A queue of a different type
Last Sunday when the sun was shining hot and bright in the western sky, thousands of youth — almost all were boys — had assembled themselves with backpacks still hanging on their backs, along the wrought iron fence of a park in Colombo ready for an overnight stay there. The writer happened to walk past them and thought that it was a sit down protest by the country’s rebellious youth though they were not waving the familiar slogan boards.
|Korean Ambassador Jongmoon Choi at Police Park, 9 August 2011|
On inquiry, he was told that they were there in a queue to receive application forms for a language test for job aspirants in South Korea. The applications were to be issued on a first come first served basis the following morning and none of them had wanted to miss the opportunity. So, they had decided to set up camp for the night in front of the application issue centre.
This was rich food for the media and even this paper had a photograph published in the following day morning with a well-meaning caption ending with a question mark: ‘Queuing up for jobs away from emerging Wonder of Asia?’ (available at: http://www.ft.lk/2011/08/08/queuing-up-for-jobs-away-from-emerging-wonder-of-asia/#more-42469.
The following morning, it indeed developed into a minor youth rebellion because the issue centre could not meet the demand. Many had used the incident to question the validity of the declining unemployment numbers in Sri Lanka, 4.3% as at end of the first quarter 2011 according to the official statistics and down from 6% at end 2007. Some had even categorised it as a dormant volcano which had become active stealthily getting ready for eruption at any moment of time. They are both right and wrong.
Employment does not mean high welfare
They are right due to two reasons. The first is that the unemployment numbers are not a meaningful indicator of the welfare level of the peoples of a country. Like other countries, Sri Lanka too follows the employment definition of the International Labour Organisation or ILO to make its statistics comparable with the rest of the world. According to this definition, a person is considered to have been employed if he had worked at least for one hour during the one week period before the date of the employment survey for wages or as an unpaid family worker contributing to the family income. Hence, an unemployed person is a person who has not worked at least for one hour in the preceding week. Since the average wage for one hour in Sri Lanka is not high enough to maintain a person for one week, being employed, as per statistics, does not necessarily mean that the person’s welfare level too is adequate. So, though the statistics say that the employment level is closer to 96% of the labour force, many of those employed persons are unhappy disgruntled and seeking for better paid jobs.
Thus the statistics are internationally comparable, but a poor welfare indicator.
High unemployment among the youth
The second reason is the high unemployment rate among the youth. Though the national unemployment rate as at the end of the first quarter 2011 is very low at 4.3%, the unemployment rate among the youth in the age category of 20-29 years standing at 12.8% is three times higher than that number. This is a decline from 15.4% in 2009, but it is still very high. Thus, as the critics have labelled it, Sri Lanka is sitting on a volcano which is ready to erupt at any moment of time. What was seen in the last week in Colombo is perhaps only a little bit of molten lava seeping over the mouth of the volcano to the otherwise happily-disposed population living down there.
The critics are wrong due to two factors.
Sending the youth abroad is Government policy
The first is that sending Sri Lanka’s youth to Korea and other countries is the government policy and has nothing to do with the high unemployment among the youth.
President Mahinda Rajapaksa’s Presidential Election Manifesto, ‘Mahinda Chinthana: A Vision for the Future’, has very clearly indicated (p 36) that even before the election, all arrangements have been made to secure 50,000 employment opportunities in several countries including Korea, Japan and Libya during the ensuing three year period. The manifesto has further stated that the selection process of successful candidates would be done in a transparent manner and their skills will be developed in the relevant fields such as nursing, nautical services, accountancy, IT, banking and engineering.
Libya is now out due to its internal political turmoil and Japan does not encourage foreign workers on a massive scale. Hence, the only country available for the government to send the country’s youth for employment is South Korea.
Purchasing power differences across countries
Second, there is a more compelling economic reason for the youth of developing countries to seek employment in developed countries, legally or illegally, whether they have a job at home or not and whether their governments sponsor it or not. This is to do with the wage level and price level differences between the two types of countries.
