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Technology, employment and development: Empirical findings
Mxid Development,
1976, Vol. 4, No. 2, pp. 121-
130. Pergamon Press. Printed in Great Britain.
Technology, Employment and Development : Empirical Findings WERNER
BAER*
University of Illinois
The employment problems of Third World countries have occupied the centre stage in the development literature and the activities of research institutes for almost a decade. Much evidence has been collected to illustrate the dimensions of the problem1 and much theorizing has been done on the reasons for the low level of labour absorption in the industrial sector.2 The main hypotheses advanced centre on the determinants of the technology used.3 It has been claimed that: a) factor-price distortions encourage the selection of capitalintensive technology; b) existing technology is inadequate since it was developed for factor availability in countries where technology was created, and this differs considerably from factor supplies in Third World countries; c) little effort is made to adapt technology due to the low level of research and development by local firms andior governments, and the unwillingness of subsidiaries of multinationals to make technological adjustments; d) high concentration in the distribution of income results in a demand profile which favours the establishment of industries with capitalintensive technologies, catering to this demand for high-income-elastic products. It has become increasingly clear that further insights into the question of technology can be gained only by careful case studies. Since such studies have been rare to date,4 the new ILO-sponsored book of cases edited by Bhalla is a welcome addition to the literature.5 Two other recent IL0 books complement this volume. One is a succinct treatise on employment and technology by Sen,e which critically sums up the state of current theoretical knowledge, and the other is a study of the service sector,’ whose role in the development process has not been well explored to date. In this review I shall indicate to what extent the main findings of these studies confirm or refute
currently received doctrines. I shall also include in the discussion some evidence from studies carried out in Brazil.
* I wish to thank and Thomas Trebat
Douglas H. Graham, for many helpful
Peter Kilby suggestions.
1. See, for instancy the IL0 studiediron’ards Full Emplo.vment: A Programme for Colombia (Geneva, 1970); Matching Emplo_vment Opportunities and Expectations: A Programme for Action for Cqvlon (Geneva, 1971); Employment, Incomes and Equality: A strategy for Increasing Productive Employment in Ken_va (Geneva, 1972). 2. W. Baer and M. E. Her&, ‘Employment in developing countries’, Quarterly Journal of Economies (February 1966): E. 0. Edwards (ed.), Emplovment in Developing Nations (New York: Col;mdia University Press, 1974). 3. Frances Stewart, ‘Technology and employment in LDCs’, World Development (March 1974). / / ~ec~&?o4. See, fot’exampl W. Paul’Sirassmann, d gical C ange and Economic Development (Ithaca, New York. Come+ University Press/l9,@);, 4 . A. Johnson, 1 The Steel Industry of India (C%bridge, Mass.: Harvard University Press, 1966); W. Baer, The Development of the Braziliarr Steel Industr~~ (Nashville, Tenn.: Vanderbilt University Press, 1969); Peter Kilby, African Enterprise: The Nigerian Bread Industry (Stanford, California: The Hoover Institution, 1965). 5. A. S. Bhalla ted.), in Industry (Geneva:
Technologv
International
and t‘mplo~~mcut
Labour Office.
1975). 6. A. Sen, Emplo.vment, (Oxford: prepared for the ment
Clarendon I LO.
Techrlo1og.v and DevelopPress, 1975). A study
7. Yves Sabolo (en collaboration avec J. Gaudr Wiry), f-es Tertiaires (Geneva: ILO. 1974).
121
et R.
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Theoretical background Sen’s inquiry ranges substantially beyond our present interests and I leave it to others to evaluate his contributions to such topics as the of disguised unemployment, measurement shadow prices, dual labour markets, and the definitions of the basic concepts of unemployment in societies with weak wage systems and large amounts of self-employment and unpaid family labour. It does not take long for anyone reflecting on technology to realize how difficult it is to come to grips with the concept and how simplistic and often useless is the economist’s traditional production-function approach to the topic. This realization is well summarized by Sen when he states that The gap between understanding how something would work and making it actually work can be quite a substantial one. and some of the major problems of technological advance in the developing countries seem to arise from difficulties-in the translation of science into technology. . Technology involves a great deal more than the mechanical processes of turning iron into steel, and in this study one must take a wider view of the technological problem (Sen, p. 11). Many of Set-r’s generalizations can only be verified through the type of case studies contained in the Bhalla volume. This is the case, for instance, with his statement that technology . . is created by looking for it, but there also exists at any point of time a vast collection of already evolved techniques. .’ (Sen, p. 12); or his suggestion that the concept of technical efficiency is elusive-e.g., input prices might be a function of which technique is chosen, or output per unit of input might have to be qualified by considerations about the location of output and/or the income distribution effect of various production techniques. Sen’s differentiation between ‘mechanization’ and ‘capital intensity’ might be quite useful to researchers. A mechanized technique requiring much machinery per worker may nevertheless be less capital-intensive than a less mechanized technique if it is used intensively. Also, if working capital is included in the calculations, less mechanized operations may be more capital-intensive (Sen, p. 47). Sen believes these distinctions to be significant for employtechment policy ‘ . . since less mechanized niques are frequently associated with a lower degree of utilization and a high ratio of working capital to fixed capital’ (Sen, p. 48). Finally, the inclusion of human capital could make either more or less mechanized techniques more capital-intensive depending on the industry in question.
Sen does not escape, on occasion, from making generalizations on topics for which empirical evidence is either not yet available or contradictory. He claims that ‘ Economic forces do . . always influence the direction of technological adaptation in the actual fields of operation. This applies not merely to the development of new technologies but also to the use of existing ones. The utilization of second-hand machinery in sectors with low wages and high interest rates is a case in point’ (Sen, p. 110). Although there are convincing studies showing how economic forces have influenced the development of agricultural technology, little evidence is available showing the influence of factor prices on the development of industrial technology. Similarly, the influence of factor prices on the use of secondhand equipment is, as will be seen below, contradictory. Empirical studies Appropriately, it is Sen who provides the foreword to the series of case studies edited by Bhalla, stating that the ‘details of technological economics’ have been a much neglected field of research because of ‘ . . the lack of glamour of such detailed work ’ and because the ‘ . . system of recognition and acclaim that applies in the world of economics does not particularly encourage the preparation of works concerned with details, however important they may be for practical planning’ (Bhalla, pp. V-VI). In fact, the first part of the book contains two review articles on the type of empirical studies for which quick professional kudos was to be had in the past, but whose contributions to our knowledge of technology have been very smalJ. J. Gaude surveys various attempts at estimating production functions in order to discover the degree of possible capital/labour substitution possibilities. His summary of the problems of estimation and of the usual restrictive assumptions made in these exercises should be enough to dissuade researchers interested in what goes on in the real world from using these approaches. For instance. the assumption behind the techniques that the capital-labour ratio does not vary with wages and labour productivity implies that the elasticity of substitution is independent of factor proportions and scale. This is ‘ . not supported by either casual empiricism or the few available microstudies of production processes’ (Bhalla, p. 38). It is also difficult ’ to isolate the effects of economies of scale without technical progress from economies reaped through technical pro-
TECHNOLOGY, EMPLOYMENT AND DEVELOPMENT: EMPIRICAL FINDINGS gress’ (Bhalla, p. 38). Furthermore ‘ . . . labour and capital are aggregates of elements that are basically heterogeneous . . . they differ in their longevity, productive qualities, mobility, etc.’ (Bhalla, p. 39). Also, there is the danger that too aggregative a definition of sectors in time series results in intra-product rather than intrafactor substitution estimates of elasticity, and CES production function . . the two-factor does not permit adequate treatment of the role of land, education, entrepreneurship, and labour mix or capital mix in the production processes’ (Bhalla, p. 39). After a summary of problems encountered in estimating elasticities of substitution, Gaude surveys a number of such studies in developing countries-some using cross-section data and some using time series. Cross-section analyses for the Philippines showed elasticities for industries to be similar to those obtained in the US, but Gaude suggests that these ‘ . . . comparisons are likely to be meaningless for the level of aggregation is different and thus the product mix is more heterogeneous’ (Bhalla, p. 45). The time series studies are also often handicapped by unrealistic assumptions. Three of the five studies surveyed assumed that firms operated under perfect competition in the factor and product markets. Most also assumed constant returns to scale, which might be more appropriate for developed countries. The estimates for India and Argentina showed a low elasticity of substitution for the chemical industry, while the elasticity for paper and pulp was high in India and low in Argentina. Elasticities for manufacturing in Kenya and Israel were found to be lower than unity. Gaude’s concluding remarks about the production function approach are quite devastating. He takes econometricians to task because . . . no serious attempt was made to test other assumptions that are more realistic in an underdeveloped setting, such as dependency of the capital-labour ratio on labour productivity through technological change and economies of scale, under-utilization of inputs. . . market imperfections, the relation between the level of aggregation and the size of the elasticity of substitution. and the effect of the passage of time. . . Moreover, highly aggregate estimates tend to be meaningless because of the large variety of production conditions in the developing setting. .’ (Bhalla, p. 57).
