Tuesday, 9 February 2010

Governments - Incentivise employment

Every government in the world says one of its biggest priorities is to create jobs. And yet, very often, they do precisely the opposite. Governments, and policy makers, do not normally get it as to how to create jobs. A shining exception is China – no government in the world comes even remotely close to China when it comes to job creation.

How should governments stimulate job creation. By helping in all of the areas covered in this series – by favouring the manufacturing industry, by not adding burdens on to labour cost, by not putting insurmountable barriers to labour flexibility, by creating the right skilled work force, by investing in infrastructure, etc etc. But governments can directly aid employment too. Here’s (again of doubtful practicality) some prescriptions.

Firstly reduce incentives based on investment and increase incentives based on employment. Remove capital subsidies, investment subsidies, and shift to employment subsidies. Base tax holidays on employment, not investment.

Secondly, enable free movement of labour to areas where manufacturing is concentrated (instead of trying to bring manufacturing to where development has not taken place). Provide cheap housing options in such manufacturing clusters. This has been the key to China’s success. Manufacturing was stimulated in the coastal provinces (especially Guangdong), Because that was the ideal location for plants. Labour moved in from all the interior provinces (especially the hugely populated Sichuan). Shenzhen, a non descript fishing village 20 years go, is now a mega city. And for heaven’s sake jail the clowns who propagate the sons of the soil theory.

Thirdly make state and local governments accountable for number of jobs that are created in their state. Give them quotas for employment generation. Today, the progressive states woo investment. They should woo employment. Again, this is taken from China’s strategy. China woos both, but there are specific job creation quotas for officials and they get promoted based on how well they achieve this.

Fourthly make the salary bill tax deductible by two times the salary, for all wages paid to workers of below X dollars. Thus there is a tax incentive to employ lower wage workers, which is where unemployment hits the most. Fund this out of the reduction in the dole (unemployment benefit, social security, or by whatever name its called) that such a move would surely result in.

Fifthly, the government, as the largest single consumer in any country can use its huge buying power very effectively. Other things being equal, favour suppliers who have contributed to job creation. Make % increase in number of people employed as a criteria in vendor selection.

Governments can do a lot directly to incentivise employment. They have to believe passionately in it. That they will do if they know that they can remain in power (win election in democratic states ; get the favour of the leader in communist ones). Both the electorate and the leader might want to consider moving this to the top in the criteria for deciding whom they wish to back.

10 comments:

  1. //And for heaven’s sake jail the clowns who propagate the sons of the soil theory/

    athey athey..unga posts padicha epect :D i was thinkng of one on similar lines.. :)

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  2. your recommendations are a virtuous cycle - coz most of these non sense such as son of soil theory etc are an offshoot of increasing vote bank and this is the best way.

    some cautions which must be exercised is that

    Agriculture must not take a backseat. Agriculture land should never get eaten by industry and the farmer's earnings from agriculture must be as competitive as an industrial worker, no farmer should convert into a industrial worker.

    government must have a strategy to move people up the chain. they must incentivise education promotion and use the power of industry to drive it

    Government must incentivise automation as well. Technology is the key to low cost produce and keep a curb on inflation. Reduced cost of labour must be partnered to increased availability of technology @ lower cost.

    a heavy explosion of training facilities to make people industry effective is also required.

    to remove regional barriers, a common language must exist. it can be english, it can be hindi but it has to exist ( i know i am opening the most controversial thing) but it is important to break the so called regional barriers.

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  3. I am proud and at the same time priveleged to have been your first reader and your first blog fan :-)

    A thought on the comment - "enable free movement of labour to areas where manufacturing is concentrated"

    There are many 'Industrial Areas' in each State in India , taking Peenya, KIADB as examples in Bangalore that have helped Bangalore become a truly Industrial city. But move away to an example like the Kanjikode Industrial area or to a Trivandrum Technology park (first STPI in India)which have failed to utlize the subsidies ,infrastructure and focus that was spent on them. They are moving backwards into oblivion by the day. Would you say that taking the route that China has taken , ie, to get people to the business , work in rejuvenating and reviving such industrial areas and the opportunities that they could generate.

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  4. Your blog points out, there is so much to be done in India. I don't think there have ever been any emphatic incentives for job creation. There are some provisions in the Taxmann, but they are riddled with a maze of conditions for someone to qualify, even the tax break is not very lucrative.

    In India, the rozgar yojnas that they come up with are also near sighted. They all provide some daily wages but don't provide a permanent employment solution to a person.

    "sons of the soil theory". Absolutely spot on. No one has experienced this better than a Maharashtrian. Its pure gundaism. You don't want another efficient person to come in, and you don't want to work yourself.

    Somehow the politicians always look for flashy short term propgandas to get votes. This one is a such a populist cause. But who wants to work?

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  5. One of the negative aspects of China's growth story is the fact that the disparity is very wide between the have and the 'have not' provinces. The east coast seems to be a special zone, but there seems to be a sense of alienation as you go more inland and people migrate to the east coast. From what I read, the Government is laying roads et al to remote provinces to enable free movement of goods, people and also for tourism. My perception is that the development should be distributed or you run into the typical urban sprawl problems.

    The ideas that you put forth are interesting and common sense. Hopefully some sense gets drilled into our politicians. Only the younger politicians can bring about some change, not the crop of oldies.

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  6. Agree on all five counts. Wish you could be here in Washington and drill some sense into the minds of the big wigs when the unemployment has been at double digits. $5000 bonus to an employer for every new employee hires is just not good math with respect to overheads. Well done.

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  7. @gils - Yes; the bane of India is people and their leaders trying to split the unity, trying to make it a colelction of states rather than a single nation.

    @Sandhya - Very valid observations and agree to everything except the language bit. In today's globalised world, multiple languages will coeexist and people will learn whatever is useful. I think India can happily motor ahead without a cvommon language although most people will eventually use Hindi as the link language.

    @Vinod - Yes absolutely. Such places haven't succeeded because they were the wrong locations for industry - best it for industry to find their right locations and let people migrate ; concurrent has to building infrastructure (housing, transport etc, which China has so effectively done.

    @Deepa - Yes the tax lawas have become so complicated that they often don't serve the intended purpose and anway employment generating braks are few and far between. And yes its so frustrating seeing the people who are narrow and parochail - its all across the land not only in Maharashta - see Telangana, Gorkhaland, etc etc

    @Rammm - Yes China's development has been lopsided and the interiros are still poor. But some 200 million people from the wets have moved east, got jobs and prospered in a way they otherwise could never have. And in the East the government has built such great infrastructure in housing and transport that there are few slums. Its a great model, I think.

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  8. @blogueur - Delighted to see you back. In the US, its so sad to see such misery brought by joblessness.

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  9. Everytime you write, you hit the right note. And make me wonder how far we are from that "feel good" factor.

    I wish that RamMmm's hope get realised as soon as possible. Young people WILL definitely make a difference.

    I had a chance of listening to Sachin Pilot recently at one of our company's meet and indeed, guys like him are capable of turning the table around.

    I imagine how delightful it could be, if you were at the helm of finance and commercial affairs for our country :-)

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  10. @Vishal - Yes, there is a new generation of leaders coming up, but they are all sons of earlier leaders. There is a lot of talent which can come into governance, but it looks like a difficult area for a newcomer to enter.

    Hey thanks for flattering me so much.

    ReplyDelete

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