It is generally agreed that a key element in the transformation of India is the creation of a large number of good jobs. While micro and small enterprises provide lots of jobs, consistent with their low productivity, they pay relatively low wages.
For example, according to recent research by Rana Hasan and Nidhi Kapoor of the Asian Development Bank (ADB), manufacturing firms with less than 20 workers each employed 73% of manufacturing workforce but produced only 12% of manufacturing output in 2010-11, the latest year for which such data are available. With such a large share in employment but small share in output, these firms are able to pay only a fraction of the average wage paid by larger firms, which is itself low in India when seen in international context.
The position of the small firms within manufacturing is not unlike that of agriculture in the economy as a whole. As many observers have noted, agriculture had 49% share in the workforce and 15% in the GDP in 2011-12.
There is compelling evidence that wages rise with the size of the enterprise. This wage pattern mirrors the pattern of average labour productivity, which shows a rising trend with the size of the enterprise. High productivity of large firms partially results from their ability to effectively exploit scale economies. Moreover, with the domestic market often small, they also overwhelmingly operate in the world market where competition is intense. Therefore, they must continuously innovate and adopt cost-saving technologies and management practices.
The presence of large, export-oriented firms also fosters a highly competitive environment in regions of their location. In so far as small and medium firms either become ancillaries of large firms or must compete against them, they too are compelled to strive for efficiency. Therefore, substantial presence of large firms combined with an outward-oriented trade policy fosters high overall productivity. Conversely, the absence of large firms is often associated with low average productivity.
India’s own experience is consistent with these observations. In apparel, where we lack substantial presence of large firms, average labour productivity is low. This in turn translates into meagre exports in relation to the total employment in the sector. Our apparel exports are less than one-tenth those by China and less in absolute terms than those by much smaller Bangladesh and Vietnam. In contrast, in software, we have significant presence of large firms and this sector exhibits high productivity and a large volume of exports.
Lack of substantial presence of large firms in India has impacted average labour productivity in two ways. First, the level of productivity in micro, small and medium firms is low compared with their counterparts in countries such as China. And, second, a disproportionately large volume of the workforce is employed in these low productivity firms.
According to a 2009 ADB study, only 10.5% of manufacturing workforce in India was employed in firms larger than 200 workers compared to China’s 51.8% in 2005. At the other extreme, 84% of India’s manufacturing workforce was in firms with less than 50 workers compared to China’s 24.8%. These differences translate into substantially lower average labour productivity and wages in India than China.
Unfortunately, large firms are missing in India in precisely the sectors in which they are needed the most: employment-intensive sectors such as apparel, footwear, electronic and electrical products and host of other light manufactures. These are products in which China has done well thereby generating a large volume of good jobs for its workers. In 2014, the country exported $56 billion worth of footwear compared with $3 billion by India and $782 billion worth of electrical and electronic goods compared with $9 billion by India.
The single most important key to China’s success in manufactures has been its decision to go for the large world markets in preference to its much smaller domestic market.
In 1980 when China’s GDP was less than $500 billion at today’s prices and exchange rate, it began by establishing four very large Special Economic Zones (SEZs) along its southeast coast. These zones were located directly across from Taiwan and Hong Kong, which then faced the prospect of being priced out of the world market due to their high wages.
Shenzhen, one of these four SEZs, was then at best semi-urban with a population of 300,000. Attracted by low wages and business- and foreign-investment-friendly environment, investors from Hong Kong immediately flocked to this SEZ. Later, investors from Taiwan, Japan, United States and other countries followed as well. Coastal location allowed these firms to operate in the world markets unhindered by the poor infrastructure in the hinterland, especially in the early years. They could import inputs from and export outputs to foreign destinations. Employment opportunities for Chinese workers multiplied.
Today, Shenzhen has a population of 11 million and it boasts of gross city product of $265 billion. Though originally Cantonese, it speaks Mandarin because the bulk of its population migrated from other parts of China. Most of the major multinational firms have a presence in Shenzhen.
Having risen at the rate of 10% a year in real terms since at least 2007, average annual manufacturing wages in China today stand above Rs. 5 lakh per year. Due to demographic transition, the country also faces worker shortage that would only get worse in the years to come. When asked in surveys, Chinese firms today point to labour costs as the most important barrier to their development. Already, many multinational firms are looking for alternative locations where they can find abundant supply of workers.