Although the limitations of input-output analysis are well known (especially fixed input coefficients), J. Krishnamurty shows its utility in estimating indirect employment effects of investment programmes. Users of the technique
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assume that input coefficients are not very sensitive to factor and product price changes. The justification for such an assumption depends on the findings of the type of empirical studies of individual industries contained in the rest of the volume. Assuming an economy with fixed coefficients, policy-makers could influence labour absorption by varying the product mix. Input-output analysis can provide an estimate of the total. employment repercussions of alternative demand and production profiles.* Krishnamurty also points to an important ‘caveat’ which is often overlooked by analysts concentrating on employment maximization. Employment expansion . . may be restricted by the inelastic supply of wage goods and the fixity of real wages.. . The longer the period we consider the less serious would be the ceiling set on employment possibilities and the greater the scope for indirect employment effects. The wage goods limitation does not invalidate the concept of indirect employment; it is just one of a number of considerations that militate against a nai’ve approach under which the maximization of total employment becomes the over-riding objective of economic policy. . .
(Bhalla, pp. 71-2). The existing evidence from some developing countries (such as India and the Philippines) suggests that indirect employment effects are important and that ‘ . . ignoring them can in some cases lead to serious errors; also a policy of maximizing output creation per unit of final demand might conflict with maximization of total employment per unit of final demand’ (Bhal!a, pp. 73-4). Input-output analysis is shown to be useful in evaluating the employment implications of measures to increase agricultural productivity in an intensive manner. If the direct employment effect of agricultural modernization is negative, can this be overcome by the employment generated through the increased use of modern inputs (backward linkage) and by the forward linkage effects of the expansion of processing industries? While there exists little evidence on backward linkages, work on India and the Philippines suggest substantial employment expansion through processing industries. 8. For an interesting application of this approach to the case of Peru, see A. Figueroa, ‘Income distribution, demand structure and employment: the case of Peru’, The Journal oj Development Studies (January 1975). Figueroa found that a redistribution of income would increase the demand for labour m industry. The impact, however, was small. An increase of 3X in industrial employment was found to require a redistribution of 6% of Peru’s national income.
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A useful input-output analysis to measure indirect employment effects would be the analysis of public works. Unfortunately Krishnamurty found this to have been ignored in most developing countries. The case studies The important contribution of Bhalla’s volume consists of eight case studies: choice of techniques in can-making in Kenya, Tanzania and Thailand (by C. Cooper, R. Kaplinsky, R. Bell and W. Satyarakwit); second-hand equipment in jute processing machinery in Kenya (by Cooper and Kaplinsky); choice of techniques in the textile industry (by H. Pack); manufacture of cement blocks in Kenya (by F. Stewart); adaptational engineering in Colombia (by the Institute of Technological Research in Bogotli); technological choice in metalworking in Mexico (by G. K. Boon); alternative techniques in copper and aluminium (by P. Della Valle); and sugar processing techniques in India (by C. G. Baron). The great virtue of these studies lies in the large dose of induction in the authors’ approach. Instead of searching for numbers to fit pre-constructed production models, they made an effort to understand how the real world functions, i.e., how goods are produced. This has the gratifying result of enriching our knowledge of the operation of the ‘productive system, but it also brings along some frustration since it leads one to realize that there are only ambiguous answers to simple questions. One should also be aware of the danger to generalize one’s findings far beyond the limited case study. Sources of data Many of these studies are based on data directly obtained from factory visits. This enabled the group studying can-making to obtain information on production levels, labour input per shift, wage rates, building costs, etc. (Bhalla, pp. 9 l-2). The cement block study is based on interviews with 23 organizationsquarry operators, builders, local government authorities building materials firms. and Stewart provides a good example of the type of information which can only be obtained by field interviews. She discovered that
Most of the builders relied on commercially Fold blocks for a good deal of their operations. . and used their own block-makers only for out-oftown jobs. Thus their requnements, in terma of scale of output and mobility of the machine, differed substantially from those of the main commercial producers: this fact had important implications for the choice of technique. (Bhalla. p. 205).
Also, only field work could have made the researcher aware of the implications of Asian and European ownership of the organizations interviewed at the time of the Kenyanization policy. The Asian exodus affected responses since it appeared that in some cases short-lived assets were being chosen in preference to long mainly because of the peculiar uncertainties of that time’ (Bhalla, p. 205). Some of the studies are based on ministry reports and were written by persons with first-hand knowledge of technological developments. Process definition The authors made great efforts to acquaint themselves with the engineering and institutional functioning of the industries they analysed. It was thus possible for Cooper et al. to identify the technical substitution possibilities along the production line. They also noted how the end purpose of the product determines technological requirements. For example, ‘ packed and sealed food cans are . processed at high temperatures; cans for this purpose must therefore meet demanding specifications. This is usually less true for the “general” line of cans. .’ (Bhalla, p. 89). Similarly, Stewart gives a meticulous description of various cementmaking methods, breaking them down into 10 techniques and discussing the qualitative differences among them (Bhalla, pp. 206-l 1). Concepts of efficiency In comparing different techniques in use, most researchers found that it was difficult unambiguously to discover the most efficient ones. The study of can-making in Kenya reveals that both the most and the least capitalintensive technologies are efficient from an engineering point of view. However, given the factor prices which prevailed at the time the research was undertaken, thk most automated technique was found to be optimal. Although a change of factor prices, i.e., lower wages, would improve the relative position of the labourintensive technique, the authors found this impractical since ‘ . . . the wage rate would have to be somewhere round about one-hundredth of its present level in Kenya for it to be preferred’ (Bhalla. p. 94). Comparing spinning machinery of 1950 and 1968 vintages, Pack found that the latter’s output per spindle was 50% higher than the former’s and labour productivity 100% higher. The economic superiority of the 1968 over the 1950 vintage depends on whether the price difference of the machines is less than the
TECHNOLOGY, EhfPLOYMENT AND DEVELOPMENT: EMPIRICAL FINDINGS productivity difference. However, ‘ . . . it is exceedingly difficult to obtain estimates of how much it would cost to produce 1950-vintage equipment at the current time; even in less developed countries with internal capital goods capacity, production of this type is not undertaken’ (Bhalla, p. 156). It may be worth noting that in his study of the choice of technique in the Brazilian textile industry, Versiani came to the conclusion that the basic choice is not between different vintages of equipment, but concerns the timing to replace depreciated machinery, and that ‘ . . the decision to replace equipment . . is much more responsive to factor prices than the choice of technology itself. . .’ Thus, ’ . the postponement of equipment replacement can be viewed as a form of substituting labour for capital. .‘9 Pack’s most interesting observations relate to the fact that machines often produce a range of products. Thus, ‘ . . . A loom that is efficient in producing one fabric may not be sufficiently flexible to allow others to be made efficiently. . . Thus despite the economic efficiency of the Lancashire loom in producing shirting material, it might not be economical to use it to produce sheeting’ (Bhalla, p. 165). A knowledge of the product mix to be produced would thus be important in selecting optimal techniques. Pack’s evidence in textiles also throws some doubts on the traditional view that newer machines .use materials more efficiently. He found ‘ . . . the evidence mixed: while newer spinning processes do reduce waste considerably, the more recent loom designs result in higher waste levels. .’ (Bhalla, p. 167). Baron’s analysis of sugar processing in India also reveals ambiguity concerning efficiency. He found that products of small labour-intensive units were hardly qualitatively inferior to the larger mills. However, ’ . . their recovery rate of sugar from sugar-cane is lower than that in the sugar mills, which constitutes a serious disadvantage. . .’ since cane accounts for 60 to 70% of total cost. Thus, in the agro-industries of low-wage developing countries ‘. the choice of technology may be more dependent upon the price of the principal input in relation to that of capital than upon the relative factor-price ratio between capital and labour’ (Bhalla, p. 186j. In her study of cement-block machines in Kenya, Stewart found that hand-operated machines produced at a substantially lower rate than vibrating machines, while the rate of output of locally manufactured and small
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imported stationary machines was less than half that of large imported machines (BhaIla, pp. 2 15 - 16). She also noted that employment rises less than proportionately with scale, i.e., labour productivity rises with scale (Bhalla, pp. 2 16-7). However, investment costs per worker rise substantially as the scale of the machine increases, so that the investment-output ratio for hand machines is lower and productivity higher than for mechanized machines. ’ _. Thus the hand machines appear technically efficient, saving investible resources in relation to output, as well as employment’ (Bhalla, p. 219). The size of the market was also found to be of relevance and to differ between urban and rural areas. In the rural regions
. . . the market is often smaller than the output obtained
from 8-hour capacity use of a hand machine, and the machines lie idle much of the time. In such situations, while the costs of all the techniques would rise, those of the hand machine would rise least, since the greatest proportion of its costs are labour and therefore escapable; conversely, if each of the techniques were operated for more than the one shift a day all costs would fall. but those of the capital-intensive techniques would fall most (Bhalla, p. 228). Finally, since wages are lower in urban areas, there is an added the use of hand-operated machines.
in rural than incentive for
The quality factor In a number of the case studies it was noted that the quality of the output is not always constant between different techniques. In Kenya, for example, more mechanized techniques for canning pineapples (producing lockseamed cans) were found to be advisable in order to insure against leakages which had occurred using more labour-intensive methods for making lap-seamed cans (Bhalla, p. 94). Pressures for using the mechanized technique came from the main customer, a multinational firm anxious to maintain its international reputation for quality. Quality as a determinant of technology was also found to be important in cement-block production. The need for stronger blocks for multi-storied urban buildings made labourintensive methods inadvisable (Bhalla, pp. 2 1O-l ! ). The copper-mining study revealed that the quality of the input can be the factor
9. Flavio R. Versiani. ‘Industrializa@ e Emprepo: 0 Problema da Reposi@o de Equipamento’. fesquiso e Piuneiamento EcorCmico (June 1972). p. 53.
