Abheek Barua on the Stephen Roach article..
…A couple of weeks ago, I had posted my thoughts on Stephen Roach’s article in Business World.
…Abheek Barua, the Chief Economist of ABN Amro comments on the same article here.
The extract that interests me
“I suspect Roach’s casual empiricism can be generalised to apply to much of large-scale manufacturing in India. The growth in the recent phase of revival in the corporate sector has been “labour saving” to an extreme degree.
In fact, the current recovery is based on large improvement in operating efficiency coming from a dramatically reduced workforce and wage bill. Going by my estimates for a sample of about 1,500 manufacturing firms, the ratio of wages and salaries to sales dropped from 5.3 per cent in 1998-99 to just 4.4 per cent in 2003-04.
Thus, the improvement in the “competitive advantage” of India’s manufacturing sector in this period went directly against the country’s “comparative advantage”, its low cost of labour. Indian manufacturers increasingly substituted capital for labour despite labour’s low cost.However, instead of seeing this as an indictment of reforms, it would be far more meaningful to analyse this in terms of the technological imperatives of large-scale manufacturing. This raises a number of questions that policy-makers need to answer.
Do manufacturers really have a choice between alternative technologies? Are they consciously choosing capital-intensive technology to reflect their concerns about Indian labour laws? Is Indian labour really that cheap if adjusted for productivity?Finally, can public policy do something to correct this and encourage firms to choose technologies that reflect the resource mix?
Roach appears to have a pithy and pessimistic answer to these questions. “Manufacturing,” he claims, “has become an intrinsically labour-saving endeavour, even in low-wage economies such as India and China.”
Thus, the growing capital-intensity of manufacturing is not a question of choice. Instead, it is a passive function of the nature of technological change. His prescription: Rid yourself of the manufacturing fetish and focus more on services as the key provider of employment.
Towards the end of the article, Mr. Barua says Roach’s pessimism is justified for certain segments of manufacturing, but is not an accurate diagonosis for other segments. But his arguments aren’t really convincing.
Again, makes me realize how prescient people like Gandhi and E.F.Schumacher were. If only, more people had listened to them. I am afraid it’s far too late for alternative technologies now. And I seriously doubt if any change in public policy will be effective enough to change things from an employment perspective.