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.


Posted on November 14, 2004, in Uncategorized. Bookmark the permalink. 4 Comments.

  1. Both articles bring out very good points regarding the manufacturing sector in India. Given the pattern of Indian manufacturing growth, I suspect we will see a lot more automation as we move up the value chain. While this will reduce the dependence on manual labour, it provides the industry an opportunity to enter markets that demand more automation in the manufacturing cycle. This does not foretell a tale of doom and gloom for the employment market, sp. in a country which adds more prospects to the job market every year. What is needed is growth in two key Indian strengths:
    1. The service industry
    2. The rise of the SME manufacturer

    The service industry will flourish because of the classic trickle-down effect. As more income is generated in the cities and urban areas, spending power and disposable incomes increase. This leads to opportunities in the service industry, be it in restaurants, malls or petrol pumps. I have to admit that this effect is currently prevalent only in the major metros and the commercial manufacturing hubs in the north.
    The SME manufacturer always starts small, relies heavily on human labour, and adopts automation only as a last resort. Small-scale manufacturers in India have always been labour intensive. It makes sense, because startup capital is low, and labour is cheap.
    It does take time to grow and graduate to a level where automation makes more sense from economic and productivity perspective, and the turning point is usually manufacturing volume. Of course, the big question to ask here is: Will small-scale manufacturing in India pickup and flourish? China has adopted this model to perfection by combining automation in the early manufacturing stages, and then relying on extensive manual labour to finish the product on the line. If India adopts this model, there is hope for a manufacturing model that encourages automation, and at the same time provides job prospects in the small and medium manufacturing segments to a sizeable number of the population. But will we have the infrastructure to support this initiative? That, i’m afraid, is a six-pack discussion!

    • I have a very simple answer. If we add 10 million people to the employment market every year, no matter how well the SME sector does, the jobs are not going to come. Besides, I really doubt that the SMEs will ever be in a position to flourish all that much. It’s a nice thought, but the reality is that scale does matter in far too many places today. And the trickle down effect has too many social costs that are not avoidable, particularly in a country with as large a population as ours.

      Adam Smith said “A profitable speculation is presented as a public good because growth will stimulate demand, and everywhere diffuse comfort and improvement. No patriot or man of feeling could therefore oppose it. But the nature of this growth, in opposition, for example, to older ideas such as cultivation, is that it is at once undirected and infinitely self-generating in the endless demand for all the useless things in the world”.

      And that’s where we stand now. Undirected, and infinitely self-generating in the endless demand for all the useless things in the world. Maybe, the real problem is that modern economics has no philosophical and spiritual base. However, that’s not going to change, and given that the stars are in our (India’s) favour now, it irritates me a great deal to see that we aren’t doing enough to grab the opportunity.

      P.S. – Labour is not cheap. The aim of labour is to be uplifting. No offence meant, but IMHO, the phrase “Cheap labour” is a reflection of a “labour sucks” thought process that has been enshrined by modern economics. Unfortunately it’s become so much a part of our vocabulary that, I for one, would like to see people reflect on that a bit more.

  2. In the long run, Public Policy can never compete with ROEs and bottomlines. We have already allowed that to happen, and business and money have become too integrated into our lives.

    Combine the ultimate ineffectiveness of public policy with John Nash’s brilliant view that maximizing individual outcomes will not maximize society’s outcome sans governmental intervention – the result seems pretty evident.

    • I think public policy can be effective. Singapore is a clear example. As are most developed coutnries today. I am sure public policy had as much a role to play there as entrepreneurial spirit.

      It is absolutely vital for us that public policy is effective. If not, yes, the result seems pretty evident.

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