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Development Strategy and Rural Employment

employment guarantee scheme seems to be the only way to ensure a minimum Development Strategy and standard of living for the majority who have been excluded from the lopsided growth process. Unfortunately, the con- Rural Employment cept of


Development Strategy andRural Employment

Employment and Development: Essays from an Unorthodox Perspective

by Amit Bhaduri; Oxford University Press, New Delhi, 2006; pp xiv + 238, $ 35.


his volume brings together a somewhat varied collection of previously published essays of Amit Bhaduri, all broadly dealing with issues related to employment and development. But as the author himself points out, more than their thematic unity, what binds the collection together is its critical approach towards the mainstream economic theory and the concomitant policy prescriptions that are often justified by appealing to the mainstream literature. As one sifts through the diverse set of articles, three distinctive lines of thought become apparent. One set of articles questions the orthodox belief in the efficacy of the market mechanism; another set points out the inherent logical inconsistencies in some of the standard and frequently used macro-theoretic tools; while the final set of essays emphasises the dual economic structure of the developing countries and reiterates the need for a coherent development strategy that pays adequate attention to the rural sector and to employment generation.

Employment Generation

The first essay of the volume is entitled ‘Joblessness’, and it is one topic that appears recurrently in the volume. The thrust of the argument lies in highlighting the close link between employment generation and economic development. According to Bhaduri, mass scale employment generation – especially in the rural/ agricultural/non-skill informal sector – plays two important roles. On the one hand, it ensures that the benefits of economic growth are equitably distributed amongst the majority of the population when the agricultural sector is not the primary engine of growth. At the same time, it enhances the purchasing power of the majority of the population, thereby ensuring sufficient demand for the nonagricultural sector, such that any such nonagriculture-driven growth process is sustainable in the long run. A number of essays in the volume convey this basic idea – some in the context of pure economic theory (e g, chapter 5, which discusses the possibility of chaotic dynamics arising even with rational expectations, which may not allow an economy to gravitate towards its equilibrium or “natural rate of unemployment”) and some in the context of policy implications for developing economies, especially India, in an era of globalisation (e g, chapters 6-14, where the link between employment and rural development and overall macroeconomic performance of an economy has been explored from various angles).

The “equity” implication of mass scale employment generation is undoubtedly an important aspect that any policymaker should keep in mind. Ensuring a decent standard of living for the majority of the population is the principle aim of any development strategy and generating mass employment goes a long way in this direction. And yet, our performance in this respect has been rather dismal. For the past five years India’s GDP rate has been around 8 per cent per annum while the rate of growth of employment has remained insignificant. Amidst the current euphoria about high growth we seem to have forgotten that a high growth rate is not an end in itself; it carries no meaning from the development perspective unless its benefits “trickle down” to the poorest section of the society. Moreover, in a country where a social security network is conspicuous by its absence, a minimum-wage employment guarantee scheme seems to be the only way to ensure a minimum standard of living for the majority who have been excluded from the lopsided growth process. Unfortunately, the concept of “inclusive” growth has made only a recent (and rather late) entry into the vocabulary of our policymakers, and Bhaduri does well in reminding us about the importance of this concept.

Sustainability Implications

I am, however, less certain about the “sustainability” implications of such an employment generation programme. To be sure, the effective demand aspect of mass scale employment generation would be of utmost importance in the context of a closed economy. But I fail to see how the same argument applies to an open economy. More importantly, a process of development inherently implies a movement away from agriculture to nonagriculture. It has long been recognised that agriculture has limited potential to act as a long-term engine of growth, and therefore, moving people away from agriculture to higher productivity sectors is important. Thus while employment generation in the low-skill intensive and less productive rural sector seems perfectly reasonable as a short-term redistributive policy, one must also focus on longer term strategies involving education and health and skill formation in general which would eventually enable more people to take advantage of the skill-intensive growth process. The fact that none of the essays that appear in this volume even mentions anything about education, health or any other aspects of human capital formation does bother me quite a bit.

Finally, I have a very minor point to make about chapter 5, which presents a neat theoretical model of unemployment, showing chaotic dynamics appearing in an otherwise rational expectations framework. Given my inherent bias towards neat mathematical formulations, I was fascinated by this piece of work which really questions the very foundation of the rational expectations school. (Indeed, if the behaviour of the economy is completely unpredictable, how can one even conceive of formulating an expectation which is

Economic and Political Weekly March 17, 2007

rational?) The only problem that I have here, however, is regarding the proposed solution of the dynamic system in question. I am not a great believer of the rational expectations school, but let me play the devil’s advocate for a moment. If I were a rational expectationist, then I would look for a “forward-looking” solution to the dynamic model, not a “backward-looking” one. In other words, given the dynamic equation, I would apply a terminal (or transversality) condition rather than an initial condition. It is quite well known that backward-looking solutions to dynamic macro-models with rational expectations often generate unstable, even chaotic, dynamics (as shown in S Turnovsky, Macroeconomic Dynamics). In fact, if one solves the dynamic equation of the Bhaduri model by forward iterations with a specified terminal condition, then the chaotic result disappears. This is not to say that economic agents in reality behave in the way the rational expectations school would want them to behave, but it seems a bit unfair to criticise a school by looking only at one-half of their proposed theory and ignoring the other half.



Economic and Political Weekly March 17, 2007

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