CHAPTER

20
Nurkses Theory Nurkses Theory of Disguised Unemployment Saving Potential Unemployment as a Saving Potential
MEANING OF DISGUISED UNEMPLOYMENT
The concept of disguised unemployment was introduced into the theory of underdevelopment by Rosenstein-Rodan in his famous article Problems of Industrialization of Eastern and SouthEastern Europe and was elaborated by Ragner Nurkse. In its strict sense, it means that given the techniques and productive resources, the marginal productivity of labour in agriculture over a wide range is zero in overpopulated underdeveloped countries. It is, therefore, possible to withdraw some surplus labour from agriculture without reducing total farm output. Such unemployment is found where too many workers are engaged in agricultural operations because of the lack of alternative or complementary employment opportunities. If, for example, seven persons are engaged in cultivating a farm that could be cultivated by five, it implies that all the seven workers are not fully employed. If two are withdrawn and given some alternative job, the total output of the farm will not be reduced when five workers are left to do the same work. It means that two workers are not contributing anything to farm output and their marginal productivity is zero. Prof. A.K. Sen does not agree with this interpretation of disguised unemployment. He asks, If marginal productivity of labour over a wide range is zero, why is labour being applied at all? The confusion arises from failure to distinguish between labour and labour time. In Sens view,

It is not that too much labour is being spent in the production process, but that too many labourers are spending it. Disguised unemployment thus normally takes the form of a smaller number of working hours per head.1 If, for instance, in a family 35 hours work a day is done on a farm, the marginal product of the 35th hour falls to zero. Let us further assume that 7 members work on the farm for 5 hours a day. Given the same technique and production process, if two labourers go away, the remaining 5 labourers would be able to maintain the same level of output by working harder and longer for 7 hours a day. Thus there is disguised unemployment of two labourers. The amount of disguised unemployment also depends on the number of hours work a TP day per labourer. If it is fixed at 7 hours a day, then again two labourers are disguised unemployed even if they work on the farm. It is thus the marginal productivity of the labourer that O L Labour is nil over a wide range and the productivity of labour may be just equal to zero at the margin. Sen explains the difference b L1 between the two approaches with the help of the Fig. 1. a TP is the total output curve which becomes horizontal when L2 OL labour is employed. It implies that the marginal product of labour becomes zero with OL labour hours and it is no use employing labour beyond this point. However, the number of Number of labourers engaged in agricultural operations is OL2 and each Labourers works for tan a hours. But the working hours per labourer are tan b. Thus L2L1 labourers are disguised unemployed. It shows that marginal productivity of labour is zero at point L and that of labourer over the range L2L1 is nil. NURKSES THEORY Ragner Nurkse 2 developed the thesis that disguised unemployment in overpopulated underdeveloped countries can be a source of capital formation. According to Nurkse, the state of disguised unemployment in underdeveloped countries constitutes a disguised saving potential. Underdeveloped countries suffer from disguised unemployment on a mass scale. With existing techniques of production in agriculture, it is possible to remove from land a large proportion of the surplus labour force without reducing agricultural output. This surplus labour force can be put to work on capital projects, like irrigation, drainage, roads, railways, houses, factories, training schemes, community development, education and health, etc. In this way, rural underemployment can be a source of capital formation. Nurkse has split up the problem of mobilizing the disguised unemployed as a saving potential in two parts: Firstly, how to feed the surplus population transferred to the various capital projects. Secondly, how to provide tools to the new workers to work with. Feeding the Surplus Population. Though the first problem can be solved to some extent by voluntary savings, by taxation and even by importing foreign capital, yet the magnitude of the problem requires that it should be self-financing. At present the unproductive surplus labourers
1. A.K.Sen, Choice of Techniques, pp. 3-5. 2. R. Nurkse. op. cit. Ch. 11.

