#49 Will Sons of Soil Do Tons of Toil?

Haryana's 'daft' ordinance on employing locals, replacement fertility rate, the evils of population, ideas of Paul Romer and more.

Jul 08, 2020

This newsletter is really a public policy thought-letter. While excellent newsletters on specific themes within public policy already exist, this thought-letter is about frameworks, mental models, and key ideas that will hopefully help you think about any public policy problem in imaginative ways. It seeks to answer just one question: how do I think about a particular public policy problem/solution?

Welcome to the mid-week edition in which we write essays on a public policy theme. The usual public policy review comes out on weekends.

— Raghu Sanjaylal Jaitley

One of the things we like to do here is what management consultants call ‘connect the dots’. Easier said than done. There are days when you scan the news and struggle to find any meta-narrative that’s lying hidden in them. And then there are days when connected dots are served on a platter with a side of masala papad.

Monday was one of those days.

A Tale Of Two Stories

The first news item was this ordinance drafted by the Haryana government to provide 75 per cent reservation in the private sector for residents of Haryana. Nothing spreads like a bad idea. AP did this last year and Maharashtra has similar plans. There have been calls for such laws in MP, Karnataka and Telangana as well. Imagined victimhood is our national sport.

The draft ordinance was passed by the Haryana state cabinet. It will become a law in the next meeting. The law, going by reports, will require private companies to register every employee with a salary below Rs. 50,000 (we are assuming this is per month) on a state portal. Any employer with more than 10 employees will be covered under the law. A domicile certificate would be mandatory for candidates to get the benefit under this scheme. If there’s no eligible local candidate for a position, the company will have to inform the state government. They will then issue permits to employers to hire from other states.

Give me a minute here. Let me scream into my pillow.

Ok. Done.

Then I noticed this – survey results of Sample Registration System (SRS) 2018. SRS is a survey commissioned by the Census Commissioner that collates data about age demographics in India including births, deaths, fertility and age-related milestones. Full report here. Few things stood out.

The Total Fertility Rate (TFR) of India is now down to 2.2. In simple terms, TFR is the average number of children that would be born to a woman over her lifetime. The replacement fertility rate for the developing world is pegged at 2.1. This is the rate at which each generation will exactly replace itself and the population will stop growing. Technically, the replacement rate is the average number of children a woman would need to have to bear a daughter who survives to child-bearing age. Considering our skewed sex ratio, we might have a replacement rate higher than 2.1. But that’s another discussion.
14 states of India are now at or below the replacement fertility rate. The population of these states will stabilise and after a decade start decreasing. Only eight states (Bihar, UP, MP, Rajasthan, Jharkhand, Chhattisgarh, Haryana and Assam) have TFR above replacement rates.
For the first time, more than half (53 per cent) of India’s population is now 25 years or older. This is higher in urban India where the fertility rates are lower. We are getting older. The demographic dividend is starting to slip through our fingers.
The death rate in India is down to 6.2 per cent from 7.3 per cent over a decade back. We are living longer, and our dependent population will get bigger over the next decade

We will discuss two issues here.

The policy of job reservation for ‘sons of soil’ will be an unmitigated disaster. We will explain why.

We will also discuss population figures and whether it is as much an evil as it is often made out to be.

Reservation About Reservations

India is a union of states. The federal structure enables better governance through devolution of power and accountability closer to the citizens. At least, that’s the design. The union enables free movement of citizens across the states, a common currency and monetary policy and control over a large part of the fiscal policy. Despite many flaws, this is an arrangement that’s worked. This reservation policy left unchecked will hurt it. Let me count the ways:

