Themes > Current Issues
08.02.2001
The Passion for Downsizing
Jayati Ghosh
A
strange fever appears to have gripped the English language media. In
fact, it is not just the media that is affected : the Prime Minister,
several of his colleagues in the Cabinet, the representatives of the
Chambers of Commerce, and many of our media-appointed economic "gurus"
all seem to have caught the bug. The main symptoms of this malaise are
an obsession with the supposedly large size of the Government’s
employed work force, and an irrepressible urge to cut down the number
of workers somehow, anyhow.
This fever is reaching frenzy point at budget time, when concern over the size of the fiscal deficit becomes the concern of the day, and because reducing the size of the public sector work force seems to be the only idea the current government has to bring in fiscal order. Not only is downsizing presented as the best means for bringing down the deficit by reducing expenditure on salaries, but it is optimistically seen as a panacea for all sorts of economic ills.
Thus we have a Prime Minister announcing proudly that the number of Central Government employees will be cut by 10 per cent in the next few years. As it happens, there has been an implicit freeze on additional jobs in the Central Government for some time. Similarly, the pressure on public sector enterprises to cut staff has been on for nearly a decade now. As a consequence, total public sector employment has been stagnant over the 1990s at around 194 lakh persons, while Central Government employment actually fell by 5 per cent between 1991 and 1998, to reach 32.5 lakh employees.
Nevertheless, the image still persists, of a bloated and incompetent public sector in which most workers are underemployed and sitting around almost uselessly, probably because the argument is repeated so widely and frequently. Quite apart from the veracity of this claim, which is highly questionable, there are important economic issues which this perception completely ignores.
Thus, take the basic issue of why we have public sector employment at all. The sweeping middle class judgement is that all of it is the result of political motivation to provide "jobs for the boys". But of course, all societies require public employment, not only to provide public goods which would otherwise not be in the private interest to produce at all, but because of essential public services which are crucial for both productive activity and for the welfare of the people.
What makes the current discussion about excessive public employment in India so ridiculous is that in fact thus far the state has failed quite dramatically in providing a range of public goods and services to the majority of people. Whether we are talking about basic transport and infrastructure development, or adequate housing or sanitation, or universal access to minimum health facilities and educational opportunities, it is more than evident that the gap between public need and actual availability is huge.
This is true for both rural and urban areas, and if anything, in some urban areas the access to and basic quality of public services has even declined over the past decade. What this means, therefore, is that the government must spend more on such areas and therefore employ more people, not less. If there is truth in the perception that public sector workers are underemployed, then the solution is surely to use their services more effectively and productively, for no one can argue that there is no real work available for them to do. It is ironic that the same people who demand a reduction of public sector expenditure and employment are typically the first to point accusing fingers at the poor condition of public services and facilities.
The illogical nature of the belief in downsizing as panacea is especially evident in the banking sector, which is currently the focus of the "second generation reforms". A reading of the financial press would suggest that the attempt to reduce employment in public sector banks through Voluntary Retirement Schemes is immensely desirable and much to be lauded. Yet it would be hard for even the most avid job-cutter to argue that the spread of banking service in our country is adequate to meet the needs of the population or of the growing economy.
Indeed, if banking is to serve its social function of financial intermediation, the sector as a whole needs to employ many more people in more places in the country, and to expand in terms of branches and activities. Instead, what we are witnessing is a systematic attempt to pare down many of the public sector banks prior to privatisation, and to reduce their ability to deliver various financial services. Of course privatisation in turn would result in additional, and more significant, job loss.
None of this needs to happen. Some of the trade unions of bank workers had in fact got together to work out a recovery and restructuring package for several problem-ridden public sector banks, which would not only make them financially viable but would allow them to increase their level of service provision. This proposal got short shrift from the Finance Minister, who claimed that he could not spare the Rs. 5,000 crore that would be required for this scheme. By contrast, the government is apparently willing to spend more than Rs. 7,000 crore on the Voluntary Retirement Scheme, which does not more than reduce the number of employees. The purely political nature of such expenditure decisions could not be more clear.
