China and India exhibit an interesting correlation for their concurrent periods of robust growth during the last decade. Both have had periods where high GDP growth has been accompanied by low employment elasticity. This somewhat unusual correlation underlines the contribution to GDP growth from mainly an increase in productivity, not in employment. This is different from the correlation observed in other emerging markets such as Brazil, Chile and Indonesia, where GDP growth, a couple of percentage points lower than in China and India, has been accompanied by higher employment elasticities. Moreover, even in the OECD economies such as the US, Australia, and Germany, lower growth has been identified by much higher employment elasticities.
Chinas low employment elasticity is striking, given the popular impression that its growth is heavily employment-intensive. The low correlation between GDP growth and employment elasticity confirms Chinas growth in the last decade having been largely driven by higher productivity. And there are two particular issues that have influenced productivity growth. The first is an improvement in productivity of labour. And the second is the improvement obtained from increasing investments in R&D and innovations.
Labour productivity in China has been steadily improving in a manner in which it has in most advanced economies of North East and South East Asia. The most important determinant in this respect is skills. The almost stupendous increase in the number of vocational and technical training institutes in China over the last 15 years has produced a workforce capable of performing a variety of low- to medium-end functions with consummate ease. Indias total strength of around 16,000 technical schools is barely 10% of the 153,000 similar schools in China. As far as building capacities for skilling entrants to the workforce is concerned, India has a huge distance to cover vis--vis China.
The second critical issue is the improvement obtained from new technological advances. Economic literature would classify these improvements as those obtained from acceleration in total factor productivity (TFP)higher output resulting from more efficient and better use of intangible non-traditional factors other than labour, land and capital. Innovations are the biggest determinant of TFP growth. They are results of sustained investments in R&D over a period of time. This is an area where China has taken significant strides during the last decade, particularly since it joined the WTO in 2001. Chinas total investments in R&D are now almost $100 billion per year, which is far more than Indias annual investment of around $15 billion.
Coming back to jobless growth, China is not particularly worried about the low employment-intensity of its GDP growth because of the relatively low incremental additions to its workforce. These additions would become even less over time as the rate of growth in Chinas population slowly declines. By 2020, China would not be adding more than 15 million people each year to its workforce. For India, however, the number is an alarming 80 million as estimated by the ILO. Goldman Sachs estimates the number at an even higher 100 million plus. With such numbers, jobless growth in India can turn out to be a far more daunting social factor than in China.
For high-growth emerging market and structural transforming economies like China and India, GDP growth will not be entirely employment-intensive given that considerable parts of their GDP growths now come from services, which are less employment-intensive and more productivity-driven than agriculture and manufacturing. The problem, however, is with a situation where population expands the workforce at a high rate, making creation of more jobs and absorption of labour imperative. The situation worsens if the sectors and industries contributing more to growth are technology-intensive and R&D driven. These sectors are not employment-intensive and cannot absorb new entrants. The problem can be partly managed if increments to the workforce are less. This is what is happening in China thanks to its one child policy. China can focus on building growth sectors that are less employment-intensive. This would fulfil its objective of shifting its industries to higher ends of the value chain. This is how value-additive production is governed in the higher-income and mature economies and China is moving fast in that direction. The endeavour will be helped by the large investments it has made in R&D and the innovations which it is beginning to apply in large-scale production. India, however, appears to be running very short on this score.
The author is head (Development & Programmes) and Visiting Senior Research Fellow in the Institute of South Asian Studies in the National University of Singapore. firstname.lastname@example.org. Views are personal