Publications

ASIST Bulletin no. 10, January 2000

Labour-based technology:
The macro-economic dimension

By Gary Taylor, IT Transport, United Kingdom

Employment creation through labour-based roadworks

Most of the readers of this article will be familiar with the socio-economic benefits of using labour-based methods. Job creation for unskilled rural people in rural areas is the most obvious. Other benefits include savings in foreign exchange; injection of cash into the local economy; increasing skills in local people; and a better chance of future sustainability through a higher sense of local ownership, and through familiarising people with the necessary operations for road maintenance.

However, it is not sufficient to present decision-makers with a simple list of the advantages of labour-based methods over the alternatives. At some point a means of measurement of the comparative advantages is required. For this reason the Government of Uganda, with support from the ILO, initiated a comparative study of labour-based and equipment-based techniques for roadworks.

The study used historical data about feeder road rehabilitation, spot improvement and maintenance costs over the mid to late 1990. Data was available for feeder road projects totalling over 1,700 kilometres in length. Some of these had been carried out by equipment-based methods and some by labour-based methods. Examination of the data permitted some broad conclusions to be drawn about average costs using the two different methods. However, the main purpose of the study was to use methods of comparison that went beyond pure financial costs to measure the wider social and economic benefits. As a first step, an economic cost comparison was carried out for which taxes were excluded and shadow prices were used for the main inputs – primarily for labour. This economic comparison gave a more realistic picture in terms of the relative costs to the economy of using the two methods. Table 1 shows the results of the comparison of the average financial and economic costs.

These results still do not fully take account of the multiplier effects of the different construction methods, whereby injections of cash into the local economy can stimulate economic development. Nor do they include for the relative effects on Gross Domestic Product, average household income, trade balance, government revenues and other macro-economic parameters. To take account of these factors the study used a simple macro-economic model based on that developed for similar studies in Madagascar and Rwanda.

The results of comparing the macro-economic impacts were both interesting and, in some cases, surprising. They served to further strengthen the case for using more labour-based methods for construction in Uganda. Some of the key results were:

• For every job created in the feeder road programme by using labour-based methods, another 1.6 jobs were created in the wider economy due to so-called ‘multiplier' effects
• Overall the use of labour-based methods created 3 times as many jobs as equipment-based methods
• Labour-based methods generated about two times more gross domestic product (GDP) through indirect effects than equipment-based methods
• Although the direct benefit of labour-based methods on public revenue (taxes, duties, etc.) is smaller than that of equipment-based methods, this is more than offset once indirect benefits are included. The overall effect is that labour-based methods result in a fiscal deficit of only 46% of that resulting from the use of equipment-based methods. Hence, higher net public revenues result from using labour-based methods compared to equipment-based methods
• There is a significant saving in foreign exchange (amounting to 62%) when using labour-based methods rather than equipment-based methods.

The implications for Uganda's macro-economic framework of these results are compelling. Labour-based methods generate more income to households, increase GDP faster and have a strong stimulus on local private investment.

In Uganda today the major cause of poverty is a lack of productive employment. Impressive growth in the economy has led to a fall in the overall percentage of those classified as poor. However, poverty among the unemployed has actually increased. The labour force is growing at a rate of at least 300,000 per year out of which only 100,000 are being absorbed into the wage economy. The total number of unemployed and underemployed, currently about 3.8 million, is therefore growing steadily.

The study illustrated that the greater use of labour-based methods has a high potential for creating productive employment both directly and indirectly. Through a policy of greater use of labour-based methods, households would have increased incomes, which would enable them to better afford the basic requirements for their livelihood. Since greater use of labour-based methods also provides a stronger stimulus to the local economy, this would also lead to increased economic growth with an accompanying improvement in the national poverty indicators.

The results of this study raise some interesting questions. Labour-based methods were shown to have a financial cost advantage over equipment-based methods. This was, on average, of the order of 20%. However, this margin of advantage significantly understated the socio-economic benefits. An economic cost comparison revealed a cost advantage of 60% in favour of labour-based methods. The macro-economic model suggested even higher benefits in a whole range of macro-economic indicators. If the country is to exploit these potential benefits, a significant shift to the use of more labour-based methods for construction is indicated.

For now, it appears that many countries are prepared to rely on ‘market forces' to settle the balance between the use of labour-based and equipment-based methods. But this study would suggest that this is an inadequate policy. A financial cost advantage of around 20% is probably insufficient to persuade entrepreneurs to risk a greater use of labour-based methods. Strong government policies together with a reform of the regulatory framework are going to be needed if countries are going to significantly tap the potential socio-economic benefits of more labour-based methods.

The case of Uganda is probably similar in many respects to other sub-Saharan African countries.

Table 1: Financial and economic comparison of labour-based methods and equipment-based methods for feeder road rehabilitation in Uganda