The large scale
decolonization post World War II brought to the forefront the issue of
development and growth for these countries. Mostly agrarian in nature, little
or no industrial base at least comparable to modern standards, they faced
structural asymmetries in their growth trajectory relative to their
counterparts in the Western World. The income
levels were at subsistence level. The income levels of the large number of
population needed to be increased. Some seventy years later, the economists and
policy makers still are grappling with the same issue. The Indian government
still aims to double the farmer’s income in the next couple of years. The programme
of Skill India still continues (current version is refined and reinvented
version of similar schemes earlier) to train the population on new skills to
increase their income. A question naturally arises why did many of the
countries that secured freedom post World War II did not make it big. There were
no dearth of theories or advice. Reasons are of course many and need detailed engagement.
But of interest at the moment would be theorising the Skill India mission in
the context of the developmental theories ages ago.
When the
government announced reforms in the agriculture sector in the last few days,
there were numerous comments by analysts about the likelihood of these reforms
succeeding or failing. A prominent
argument was the growth in incomes in agriculture and thus rising prosperity
was possible only through a shift in population engaged in agriculture towards
other occupations. Implied is the rise in income will be constant rate which
has to be divided across a large pool thus smaller units per capita. As the
number of people engaged in agrarian occupations decrease, the same income
level now gets divided among a smaller pool thus larger units per capita. In a
Darwinian sense, it is the survival of the fittest or the last man standing. It
is not unknown to the people engaged in these agrarian vocations that the last
one standing will reap the maximum profit. The new entrants have to plough the
marginal land thus reducing the income levels further. However, no one wants to
be the one who quits allowing others to reap the benefits. There exists a
prisoner’s dilemma among the agricultural population that causes the income
levels to drop down further.
Skill India is
supposed to encourage the agrarian surplus to migrate to other sectors earning
higher wages. When they are armed with skills that are in high demand in the
urban areas, they are likely to command higher wages thus witnessing a likely
shift. People respond to incentives and thus objective is to incentivise the
surplus population. The underlying principle is not new. In the post War years,
the Western models of economic thinking were generally found to be wanting in
propelling the developmental trajectories. Keynesianism was the fashion. To add,
the reports emerging from Soviet Union were being hailed as great examples of
industry led development. It was of course not known that the data that was
emerging from Soviet Union was dubious. Arriving at similar conclusions
independently Harrod and Domar suggested that investment would be key to
capital growth. Yet while these were likely to offer higher returns to
productivity, the problem was shortage of labour. There has to be addressed
these issues of labour shortage. At this juncture, in 1954, Arthur Lewis
suggested a model that underpinned on the mobility of labour from agriculture
to manufacturing.
To Lewis, the
economies in the developing world could be delineated into a capitalist sector
and an agrarian subsistence sector. The capitalist sector endowed with
reproductive capital was fetching higher returns thus an instance of increasing
returns to capital. Given the capital was reproductive, it could be reinvested
to yield even greater returns in the same industry and possibly the other
industries too. In contrast, the agriculture sector survived on subsistence. In
absence of alternative occupations, everybody in family and network converged
on the same piece of land. There was little contribution by the marginal labour.
It would not be mistaken to assume the marginal productivity of labour had
approached zero and perhaps even negative in some contexts. There was
widespread disguised unemployment that distorted the employment data for the
country. The surplus labour was contributing zero and thus could be shifted to
industrial sector.
Lewis further
assumed that the countries in the developing world were overpopulated and thus
the supply of surplus labour was seemingly infinite. As the labour shifted from
agrarian to the manufacturing sector attracted by the higher wages, there would
be increasing returns to scale. These increasing returns would increase
productivity thus increasing the reproductive capital. The reinvestment of this
capital would spur the virtuous cycle leading the economy into a trajectory of development
and growth. The agrarian sector in contrast did not possess reproductive capital.
Yet, Lewis
missed a key point of skill sets of labour. In the absence of skilled labour,
Harrod Domar investment driven model led to diminishing returns of capital. It is
best manifested in the Charlie Chaplin movie Modern Times. One person literally
had to handle many machines causing the production to go awry and chaotic. The agrarian
sector thus while having a surplus labour did not have a skilled pool that
could be transferable to the manufacturing sector. To Lewis, the transfer from
one sector to another in the dual sector framework was frictionless. Yet it was
from the truth. The frictions that emerged in the transition deterred the shift
on the scale envisaged by Lewis and other economists of his school. Secondly,
contrary to their expectations, there indeed was no surplus labour that was
available and willing to shift to the manufacturing sector. It was not as if
the surplus labour did not shift. The large scale migration from the rural to
the metro cities and elsewhere were a natural movement towards the new centre
of industrial gravity. If manufacturing and services sector were not to exist,
the current population in rural belt would have been manifold complicating the
agrarian problems. The project mission of Skill India is to value-add skills to
the unskilled labour thus enabling them to move higher in the value chain. It is
not the subsistence urban wages that is at the root of the problem but a shift
from the urban subsistence sector to the modern technology underpinned manufacturing
and services sector. In some ways, the dual sector is not merely agrarian and
manufacturing but in between there are multiple shades of grey. It is the dual
unskilled urban and the skilled urban that needs to see movements and
transitions across which the Skill India is aiming at. The corollary of
agrarian shift to urban skilled is a bonus element in the same. The agriculture
to sustain and prosper needs different set of reforms which is for another day.
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