There’s nothing to redress: There are instances when the moral argument in favour of reservation overrides everything else. A long history of subjugation of a race, ethnicity or class of people is an example of it. Reservation becomes a tool to overcome prejudices and offer a level playing field to them. Philosopher John Rawls called it justice as fairness that should take priority over the utilitarian lens to maximise social output. There’s no evidence to suggest the youth of Haryana have been discriminated against for generations.
In the long-run, employment in Haryana will be dead: Does Haryana have skilled unemployed youth to fill up 75 per cent of all new jobs created in the state? If Amazon were to open a large development centre in Gurgaon with an intention of hiring 10,000 high-quality engineers, will Haryana be able to serve 7500 of them? The answer is no. Besides, why will Amazon constrain itself with this talent pool when it wants to tap the best engineering talent in India. Why will any company want to add capacity in Haryana? They will take their business to another state.
Moral Hazard: What’s the incentive for the Haryana youth to do well in studies? The reservation would mean with mere threshold qualifications, they will be a shoo-in for most jobs. Once in a job, what’s their incentive to work hard? They can free ride because the 75 per cent ‘local’ metric will become the primary constraint for the company than competence. Haryana youth will not be competitive, and the employers will lose on productivity. It’s lose-lose all around.
Rent-seeking: The whole arrangement is tailor-made for a large but weak state to play their favourite sport. Rent-seeking. The ‘business’ of issuing domicile certificates will take off at the lower levels of the administration. Companies will have to receive permits to hire for skills they can’t find in Haryana. How will they prove this scarcity? The bureaucrat will be the overlord deciding on this. This absurd, arbitrary clause will be abused. This is a but a step away from a Kafkaesque bureaucratic nightmare.
Weakening rule of law: A possible scenario that will emerge is that of employers hiring temporary workers or pegging compensation for roles at Rs. 50,001 p.m to circumvent the law. The other option for smaller firms will be to keep their headcount below 10 for as long as possible. If this can’t be managed, entrepreneurs will start shell companies to hire new employees to stay below the threshold of 10. The state creates a bad law that forces its citizens to turn unlawful. This corrodes the moral fabric of society.
Partial equilibrium thinking: Haryana is doing what it thinks is good for its citizens. How will other states respond? This will trigger similar populist moves in states that have one or more regional parties. If that comes to pass, labour mobility will be restricted across states. This will distort the labour market and reduce the competitiveness of states. Any company planning to invest in India will have to contend with a labour market that is ‘balkanised’. India isn’t an easy place to do business. We have written about this and Goodhart’s Law in a previous edition. If this turns into a contagion with other states joining in, we will struggle to attract investments. The general equilibrium effect will be terrible. Also, the other states could choose a tit-for-tat response by discriminating against candidates from Haryana for jobs in their states. This is a slippery slope for our federal structure.
Over-regulation: Like is usual with the state, the draft law has threats, fines and punishment for non-compliance. As the political ends of this law become difficult to achieve because of the lack of logic in the law itself, the state will overreach. The law will become more stringent with worse results for everyone.

Balkanisation Of Labour Market

Now, imagine 2035. If the trends as seen in SRS 2018 play out, we will have 14 states running below-replacement fertility rate with a declining rate of population. These states already have better human development indices and higher capital investments. Expect them to have consolidated these gains further. Some states (let’s call them category 1) will have a large productive workforce in the market for jobs while the other states (category 2) will be ageing but prosperous. This is a complex problem by itself with deep implications on centre-state relationships and devolution of grants to states. A ‘balkanised’ labour market will make it worse.

The better way to help ‘local’ labour is to clear the regulatory cholesterol so that more and bigger industries take shape in our states. Larger the pool of available jobs, lesser the chances that this victimhood will resonate politically.

This Haryana law must be withdrawn. It has no redeeming feature.

PS: There’s something deeply evil about a local job quota that applies below an income threshold. Migration still remains the most-powerful route for people at lower incomes to change their fortunes for the better. To block that route by balkanising the labour market is reprehensible.

Population Isn’t A Problem

That brings us to the issue of population. From an economic perspective, population is a neutral variable. It can be good or bad depending on the context. We will examine it in the Indian context below.

Malthusian muddle: The supposed ills of large population has an outsized influence in our policymaking. The near-death experience in the mid-60s when we were in danger of being a global basket case casts its long shadow on our thinking. The idea that the human population will outpace farm productivity leading to hunger, pestilence and deaths has been debunked over the years. The role of human capital, institutions and ideas on productivity have been established by economists like Solow and Romer.

