Industrialization and Development in Asia: Labour Structure and Labour Relations in China and India - Research Paper Example

Industrialisation and development in Asia: Labour structure and labour relations in China and India Introduction The recent economic changes in China and India have drawn widespread attention for two major reasons. First, these two large economies have demonstrated that market-oriented reforms can trigger both strong industrial growth and economic development (Saha, 2006). At the same time, they have also demonstrated how market regulations affecting labour and labour relations can play an important role in determining the economic performance of the economy. As it will be noted in this discussion, major labour reforms and market incentives adopted by China in the past have led to the creation of a free labour market. As Saha (2006) explains, this has been one of the key drivers of rapid industrialisation and economic growth and development in this country. Similarly, India has numerous labour laws that affect labour conditions in the country. However, unlike China, India has been stuck to various labour laws and regulations that are rigid and overtaken by time and which pose barriers to effective restructuring (Sen, Saha & Maiti, 2010). The inflexible laws and regulations act as a stumbling block to industrialisation and economic development. This essay makes a comparative assessment of the labour structure and labour relations in China and India. It also explains the effects of laws and regulations affecting labour structure and labour relations on industrialisation and economic development in the two countries. To understand this better, it will be prudent to understand the background of labour reforms in both China and India. Background of labour reforms in China and India Before 1970, both China and India engaged in massive planning and large-scale public investment which gave a head start to industrialisation and economic development in the two countries (Saha, 2006). In China, there were large-scale and small-scale state-owned enterprises which were managed and controlled by the central authority as well as small enterprises that were privately-owned. Together, they helped to create a strong base for industrial growth and economic development. In India, there were numerous large-scale state owned enterprises which were fully controlled by the government. There were no small-scale state-owned enterprises but there were widespread small-scale privately-owned enterprises. The early phase of planning in 1960s led India to become more industrialised than many nations in East Asia. According to Saha (2006), China and India recorded an average annual growth of 5.4% and 11.2% respectively between 1960 and 1970. However, these countries financed their poor closed economies by taxing agriculture, both directly and indirectly. The Indian government for instance, controlled the movement of agricultural products, ensured that they were sold at low prices in urban areas, and restricted exports in order to support industrialisation. Though the industrial sector received much protection from external protection, the agricultural sector continued to deteriorate due to coercion and lack of attention. China too followed the same path by controlling movement of agricultural products. Yueh (2004) explains that food grains in China were surrendered to the authorities in the form of targets and quotas. Farmers were transformed into community employees, and placed under the management of party officials. However, the ill effects of this command-and-control economy began to be evident in China during the same period (Saha, 2006). This transformed into high levels of inefficiency, distorted incentives, lack of employment security in both the agricultural and industrial sectors, deficiency in food production and lack of a market system. Driven by this backdrop, Saha (2006) explains that China launched agricultural reforms in 1978 by renting out community lands to individual farmers on a private basis. This step was successful and agricultural output increased by 64 percent between 1978 and 1984. Similar reforms were adopted in state-owned enterprises. These were followed by deep wage and managerial reforms as well as privatisation of all small-scale enterprises. Improved agricultural production led to higher agricultural income, increased savings and improvement in the performance of the overall economy. It also provided a breeding ground for small and medium-scale private entrepreneurship and increased employment security (Saha, 2006). Generally, Chinese reforms were concentrated on adding market incentives and reforming labour laws and regulations. India took a different path from China. Rather than adding incentives or reforming labour laws and regulations, the state-owned enterprises in India increased employment in 1970s. Consequently, the ailing agricultural sector in India worsened due to increased inefficiencies in production. This situation worsened further after the Indian government passed labour laws in 1976 and 1982 which saw large firms lose the right to fire or lay off employees or even close down. Industrial de-regulation in India started during the late 1980s after the government realised the adverse impact of the past policies (Saha, 2006). Foreign investment was also welcomed, though selectively. As a result of these reforms, India recorded a rise in real GDP per capita by 5.67 percent. In 1991, some of the physical regulations on industries that existed were removed and the Indian economy continued to perform much better. However, as Sen, Saha and Maiti (2010) note there have been limited reforms carried out on labour laws and regulations in India and the Indian economy is still thriving under the rigid labour laws introduced during the planning stage. The reforms carried out in India were meant to improve efficiency in allocation of production resources and foster competition. Though this move led to improvement in the performance