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determining technology, i.e., the lower the copper content of the ore, the more capitalintensive the technology required to process it (Bhalla, p. 287). Research being carried out in Brazil has also shown product quality to be an important determinant of technology. This became especially clear with that country’s export diversification policies in the late 1960s and early 1970s which included incentives for the exportation of. manufactured goods.10 (See section on second-hand equipment below.) Relative factor prices Those who believe in the relative price of Iabour and capital as being the main determinant of technological choice will get little support from these studies. In the case of can-making, Cooper et al. come to the conclusion that ‘ . . policies designed to adjust distorted factor prices would have been . . ineffective in changing the choices made. On the other hand, some techniques (the most labour-intensive among those used in the cases studied) could not have been preferred unless relative factor prices had been changed to a degree that does not seem at all acceptable’ (Bhalla, p. 116). Baron’s study of the Indian sugar industry led him to observe that since wages constitute only a small fraction of total cost and trade union pressure against employment reduction is strong, there was little incentive for mechanization (Bhalla, p. 177). Government controls have also influenced the balance between the smallscale labour-intensive sugar producers and the large mills. Since the government regulates the sale of the latter to ensure a steady supply throughout the year, their need for working capital is high. This is not the case for the smaller units which can sell their entire output in the crushing season. If this were not the case, the ratio of total fixed and working capital to output of the smaller units would be much higher than for the mills (Bhalla. p. 183). Baron also shows the interesting phenomenon of the existence of different factor prices for different techniques. Thus, the modern Indian sugar-mill was paying wages which were four tunes as high as those of the small units. Although the large mills are located in agricultural areas. they are, in fact, enclaves of the manufacturing sector and their factor prices are conditioned by the latter. The practical result of these wage differences was that there was no difference m total wage costs between the large mills and the smail production units. The basic choice then was found to
be one related to the values of the policymakers-whether it was more socially desirable to encourage mills paying high wages but employing few workers or to encourage sugar production through small mills employing many at much lower wages (Bhalla, pp. 188-9). Finally, Baron discovered the influence of the length of the season on the profitability of different techniques. His calculations show that the longer the season the more advantageous is the use of mills: the opposite being the case for shorter seasons. This phenomenon is basically related to capacity utilization. Thus, ’ Sugar mills are not justifiable if they crush cane for less than 150 days per season’ (Bhalla, p. 191)” Boon’s analysis of the Mexican metalworking industry leads him to conclude that the lot size is the critical factor in technological choice. The ’ highly mechanized and productive equipment becomes mechanically more complex and therefore the time to prepare such equipment for operation increases; whereas a simple machine may require only one to three hours to set up, no less than three days may be needed to prepare complex machinery for a production lot. .’ (Bhalla. p. 759). Another variable influencing technology. according to Boon, is the proximity of the place of production to the urban centre. As cost of space increases, capital-intensive techniques will be preferred as they minimize the cost of machine and operator space per unit of output (Bhalla. p. 263). Della Valle shows that the elasticity of factor substitution in copper mining is significantly less than one in developing countries (Zaire, Zambia. and Chile), whereas it is much higher (close to unity) in the US. This 1s especially striking when considering that production units in the developing countries have been subsidiaries of multinational firms. Della Vatle only has some tentative suggestions. There is the possibility that wages in the developinp countries were quite low to start with. so that an!.
10. ‘Transfer ot Tzchnolopy and Labour Absorption’. research proJrct carried out by Jo& Almsrda and IVzrner BXI fur IPtA/lNPES. in Rio de Janriro’during 1973. 11. Similar observations were made a few years ago by Peter KiJby, based on his study of Nigerian industries. See Peter Kilby, Industrializatiorz in m Open Ecu m~n.v. .Vigeria 1945-66 (Cambridge LTniversrty Press. 1969). pp. 164.--5.
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increase in earnings did not represent a significant increase in cost to the companies involved. In such a case, relatively small increases in labour costs will not lead to substantial substitution of capital for labour. Secondly, we might consider the political and economic environment. . . . Large, foreignbased corporations have always been suspiciously regarded by the governments and unions in developing countries, and any attempt rapidly to reduce the labour force has often been met with strong opposition (Bhalla, pp. 282-3).
Our study of a sample of Brazilian firms in various industries confirms the above findings of the unimportance of labour-capital price ratios in technological choice. In a questionnaire returned by 20 firms in such fields as agricultural machinery, steel, cement, fertilizer, boilers and tractors, not one mentioned labour costs as being the most important in a list of factors influencing technological choice. Averaging the responses, we found that labour costs were fourth in order of importance in determining factor choice-after quality of product, market size, and cost and availability of financing. Also, in spite of factor price distortions-i.e., artificially high labour costs for large industries and easy financing-many of the industries promoted in Brazil’s heyday of import substitution in the 1950s used second-hand equipment, especially in the automobile industry. Finally, similar findings emerged from a study by Morley and Smith of 35 foreign firms operating in Brazil in the fields of automobiles, television-radio assembling, telecommunications, diesel engines, bearings and tyres.12 Through interviews they found that . . . With remarkable
regularity, scale emerged as the overwhelming determinant of machine choice and labour use. Low labour costs in Brazil and/or the prospect of much higher machine costs were seen as having a small effect on factor proportions in the great majority of cases. Multinationals use more, sometimes three or four times more, labour per unit of output in Brazil than in their home country, but they say this is primarily a result of their smaller scale operations in Brazil. 13
Second-hand equipment Some of the cases in the Bhalla volume contain useful information and insights on the role of second-hand equipment. In fact, Cooper and Kaplinsky devote a whole chapter to its use in Kenyan jute processing machinery. They provide an analytical framework to explain the forces
behind
the
demand
for
and
supply
of
such equipment. The most interesting aspect of their study is to show a series of disadvantages in using such equipment which have to be weighed against the possible employment
advantages.
EMPIRICAL They
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FINDINGS
discovered
that
second-hand
looms are much less productive than new ones; this was not the case with spinning frames, however, and is attributable to the fact that they are much simpler machines than looms. Second-hand equipment was found to have high installation costs, whittling down substantially its initial price advantage (Bhalla, pp. 141-2). Older machines also showed a higher degree of unit cost variation than new ones, which was found to be connected to greater variations in the rates of output. The authors come to some refreshingly eclectic conclusions. They feel that ‘ . . . proponents and opponents of the use of second-hand machines both miss the point. The arguments about the merits and demerits of second-hand machines are carried out in terms that obscure the main problem, which can be put simply: any investment involves risks and uncertainties; the problem about investment in second-hand machines is that the risks and uncertainties are nearly always much greater than in the case of new machines. . .’ Also, ‘ . . . there is a point that is left out of the conventional argument. If the performance of the second-hand machines is poor enough, it can happen that unit variable costs on them will be actually higher than unit total cost on new machines. . . .’ Finally, ‘ . . . the risk of making mistakes about- second-hand equipment is a very serious problem not only because of the usual disadvantages that follow from using inefficfent technology but more particularly because it can lead, paradoxically, to very high investment costs per workplace’ (Bhalla, pp. 146-7). That is, the cost of installing used equipment can be much higher than that of new machinery. Although Cooper et al. believe that the spare parts problem is a real negative aspect of second-hand equipment (Bhalla, pp. 147-8), Pack concludes from his study that ‘ . . . the absence of spare parts seems to be a spurious issue: there is a large, flourishing international trade in such parts, and three or four wellfinanced specialists in spare parts within a country such as Kenya have been able to make the absence of parts largely a myth’ (Bhalla, p. 159). 12. Samuel A. Morley and Gordon W. Smith, ‘Managerial Discretion and the Choice of Technology by Multinational Firms in Brazil’ (Houston. Texas: Rice University Program of Development Studies, Paper No. 56, Fall 1974). 13. ibid., pp. 4-5.
