Tuesday, February 2, 2010

Manufacturing is key

Manufacturing sector is the key to creating jobs. Not agriculture. Not services.

Agriculture employs a lot of people , especially in developing countries, but cannot create more jobs. Land is finite. Agricultural development will be primarily in improving productivity and output ; not in expansion of jobs. In this sector, policy must focus on efficiency; not on job creation.

The services sector is sexy, but not a massive creator of jobs. For all the growth of the Indian IT industry, the number of direct jobs it has created is probably 1 million. Add the indirect employment and you probably can get 5 million. That is a drop in the ocean of the employment challenge in India. So from a policy perspective, this sector needs to be left free, facilitated to grow, and encouraged, but with limited policy intervention.

The sector that can really boost jobs on scale is manufacturing. This is where policy initiatives must be most active.

What sort of policy initiatives ? Some thoughts, equally applicable to developing as well as developed countries.

Make it easy to open a manufacturing unit. In developing countries it is the problem of land acquisition. In the developed countries, it is the problem of myriad of planning permissions, approvals, fighting green lobbyists, obstructionists, etc etc. (Try setting up a power plant in California). Countries must legislate clearly facilitating easy setting up of plants – a fast track clearing process that must be mandated. In today’s atmosphere of joblessness, the political selling of such legislation is feasible.

Provide a clear incentive based on number of jobs created (not on the size of the investment). This will attract those operations that create more jobs, as opposed to capital intensive sectors. I suggest that, especially for developed countries, this is the most desirable track. For example provide an income tax holiday to employees (thereby lowering the cost of labour) and not to the company.

Develop great infrastructure. Manufacturing units needs perfect infrastructure – power, water, transportation, etc. It’s the job of governments to facilitate building such an infrastructure. This is particularly true of developing countries like India and those in Africa. It’s a fallacy that these are mind bogglingly expensive. Allow private participation and capital will come.

Add to this the other boosters namely labour flexibility, labour pricing and training (all to be covered in separate posts) and you can stimulate the manufacturing sector, even in developed countries.

It’s a myth that all manufacturing will move to the low labour cost countries like China. Firstly, labour cost is only a component of total manufacturing cost and often not the largest component. Secondly China is not the lowest wage country – India for example has lower labour costs; it’s a combination of infrastructure, labour flexibility, productivity, speed, etc that makes China’s manufacturing many times India’s.

But labour cost is an issue. Manufacturing will move to places where the total cost of production is cheapest. Can anything be done about labour cost ? I believe yes. In tomorrow’s post.