Total Output

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are being supported by the productive labourers. The latter are doing virtual saving since they are producing more than they consume. But this saving is running waste because it is being utilized in feeding the unproductive labourers whose contribution to output is zero or negligible. If the productive peasants working on land continue to feed their unproductive dependents working on capital projects, then their virtual saving would become effective saving. But this capital formation through the use of surplus labour is self-financing only if the mobilization of the concealed saving potential is 100 per cent successful. Nurkse further emphasizes, It seems to be a question of all or nothing. Either the whole of the food surplus that becomes available on the land through the withdrawal of the surplus labourers is mopped up to feed the unproductive labourers in their new occupations or nothing can be done at all. But the snag is that there may arise certain leakages in this food fund available for capital formation: (a) The newly employed worker may start consuming more food than they were consuming at the farms; (b) the peasants left behind on the farms may themselves start consuming more food than before; and (c) the problem of bearing the cost of transporting food from the farms to the capital projects. Though it is not possible to plug these leakages fully, Nurkse suggests that this can be done by complementary savings in other sectors of the economy, by state action in requisitioning the surplus food stocks from the peasantry, and even by meeting the deficit from imported food stocks. He also stresses the need for levying indirect taxes on commodities that enter into the peasants budget: taxation in kind, a tax on land owners and on their rents may further help in mopping up the food surplus. Nurkses firm conviction is that whatever the machinery employed may be, some form of collective saving enforced by the state may prove to be indispensable for the mobilization of the saving potential implicit in disguised unemployment. Financing of Tools. The second problem relates to the financing of tools to be provided to new construction project workers. Even though capital goods can be imported, yet as usual an act of domestic saving is required in this case. In some of the densely populated agricultural economies, there is not only underemployment of labour but also of capital. Due to small scattered plots, large number of farm tools, implements and draught animals are used. But if these small and scattered holdings are consolidated, certain simple tools will be released which the investment workers can use in new capital projects. Moreover, simple tools and equipment that the newly employed workers require can be made by the workers themselves with their own hands. Such simple tools can also be imported from abroad in exchange for the countrys exports. But it is essential that only that capital equipment should be imported which can be easily adapted to the prevailing factor endowments in the country. As Nurkse puts it, Much simpler tools and equipment may be appropriate to the relative factor endowments of countries of this type in the early stages of development. To sum up, Hands would move from the village to the new construction sites; with the hands would also move mouths; and with less mouths to feed in the village the possibility would be created for food to move out of the village to supply the needs of a swollen army of construction workers, without any fall in consumption on the part of those remaining in the village. 3 Thus a process of economic development is generated through the use of the disguised unemployed.
3. M. Dobb, Some Aspects of Economic Development, 1951. Dobb propounded this thesis, independent of Nurkse, in one of his lectures delivered at the Delhi School of Economics when the writer was a student.

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Nurkse, therefore, rightly believes that there is concealed saving potential in rural underemployment in overpopulated underdeveloped countries that can be effectively utilized as a means of capital formation. LIMITATIONS OF THE CONCEPT The concept of disguised unemployment as a concealed saving potential has led to considerable controversy. Economists have questioned the practicability of this concept in democratic underdeveloped economies. The various difficulties that stand in its working are examined below: 1. Propensity to Consume not Constant. Nurkse assumes that the propensity to consume of both the newly employed workers and those left on the farms remains constant. But this is an untenable assumption. Kurihara is of the view that as a result of transferring the disguised unemployed to the capital-goods sector, the propensity to consume may rise in the case of the whole economy. In this event the pressure will increase for allocating to the consumer goods sector those resources which might otherwise be used to increase output of capital goods.4 2. Problems of Collection and Distribution of Food Surplus. Nurkse fails to visualise the problems connected with the mopping up and the distribution of the food surplus from those working on the farms to those working on the new capital projects. How is the food to be collected and distributed to workers at the project sites? How much each farm is to contribute to the food fund, if such a fund is created? If farm owners refuse to supply food, what action is contemplated? Nurkses thesis does not offer any solution to these problems. 3. Marketable Surplus does not Increase. Further, it is doubtful that the withdrawal of surplus labour from agriculture would increase the marketable surplus. Kaldor holds that in underdeveloped countries, peasants produce for self-sufficiency rather than for profits and the amount supplied to the non-agricultural sector tends to be governed by the need for industrial products. Since as a result of reduction of farm hands, the demand for industrial products is also reduced, it is possible that a reduction in surplus labour force would be followed by a reduction, rather than an increase, in the amount of marketable surplus for the towns.5 4. Difficult to Mobilize Disguised Unemployed. It is not easy to mobilize the disguised unemployed and send them to the new capital projects. They are so intensely attached to their family and land that they do not like to leave their kith and move to the new projects. Majority of the disguised unemployed, however, find their way into the armed forces, as is the case in India. 5. Not Possible to Get Work without Payment of Wages. In Nurkses analysis, the problem of payment of wages to the workers does not arise because the entire process of capital formation is assumed to be self-financing. This is unrealistic. Unless wages are paid, workers cannot be attracted to the new capital projects. As Lewis remarks, Unpaid labour may be very important in countries which resort to compulsory labour but its scope in other countries is limited. 6. Successful only in Totalitarian States. As a corollary to the above, this up by the bootstraps approach can succeed only under strong totalitarian governments and has little relevance to democratic underdeveloped countries. As a matter of fact, this approach to capital formation has succeeded in China where the masses have been forced to work on capital projects by providing only minimum rations required for bare subsistence. Nurkse himself admitted this
4. K. Kurihara, op. cit., pp. 119-120. 5. N. Kaldor, Essays on Economic Stability and Growth, 1960.

