Oct 28, 2012

Retail FDI Reloaded: Manmohan Singh says FDI brings jobs. Paul Krugman says unless any business increases labour force, no jobs created.

Employment generation is always on the top of agenda for any visiting Head of State. No, I didn't mean the visiting Presidents/Prime Ministers want to look into the possibility of creating employment in India . What I meant was that they come to India with the hope of creating thousands of jobs back home. I have always heard successive US Presidents spell out how many jobs they are going to bring back when they leave for any foreign country. Lately, I find even Presidents and Prime Ministers of many European countries as well as that of Canada and Australia say the same.

It is in this context that I can understand how important and crucial employment generation is for the Indian Prime Minister Dr Manmohan Singh. More so at a time when he has to justify economic reforms at times of a repeat of an economic slowdown that the world is witnessing. Considering "India's official upper limit of unemployment and underemployment is about 70 million -- that's more than the population of France, UK, Italy, South Korea, Spain and Canada. Even this figure is disputed by experts who believe that the actual number is several times larger. The official 6.6 per cent unemployment rate is possibly a mirage created by the complex nature of labour markets." (Why India is not on the job The Times of India, Oct 22, 2012. http://timesofindia.indiatimes.com/india/Why-India-is-not-on-the-job/articleshow/16908904.cms)

So when the Prime Minister restarted the 2nd phase of economic reforms with the approval of 51 per cent  FDI in Indian retail, employment generation was a big plank. Commerce Minister Anand Sharma had talked of creating millions of jobs in the years to come. In fact, out of sheer excitement he has even been quoted as saying that 10 million jobs will be created within few years. Many experts have worked out the employment potential to be 3 million (both direct and indirect) in the first 3 years gradually rising to 10 million in 10 years or so. (Retail FDI: Why experts expect creation of 10mn jobs. http://www.firstpost.com/economy/retail-fdi-why-experts-expect-creation-of-10-mn-jobs-476213.html). At a number of official programmes, Prime Minister himself has been talking of the potential of retail FDI in creating millions of jobs.

While I will not get into the debate on how many jobs big retail will displace in the process, the Confederation of All-India Traders (CAIT) has made an interesting calculation. It says that if 4 million jobs are to be created in India in the next three years, Wal-mart (or other retail giants) will need to open over 18,600 supermarkets. This means 644 stores in each of India's 53 cities. Now this is a tall order I am sure you will agree.

Nevertheless, let us look at whether Wal-mart and other retail giants will in reality be creating "real" employment. Although I have time and again questioned the employment figures asking the Government  to specify as to how many jobs would be lost in the process (a question that has never been answered), but when I read Nobel laureate Paul Krugman's New York Times blog The New Physiocrats (Oct 27, 2012. ) which possibly was a reaction to a statement made by Robert Samuelson's outburst in NYT, I realised he had provided us an economic explanation that demolishes the argument of job creation by private sector.

Samuelson had said that the Government jobs weren't "real" -- and as explained by Paul Krugman, it meant that these jobs aren't of much value to society. In other words, Samuelson was trying to say that only private sector jobs are worth the investment. To this, Paul Krugman replies: "Unless your business expansion somehow leads to an increase in the labor force, simple arithmetic says that it didn’t add jobs. It may have created better jobs; it may have raised productivity; but more jobs, no."

I am stretching this argument further. As Paul Krugman says if your business is somehow not going to lead to an expansion of the labour force, the job creation is nil. The employment generation claims that have been made by experts as well as the Prime Minister/Commerce Minister on behalf of the big retail giants too is not going to lead to an increase in the labour force. It is expected that while the new jobs may be much better in quality than the existing retail jobs, may improve efficiency, but the additional job creation is going to be zero. In fact, it is going to be in minus considering the displaced and lost jobs from the closure of small local stores.

Paul Krugman concludes: "If you believe that we should have fewer schoolteachers and firefighters — or that education should be privatized — make that case. Don’t try to hide your prejudices under a mystical doctrine in which important, productive jobs somehow don’t count if they come from a place with a gov email address." In that case, it means that even the existing retail jobs in India are in reality productive jobs. And this should not be discounted. 

Subsequently, Paul Krugman writes (in his next blog Denial of Economics. ): "Now, what is true is that efficient markets and equilibrium business cycle theory have suffered what should be fatal blows to their credibility — but essentially nobody in that camp is even willing to admit that there is a problem. What that says, however, is that while we obviously need new thinking — we always do! — the biggest problem these days has been the rejection of knowledge we used to have." Try to put this in the Indian context where the business media goes on chanting day in and day out that market are efficient in self-regulation and have the capability to correct itself. I think it is high time that we accept that market efficiency has no credibility left. Markets cannot be left to operate free. They will gallop like an untamed horse if not properly reined in.

Coming back to the bigger question, if Paul Krugman is right in saying that the private sector does not make any significant contribution to employment creation unless the business expansion plan leads to an increase in the labour force than isn't Prime Minister Manmohan Singh, who is also a trained economist, providing a false hope to the nation? Isn't he trying to take the country for a ride? Isn't Manmohan Singh wrong? Aren't therefore the fundamentals of Manmohanomics flawed?

FDI in retail will not provide any "real" jobs, only an illusion of employment creation.        


अमित भारतीय said...

I think that we are wrong, because every visiting head wants more and more jobs for their country and if Manmohan Singh G do so than why should we loud.? Manmohan Singh isn't an Indian by both mind and heart..!! He is no more than a VISITNG HEAT for INDIA.

Kunal said...

Sorry to say, but badly flawed economic logic.