Labour reform

Thursday, 4 January 2018 00:49 - - {{hitsCtrl.values.hits}}

A recent report by the Immigration and Emigration Department showed that an estimated 25,000 foreigners work in Sri Lanka. Despite high levels of literacy, Sri Lanka has been challenged by low skills, a brain drain and chronic labour shortages. It is tempting to think that labour liberalisation holds the answer but this issue needs to be tackled with extreme care.

Several sectors such as apparel, construction, shipbuilding and plantations are among those hardest hit by the labour shortage and seek liberalisation. But the situation is more complicated in Sri Lanka because as a developing country it also has a serious brain drain problem, which policymakers also need to tackle.

Proponents of a closed labour market argue that priority should be given to stop the brain drain as they are primarily professionals and would attract IT and other high-end service oriented industries to Sri Lanka. Stopping people from leaving is easier than getting new people. Allowing low-skilled migrant labour into the country is a challenge because while profits from them are private the socioeconomic fallout would be public and would have to be borne by the State.

Countries such as Malaysia that have long had open migration policies have found that not only does an influx of low-skilled workers create social problems they also hamper labour moving up the value chain to create better employment opportunities. Indeed, the Malaysian Central Bank has pointed out that some foreign investors eye Malaysia simply because it is able to establish labour intensive industry there more easily than other destinations. This does not necessarily promote growth in the model that Sri Lanka needs.

Even if these concerns are set aside, labour liberalisation comes with a raft of reforms that would be politically difficult to implement. Policymakers should be aware that deregulation alone is unlikely to produce a quick recovery in growth and employment. Most labour market liberalisation is initially contractionary. Easing the dismissal of staff and giving employers more freedom to impose hours, practices and pay are likely to make workers feel insecure and cut back consumer spending. Demand for labour needs to compensate, especially in a country where labour rights are highly prized.

Several companies have already tackled the labour challenge by setting up their own training centers or linking with existing vocational and technical training institutions. The success they have experienced makes a case for how deeply the local labour force needs to have their skills upgraded, particularly in semi-urban and rural areas. Stronger matching of training to jobs as well as upgrading the social acceptance and standards of employment would also address labour shortages. It would also encourage sectors to move up the value chain and adopt greater technological advances. Simply put some sectors will need to rethink their business, as has happened elsewhere in the world. Selective opening of the labour market may be possible but the Government would need a research and fact-based set of policies to go about doing this. Sri Lanka’s unique mix of developing and developed country challenges along with high levels of debt and an aging population means that there are no easy answers but it is necessary to make a start.