Poverty & Inequality

DUET: The industrial policy angle

  • Blog Post Date 08 October, 2020
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Swati Dhingra

London School of Economics

s.dhingra@lse.ac.uk

Providing her perspective on Drèze’s DUET proposal for an urban work programme, Swati Dhingra contends that addressing the immediate, monumental problem of joblessness arising from the Covid-19 pandemic requires abandonment of austerity and modernisation of industrial policy to focus on decent work. A national urban employment guarantee – even a temporary one – would begin to address the job crisis directly and other policy levers could provide the demand-side impetus to kick-start the recovery process.

 

In this post, I offer a different perspective – addressing an urban job guarantee in the light of India’s broader industrial policy in five key points.

First, India’s recovery package has been an austerity policy. In the face of the current crisis, it must be abandoned and policy levers deployed to prevent individuals from falling into long-term unemployment. Advanced and middle-income economies across the world have recognised this and abandoned fiscal discipline to adopt industrial policies that prioritise employment (see Verwey et al. 2020, Motta and Peitz 2020).

Second, job guarantees can be an important policy lever to assist recovery of labour markets from the crisis, not least because a large majority of workers in low-income urban areas value the work and security provided by a guarantee of a minimum number of days of work. A recent field survey shows that, on average, these workers would be willing to give up a quarter of their daily wages for it and they want a job guarantee more because of the livelihood crisis arising from the pandemic (Dhingra and Machin 2020).

Third, whilst relief transfers can certainly alleviate economic hardship, ultimately displaced individuals will need to transition into productive employment. Expecting the private sector in these times to pick up all of that slack labour on its own is a near impossible ask, much more difficult than the central government stepping in to prevent long-term unemployment. Even in normal times when the economy is growing on aggregate, there are many cases where countries like India, UK, US, and Brazil, have not been able to create jobs that would absorb displaced workers and regenerate communities affected by economic shocks (Hummels et al. 2018). A concern is that job guarantees would directly displace private-sector employment, but these theoretical arguments have not held up in practice even during times of tighter labour markets (as shown in many cases of minimum wage increases around the world and as discussed by Sandip Sukhtankar for the MNREGA (Mahatma Gandhi National Rural Employment Guarantee Act).

Fourth, India’s antiquated and hard industrial policies, with at best, mixed record, needs to be brought into the modern world. An industrial policy focussed on human capital accumulation is required. Across the world, thinking on industrial policy has evolved to understand the importance of labour markets for various reasons such as declining labour shares, rising inequality and low wage growth (Blanchard and Rodrik 2019). India’s hard industrial policies like sectoral subsidies have outlived their time, some even contravene international law (Dhingra and Meyer 2020). Active labour market policies, just like any other industrial policy, are not easy but they are absolutely fundamental now.

Fifth, as Debraj Ray emphasises, keep it simple. A national employment guarantee at a national minimum wage needs to be the ambition. Simply put, take the R out of MNREGA. The last few decades of work on regional labour markets has shown that segmented national labour markets often add to the misery of displaced workers and lagging regions, both in advanced economies and in middle-income countries like India and Brazil (Goldberg and Pavcnik 2016). The crisis has further highlighted that the rural-urban dichotomy is a false one. Segmenting national labour markets further through policy breaks the national social contract.

Overall, the fear with an urban job guarantee is much less that local municipalities will not deliver on projects – urban residents are likely to be better placed to monitor public services. The fear is much more that the central government will continue an austerity policy that does not prioritise jobs. Jean’s proposal provides a starting point to prevent the government from shirking this responsibility – maintenance work at public institutions does not require huge start-up investments. Ultimately, of course, if a job guarantee is to result in bigger benefits like upskilling, essential service provision and public health or infrastructure projects, urban local bodies could provide a better way of democratising the process of project selection and monitoring, as Dilip Mookherjee and Pranab Bardhan discuss.

These are not normal times and we are not going back soon. To address the immediate and monumental problem of joblessness arising from the pandemic and the global slowdown, austerity needs to be abandoned and industrial policy modernised to focus on decent work. A national urban employment guarantee – even a temporary one – would begin to address the jobs crisis directly and other policy levers could provide the demand-side impetus to kick-start the recovery process.

Further Reading

  • Blanchard, O and D Rodrik (2020), ‘We have the tools to reverse the rise in inequality’, Reflections on the conference on ‘Combating Inequality: Rethinking Policies to Reduce Inequality in Advanced Economies’, Peterson Institute for International Economics, October 17-18, 2019.
  • Motta, M and M Peitz (2020), ‘EU State Aid Policies in the Time of COVID-19’, VoxEU, 18 April.
  • Verwey, M, S Langedijk and R Kuenzel (2020), ‘Next Generation EU: A Recovery Plan from Europe’, VoxEU, 9 June.
  • Dhingra, S and S Machin (2020), ‘The Crisis and Job Guarantees in Urban India’, CEP Discussion Paper 1719.
  • Dhingra, S and T Meyer (2020), “India Export Measures”, World Trade Review (forthcoming).
  • Goldberg, P and N Pavcnik (2016), ‘The Effects of Trade Policy’, in N Bagwell and R Staiger (eds.), Handbook of Commercial Policy.
  • Hummels, D, J Munch and C Xiang (2018), “Offshoring and Labor Markets”, Journal of Economic Literature, 56(3), 981-1081.
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