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Our Brazilian studies have led us to the conclusion that the use of second-hand equipment is linked to the general industrialization strategy adopted by the government. While the emphasis was on the internal market in Brazil’s hey-day of import-substitution industrialization in the 195Os, much of the industrial capacity (especially in the automobile industry) was built with second-hand equipment. The expansion of industrial capacity in the late 1960s and early 197Os, when part of the development strategy consisted of efforts to expand and diversify exports, was based to a large extent on new equipment. Of the twenty firms answering our questionnaire, 15 stated that they were not buying second-hand machinery, and three of the five who had acquired some were having doubts about the wisdom of their decision. The principal reasons for this negative attitude towards used machinery were: difficulty and high cost of maintenance; inferior quality of product; and problems in obtaining spare parts. Emphasis on quality of product is in large part due to the desire to compete in the international market. Thus, the general economic strategy of the government to expand the exportation of manufactured goods had the side-effect of dampening the demand for second-hand equipment. Intermediate technology Opinions and evidence concerning the usefulness of intermediate technology vary considerably. Pack concludes from his work that ‘ . existing older-style equipment does offer efficient labour-intensive possibilities (even though little research on this type of equipment has been carried out in recent years) and is available in large quantities in used form’ (Bhalla, p. 171). He doubts the worthwhileness of searching for newer more labour-intensive it is far from clear that technology since ‘ . the effort is warranted by a cost-benefit calculus. Resources devoted to developing new techniques would, if successful, yield a prototype machine only after a number of years; the actual beginning of substantial production of this new textile equipment would take still longer . thus potential employment gains. if any, would accrue only a number of years later’ (Bhalla, p. 172). On the other hand, the entire article of the Colombian Institute of Technological Research is concerned with showing the ways in which Colombian engineers adapted technologies to suit the country’s special conditions-special potato silos, a portable sawmill, food processing
and petroleum equipment, building materials, etc. The major problem ‘. is a lack of communication between manufacturers of agricultural equipment and institutions devoted to research, design and development connected with such equipment’ (Bhalla, p. 244). Ancillary employment In the literature one frequently finds the argument that though the core processes of many industries are not very flexible, a substantial amount of employment can be generated by making such activities as product handling as labour-intensive as possible. Pack’s study of the textile industry leads him to doubt the possible impact of this. He found that
. . . Textiles . . appeared to be one industry in which material movement . . . offered only minor opportunities for additional employment, so that if additional employment was to be generated in this industry it would have to be through the use of more labour-intensive primary equipment. The very nature of the spinning process, which takes raw cotton and makes it longer while strengthening and straightening it, suggests that the process will be much more efficient if material is fed automatically from stage to stage (Bhalla. p. 161).
Our findings in Brazil were similar. A group of consulting engineers who toured 76 small and medium-size metalworking concerns found that the greatest amount of ancillary employment occurred in firms with old equipment. The more modern firms also had more automated ways of moving materials and semifinished products from one part of the factory to another. 14 Skills and technology The evidence on the relationship between skilled labour supplies and technology is ambiguous. In their can-making study, Cooper et al. come to the conclusion that ‘ . the skills needed for organising workers (as opposed to supervising machines) are more readily available in developing countries than those needed for automated lines’ (Bhalla, p. 112). On the other hand, in her cement-block study Stewart found that ‘ . characteristic of.. .the use of vibrating machines, as compared with that of hand machines, is that it is to a greater extent machine paced. In no case did the pace of a vibrating machine entirely determine the pace of work. since the machine could be slowed
14. Special report by the ItaLian firm ltalconsult and the Brazilian fiim Tecnometal to IPEA. 1973. For similar findings in the steel industry, see Baer, op. cit.
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down, but the machine did impose a regular rhythm which was lacking in hand operation’ (Bhalla, p. 214). The lack of adequately trained manpower was held to be responsible for limiting the development of the Colombian engineering industry and its possibility of technological adaptation (Bhalla, p. 251). In Mexico’s metalworking industry, the lack of skilled manpower and supervisory personnel were the principal factors preventing the more intensive use of production capacity, i.e., the usage of second and third shifts (Bhalla, p. 271). Time (IS an elemenr in technological choice In our work on Brazilian technology, interviews with engineering consulting firms brought forth the matter of ‘time’ as an important variable. This is especially the case of firms in the infrastructure sector. For instance, in road construction the time limit for finishing a project (which includes fines for not finishing the project in a specified period) has led to the adoption of capital-intensive techniques. The latter give greater assurance of finishing a project on time, without sacrificing quality. In the construction or modernization of ports, time enters doubly into consideration. First, it plays a role in the technology used for construction. Second, if the government feels it necessary to link the country to the international market in an efficient way, loading operations can best be achieved by automation, i.e., adopting labour-saving techniques. Even in industry, firms in a hurry to enter the market have been known to buy whole projects without attempting to adapt them to local conditions. Eclectic conclusions Bhalla concludes that ‘ . . . most of these studies point in one important direction, namely that the determinist view that choice of technique does not exist, especially in manufacturing, is incorrect’ (Bhalla, p. 309). However, it is also obvious that ‘ . . . The simplistic choice of factor proportions between two inputs, namely physical capital and labour, does not correspond to reality’ (Bhalla, p. 3 11). He seems to be optimistic about the possibility of government actions influencing the degree of labour absorption. For instance, he believes that ‘ . . . governments can take action directly in public sector industries by making project appraisals on the basis of social cost-benefit explicitly introducing employment analysis, into the objective function’ (Bhalla, p. 318). Also, that ‘ . . . private firms can be encouraged
EMPIRICAL FINDINGS
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to employ more labour-intensive methods in several ways, namely by general measures to make the use of equipment less attractive by comparison with that of labour’ (Bhalla, p. 319). It is of interest to contrast these recommendations with a diametrically opposite point of view. Jose Almeida, a leading Brazilian industrial economist, has come to the conclusion that ‘ . . . to create obstacles to the use of capital-intensive methods is a very simplistic of laboursolution. . . .’ and ‘ . . . the adoption intensive techniques can retard technological development. . . . A strategy designed mainly to create jobs condemns developing countries to stagnation. 1s Almeida feels that a development strategy devoted almost exclusively to the creation of employment will increase the technological countries. t 6 dependency of developing Furthermore, a technology adapted to existing factor supplies in these countries, i.e., unskilled manpower, ‘ . . . will result in a marginalization of these countries from scientific and technological progress, which will perpetuate their economic and technological dependence.‘17 The role of the service sector The fascination of economists with labour absorption problems in industry has led them to neglect the service sector. Explicitly or implicitly the literature has mostly taken the rapid increase of employment in services as an indication of growing underemployment as LDCs have become increasingly urbanized. It should not take much reflection to realize that industrial growth and the modernization of a country’s infrastructure will necessitate the complementary expansion of services. To fully evaluate the employment impact of an industrialization programme it is therefore necessary to investigate service employment in greater detail and divide it into ‘legitimate’ or ‘productive’ and ‘unproductive’ employment, the latter representing underemployment. The recent IL0 publication by Sabolo provides some much needed comparative data on service employment; these lend themselves to the formulation of a number of new hypotheses on the role of the service sector in the development process. 15. Jose Almeida, ‘Transferencia de Tecnologia e AbsorcaE de M&de-Obra’. Pesquisa e Planejamento .EcorzBmico(March 1973), p. 197. 16. ibid., p. 199. 17. ibid., p. 207.
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The study shows that 50% of the economically active population (EAP) in a sample of industrial countries was employed in the service sector (the proportion was as high as 61.3 and 62.1% in Canada and the US respectively), while the proportion was only 32% in the sample of LDCs. However, in industrial countries the service sector employment proportion was on the average only 1.2 times as high as the industry employment proportion; for the LDCs the service proportion was on the average 1.8 times higher. Sabolo applied various tests to see if these differences represented undersubstantial employment in the LDCs’ service sector. The basic goal was to see if service employment growth was attributable either to supply or to demand factors, the former implying greater growth of underemployment than the latter. To calculate changes in productivity of the service sector, the ratio
where Xs is the value of the service output and I?, represents service employment, was used. It was found that this ratio was fairly constant for the sample of industrial countries and stood at 1.3; for LDCs it ranged from 1.0 to 1.85. Though very aggregative, these findings indicate that there was no obvious growth (as opposed to already existing) underemployment in the LDCs (Sabolo, p. 35). Three simple service demand functions were tested. One, relating service employment to private service consumption, showed a high direct correlation for LDCs and a slightly lower one for industrial countries (Sabolo. p. 33). A relationship between service employment and public sector consumption was almost nonexistent for the LDCs and was very weak for industrial countries. Thus, the public service sector is not an obvious absorber of surplus labour. Finally, the correlation between service employment and industrial growth was almost non-existent for LDCs and fairly strong for industrial countries. This difference is explained by the fact that ‘ . . it is only at a certain stage
of the integration of the economy that rhe development of the secondary sector has a significant effect on the growth of services’ (Sabolo, p. 36). This becomes clearer in a later part of this study when services are examined in a more disaggregated way. Sabolo divides services into traditional and modern. He found that for the former (consisting of street vendors. domestic servants, etc.) there was a negative relationship with per capitu income. For modern services (transport communication. commerce, and banking, health services, etc.) a regression analysis showed an extremely high and significant relationship. This leads him to conclude that it of services clearly ‘ . seems that growth sector employment in developing countries is due in large part to the existence of a demand for services. .’ as opposed to supply-induced growth (Sabolo, p. 7 1). The most important finding of the study is that as traditional services are becoming proportionately less important over time. a large part of service employment growth can be explained by economic progress, that is by demand for modern services generated by the industry/ urban sector. It is less and less attributable to demographic pressures (Sabolo. p. 14 1). In connection with the main concern of this review article-technology and employment in industry-the most interesting issue raised by the Sabolo volume is the connection between industrial and service employment growth. It is quite likely that the growth of large-scale capital-intensive industrial units generate more marketing, service employment (repairs, finance, modern health and urban services) than labour-intensive industry. Also, the service employment generated by modern industries will be of a higher skill level than that generated by small labour-intensive units. It is thus necessary to study whether the overall effect of capital-intensive industrial growth on employment-small direct and large indirect employment-is larger or smaller than that of more labour-intensive industries, and also whether the quality of the total labour force will improve more rapidly under the former than under the latter strategy.
