Guest blog by Nijat Rahmanli, LEG ’23
Throughout my career in the government, I have participated in numerous discussions and workshops on how to achieve economic growth while ensuring inclusivity and sustainability. However, few of them were as practical and down-to-earth as the course on Leading Economic Growth. We came to understand that the easiest part of addressing certain economic challenges is to draft a sophisticated, finely detailed action plan, full of carefully selected policy choices. Instead, what the course taught was that, unfortunately, real economic challenges are not tackled through top-to-bottom approach. A central government should be a coordinator at best, but not an implementer.
Implementers should arise from those who understand the problem, who is affected by a problem, and who can actually impact the results.
Finding a problem and identifying its underlying causes is a first step to addressing an economic challenge in general. In the course we have been introduced to simple, but effective methods of, for example, Toyota’s 6 “why”s – in order to find an underlying cause of a problem, one just needs to ask 6 times a sequential “why” questions. A similar and more sophisticated methodology was a fishbone diagram which helps to identify several causes of a certain problem and like in the Toyota’s “why” methodology it divides the causes into layers and finally finds a binding constraint for the economic growth.
Identifying a problem and a binding constraint might be the first and significant step in addressing the challenge, however, implementing policy actions is another issue that needs to be carefully approached. The three “A”s, Authority, Acceptance and Ability, is a key starting point for the implementation of policies selected. A team needs to get authority to implement necessary actions, the problem itself needs to be accepted and finally the team needs to have the ability to actually solve the problem. We have also learned that PDIA approach is the best for addressing an economic challenge. Instead of having identified a set of policy actions and implementing them, it is much better and efficient to be problem oriented and based on current existent situation alter policies and come up with novel solutions.
Governed by all these theoretical and practical tools, I have tried to explore a problem with informal employment in Azerbaijan. As an official from the Ministry of Labor and Social Protection of Population, workers’ rights and their social protection are a key area of my responsibilities. Without a formal labor contract, it is impossible to ensure those rights and to protect workers since without formal labor relations the state is legally unable to have a control over employment relations. The first and foremost issue here was to formalize employment relations so that the state could deploy all the legal tools towards improving workers’ rights. Also, we have seen from the lectures that there is a direct relationship between a lack of formal jobs and poverty rate in the country as in the case of Bogota, Columbia. So, basically by formalizing labor relations not only do we ensure workers’ basic rights to be protected, but also, we contribute to overall economic growth. More formal jobs lead to proper labor regulation which in its turn result in more productivity, hence economic growth.
However, having a problem set on the table requires identifying the underlying causes leading to the problem. Having identified several underlying causes by using a fishbone diagram, I tried to select a binding constraint among them where I came up with a complicated registration process being currently a real challenge for employers. Indeed, labor relations are strictly regulated in the country, therefore registering workers (although it became easier by introducing a digital registration process) is still complicated where many documents are required. Especially when micro and small businesses employ workers for a short time period, they tend to not get engaged in complex registration processes and thus employing workers informally. The government referring to the best practice in the world a few years ago completely downsized the labor tax to zero percent claiming that a binding constraint here was high labor tax expenses for employers. Though it was only applicable for private employers engaged in the non-oil and gas sector, there was some degree of success. However, the success was short-lived, because it turned out that the existence of informal employment is especially predominant in small and medium enterprises where lower taxes did not play a significant role in tackling informality.
If a country attempts to deal with informality in the economy, I have argued throughout the course that, the best approach would be to have customized policy designs for different sectors of the economy. Policies that are effective for the large businesses might not be working for the small and medium businesses. Also, what seems effective for the large cities might be wrong for the regions. Therefore, designing a country-wise policy proposals should take into consideration all the regional and sectorial differences in the economy.
Another issue that needs to be considered was to switch focus from employers to employees while choosing policy actions. Awareness raising campaigns, incentives for workers for having formal labor contracts are among those choices. We have also learned that a team that needs to be organized should involve people not only from public agencies, but also civil society members, representatives of both workers’ and employers’ organizations.
What would the success look like in my context? We were presented with two sets of indicators – one proposed by OECD and another by Brooking Metro Monitors. Although, in terms of direct numerical indicators, it is easier to calculate the number of formal labor relations prior and after the policy implementation, however, I have selected three indicators from OECD Framework, namely – (1) a wealth share of bottom 40% and top 10% households on total household’s net wealth in order to understand dynamics of income distribution and socio-economic equality in the country (2) Employment-to- population ratio to assess labor market and (3) relative poverty rate indicator since we have argued that there is a strong relationship between these two.
To sum up, a classic way of problem-solving such as designing state programs, selecting certain public agencies responsible for carrying out given policies and monitoring and evaluating them in the end seem to me obsolete towards the end of the course. Using the above-mentioned tools and approaches one can achieve better results with more direct engagement and less resources.
This is a blog series written by the alumni of the Leading Economic Growth Executive Education Program at the Harvard Kennedy School. 58 Participants successfully completed this 10-week online course in December 2023. These are their learning journey stories.