Manila: Many developing countries are paying higher salaries to their state employees than they can accord and stunting economic growth in the process, a study by the Asian Development Bank shows.
“The higher the relative government pay rates, the lesser the economic growth attained,” the study of 19 Asian, African and Latin American countries said.
“The high relative government pay rates cost the country in terms of economic growth, while the higher employment share does not seem to have any economic growth impact,” the Manila-based bank report said.
It said part of this could be due to “rent-seeking behaviour” such as minimum wages set above the competitive rate, wage adjustments getting ahead of actual productivity growth, and misguided attempts by politicians to increase employment or redistribute wealth.
“India stands out among the high-pay countries, as it has experienced one of the most pronounced increases in relative government pay rates in recent decades,” the study said.
“The least favourable estimates identify Bangladesh as a country with one of the highest relative government pay rates,” it said.
While listed as a high-paying country, Vietnam’s pay rate has “fallen rapidly, and it may no longer be of concern.”
It said economic rents embedded in government pay rates “reduce the affordability of government and reduce the coverage of public services essential to economic growth.”
The resulting high government pay “leads to far less employment in government, and the creation of a group of unemployed labour in search of government employment,” it added.
It said these countries “could raise their economic growth by reducing relative pay rates in government and using the budget savings to expand employment.”