of the economy, the benefits are basically unsustainable without reforming the rigid labour laws. Therefore, though Indian economy has been improving, the rigid labour laws and regulations have been an obstacle to rapid industrialisation and economic development (Sen, Saha & Maiti, 2010). Labour reforms in China Unlike in most countries in East Asia, China has been cautious and adaptive while introducing reforms that affect local industries. As Sen, Saha and Maiti (2010) explain, Chinese reforms concentrated more on the labour market than on other areas. During the period of planning, the Chinese government ensured that workers enjoyed complete employment security in all sectors. For instance, large industries and small enterprises were required to create room for new employees regardless of their needs. Further, employees could not move from one town or city to another before they could secure a residence there. Several reforms followed later between 1984 and 1994. The first was the wage reform carried out in 1985, which required all industries as well as small enterprises to link their wage budget with performance (Davis, 1999). This motivated workers and eventually led to improvement in performance of most industries. Another reform that was carried out in 1992 gave enterprises permission to set their own wage structure but stick to the wage budget limit set by the government (Davis, 1999). Later in 1994, the state-owned enterprises that were publicly-listed were allowed to set their internal wage structure, subject to some restrictions. Other reforms made between 1996 and 2000 led to simplification of wage structure to link every worker’s performance with their wages (Sundar, 2004). The Chinese government also introduced reforms that led to free mobility of workers. Davis (1999) notes that prior to 1988, local and regional bureaucrats used to assign employees to organisations without their choice, just like physical inputs of production. However, important declarations that were made between 1988 and 1992 led to dismantling of the bureaucratic system of allocation and workers started to find their jobs freely. Various labour laws which govern labour and labour relations in China today were introduced. The Regulations on Private Enterprises, 1988 permits private ownership of businesses (Sundar, 2004). The Trade Unions Act, 1992 (amended in 2001) gives workers the right to form trade unions. The Labour Act, 1994 introduced the concept of labour as a contract between employers and workers. It therefore gave employers the right to freely hire and fire employees but on reasonable grounds. Various grounds were also defined under which employers can breach an employment contract, such as financial distress. The Regulations on Collective Contracts of 2004 further defines the nature of employment contracts (Saha, 2006). It states that the nature and terms of employment contracts should be determined through bargaining. Generally, though there have been mass lay-off s and unemployment in China, cases of industrial disputes have been minimal (Saha, 2006). Though this has often been attributed to the Chinese Communist Party that has highly been able to manage and control public reactions, the labour reforms have played a great part. Labour laws in India As mentioned earlier, most of the reforms carried out in India have focused on trade and industrial policies, with very minimal changes focusing on labour laws and regulations. The Factories Act, 1948 is the major Act that is used to define industrial workers and factories in India (Planning Commission of India, 2007). Thus, the reforms that have been made to this Act in the past have concentrated on the factory part. There are other laws that regulate labour relations apart from the Factories Act, 1948. One of these is the Industrial Employment (Standing Orders) Act, 1946 which requires an employer to explain to an employee his or her status in relation to conditions of employment in the most precise terms (Planning Commission of India, 2007). These include conditions related to recruitment, confirmation, discharge, misconduct, leave, disciplinary action and holiday. This Act applies to all business enterprises in India employing more than 50 workers (Planning Commission of India, 2007). In addition, this legislation defines the severance pay that should be granted to employees. The Trade Union Act, 1926 on the other hand recognises the freedom of employees with regard to association, expressing their interests among themselves and to their employers, expressing grievances when dissatisfied, and engaging in collective bargaining (Planning Commission of India, 2007). This legislation allows a minimum of seven individuals to form a union, which can be formed both at factory or industry level. Notably, this legislation protects office bearers and members of unions from criminal and civil suits that are related to trade union activities. As Sen, Saha and Maiti (2010) point out, this is one of the legislations that have been in existence since the colonial period and only minimal changes have been made in light of the changed circumstances. The Industrial Disputes Act, 1947 is concerned with disputes related to terms and conditions of work or matters related to wage (Planning Commission of India, 2007). The aim of this legislation is to create a legal framework to help in solving industrial disputes peacefully. It permits layoffs when terms of employment are contractual or on medical or disciplinary grounds. However, under the Act, all business enterprises employing 100 or more workers are required to seek permission from the government before retrenching or laying off any worker or closing down the business. Any employer who violates this requirement may be seriously penalised and the workers laid off reinstated. The major problem with this Act is that in addition to being too restrictive, the government has been too conservative in granting permissions to lay-off or retrench. A good example is the case of 1997 when