As Julian Simon argued in his 1981 book The Ultimate Resource, we are an intelligent race who innovate in the face of scarcity. Human ingenuity is the ultimate resource that can make other resources plentiful. More humans lead to more ideas, bigger markets, larger infrastructure spends and, paradoxically, higher prices for scarce resources which leads to conservation or search for replacement products. There is empirical evidence to support this has been good for the world over the last century.

Pitted against Simon was Paul Ehrlich whose 1968 book The Population Bomb was a stronger and more logical update of the Malthusian argument for a different era. Ehrlich believed human exploitation of resources will make them scarcer and costlier till we run out of them. Famously, in 1980, Ehrlich and Simon placed a bet on the future prices of five metals ten years later. Here’s Ronald Bailey in his book The End of Doom about the bet:

“In October 1980, Ehrlich and Simon drew up a futures contract obligating Simon to sell Ehrlich the same quantities that could be purchased for $1,000 of five metals (copper, chromium, nickel, tin, and tungsten) ten years later at inflation‐adjusted 1980 prices. If the combined prices rose above $1,000, Simon would pay the difference. If they fell below $1,000, Ehrlich would pay Simon the difference. Ehrlich mailed Simon a check for $576.07 in October 1990. There was no note in the letter. The price of the basket of metals chosen by Ehrlich and his cohorts had fallen by more than 50 percent. The cornucopian Simon won.”

The Same Old Moral Imperative

Population isn’t a problem. The ability to tap human capital to produce ‘catch-up’ growth and ‘cutting-edge’ growth is the issue in India. We have failed to create institutions or policy frameworks that enable the ultimate resource. As Nitin Pai puts it eloquently on his blog: undergovernance, and not overpopulation, is India’s problem.

“To say that our public institutions have the capacity to handle only so large a population is not an argument to reduce the population. It is an argument to enlarge the capacity of our public institutions. Like Procustes, we cannot chop off the legs of sleepers who were too tall to sleep on his bed. We need longer beds. Enlarging capacity is about better ideas, better technology, better people and more people engaged in governance. It is wholly wrong to attribute our failure to scale up governance to keep pace with population growth to ‘overpopulation’.”

Nevertheless, we continue to blame our population. Several PMs in the past have failed to appreciate this and PM Modi in his address to the nation on Aug 15, 2019, followed the same line. This sentiment is shared by large sections of our society too. It’s not difficult to find Malthusians opposing migration on the grounds that there are just way too many people in my city.

We will get older before getting richer (or never getting richer?): This is the plain truth. At mere $2000 per capita income, we are sliding below-replacement fertility rate in most of the states. This is a bigger problem than our imagined overpopulation. In 2040, we will be an old, low-income country lacking a social security net. At this time, the only moral imperative is income growth. Everything else pales in comparison. But we continue with false trade-offs between growth and other higher-order virtues – equity, environment and national pride. This is not to argue these aren’t important. But we should consider our priorities as a $2000 per capita income economy. Not what we imagine ourselves to be.

The Same Old Conclusion

Every week we end up with the same conclusion. Strong economic growth should be the sole focus at this stage for the Indian state. And every week the state confounds us by distracting itself into areas that hurts this focus, and worse, its citizens.

Jagadish Bhagwati once said public policy advocacy is like running a marathon. We’d like to add – ‘often running at the same spot’. Or as our friend, Ameya Naik puts it, it’s a Sisyphean Marathon.

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Reading and listening recommendations on public policy matters

[Article] Prof. Maurice Kugler on the economics of ideas and the contribution of Nobel laureate Paul Romer. A detailed narrative of the evolution of economic thinking in this area.
[Article] Paul Romer on Economic Growth and our failure of imagination. This is a great line for Indian policymakers to chew on - “the country that takes the lead in the twenty-first century will be the one that implements an innovation that more effectively supports the production of new ideas in the private sector.”
[Article] Tim Worstall in the Forbes about the Simon-Ehrlich wager with data, arguments and counters on why Simon won.