Labor market flexibility & trajectories of development: lessons from Brazil, India & China.

Author:Verma, Anil
Position:By Invitation - Abstract

Introduction

The debate around labor reforms in India became prominent once again with the election of a majority BJP government in May 2014. This change in government came when despite much debate in the past, the previous Congress-led governments had failed to undertake any significant reform. Great expectations now await the new government for reforms in labor policy. It is in this context that we examine the labor and employment system in India with particular attention to the issue of labor flexibility.

Recent research in India has richly documented the dysfunctions of the Indian industrial relations system to establish the case for substantive reforms in a number of areas(Shyam Sundar, 2012; 2011; Sharma 2006; Sodhi, 2011). However, when one considers potential solutions there is an alarming lack of consensus on possible directions for reform. It is arguably one of the reasons why previous governments found themselves stymied into inaction. The analysis in this paper explores possible avenues for reform around which parties to the employment system could converge. It can be useful to look for relevant lessons from both inside and outside India in a search for better ideas. It is in this spirit, that we compare the labor and employment systems in India, China and Brazil. These insights can be useful in breaking the gridlock around labor reforms, which in turn, could contribute to sustained economic development.

Why compare India with China and Brazil? Despite significant differences, these three countries face many similar challenges. They are striving to reduce poverty, improve education and health, and to become full employment economies. All three are among the biggest countries in the world in terms of population, landmass and total GNP. Together with Russia they became known as BRIC, a moniker for investors looking to profit from high growth emerging economies.

China and Brazil also share many of India's challenges in making their labor and employment systems more skilled, productive and flexible. For example, in moving its 450+ million workforce from the public sector to the private sector, China faced a challenge unprecedented in history in scale and scope. Labor regulations needed to be changed dramatically. This transformation of the labor market is far from being perfect or complete but a substantive set of regulations was put in place to facilitate this large-scale re-allocation of labor. Brazil, already a middle-income country, faces the challenge of moving its labor and employment system to the next higher level from its current plateau. Most skilled labor is in short supply despite a large labor pool that is largely unskilled or semi-skilled. Labor regulation is designed to protect workers and jobs but its large informal economy leaves many workers unprotected. So, improving the skills of its workforce and reducing informality in the labor market are significant challenges.

In the next section we provide a brief comparative sketch of the main characteristics of the three countries. This is followed by an overview of the Indian case for labor reforms. Lastly, we review the lessons that policymakers in India can draw from the experiences of China and Brazil for developing a consensus around much needed labor reforms.

BIC: A Comparative Overview

India and China are the only countries in the world with a population in excess of one billion each. Although Brazil is much smaller with a population approaching 200 million, it is the dominant economy in its neighborhood much in the way that India dominates South Asia and, China, the global economy. There are other similarities. Although China has been able to sustain its high growth rate over a much longer period, both India and Brazil are also considered to be emerging economies that boosted their historically anemic growth rates to new highs in the most recent decade. High rates of growth have generated more jobs, reduced poverty and raised the aspirations for a better life. Scores of enterprises from these three countries have confidently expanded at home and overseas.

In terms of per capita GDPin 2013, Brazil was at the higher end of middle-income countries (USD 11,208), India at the low end (USD 1,499) with China near the middle of this range (USD 6,807) (Table 1).

There are a number of similarities and differences in factors relating to workforce development and the resulting flexibility of labor. First, India has the youngest workforce while Brazil has the oldest of the three countries. The population pyramid for Brazil has been shrinking now for many years already. In China, the pyramid has just begun to shrink while in India it is still expanding at the base. These trends suggest that India needs to generate new jobs at a much faster rate over a longer time period than do Brazil and China (Goswami, 2014).

India has the largest share of its population still living in rural areas and dependent on agriculture. This share is the lowest for Brazil, which has become a largely urbanized country in recent decades. But despite such urbanization Brazil's workforce is underutilized in the north and the north-east while southern Brazil experiences critical labor shortages. Brazil is also a large landmass with relatively poor infrastructure that makes it hard to relocate the workforce and jobs. India needs to generate new jobs at a much faster rate over a longer time period than do Brazil and China.

India is the smallest of the three countries in terms of area but poor infrastructure creates problems of mobility with attendant adverse consequences for flexible allocation of labor. China is also a large land mass and has experienced uneven development between the fast developing north and coastal areas on the one hand and the less developed regions of central and western China on the other Large investments in coastal infrastructure have made China an export powerhouse but its challenges in managing migrant labor resulting from the uneven development remain substantial.

In terms of inequality, Brazil has the highest degree of income inequality of the three countries. Its Gini coefficient, a measure of inequality, was 54.7 in 2009 compared to 33.9 in India (measured in 2010) and 42.1 in China (also measured in 2010). But, whereas inequality increased in both China and India since the 1990s, Brazil is among the few countries that have managed to reduce inequality in recent decades. Its Gini coefficient declined from an exceptionally high level of 63.3 in 1989 to 54.7 in 2009. For India, the Gini increased relatively moderately from 30.8 in 1994 to 33.9 in 2010. In China, inequality rose more significantly from 32.4 in 1990 to 42.1 in 2009. (1)

Both China and India have followed a trend that Piketty (2014) contends is a law of development itself: the rate at which wealth becomes concentrated in a few hands, i.e., rate of rising inequality, exceeds the rate of economic growth. So, even as countries grow economically, they inevitably contribute to rising inequality. This is a challenge for all societies but for developing nations it poses a specially difficult challenge: how to sustain growth that would raise living standards for all without increasing inequality or even better, while reducing inequality?

Flexibility Debate

The labor flexibility debate is often framed within the narrow context of the workplace or the level of the firm. In India, a major demand of those advocating for greater labor flexibility is to ask the government to spell out an "exit" policy that would make it easier for employers to terminate employment for workers who are no longer needed because of changes in technology or in demand for its products or in its financial ability to sustain a workforce. By itself this is not an unreasonable demand. Schumpeter's concept of "creative destruction" captures well the dynamics of economic growth in our era of globalization. No job or workplace or firm can remain unaltered for forever. The need to restructure, reorganize and refocus the enterprise is forever present in the global economy and it needs to be facilitated by domestic policy for sustained growth.

This approach to flexibility has been criticized by a number of scholars for various reasons that are discussed in the next section. The purpose here is to put this debate in the larger context of development so that we can look beyond India's borders for lessons on how best to facilitate flexibility. The narrowly-framed flexibility debate loses its moorings if it is not embedded in the larger context of India's developmental needs. When one examines the larger context for human resources in India, a number of issues become apparent.

First, India has a much larger share of its population in rural areas. In 2013, 68% of India's population lived in rural areas while in China, this proportion was 47% and shrinking rapidly. In Brazil, less than 15% of the population is rural. The generally accepted wisdom is that it is extremely difficult to raise incomes, provide a decent level of education and health services, and create a full employment economy if a large share of the population lives in rural areas. It is for this reason that China has embarked on an ambitious program to urbanize its population (Yusuf & Saich, 2008; Davis, 2013; China Development Research Foundation, 2013). Urbanization does not necessarily mean that there has to be a shift of rural population to existing cities, which would be a huge challenge in itself given that Indian cities are already overcrowded. Rather, it implies that more areas need to be urbanized by developing smaller towns into cities. Any new labor policy initiatives need to carefully weigh the implications for future urbanization. Labor policies need to create the kind of flexibility that would smoothen the path to urbanization. An urbanization strategy would involve massive investments in construction of urban infrastructures. From this...

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