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fact when he declared later on, Some of the underdeveloped countries do have potential domestic resources available for capital construction. But it may be very hard nay impossible to mobilize them without resorting to coercive methods.6 7. Problems of Inflation and Balance of Payments. The task of providing work to the surplus labour force is beset with a number of difficulties. Lewis maintains that what holds back the use of such labour is not the lack of fixed capital but the lack of working capital. Assuming that working capital is available, the employment of surplus labour is likely to lead to inflation in the economy. When the newly employed workers are paid wages, their demand for consumer goods increases without a corresponding increase in the output of consumer goods. Hence prices will rise. This will also stimulate imports of consumer goods, with unfortunate effect on the balance of payments, and if these effects are prevented by strict control of imports and of exports the effect is merely to swell the sum of money circulating at home, and set to put greater pressure on the domestic prices.7 8. Unskilled Labour Fails to Increase the Output of Fixed Capital. According to Kurihara, the use of unskilled and ill-equipped labour may not increase significantly the output of fixed capital which is of crucial importance to industrialization. The shifting of the disguised unemployed to investment projects of a labour-intensive type requiring no special skill or equipment cannot be expected to produce fixed capital in quantities and qualities that are of immediate and adequate use to industrialization. The most that could be expected of such labour-intensive projects is a limited amount of preliminary capital formation (e.g., swamp clearance of factory sites, dirt road building for modern highways, and handicrafts serving as raw materials for machine made manufactures). But it takes machines to make machines on a scale large enough to speed up industrialization. And the disguised unemployed are an ineffective substitute for such machines to make machines.8 9. Unrealistic Assumption of Technological Neutrality. Kurihara further maintains that the tacit assumption of technological neutrality involved in Nurkses idea of disguised unemployment as a saving potential is untenable and unhelpful. During the process of industrialization, if the capital-goods sector adopts labour-saving devices, it will set a limit to the full mobilization of the disguised unemployed in the economy. In such a situation, capital equipment will have to grow at a much faster rate to equip labour with increasing productivity. Technological progress is thus inevitable. 10. Effects of Increasing Population on Capital Formation. To Kurihara, Nurkse fails to analyse the effects of rising population on capital accumulation. A rapidly growing population aggravates the difficulty of increasing the rate of capital formation in two ways: (i) there is a continuous addition to the unproductive labour force which eats up whatever saving potential is created by shifting the disguised unemployed to the new capital projects; and (ii) this population growth outstrips capital accumulation showing thereby that disguised unemployment grows faster than can be absorbed productively by the very stock of capital that the disguised unemployed are supposed to help expand. 11. Not Applicable to Directly Productive Activities. Hirschman makes a distinction between permissive and compulsive factors in economic development. According to Nurkse, it is by
6. R. Nurkse, Lectures on Economic Development, p. 200. Italics mine. 7. W.A. Lewis, op. cit., p. 218. 8. K. Kurihara op. cit., p. 119.

