U. R. Patel

Urjit R. Patel

Comments on: “Economies with a Small Labour Force”

September 27, 11.30 am session

2

U. R. Patel

Plan

Overview of main findings/conclusions of the three papers.

Emphasis on state of factor markets, especially labour markets, and “transaction” costs of doing business.

Alternative questions/issues that may be relevant.

Have authors ignored/underemphasised other factor market(s)?

The South Asia paper and the previous point allows me to talk a little about an aspect of the Indian small firm sector.

U. R. Patel

3

Main findings I

Contrast between South Asia and Singapore in formal sector job creation.

Clear overriding objectives matter. Crystal clear in the case of Singapore.

Do what it takes – a “maximalist” form of development. Doesn’t matter who creates the jobs, i.e., identity of entrepreneurs/owners is irrelevant.

Low transaction costs – defined broadly.

Outstanding provision of physical public goods – turned into an unparalleled logistics centre.

Established a plug & play hub for both manufacturing and services, high & low capital intensive enterprises.

Refineries/petrochemicals to financial sector.

Certainly true of India (may be also other parts of S. Asia), revenue subsidies has been at cost of underinvestment in infrastructure – transaction costs for business is higher.

4

U. R. Patel

Main findings II

For Singapore: Investment and emphasis on level of education has been calibrated as the country moves up the “value chain”.

Low taxation of all factor incomes – labour & capital.

Keep labour costs relatively low. Trade unions are hardly free.

Interesting dichotomy between “importing” capital through FDI, and then use current account surpluses to make investments abroad through government sponsored funds.

Relatively non transparent. How does Singapore’s ROCE rate with other (comparable) countries?

How important is continuing immigration to maintain Singapore’s competitiveness?

How serious is the resentment against immigration.

U. R. Patel

Efficacy of labour subsidies

Impact of (demand side) labour subsidies in Sri Lanka.

The experiment is designed to see if it incentivises micro enterprises to hire.

Which labour market “distortion” does the subsidy help to alleviate – not clear to me.

Dog that didn’t bark. Even with a 50 percent subsidy, only about a fifth of eligible enterprises made one hire with the expectation that median sales will rise by 25 percent.

It would be helpful to know whether this is consistent with other evidence, e.g., from other countries.

5

U. R. Patel

Alternative questions

Since a labour subsidy is likely to be systemic it is important to assess welfare effects in a general equilibrium framework.

Especially since distortionary taxes are used to raise fiscal resources for funding the subsidy.

It would also be helpful to know how a labour subsidy compares to existing government interventions/(implicit)subsidies that are “deployed” by governments.

Higher thresholds for taxes are applicable to small enterprises. Hidden subsidy like using public land for premises. Implicitly subsidised infrastructure, e.g., turn a blind eye to pilfering of

electricity.

6

7

U. R. Patel

Cont’d.

Is a demand side labour subsidy the “best” way to breakout of a low level equilibrium?

Would a supply side labour subsidy be more effective?

Is lack of access to credit/financial capital more of a constraint to expansion in business (sales) and concomitantly employment?

U. R. Patel

Some small enterprise issues for India

A thriving small firm (SME) sector is important as an opportunity for first time entrepreneurs to enter, thrive and grow to the next level of market presence.

Helps to convey a fairer form of market/capitalist development. Creates jobs.

Need to view them from a dynamic perspective.

Small units want to expand. Relevant labour skill mix does not seem to be a major constraint.

Tension between staying small and graduating to the next stage/scale/size.

Most likely become less labour intensive as small firms grow?

Government policies come in the way in key sectors, e.g., textiles & garments in India by undermining consolidation/exit.

8

U. R. Patel

Access to (risk) capital

The transaction cost for banks to service SMEs seems to be high. Restructuring loans/higher working capital limits. Even specialised intermediaries have been ineffective.

This comes in the way of optimal financial structures.

Need to create a “life cycle” bridge between between small firms, private equity and venture capital.

There is a proposal to make it less costly and easier for small entities to float equity on a dedicated trading platform.

The extant capital market ecosystem is too costly for small firms. There are pros and cons to diluting listing/compliance norms. But an experiment worth going forward with due safeguards and

flexibility for changes as evidence mounts.

9