From UPSC perspective, the following things are important :
Prelims level : Kuznets Curve
Mains level : Read the attached story
In India, there are fewer people employed in agriculture today, but the transformation has been weak. Those moving out of farms are working more in construction sites and the informal economy than in factories.
What is the news?
- India has too many people in agriculture and the inability to move surplus labour from farms constitutes a major policy failure of successive governments.
- In 1993-94, agriculture accounted for close to 62% of the country’s employed labour force.
- Overall, between 1993-94 and 2018-19, agriculture’s share in India’s workforce came down from 61.9% to 41.4%.
- In other words, roughly a third in 25 years. That isn’t insignificant.
- The declining trend continued, albeit at a slower pace, in the subsequent seven as well.
What is our point of analysis?
- Even the movement of workforce from agriculture that India has witnessed over the past three decades or more does not qualify as what economists call “structural transformation”.
- Such transformation would involve the transfer of labour from farming to others sectors – particularly manufacturing and modern services – where productivity, value-addition and average incomes are higher.
- The surplus labour pulled out from the farms is being largely absorbed in construction and services.
- The bulk of the jobs are in petty sectors such as retailing, small eateries, domestic help, sanitation, security staffing, transport and similar other informal economic activities.
- This is also evident from the low, if not declining, share of employment in organised enterprises, defined as those engaging 10 or more workers.
What is the crux of the story?
- Simply put, the structural transformation process in India has been weak and deficient.
- Yes, there is movement of labour taking place away from farms – even if stalled, possibly temporarily.
- But that surplus labour isn’t moving to higher value-added non-farm activities, specifically manufacturing and modern services.
- This is familiar to the ‘Kuznets Process’ named after the American economist and 1971 Nobel Memorial Prize winner, Simon Kuznets.
What is Kuznets’ Hypothesis?
- In the 1950s and 1960s, Simon Kuznets hypothesized that as an economy develops, market forces first increase and then decrease the overall economic inequality of the society.
- This is illustrated by the inverted U-shape of the Kuznets curve.
- For instance, the hypothesis holds that in the early development of an economy, new investment opportunities increase for those who already have the capital to invest.
- These new investment opportunities mean that those who already hold the wealth have the opportunity to increase that wealth.
- Conversely, the influx of inexpensive rural labor to the cities keeps wages down for the working class thus widening the income gap and escalating economic inequality.
Basis of this hypothesis
- The Kuznets curve implies that as a society industrializes, the center of the economy shifts from rural areas to the cities as rural laborers, such as farmers, begin to migrate seeking better-paying jobs.
- This migration, however, results in a large rural-urban income gap and rural populations decrease as urban populations increase.
- But according to Kuznets’ hypothesis, that same economic inequality is expected to decrease when a certain level of average income is reached.
- This process is triggered by the processes associated with industrialization, such as democratization and the development of a welfare state, take hold.
- It is at this point in economic development that society is meant to benefit from trickle-down effect and an increase in per-capita income that effectively decreases economic inequality.
What does the inverted Kuznets Curve mean?
- The inverted U-shape of the Kuznets curve illustrates the basic elements of the Kuznets’ hypothesis with income per capita graphed on the horizontal x-axis and economic inequality on the vertical y-axis.
- The graph shows income inequality following the curve, first increasing before decreasing after hitting a peak as per-capita income increases over the course of economic development.
Criticism of the theory
- Critics say that the Kuznets curve does not reflect an average progression of economic development for an individual country.
- Rather it is a representation of historical differences in economic development and inequality between countries in the dataset.
- It suits to the countries that have had histories of high levels of economic inequality as compared to their counterparts in terms of similar economic development.
- The critics hold that when controlling for this variable, the inverted U-shape of the Kuznets curve begins to diminish.