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employing the unproductive workers in social overhead capital projects that capital formation will take place. But Hirschman is of the view that though social overhead capital is fundamental to economic development, yet it is only a permissive factor, for it simply permits private investment to go ahead. The existence of directively productivity activity, on the other hand, is a compulsive factor in economic development. It includes, among others, machine tools and iron and steel industries. He, therefore, contends that Nurkses concept of converting the rural surplus labour into capital formation can have relevance only with regard to social overhead capital but not to directly productivity activities which are more significant from the viewpoint of economic development.9 12. Fall in Production. Schultz does not agree with Nurkse that the removal of surplus labour force from the farms to the new capital projects will not reduce agricultural productivity. He contends that there is no evidence for any poor country anywhere that would suggest that a transfer of even some small fraction, say, 5 per cent of the existing labour force out of agriculture, with other things equal, could be made without reducing its production.10 As Doreen Warriner has pointed out, the emphasis on overpopulation or disguised unemployment is most unfortunate because it concentrates on pure guesswork and diverts attention away from the ascertainable factsthe fall in output per head resulting from pressure of population on the means of subsistence and the destruction of soil fertility.11 13. Defective Empirical Evidence. Empirical evidence has shown that the estimates of 20-25 per cent of surplus labour are entirely inadequate and defective. Kao, Anschel and Eicher have shown that the empirical studies supporting such optimistic estimates of disguised unemployment were often poorly conceived. In addition, by considering temporary rather than permanent labour transfers and by allowing some reorganisation of production, various writers have arrived at a high percentage of disguised unemployment. To date, there is little reliable empirical evidence to support the existence of more than 5 per cent disguised unemployment in underdeveloped countries.12 Conclusion. The inference can be drawn from the entire discussion that the existence of disguised unemployment as a concealed saving potential and hence as a source of capital formation in overpopulated underdeveloped countries is beset with a number of difficulties and has little practicability in countries that have wedded themselves to a democratic way of living. We may thus conclude with Viner that there is little or nothing in all the phenomena designated as disguised unemployment, as hidden unemployment, or as underemployment which in so far as they constitute genuine social problems would not be adequately taken into account by competent, informed, and comprehensive analysis of the phenomenon of low productivity of employed labour, its causes, its true extent, and its possible remedies.13 A REALISTIC VIEW The views expressed above are by those who are sceptical about the concept. But it cannot be denied that the use of surplus labour as the source of capital formation brings within a narrow
9. A.O. Hirschman, The Strategy of Economic Development, 1958. 10. The Role of Government in Promoting Economic Development in The State of Social Sciences (ed.) L.D. White. 11. D. Warriner, Land Reform and Economic Development, 1955. 12. C.K. Eicher and L.W. Witt (eds.), Agriculture In Economic Development, 1964. 13. Some Reflections on the Concept of Disguised Unemployment, IJE.

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time-horizon projects which were outside this horizon. It gives scale economies, enlarges land, capital and employment and raises productivities all round. So far as the problem of wage payment is concerned Prof. Khusro14 suggests three methods: (i) Underemployed workers can be organized on their own and on their neighbours farms on mutual aid on capital building. They need not be given a wage. They eat the same food at their own kitchens. As a result, there are no inflationary pressures on food prices. (ii) Underemployed workers can be organized to work on capital construction within a village outside their own farms. They are given a wage. But they return to their kitchens daily to eat the same food which they would have eaten any way. They spend their wages on non-food items whose prices rise. But with a time-lag, they would produce the capital which would produce the extra food which will pay for the wage-goods. (iii) Underemployed workers can be organized to work on capital projects away from their villages and paid a wage. They would spend their wages on food and this will lead to inflationary pressures. But eventually it produces the capital which produces the food which pays for the wage. The problem in all the three cases is (a) of organization, and (b) of bridging the gap between work (wage payment) and product. If these programmes are undertaken on a nationwide basis, monetary-fiscal measures become necessary. According to Khusro, the essence of the matter is organization in the field and taking up of projects with due regard to efficiency.

14. A.M. Khusro, Readings In Agricultural Development, 1968.