1976, Vol. 4, No. 2, pp. 121-
130. Pergamon Press. Printed in Great Britain.
Technology, Employment and Development : Empirical Findings WERNER
BAER*
University of Illinois
The employment problems of Third World countries have occupied the centre stage in the development literature and the activities of research institutes for almost a decade. Much evidence has been collected to illustrate the dimensions of the problem1 and much theorizing has been done on the reasons for the low level of labour absorption in the industrial sector.2 The main hypotheses advanced centre on the determinants of the technology used.3 It has been claimed that: a) factor-price distortions encourage the selection of capitalintensive technology; b) existing technology is inadequate since it was developed for factor availability in countries where technology was created, and this differs considerably from factor supplies in Third World countries; c) little effort is made to adapt technology due to the low level of research and development by local firms andior governments, and the unwillingness of subsidiaries of multinationals to make technological adjustments; d) high concentration in the distribution of income results in a demand profile which favours the establishment of industries with capitalintensive technologies, catering to this demand for high-income-elastic products. It has become increasingly clear that further insights into the question of technology can be gained only by careful case studies. Since such studies have been rare to date,4 the new ILO-sponsored book of cases edited by Bhalla is a welcome addition to the literature.5 Two other recent IL0 books complement this volume. One is a succinct treatise on employment and technology by Sen,e which critically sums up the state of current theoretical knowledge, and the other is a study of the service sector,’ whose role in the development process has not been well explored to date. In this review I shall indicate to what extent the main findings of these studies confirm or refute
currently received doctrines. I shall also include in the discussion some evidence from studies carried out in Brazil.
* I wish to thank and Thomas Trebat
Douglas H. Graham, for many helpful
Peter Kilby suggestions.
1. See, for instancy the IL0 studiediron’ards Full Emplo.vment: A Programme for Colombia (Geneva, 1970); Matching Emplo_vment Opportunities and Expectations: A Programme for Action for Cqvlon (Geneva, 1971); Employment, Incomes and Equality: A strategy for Increasing Productive Employment in Ken_va (Geneva, 1972). 2. W. Baer and M. E. Her&, ‘Employment in developing countries’, Quarterly Journal of Economies (February 1966): E. 0. Edwards (ed.), Emplovment in Developing Nations (New York: Col;mdia University Press, 1974). 3. Frances Stewart, ‘Technology and employment in LDCs’, World Development (March 1974). / / ~ec~&?o4. See, fot’exampl W. Paul’Sirassmann, d gical C ange and Economic Development (Ithaca, New York. Come+ University Press/l9,@);, 4 . A. Johnson, 1 The Steel Industry of India (C%bridge, Mass.: Harvard University Press, 1966); W. Baer, The Development of the Braziliarr Steel Industr~~ (Nashville, Tenn.: Vanderbilt University Press, 1969); Peter Kilby, African Enterprise: The Nigerian Bread Industry (Stanford, California: The Hoover Institution, 1965). 5. A. S. Bhalla ted.), in Industry (Geneva:
Technologv
International
and t‘mplo~~mcut
Labour Office.
1975). 6. A. Sen, Emplo.vment, (Oxford: prepared for the ment
Clarendon I LO.
Techrlo1og.v and DevelopPress, 1975). A study
7. Yves Sabolo (en collaboration avec J. Gaudr Wiry), f-es Tertiaires (Geneva: ILO. 1974).
121
et R.
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Theoretical background Sen’s inquiry ranges substantially beyond our present interests and I leave it to others to evaluate his contributions to such topics as the of disguised unemployment, measurement shadow prices, dual labour markets, and the definitions of the basic concepts of unemployment in societies with weak wage systems and large amounts of self-employment and unpaid family labour. It does not take long for anyone reflecting on technology to realize how difficult it is to come to grips with the concept and how simplistic and often useless is the economist’s traditional production-function approach to the topic. This realization is well summarized by Sen when he states that The gap between understanding how something would work and making it actually work can be quite a substantial one. and some of the major problems of technological advance in the developing countries seem to arise from difficulties-in the translation of science into technology. . Technology involves a great deal more than the mechanical processes of turning iron into steel, and in this study one must take a wider view of the technological problem (Sen, p. 11). Many of Set-r’s generalizations can only be verified through the type of case studies contained in the Bhalla volume. This is the case, for instance, with his statement that technology . . is created by looking for it, but there also exists at any point of time a vast collection of already evolved techniques. .’ (Sen, p. 12); or his suggestion that the concept of technical efficiency is elusive-e.g., input prices might be a function of which technique is chosen, or output per unit of input might have to be qualified by considerations about the location of output and/or the income distribution effect of various production techniques. Sen’s differentiation between ‘mechanization’ and ‘capital intensity’ might be quite useful to researchers. A mechanized technique requiring much machinery per worker may nevertheless be less capital-intensive than a less mechanized technique if it is used intensively. Also, if working capital is included in the calculations, less mechanized operations may be more capital-intensive (Sen, p. 47). Sen believes these distinctions to be significant for employtechment policy ‘ . . since less mechanized niques are frequently associated with a lower degree of utilization and a high ratio of working capital to fixed capital’ (Sen, p. 48). Finally, the inclusion of human capital could make either more or less mechanized techniques more capital-intensive depending on the industry in question.
Sen does not escape, on occasion, from making generalizations on topics for which empirical evidence is either not yet available or contradictory. He claims that ‘ Economic forces do . . always influence the direction of technological adaptation in the actual fields of operation. This applies not merely to the development of new technologies but also to the use of existing ones. The utilization of second-hand machinery in sectors with low wages and high interest rates is a case in point’ (Sen, p. 110). Although there are convincing studies showing how economic forces have influenced the development of agricultural technology, little evidence is available showing the influence of factor prices on the development of industrial technology. Similarly, the influence of factor prices on the use of secondhand equipment is, as will be seen below, contradictory. Empirical studies Appropriately, it is Sen who provides the foreword to the series of case studies edited by Bhalla, stating that the ‘details of technological economics’ have been a much neglected field of research because of ‘ . . the lack of glamour of such detailed work ’ and because the ‘ . . system of recognition and acclaim that applies in the world of economics does not particularly encourage the preparation of works concerned with details, however important they may be for practical planning’ (Bhalla, pp. V-VI). In fact, the first part of the book contains two review articles on the type of empirical studies for which quick professional kudos was to be had in the past, but whose contributions to our knowledge of technology have been very smalJ. J. Gaude surveys various attempts at estimating production functions in order to discover the degree of possible capital/labour substitution possibilities. His summary of the problems of estimation and of the usual restrictive assumptions made in these exercises should be enough to dissuade researchers interested in what goes on in the real world from using these approaches. For instance. the assumption behind the techniques that the capital-labour ratio does not vary with wages and labour productivity implies that the elasticity of substitution is independent of factor proportions and scale. This is ‘ . not supported by either casual empiricism or the few available microstudies of production processes’ (Bhalla, p. 38). It is also difficult ’ to isolate the effects of economies of scale without technical progress from economies reaped through technical pro-
TECHNOLOGY, EMPLOYMENT AND DEVELOPMENT: EMPIRICAL FINDINGS gress’ (Bhalla, p. 38). Furthermore ‘ . . . labour and capital are aggregates of elements that are basically heterogeneous . . . they differ in their longevity, productive qualities, mobility, etc.’ (Bhalla, p. 39). Also, there is the danger that too aggregative a definition of sectors in time series results in intra-product rather than intrafactor substitution estimates of elasticity, and CES production function . . the two-factor does not permit adequate treatment of the role of land, education, entrepreneurship, and labour mix or capital mix in the production processes’ (Bhalla, p. 39). After a summary of problems encountered in estimating elasticities of substitution, Gaude surveys a number of such studies in developing countries-some using cross-section data and some using time series. Cross-section analyses for the Philippines showed elasticities for industries to be similar to those obtained in the US, but Gaude suggests that these ‘ . . . comparisons are likely to be meaningless for the level of aggregation is different and thus the product mix is more heterogeneous’ (Bhalla, p. 45). The time series studies are also often handicapped by unrealistic assumptions. Three of the five studies surveyed assumed that firms operated under perfect competition in the factor and product markets. Most also assumed constant returns to scale, which might be more appropriate for developed countries. The estimates for India and Argentina showed a low elasticity of substitution for the chemical industry, while the elasticity for paper and pulp was high in India and low in Argentina. Elasticities for manufacturing in Kenya and Israel were found to be lower than unity. Gaude’s concluding remarks about the production function approach are quite devastating. He takes econometricians to task because . . . no serious attempt was made to test other assumptions that are more realistic in an underdeveloped setting, such as dependency of the capital-labour ratio on labour productivity through technological change and economies of scale, under-utilization of inputs. . . market imperfections, the relation between the level of aggregation and the size of the elasticity of substitution. and the effect of the passage of time. . . Moreover, highly aggregate estimates tend to be meaningless because of the large variety of production conditions in the developing setting. .’ (Bhalla, p. 57).
