The heated war of words between the US and China on currency values is overtly about rarefied issues such as global imbalances, excess savings and monetary policy. But at the heart of the debate is actually a very simple issue: jobs.
US critics of Chinese exchange rate policy believe that a cheap renminbi is putting US workers out of jobs while the Chinese fear that any move to push up their currency against the dollar would endanger jobs in China. The unemployment rate in the US continues to hover around the double-digit mark. The Chinese communists have for long held that inability to create jobs would spark off social unrest in their country, though a looming labour shortage seems to be the more relevant threat right now.
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The challenge of creating jobs has moved to the centre stage of economic thinking in recent times. In September, the International Monetary Fund (IMF) and the International Labour Organization (ILO) held a joint conference in Oslo on “The Challenges of Growth, Employment and Social Cohesion”. These two multilateral institutions have traditionally held different views on most economic matters. Yet, the joint working paper written as a curtain-raiser for the conference—with IMF focusing on the human costs of recessions and ILO on the need to have job-oriented economic growth —gives us some indications on the changing nature of the policy debate.
IMF says in its contribution to the working paper: “…if the effects of past recessions are a guide, the cost of those who become unemployed could be a persistent loss of earnings, reduced life expectancy and earnings of their children. And unemployment is likely to affect attitudes in a manner that reduces social cohesion, a cost that all will bear.” The underlying point is that there are long-term social consequences of sustained unemployment, something that many contemporary economists have shown in their research.
The IMF-ILO conference was focused on the rise in unemployment because of the recent global downturn rather than the lack of good jobs in poor countries such as India. The underlying assumption is that no economy can claim to have fully recovered till it creates ample new jobs of high quality. Some policymakers have now come round to the view that job creation should be made an explicit goal of economic policy, rather than a beneficial side effect of high growth.
This view mirrors an old debate in monetary policy: Should a central bank focus on “intermediate targets” such as interest rates or money supply that can help it control inflation, or should it directly target inflation itself? Similarly, should national governments seek high growth (an intermediate target) and hope that new jobs are created as well, or should they put in place policies that explicitly promote job creation?
India has clearly failed to produce enough high-quality jobs that offer citizens a way out of the stagnation of farm work and the volatility of the informal sector. That was the initial promise of economic reforms, as a reading of Manmohan Singh’s early speeches as finance minister show. Economic growth was to have created well-paid jobs in the modern sector and the state was to have supported this process with public goods and infrastructure. India was to walk down the same path that many other Asian countries had traversed in previous decades. That promise has been very quietly buried in recent years, as inclusive growth has been redefined as the expansion of various entitlement programmes that could be fiscally ruinous, but are politically attractive. There seems to be a conspiracy of silence about the plain fact.
India creates more jobs per 1 percentage point of economic growth than China does, as new research by investment bank Morgan Stanley reiterates. But there are well-founded fears about jobless growth.
Job creation needs to get back into the centre of Indian policy debates once again. The very process of economic development is the gradual shift of people away from agriculture and into modern industrial and service jobs. Most rich countries have undergone this necessary transition. In India, ridiculous labour laws make it unattractive for companies to hire new hands because laying them off is so impossibly difficult; companies hence prefer machines to men. Job creation is hampered. Labour market reforms need to be pulled out of the cold storage if we are to see employment-led inclusive growth.
Political interest in jobs comes to the fore only when existing jobs have to be protected. There is little enthusiasm for creating new jobs. We see this in the debates about modern retail, for example. Every politician seems ready to reel off numbers about how many jobs will be lost, but nobody offers any estimate of how many jobs will be created. The preference for protecting existing jobs over creating new ones can harm economic dynamism in the long run.
Niranjan Rajadhyaksha is managing editor of Mint. Your comments are welcome at firstname.lastname@example.org