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Social engineering in the third world
TECHNOLOGICAL
FORECASTING
AND SOCIAL
Social Engineering
CHANGE
7,229-232
(1975)
229
in the Third World
WILLIAM D. HERMANN
ABSTRACT Success in economic development is normally measured in terms of growth rates in gross national product, with little attention given to the accompanying increase in employment. However, growth can be more or less labor absorbing depending upon the technology introduced during industrialization. In this article the author states the case for intermediate technology along with examples of its application.
In the 50’s and 60’s many of us believed that the mere transfer of scientific know-how and the latest technological methods from the industrialized world would solve the economic problems of developing nations. The process would, of course, take some time since the capital stock would have to grow to match the capital-labor ratios of advanced countries, but there was little discussion concerning the form this capital should take. The attempt was more to create a mirror image of our Western, industrialized, consumeroriented societies than to direct efforts toward the real problems endemic in the economic development process. In some cases, that wasn’t too inappropriate. In others, it ran counter to many of the basic needs of the country. It tended to confuse the results of development with the prerequisites for modernization and growth. Since then, we have learned a great deal, which is beginning to be reflected in a shift of emphasis in development programs. For example, recent studies indicate that the employment effects of industrialization fall far short of what might be expected, given the economic growth rates of some developing countries. During the decade of the 1960’s, some less developed countries experienced industrial sector growth rates of as high as 8 to 10% per year, but even these substantial improvements in output were associated with annual labor absorption rates of only 2 to 3%. Meanwhile, the urban labor force was growing at a rate of about 4 to 5% per year. The resulting urban unemployment soon became obvious. Moreover, the ratio of the rate of expansion of industrial employment to the rate of growth in output has not only been low, but also, apparently, falling over time. Consequently, if some combined index of unemployment and underemployment were applied to the developing countries, it would show a discouraging tendency to rise. Traditional analysis dictates that resources should be combined so that the ratios of their marginal physical product to price are equal, but this rather elementary application of economic analysis has seemingly fallen into disuse. In advanced economies, labor is relatively scarce and expensive, while capital is relatively plentiful and cheap. Most of our
WILLIAM D. HERMANN is an Economist meeting of the Texas Academy of Science.
with the Bechtel
0 American
Corporation.
This paper was delivered
Elsevier Publishing
Company,
at a
Inc., 1975
230
WILLIAM D.HERMANN
technology is capital intensive, designed specifically to avoid the high cost of labor. Mechanization and automation increase labor’s productivity, but at the same time, reduce the demand for additional workers. Yet in less developed countries, capital is the more scarce and expensive factor, and labor the more plentiful and cheap. In fact, the most discouraging and potentially explosive problem in the economic growth process is persistent and widespread unemployment. And the most urgent need is for a massive expansion of employment in every sector of the economy. Thus political and industrial, as well as labor leaders must concentrate on finding work for the rapidly expanding labor force or face the consequences of political and social unrest or perhaps even revolution. It is therefore imperative that economists, engineers and managers working in developing countries become aware of the resource endowments of the individual countries, as well as the differing prices of these resources and their relative productivity. It should be obvious that a machine, which can be used economically when wages are $5 per hour and interest rates 6% per annum, may be uneconomical where wages are 20 cents per hour and interest rates, 15% per year. A fine example of the implementation of this line of thought occurred during the early industrialization period in Japan. At that time, most of the textile equipment was imported from the United Kingdom. Instructions that came with the spinning wheels warned that they should not be run in excess of a certain speed. When the Japanese asked why, they were told that the thread would break more often as the speed was increased. However, it cost relatively little for the Japanese mill operators to hire additional girls to tie knots in the broken thread so they began to experiment with the speed of the machines. They soon found that they could run the spinning wheels at three times the prescribed speed. Productivity per worker might well have been lower, but the Japanese wage rates were far enough below those of the British to compensate. Thus, with the same machines, the Japanese not only provided more employment, but the capital-labor ratio of the productive process more nearly reflected the differing resource costs as compared to the British mills. It is true that the industrial sector is often small in relation to the entire economy of developing countries, since most of the work force remains in subsistence farming. However, modernization of the agricultural sector implies a dwindling, rather than an increase, in rural employment. Thus nonagricultural sectors of the economies of poor nations must absorb workers from the countryside as well as from a growing population. It is clear that the emphasis in the commercial and industrial areas must be on employment. In a search for the causes of lagging job opportunities in the less developed countries, it is not surprising that growing attention is being directed toward the type of technology transferred from advanced to developing countries. In the past, technology has often been introduced intact from the industrialized part of the world, but it may well be time to establish more appropriate methods of reaching the employment goals of industrialization. This can be done in part by introducing more appropriate technology. Another way to increase employment is to pursue policies that encourage the establishment of small firms. A Taiwan study, for example, comparing small industries with an investment of under $25,000 with those having an investment of over $25,000,000, showed that each additional dollar invested in the smaller plants not only created about twice as much output as an additional investment in the larger, but labor’s share of income in small plants was double that in the large ones.
