Tag Archives: land

Troublesome landing — They don’t grow land anymore

(Published in The Telegraph, Calcutta, April 9, 2015)

 
 
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Singur, the potato bowl of Bengal, appears to have landed in trouble again. Not on account of unwilling farmers grieving over their lost assets, but on account of overproduction by the ones who didn’t lose their land. Excess supply of the crop has pulled down prices, leading indebted farmers to slither down the precipice. According to media reports, matters have come to a dismal pass, with a section of the farmers demanding that the Tatas be recalled to help rectify the situation. Industrialization, presumably rapid, will bring along with it employment for the farmers, thereby leading them out of misery.

Simultaneously, the Central government is leaving no stone unturned to ensure the passage of the land bill. What with its minority status in the Rajya Sabha, it is relying now on repeat promulgations of ordinances, till presumably, a joint session of Parliament will beget the act itself, the promised blueprint for industrial bliss. Unleashing the forces of industrialization is believed to be the sine qua non for economic growth, an adored goal for governments across our planet. Growth increases output and growth creates employment, as the recent Singur message appears to suggest. In his radio broadcast, the prime minister, too, has assured a job for each land-losing family, over and above the compensation offered for acquired land.

Availability of land, of course, is an essential precondition for building factories. It is a basic factor of production along with labour and capital utilized by industry. Of these three, though, land enjoys a unique position in that while the other factors can grow, land cannot. Widespread industrialization makes land increasingly scarce vis-à-vis other factors of production, leading to a rise in its market price in the vicinity of industry.

Let us concentrate, however, on the nature of technology associated with growth. As every budding undergraduate student of economics is aware, extra doses of capital and labour, applied to a fixed plot of land, cause aggregate output from an enterprise to rise, but the incremental output brought about by the extra labour and capital begins to fall eventually. Elementary text-books refer to this as the law of diminishing returns. Put somewhat dramatically, a banyan tree cannot be grown in a flower pot, unless it is cultivated as a bonsai.

A sustained rate of growth of per capita aggregate output will call, then, for forces that can negate the tendency for diminishing returns to capital and labour as they are applied to non-augmentable land. Quite obviously, the forces in question will assume the form of technological upgrades that will improve the productivity of capital as well as labour. However, a rapid rise in labour productivity may not necessarily be a phenomenon that acts in the interest of the labouring class as a whole, for it implies that any given volume of output will require a smaller workforce to produce it. The labour required by the industrial sector could nonetheless rise over time, provided, of course, that the size of the manufactured produce itself grows at a high enough rate to engage not only more productive labourers, but also a larger number of them.

Indeed, this is the way employment in China’s industrial sector behaved from 2003 till 2012, during which period the number of workers engaged in industry expanded from 159.27 million to 232.41 million. These figures translate to 21.6 per cent and 30.3 per cent of the total workforce for China. As opposed to this, India employed 24.7 per cent of its workers in industry in 2012, while in agriculture it had engaged 47.2 per cent of the workforce. The land ordinance or act is aimed at reducing the size of the agricultural workforce through allocation of land to industry. Even if the land reallocation goal is achievable, what is not clear is how the displaced agricultural workers will be rehabilitated as industrial workers.

There are at least two issues that need to be borne in mind in this context. First, India’s land area is approximately 2.97 million square kilometres as opposed to China’s much higher 9.33 million sq km. Further, India’s population density is around 421 persons per sq km as opposed to China’s approximate density of 145. In other words, not only does China have more land available in absolute terms to be distributed in favour of industry, it is also likely to displace fewer people in the process relative to India. In comparison with China, the law of diminishing returns is likely to work with a vengeance in India therefore, to counter which India needs massive access to productivity improving technology. And this, as already pointed out, does not send a cheerful message to the agricultural land owners. More productive industrial workers will probably give rise to greater, not less, unemployment in the workforce, especially for those displaced from agriculture.

