Asia’s economic growth owes a lot to the rise of both big business and SMEs. But left alone, there is little incentive for private firms to do more for workers beyond the norm.
In short, yes it can.
The “race to the bottom” issue affects many developing countries in Asia and the Pacific. Simply defined, the race to the bottom is a situation when companies compete to gain more profit by reducing production costs, mainly labor. Asia’s economic growth owes a lot to the rise of both big business and small and medium-sized enterprises. But left alone, there is little incentive for private firms to do more for workers beyond the norm.
Workers, mostly poor, will work even with little pay and under the worst conditions. Can social protection stop the race to the bottom? Is there a need for governments to intervene in the labor market and invest more in social protection? Some experts may say that markets thrive if untouched, but we can always ask, is market equilibrium more desirable than people’s welfare? Does it always have to be a tradeoff, or can a balance be reached?
Long- versus short-term goals come into play. In the short term, lower costs mean more profits. The question is, can this be sustained in the long term? It may be true that more social protection increases costs, but this can result in a healthier workforce, which can sustain growth and profits longer. Granted that social protection can improve worker’s conditions and stop the race to the bottom, we face two problems: (i) social protection systems in Asia are not yet fully developed, and for instance huge sectors of the labor force remain uncovered by basic social security; and (ii) while labor laws are in place, the capacity of institutions to enforce them remains weak.
When we talk about social protection, we do not just mean cash transfers, which have been widely used to reduce extreme poverty. Social protection goes beyond cash transfers for the poor. It also covers easing the risks workers face throughout their lifetime, through health insurance, unemployment benefits, pensions, skills development, and finding good jobs. Setting minimum wages and good standards in the workplace are likewise part of social protection. These are areas where the help of both the public and the private sector is needed.
Expanding social protection systems should become part of national development targets. Most countries in Asia have begun tackling this challenge. Spending on social protection programs has increased in countries with a vast labor force like the Philippines, but more can be done and if other countries invested more and followed this path, they could prevent a race to the bottom, create better conditions for their workforces, and build sustainable foundations for growth.