SOCIAL ENGINEERING IN THE THIRD WORLD
231
In addition to using a level of technology that creates more employment, small industries can economize on scarce managerial talent because management is simple and direct. At the same time, small firms provide opportunities for large numbers of businessmen to acquire experience and skill in management, the lack of which may be the most formidable obstacle to development. It has been found that there is normally a broad range in the choice of technology that can be used in a given industry. For example, an International Labor Organization study shows that investment per worker in the rubber products industry ranges from over $2600 in the Philippines to about $600 in Korea. In the Philippines, import substitution was heavily protected, and machinery imports were in effect subsidized through overvalued exchange rates and easy access to credit on very favorable terms. In Korea, by contrast, machinery has been more expensive and technologies were adapted to that situation. Rubber products made in Korea are as good and as profitable as those made in the Philippines and provide nearly twice as much employment for a given amount of investment. In countries where capital is scarce and labor is underemployed, emphasis should be placed on maximizing capital productivity rather than that of labor. The techniques used in the construction of a plant or in the design of a productive operation should, as nearly as possible, reflect the local resource situation. In some cases, a method or design might seem quite obsolete when viewed from the perspective of industrialized economies. In others, a more intermediate level of technology may be the most efficient choice. In still other situations, advanced machinery could be used, but capital productivity increased by increasing the size of the relatively inexpensive labor force. A simple example of the use of completely obsolete technology is the employment of many people with shovels to move earth or dig ditches. If a machine, which can be rented for $120 per day, can accomplish the same work as 100 men with shovels whose wages are $1 per day, it would obviously pay a contractor to hire the 100 men. Where a number of alternative methods exist, the one which achieves the highest output for a given capital input should be selected, even though this may result in a greater labor component. This is, of course, decidedly not true of certain kinds of labor, particularly entrepreneurial, managerial or advanced technological skills. These categories of labor are usually scarce and should be husbanded accordingly. In addition, there are fields where employment intensification through changed technological methods is not feasible. The chemical industry, for example, requires fine tolerances unobtainable manually, and quality control inconsistent with labor intensive production. But this type of operation represents a relatively small proportion of the total output of the economy. During the Great Leap Forward, China decided to create employment by use of small-scale technologies in the steel industry and found they were a very costly drain on resources. The Chinese leaders knew that a modern steel mill produces steel of higher quality much more cheaply than does a small backyard furnace. Nonetheless, employment was accorded a very high priority-presumably sufficiently high to offset the higher costs and lower quality as well as the lower rate of economic growth. Over a period of time, technology will change in response to the developing country’s ability to apply and utilize more sophisticated methods of production. This periodic revision in production methods is sometimes referred to as “progressive technology”. The term describes those changing techniques that make optimum use of available resources as their prices and relative scarcities alter over time. The idea of applying gradually improved methods of production is not new. It has been examined in the professional economic journals for at least 20 years.
