The Sunday Times Economic Analysis

Labour laws that the country boasts about are among the bottlenecks for rapid economic growth.

The Central Bank Annual Report for 2005 makes this point when it says that there is a need to reform labour legislation to make them more flexible. It makes the point that, "Flexibility in labour relations and consistent policies are key elements in creating an investor friendly business environment." The Central Bank makes the point that recent labour legislation may be perceived by investors as a reversal of the earlier efforts to make the labour market more flexible and market friendly.

It is true that these laws have protected workers over a long period from the rapacious acts of employers and given a degree of security towrds employment. However, in today's context of globalization, characterized by fierce and harsh international competition, rigid labour regulations to protect the employed can be detrimental to enhancing competitiveness.

Productivity is the key to success in the industry and especially in the export industry on which Sri Lanka must maintain competitiveness if it is to achieve rapid economic growth. Our labour laws are not consistent with the current economic order. They deny employers a much-needed degree of flexibility in employing labour. The intense international competition ensures that only the fittest survive. This places severe pressures on management to extract the most from labour. Industries rise and fall in the face of new emerging competition and economic changes. The need for flexibility is paramount for the industry to survive in such a harshly competitive global market.

The socialist regimes of the past have tended to institutionalise worker's rights to the extent that such protection inhibits industrial efficiency, re-organisation and expansion.

The rigidity in maintaining the workforce has induced inefficiency. The inability to contract an industry or firm in response to market conditions has inhibited the expansion of firms.

Consequently it has led to a misallocation of resources in a labour abundant economy. In a society with high unemployment economic forces should encourage labour intensive modes of production. Instead, in some industries, capital-intensive technologies are being adopted to circumvent labour problems. However, there continues to be a conflict of interest between the employed and those seeking employment.

While the employed may be protecting their jobs, those seeking employment may have lesser opportunities to be employed. Overall this leads to lesser labour absorption and inefficiencies.

The economy is performing at a lower level of labour absorption than its potential. The labour laws have created a situation in which management prefers employment of less persons as they are unable to get rid of any surplus labour that may emerge later owing to market conditions. This has resulted in the government over employing to reduce the rate of unemployment among the more articulate sections of the unemployable, thereby increasing the public burden on wages and ultimately on pensions. Such a strategy is not only costly to the public purse, but also detrimental to efficiency in the public service itself. The fact that Sri Lanka's public service is the largest in terms of population speaks volumes.

East and South East Asian countries have adopted varied flexible practices that have enabled the industry to be freer in employing and dismissing workers. In South East Asian countries like Malaysia there is flexibility to hire and fire.

This has been an important factor in encouraging direct foreign investment to these countries. It has enabled the economy to change its industrial structure in the face of changing cost structures, especially owing to new competition from lower labour cost countries such as Bangladesh and Vietnam and rising wages in Malaysia. The ultimate result of these countries' labour policies is that they have over a relatively short period of time transformed from labour surplus countries with high rates of unemployment to labour deficit countries that require to import workers from countries like Sri Lanka.

In some East Asian countries, notably Japan, industry traditions have not favoured downsizing even when facing conditions that necessitated it. Instead owners, management and workers have accepted lower profits, salaries and wages to sustain the industry. Recognition of a common interest between management and workers has enabled such an approach. This is based on values steeped in the past when workers considered employment in a firm a life long involvement. However these values are being gradually eroded. The younger generation of Japanese accept employment as being for a fixed period rather than for an entire working life. Sri Lankans require shifting to this approach in employment.

The conflict between management and workers has been sharpened all over the world in both capitalist and former communist countries. The underlying factors have been the global competitiveness just mentioned and the incessant seeking after maximisation of profits. The latter is seen most clearly in developed countries where seeking maximum corporate profits has led to a downsizing of firms. The laws in those countries permit such reduction of employment and workers move on to seek employment elsewhere.

There may be a need at the current stage of development and inadequate employment opportunities to find mechanisms such as unemployment insurance to enable more flexible employment policies.

What this discussion points out is the need to fashion new means of ensuring the interests of both workers and their management. Crucial to such a strategy would be a need for trust between the parties and the acceptance of the stark economic fact that a conflict of interest could lead to economic stagnation and collapse of industries.

This means that workers' interests would not be served ultimately. The interests of workers would be best served by the rate of employment rising and consequently the wage rates rising in tandem.

This could be achieved only in the long run with painful adjustments in the immediate future. Labour regulations, trade union actions and the political milieu in the country are hostile to the adoption of the needed flexible adjustment policies. Consequently long run increases in employment are likely to be hampered.

Labour legislation could lead to lesser investment, a substitution of capital for labour and lower economic growth. Workers and trade unions should unite with their management to ensure higher levels of economic activity and employment.