So far the firms exiting China have gravitated more towards countries such as Vietnam and Malaysia. But with its large labour force, India is well positioned to take advantage of the opportunity. What is needed to convert this opportunity into reality is a business friendly ecosystem in regions that can serve as export bases of the migrating firms. Given our relatively weak internal infrastructure links, coastal regions adjacent to deep-draft ports are the best candidates for such bases.
Happily, this opportunity coincides with the launch of Sagarmala project of Prime Minister Narendra Modi. Building on the Gujarat experience of the Prime Minister, this project seeks to unleash port-led development in the country. The impressive success of Gujarat during the Prime Minister’s tenure as Chief Minister had been partially built on a port-led-development strategy.
In 2013-14, Kandla distinguished itself among the major port for carrying the most cargo. At the same time, non-major ports of Gujarat jointly carried three times the cargo carried by Kandla. The SEZs in Gujarat also accounted for a hefty 45% of exports by all SEZs in India in 2013-14.
Therefore, in the context of Sagarmala project, India could begin by creating one Shenzhen-style Coastal Economic Zone (CEZ) on its western coast and another on the eastern coast near deep-draft ports capable of accommodating very large and heavily loaded ships.
To be successful, these zones would have to cover a large area (Shenzhen covers 2,050 square kilometres) and would have to have some existing infrastructure and economic activity. They would need to must provide a business friendly ecosystem including ease of doing business, especially, ease of exporting and importing, swift decisions on applications for environmental clearances and speedy water and electricity connections.
Apart from conventional infrastructure, the zones would need to create urban spaces to house local resident workforce. For firms that create a threshold level of direct employment (e.g., 50,000 jobs), a tax holiday for a pre-specified period may be considered. To incentivize early investments in the zones, the tax holiday might be limited to investments made in the first three or four years of the creation of the zones.
An important advantage of locating the zones near the coast is that they would attract large firms interested in serving the export markets. These firms would bring with them technology, capital, good management and links to the world markets. They would help create an ecosystem around them in which productive small and medium firms would emerge and flourish.
It may make sense to initially limit the number of zones to a few, perhaps two or three. This would help ensure that many sector-specific zones and clusters emerge within each CEZ to fully exploit economies of scale and agglomeration. Simultaneous creation of too many zones would spread the available public resources thinly while also diffusing economic activities with potential synergies. As initial zones succeed, more may be subsequently launched. This is not unlike the software industry, which initially concentrated in Bangalore but subsequently spread to other towns. (Of course, since software travels on the wire, this industry did not require location near a coast.)
There remain two final questions. First, why can we not rely on a protected domestic market to attract investment? The answer is that the domestic market still remains small and fragmented so that it will not give rise to genuinely large firms. For example, home market in electronic goods is $65 billion of which $26 billion is already supplied by domestic firms. In comparison, the world market in electronic goods is $2 trillion. Domestic market can serve as an attractive complement; it cannot substitute for the large world market.
Second, with the export market growing slowly, can we rely on an export-oriented strategy? The answer is in the affirmative. At $18 trillion, the world export pie is extremely large. Even if this pie is not growing, our current share of it at 1.7 per cent leaves us considerable scope for expansion. We should remember that during 1995 to 2013 when China grew at 10%, the OECD [Organization for Economic Cooperation and Development] countries grew only 1.4% annually. China succeeded by taking an ever-larger slice of the world market: it expanded its share in the world exports from 2.9% in 1995 to 12.3% in 2014.
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The United Nations has shaped so much of global co-operation and regulation that we wouldn’t recognise our world today without the UN’s pervasive role in it. So many small details of our lives – such as postage and copyright laws – are subject to international co-operation nurtured by the UN.
In its 75th year, however, the UN is in a difficult moment as the world faces climate crisis, a global pandemic, great power competition, trade wars, economic depression and a wider breakdown in international co-operation.
Still, the UN has faced tough times before – over many decades during the Cold War, the Security Council was crippled by deep tensions between the US and the Soviet Union. The UN is not as sidelined or divided today as it was then. However, as the relationship between China and the US sours, the achievements of global co-operation are being eroded.
The way in which people speak about the UN often implies a level of coherence and bureaucratic independence that the UN rarely possesses. A failure of the UN is normally better understood as a failure of international co-operation.
We see this recently in the UN’s inability to deal with crises from the ethnic cleansing of the Rohingya Muslims in Myanmar, to civil conflict in Syria, and the failure of the Security Council to adopt a COVID-19 resolution calling for ceasefires in conflict zones and a co-operative international response to the pandemic.
The UN administration is not primarily to blame for these failures; rather, the problem is the great powers – in the case of COVID-19, China and the US – refusing to co-operate.
