For the last three decades the graduate unemployment problem has been “solved” by government that absorbs these young men and women into government service. In 2004 about 42,000 graduates were taken as teachers and office workers. Now 20,000 more are demanding government jobs. Unfortunately this is not a sustainable solution to the problem.
A senior minister recently reported that about 15,000 of those that were taken in 2004 were still idling. This is not surprising. The government is grossly over-staffed. Between 1990 and 2005 Sri Lanka's population increased by about 21%. In the same period the aggregate number of employees in central government, provincial government and local government increased from 649,000 to 850,000 by 31%. That means in 1990 we had one public official to serve every 25 people in the country. In 2005 we had one for every 23. But there is no reason to believe that the quality of government services has improved appreciably.

The government has managed to increase the average real salary (in 1990 prices adjusted for inflation) of government employees from about Rs 2,300 per month in 1990 to about Rs 4,800 in 2005. This increase of about 110% lags behind the 150% increase in the country's GDP per capita in US dollars that increased from about $475 to $1,200. The implication is that the private sector salaries have very likely raced ahead of government sector salaries. This has serious implications for the quality of people attracted to the public sector as well as their morale.

Adding more recruits will only make it harder to pay a decent salary to those who are already in government employment. Here is a simple calculation to make this point. If the 20,000 unemployed graduates are recruited and paid Rs 15,000 each per month the total monthly salary bill will rise by Rs 300m. Instead if that money is given to the existing employees each of the 850,000 will get an additional Rs 350 per month.

Giving non-existent government jobs to unemployed graduates is not a solution to the problem. On the demand side maintaining a high growth rate is a basic requirement to absorb not only graduates but young workers of all kinds.

But there is also a huge supply side problem that does not seriously get addressed. There is no question about the natural intelligence of our graduates. In an intensely competitive environment, notwithstanding the well known weaknesses of the education system ranging from tuition classes to rote learning, this is the crème de la crème of the country's young intelligentsia. They also possess a quantum of knowledge that they have gained in class that they have attended. However, many of them are seriously deficient in skills and competencies. There is anecdotal evidence of this from the stories that private employers narrate of their disappointment with young graduates at work. But there is more to it.

The globalised work place requires skills such as IT and English that many if not most of our graduates lack. Whether we like it or not basic social skills are also important for private business and these are also in short supply. Some may also argue that the creativity of these young men and women has been blunted by our education system.

In the US it is unthinkable that a private company would prefer a high school graduate to a university graduate even from a second or third tier university let alone an ivy league school. A few years ago research revealed that the best managers in the US corporations came from among young graduates who have had a “liberal arts” education. This is not surprising. The best of liberal arts education in US is not about “job-oriented” courses. The US liberal arts education is some combination of Languages, Music, Mathematics, History, Art, Economics, Biology, and Physics and so on. The secret is to train and discipline the young minds to think critically and creatively and equip them with the knowledge, skills and competencies to handle the challenges that lie ahead of them.

In Sri Lanka we have our top private companies that want the best workers to shore up their profits recruit high school leavers in preference to university graduates especially in the management field. This is very powerful evidence that something is fundamentally wrong with our university education system especially in the social sciences and humanities.

The short-term remedy is for the government to invest a substantial amount of resources to train the unemployed graduates to acquire the skills and competencies needed for the modern workplace. The long term solution lies with our schools and universities. They have to constantly review and reform the curriculum to impart the knowledge, skills and competencies that the job market demands of graduates.

Officials Should Be Allowed To Sell Their New Cars

The government recently announced that senior staff grade officials in government sector including those serving in the armed services and the universities will be eligible to import new cars paying a reduced duty. But the law prohibits them from selling their cars for five years. In my view both economics and social justice demand that if they are allowed to import cars they must also have the freedom to sell them if they so wish. I will explain my reasons for saying so after briefly examining the economics of the scheme.

The duty to be paid will vary as follows depending on the cylinder capacity of the car: 1300cc or less 25% duty - maximum CIF value $11,500; 1600cc 35% - maximum CIF value of $12,500. Higher duty rates of 40% and 45% are specified for diesel cars. Very senior officials can also import petrol cars with higher (1800cc) engine capacity paying a 40% duty. Most of the cars imported under this scheme are bound to be under the 1300cc category and the 1300cc to 1600cc category. A car such as a 1500cc Toyota Yaris is proving to be a popular choice. However, the more junior officials would have to settle for a smaller car under 1300cc.
I do not have actual data on the type of cars that are being imported under this scheme. It is reasonable to assume that on average the CIF price of a car imported under the scheme would be around $12,000 (Rs1.3m). The normal duty for such a car is 224% or Rs 2.9m. (http://www.customs.gov.lk/crdtc2/HSCODES_list.asp). But an official would pay on average about Rs 400,000 as duty. This is a saving of Rs 2.5m. For the official who is importing under the concession the total cost to put the car on the road would be Rs 1.7m whereas if normal duty had applied it would have been Rs 4.2m.

Media reports have stated that there are over 3000 officials who are eligible to import cars under this scheme. But under the present rules not everyone will make use of this opportunity. Some will have no need for a new car, others may not have the capital and yet others may not be able to maintain a new car. I am assuming rather arbitrarily that 2,500 would make use of the concession to import cars. That means for the 2,500 cars the total foreign exchange cost would be around $30m (Rs 3,300m). The treasury will collect about Rs 1,000m in taxes. But if the normal duty had been charged the Treasury would have earned Rs 7,400m. The Treasury loses in duty revenue about Rs 6,400 from this scheme if 2,500 cars are imported. But for reasons stated below even 2,500 cars may not be imported.

Those officials who have the capital to import and the resources to maintain a new car are clear winners. However, not every official has the capital to import a new car. Even if they could do so maintaining a new car is expensive. As a general economic principle the resources that one could devote to a car would have some relation to the total net worth of a person. Thus for many officials a new car worth several million rupees is unaffordable in terms of ones net worth. That means this scheme mostly benefits the wealthier officials. That, in my view, is unfair and discriminatory.

What is worse is that the rule that the car cannot be sold for five years also encourages some to break the law. We know that some who import vehicles on concessionary duty rates transfer them to others and earn a profit. A scheme that encourages some to break the law for personal gain while penalizing others who stick to the rules cannot be deemed fair.
Suppose the importing official is allowed to freely sell the car the chances are that almost all the officials who are eligible would import a car. Even if they do not have the capital they can raise a loan that can be repaid when the car is sold. In such a situation I would say that the duty concession will have the same impact as a salary bonus to all the eligible officials. That may be considered as part compensation for the modest pay that senior government officials get.

When these cars are sold in the local market the buyers would be the more wealthy individuals such as businessmen and professionals. Some of these people might even use “black” money that in the first place should have gone to the Department of Inland Revenue as taxes. To that extent the government has devised a scheme to collect some tax money indirectly to boost the salary of under-paid officials. I would argue that a case can be made for it. But for such a scheme to work the government must allow the vehicles that are imported to be sold freely in the market. If not it will help only two categories of officials those that are wealthy enough to import and use a multi-million rupee vehicle and those who break the law and transfer ownership to make a profit.

Sam S