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A resurgent Asia is introducing a new strategy: income-led economic growth. Initiated by South Korea and Malaysia the concept aims to connect an increase in wages to the GDP growth rate.
As governments face an evolving workforce and strained state-run welfare systems, development economists say a few countries are also experimenting with the idea of Universal Basic Income as a simple substitute for the existing welfare systems.
South Korean President Moon Jae-in came up with the strategy of ‘income-led growth’ which envisaged frequent increase in minimum wages — South Korea hiked its minimum wage by 16 per cent in February this year. Under the labour reforms, work hours have also been reduced to 52 from 68 hours a week to allow workers more leisure time.
In addition to stepping up social spending, the South Korean reforms include a complex array of subsidies intended to help small businesses implement the government-hiked minimum wages and to encourage micro-enterprises to hire more workers.
The country’s new strategy of economic growth is a radical departure from the combination of export-led, investment-led and globalisation-led growth model that South Korea has pursued over the past decades with great success. In 2017, with per capita income of $28,380, it was ranked amongst the countries with the highest income by a rating agency.
The focus now is shifting to domestic demand-led economic growth owing to rising uncertainties being created as a result of a faltering and fragmenting international market. There are also fears of a cyclic global recession in the near-term. However reforms are facing tough opposition from affected quarters. Critics say that the subsidies may boost the purchasing power of the poor but fear a mushrooming of ‘zombie companies’.
They also point out that like his predecessors Mr Moon has learnt by now that it is not possible to tamper with the complex structure of the chaebols (a large industrial conglomerate that is run and controlled by an owner or family in South Korea). Like all new ideas for change, the reforms are facing teething problems.
While the South Korean president is sticking to his reforms agenda, he has been forced to slow down the pace at which the increase in wages was originally intended.
It may be noted that South Korea is not alone in its efforts to improve income levels. Malaysia’s 11th development plan launched in 2015 stipulates employee compensation to increase from 32.5pc to 40pc of GDP by 2020. It currently hovers around 36pc.
China also recently announced that it would link increase in wages to GDP growth.
Pakistan, meanwhile, is struggling to switch from import-led growth to export-oriented industrialisation.
However policymakers have been trying to expand the social safety net, to quote the latest Pakistan Economic Survey, because they believe that ‘redistribution of wealth to the poor helps reduce chances of recession and promotes social harmony.
As the economy expanded, the government hiked minimum wage for workers in the private sector for three successive years starting from July 2015. That included retrospective increases for previous four years, resulting in a cumulative jump from Rs6,000 in 2008 to Rs15,000 from July 2017. Wages for government employees have increased more steadily.
S. Korea hiked its minimum wage by 16pc this year. Work hours have also been reduced to 52 from 68 hours a week
It is no less significant that the wage increases took place in a virtuous cycle of low inflation and a moderate GDP growth rate. No increase was announced in budget for FY2019 as GDP growth began to slide.
In comparative terms, wages of highly skilled persons recorded an average of Rs49,800 per month in FY 2017 from Rs41,000 in 2016.
However, the statutory minimum wage increase for unskilled workers has not been uniformly implemented across industries and businesses. And the relevant law does not cover agricultural labour and workers in the informal sector.
The International Labour Organisation has urged Pakistan to bring farm workers and those in the informal sector of the garment industry within the ambit of the minimum wages act.
The scope of the government’s flagship Benazir Income Support Programme (BISP) is gradually expanding from mere doles to helping an increasing number of beneficiaries acquire skills to fend for their livelihood. Other programmes to alleviate poverty—youth employment scheme, zakat and usher, microfinance—seem unable to address the ever growing unemployment dilemma.
A handful of countries are also experimenting with the idea of Universal Basic Income. Finland launched a two-year pilot project in 2017 for providing 560 euros per person per month to 2,000 unemployed.
At the end of the programme it will assess how monetary support affects recipients’ incentive to work. The cash transfer is of equal amounts for all individuals and is seen as a simpler substitute to welfare systems.
Published in Dawn, The Business and Finance Weekly, November 12th, 2018