Where states fail to agree, the UN is powerless to act.
Marking the 75th anniversary of the official formation of the UN, when 50 founding nations signed the UN Charter on June 26, 1945, we look at some of its key triumphs and resounding failures.
Five successes
1. Peacekeeping
The United Nations was created with the goal of being a collective security organisation. The UN Charter establishes that the use of force is only lawful either in self-defence or if authorised by the UN Security Council. The Security Council’s five permanent members, being China, US, UK, Russia and France, can veto any such resolution.
The UN’s consistent role in seeking to manage conflict is one of its greatest successes.
A key component of this role is peacekeeping. The UN under its second secretary-general, the Swedish statesman Dag Hammarskjöld – who was posthumously awarded the Nobel Peace prize after he died in a suspicious plane crash – created the concept of peacekeeping. Hammarskjöld was responding to the 1956 Suez Crisis, in which the US opposed the invasion of Egypt by its allies Israel, France and the UK.
UN peacekeeping missions involve the use of impartial and armed UN forces, drawn from member states, to stabilise fragile situations. “The essence of peacekeeping is the use of soldiers as a catalyst for peace rather than as the instruments of war,” said then UN Secretary-General Javier Pérez de Cuéllar, when the forces won the 1988 Nobel Peace Prize following missions in conflict zones in the Middle East, Africa, Asia, Central America and Europe.
However, peacekeeping also counts among the UN’s major failures.
2. Law of the Sea
Negotiated between 1973 and 1982, the UN Convention on the Law of the Sea (UNCLOS) set up the current international law of the seas. It defines states’ rights and creates concepts such as exclusive economic zones, as well as procedures for the settling of disputes, new arrangements for governing deep sea bed mining, and importantly, new provisions for the protection of marine resources and ocean conservation.
Mostly, countries have abided by the convention. There are various disputes that China has over the East and South China Seas which present a conflict between power and law, in that although UNCLOS creates mechanisms for resolving disputes, a powerful state isn’t necessarily going to submit to those mechanisms.
Secondly, on the conservation front, although UNCLOS is a huge step forward, it has failed to adequately protect oceans that are outside any state’s control. Ocean ecosystems have been dramatically transformed through overfishing. This is an ecological catastrophe that UNCLOS has slowed, but failed to address comprehensively.
3. Decolonisation
The idea of racial equality and of a people’s right to self-determination was discussed in the wake of World War I and rejected. After World War II, however, those principles were endorsed within the UN system, and the Trusteeship Council, which monitored the process of decolonisation, was one of the initial bodies of the UN.
Although many national independence movements only won liberation through bloody conflicts, the UN has overseen a process of decolonisation that has transformed international politics. In 1945, around one third of the world’s population lived under colonial rule. Today, there are less than 2 million people living in colonies.
When it comes to the world’s First Nations, however, the UN generally has done little to address their concerns, aside from the non-binding UN Declaration on the Rights of Indigenous Peoples of 2007.
4. Human rights
The Human Rights Declaration of 1948 for the first time set out fundamental human rights to be universally protected, recognising that the “inherent dignity and of the equal and inalienable rights of all members of the human family is the foundation of freedom, justice and peace in the world”.
Since 1948, 10 human rights treaties have been adopted – including conventions on the rights of children and migrant workers, and against torture and discrimination based on gender and race – each monitored by its own committee of independent experts.
The language of human rights has created a new framework for thinking about the relationship between the individual, the state and the international system. Although some people would prefer that political movements focus on ‘liberation’ rather than ‘rights’, the idea of human rights has made the individual person a focus of national and international attention.
5. Free trade
Depending on your politics, you might view the World Trade Organisation as a huge success, or a huge failure.
The WTO creates a near-binding system of international trade law with a clear and efficient dispute resolution process.
The majority Australian consensus is that the WTO is a success because it has been good for Australian famers especially, through its winding back of subsidies and tariffs.
However, the WTO enabled an era of globalisation which is now politically controversial.
Recently, the US has sought to disrupt the system. In addition to the trade war with China, the Trump Administration has also refused to appoint tribunal members to the WTO’s Appellate Body, so it has crippled the dispute resolution process. Of course, the Trump Administration is not the first to take issue with China’s trade strategies, which include subsidises for ‘State Owned Enterprises’ and demands that foreign firms transfer intellectual property in exchange for market access.
The existence of the UN has created a forum where nations can discuss new problems, and climate change is one of them. The Intergovernmental Panel on Climate Change (IPCC) was set up in 1988 to assess climate science and provide policymakers with assessments and options. In 1992, the UN Framework Convention on Climate Change created a permanent forum for negotiations.