the Indian government received 60 applications for retrenchment, layoff and closure, but only six cases were granted permission (Sen, Saha & Maiti, 2010). This has been a major hindrance for effective restructuring of loss-making business enterprises. Most remarkably, such legislations have negatively affected economic performance in India. Sen, Saha and Maiti (2010) note that as a result of the divergent and complex nature of labour legislations, disputes have plagued the Indian industry since the planning period. The laws have established an elaborate procedure for dispute resolution but the system itself has been quite inefficient. Impact of laws on industrialisation and economic development in China and India As mentioned earlier, the rigid labour laws and excessive regulations put a stumbling block to the process of industrialisation and economic development in India. First, as Boeri, Helppie and Macis (2008) note, they create a perception of lack of flexibility among investors. This leads to greater cost of employment, which induces investors to employ few workers or to shy away completely. Ironically, the few of the recent changes carried out on the labour laws and regulations in India tend to substitute these laws for social security programmes (Boeri, Helppie & Macis, 2008). This tends to push the welfare burden to employers. Investors tend to shy away due to the increased cost of employment and hence, the burden comes back in form of lower employment rates and the foregone tax. This translates to lower aggregate income as well as a lower rate of industrialisation and economic development. To understand the impact of flexibility and rigidity further, it is vital to examine two of the various ways in which flexibility brings about benefits in an economy: ‘low road’ and ‘high road’ to restructuring (Bamber & Lansbury, 2001). Firms apply the ‘low road’ by organising labour in the least costly way. This is achieved through employment of cheap labour with little or no emphasis on skills accumulation. On the other hand, the ‘high road’ to restructuring implies that employers rely on the skills of workers to compete effectively in the market. Usually, this kind of investment in human capital induces employees to be loyal to their employers and prevents opportunistic behaviour. This translates into worker satisfaction, motivation and high productivity among workers, which benefits them and enables firms to realise higher profits (Bamber & Lansbury, 2001). Generally, flexibility leads to increased productivity among individual firms and in the overall economy, which is a key incentive to industrialisation and economic development (Besley & Burgess, 2004). This also explains the cause of the lower rate of industrialisation and economic development in India as compared to China. Despite the fact that both India and China embraced reforms for similar reasons, they chose different patterns. As mentioned earlier, China responded by creating free labour markets and various market-oriented incentives. These moves, among others, helped to attract foreign investors. Foreign investors brought with them new technology, which was necessary for industrialisation entrepreneurship. According to Srivastava (2005), flexibility also allowed the foreign investors to cut input costs by attracting cheap labour with the freedom to hire and fire. This enabled the investors to employ workers on a larger scale, to increase productivity and to realise a lot of profits. Therefore, industrialisation and economic growth and development in China have largely been driven by availability of semi-skilled workers as well as a favourable climate for investment that has attracted a steady flow of foreign investors. One of the disadvantages of incentives and flexibility is that they tend to widen income differentials (Srivastava, 2005). As noted earlier, reforms removed distributive mechanisms that guided employment contracts. As a result, employees, especially in private firms, suffered from discrimination and exploitation. In spite of this, overall production increased to a large extent Conclusion In conclusion, the labour structure and labour relations have a huge impact on industrialisation and development of any economy. As noted in this discussion, the labour laws and regulations adopted in any country affect the labour structure as well as labour relations. In turn, the labour structure and labour relations determine the willingness of both local and foreign investors to invest in any country. An economy that is driven by flexible labour laws and regulations, such as China, encourages local investors to invest more and as well, attracts foreign investors. This brings about various benefits to an economy, including increased productivity and introduction of new technology. Therefore, flexibility is essential for industrialisation and economic development, as demonstrated by the Chinese case. In contrast, rigid labour laws and regulations make investors to shy away and thus, leads to lower productivity in the long-run. Failing to attract foreign investors makes it more difficult to acquire or to import the latest technology in an economy. This explains the fact that the rate of industrialisation and economic development has been higher in China than in India.             References Bamber, G. J. &, Lansbury R. D. (2001). International and comparative labour relations. London: Sage Publications. Besley, A. &, Burgess, G. (2004). “Can labour regulation hinder economic performance? Evidence from India.” The Quarterly Journal of Economics, 119 (1): 91-134. Boeri, T., Helppie, B. & Macis M. (2008). “Labour regulations in developing countries: A review of the evidence and directions for future research.” Retrieved from http://siteresources.worldbank.org/SOCIALPROTECTION/Resources/SP-Discussion-papers/Labor-Market-DP/0833.pdf Davis, D. S. (1999). “Self-employment in Shanghai: A research note.” China              Quarterly, 157(1): 22–43. 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