NURKSE’S THESIS OF DISGUISED UNEMPLOYMENT

1. NURKSE’S THESIS OFDISGUISED UNEMPLOYMENT

2. BIOGRAPHY – RAGNAR NURKSE Ragnar Nurkse (5 October [O.S. 22 September] 1907, Käru, now Rapla County, Estonia - 6 May 1959, near Lake Geneva, Switzerland) was an Estonian international economist and policy maker mainly in the fields of international finance and economic development. Ragnar Nurkse was born in the Käru village, Governorate of Estonia of the Russian Empire, son of an Estonian father who worked himself up from lumberjack to estate manager, and an Estonian-Swedish mother. Nurkse is one of the founding fathers of Classical Development Economics. Together with Rosenstein-Rodan and Mandelbaum, he promoted a 'theory of the big push', emphasized the role of savings and capital formation in economic development, and argued that poor nations remained poor because of a vicious circle of poverty. Among his major works are International Currency Experience: Lessons of the Interwar Period (1944), the foundation of the Bretton Woods Agreement, Conditions of International Monetary Equilibrium (1945), and Problems of Capital Formation in Underdeveloped Countries (1953).

3. INTRODUCTION In most less developed countries of the world there is an excess of population with limited means of employment. So, a sizeable portion of the working population remains unemployed in these countries. Agriculture is the principal occupation in these countries. This is the occupation working in which all members of the family are apparently engaged so that, in the absence of alternative job opportunities they have the feeling of being gainfully employed. But the result of it is that many more persons are engaged in this occupation than what are actually needed. Many of those apparently employed are thus disguisedly unemployed. If these are withdrawn from agriculture and engaged in some alternative occupations, total output in agricultural sector will not fall while on the other hand if they continue to be dependent upon their family members (in the agricultural sector) for their subsistence needs, they would be contributing to output more than the additional cost of output. Thus savings and capital formation would be stimulated in the these countries. Disguised unemployment thus serves as a potential source of saving and capital formation in less developed countries.

4. Difference between Disguised nemploymentand Industrial Unemployment • Following are the principal differences between the industrial unemployment and disguised unemployment: • Disguised unemployment is concealed. Apparently all persons are employed, while in fact some are not. Industrial unemployment on the other hand is open and can be precisely estimated. • In disguised employment workers are generally engaged in their family work. Thus they work on their family farms. In the industrial unemployment, workers are found to be unemployed because they are not hired by others. Workers are not engaged in their family occupations. These can therefore be easily identified. • Industrial unemployment may be removed by increasing the supply of money in turn raising the level of effective demand. In the case of disguised unemployment, however, rise in the supply of money would only raise the level of prices in the country. • It is not simple to estimate disguised unemployment. According to U.N.O. experts, nearly 25% of the working population engaged in the agricultural sector of countries like India and Pakistan is disguisedly unemployed. However this estimation is a mere approximation. Industrial unemployment on the other hand can be precisely estimated.

5. DISGUISED UNEMPLOYMENT The term disguised unemployment was coined by Mrs. Joan Robinson. According to her "Disguised unemployment is a situation in which wage workers take to less productive jobs, because they lose their regular jobs to cyclical trends in economic activity- However, this definition of disguised unemployment is valid in the context of developed countries only. In the context of under-developed countries. "disguised unemployment" is a situation in which more persons are employed to do a job which can be done with equal efficiency by a less number of workers. In less developed countries, people generally fall back upon their family occupations (viz agriculture and allied activities) because of the lack of alternative job opportunities. If some of these persons are withdrawn, total output will not reduce. So that, while apparently these workers are gainfully employed, intact they are not. They are disguisedly unemployed. This may be illustrated through an example. Suppose that a family of eight members has four hectares of land. Also assume that 4 persons are needed to effectively cultivate that land. However, owing to the lack of job opportunities elsewhere all the eight members are working on their family farm. So that, four of them, though apparently employed are in (act unemployed. In other words, four persons are disguisedly unemployed. If they are withdrawn from the farm, the total farm output will not reduce. This is disguised unemployment.