A second issue that needs to be emphasized is that employment generation in the industrial sector is not merely a technological phenomenon. Industry does not produce output unless it can be sold. And the market for Indian goods is no longer restricted to its geographical boundaries. The country’s open economy policies are gathering pace and this means that it is rapidly transforming into one amongst the many producers catering to world demand. Its producers have to compete with foreigners for a rising chunk of the world market, and this too when the world market itself has been in doldrums for the last few years. Even China is showing signs of a slowdown, in spite of a political structure that allows workers to be woken up in the middle of the night to attend to lucrative export orders.

Whether India can harness the forces of technological advancement in industrial production and compete in world markets is yet to be seen. But even if it is successful in its endeavour, we are likely to be caught in a Scylla and Charybdis paradox, namely, needing to compete in a weak world market on the one hand and preventing unemployment from rearing its head at home on the other.

The implication of technical progress for employment may easily be gauged from the performance of India’s service sector, which produced 56.27 per cent of the gross domestic product in 2012 by employing 28.1 per cent of the workforce. China’s share of services by contrast was 44.6 per cent and its employment share of the workforce was 36.1 per cent. It is no secret that India has a giant lead over China in services and the secret of our success lies in labour saving technological innovations. Exactly the reverse situation prevailed in Indian industry in 2012, where 24.7 per cent of the workforce produced 26.21 per cent of the GDP. China on the other hand utilized 30.3 per cent of the workers to turn out its 45.3 per cent of the industrial share.

It is not entirely clear, therefore, that the magic of competitive growth in industry can be achieved through a simultaneous increase in employment of land and labour, even though the media reported the government to have made precisely this claim following the re-promulgation of the ordinance. If the assertion turns true, what is almost certain to happen is a growth in the ranks of the unorganized labour force working in the fringes of industry in townships surrounding industries.

Since land acquired for industrial use cannot keep pace with the growth in industrial capital and output, a steep rise in the price of land in the neighbourhood of industry can hardly come as a surprise. This had happened in Singur before the Tatas took the curtain call. As Mark Twain had famously observed, the best way to get rich was to buy land, since people didn’t produce it anymore. Some people out there are awaiting a bumper harvest therefore. Not of potatoes anymore, needless to say.

(The author is former professor of economics, Indian Statistical Institute, Calcutta)

 
 
 
 
 

Industrialization in a Land Hungry State – A Lesson from Robert Solow

Originally published in The Telegraph, Calcutta on January 1, 2013 under the title Exploring the Possible

 

If surviving the test of time is proof of quality, then MIT Nobel Laureate Robert M. Solow’s model of economic growth has surely distinguished itself with flying colours. The work was published as far back in time as 1956 and survives in the academic world till this day, despite the ruthless attack it had to face from Professor Joan Robinson of Cambridge, UK and her associates. Rightly or wrongly, the latter questioned the logical underpinnings of Solow’s work and the debate was intense enough to metamorphose childhood friends into bitter enemies belonging to opposite camps in their adulthood. The controversies ultimately waned out though, possibly on account of a workable alternative model of economic growth that the critics failed to provide.

The Solovian prescription for growth and the plans for West Bengal’s industrialization, one might suspect, are strange bedfellows. However, this, curiously enough, may not be the case. For sustained growth, Solow visualizes all means of production to be growing at the same rate in the long run.  The situation resembles the cloning of production organizations, two of which, identical in all respects, particularly in the use of resources, would produce double the output produced by one, three producing three times and so on. Amongst the resources, population, which acts as a proxy for the labour force, is controlled by demographic rather than economic activities. Thus, all other inputs, most importantly capital, need to adjust and grow at the same rate as labour and this in turn leads output too to grow at the same rate.

Interestingly enough, Solow was not overly worried about the land problem. His cloning exercise involves replication of production organizations that are identical in their use of capital and labour. But common sense suggests that two factories that use identical quantities of capital and labour, can be constructed only on similar plots of land. On the other hand, while both capital and labour can expand endlessly, at least for argument’s sake, the total quantum of land available on the planet  is physically limited. Thus, Solow’s cloning comes up against a major barrier, viz. the scarcity of land, unless of course one imagines production units to grow vertically upwards in search of the moon rather than spread horizontally.