However, despite an international scientific body in the IPCC, and 165 signatory nations to the climate treaty, global greenhouse gas emissions have continued to increase.
Under the Paris Agreement, even if every country meets its greenhouse gas emission targets we are still on track for ‘dangerous warming’. Yet, no major country is even on track to meet its targets; while emissions will probably decline this year as a result of COVID-19, atmospheric concentrations of greenhouse gases will still increase.
This illustrates a core conundrum of the UN in that it opens the possibility of global cooperation, but is unable to constrain states from pursuing their narrowly conceived self-interests. Deep co-operation remains challenging.
Five failures of the UN
1. Peacekeeping
During the Bosnian War, Dutch peacekeeping forces stationed in the town of Srebrenica, declared a ‘safe area’ by the UN in 1993, failed in 1995 to stop the massacre of more than 8000 Muslim men and boys by Bosnian Serb forces. This is one of the most widely discussed examples of the failures of international peacekeeping operations.
On the massacre’s 10th anniversary, then UN Secretary General Kofi Annan wrote that the UN had “made serious errors of judgement, rooted in a philosophy of impartiality”, contributing to a mass murder that would “haunt our history forever”.
If you look at some of the other infamous failures of peacekeeping missions – in places such as Rwanda, Somalia and Angola – it is the limited powers given to peacekeeping operations that have resulted in those failures.
2. The invasion of Iraq
The invasion of Iraq by the US in 2003, which was unlawful and without Security Council authorisation, reflects the fact that the UN is has very limited capacity to constrain the actions of great powers.
The Security Council designers created the veto power so that any of the five permanent members could reject a Council resolution, so in that way it is programmed to fail when a great power really wants to do something that the international community generally condemns.
In the case of the Iraq invasion, the US didn’t veto a resolution, but rather sought authorisation that it did not get. The UN, if you go by the idea of collective security, should have responded by defending Iraq against this unlawful use of force.
The invasion proved a humanitarian disaster with the loss of more than 400,000 lives, and many believe that it led to the emergence of the terrorist Islamic State.
3. Refugee crises
The UN brokered the 1951 Refugee Convention to address the plight of people displaced in Europe due to World War II; years later, the 1967 Protocol removed time and geographical restrictions so that the Convention can now apply universally (although many countries in Asia have refused to sign it, owing in part to its Eurocentric origins).
Despite these treaties, and the work of the UN High Commission for Refugees, there is somewhere between 30 and 40 million refugees, many of them, such as many Palestinians, living for decades outside their homelands. This is in addition to more than 40 million people displaced within their own countries.
While for a long time refugee numbers were reducing, in recent years, particularly driven by the Syrian conflict, there have been increases in the number of people being displaced.
During the COVID-19 crisis, boatloads of Rohingya refugees were turned away by port after port. This tragedy has echoes of pre-World War II when ships of Jewish refugees fleeing Nazi Germany were refused entry by multiple countries.
And as a catastrophe of a different kind looms, there is no international framework in place for responding to people who will be displaced by rising seas and other effects of climate change.
4. Conflicts without end
Across the world, there is a shopping list of unresolved civil conflicts and disputed territories.
Palestine and Kashmir are two of the longest-running failures of the UN to resolve disputed lands. More recent, ongoing conflicts include the civil wars in Syria and Yemen.
The common denominator of unresolved conflicts is either division among the great powers, or a lack of international interest due to the geopolitical stakes not being sufficiently high. For instance, the inaction during the Rwandan civil war in the 1990s was not due to a division among great powers, but rather a lack of political will to engage.
In Syria, by contrast, Russia and the US have opposing interests and back opposing sides: Russia backs the government of the Syrian dictator Bashar al-Assad, whereas the US does not.
5. Acting like it’s 1945
The UN is increasingly out of step with the reality of geopolitics today.
The permanent members of the Security Council reflect the division of power internationally at the end of World War II. The continuing exclusion of Germany, Japan, and rising powers such as India and Indonesia, reflects the failure to reflect the changing balance of power.
Also, bodies such as the IMF and the World Bank, which are part of the UN system, continue to be dominated by the West. In response, China has created potential rival institutions such as the Asian Infrastructure Investment Bank.
Western domination of UN institutions undermines their credibility. However, a more fundamental problem is that institutions designed in 1945 are a poor fit with the systemic global challenges – of which climate change is foremost – that we face today.