Posted by: Vikram | January 18, 2020

Service Exports will remain the key to boost the wages of Indian workers

Will the migration of manufacturing jobs from China to India help our vast mass of agricultural laborers move up the economic ladder? Historically, industrialized Western and East Asian countries used low-cost manufacturing to increase the wages of their agrarian workforce. Can India actually follow the same path for enriching its mass population?

The United States is often presented as the archetype of a country becoming prosperous by large scale industrialization. However, it’s important to put this path to prosperity in the context of the modern services-based economy. Figure 1(a) shows that from 1840 to 1930, the contribution of agriculture to American GDP decreased from nearly 50% to 10%, while industry increased its share from 20% to 45%. However, from the 1950s, the share of industry in US GDP has fallen rapidly with the rapid expansion of the services sector. Today, it is the services sector that commands the overwhelming share of economic output in the US.

us_gdp

Figure 1(a) (Source: https://tinyurl.com/y7uny37k)

us_labor

Figure 1(b) (Source: https://tinyurl.com/y7uny37k)

 

Concurrently, as seen in Figure 1(b), in the 1840-1950 time period, American workers shifted to manufacturing jobs. Thus, when American workers were engaged in manufacturing jobs, these were high value addition activities and relatively lucrative jobs. In other words, Americans building a television in the 1930s were not engaged in ‘low cost manufacturing’. And as America’s service economy expanded, the children of America’s manufacturing workers found employment in the services sector, which have offered the highest wages since the 1950s.

In stark contrast, China’s manufacturing boom since the 1990s did not lead to substantially improved economic lives for workers precisely because such jobs were now low-paying. From 1995 to 2018, the Chinese economy expanded by a factor of 5. While China as a whole has become wealthier using low cost manufacturing exports, this wealth has been captured by a small fraction of businessmen and party officials. Indeed, the consumption expenditure of the average Chinese citizen (Figure 2) increased only 1.3 times between 1995 and 2018. Chinese workers have actually become poorer compared to the rest of the world, even as their country has grown rich. China’s Gini index (46.5) is similar to that of resource dependent industrial economies such as Brazil (47.5), Mexico (48.3) and Russia (42). China’s economic model effectively treats its mass workers as a natural resource to be exploited by a local elite to supply cheap goods to a global middle class. Such a model is unsustainable in a democratic polity.

consumption

Figure 2, Household Final Consumption Expenditure by year for China and World average

Like China, in India manufacturing jobs are already amongst the lowest paying vocations. Salaries for even low-level service workers (Rs 251) are at similar levels as those for manufacturing workers (Rs 254) in India. We see this clearly in the table below, which shows average wages earned by workers in the various sectors of our economy.

wages

Table 1 (Source: https://tinyurl.com/tygjkj6)

As a concrete example, consider workers in Foxconn’s iPhone assembly plant in Andhra, who were profiled in a recent Forbes magazine article. The pay of Foxconn’s Indian workers (around Rs. 9000) was nearly half the average salary of a maid in Delhi (Rs. 14462). The workers also don’t see the factory jobs as a long-term vocation, with the job not providing any job security or patronage benefits.

The question remains as to what can drive wage growth for our mass work force. We contend that a further expansion of the service economy, both at the level of exports and internal consumption can better drive such growth. One source of continued service export growth can be serving America’s healthcare sector. As Rajkamal Rao points out in the The Hindu Businessline, “If India Inc can innovate just like Nasscom did in the 1990s, India’s health services sector can grab a portion of the American market by offering world class medical tourism services to American patients. Even a 5 per cent slice can result in a $175 billion export industry, much larger than our IT services sector today.” There are also opportunities in the areas of nursing and school education for India’s English-speaking workforce. India also needs to press for a migrant worker agreement with Japan. Japan has preferential migrant worker agreements with a host of Asian economies, including China, Nepal and Myanmar, but has excluded India for now. Our government must press for Indian access to the Japanese labor market, in exchange for Japanese access to our market for electronics and other high-tech goods.

New jobs in the service and manpower export economy will not be immediately accessible to agricultural laborers. However, an expanded population chunk connected to global markets via service and manpower exports will spur internal consumption of goods and services. Our mass agrarian workforce can find better paying employment in the construction and service jobs created by this internal consumption.


Responses

  1. Vikram: I am wondering what your views are now on demonetization?

  2. Thanks. You are an expert in decision-making. I am sure you have used your expertise in assessing the gains and losses of demonetization to arrive at your conclusion.

    • Thank you for your engagement.


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