232
WILLIAM
D. HERMANN
However, it is only within recent years that opinion in the developing countries themselves has begun to shift from the exclusive pursuit of economic growth to a greater concern with the distribution of the output. This concern is apparent in fewer prestige projects that were common during the last two decades, but contributed little to the development of these countries. It is also manifested in recent contracts that prescribe levels of local employment agreed to between the expatriate firm and host government. Employment and training requirements on specific projects are often implicit indications of the technology most appropriate for the undertaking. These contractual and other legal arrangements are being used by host countries to place greater emphasis on social and employment considerations, and should be viewed by both parties as acceptable balances between efficiency and equity. We have described what is meant by and indicated a need for “intermediate”, “appropriate” and “progressive” technologies. But where are they to come from? We all know what a lathe looks like in the United States where associated labor costs might run to $15 per hour. But what would a lathe look like if it were designed specifically for a society where labor costs were $1 per hour or less? At the moment there is a vast vacuum of knowledge to be filled. In some cases Western machinery can be adapted to the local situation. In others, it may be necessary to develop entirely new technologies especially suited to the conditions of low-income countries. One of the best examples of the introduction of ingenious intermediate technology was observed in a rice project in West Africa. A large combine identical to those used in the Kansas wheat fields had been found to be impractical because of the uneven terrain and tree stumps scattered through the rice fields. While it sat unused in a shed, Chinese families were brought in to improve rice production. They built an imaginative thresher consisting of a wooden drum mounted on a box with a chain connecting the drum to a foot pedal. The operator held small bunches of unthreshed rice so that the rotating drum with protruding nails separated the grain from the straw, the grain falling in the box and the straw remaining in the hand of the operator. This simple thresher represented an immense improvement over the method being used when the Chinese arrived, even though it seemed quite primitive to observers from industrialized countries. Previously the unthreshed rice had been placed on the ground, threshed by continuously walking on it and picking the grain from the dirt. It is unfortunate, however, that little research is being done in the field of intermediate technology. Only a handful of institutions are devoting their efforts to the discovery of appropriate technologies for particular industries. About 98% of all research and development funds are spent in the advanced countries. This leaves precious little for the less developed nations. In the meantime, more can be done in the field of technology adaptation by the developing countries and multinational corporations. There are numerous possibilities for capital stretching and labor intensive applications given a greater willingness on the part of both to respond to these social needs. Modernization, or economic development, is only a means to social goals and aspirations such as diminished unemployment, increased real incomes and improved general well-being. Corporations operating in advanced countries have been aware of broad social responsibilities for some years. More recently, they have responded to demands for environmental preservation. These firms are now being asked to raise their newly-found domestic sociai responsibility to a global level. By responding positively to the concerns and national aspirations of the less developed countries, more appropriate technologies can be discovered and applied. Corporations may be surprised to learn that the route to proper resource use is the same as that leading to maximum profits. Received 12 March I974
FORECASTING
AND SOCIAL
Social Engineering
CHANGE
7,229-232
(1975)
229
in the Third World
WILLIAM D. HERMANN
ABSTRACT Success in economic development is normally measured in terms of growth rates in gross national product, with little attention given to the accompanying increase in employment. However, growth can be more or less labor absorbing depending upon the technology introduced during industrialization. In this article the author states the case for intermediate technology along with examples of its application.
In the 50’s and 60’s many of us believed that the mere transfer of scientific know-how and the latest technological methods from the industrialized world would solve the economic problems of developing nations. The process would, of course, take some time since the capital stock would have to grow to match the capital-labor ratios of advanced countries, but there was little discussion concerning the form this capital should take. The attempt was more to create a mirror image of our Western, industrialized, consumeroriented societies than to direct efforts toward the real problems endemic in the economic development process. In some cases, that wasn’t too inappropriate. In others, it ran counter to many of the basic needs of the country. It tended to confuse the results of development with the prerequisites for modernization and growth. Since then, we have learned a great deal, which is beginning to be reflected in a shift of emphasis in development programs. For example, recent studies indicate that the employment effects of industrialization fall far short of what might be expected, given the economic growth rates of some developing countries. During the decade of the 1960’s, some less developed countries experienced industrial sector growth rates of as high as 8 to 10% per year, but even these substantial improvements in output were associated with annual labor absorption rates of only 2 to 3%. Meanwhile, the urban labor force was growing at a rate of about 4 to 5% per year. The resulting urban unemployment soon became obvious. Moreover, the ratio of the rate of expansion of industrial employment to the rate of growth in output has not only been low, but also, apparently, falling over time. Consequently, if some combined index of unemployment and underemployment were applied to the developing countries, it would show a discouraging tendency to rise. Traditional analysis dictates that resources should be combined so that the ratios of their marginal physical product to price are equal, but this rather elementary application of economic analysis has seemingly fallen into disuse. In advanced economies, labor is relatively scarce and expensive, while capital is relatively plentiful and cheap. Most of our
WILLIAM D. HERMANN is an Economist meeting of the Texas Academy of Science.
with the Bechtel
0 American
Corporation.