Land of course does not concern Slow. But if it did, how should he have proceeded? The answer could probably be found in the special manner in which labour is treated in his work. A worker is both an embodiment of nature endowed muscle power as well as socially available technological skills. The stock of muscle power grows with the population. This is the demography story. Technological skills multiply too over time, but Solow was vague at best as far as the technology tale went. What he was clear about though was that his labour resource was separable into two parts, ability to work and the skill associated with that ability. The cloning in Solow’s model involves replication of capital and the joint person cum skill input. Capital and the joint input, and hence output, grow at the same rate in the long run, but the joint input itself grows at a higher rate than the rate of growth of population in isolation, since its growth rate is the sum of the growth rates of population and technology. Consequently, even as output grows at the same rate as the joint population cum skill input, it grows faster than population. This means that output finally grows faster than population so that per capita output rises in the long run, which is the objective of economic growth and development in most societies.

It is not output alone that rises faster than population. So does capital, since the latter too grows at the same rate as the population cum skill input. Suppose, however, that labour lacked the skill attribute altogether. Then growth in capital at a rate faster than population would have given rise to the same absurdity as factories multiplying over non-augmentable land.

Economics text-books assert that the extra output one can squeeze out of  fixed size inputs diminishes with each extra squeeze with the help of inputs capable of growth. Therefore, in the absence of skill formation, as we are temporarily assuming, if capital were to rise at a higher rate than the growth in population, then the resulting output would be growing at ever slower rates. The only steady growth the system will be able to handle would involve capital, unskilled labour  as well as output growing at the same rate. To the extent then that a rise in output per head of population is a desired goal of development, the Solow model has a pretty dreary prediction to make if skills fail to grow.

Speaking more broadly, skill improvement signifies technical progress and the Solow message is that per capita output growth is not sustainable in the absence of a simultaneous growth in technology. Solow restricted his exercise to capital and labour resources alone. However, there is no reason why we should not interpret his work to include non-augmentable land too. Just as skilled labour qualifies for a larger number of workers than a mere a headcount, so should land services not be judged by the geographical size of land alone. Like labour, effective land size could be larger than its physical size in the presence of land augmenting technical progress.

Given this Solow insight, it is not enough for the authorities in charge of this land scarce state to simply send blank invitations to industrialists to invest in employment generating projects. Instead of adopting a rigid stand on land policy, attracting thereby criticisms from its political opponents and raising doubts in the minds of potential investors, the government might be able to do far better by laying down an acceptable road map for the sort of industries the Bengal economy should be able to cope with. As matters stand now, such industries ought to be equipped with technologies that are simultaneously labour intensive and frugal in the use of land.

A number of service sectors might easily qualify, though it is doubtful that the IT sector belongs to this category. The IT sector is mostly skilled labour intensive and, as elsewhere in the Indian economy, its growth, however phenomenal, holds little promise for unskilled or semi-skilled employment generation in a large scale. Heavy manufacture too cannot qualify as was evident during the 600 acres controversy in Singur’s Nano factory.

It makes little sense therefore to throw open the land markets to all and sundry. Land being scarce, its market price will be prohibitively high for new ventures to be initiated. A far better idea could be to set up an expert group to identify those industries alone that are endowed with technology that is either capable of converting small land holdings into effectively large ones or require small land holdings relative to output. These are the industries that the government should be luring into the state by offering whatever incentives it is in a position to offer.

Despite the clamour raised by the Chambers of Commerce, it is unlikely that large scale industries will fulfill the criterion. Agro-industries backed up by multiple cropping could well be a solution. The hotel industry in remote tourist spots could work as well. Both are semi-skilled labour intensive and hotels can actually expand vertically. The list, even if short, needs to be carefully prepared instead of wearing the mask of an unqualified industry friendly face. Even if a large industry or two were to move into the land hungry state, it cannot open the floodgates for heavy industrialization. Instead of criticizing and lamenting over the impossible therefore, our time will be far better spent in discovering the possible.