BENEFITS OF LABOR SHORTAGE

Just over a decade ago, Nepali woolen carpet was not only the largest export of the country but also the largest job provider after agriculture, as some half a million people were engaged in different activities related to carpet industry. But, ten years down the line, the industry had shrunk to roughly one-fourth its peak-time size and was struggling for its existence. The eye-watering downfall of carpet industry still dominates discussions organized to explore new strategies to promote Nepal’s shrinking export sector. Lately, as the demand for hand-knit carpet has risen, particularly in the US, there is again a flicker of hope. But carpet entrepreneurs say acute labor shortage has become a major stumbling block to seize the opportunity.

Undoubtedly, Nepali economy has been increasingly facing a shortage of laborers and it has slowly started hitting not only labor-intensive industries like carpet and readymade garment, but also other vital sectors like agriculture, construction and small-scale industries. As more and more rural workers, who fulfill the bulk of the demand in various agricultural and industry sectors, continue to opt for foreign employment, reports of fertile land left uncultivated or under-cultivated will continue make the headlines. Undoubtedly, severe shortage of laborers during the last rice plantation season was scary, particularly in the Tarai, as peasants couldn’t find sufficient seasonal laborers even after doubling the daily wage. The obvious effects of worsening shortage of laborers have been reflected in their wages. According to National Salary and Wage rate index issued by the central bank, the average wage of laborers increased by over 26 percent during the last fiscal year; wages of industrial laborers recorded the highest increment of 34 percent.

Unquestionably, mass exodus of Nepali youth for foreign employment is the main reason for acute labor shortage. As the number of fresh laborers entering labor market is now more or less equal to the number opting for foreign employment, the shortage of laborers is likely to worsen in coming years. So, what are the economic consequences of deepening labor shortage? There is often big hue and cry about labor shortage, sometime portraying it as disastrous for economic development. Certainly, labor market is at the heart of the economy and any deviation in this market will not only hurt competitiveness but also result in toxic impacts in other sectors. Rise in labor cost pushes up cost of production that erodes competitiveness of exportable commodities, fuels inflation and slows economic growth.

In a modern economy where the number of jobs added at a specific time is seen as a benchmark for success of political leadership, it can seem a little out of place to argue that labor shortage is good for the economy in the long run. This is a fact most politicians find difficult to accept. If development history of advanced countries is anything to go by, every developed economy has passed through a phase of labor shortage whether due to war, disease or massive migration; in each case, such a shortage did the economy more good than bad.

It might sound harsh but excessive supply of cheap labor, a characteristic of subsistence economy, is the biggest stumbling block to development. In an economy with excess supply of cheap labor, the urge to use fewer workers to minimize production cost and increase competitiveness carries no substantial meaning. The culture of rewarding innovations in such an economy is nearly non-existent. This in turn kills the prospects of mechanization and innovation. If we look at the history of mechanization in industrial or agricultural sectors, there is hardly any innovation in an economy with excess labor supply. More than that, most technological innovations of the twentieth century, be it in agriculture or industry, were aimed at promoting automation that raise production speed but cuts down on workers. That is how many companies were able to achieve superior competitiveness in the global market like the Japanese vehicle manufacturers in 1970s.

History has shown that labor shortage fosters mechanization and innovation in industries and agriculture and promotes rapid economic development, as was seen in the US and Japan during their initial phase of development. According to the famous Habakkuk Thesis, high wages combined with scarce labor opened avenues for technical improvements in the US in the 19th century. The theses further argued that high wages and labor scarcity stimulated technological progress that brought about the American system of manufacturing based on interchangeable parts. Japan also faced an alarming shortage of labor in the sixties, which compelled the emerging economy to look for alternatives. That shortage not only made Japan the first country to massively use robots in automotive industries but also to become one of the first countries to use mechanical harvesting equipment.

The availability of cheap and unlimited number of laborers in Nepal has keep entrepreneurs from looking at alternative means of production, a major reason for underdevelopment of major sectors like agricultural and industry. But a glimmer of hope has emerged, albeit belatedly. As the shortage of labor has started forcing peasants to look for alternatives, Nepal has witnessed a sharp rise in import and use of diesel-power tractors to plow farm land for sowing rice and wheat. That marks the beginning of the much-awaited mechanization of farm activities, an absolute necessity to speed up agricultural growth that has been pegged at slightly over 3 percent in the last decade. That was one of the main reasons why poverty is much higher in the families dependent on agriculture.

Though rapid adaptation of modern means of production seems less likely in industry due mainly to an acute shortage of power, agriculture is one sector where the state can play an important role in spreading up mechanization. For that the state need to launch a campaign to educated farmers about the benefits of using machines to plow, sow and harvest. But such a campaign should be accompanied by an effective finance mechanism. We have to make them understand that buying and operating a two-wheel multi-useable Chinese tractor is much cheaper in the long run than keeping a pair of oxen. We have to tell them that owning a diesel pump can increase agro production by multifold, and they can recover the cost within one or two years.

One study in Nepal suggests that rice yield can be doubled with proper mechanization and modern crop management. The study reckoned that farmers who have introduced modern mechanization in rice farming have seen production cost reduced by 27 percent while at the same time their profits per hectare increased by 36 percent. Thus, mechanization could be a solution to acute labor shortage in the Tarai, concluded the report.

The existing labor shortage in developing countries like Nepal should not be taken as a curse but a blessing to kick start a new revolution of mechanization of our farms and industries. Make no mistake, mechanization will never squeeze job opportunities; it is something that has not happened anywhere in the world. But, as in India and China, mechanization opens many unexplored avenues for value addition in the production process, which ultimately creates thousands of additional jobs for those youths engaged in subsistence farming but are barely subsisting.

The author is associate editor at Republica.

Published on: 19 November 2012 | Republica