Although the limitations of input-output analysis are well known (especially fixed input coefficients), J. Krishnamurty shows its utility in estimating indirect employment effects of investment programmes. Users of the technique
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assume that input coefficients are not very sensitive to factor and product price changes. The justification for such an assumption depends on the findings of the type of empirical studies of individual industries contained in the rest of the volume. Assuming an economy with fixed coefficients, policy-makers could influence labour absorption by varying the product mix. Input-output analysis can provide an estimate of the total. employment repercussions of alternative demand and production profiles.* Krishnamurty also points to an important ‘caveat’ which is often overlooked by analysts concentrating on employment maximization. Employment expansion . . may be restricted by the inelastic supply of wage goods and the fixity of real wages.. . The longer the period we consider the less serious would be the ceiling set on employment possibilities and the greater the scope for indirect employment effects. The wage goods limitation does not invalidate the concept of indirect employment; it is just one of a number of considerations that militate against a nai’ve approach under which the maximization of total employment becomes the over-riding objective of economic policy. . .
(Bhalla, pp. 71-2). The existing evidence from some developing countries (such as India and the Philippines) suggests that indirect employment effects are important and that ‘ . . ignoring them can in some cases lead to serious errors; also a policy of maximizing output creation per unit of final demand might conflict with maximization of total employment per unit of final demand’ (Bhal!a, pp. 73-4). Input-output analysis is shown to be useful in evaluating the employment implications of measures to increase agricultural productivity in an intensive manner. If the direct employment effect of agricultural modernization is negative, can this be overcome by the employment generated through the increased use of modern inputs (backward linkage) and by the forward linkage effects of the expansion of processing industries? While there exists little evidence on backward linkages, work on India and the Philippines suggest substantial employment expansion through processing industries. 8. For an interesting application of this approach to the case of Peru, see A. Figueroa, ‘Income distribution, demand structure and employment: the case of Peru’, The Journal oj Development Studies (January 1975). Figueroa found that a redistribution of income would increase the demand for labour m industry. The impact, however, was small. An increase of 3X in industrial employment was found to require a redistribution of 6% of Peru’s national income.
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A useful input-output analysis to measure indirect employment effects would be the analysis of public works. Unfortunately Krishnamurty found this to have been ignored in most developing countries. The case studies The important contribution of Bhalla’s volume consists of eight case studies: choice of techniques in can-making in Kenya, Tanzania and Thailand (by C. Cooper, R. Kaplinsky, R. Bell and W. Satyarakwit); second-hand equipment in jute processing machinery in Kenya (by Cooper and Kaplinsky); choice of techniques in the textile industry (by H. Pack); manufacture of cement blocks in Kenya (by F. Stewart); adaptational engineering in Colombia (by the Institute of Technological Research in Bogotli); technological choice in metalworking in Mexico (by G. K. Boon); alternative techniques in copper and aluminium (by P. Della Valle); and sugar processing techniques in India (by C. G. Baron). The great virtue of these studies lies in the large dose of induction in the authors’ approach. Instead of searching for numbers to fit pre-constructed production models, they made an effort to understand how the real world functions, i.e., how goods are produced. This has the gratifying result of enriching our knowledge of the operation of the ‘productive system, but it also brings along some frustration since it leads one to realize that there are only ambiguous answers to simple questions. One should also be aware of the danger to generalize one’s findings far beyond the limited case study. Sources of data Many of these studies are based on data directly obtained from factory visits. This enabled the group studying can-making to obtain information on production levels, labour input per shift, wage rates, building costs, etc. (Bhalla, pp. 9 l-2). The cement block study is based on interviews with 23 organizationsquarry operators, builders, local government authorities building materials firms. and Stewart provides a good example of the type of information which can only be obtained by field interviews. She discovered that
Most of the builders relied on commercially Fold blocks for a good deal of their operations. . and used their own block-makers only for out-oftown jobs. Thus their requnements, in terma of scale of output and mobility of the machine, differed substantially from those of the main commercial producers: this fact had important implications for the choice of technique. (Bhalla. p. 205).
Also, only field work could have made the researcher aware of the implications of Asian and European ownership of the organizations interviewed at the time of the Kenyanization policy. The Asian exodus affected responses since it appeared that in some cases short-lived assets were being chosen in preference to long mainly because of the peculiar uncertainties of that time’ (Bhalla, p. 205). Some of the studies are based on ministry reports and were written by persons with first-hand knowledge of technological developments. Process definition The authors made great efforts to acquaint themselves with the engineering and institutional functioning of the industries they analysed. It was thus possible for Cooper et al. to identify the technical substitution possibilities along the production line. They also noted how the end purpose of the product determines technological requirements. For example, ‘ packed and sealed food cans are . processed at high temperatures; cans for this purpose must therefore meet demanding specifications. This is usually less true for the “general” line of cans. .’ (Bhalla, p. 89). Similarly, Stewart gives a meticulous description of various cementmaking methods, breaking them down into 10 techniques and discussing the qualitative differences among them (Bhalla, pp. 206-l 1). Concepts of efficiency In comparing different techniques in use, most researchers found that it was difficult unambiguously to discover the most efficient ones. The study of can-making in Kenya reveals that both the most and the least capitalintensive technologies are efficient from an engineering point of view. However, given the factor prices which prevailed at the time the research was undertaken, thk most automated technique was found to be optimal. Although a change of factor prices, i.e., lower wages, would improve the relative position of the labourintensive technique, the authors found this impractical since ‘ . . . the wage rate would have to be somewhere round about one-hundredth of its present level in Kenya for it to be preferred’ (Bhalla. p. 94). Comparing spinning machinery of 1950 and 1968 vintages, Pack found that the latter’s output per spindle was 50% higher than the former’s and labour productivity 100% higher. The economic superiority of the 1968 over the 1950 vintage depends on whether the price difference of the machines is less than the
TECHNOLOGY, EhfPLOYMENT AND DEVELOPMENT: EMPIRICAL FINDINGS productivity difference. However, ‘ . . . it is exceedingly difficult to obtain estimates of how much it would cost to produce 1950-vintage equipment at the current time; even in less developed countries with internal capital goods capacity, production of this type is not undertaken’ (Bhalla, p. 156). It may be worth noting that in his study of the choice of technique in the Brazilian textile industry, Versiani came to the conclusion that the basic choice is not between different vintages of equipment, but concerns the timing to replace depreciated machinery, and that ‘ . . the decision to replace equipment . . is much more responsive to factor prices than the choice of technology itself. . .’ Thus, ’ . the postponement of equipment replacement can be viewed as a form of substituting labour for capital. .‘9 Pack’s most interesting observations relate to the fact that machines often produce a range of products. Thus, ‘ . . . A loom that is efficient in producing one fabric may not be sufficiently flexible to allow others to be made efficiently. . . Thus despite the economic efficiency of the Lancashire loom in producing shirting material, it might not be economical to use it to produce sheeting’ (Bhalla, p. 165). A knowledge of the product mix to be produced would thus be important in selecting optimal techniques. Pack’s evidence in textiles also throws some doubts on the traditional view that newer machines .use materials more efficiently. He found ‘ . . . the evidence mixed: while newer spinning processes do reduce waste considerably, the more recent loom designs result in higher waste levels. .’ (Bhalla, p. 167). Baron’s analysis of sugar processing in India also reveals ambiguity concerning efficiency. He found that products of small labour-intensive units were hardly qualitatively inferior to the larger mills. However, ’ . . their recovery rate of sugar from sugar-cane is lower than that in the sugar mills, which constitutes a serious disadvantage. . .’ since cane accounts for 60 to 70% of total cost. Thus, in the agro-industries of low-wage developing countries ‘. the choice of technology may be more dependent upon the price of the principal input in relation to that of capital than upon the relative factor-price ratio between capital and labour’ (Bhalla, p. 186j. In her study of cement-block machines in Kenya, Stewart found that hand-operated machines produced at a substantially lower rate than vibrating machines, while the rate of output of locally manufactured and small
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imported stationary machines was less than half that of large imported machines (BhaIla, pp. 2 15 - 16). She also noted that employment rises less than proportionately with scale, i.e., labour productivity rises with scale (Bhalla, pp. 2 16-7). However, investment costs per worker rise substantially as the scale of the machine increases, so that the investment-output ratio for hand machines is lower and productivity higher than for mechanized machines. ’ _. Thus the hand machines appear technically efficient, saving investible resources in relation to output, as well as employment’ (Bhalla, p. 219). The size of the market was also found to be of relevance and to differ between urban and rural areas. In the rural regions
. . . the market is often smaller than the output obtained
from 8-hour capacity use of a hand machine, and the machines lie idle much of the time. In such situations, while the costs of all the techniques would rise, those of the hand machine would rise least, since the greatest proportion of its costs are labour and therefore escapable; conversely, if each of the techniques were operated for more than the one shift a day all costs would fall. but those of the capital-intensive techniques would fall most (Bhalla, p. 228). Finally, since wages are lower in urban areas, there is an added the use of hand-operated machines.
in rural than incentive for
The quality factor In a number of the case studies it was noted that the quality of the output is not always constant between different techniques. In Kenya, for example, more mechanized techniques for canning pineapples (producing lockseamed cans) were found to be advisable in order to insure against leakages which had occurred using more labour-intensive methods for making lap-seamed cans (Bhalla, p. 94). Pressures for using the mechanized technique came from the main customer, a multinational firm anxious to maintain its international reputation for quality. Quality as a determinant of technology was also found to be important in cement-block production. The need for stronger blocks for multi-storied urban buildings made labourintensive methods inadvisable (Bhalla, pp. 2 1O-l ! ). The copper-mining study revealed that the quality of the input can be the factor
9. Flavio R. Versiani. ‘Industrializa@ e Emprepo: 0 Problema da Reposi@o de Equipamento’. fesquiso e Piuneiamento EcorCmico (June 1972). p. 53.
