A Long, Hard Journey Back to Job Growth in Asia

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As Asia struggles to cope with a global economic downturn that has sharply trimmed its once-soaring growth rates, some of the harshest effects are hitting home among the region’s workers, especially the poorest and most vulnerable.

A dramatic drop in exports across Asia—resulting chiefly from plunging demand in the United States and Europe—has triggered a surge of plant closings and layoffs in industries that churn out electronics, apparel, and a variety of other goods for foreign markets.

The result has been a sudden expansion of poverty, propelled not only by increased joblessness but by greater underemployment, reduced working hours, and downward pressure on wages, benefits, and job security.

In its most recent update on worldwide employment, the International Labour Organisation (ILO) projects that as many as 239 million people around the world could be jobless this year, up from 180 million in 2007. As many as 104 million of the unemployed could be in Asia (including East Asia, South Asia, Southeast Asia, and the Pacific), the ILO says.

Compared to data collected since 1991, the ILO’s approximate starting point of a more integrated global economy, “2009 will represent the worst global performance on record in terms of employment creation,” the ILO says in its Global Employment Trends report issued in May.

Even more worrisome, the ILO says, is the growing number of workers living in poverty or stuck in “vulnerable employment” without adequate labor rights or a social safety net if they lose their livelihood or face a challenge such as serious illness.

Before 2008, the percentage of workers living in extreme poverty—defined as having an income of less than $1.25 per person per day—was shrinking. The working poor comprised 21% of all workers, or about 624 million, in 2007. This year, however, that trend is expected to reverse, with 122 million to 233 million additional workers—24% to 28% of the global total—living in extreme poverty. Of those additional workers, more than two thirds live in Asia.

In its worst-case scenario, the ILO forecasts that the number of Asians in extreme poverty could rise to nearly 590 million, almost 69% of the global total.

“Although the projected increase in the level of unemployment is a major global challenge, the potential increase in vulnerable employment is even more alarming,” the ILO says. It estimates that half the global workforce—seven times more people than the number of unemployed—is likely to be in vulnerable employment this year.

In 2007, nearly 1.5 billion people around the world were in vulnerable employment, about 1 billion of them in Asia, the ILO reports. This year there could be as many as 1.6 billion people in that category worldwide, 70% of them in Asia.

Especially hard-hit have been women, young people, and migrant workers. The global economic downturn also has raised concerns about remittances, a major source of revenue for countries such as the Philippines and Viet Nam, and the nations of South Asia.

Despite stimulus measures enacted by various countries in recent months, including a $586 billion package in the People’s Republic of China (PRC), experts see little prospect of improvement in Asian labor markets in the short term. Some say progress requires structural changes and vast infrastructure spending that the region’s economies are in no position to make now.

In the PRC, where there is relentless pressure to create jobs for the country’s 1.3 billion people, demographic trends are expected to bring some relief. An aging population means that fewer people will be entering the PRC workforce in the years ahead.

“This tremendous pressure is going to last a few more years,” says Derek Scissors, a research fellow on Asian economic policy at the Washington-based Heritage Foundation’s Asian Studies Center. “Three to five years from now you’ll see a noticeable decline in the number of workers entering every year,” ultimately leading to “net withdrawals” from the labor force.

But in India, which is projected to surpass the PRC as the world’s most populous country by 2025, intense labor market pressure is expected to continue for decades.

“India has a long-term problem” in creating enough jobs for its population, and the current crisis is exacerbating it, Mr. Scissors says. “But even when exports come back, they’re still going to have a problem of creating lots of jobs for years.”

Indeed, according to ADB, the most important problem that policy makers in developing Asia face in the coming decades is generating enough employment for the region’s huge labor force.

“The phenomenal success measured in terms of GDP growth and poverty reduction in the last three decades, particularly in East and Southeast Asia, does not seem to have led to more and better employment,” says a report on labor market issues by Rana Hasan and Jesus Felipe of ADB. “Of all the problems that beset developing Asia, the employment problem is probably the central one,” they write.

