Towards full employment

Historically, three types of growth strategies were pursued by different groups of countries in the Asia-Pacific region. The fast-growing economies of East and Southeast Asia pursued what is known as outward-oriented strategy; these economies were open and they relied on international trade and capital flows for promoting industrialization. The transition economies and the countries of South Asia pursued import-substitutive strategies; their economies were insulated from external competition through protectionist measures, and the state-led industrialization drive relied mainly on domestic savings and proceeded on the basis of import substitution. The island economies of the Pacific were open, but they were dependent on exports of a few agricultural commodities; as such, growth critically depended on commodity prices in international markets.

Since the early 1980s, however, the transition economies and the countries of South Asia have been gradually moving away from import-substitutive strategies. They have been engaged in opening up their economies to external trade and capital flows and promoting greater market orientation. In fact, the notably greater success of the countries of East and Southeast Asia in achieving high growth has been a main inspiration behind changing strategies in the transition and South Asian economies; the East Asian model had become the generally accepted framework for all Asia-Pacific developing countries. Nevertheless, even by the mid-1990s, the transition and South Asian economies remained markedly less outward oriented than the East and Southeast Asian economies.

It is widely agreed today that macroeconomic stability is a basic precondition for growth. In this respect, too, the countries of East and Southeast Asia performed well; over a long period, they managed to maintain fiscal and current account balances at sustainable levels so that their economies did not face serious problems of inflation or exchange rate fluctuations. Even the current crisis, it is generally agreed, was not caused by macroeconomic mismanagement. The South Asian economies, on the other hand, have been periodically faced with problems of fiscal and current account imbalances since the early 1980s, and this has been the immediate compulsion for implementing stabilization and structural adjustment programmes which set them on the path to greater outward orientation.

There is no doubt that the East and Southeast Asian countries achieved much more impressive economic growth than other countries in the region. From the early 1980s until the onset of the economic crisis which gripped them in the second half of 1997, most economies of East and Southeast Asia grew at 7-8 per cent per annum. In comparison, the South Asian economies recorded growth rates of 4-5 per cent per annum. There are thus valid grounds for assigning superiority to the East Asian model, the hallmarks of which were thought to be a stable macroeconomic environment, outward orientation, flexible labour markets and emphasis on human resource development. The Asian crisis, of course, has now given rise to some doubts and the emerging issues are taken up for discussion in Chapter 4.

At a broad level, it is also clear that a high rate of economic growth improves employment conditions and makes progress towards full employment possible. All the countries which made steady progress towards full employment are in East and Southeast Asia, and it is undeniable that the main factor behind this progress was rapid economic growth (these countries had very few policies designed specifically for promoting employment). Perhaps more telling is that a growth crisis of less than a year has caused a huge movement away from full employment in precisely the countries which were relatively successful in promoting it. Clearly, rapid economic growth is absolutely essential for achieving improvements in employment conditions. It is also clear that, in terms of pace of growth, outward-oriented strategies performed much better than import- substitutive strategies. Given these experiences, it is not surprising that the East Asian model has for some time been upheld as the right framework for promoting employment-intensive growth.

However, closer inspection of those experiences suggests that rapid growth, though necessary, is not always sufficient. China achieved a growth rate higher than that of Thailand, and Indonesia's growth rate was only slightly lower than Thailand's; yet progress towards full employment was achieved only in Thailand. The growth rates of South Asian countries, though slower than those of East and Southeast Asia, were by no means poor (when viewed against the experiences of developing countries in other parts of the world); yet the employment situation moved away from full employment.

These discrepancies, it could be argued, are explained by differences in initial conditions, labour force growth, degree of systemic stability and labour policies. Arguably, China and Indonesia started with a much larger backlog of underemployment than Thailand. Moreover, the transition economies and South Asia have been undergoing systemic transformation of a fundamental kind and such a process cannot but disrupt the relationship between economic growth and employment growth.

The most important explanation, it appears, is to be found in the differences in labour policies pursued in different countries. In the transition economies and South Asia, labour policies had the consequence of generating very significant rigidities in the organized labour market, which constrained employment growth in the modern sector. At the same time, South Asian countries in particular failed to promote broad-based human capital formation. These factors pre-empted improvements in general employment conditions by depressing employment intensity of growth in the non-agricultural sector as a whole, and particularly in the organized segment. Overall employment conditions could not improve in these circumstances. Such problems were largely avoided in the countries of East and Southeast Asia, which managed to keep organized labour markets flexible and were very successful in stimulating human resource development.

There is evidence to suggest that, in South Asian countries, regulations concerning termination of contracts and methods of wage determination had obstructed reallocation of labour from declining to emerging industries and delinked labour costs from productivity. At the same time, inadequate attention to education and training made formation of human capital difficult. The transition economies had a better record in education and training, but bureaucratic methods of labour allocation and the system whereby individual enterprises were responsible for providing social services (education, health, housing, etc.) to their workers created severe obstacles to reallocation and mobility of labour. The economies of East and Southeast Asia were better performers in all these areas. Labour regulations there did not obstruct labour reallocation and wages rose in step with productivity. Most importantly, they invested wisely in education and training, which increased labour mobility and led to more rapid development of human resources.

The Asian experience until 1997, therefore, provides strong grounds for thinking that the growth strategies and labour policies pursued in the East Asian countries are indeed models to be adopted by other developing countries of the region. However, the unprecedented economic crisis faced by these very countries since the middle of 1997 obviously puts serious question marks on such a judgement. The Asian crisis has indeed revealed hidden weaknesses, which are discussed at various points in the following sections. Here we briefly review the macroeconomic and structural policies now being pursued in these countries to overcome the crisis.

However, these policies have been widely criticized as unduly contractionary, particularly in a context where the crisis was not caused by macroeconomic imbalances and the economies in question have already suffered massive deflationary shocks. The critics argue that expansionary fiscal policies would have allowed growth of domestic demand and that lower interest rates would have allowed expanded production for export; both would have helped revive growth. It is noteworthy in this context that at least one crisis-affected country has embarked on a different path; Malaysia has reimposed controls on international capital flows which make it possible to reduce interest rates without risking currency depreciation. It is too early to judge, however, if these policies will be more successful than the IMF-prescribed policies in reviving growth.

These debates are not easy to settle. At any rate, this is not the place to try to settle them. It is important to remember that, in times of economic crisis of this magnitude, policy dogmatism must be avoided. The IMF policies, as well as the alternative policies suggested by the critics, must all be kept in view and, if one set of policies turns out to be ineffective, there should be no hesitation in adopting alternatives.

One feature of the economic systems of the crisis-affected countries which has come into focus is the absence of meaningful social safety nets. Most countries have systems of severance payments for retrenched workers, but they usually cover only a small proportion of all those laid off. Only the Republic of Korea has an unemployment benefit system. However, even here, only a minority of the unemployed actually receive benefits, the level of benefits is rather low and they are usually of short duration. Efforts are now being made to extend the benefit system, but this is obviously not easy in times of economic crisis.

Some efforts have been made to introduce flexible work practices in enterprises to restrict retrenchment, but these do not appear to have been remarkably successful. In fact, certain weaknesses in the framework for social dialogue have come to light in the process. Under the circumstances, all crisis-affected countries have been forced to design emergency safety net measures. These consist essentially of retraining and counselling programmes for displaced workers, public works programmes for generating short-term employment and training-cum-credit programmes for promoting self-employment. Funding for such programmes has been provided by organizations such as the Asian Development Bank, the World Bank, the United Nations Development Programme (UNDP) and the Overseas Economic Cooperation Fund (OECF) of Japan.