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determining technology, i.e., the lower the copper content of the ore, the more capitalintensive the technology required to process it (Bhalla, p. 287). Research being carried out in Brazil has also shown product quality to be an important determinant of technology. This became especially clear with that country’s export diversification policies in the late 1960s and early 1970s which included incentives for the exportation of. manufactured goods.10 (See section on second-hand equipment below.) Relative factor prices Those who believe in the relative price of Iabour and capital as being the main determinant of technological choice will get little support from these studies. In the case of can-making, Cooper et al. come to the conclusion that ‘ . . policies designed to adjust distorted factor prices would have been . . ineffective in changing the choices made. On the other hand, some techniques (the most labour-intensive among those used in the cases studied) could not have been preferred unless relative factor prices had been changed to a degree that does not seem at all acceptable’ (Bhalla, p. 116). Baron’s study of the Indian sugar industry led him to observe that since wages constitute only a small fraction of total cost and trade union pressure against employment reduction is strong, there was little incentive for mechanization (Bhalla, p. 177). Government controls have also influenced the balance between the smallscale labour-intensive sugar producers and the large mills. Since the government regulates the sale of the latter to ensure a steady supply throughout the year, their need for working capital is high. This is not the case for the smaller units which can sell their entire output in the crushing season. If this were not the case, the ratio of total fixed and working capital to output of the smaller units would be much higher than for the mills (Bhalla. p. 183). Baron also shows the interesting phenomenon of the existence of different factor prices for different techniques. Thus, the modern Indian sugar-mill was paying wages which were four tunes as high as those of the small units. Although the large mills are located in agricultural areas. they are, in fact, enclaves of the manufacturing sector and their factor prices are conditioned by the latter. The practical result of these wage differences was that there was no difference m total wage costs between the large mills and the smail production units. The basic choice then was found to
be one related to the values of the policymakers-whether it was more socially desirable to encourage mills paying high wages but employing few workers or to encourage sugar production through small mills employing many at much lower wages (Bhalla, pp. 188-9). Finally, Baron discovered the influence of the length of the season on the profitability of different techniques. His calculations show that the longer the season the more advantageous is the use of mills: the opposite being the case for shorter seasons. This phenomenon is basically related to capacity utilization. Thus, ’ Sugar mills are not justifiable if they crush cane for less than 150 days per season’ (Bhalla, p. 191)” Boon’s analysis of the Mexican metalworking industry leads him to conclude that the lot size is the critical factor in technological choice. The ’ highly mechanized and productive equipment becomes mechanically more complex and therefore the time to prepare such equipment for operation increases; whereas a simple machine may require only one to three hours to set up, no less than three days may be needed to prepare complex machinery for a production lot. .’ (Bhalla. p. 759). Another variable influencing technology. according to Boon, is the proximity of the place of production to the urban centre. As cost of space increases, capital-intensive techniques will be preferred as they minimize the cost of machine and operator space per unit of output (Bhalla. p. 263). Della Valle shows that the elasticity of factor substitution in copper mining is significantly less than one in developing countries (Zaire, Zambia. and Chile), whereas it is much higher (close to unity) in the US. This 1s especially striking when considering that production units in the developing countries have been subsidiaries of multinational firms. Della Vatle only has some tentative suggestions. There is the possibility that wages in the developinp countries were quite low to start with. so that an!.
10. ‘Transfer ot Tzchnolopy and Labour Absorption’. research proJrct carried out by Jo& Almsrda and IVzrner BXI fur IPtA/lNPES. in Rio de Janriro’during 1973. 11. Similar observations were made a few years ago by Peter KiJby, based on his study of Nigerian industries. See Peter Kilby, Industrializatiorz in m Open Ecu m~n.v. .Vigeria 1945-66 (Cambridge LTniversrty Press. 1969). pp. 164.--5.
TECHNOLOGY,
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AND DEVELOPMENT:
increase in earnings did not represent a significant increase in cost to the companies involved. In such a case, relatively small increases in labour costs will not lead to substantial substitution of capital for labour. Secondly, we might consider the political and economic environment. . . . Large, foreignbased corporations have always been suspiciously regarded by the governments and unions in developing countries, and any attempt rapidly to reduce the labour force has often been met with strong opposition (Bhalla, pp. 282-3).
Our study of a sample of Brazilian firms in various industries confirms the above findings of the unimportance of labour-capital price ratios in technological choice. In a questionnaire returned by 20 firms in such fields as agricultural machinery, steel, cement, fertilizer, boilers and tractors, not one mentioned labour costs as being the most important in a list of factors influencing technological choice. Averaging the responses, we found that labour costs were fourth in order of importance in determining factor choice-after quality of product, market size, and cost and availability of financing. Also, in spite of factor price distortions-i.e., artificially high labour costs for large industries and easy financing-many of the industries promoted in Brazil’s heyday of import substitution in the 1950s used second-hand equipment, especially in the automobile industry. Finally, similar findings emerged from a study by Morley and Smith of 35 foreign firms operating in Brazil in the fields of automobiles, television-radio assembling, telecommunications, diesel engines, bearings and tyres.12 Through interviews they found that . . . With remarkable
regularity, scale emerged as the overwhelming determinant of machine choice and labour use. Low labour costs in Brazil and/or the prospect of much higher machine costs were seen as having a small effect on factor proportions in the great majority of cases. Multinationals use more, sometimes three or four times more, labour per unit of output in Brazil than in their home country, but they say this is primarily a result of their smaller scale operations in Brazil. 13
Second-hand equipment Some of the cases in the Bhalla volume contain useful information and insights on the role of second-hand equipment. In fact, Cooper and Kaplinsky devote a whole chapter to its use in Kenyan jute processing machinery. They provide an analytical framework to explain the forces
behind
the
demand
for
and
supply
of
such equipment. The most interesting aspect of their study is to show a series of disadvantages in using such equipment which have to be weighed against the possible employment
advantages.
EMPIRICAL They
127
FINDINGS
discovered
that
second-hand
looms are much less productive than new ones; this was not the case with spinning frames, however, and is attributable to the fact that they are much simpler machines than looms. Second-hand equipment was found to have high installation costs, whittling down substantially its initial price advantage (Bhalla, pp. 141-2). Older machines also showed a higher degree of unit cost variation than new ones, which was found to be connected to greater variations in the rates of output. The authors come to some refreshingly eclectic conclusions. They feel that ‘ . . . proponents and opponents of the use of second-hand machines both miss the point. The arguments about the merits and demerits of second-hand machines are carried out in terms that obscure the main problem, which can be put simply: any investment involves risks and uncertainties; the problem about investment in second-hand machines is that the risks and uncertainties are nearly always much greater than in the case of new machines. . .’ Also, ‘ . . . there is a point that is left out of the conventional argument. If the performance of the second-hand machines is poor enough, it can happen that unit variable costs on them will be actually higher than unit total cost on new machines. . . .’ Finally, ‘ . . . the risk of making mistakes about- second-hand equipment is a very serious problem not only because of the usual disadvantages that follow from using inefficfent technology but more particularly because it can lead, paradoxically, to very high investment costs per workplace’ (Bhalla, pp. 146-7). That is, the cost of installing used equipment can be much higher than that of new machinery. Although Cooper et al. believe that the spare parts problem is a real negative aspect of second-hand equipment (Bhalla, pp. 147-8), Pack concludes from his study that ‘ . . . the absence of spare parts seems to be a spurious issue: there is a large, flourishing international trade in such parts, and three or four wellfinanced specialists in spare parts within a country such as Kenya have been able to make the absence of parts largely a myth’ (Bhalla, p. 159). 12. Samuel A. Morley and Gordon W. Smith, ‘Managerial Discretion and the Choice of Technology by Multinational Firms in Brazil’ (Houston. Texas: Rice University Program of Development Studies, Paper No. 56, Fall 1974). 13. ibid., pp. 4-5.
