Pitting knowledge against work

A sign board in Chennai appealing to road-users to bear with the inconvenience caused by the construction of a six-lane "IT Higway". The relatively small share of the IT sector in employment, the high degree of concentration in the industry and the inter- and intra-industry differentials that accompany its growth suggest that its external effects on the rest of the economy and economic welfare are limited. - M. KARUNAKARAN

The knowledge economy discourse is being used in countries like India to make a case for permitting firms to hire and fire workers, ban unions in the IT, IT services and BPO sectors and modify the law relating to contract labour to facilitate flexible employment.

TERMS such as the "information revolution" and "information society" have been in vogue for more than two decades now, used often to emphasise the transformative effect of the arrival and diffusion of microelectronic devices and technologies. More recently, however, terms such as the "new economy" and the "knowledge economy" are increasingly in use, implying that a range of developments, including of course the information and communication technology (ICT) revolution, necessitate a paradigmatic shift in our understanding of how economic mechanisms and economic systems work, with attendant implications for policy.

Thus the long boom in the United States in the late 1990s, which combined high gross domestic product (GDP) growth, low unemployment, low inflation and a surplus on the government's budget, provided the basis for "new economy" theorists to argue that technological change is transforming the nature of present-day capitalism. According to them, economists who believed that a capitalist economy could not sustain strong growth, a unemployment rate and stable prices for long, missed the mark because of sweeping changes in the U.S. economy." Those changes, "resulting from a spurt of invention and innovation, led by the microprocessor", were seen to have generated a new economy, in which "knowledge is more important to economic success, than money or machinery".

More recently, a large segment of the mainstream media and mainstream economic analysis has been obsessed with the emergence of a new, "knowledge economy" in Organisation for Economic Cooperation and Development (OECD) countries and elsewhere. What is noteworthy, however, is that developing countries like India too are seen as capable of exploiting the knowledge revolution, if they adopt the "appropriate" policies. According to a study by the World Bank (2005), India has many of the key ingredients for making this transition. It has a critical mass of skilled, English-speaking knowledge workers, especially in the sciences. It has a well-functioning democracy. Its domestic market is one of the world's largest. It has a large and impressive diaspora, creating valuable knowledge linkages and networks. The list goes on: macroeconomic stability, a dynamic private sector, institutions of a free market economy, a well-developed financial sector, and a broad and diversified science and technology (S&T) infrastructure. In addition, the development of the ICT sector in recent years has been remarkable. India has created profitable niches in information technology (IT) and is becoming a global provider of software services. Building on these strengths, India can harness the benefits of the knowledge revolution to improve its economic performance and boost the welfare of its people. Clearly, the creation of the Knowledge Commission, noted in the World Bank report, was inspired by this perception.

The recognition of the role of knowledge in facilitating economic growth is not new. As Joel Mokyr argued: "Any historical account of economic progress, and above all accounts of the Industrial Revolution and its aftermath, need to incorporate the concept of useful knowledge explicitly." Put simply, "what people knew affected what they did." The change over time was that the extent and tightness of "propositional knowledge" - or acquired beliefs about natural phenomena and regularities - has increased substantially, increasing the ability to generate instructional or prescriptive knowledge on "how" to do things, which includes what are commonly called techniques.

When can this process result, if at all, in the emergence of a "knowledge economy" necessitating a paradigm shift? According to Paul David and Dominique Foray, leading "knowledge economy" theorists, this "recently coined term... marks a break in the continuity with earlier periods, more a `sea-change' than a sharp discontinuity".

The sea-change is, in their view, a result of a number of features of the current conjuncture. Principally, there has been acceleration, to unprecedented levels, of the pace at which knowledge is being created, accumulated and rendered obsolete. This has had a number of implications. To start with, the improvement in the quality of human and other forms of capital rendered possible by this knowledge revolution has become a crucial determinant of productivity differentials across sectors and nations. That is, the intangible component embodied in "factors of production", intermediates and final goods, which is crucial to the determination of their contribution to growth, is seen to have increased substantially.

Since the transmission of these intangibles from the pure knowledge domain to commodities must be mediated by labour of different kinds which must acquire the necessary intangibles, investment in intangible capital involves "on the one hand, investment geared to the production and dissemination of knowledge (that is., in training, education, R&D, information and coordination); on the other, investment geared to sustaining the physical state of human capital (health expenditure)". This investment would support the proliferation of jobs in the production, processing and transfer of knowledge and information.

It is obvious that not all sectors would simultaneously benefit equally from the accelerated production of new knowledge, even though the notion of a "knowledge economy" presupposes substantial diffusion of the application of new, intangible knowledge in economic activities. This implies that arbitrary measures or investment, output and employment indicators characteristic of knowledge economies would differ in terms of the sectors they focus on at a given point in time and over time. Adopting, "the simple yet highly restrictive measure of investment in research and development, public education and software", David and Foray found that such investment in the OECD countries had "grown strongly since the 1980s [at an average annual rate of 3 per cent]".

If these indicators of a knowledge economy are adopted, India is by no means near the brink of a knowledge revolution. Even the spread of literacy has been slow during the years of globalisation and in 1999-2000 the country was far short of total literacy even in the more developed urban areas. In that year, only 18.9 and 46.4 per cent of males of age 15 years and above had an educational level of secondary school and above in rural and urban areas respectively. The figures for females was much lower at 7.7 per cent and 32.8 per cent in rural and urban areas. Further, just one per cent of persons of age 15 years and above in rural areas and less than 5 per cent in urban areas had technical qualifications of even the rudimentary kind. By no stretch of imagination then can India be characterised as a knowledge economy in any meaningful sense. Finally, India like many other developing countries is a relatively minor spender on R&D despite substantial state support. India spends between 0.6 per cent and 0.8 per cent on R&D which well below that even in many other developing countries like South Africa and the newly industrialised developing countries of Asia.