While labor markets have taken a hit across Asia, from prosperous Singapore to impoverished Bangladesh, most of the world’s attention has focused on the PRC. The challenges confronting the country stem largely from what the ILO calls “the world’s largest-ever peacetime flow of migration.” The organization estimates that the number of rural migrants seeking jobs in the country’s urban centers has risen from about 2 million in the mid-1980s to as many as 150 million today.

Since the economic crisis struck, an estimated 23 million Chinese migrant workers have lost their jobs, and about 670,000 smalland medium-sized enterprises have closed.

In addition, about 6.1 million university graduates are entering the job market this year—500,000 more than last year’s 5.6 million. And about 1.5 million of the 2008 graduates failed to find a job, according to the Chinese Academy of Social Sciences.

Officially, the PRC government puts the nation’s unemployment rate at about 4%, but some dispute that figure. Researchers at the academy, the PRC’s leading think tank, have pegged the jobless rate in urban areas at 9.4%.

For the PRC government, today’s economic conditions carry a sense of déjà vu. Twenty years ago, the government faced public unrest that fueled the Tiananmen Square protest movement. Now the world’s most populous nation is confronted by the same specter of soaring joblessness and growing economic hardship.

The PRC faces an enormous challenge in absorbing the 150 million surplus workers from the rural sector, as well as new entrants to the labor market, and 5 million to 10 million people who have been laid off from state enterprises in the last 3 years, says Eswar Prasad, a senior fellow at the Brookings Institution and a professor of trade policy at Cornell University.

“This is a major concern for China,” he says. “If they’re not able to deliver a decent level of job growth, it could affect social stability. This creates a potentially explosive situation if there isn’t a good social safety net in place. It’s a challenge that has been substantially heightened by the adverse effects of the current crisis.”

Even some PRC authorities have begun to speak openly of their concerns that the economic crisis could lead to social unrest this year.

“In 2009, Chinese society may face more conflicts and clashes that will test even more the governing capabilities of all levels of the party and the government,” Huang Huo, bureau chief of the official Xinhua news agency in the southwestern city of Chongqing, tells the agency’s Outlook magazine.

PRC authorities recognize that they need to invest more in rural areas to provide jobs that would stem the flow of migrants to the cities—and limit potential pockets of urban discontent. While hundreds of billions of dollars have been invested in the countryside, the spending has not kept pace with investment in urban areas. According to the PRC’s National Bureau of Statistics, investment in rural areas from all sources in 2008 came to about $351 billion, but that paled in comparison to the roughly $2.16 trillion that was poured into urban areas.

In addition to spending on infrastructure, Beijing has been trying to spur consumption and job growth in rural areas by, for example, cutting taxes for farmers, offering villagers coupons, allowing them to buy appliances such as refrigerators at minimal cost, and giving college graduates full refunds of their tuition fees if they take jobs in poor and relatively undeveloped parts of central and western PRC.

When the PRC started its economic reforms in 1979, the government focused primarily on the country’s rural areas, the Heritage Foundation’s Mr. Scissors notes. After the unrest in the late 1980s, Beijing switched its reform efforts to urban areas. Since then, economic gains have been more concentrated in cities.

“Urban investment was six times larger than rural investment in 2008, even though the rural population is twice as large as the urban population,” he says, citing figures from the National Bureau of Statistics. In other words, per capita investment is 12 times higher in urban areas than in rural areas.

“The Chinese have both a short-term problem and a structural problem to deal with,” says Mr. Prasad. The structural problem is that the economy still depends heavily on the export sector to generate employment growth, but major incentives, such as financing available from state banks, are all tilted toward investment-led growth. Large state-owned enterprises get most of the credit that flows through the banking system, and they have every incentive to invest in physical capital.

“This substantially dampens employment growth because the incentives are for investment-led production,” he says.

The export sector, however, generates most jobs in the PRC these days—a big problem given the current global crisis. “It is very difficult to see prospects of strength in the world economy sufficient to absorb large volumes of Chinese exports,” Mr. Prasad says.

