Assessing manufacturing growth in India: an alternative view.

AuthorPadhi, Satya Prasad
PositionBy Contribution


The present paper is an attempt to asses the manufacturing growth performance in India, following the Youngian perspective (Young, 1928) on economic progress. Instead of focusing on total factor productivity growth indices below, the present focus is on the creation of more productive employment opportunities. More specifically, the creation of more productive employment opportunities could reflect the initiation of division of labour, which, in turn, forms the basis of economic growth that reflects the increased scope of industrial differentiation. The focus therefore is on achieving the sophistication in intermediate good production. Interpreting Young, as Stigler (1951) noted, what distinguishes the underdeveloped countries from the developed ones is the degree and sophistication of the intermediate goods production (see also, Huang, et al 2004). To quote (Stigler, 1951: 192-3) "By a now overly familiar argument, we (American production methods) shall often be a seriously inappropriate model for industrialization on a small scale. Our processes would be too specialized to be economical on this basis. The vast network of auxiliary industries which we can take for granted here will not be available in small economies. Their educational institutions will be unable to supply narrowly specialized personnel; they will lack the specialists who can improve raw materials and products."

Stigler goes on to highlight an important insight, which is important for the present paper: "At best, the small economies that imitate us can follow our methods of doing things in this year, not our methods of changing things next year" (Stigler, 1951: 193). This highlights the importance of a prior existence of division of labour in an economy that becomes the agent of change. Rodriquez-Clare (1996: 4-5) also noted the importance of local production of intermediate goods. Imports of such goods can be costly and risky. Porter (1992) also emphasizes that the domestic suppliers of such goods is the most important determinant of comparative advantage that has accrued to the developed nations. It provides rapid, timely, efficient accesses to cost-effective inputs.

There is growing evidence that shows that the competitiveness of the manufacturing sector is based on such industrial differentiation (say, the increased incidence of inter and intra firm trade in international trade amongst the developed countries). In addition, sophisticated division of labor also permits a cyclical pattern that explains the incidence of higher wages (Huang et al, 2004). Rodriquez-Clare (1996) also shows that the very existence of a sophisticated division of labor in a developed country permits both higher returns and higher wages to induce capital formation that maintains the developed status of such a few countries.

The present paper however adopts a framework for a developing country where the focus is not on the existence of such a sophisticated production structure but is on the initiation of division of labor, which in turn can create such a production structure. Though the initiation of division of labor involves the introduction of substantial fixed capital, the successful initiation also depends on the creation of new employment opportunities. This implies that the division of labor has to permit both higher wages to such new employment opportunities and higher returns to firms. The paper tries to show that this in turn is dependent on two conditions. First, division of labor allows intermediate goods/material cost reduction as volume of production is enlarged. Second, division of labor also allows for stickiness of prices of final products (Basu, 1995; Huang et al, 2004) as output is increased. Both the conditions permit higher nominal value added per unit of output, as output is increased, and, in turn, permits both higher wages and rate of return. This induces further division of labor. In other words, such changes become an index of new employment opportunities embodied in division of labor, crucial for achieving the developed status.

This particular perspective is relevant because Indian manufacturing is associated with higher material ratio, which is a legacy of the particular type of import substitution in India that replicated a diversified manufacturing base of the advanced countries (whether such diversification was to be justified in terms of higher per capita income base of the country or not). The focus therefore should be on the empirical issues relating greater dynamism of the intermediate goods production.

The Young Perspective

In the Young (1928) perspective, the focus is on the phenomenon of division of labor that targets large volume of production and allows for the sub-division of production process, which in turn permits the introduction of specialized machinery for the purposes of intermediate cost reduction through specializations. The basic purpose is that such cost related advantages translates into trade related advantages (larger market for larger production base), which in turn permits higher returns.

Such initiatives highlight the creation of specialized employment opportunities. It should be noted that the cost reduction permits the firm to undertake additional functions (better employment opportunities or informal human capital) that are firm specific and permits the firm to be seen as a collection of distinct but complementary processes (also see, Stigler, 1951). The functions, targeting larger volume of production--would involve (i) arrangement of informal finance, (ii) informal creation of exact specification of machinery for industrial differentiation, (iii) purchase and storing of materials, (iv) transforming materials into semi-finished goods and semi finished goods into final products, (v) undertaking modern transport, marketing, creation of communication channels, extension of credit to buyers, etc. All these informal human capital formation, i.e. additional employment opportunities beyond production related activities, having the ingredients of formal human capital in latent forms, is entirely a function of the growth of a firm.

More importantly, such employment creation, especially targeting more specialized trading activities that increase the market share of the firm (permitting economies associated with larger production), forms the basis of increasing returns, which in turn forms the basis of a generalized adoption of division of labor in the economy, which in turn permits the scope for industrial differentiation. To elaborate, according to Young (1928) the successful initiation of division of labor (and trade related advantages) creates important dynamic externalities. The emphasis is on the fact that division of labor creates technological externalities: to quote, "Every important advance in the organization of production, regardless of whether it is based upon anything which, in a narrow sense or technical sense, would be called a new "invention", or involves a fresh application of the fruits of scientific progress to industry, alters the conditions of industrial activity and initiates responses elsewhere in the industrial structure which in turn have a further unsettling effect. Thus change becomes progressive and propagates itself in a cumulative way" (Young, 1928: 533). This comes close to Scitovsky's (1954: 297) third example of direct (and non-market) interdependence between producers where adoption of new methods (roundabout methods of production) is made available to others without charge (and is not impeded by patents) (1); here the focus is not on Adam Smithian emphasis on specialized machinery, but on simple and standardized process that permits technological externalities. Therefore, for Young (1928), the initiation of division of labor in any line of production, targeting large volume of production, is also associated with increased production in other lines (increases in market size), permitting division of labor to be introduced there, and consequently increases in aggregate production.

Even if division of labor leads to cost reduction, if the larger market share (and higher returns) to the firm is based on demand diversion from others (say through price reduction), money expenditure remaining the same, it will not induce similar practices elsewhere (that also needs higher market share). Therefore, following Kaldor (1972)'s suggestion, division of labor has to be seen as an aspect of induced investment (accumulation of capital), facilitated by finance, which leads to increase in aggregate money...

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