Skills development policy in Sri Lanka

The report indicates that Sri Lanka"s strategy for skills development is somewhat inappropriate for achieving the objective of maximizing economic growth. Existing policy is decidedly "equity-oriented," i.e., driven by the objectives of reducing unemployment and alleviating poverty. While skills development can assist in improving access to future earning opportunities, it turns out to be rather ineffective in redistributing current incomes. Skills development does not create jobs (and subsequent incomes); it only allows them to be filled. Unless there is excess demand for labor (unfilled job vacancies) or downwardly flexible wages, the short-term effects of training or vocational education can be at best to redistribute unemployment or, at worst, to exacerbate frustrations. Therefore, Sri Lanka"s policy has been somewhat misguided, in the sense of trying to use skill development programs for purposes for which they are ill-suited. The result of this equity orientation has been a proliferation of underfunded institutions (nearly 3,000), staffed by underpaid instructors and teaching courses designed largely in isolation from the needs and realities of the labor market to students who have very little real interest in learning a trade. Placement rates for graduates are low: more than 50% of those who successfully negotiated some training or vocational education program in 1983 remained unemployed by 1985. There has been a general but cumulative deficiency in labor demand, relative to the increasing number of job seekers, in recent years. The cumulative effects of political and ethnic unrest over the last seven years have significantly dimmed the labor market outlook as foreign investment has fallen and the capital stock -- both physical and human -- has eroded. Offsetting or corrective policy has been constrained by mounting budgetary and trade deficits. The infrastructure necessary to support the accumulation of capital and technology has seriously deteriorated, and there has been a contemporaneous "skill drain" to foreign labor markets. Although there is a mismatch between the outputs of the skill development system and the requirements of labor markets, it is not so much a mismatch of skills as one of attitudes. A significant number of young people seem to prefer to wait in the unemployment queue rather than accepting what they perceive to be low-status jobs. Public policy (food stamps, preferential hiring of the unemployed by the Government, and stipends for vocational training) appear supportive of this waiting game. Employers, having been bypassed in the process of policy formulation, have cut themselves off from the outputs of skill development programs. Survey results indicate that employers are generally unaware of what happens in training and vocational institutions and are predisposed to keep it that way. Respondents felt that their equipment and production processes were so unique that they could not trust outside training for first-job hires. Several employers said to give them people who are motivated and trainable and they would teach them what they should know. In recent years, private businesses have had to deal with their own mounting problems: increased taxes to support defense and transfer expenditures; stagnation or decline in consumer demand and investable funds; price controls; constantly changing Government regulations; and a deteriorating, inadequate infrastructure. Private sector adaptations to these reinforcing constraints have hardly been conducive to socially productive human capital investments. Where feasible, employers have shifted to low-skilled production techniques, overstaffing to account for absenteeism and low productivity, scheduling that allows time for delays, the breaking down of tasks into their simplest components, and low wages and selling prices. While wages are low, unit labor costs are not. The few skill investments that have been made are in firm-specific human capital, not in industry-general human capital. There are a great many steps that could be taken to improve the skills development system in Sri Lanka or to promote greater private sector participation in the process. The options range from the general (levy-grant system with tax credits for training) to the specific (TA from larger to smaller firms, the upgrading of one teacher training college to a polytechnic school). Funds are in shorter supply than are good ideas. The essential point is that a great many preconditions must be satisfied before any of the possible improvements are likely to be effective. Rationalization of the compensation system (wage policy) would be one such precondition. Effective partnerships -- whether between the public and private sectors or among different ministries within the public sector -- presuppose a certain degree of trust and commonality of purpose. For the moment, these appear to be lacking in Sri Lanka, so the symbiotic benefits of policy, or returns to scale, go unrealized. The demand for skills development should be looked on as a derived demand which is derived, ultimately, from the services, products, and incomes those skills can generate. Current programs do not appear to be guided by such economic growth objectives. They appear, rather, to be a reaction to past macroeconomic failures and thus poorly positioned to fuel future macroeconomic success. Admittedly, policymakers face a logical conundrum regarding skills development. Economic growth can be facilitated by anticipatory human capital investments, yet growth prospects need to brighten before such investments can be induced. This report contends that the logical starting point should be with business development, i.e., picking a few promising growth (export) areas, identifying constraints that now appear to be inhibiting that growth, and setting about to relax the constraints. Skills may be one such constraint, and skills development policy thus has a supportive role to play in the process. (Author abstract)