How does this happen?
It was the Swedish economist Gustav Cassel who came up in 1918 with the idea that the welfare levels across the countries in the world are not comparable due to differences in the purchasing power of the incomes involved. This is because of the restrictions imposed on free trade in goods and differences in the exchange rate arrangements followed by the countries.
The logic behind this argument is simple. If goods can move from one country to another freely without restrictions, there will be a single price in both countries irrespective of the differences in productivity that leads to differences in costs. For example, if there is free trade between India and Sri Lanka, when the coconut prices in Sri Lanka go up due to an increase in the cost of production or a shortage, coconuts will freely flow from India to Sri Lanka. This will create a relative scarcity of coconuts in India raising its price. On the other side, more coconuts will be supplied to the local market in Sri Lanka causing a decline in its price. This process will go on until both prices are equated by free trade and at that point there is no more incentive for exporters in India to sell their coconuts in Sri Lanka because they can make the same profits by selling their coconuts in the local market.
The law of one price
Thus, under free trade, there is a single price across the world and economists call this ‘the law of one price’. The differences in prices are only due to differences in transport costs and differences in tax rates on commodities imposed by respective countries.
But there is another reason for these differences to occur. That is the different exchange rate regimes adopted by different countries. If exchange rates are determined by the markets as in the case of the freely floating exchange rate systems, then there is no, again, a problem about the prices in different countries. If one country is less productive than another country, the exchange rate will move up to compensate for the lesser productivity and the prices will be the same.
If a country has deliberately allowed its currency to move up against other currencies which economists call an appreciation of the currency, the prices in the home country will be lower than the prices in the exporting country. In the converse, if a currency has been allowed to move down against other currencies, an act of depreciation, the prices in the home country will be higher than the prices in the exporting countries.
Appreciate exchange rate to show low prices and high incomes
Thus, the exchange rate system, whether it is appreciated or depreciated, will create differences in prices and accordingly, cause differences in the purchasing power of the incomes earned by respective people of the countries.
For instance, if a kilogramme of tea in Sri Lanka is 4 dollars and a kilo of tea in USA is 8 dollars, an income of 4 dollars in Sri Lanka has the same purchasing power of 8 dollars earned in USA. Thus, a Sri Lankan earning 4 dollars has the same welfare level, assuming that the quality of tea is the same, as an American earning double that income.
This analysis led economists to come with a new income indicator called Purchasing Power Parity or PPP Income which they claimed provided a better indicator to compare welfare levels across the countries in the world than the non-PPP or nominal income levels. The nominal income levels had the defect of showing a country’s income better or worse than the income of other countries depending on whether the exchange rate is unduly appreciated or unduly depreciated against other countries.
For international comparison, all GDP data calculated in domestic currencies are converted to US Dollars by using the average exchange rate against the US Dollar. But the GDP data calculated in domestic currencies have an element of inflation included in them and therefore show a higher figure than the real welfare level enjoyed by the people of the country. This is normally corrected by a depreciation of the exchange rate so that the country’s GDP numbers do not show an undue enhancement against other countries. But if the exchange rate has not been allowed to depreciate or in fact has been appreciated despite the presence of domestic positive inflation, then, the GDP numbers show an unduly higher figure.
A good example is the former Soviet Union. Despite the domestic inflation, the Soviet Union had kept its exchange rate at a fixed level and above the value of the US dollar at one Rouble is equal to 1.67 US Dollars for 67 years from 1917. Thus, due to inflation, the GDP was high in nominal terms and when converted to US Dollars at the appreciated exchange rate, it was even higher than nominal numbers. This raised the Soviet Union to the status of a highly developed country in the world.
But in 1990 when the Soviet Union disintegrated, its exchange rate fell to its actual level making the Rouble worthless in terms of the Dollar or any other currency in the world. Earlier, at the appreciated exchange rate, one Dollar was equal to a fraction of a Rouble, namely, 60 kopeks. But, after the Rouble fell in the market, it was 30,000 Roubles to a Dollar. The result was that Russia, the successor to the Soviet Union, became a poor country overnight.
