Poverty & Inequality

DUET: Need to keep open mind, pilot cautiously

  • Blog Post Date 24 September, 2020
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Commenting on Drèze’s DUET proposal for an urban work programme, Sandip Sukhtankar contends that given the potential promise but obvious issues that need to be addressed, the proposal is indeed ripe for a pilot and evaluation. 

Jean Drèze’s ambitious and interesting proposal for an urban employment programme (DUET; Decentralised Urban Employment and Training) in India, provokes several thoughts. The first thought is a question: why is DUET necessary? It might seem compelling to see two problems – urban unemployment and poor urban infrastructure – and attempt to tackle them with one solution. However, one clearly needs to look at why these problems exist in the first place, and perhaps seek to address those reasons. For example, high urban unemployment is likely related to restrictive labour laws creating gaps between the formal and informal sector (the “Harris-Todaro unemployment” that Ashok Kotwal refers to), and fixing these laws might be a priority. In any case, Ashok does a great job of raising and examining the ‘why’ question, so I do not need to go into further detail here.

The second thought is that – assuming it is necessary – why does the programme not already exist? The answers to this question clearly have to do with the lack of proper decentralisation and devolution of revenue-generation responsibility to urban local bodies. While rural local governance is thriving, urban decentralisation is far from complete and local governance is severely constrained (see Auerbach and Kruks-Wisner 2020). Dilip Mookherjee examines these issues further, and argues for DUET as part of effective urban decentralisation, which I find eminently sensible.

Next, it is hard to ignore the knee jerk neoclassical view that one should not be interfering in markets. But one has to be very cautious in applying these views to places like India, where there are a number of market frictions already. Take, for example, the case of MNREGA (Mahatma Gandhi National Rural Employment Guarantee Act). When my co-authors Karthik Muralidharan, Paul Niehaus, and I were first studying the programme, our priors were that while it may help provide social insurance to some, it was likely not efficiency enhancing for the economy. We had thought that although it might increase rural wages, this might come at the cost of private sector employment being crowded out. Those priors were overturned, however, as we realised that the general equilibrium effects meant that the programme not only increased rural wages, it also increased overall employment (Muralidharan et al. 2020). The reason for this was that rural employers have monopsony power, and the employment guarantee diminished this power, thus increasing efficiency and significantly increasing income for the average rural resident. 

Similarly, an urban DUET might also prove to be efficiency enhancing. In urban areas, it is unlikely (although possible) that employer market power is a big concern. However, other sources of increased efficiency could be enhanced worker productivity and reduced search frictions. We know, for example, that even urban workers can increase productivity by eating better and sleeping better, given the excellent research by Heather Schofield, Frank Schilbach, and co-authors. A number of constraints – behavioural, credit, “prisoners’ dilemma”1 type issues between workers and employers – might mean that these simple productivity-enhancing investments are currently not made, and DUET might indeed spark these investments. Moreover, we also know that search frictions in labour markets worldwide are costly; a recent study by Banerjee and Chiplunkar provides specific evidence from India. Reducing these costs through placement agencies and/or the work experience model provided by DUET might produce substantial economic gains.

Nonetheless, there are a number of issues with the current proposal that would need to be addressed before the idea can proceed. I am sure, of course, that Jean recognises this and the public debate is likely an attempt to refine the proposal. Debraj Ray has already pointed here some of the logistical issues, foremost amongst them the need for a universalisation with MNREGA and streamlining bureaucratic procedures. My additional concerns are related to incentives for management, and fraud. For example, the current proposal states that “approved employers would have a stake in ensuring that the work is productive”; but since local bodies are not paying for it, what is the incentive here to ensure that the work actually gets done? Second, I do not really understand how the use of ‘placement agencies’ would solve graft; the MNREGA equivalent would be the ubiquitous rural ‘contractors’, generally acknowledged to increase corruption and reduce accountability of the programme. Overall, there needs to be a mechanism for ensuring that the subsidised job transaction has actually happened.

Given the potential promise but obvious issues that need to be sorted out, the proposal is indeed ripe for a pilot and evaluation. Consistent with some of Pranab Bardhan’s suggestions, perhaps local government authorities in small towns could be given the authority to pilot this programme. With a reasonable sample, the pilot could be thoroughly evaluated before being expanded throughout the nation.

The author is grateful to Paul Niehaus for helpful comments.

Note:

  1. In game theory, a prisoner’s dilemma refers to a situation in which two individuals acting in their own self-interests do not result in the optimal outcome, since both parties choose to protect themselves at the expense of the other participant. As a result of following a purely logical thought process, both participants find themselves in a worse state than if they had cooperated with each other in the decision-making process.

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