Special labor employment zones

Unemployment and poverty are related problems that must be addressed by any government. In the unique situation of the Philippine economy, these are major problems that the sitting president must give high attention to.

Erasing unemployment and improving the lives of those in poverty constitute a great and challenging mission for any leader. The president who, on leaving office, is said to have opened the way for the conquest of these two problems will be remembered long and will be considered great.

This is the reason why the idea of creating special labor zones in the country is offered as a solution toward jumpstarting employment creation in manufacturing and industry. The solution does not depend on huge government spending. Through these zones, the country can attract organized large enterprises to locate in relatively poor regions of the country where enormous labor is available. Thus, the zones become magnets for urban growth in depressed regions of the country.

The special labor zone proposal is fully explained in my Spotlighting on Economic Growth… paper. (Note to reader: Go to the UP School of Economics website for more guidance.). The incentives would be similar to those given to firms that are under the export processing zone (EPZ) law but are specifically targeted to win the establishment of large labor using industries in the country.

The labor employment zones will reinvigorate the country’s economy with the expansion of labor-using industries and the growth of consumer demand that is driven by new wage earners whose incomes surpass their old incomes at the poverty level. Thus, with the rise of the ranks of those employed in formal industry, unemployment and underemployment will shrink much faster.

Because the labor zones will be established mainly in the depressed communities of the country, there will rise a new phenomenon of poor regions rising from poverty into some prospect for modernity. The employment zones will bring citizens up the path from poverty to relative hope, built by their efforts through work and not through subsidies for the poor.

Each new, sustained job that is created becomes a multiplier for additional jobs in the community where it happens. This is also one reason why – when heavily labor using manufacturing firms left the country for other manufacturing sights, the job losses we suffered were far beyond the numbers of direct employees left without jobs.

Labor market issues constitute a major aspect of the concerns of policy makers. The creation of labor employment zones is a second-best solution. But it will do its job in helping to absorb many of the country’s unemployed and underemployed into useful, productive workers enjoying some amount of personal prosperity.

The labor employment zones will become catalysts for the attraction of foreign direct investments that use labor heavily. Nike and other shoe and apparel companies have located in countries where it found low cost labor. Domestic subcontractors to these companies have sprouted even faster. Those rural factories that got built in Indonesia by Nike helped propel village prosperity where the enterprises located.

We can attract again industries that have left us before. We can further attract more labor using industries from foreign capital and – don’t forget – domestic capital. The Philippines could enter the picture for labor-intensive manufacturing once more if the right policy moves are taken.

Special labor employment zones would be mainly driven by using private sector initiatives. These zones will not cost much from the viewpoint of the government. Private enterprise could undertake the construction and administration of the zones, through permits from the government authority created for the purpose.

The zones would be given the wherewithal and the proper business framework to start job creating industries through government incentives. The private sector would be asked to build the business zones in the manner of the private sector export zones that are run and pioneered by the PEZA. The government therefore must put in place the business framework to take place in order to start the process.

The special labor employment zones will not be allowed in the developed regions where successful export processing zones (EPZs) are already in place. They would therefore not be in the Metro Manila area nor in the Calabarzon provinces, for instance.

The special labor zones will be allowed only in regions identified by law – perhaps administered through the PEZA or by a LEZA (labor employment zone authority). These could be relatively poor regions of the country where the per capita income is below the national average.

However, they are to be set up where there is already access to a fair amount of public infrastructure in roads, ports, other transports, and telecommunications. This will avoid their establishments in purely virgin areas where large amounts of new investments would be needed unless such construction is financed purely by the private sector.

Experience of the country in terms of EPZs made the country a source of manufacturing for exports in the global production chain. Enterprises that located in the zones enabled the country to relax the gridlock that the highly protectionist industrial framework had foisted on the nation for years.

The most important feature or incentive for these firms in the labor employment zones would be exemption from the application of the minimum wage setting processes and from restrictive requirements of forced regularization of employment.

In short, the enterprises would be given guarantees that they could adjust their operations as market conditions permit, with the welfare of workers also being considered. But the labor standards cannot be made to impose on the viability of firms in their market operations. As for social protection of workers, their pension fund and social security memberships would be there to help when conditions are dire.

The special labor employment zones are going to help host many enterprises built around the use of domestic labor. The examples of these activities are many: garment making, textile factory, toy fabrication, shoe making, furniture making and so on. The special labor employment zones could even be extended toward the attraction of many types of agricultural, forestry and marine based industries.

We had many of these firms before in growing numbers until the government adopted inordinate efforts to raise “welfare” by legislating wage standards through regulation and government definitions. It was forgotten that the main drivers of rising high standards of income and employment – in short of rising wages among laborers – are essentially market driven.

President Aquino could address labor market reforms directly and innovatively. Like in the case of the reform the constitutional provisions suggested in this column, he does not need to abandon the present labor laws and the minimum wage setting process in their present form. He can consider them as settled politics for much of the nation.

The president needs only to develop new mechanisms to improve the employment creating potentials in industry and the labor employment zones would constitute a major contribution in that effort. The zones will help to bring to the fold of continuous employment from year to year a lot of underemployed and unemployed who are tapped into the market only during peak times of seasonal demand for work in the farm.

In the subsequent week, I pay attention to the criticisms that are often lodged against relaxing the provisions of current labor law standards as they exist. It is essential to engage the reasons often heard about maintaining and even raising labor market standards through government initiated efforts.

Visit this site for more information, feedback and commentary: http://econ.upd.edu.ph/faculty/gpsicat/ –Gerardo P. Sicat (The Philippine Star)