In my recent India trip, Prof. Jaya Indiresan gifted me Prof. PV Indiresan's book, Vision 2020 and explained to me how I had misunderstood Prof.PV Indiresan's work. I assured her that I'd read every word with great care and also include all useful suggestions in the SKC agenda.
I'll provide overall thoughts on the book in the coming days, but first, let me publish an EXCELLENT article I found (chapter 5). This article demonstrates that Prof. PV Indiresan understood some of the basics of economics reasonably well (in other parts of the book, there are definitely a number of relatively minor issues about his basic understanding of economics, but this particular article is generally very good. I'll comment on those issues separately).
(Btw, on this and in a number of other areas, his work provides deeper insights than Kumraswamy's work which I had recently reviewed. In this particular area, Kumaraswamy is anti-capital intensity. He is wrong. Indiresan is right.)
The Low Development Trap
In rural development, the stress is invariably on maximizing employment through labour-saving technology. That appears obvious. However, more jobs are created in capital-intensive cities than in labour-intensive villages. Why does labour-saving high technology ends up creating more jobs than labour-intensive low technology? That is a riddle, which few rural development activists bother to unravel.
Let us take a simple, idealized example: There is a closed economy with a hundred workers each one capable of producing a thousand rupee worth of goods or services. Suppose each worker consumes also the same thousand rupee worth of goods and services. Than all 100 workers will have a market for their services, and there will be no unemployment. If at this stage, suppose a new technology is introduced whereby an activity that employed 50 workers can now be done with only 25. Then, the other 25 become redundant. Therefore, rural development experts conclude that labour saving technology creates unemployment.
That is not true. The remaining 25 workers retained on the job can now be paid Rs.2,000 instead of the Rs.1,000 they were getting earlier. Hence, they are now in a position to buy many new goods and services, which they could not afford earlier. That will create new job opportunities for the 25 that were laid off. The redundant workers may then be redeployed immediately if there is enough slack in the supply system, and production in the wanted items can be raised immediately. If there is no slack, those workers will have to wait until additional production gets established.
In this example, workers in the modernized sector earn twice as much as the others. There are several sectors of the economy like the police, schools, live entertainment and the like where there is no or little scope for productivity improvement. It would be unfair, and even unworkable to deny workers in those sectors fruits of economic growth. Ideally, the benefits of productivity gains in any one sector should be distributed equally to all. In practice, some redistribution takes place. That is how the price of haircuts, and teachers' salaries increase when engineers in the IT sector get fatter salaries even though the productivity of neither barbers nor teachers increase.
This linkage between productivity in the primary and secondary sectors and wages in the service sector leads to peculiar anomalies. In the West, industrial workers get high wages, much higher than in India, because their productivity is much higher. That is understandable. However, it is not obvious why bus drivers in the West too earn much more than in India even though Indian bus conductors handle larger crowds and are several times more productive.
In spite of their higher productivity, Indian bus conductors earn less because wage levels are determined primarily by the productivity in tradable goods and services. Higher productivity in non-tradable goods or services rarely gets reflected as high wages. For that reason, rural wages will be low wherever agricultural productivity is low. Conversely, rural wages will increase when agricultural productivity increases, or when high productivity industry moves to villages, not otherwise. As a rule, our schemes for rural development insist on low productivity agriculture and handicrafts. Thereby, they perpetuate poverty.
Jobs are lost in agriculture and in industry due to increases in productivity. They are compensated by growth in the service sector. As a thumb rule, for every job in industry, three more should be created and supported in the service sector. Our planners have neglected this aspect of development. Thereby, they have stunted growth.
Rural development is limited also because rural markets are small. A cinema theatre is viable only when it can be accessed by tens of thousands of potential customers. The same is true of hospitals and a host of other services. Connectivity to such large numbers of potential customers exists in cities but not in villages. Therefore, such services flourish in cities but not in villages. For that reason, villages do not support jobs in theatres, hospitals, colleges, banks, and the like. In other words, rural jobs are few not so much because of limited demand but because that demand is fragmented.