This paper was delivered
Elsevier Publishing
Company,
at a
Inc., 1975
230
WILLIAM D.HERMANN
technology is capital intensive, designed specifically to avoid the high cost of labor. Mechanization and automation increase labor’s productivity, but at the same time, reduce the demand for additional workers. Yet in less developed countries, capital is the more scarce and expensive factor, and labor the more plentiful and cheap. In fact, the most discouraging and potentially explosive problem in the economic growth process is persistent and widespread unemployment. And the most urgent need is for a massive expansion of employment in every sector of the economy. Thus political and industrial, as well as labor leaders must concentrate on finding work for the rapidly expanding labor force or face the consequences of political and social unrest or perhaps even revolution. It is therefore imperative that economists, engineers and managers working in developing countries become aware of the resource endowments of the individual countries, as well as the differing prices of these resources and their relative productivity. It should be obvious that a machine, which can be used economically when wages are $5 per hour and interest rates 6% per annum, may be uneconomical where wages are 20 cents per hour and interest rates, 15% per year. A fine example of the implementation of this line of thought occurred during the early industrialization period in Japan. At that time, most of the textile equipment was imported from the United Kingdom. Instructions that came with the spinning wheels warned that they should not be run in excess of a certain speed. When the Japanese asked why, they were told that the thread would break more often as the speed was increased. However, it cost relatively little for the Japanese mill operators to hire additional girls to tie knots in the broken thread so they began to experiment with the speed of the machines. They soon found that they could run the spinning wheels at three times the prescribed speed. Productivity per worker might well have been lower, but the Japanese wage rates were far enough below those of the British to compensate. Thus, with the same machines, the Japanese not only provided more employment, but the capital-labor ratio of the productive process more nearly reflected the differing resource costs as compared to the British mills. It is true that the industrial sector is often small in relation to the entire economy of developing countries, since most of the work force remains in subsistence farming. However, modernization of the agricultural sector implies a dwindling, rather than an increase, in rural employment. Thus nonagricultural sectors of the economies of poor nations must absorb workers from the countryside as well as from a growing population. It is clear that the emphasis in the commercial and industrial areas must be on employment. In a search for the causes of lagging job opportunities in the less developed countries, it is not surprising that growing attention is being directed toward the type of technology transferred from advanced to developing countries. In the past, technology has often been introduced intact from the industrialized part of the world, but it may well be time to establish more appropriate methods of reaching the employment goals of industrialization. This can be done in part by introducing more appropriate technology. Another way to increase employment is to pursue policies that encourage the establishment of small firms. A Taiwan study, for example, comparing small industries with an investment of under $25,000 with those having an investment of over $25,000,000, showed that each additional dollar invested in the smaller plants not only created about twice as much output as an additional investment in the larger, but labor’s share of income in small plants was double that in the large ones.
SOCIAL ENGINEERING IN THE THIRD WORLD
231
In addition to using a level of technology that creates more employment, small industries can economize on scarce managerial talent because management is simple and direct. At the same time, small firms provide opportunities for large numbers of businessmen to acquire experience and skill in management, the lack of which may be the most formidable obstacle to development. It has been found that there is normally a broad range in the choice of technology that can be used in a given industry. For example, an International Labor Organization study shows that investment per worker in the rubber products industry ranges from over $2600 in the Philippines to about $600 in Korea. In the Philippines, import substitution was heavily protected, and machinery imports were in effect subsidized through overvalued exchange rates and easy access to credit on very favorable terms. In Korea, by contrast, machinery has been more expensive and technologies were adapted to that situation. Rubber products made in Korea are as good and as profitable as those made in the Philippines and provide nearly twice as much employment for a given amount of investment. In countries where capital is scarce and labor is underemployed, emphasis should be placed on maximizing capital productivity rather than that of labor. The techniques used in the construction of a plant or in the design of a productive operation should, as nearly as possible, reflect the local resource situation. In some cases, a method or design might seem quite obsolete when viewed from the perspective of industrialized economies. In others, a more intermediate level of technology may be the most efficient choice. In still other situations, advanced machinery could be used, but capital productivity increased by increasing the size of the relatively inexpensive labor force. A simple example of the use of completely obsolete technology is the employment of many people with shovels to move earth or dig ditches. If a machine, which can be rented for $120 per day, can accomplish the same work as 100 men with