of which is paid for out of labour taxes, although the degree of compliance is unclear in practice.

In Bangladesh and Bhutan, civil servants are entitled to six months of paid maternity leave, whereas private sector employees in Bangladesh can access paid maternity leave on one occasion, for 16 weeks, and unpaid leave during subsequent pregnancies.

Empirical evidence

Loosening EPL would seem to lead to an increase in total employment over time, lower informality, and an (CONTINUED IN THE BOOK)

SOUTH ASIA’S PATH TO RESILIENT GROWTH

RANIL M SALGADO; RAHUL ANAND (EDS)

IMF

367 pages

23 December 2022

9798400228568

Download ebook free from the IMF website

EDITOR’S NOTE

Over the past two decades, extreme poverty has declined from 500 million to fewer than 250 million people in Bangladesh, Bhutan, India, Maldives, Nepal and Sri Lanka — a remarkable success story for the region and the world. Per capita income during this time has doubled, helping to deliver improved health care, education and infrastructure, as well as better access to financial services, the Internet and mobile technology.

However, the Covid-19 pandemic and the economic repercussions of Russia’s war in Ukraine have slowed the fight and — together with the effects of climate change — have impeded growth and poverty reduction in the region.

South Asia’s Path to Resilient Growth tackles these factors by reviewing South Asia’s experience of the pandemic and of post-pandemic recovery as well as the risks and setbacks that have followed in their wake. Several chapters of the book then take a longer-term perspective and draw lessons from South Asia’s own development experience over the past decades to chart a path forward.

The key, overarching question is how South Asia can return to the growth rates of the past two decades, resume the momentum of poverty reduction and achieve resilient and climate-friendly growth without a renewed buildup of macro-economic vulnerabilities.