6. FEATURES OF DISGUISED UNEMPLOYMENT • In situations of disguised unemployment, it is not possible to identify the persons who are actually unemployed. • In less developed countries excess of population and the lack of capital is the principal cause of disguised unemployment. • Disguised unemployment is generally associated with agricultural families. • In the less developed countries disguised unemployment is concerned largely with the agricultural and allied activities. • In certain countries disguised unemployment is confined to specific season, such as during the intervening period between the sowing and harvesting of crops. Generally, however, disguised unemployment is a permanent feature stretching over long periods of time.

7. A.K.SEN’S VIEWS ON DISGUISED UNEMPLOYMENT Sen is of the opinion that, in situations of disguised unemployment, marginal productivity of labour is not zero. Why should the workers work at all when their contribution to output is zero? Disguised unemployment is a situation wherein more persons are engaged in an occupation than needed so that hours of work per worker are reduced. In such a situation, the marginal productivity of the labourer is nil over a wide range and the productivity of labour may just be equal to zero at the margin. This yew of Prof. Sen may be illustrated through the following Figure.

8. DISGUISED UNEMPLOYMENT AND SAVING POTENTIAL • Lot of labour power is actually wasted owing to the presence of disguised unemployment in less developed countries. Nurkse and Lewis are of the opinion that disguised unemployment is a potential source of savings and capital formation in these countries. In what follows, we discuss Lewis and Nurkse views separately. • LEWIS THEORY • According to Prof. Lewis there are two principal sectors in the economies of less developed countries • Subsistence Sector: This is the principal sector of less developed countries. People in this sector are primarily engaged in agricultural occupations. Because of the pressure of population there is a high degree of disguised unemployment in this sector. Also, because of the low marginal productivity of labour wages are very low in this sector. • Capitalistic Sector: This sector is dominated by the industrial and allied activities. Because of the intensive use of capital, marginal productivity of labour rules fairly high. Accordingly, wages are equally high. The wages prevailing in this sector are called capitalistic wages. Lewis is of the opinion that if workers are withdrawn from the subsistence sector and engaged in the capitalistic sector, their marginal productivity would increase. However if they are paid lower wages (lower than their contribution to output) the capitalists would earn surplus. If re-invested this surplus becomes the source of capital formation and economic growth of the country.

9. NURKSE’S THEORY Prof. Nurkse offers following hypothesis to exploit disguised unemployment as a source of capital formation in less developed countries: In less developed countries more worker are engaged in farming operation than actually needed. The excess number of workers do not add anything to the farming output. However these disguisedly unemployed people obtain their livelihood from agriculture itself. The possibility of saving in the agricultural sector is exhausted when agriculture has to support a large number of disguisedly unemployed persons. Nurkse maintains that productive workers have to spend their prospective savings on the maintenance of their unproductive counterparts. These prospective saving are what Nurkse calls 'Disguised Saving Potential.' "There is the possibility, however, of taking surplus people away from the land. Anything they could produce elsewhere would be a clear addition to the real national income," says Nurkse. The persons withdrawn from agriculture are to be engaged in capital projects. Nurkse suggests that these persons could be engaged in irrigation works, construction of roads and dams and other social overheads in the country. Their withdrawal will not affect production in the agricultural sector as marginal productivity of these workers was zero there. However contribution to output by these workers when engaged in capital output would add to total national product. All that is added to the national product is the surplus generated on account of productive employment of the earlier unproductive workers. However. two problems are confronted in this regard

10. ARRANGEMENT OF FINANCE In this context the basic problem is of providing food clothing and shelter to the persons withdrawn from the agricultural sector. Nurkse is of the opinion that for these requirements these workers should continue to be dependent upon their rural counterparts as before. They were being supported by their family members earlier too when they were disguisedly unemployed in the agricultural sector. Thus Nurkse writes: "The use of disguised unemployment for the accumulation of capital could be financed from within the system itself. There is no question of csking the peasants who remain on the land to eat less than before, only of preventing them from eating more. What is wanted is that they go on feeding their dependents who leave the farms to go to work on capital projects". Formation of capital out of disguised unemployment may be illustrated with an example. Let us suppose a farming family working on its farm is producing 20 qtls. of wheat. Only two persons are needed to work on this farm. But owing to the lack of job opportunities, all the 5 members are working together on the same level. The share of each person in total output comes to 4 Os. If 3 persons are withdrawn from this farm and engaged in the construction of roads, dams etc., even then the farm output would continue to be 20 qtls. If 12 qtls. out of this 20 qtls. continues to be given to 3 persons (now withdrawn from the farming work) and the remaining two persons continue to have 4 qtls per head as their usual share in output, there would be a net addition to national product by 3 persons engaged in the construction of roads and dams without any extra expenditure upon them.