These are all hurdles. Even when these hurdles are overcome, one additional problem remains. New jobs should be created rapidly – growth rate depends both on the quantum of growth and the rapidity with which that growth is engineered. How fast the economy grows depends on whether investment policy is proactive or reactive.
To appreciate the difference between proactive development and reactive development, consider the way airports come up in India and how they do in China. In our country, the policy is to wait for the airport to get crowded beyond endurance and then debate what to do. That is reactive administration. In contrast, the Chinese have built huge airports in anticipation of future growth. The Chinese invest for the future; Indians invest to correct errors inherited from the past.
In the Chinese scenario, airports start operating much below breakeven level. Initially, they incur substantial losses until demand reaches breakeven level. India avoids that transitory loss but incurs a more permanent one, that of never ending shortages. In India, overcrowding stunts growth; makes it slower than what it need be. In China, Say's Law applies. Excess supply creates its own demand. That accelerates growth; makes it greater than what it would have been otherwise. That is the secret of rapid growth in China, and the cause of tardy growth in India.
This simple example leads us to two styles of development: One, the proactive, where excess production capacity is pre-established in anticipation of future growth. Two, the reactive, capacity is created only after demand manifests itself. The former incurs a finite initial loss. The latter incurs a perpetual loss.
If policy-makers are proactive, invest in anticipation of future growth, and are unafraid to incur transitional loss, growth will be rapid. If they are reactive, wait for market shortages to appear first before investing, and prefer to bear the hardships, lost opportunities and congestion costs of shortages, growth will be slow. The former is the enterprise mode where errors of judgment are accepted as unavoidable. The latter is the bureaucratic mode where procedural errors should be zero but losses can be infinite.
In brief, the factors that restrict rural development both through low wages and by limiting job opportunities are:
1. Villages do not support large markets.
2. Rural development schemes support only low productivity traditional crafts, not high-wage modern industry. No rural development minister would dream of inviting Mr. Tata, or Mr. Narayanamurthy to a village.
3. We have a dual policy: high quality, high cost amenities in cities, and low quality, low cost systems in villages. We deliberately provide substandard schools, healthcare, roads, energy, water, and connectivity in rural areas.
4. As a national policy, whether in villages or in cities, our investments in infrastructure are reactive, not proactive.
Except the first item, these are all artificially created hurdles. Even the first issue of fragmented markets can be remedied by linking a loop of 1520 villages by fast and frequent bus services. That will integrate the separate tiny markets of all those villages, and make them a virtual town. When that step is taken (that will require, as a prerequisite, the construction of a high-speed ring road linking the villages), rural poverty ceases to be a heavenly ordained calamity and becomes a man-made malady.
Then, let us try an experiment. One, let us adopt the Chinese model of infrastructure development – invest first, accept transitional loss as desirable, and construct a ring road linking a suitable set of villages. The cost may be minimized by routing the road as far as possible through uncultivated land, or les fertile space. Let us also establish frequent bus services according to urban norms (say every ten minutes).
We may even stop here. In that case, all the villages situated along the ring road become one market of 50-100,000 customers but without the amenities and services that a town of that population will normally have. That differential between what a town of that size can support, and what these villages actually possess, becomes a Driving Force of development, a business opportunity. Hence, the ring road will attract many new businesses. In course of time, the ring road will attract all that towns will have but isolated villages do not have.
Let us call this the Connectivity Based Development model. Past-experience tells us that in this basic model, businesses will come right up to the edge of the ring road, and even encroach on it. Those encroachments, and the cross-traffic between businesses on either side of the road, will force traffic to crawl. Unplanned construction will erupt on either side. Such unregulated development based solely on road connectivity leads to faster development, but development of low quality. Not only will the development be of low quality, it will also be a self-limiting one – future improvements become quite impossible. That phenomenon, all too common in India, may be described as Low Level Development Trap.
The moral of the story is, connectivity is necessary but not sufficient for quality development. We will discuss next how to remedy this problem.
- April 22, 2002 (69).