“This is a long-term problem they have even when their economy is growing by 10% to 12% a year,” he adds. Even that level of GDP growth has produced net employment growth of only about 1% a year.

According to Messrs. Felipe and Hasan of ADB, while it took a 3% economic growth rate in the PRC to produce a 1% increase in employment in the 1980s, it took an 8% growth rate to achieve the same result by the 1990s. This is because of increasing reliance on modern technologies and capitalintensive industries to boost output, which is a continuing trend.

As a result, even though the PRC’s National Development and Reform Commission estimated in early 2006 that the country would need to create about 25 million urban jobs to accommodate new job seekers, workers laid off from state enterprises, and rural migrants, Messrs. Felipe and Hasan say urban areas would be able to generate only about 11 million jobs.

To manage its unemployment problem, the PRC needs to maintain a GDP growth rate of at least 8%, economists say. But after reaching a peak of nearly 12% growth in 2007, output has fallen off sharply, and private forecasters, such as Moody’s Investors Service, say it could drop to as low as 5% this year.

Many economists think that the way for the PRC to solve its employment growth problem is to shift away from dependence on exports and boost domestic private consumption.

“But this is not very easy to do in the short term,” Mr. Prasad says. “In the short term they’re sort of locked into their growth model. They have little choice but to keep relying on exports to generate whatever little employment growth they can muster.”

To stimulate domestic consumption, the Chinese need to reform their financial system, develop a stronger social safety net and improve their health care and unemployment insurance systems. Over the years, the PRC has become a nation of savers, rather than spenders, in large part because families needed to put away money for contingencies, such as job loss or serious illness. In the past, the absence of a social safety net was not considered such a big problem because state enterprises themselves were a safety net, offering health care and subsidized housing and education. But the streamlining of the state sector has sharply reduced that safety net.

Other Asian nations also face a hard slog in their efforts to regain the employment rates they enjoyed before the economic crisis. Prescriptions for doing so vary by country, according to ADB, which cautions policy makers against adopting a one-size-fits-all approach.

One potential pitfall lies in turning to rapid technological progress as a means of recapturing the economic growth of previous years. ADB’s Messrs. Felipe and Hasan warn in their report on labor markets that this “may actually lead to increasing unemployment” since faster output growth does not require a proportionate increase in employment.

In their studies of labor markets in five Asian countries—the PRC, India, Indonesia, the Philippines, and Viet Nam—the authors reject calls by market-oriented advocates of globalization for across-the-board labor market reforms. Instead, they call for “well-designed, country-specific piecemeal reforms that target the particular policies that inhibit employment creation.” They conclude that “labor market reforms aimed at increasing flexibility are by no means a panacea” for the region.

In India, where stringent labor laws make it difficult to lay off workers and, thus, make companies reluctant to hire in the first place, labor reforms may be a good idea, Messrs. Felipe and Hasan say. But in the Philippines, even though certain labor market policies may impede job creation, other factors underlie persistent lackluster economic growth and the chronic unemployment and underemployment that affect about a quarter of the islands’ workforce.

According to the ADB report, conditions such as “substandard investment, lack of sensible population management policies, incomplete land reform, and the monopolistic structure of the economy are probably more important factors in explaining the country’s situation.”

In Indonesia, the emergence of democratic rule in 1998 led to improvements in workers’ rights. But some analysts have argued that large hikes in the minimum wage and severance pay have raised businesses’ costs and reduced demand for labor. Messrs. Felipe and Hasan counter that the evidence for these claims is weaker than commonly believed. Instead, they suggest that constraints on foreign investment and formal sector employment can be better explained by “macroeconomic instability, policy uncertainty, and corruption,” as well as business regulations that are “very cumbersome by international and regional standards.”

The report urges Asian governments to give top priority to promoting “full, productive, and decent employment” without resorting to “populist measures” such as creating thousands of unneeded jobs in state enterprises. But the authors are under no illusion that this will be easy.

In fact, they conclude, “it is easy to conceive of a region, say, 25 years from now, that, despite continuous growth, still harbors most of the world’s poor.” •