Economic development-II

Economic development-II.. So far, so good. The emphasis on the implications of ‘disguised unemployment’ for the economics of growth is commendable. The proposition that employment is limited by the flow of wage-goods that can be made available to labourers, though apparently commonplace, is worth emphasizing at a time when economic thinking is so widely influenced by the Keynesian theory of effective demand. In an under-developed economy, the scope for expansion of the current output of wage-goods is limited, and the Keynesian investment multiplier is insufficiently operative.

Yet an opportunity for a ‘cumulative process’ offers itself in such an economy if the ‘disguised unemployed’ is released from the subsistence sector and the ‘saving potential’ that it carries is used as a supplement to whatever additional savings can be drawn from the rest of the economy. For this to happen, the rate of growth of employment must pass the critical limit set by the growth of population. Our authors’ crusade against India’s Second Five Year Plan is based largely on this concept. The employment target set in the Plan is much too inadequate to draw in the ‘disguised unemployed’ and to bring the cumulative process into play. Economic development is important

However, if our authors had reflected upon their hypothesis a little more closely they would perhaps realize that they had started from the wrong end. Not that their proposition is wrong; of course it is not, so far as the arithmetic is concerned. But the way it is presented suggests a certain lack of awareness of the obstacles to the growth of an under-developed economy. In their excitement at what they thought was a discovery they forgot to notice that if the proposition were put the other way round, it would take a form which has been familiar to most of us most of the time. Let us revert to our authors’ example. The ‘consumption unit’, as we have called it, is Rs 200 and the ‘wage unit’ is Rs 400. Assume, with our authors, that along with the transfer of the ‘disguised unemployed’, the goods that they used to consume in the subsistence sector are also transferred to the planned sector. The market is then provided with an additional Rs 200 worth of wage-goods for each extra unit of labour employed in the planned sector. It is true, then, that if an extra saving of Rs 400 is made available in the planned sector, possibilities will be opened up for the employment of two units of labour instead of one which is the labour content of the extra savings, and the so-called multiplier effect will be operating. Now look at this same thing the other way round. A unit of labour is released from the subsistence sector and with it a bundle of goods worth Rs 200.

The consumption unit thus released is not sufficient to provide employment to one additional unit of labour in the planned sector; the market has to somehow secure another Rs 200 worth of wage-goods by way of savings. The transfer of a unit of labour from the subsistence sector releases wage-goods whose value is only one-half of the actual wage that has to be paid if it is to be productively employed. If we look at the matter this way, which is perhaps the more realistic way, the ‘consumption-goods multiplier’ takes on an altogether different complexion. Economic development is important
One feels tempted, at this stage, to turn back and to see wherein our crucial problems lie. The problem of growth in an under-developed economy with a large and redundant population is basically a problem of capital formation. Employment in the investment goods sector needed for capital formation is no doubt limited at any moment by the availability of wage-goods. But the output of consumption goods in general and of wage-goods in particular is itself a function of the stock of capital. An increase in the stock of capital increases the scope for the employment of labour, although during any given period of investment needed for the production of capital goods, it is the current release of wage-goods that determines the extent to which employment can be increased. Economic development is important

The principal aim of economic planning in an under-developed country is to raise the rate of investment and hence of capital formation with a view to an increasing flow of consumption goods in the future. Since there is a plethora of unemployed in the economy, the speeding up of investment does not require curtailment of activities in the consumption goods sector; the economy can draw upon the reserve of unemployed. If concurrently with the increase of investment there is also increased production of consumption goods, as happens when there is excess capacity in the consumption goods sector, the wage-bill of the additional labourers can be met out of the additional output of consumption goods, and there is no pressure on the consumption goods market. We are, so to say, in the Keynesian world of plenty where an increment of investment leads by itself to an increment of consumption.

It is wrong to suppose that these Keynesian effects are altogether absent in an under-developed country such as India. The capacity in our organized sector does lend itself to fuller utilization, as findings of competent statisticians indicate. Moreover the Plan period that we have in view is not exactly the Keynesian short period where resources and technique are given and fixed; certain investments may well be made to bear fruit during the Plan period. There is, therefore, some scope for the expansion of output of consumption goods to be set against the additional employment in the investment goods sector. But these possibilities are negligible in the context of the volume of investment that is needed to fully absorb the reserve of unemployed, when account is taken not only of the existing volume of ‘disguised unemployment’ but also of the addition to the labour force resulting from the normal growth of population.

Assume, then, to bring out the essence of the matter, that there is ‘full employment’ in the organized sector. What happens if, as the need for economic development demands, more employment is to be provided in the investment goods sector towards the production of capital goods? We are in the classical world of Scarcity, and an adequate volume of wage-goods has to be released from the rest of the economy to make provision for the additional labourers engaged in the investment goods sector during the investment period. The rest of the economy has to put up with reduced consumption, the extent of this reduction being determined by the wages-bill (assuming that wages are wholly spent on consumption) of the newly employed labourers. This is the raison d’etre of ‘saving’ in the context of the economic development of under-developed countries. It is ‘saving’ that makes possible an expansion of investment needed for the growth of the economy. So economic development is important

Now, the distinction between ‘disguised unemployment’ and new labour force generated in the process of population growth is often too sharply drawn. They are not necessarily distinct and separable entities. In practice, very substantially one merges into the other. The major impact of the growth of population in an under-developed economy is on agriculture. And there what happens, as population grows, is that an increasing degree of congestion occurs in the age group that call themselves ‘occupied’. The ‘saving potential’ remains more or less the same, but the mouths to draw upon it increase in number. In fact, the distinction drawn here is not a distinction between two categories of unemployment; it is rather a distinction between two ways of looking at it. However, the distinction becomes analytically significant if we assume that the ‘saving potential’ gets released for use in the planned sector only at a level of employment beyond what would be needed for the full absorption of the newly emerging labour force. At any rate it is in this sense that the distinction is used here, although it is clear that there is no knowing in practice, at what level of employment this process of release of the ‘saving potential’ starts operating, if it does operate at all.

Since in the context of the situation that we are contemplating additional employment is devoted entirely to investment and is unaccompanied by any expansion in the output of consumption goods, the wages-bill of the additional labourers has to be matched entirely by ‘saving’ done in the rest of the economy. In so far as these additional labourers are recruited from the newly emerging labour force, the entire saving needed for meeting their wages-bill has to be newly created. It is only when investment is pushed so far as to enable the economy to encroach on the ‘disguised unemployed’ that some relief is found, on our assumption, in the release of goods that the labourers drawn into the planned sector used to consume in the subsistence sector.

Even here, the ‘wage unit’ in the planned sector being substantially higher than the ‘consumption unit’ in the subsistence sector, further new savings have to be created for covering the gap. Economic development is important.

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