shovels whose wages are $1 per day, it would obviously pay a contractor to hire the 100 men. Where a number of alternative methods exist, the one which achieves the highest output for a given capital input should be selected, even though this may result in a greater labor component. This is, of course, decidedly not true of certain kinds of labor, particularly entrepreneurial, managerial or advanced technological skills. These categories of labor are usually scarce and should be husbanded accordingly. In addition, there are fields where employment intensification through changed technological methods is not feasible. The chemical industry, for example, requires fine tolerances unobtainable manually, and quality control inconsistent with labor intensive production. But this type of operation represents a relatively small proportion of the total output of the economy. During the Great Leap Forward, China decided to create employment by use of small-scale technologies in the steel industry and found they were a very costly drain on resources. The Chinese leaders knew that a modern steel mill produces steel of higher quality much more cheaply than does a small backyard furnace. Nonetheless, employment was accorded a very high priority-presumably sufficiently high to offset the higher costs and lower quality as well as the lower rate of economic growth. Over a period of time, technology will change in response to the developing country’s ability to apply and utilize more sophisticated methods of production. This periodic revision in production methods is sometimes referred to as “progressive technology”. The term describes those changing techniques that make optimum use of available resources as their prices and relative scarcities alter over time. The idea of applying gradually improved methods of production is not new. It has been examined in the professional economic journals for at least 20 years.
232
WILLIAM
D. HERMANN
However, it is only within recent years that opinion in the developing countries themselves has begun to shift from the exclusive pursuit of economic growth to a greater concern with the distribution of the output. This concern is apparent in fewer prestige projects that were common during the last two decades, but contributed little to the development of these countries. It is also manifested in recent contracts that prescribe levels of local employment agreed to between the expatriate firm and host government. Employment and training requirements on specific projects are often implicit indications of the technology most appropriate for the undertaking. These contractual and other legal arrangements are being used by host countries to place greater emphasis on social and employment considerations, and should be viewed by both parties as acceptable balances between efficiency and equity. We have described what is meant by and indicated a need for “intermediate”, “appropriate” and “progressive” technologies. But where are they to come from? We all know what a lathe looks like in the United States where associated labor costs might run to $15 per hour. But what would a lathe look like if it were designed specifically for a society where labor costs were $1 per hour or less? At the moment there is a vast vacuum of knowledge to be filled. In some cases Western machinery can be adapted to the local situation. In others, it may be necessary to develop entirely new technologies especially suited to the conditions of low-income countries. One of the best examples of the introduction of ingenious intermediate technology was observed in a rice project in West Africa. A large combine identical to those used in the Kansas wheat fields had been found to be impractical because of the uneven terrain and tree stumps scattered through the rice fields. While it sat unused in a shed, Chinese families were brought in to improve rice production. They built an imaginative thresher consisting of a wooden drum mounted on a box with a chain connecting the drum to a foot pedal. The operator held small bunches of unthreshed rice so that the rotating drum with protruding nails separated the grain from the straw, the grain falling in the box and the straw remaining in the hand of the operator. This simple thresher represented an immense improvement over the method being used when the Chinese arrived, even though it seemed quite primitive to observers from industrialized countries. Previously the unthreshed rice had been placed on the ground, threshed by continuously walking on it and picking the grain from the dirt. It is unfortunate, however, that little research is being done in the field of intermediate technology. Only a handful of institutions are devoting their efforts to the discovery of appropriate technologies for particular industries. About 98% of all research and development funds are spent in the advanced countries. This leaves precious little for the less developed nations. In the meantime, more can be done in the field of technology adaptation by the developing countries and multinational corporations. There are numerous possibilities for capital stretching and labor intensive applications given a greater willingness on the part of both to respond to these social needs. Modernization, or economic development, is only a means to social goals and aspirations such as diminished unemployment, increased real incomes and improved general well-being. Corporations operating in advanced countries have been aware of broad social responsibilities for some years. More recently, they have responded to demands for environmental preservation. These firms are now being asked to raise their newly-found domestic sociai responsibility to a global level. By responding positively to the concerns and national aspirations of the less developed countries, more appropriate technologies can be discovered and applied. Corporations may be surprised to learn that the route to proper resource use is the same as that leading to maximum profits. Received 12 March I974