The downsizing bug is not confined to those in control of government or public sector enterprises. It is now the mantra of the private sector as well. And each merger or acquisition is met with eventual reduction in staff, as the recent merger of two foreign banks, Standard Chartered and ANZ Grindlays, is illustrating in India at the moment.
What those advocating such downsizing tend to forget is that the issue involves much more than justified concern about the fate of the workers who lose their jobs in this process. It also tends to involve a genuine loss of efficient functioning as the remaining workers are forced into additional workload and insecure contracts. International experience, from countries as far apart as England and Brazil, suggests that the costs of obsessive downsizing of the workforce can be severe and even socially damaging.
Thus, in Britain, the reduction of staff strength in the privatised railway system has been associated with a near collapse of the system, with many more accidents, inordinate delays, frequent unannounced changes of schedule and apparently a much more surly workforce which is made to work longer and more intensely without security of contract. Similarly, the Latin American privatisations of several important public utilities has implied not just job loss but also declining safety precautions and reduced effectiveness of services as those workers who remain in employment find themselves unable to match the delivery levels associated with the earlier higher employment.
Quite apart from these supply-side considerations, there is the obvious Keynesian point to be made, that public employment is also necessary because it creates purchasing power which is important even from the point of view private growth. Keynes famously argued that in an economy with unutilised capacity, simply getting workers to dig holes and then fill them again would serve as positive economic purpose because it would increase effective demand, and therefore production, by a multiple of the wages paid to such workers. This simple point tends to be forgotten today, but that does not make it any less relevant.
In a world context of substantial aggregate unemployment, such labour reduction strategies are therefore hard to justify in any economy-wide perception, and can only be explained by private agents’ desire for short term profitability at any cost. But such motivations are not supposed to determine government’s actions, which is why societies choose to have governments in the first place.
This is what makes the current Indian’s government’s obsession with downsizing so bizarre. And seen in the immediate macroeconomic context, of declining growth rates in all sectors, poor aggregate employment generation and huge wastage of the country’s human resources, such a fixation is nothing short of obscene.
This fever is reaching frenzy point at budget time, when concern over the size of the fiscal deficit becomes the concern of the day, and because reducing the size of the public sector work force seems to be the only idea the current government has to bring in fiscal order. Not only is downsizing presented as the best means for bringing down the deficit by reducing expenditure on salaries, but it is optimistically seen as a panacea for all sorts of economic ills.
Thus we have a Prime Minister announcing proudly that the number of Central Government employees will be cut by 10 per cent in the next few years. As it happens, there has been an implicit freeze on additional jobs in the Central Government for some time. Similarly, the pressure on public sector enterprises to cut staff has been on for nearly a decade now. As a consequence, total public sector employment has been stagnant over the 1990s at around 194 lakh persons, while Central Government employment actually fell by 5 per cent between 1991 and 1998, to reach 32.5 lakh employees.
Nevertheless, the image still persists, of a bloated and incompetent public sector in which most workers are underemployed and sitting around almost uselessly, probably because the argument is repeated so widely and frequently. Quite apart from the veracity of this claim, which is highly questionable, there are important economic issues which this perception completely ignores.
Thus, take the basic issue of why we have public sector employment at all. The sweeping middle class judgement is that all of it is the result of political motivation to provide "jobs for the boys". But of course, all societies require public employment, not only to provide public goods which would otherwise not be in the private interest to produce at all, but because of essential public services which are crucial for both productive activity and for the welfare of the people.
What makes the current discussion about excessive public employment in India so ridiculous is that in fact thus far the state has failed quite dramatically in providing a range of public goods and services to the majority of people. Whether we are talking about basic transport and infrastructure development, or adequate housing or sanitation, or universal access to minimum health facilities and educational opportunities, it is more than evident that the gap between public need and actual availability is huge.