11. PROBLEM OF TOOLS • Provision of tools and implements to the persons withdrawn from the agricultural • sector and engaged in public works programmes is yet another problem. • Following suggestions may be offered in this context • Use of labour-intensive techniques: Those techniques should be used which are more labour intensive. Thus tree-felling could be done solely by worker's manual efforts with small tool and implements. avoiding the use of capital-intensive techniques • Use of simple tools: Disguisedly unemployed persons when employed on capital projects should be provided only simple tools and expenditure that does not involve heavy capital expenditure. • Leakage from Concealed Saving Potential • When the remaining persons working on the family farm raise their consumption(after some of their counterparts are withdrawn for working elsewhere), a serious leakage erupts in the saving potential. Nurkse is of the opinion that farmers live mostly at the subsistence level. Therefore there always remains the urge and the need to raise their living standard. And they dolt by consuming more of food grains when they can. Thus the share of workers transferred from the agricultural sector generally does not reach them in full.

12. SOLUTIONS FOR PLUGGING THE LEAKAGES Following suggestions may be offered for plugging the leakages: (1) Agricultural Taxation: Remaining persons in the agricultural sector are likely to increase their consumption level following the withdrawal of some of their counterparts. The government can tax the surplus in terms of foodgrains and give the same to those engaged on the capital projects. However, one may encounter various difficulties in the execution of this plan. (2) To Collect Rent in the Form of Foodgrains: It may be suggested that the government collects rent in terms of foodgrains. But this also entails several difficulties. (3) Compulsory Sale of Surplus Produce to the Government: The government may compel the farmers to sell their surplus produce at some fixed price. If, for example, a farming family is producing 50 qtls. of wheat and to maintain the old standard of consumption only 25 Os. of wheat are required, the remaining 25 qtls. may be compulsarily purchased by the government at the fixed price. This method was fairly popular in less developed countries. (4) Complementary Savings: Prof. Nurkse is of the opinion that there may remain certain lapses in the above stated various methods of plugging the leakages. It is therefore essential that some additional savings are raised through other sources. Suppose, the surplus in terms of foodgrains is of Rs. 2 crores after some persons are withdrawn from the agricultural sector. One crore out of it may be spent on the transfer of surplus to those now working on capital projects or exhausted otherwise in terms of the various leakages discussed above. Thus only one crore is left to be transferred for the consumption of withdrawn workers while they need minimum of Rs. 2 crore to maintain their earlier living standard.

13. CRITICISM • Nurkse's concealed saving potential hypothesis is criticized on the following counts. • Leakages: Some economists are of the opinion that the success of Nurkse's hypothesis depends upon the condition that there are no leakages from the subsistence fund. But this is practically not possible. Leakages are sometimes so vital that they are difficult to be plugged through domestic or external sources. • (2) Difference In the Nature of Labourers: Nurkse does not distinguish between the farming workers and those working on the capital projects. While farming workers are generally unskilled and illiterate, those needed for capital projects are skilled and educated workers. Prof. Kurihara is of the opinion that if unskilled and i literate workers are as such employed on the capital projects, there would hardly be any meaningful contribution to the process of capital formation. Capital projects need expensive and modem tools and implements, difficult to be handled by the unskilled workers. • (3) Identification of the Disguised Unemployment is Difficult: Prof. Nurkse himself accepts it that it is so very difficult to identify the disguisedly unemployed persons. Unless this is done, it is almost impossible to transfer the farming workers to the capital projects. It is only through the labour market that workers can be drawn from the agricultural sector. Thus they have to be offered higher wages. • (4) Less Consumption: According to Nurkse, disguised unemployment can be exploited as a source of potential savings only if the remaining workers on the farming lands do not increase their consumption. However this is not likely to be true in view of the subsistence level of consumption of these workers.

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