It follows that the only criterion on the basis of which India can be seen as capable of transforming itself into a knowledge-based economy is the growth of its IT sector. In absolute and relative terms the size of the IT sector in India is now impressive. The National Association of Software and Service Companies (NASSCOM) estimates the size of the industry at $22 billion, comprising $4.8 billion of domestic revenues, $12 billion of software and services export revenues and $5.2 billion of revenues from exports of IT-enabled services (ITeS) and business process outsourcing (BPO). Placed in the context of the economy as a whole, the sector's revenues now amount to 4.5 per cent of GDP. This makes it an important segment of the non-agricultural sector.

However, the relatively small share of the IT sector in employment (just 0.21 per cent of the non-agricultural workforce in the country and 0.08 per cent of the aggregate workforce), the high degree of concentration in the industry and the intra- and inter-industry income differentials that accompany its growth, suggest that its external effects on the rest of the economy and on economic welfare are limited. Moreover, there are segments of this sector, especially the ITeS segment that is erroneously bundled into the IT services industry, which cannot be considered hi-tech.

Given this evidence, it appears that the emphasis on the potential of countries like India to exploit the knowledge revolution merely based on enclave-type growth in the IT sector is aimed at justifying certain kinds of economic policies. What are considered appropriate policies with regard to production, trade and labour could vary between sectors. If, therefore, an exaggerated view of the information revolution or of the role of intangibles such as knowledge in overall economic activity becomes the mainstream opinion, there could be a tendency to recommend that policies considered appropriate for the so-called knowledge or information sectors are applied more generally or over the economy as a whole. These could influence opinions on the role of government regulation or on the needed flexibility of labour markets.

One obvious way in which notions of India's knowledge advantage influences policy is that since the IT sector has grown largely on the basis of relatively unregulated private initiative, its success is used as an argument against such regulation. In fact, even the limited regulation of labour markets that currently exists in the country is seen as detrimental to the emergence of the knowledge economy.

Thus among the policies identified by the World Bank (2005) as conducive to India's transformation into a knowledge economy are: speeding up trade reform by reducing tariff protection and phasing out tariff exemptions; encouraging Foreign Direct Investment (FDI) and increasing its contribution to economic growth by phasing out remaining FDI restrictions and increasing positive linkages with the rest of the economy; simplifying and expediting all procedures for the entry and exit of firms, for example, through "single window" clearances; and reducing inefficiencies in factor markets by easing restrictions on hiring and firing of workers.

ACROSS the world, advocates of flexible labour markets have often turned to the new requirements set by the rise of the information or knowledge economy to justify their case. The evidence does indeed suggest that there has been an increase in flexibility in the sense of decreasing job stability, higher temporary unemployment and greater mobility of workers in the U.S. and the European Union (E.U.), though to a lesser degree in the latter. According to one estimate, "precarious paid employment" (defined as fixed-term and temporary contracts) accounts for 15 per cent of paid employment in the E.U. In the U.S., where flexible work emerged earlier, if the definition of such work used includes any kind of flexible job (for example, part time, independent or company contract, self-employment, on call, temporary, day labour), the proportion had reached 30 per cent of the workforce as far back as 1995.

The reasons for this are also well recognised. Increasing concentration has increased expectations with regard to profit margins whereas the more intense oligopolistic competition associated with globalisation is forcing firms to hold down prices. In the inevitable race to cut costs that this sets off, wage costs are one of the areas targeted. What is remarkable, however, is that instead of seeing this as a problem that awaits resolution, it is increasingly being argued that technological changes have rendered flexibilisation the new basis for competitive success of firms, industries and countries. Since the lowering of international trade barriers, access to easier and cheaper means of transport and the information and communication revolution, has inevitably increased competition, companies are forced to react more quickly and flexibly to market signals than before. Thus, in the words of Castells (1996), "we are witnessing the end of the historical trend toward the salarisation of employment and the socialisation of production that was the dominant feature of the industrial era".

What is surprising is that the knowledge economy discourse is being used even in a country like India to make a case for permitting firms to hire and fire workers, as in the World Bank report quoted above, to ban unions in the IT, IT services and BPO sectors and to modify the law relating to contract labour to facilitate flexible employment.

There are a number of features of India's labour market that are ignored in the process. First, the case for increased flexibility applies only to India's organised labour market, whose share in total employment is currently well below 10 per cent. Second, even without Indian's transition to a knowledge economy having occurred, the data collated by the Directorate-General of Employment and Training, suggests that a process of flexibilisation has been under way inasmuch as (in the words of economist Suresh Tendulkar) "whether we assume reported total organised employment to be entirely non-agricultural, or entirely urban or entirely urban non-agricultural, the share of the organised employment has declined significantly over time whatever subjective but reasonable allowance one chooses to make about underestimation." Third, overall there is evidence of a decline in regular employment and an increase in the share of self-employment and casual employment, which are all features of a flexible labour market.

In sum, depending on one's predilections one can either argue that the poor employment performance of the commodity producing sectors during the years of globalisation have resulted in a forced process of flexibilisation that has not yielded the results it is supposed to deliver, or suggest that India's higher rates of GDP growth since the 1980s, as compared to earlier decades has been made possible by flexibilisation. What one cannot argue is that inadequate flexibilisation has held back India's transformation into a knowledge economy. To do so, as the World Bank and others of similar inclination suggest, is to use the knowledge economy as an ideological ruse to advance a reform agenda that would only aggravate the inequalising effects of India's so-called "economic reform".