Development Strategies for Labour-Surplus Developing Countries

Introduction

• Evaluation of development strategies is essential from the perspective of whether they provide an adequate solution to the problem of surplus labour, unemployment, and underemployment in India, and helps identify policy measures required for an appropriate employment-oriented development strategy.

• Every development strategy for employment generation is based on a particular diagnosis and explanation of the causes of surplus labour; different economists have therefore proposed different approaches to unemployment and employment creation.

• One major approach is the industrialisation-led strategy of development, associated with economists such as Ragnar Nurkse, W. Arthur Lewis, Richard Eckaus, Joan Robinson, Prasanta Chandra Mahalanobis, Albert O. Hirschman, Gustav Ranis and Dale W. Jorgenson.

  • This approach attributes unemployment in developing countries primarily to the lack of industrialisation.

  • It advocates increasing the rate of investment and capital formation to expand the modern industrial sector.

  • Expansion of the industrial sector is expected to absorb surplus labour.

• P. R. Brahmananda and C. N. Vakil explained unemployment through the concept of a wage-goods gap.

  • They argued that inadequate availability of wage goods is a major cause of unemployment.

  • Their development strategy assigns high priority to wage-goods industries in the allocation of investment resources.

  • Increased production of wage goods is expected to facilitate greater employment generation.

• Another group of economists led by E. F. Schumacher, Gunnar Myrdal and Hans Singer identified the use of capital-intensive technology in large-scale industries as the principal reason for rising unemployment in developing countries.

  • Their approach advocates adoption of labour-intensive techniques as a central component of development strategy.

  • Greater use of labour-intensive technology is expected to generate more employment opportunities.

• A further approach, associated with V. M. Dandekar, Nilakantha Rath, John P. Lewis and B. S. Minhas, recommends large-scale rural public works programmes as a solution to unemployment and poverty.

  • According to this view, adequate employment opportunities cannot be generated in the short run merely by accelerating investment, capital formation, or altering the pattern of industrial investment.

  • Direct creation of employment through rural public works is considered necessary to absorb unemployed labour and reduce poverty.

• These differing strategies represent alternative methods for the productive absorption of surplus labour, each based on a distinct explanation of the causes of unemployment in developing economies.

Industrialisation-Led Strategy of Development: Lewis Model of Growth

• Influenced by the growth experience of Western developed countries and based on the Lewis model, many developing countries adopted an industrialisation-led strategy of development to absorb surplus labour into the modern industrial sector.

• The central feature of this strategy is the generation of employment opportunities through a higher rate of industrial growth, achieved by accelerating investment and capital accumulation; it treats labour and capital as complementary inputs in the production process.

• According to this approach, developing countries suffered from large-scale disguised unemployment in agriculture because the growth of capital stock and modern industries was not rapid enough to match population growth.

• The Lewis model and the industrialisation-led strategy based on it envisaged the transfer of surplus labour from agriculture, where labour productivity is very low, to the industrial sector, where productivity is higher.

  • Employment of labour in more productive industrial activities raises labour productivity.

  • Economic growth occurs through this increase in productivity accompanying labour transfer.

• In their dual-economy growth models, W. Arthur Lewis and John C. H. Fei–Gustav Ranis considered capital as the crucial factor determining expansion of employment in the modern industrial sector.

• These models argue that the rate of employment growth depends on the rate of capital accumulation and economic growth, but differ from the Harrod–Domar model by explicitly distinguishing between two sectors of a developing economy:

  • Subsistence agricultural sector characterised by surplus labour, low productivity, and self-employment.

  • Modern industrial sector characterised by wage employment and high productivity.

• The models emphasise the transfer of surplus labour from subsistence agriculture to modern industry, with the scale of labour absorption and employment expansion in industry being determined by the rate of capital accumulation.

• According to this strategy, a sufficiently high rate of capital accumulation and industrial economic growth would, over time, create enough employment opportunities to withdraw all disguisedly unemployed labour from agriculture.

• The strategy assumed that agriculture would adjust endogenously to the requirements of industrial growth.

  • The assumption of an unlimited supply of labour at a given wage rate implied that labour could move out of agriculture without reducing agricultural output.

• Lewis, however, recognised a potential limitation:

  • If withdrawal of labour from agriculture causes agricultural labour productivity to fall, agricultural output, particularly food production, may decline.

  • Reduced food supply would raise food prices.

  • Higher food prices would increase industrial wage rates.

  • Rising wages would reduce industrial profits.

  • Lower profits would discourage investment and could halt further industrial growth.