Expand exports to resolve the South Asian paradox

By Hartwig Schafer and Deborah Greenfield

South Asia has grown strongly to reduce poverty and create jobs, but the region remains a development paradox: Despite strong growth job creation remains weak and is often of poor quality.

Sri Lanka grew at an average rate of 5.8% from 2010-2017 but the growth of new job opportunities is below what many had hoped for. Most Sri Lankans still lack a regular job in the formal economy, and huge differences in pay among workers exist.

Meanwhile, trade in goods as a share of the economy is much lower than in other regions. The trends in Sri Lanka and much of South Asia differ from other regions, where trade, growth and jobs are directly connected and go hand in hand. This South Asian paradox raises the question of how governments can boost job growth, and how to raise the quality of new jobs so that economic development brings more shared prosperity.

A new report by the World Bank and the International Labour Organisation (ILO) finds that increasing exports has the potential to contribute to a broader strategy for promoting growth, job creation and shared prosperity.

Titled “Exports to Jobs: Realising the Gains from Trade,” the report shows how higher exports can translate into benefits for workers across the country, and it therefore recommends policies to expand exports together with policies that help sharing these benefits more widely, for example through measures that help workers get the skills needed to compete for new formal sector jobs. 

Traditionally, economic research on the relationship between globalisation and labour markets has focused on the impact of falling tariffs or rising imports, with few studies examining the growth of local labour market opportunities and challenges that follow from increased exports. 

The new World Bank-ILO report takes a novel analytical approach by combining household-level or worker-level surveys with trade data to construct a unique dataset that bolsters our understanding of how big changes in trade can impact local labour markets. It builds on a new literature that credibly assesses the response of employment and wages to a greater exposure to trade.

In short, the report quantifies potential benefits of trade to address the South Asian paradox. It finds that increasing exports per worker could lead to higher wages and better jobs, including more formal sector jobs for women. It also shows that the impacts of trade are geographically localised, and the effects do not easily disseminate across all regions and all groups of workers. 

Increased exports could result in a shift in workers in South Asia from the informal sector to formal sector jobs with higher wages and benefits, which could be beneficial for Sri Lanka given that the majority of Sri Lankan workers are in the informal sector.

To expand and widely share the benefits of exports, the report recommends policies including raising skills and helping groups such as women and youth, who face particular disadvantages, enter the labour force.

Greater participation of women in export-oriented industries also could improve labour market outcomes. This would require reducing economic and social obstacles to women joining the workforce in Sri Lanka, such as changing potentially discriminatory regulations now in place.

Boosting exports in labour-intensive industries, which is a comparative advantage for South Asia, also could significantly lower informal-sector employment, particularly for rural and less-educated workers. 

Other steps to extend labour market gains more widely include investing in infrastructure, removing trade barriers, and increasing the ability of workers to move to areas and into occupations where new jobs are being created. 

Regional challenges also must be addressed. Intra-regional trade accounts for just over 5% of South Asia’s total, compared with 50% in East Asia.

Greater global integration provides an opportunity to help address the South Asian paradox of remarkable growth with persistent labour market shortfalls and a stagnant or declining openness to trade. The new World Bank-ILO report offers a fresh analysis on the way forward.

(Hartwig Schafer is the Vice President of the South Asia Region of The World Bank Group and Deborah Greenfield is the Deputy Director-General for Policy of the International Labour Organisation)