Thus, by manipulating the exchange rate unduly, a country can show its performance better in US Dollar terms. But it does not necessarily mean that people have a higher welfare level in actual form.
Balassa – Samuelson Effect
This was shown by two American economists working independently but coming up with their results simultaneously. One is the Nobel Laureate and MIT Professor Paul Samuelson. The other is the John Hopkins University Professor Bela Balassa. Their argument was that even when there is free trade in goods, the law of one price does not prevail because of the existence of the services which cannot be sold across the border to another country. Economists call them ‘untradeables’.
Balassa found that the prices of services in developing countries are very much lower than those in developed countries. For instance, a person can have a haircut in Sri Lanka for Rs. 110 or one US Dollar. But a haircut in USA will cost anything like $ 10. But the welfare level, as far as the services are concerned, of a Sri Lankan earning one US Dollar is equal to that of an American earning $ 10. Hence, the ordinary price levels in developing countries are significantly lower than those in developed countries.
But the income levels in the two countries are different. In Sri Lanka, the hourly average wage level of a manual worker is about 85 US cents. But the same manual worker in USA will earn about $ 20 per hour before tax and about $ 13 after tax. Thus, for a Sri Lankan worker to have a haircut, he has to work a little more than one hour. The US worker is not better off, because, according to our example, he has to work a little longer than a Sri Lankan worker to have a haircut. This is more visible in the case of dental services: a tooth extraction in Sri Lanka costs about $ 5 requiring a worker to put in 6 hours and in USA, about $ 100 requiring a worker to put in 7 hours.
The US workers cannot come to Sri Lanka to have their tooth extracted because the price difference is not sufficient to cover the transportation and living expenses. On the other hand, hairdressers are not permitted to come and work in USA freely and therefore prices there do not fall.
Thus, developed country workers, burdened with high cost of living, agitate for higher wages and employers, to cut the costs, prefer to hire workers from developing countries.
Balassa effect on migration patterns
This observation has in fact thrown light on the nature and pattern of international migration.
Accordingly, young people in developing countries have an incentive to migrate to developed countries, work there for some time at high salaries and return to home countries after earning a significant wealth so that they can enjoy a higher living. At the same time, old people with pensions paid in foreign currencies in developed countries have incentive to migrate to developing countries and have a good living there with their high foreign currency pension incomes. This migration pattern can be called ‘Balassa Effect’.
Thus, South Korea with its higher wage levels than those in Sri Lanka lures youth in Sri Lanka to seek jobs there. That was why those young people chose to make an overnight stay in front of that park that day suffering innumerable difficulties and hardships to ensure that they could get an application form to sit for that language test to enter South Korea as workers.
There is another implication of this pattern. If these youth cannot enter a developed country legally, they would resort to illegal methods to enter those countries and work as underground workers at lower wages than the market wages. Those lower wages are still attractive compared to wages back at home and therefore they choose to take the risk.
The underground market forces also spring up spontaneously to meet this demand at a price. That is how there is a lucrative trade in trafficking willing youth in multi-day fishing boats to Australia in the Pacific and Italy and Germany in the West. A similar tendency has occurred in Japan and South Korea in a different form. Young people enter these two countries legally but disappear without a trace into the underground market. Their objective is to earn a sufficient wealth, return to home one day and make a good living there. The money they have sent through banking channels has enabled Sri Lanka to have a good living despite the mounting trade gap between its imports and exports. Similarly, the illegal workers send money through illegal channels. That money has helped to keep their families afloat in these hard times. Thus, contrary to what many preach us, those who leave the Sri Lankan shores, legally or illegally, to work in a foreign country are not unpatriotic at all.
(W.A. Wijewardena can be reached at firstname.lastname@example.org )