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WORLD DEVELOPMENT
Our Brazilian studies have led us to the conclusion that the use of second-hand equipment is linked to the general industrialization strategy adopted by the government. While the emphasis was on the internal market in Brazil’s hey-day of import-substitution industrialization in the 195Os, much of the industrial capacity (especially in the automobile industry) was built with second-hand equipment. The expansion of industrial capacity in the late 1960s and early 197Os, when part of the development strategy consisted of efforts to expand and diversify exports, was based to a large extent on new equipment. Of the twenty firms answering our questionnaire, 15 stated that they were not buying second-hand machinery, and three of the five who had acquired some were having doubts about the wisdom of their decision. The principal reasons for this negative attitude towards used machinery were: difficulty and high cost of maintenance; inferior quality of product; and problems in obtaining spare parts. Emphasis on quality of product is in large part due to the desire to compete in the international market. Thus, the general economic strategy of the government to expand the exportation of manufactured goods had the side-effect of dampening the demand for second-hand equipment. Intermediate technology Opinions and evidence concerning the usefulness of intermediate technology vary considerably. Pack concludes from his work that ‘ . existing older-style equipment does offer efficient labour-intensive possibilities (even though little research on this type of equipment has been carried out in recent years) and is available in large quantities in used form’ (Bhalla, p. 171). He doubts the worthwhileness of searching for newer more labour-intensive it is far from clear that technology since ‘ . the effort is warranted by a cost-benefit calculus. Resources devoted to developing new techniques would, if successful, yield a prototype machine only after a number of years; the actual beginning of substantial production of this new textile equipment would take still longer . thus potential employment gains. if any, would accrue only a number of years later’ (Bhalla, p. 172). On the other hand, the entire article of the Colombian Institute of Technological Research is concerned with showing the ways in which Colombian engineers adapted technologies to suit the country’s special conditions-special potato silos, a portable sawmill, food processing
and petroleum equipment, building materials, etc. The major problem ‘. is a lack of communication between manufacturers of agricultural equipment and institutions devoted to research, design and development connected with such equipment’ (Bhalla, p. 244). Ancillary employment In the literature one frequently finds the argument that though the core processes of many industries are not very flexible, a substantial amount of employment can be generated by making such activities as product handling as labour-intensive as possible. Pack’s study of the textile industry leads him to doubt the possible impact of this. He found that
. . . Textiles . . appeared to be one industry in which material movement . . . offered only minor opportunities for additional employment, so that if additional employment was to be generated in this industry it would have to be through the use of more labour-intensive primary equipment. The very nature of the spinning process, which takes raw cotton and makes it longer while strengthening and straightening it, suggests that the process will be much more efficient if material is fed automatically from stage to stage (Bhalla. p. 161).
Our findings in Brazil were similar. A group of consulting engineers who toured 76 small and medium-size metalworking concerns found that the greatest amount of ancillary employment occurred in firms with old equipment. The more modern firms also had more automated ways of moving materials and semifinished products from one part of the factory to another. 14 Skills and technology The evidence on the relationship between skilled labour supplies and technology is ambiguous. In their can-making study, Cooper et al. come to the conclusion that ‘ . the skills needed for organising workers (as opposed to supervising machines) are more readily available in developing countries than those needed for automated lines’ (Bhalla, p. 112). On the other hand, in her cement-block study Stewart found that ‘ . characteristic of.. .the use of vibrating machines, as compared with that of hand machines, is that it is to a greater extent machine paced. In no case did the pace of a vibrating machine entirely determine the pace of work. since the machine could be slowed
14. Special report by the ItaLian firm ltalconsult and the Brazilian fiim Tecnometal to IPEA. 1973. For similar findings in the steel industry, see Baer, op. cit.
TECHNOLOGY,
EMPLOYMENT AND DEVELOPMENT:
down, but the machine did impose a regular rhythm which was lacking in hand operation’ (Bhalla, p. 214). The lack of adequately trained manpower was held to be responsible for limiting the development of the Colombian engineering industry and its possibility of technological adaptation (Bhalla, p. 251). In Mexico’s metalworking industry, the lack of skilled manpower and supervisory personnel were the principal factors preventing the more intensive use of production capacity, i.e., the usage of second and third shifts (Bhalla, p. 271). Time (IS an elemenr in technological choice In our work on Brazilian technology, interviews with engineering consulting firms brought forth the matter of ‘time’ as an important variable. This is especially the case of firms in the infrastructure sector. For instance, in road construction the time limit for finishing a project (which includes fines for not finishing the project in a specified period) has led to the adoption of capital-intensive techniques. The latter give greater assurance of finishing a project on time, without sacrificing quality. In the construction or modernization of ports, time enters doubly into consideration. First, it plays a role in the technology used for construction. Second, if the government feels it necessary to link the country to the international market in an efficient way, loading operations can best be achieved by automation, i.e., adopting labour-saving techniques. Even in industry, firms in a hurry to enter the market have been known to buy whole projects without attempting to adapt them to local conditions. Eclectic conclusions Bhalla concludes that ‘ . . . most of these studies point in one important direction, namely that the determinist view that choice of technique does not exist, especially in manufacturing, is incorrect’ (Bhalla, p. 309). However, it is also obvious that ‘ . . . The simplistic choice of factor proportions between two inputs, namely physical capital and labour, does not correspond to reality’ (Bhalla, p. 3 11). He seems to be optimistic about the possibility of government actions influencing the degree of labour absorption. For instance, he believes that ‘ . . . governments can take action directly in public sector industries by making project appraisals on the basis of social cost-benefit explicitly introducing employment analysis, into the objective function’ (Bhalla, p. 318). Also, that ‘ . . . private firms can be encouraged
EMPIRICAL FINDINGS
129
to employ more labour-intensive methods in several ways, namely by general measures to make the use of equipment less attractive by comparison with that of labour’ (Bhalla, p. 319). It is of interest to contrast these recommendations with a diametrically opposite point of view. Jose Almeida, a leading Brazilian industrial economist, has come to the conclusion that ‘ . . . to create obstacles to the use of capital-intensive methods is a very simplistic of laboursolution. . . .’ and ‘ . . . the adoption intensive techniques can retard technological development. . . . A strategy designed mainly to create jobs condemns developing countries to stagnation. 1s Almeida feels that a development strategy devoted almost exclusively to the creation of employment will increase the technological countries. t 6 dependency of developing Furthermore, a technology adapted to existing factor supplies in these countries, i.e., unskilled manpower, ‘ . . . will result in a marginalization of these countries from scientific and technological progress, which will perpetuate their economic and technological dependence.‘17 The role of the service sector The fascination of economists with labour absorption problems in industry has led them to neglect the service sector. Explicitly or implicitly the literature has mostly taken the rapid increase of employment in services as an indication of growing underemployment as LDCs have become increasingly urbanized. It should not take much reflection to realize that industrial growth and the modernization of a country’s infrastructure will necessitate the complementary expansion of services. To fully evaluate the employment impact of an industrialization programme it is therefore necessary to investigate service employment in greater detail and divide it into ‘legitimate’ or ‘productive’ and ‘unproductive’ employment, the latter representing underemployment. The recent IL0 publication by Sabolo provides some much needed comparative data on service employment; these lend themselves to the formulation of a number of new hypotheses on the role of the service sector in the development process. 15. Jose Almeida, ‘Transferencia de Tecnologia e AbsorcaE de M&de-Obra’. Pesquisa e Planejamento .EcorzBmico(March 1973), p. 197. 16. ibid., p. 199. 17. ibid., p. 207.
130
WORLD DEVELOPMENT
The study shows that 50% of the economically active population (EAP) in a sample of industrial countries was employed in the service sector (the proportion was as high as 61.3 and 62.1% in Canada and the US respectively), while the proportion was only 32% in the sample of LDCs. However, in industrial countries the service sector employment proportion was on the average only 1.2 times as high as the industry employment proportion; for the LDCs the service proportion was on the average 1.8 times higher. Sabolo applied various tests to see if these differences represented undersubstantial employment in the LDCs’ service sector. The basic goal was to see if service employment growth was attributable either to supply or to demand factors, the former implying greater growth of underemployment than the latter. To calculate changes in productivity of the service sector, the ratio
where Xs is the value of the service output and I?, represents service employment, was used. It was found that this ratio was fairly constant for the sample of industrial countries and stood at 1.3; for LDCs it ranged from 1.0 to 1.85. Though very aggregative, these findings indicate that there was no obvious growth (as opposed to already existing) underemployment in the LDCs (Sabolo, p. 35). Three simple service demand functions were tested. One, relating service employment to private service consumption, showed a high direct correlation for LDCs and a slightly lower one for industrial countries (Sabolo. p. 33). A relationship between service employment and public sector consumption was almost nonexistent for the LDCs and was very weak for industrial countries. Thus, the public service sector is not an obvious absorber of surplus labour. Finally, the correlation between service employment and industrial growth was almost non-existent for LDCs and fairly strong for industrial countries. This difference is explained by the fact that ‘ . . it is only at a certain stage
of the integration of the economy that rhe development of the secondary sector has a significant effect on the growth of services’ (Sabolo, p. 36). This becomes clearer in a later part of this study when services are examined in a more disaggregated way. Sabolo divides services into traditional and modern. He found that for the former (consisting of street vendors. domestic servants, etc.) there was a negative relationship with per capitu income. For modern services (transport communication. commerce, and banking, health services, etc.) a regression analysis showed an extremely high and significant relationship. This leads him to conclude that it of services clearly ‘ . seems that growth sector employment in developing countries is due in large part to the existence of a demand for services. .’ as opposed to supply-induced growth (Sabolo, p. 7 1). The most important finding of the study is that as traditional services are becoming proportionately less important over time. a large part of service employment growth can be explained by economic progress, that is by demand for modern services generated by the industry/ urban sector. It is less and less attributable to demographic pressures (Sabolo. p. 14 1). In connection with the main concern of this review article-technology and employment in industry-the most interesting issue raised by the Sabolo volume is the connection between industrial and service employment growth. It is quite likely that the growth of large-scale capital-intensive industrial units generate more marketing, service employment (repairs, finance, modern health and urban services) than labour-intensive industry. Also, the service employment generated by modern industries will be of a higher skill level than that generated by small labour-intensive units. It is thus necessary to study whether the overall effect of capital-intensive industrial growth on employment-small direct and large indirect employment-is larger or smaller than that of more labour-intensive industries, and also whether the quality of the total labour force will improve more rapidly under the former than under the latter strategy.