This is true for both rural and urban areas, and if anything, in some urban areas the access to and basic quality of public services has even declined over the past decade. What this means, therefore, is that the government must spend more on such areas and therefore employ more people, not less. If there is truth in the perception that public sector workers are underemployed, then the solution is surely to use their services more effectively and productively, for no one can argue that there is no real work available for them to do. It is ironic that the same people who demand a reduction of public sector expenditure and employment are typically the first to point accusing fingers at the poor condition of public services and facilities.
The illogical nature of the belief in downsizing as panacea is especially evident in the banking sector, which is currently the focus of the "second generation reforms". A reading of the financial press would suggest that the attempt to reduce employment in public sector banks through Voluntary Retirement Schemes is immensely desirable and much to be lauded. Yet it would be hard for even the most avid job-cutter to argue that the spread of banking service in our country is adequate to meet the needs of the population or of the growing economy.
Indeed, if banking is to serve its social function of financial intermediation, the sector as a whole needs to employ many more people in more places in the country, and to expand in terms of branches and activities. Instead, what we are witnessing is a systematic attempt to pare down many of the public sector banks prior to privatisation, and to reduce their ability to deliver various financial services. Of course privatisation in turn would result in additional, and more significant, job loss.
None of this needs to happen. Some of the trade unions of bank workers had in fact got together to work out a recovery and restructuring package for several problem-ridden public sector banks, which would not only make them financially viable but would allow them to increase their level of service provision. This proposal got short shrift from the Finance Minister, who claimed that he could not spare the Rs. 5,000 crore that would be required for this scheme. By contrast, the government is apparently willing to spend more than Rs. 7,000 crore on the Voluntary Retirement Scheme, which does not more than reduce the number of employees. The purely political nature of such expenditure decisions could not be more clear.
The downsizing bug is not confined to those in control of government or public sector enterprises. It is now the mantra of the private sector as well. And each merger or acquisition is met with eventual reduction in staff, as the recent merger of two foreign banks, Standard Chartered and ANZ Grindlays, is illustrating in India at the moment.
What those advocating such downsizing tend to forget is that the issue involves much more than justified concern about the fate of the workers who lose their jobs in this process. It also tends to involve a genuine loss of efficient functioning as the remaining workers are forced into additional workload and insecure contracts. International experience, from countries as far apart as England and Brazil, suggests that the costs of obsessive downsizing of the workforce can be severe and even socially damaging.
Thus, in Britain, the reduction of staff strength in the privatised railway system has been associated with a near collapse of the system, with many more accidents, inordinate delays, frequent unannounced changes of schedule and apparently a much more surly workforce which is made to work longer and more intensely without security of contract. Similarly, the Latin American privatisations of several important public utilities has implied not just job loss but also declining safety precautions and reduced effectiveness of services as those workers who remain in employment find themselves unable to match the delivery levels associated with the earlier higher employment.
Quite apart from these supply-side considerations, there is the obvious Keynesian point to be made, that public employment is also necessary because it creates purchasing power which is important even from the point of view private growth. Keynes famously argued that in an economy with unutilised capacity, simply getting workers to dig holes and then fill them again would serve as positive economic purpose because it would increase effective demand, and therefore production, by a multiple of the wages paid to such workers. This simple point tends to be forgotten today, but that does not make it any less relevant.
In a world context of substantial aggregate unemployment, such labour reduction strategies are therefore hard to justify in any economy-wide perception, and can only be explained by private agents’ desire for short term profitability at any cost. But such motivations are not supposed to determine government’s actions, which is why societies choose to have governments in the first place.
This is what makes the current Indian’s government’s obsession with downsizing so bizarre. And seen in the immediate macroeconomic context, of declining growth rates in all sectors, poor aggregate employment generation and huge wastage of the country’s human resources, such a fixation is nothing short of obscene.
© MACROSCAN 2001