The Rural Employment Guarantee Scheme (REGS) has the word guarantee in it and whatever else it may or may not guarantee, it certainly guarantees greater overall poverty than would be the case without the REGS.
In brief, REGS does not increase the aggregate production of the economy, nor does it increase productive capacity; it merely redistributes incomes by giving money to those in the rural areas. The first order effect of this diversion of resources is that other projects which have the potential to increase production and increase productive capacity do not get done; that is, the opportunity cost of the REGS is very high. The second order effects are increased public corruption, making the population much more dependent, increasing population, etc. This means in the future, the economy will produce much less than it would have otherwise produced and thus more people would face poverty as a result of the REGS .The rest of this essay is an elaboration of this argument.
Reasoning from the basics, first we must understand what the words poverty, income, employment, and production mean and how they are related to each other. Given the widespread confusion of these basic words, it is not surprising that the reasoning comes out all warped and some rather silly notions are entertained by supposedly sane people.
Poverty is lack of income, fundamentally and essentially. Income is real and is not to be confused with money which is nominal. The confusion between income and money happens because income is denominated in money terms. One can have income without having money. For instance in a Robinson Crusoe economy, Robinson’s income is what he gathers from the forest and the sea, farms and manufactures through his labor. Income is the real stuff that he can eat, and wear, and save. The seeds he saves for the next season’s plantings are his investments. Whether Robinson is poverty stricken or not depends entirely upon how much stuff he produces through his labor, and what he gets without having to exert any labor such as coconuts falling of their own on his head.
A Robinson Crusoe economy is a simplified model of a real economy. In the RC economy, there are natural resources such as the ocean and forests (land), Robinson’s ability to do work (labor), a few tools (capital), and Robinson’s knowledge of how to do things such as making a fire, planting corn, making bread (technology). Robinson is the capitalist who owns the means of production. He supplies the labor, and he gets paid wages which are his income. Depending upon how good his technology is – such as knowing when to plant what, or how to make a fishing net; and how much labor he supplies – or how much leisure he enjoys; and how much of his income he consumes and how much he saves for future investment; and how good his tools are, all add up to a steady stream of stuff that is available to him and that is his income. If the amount of stuff he produces plus what nature gives to him without his exertions is below a certain level, he is poverty stricken.
Robinson could be fabulously wealthy without ever lifting a finger if nature provided all the goods he needed. That is, he would be totally unemployed and still not be poor because he would have an income without so much as moving out of his hammock. On the other hand, he could be toiling day and night and be fully employed 24/7 and yet produce so little stuff that he lives in dire poverty. You could be unemployed and rich if you get gifts, or you could be employed and yet be poor if you produce too little. To conclude this bit, poverty is lack of income, and income is stuff that you get to consume – whether it was produced by your labor or not.
Now getting back to the real economy, you have one major difference with the RC economy: the real economy has more people. All other bits remain the same. Income to a person then is that person’s share of the total amount of stuff produced in the economy. How he is apportioned his share of the total production of the economy – that is his income – is a matter that is determined by various factors. For example, he could own machines, which other people use to produce stuff and in exchange they give him some of the stuff produced. He then is a capitalist and enjoys an income without working. He is “unemployed” but not poor. Or he could be a laborer who works in a farm and gets to keep what he produces, or he could be a programmer and gets paid money which he uses to buy stuff. Or he could be just a bum and the government gives him a handout every month.
So here is absolute bottom line: people are poor when their incomes are below a certain level, irrespective of whether they are employed or not, whether they have money or not. Now the reason that a person’s income is low could be because the economy as a whole produces too little relative to the number of people among whom the production has to be distributed (the production-population imbalance), or it could be that the economy produces a huge amount of stuff but the person for some reason is unable to receive his fair share of the production (the production-distribution imbalance.) Of course, you could have combinations of the above two to get inadequate production coupled with poor distribution.
Just to underline one point that we need to keep in mind: no one, including me, wants employment; we want an income. Employment is a means to the end—the income—and not an end in itself. If we did not have to be employed but received an income, we would be free to enjoy leisure in which we could do what we pleased, from programming computers to raising corn or digging ditches. I would be happy to let robots create all the stuff that I need so that I can spend the entire time eating with nice people, drinking with nice people, and sleeping
with nice people with a contented mind.
So far we have been trying to get the vocabulary straight. Now that I am done with the vocabulary bit, we can start to reason about the problem with REGS.
India has a poverty problem because some people have incomes far below what is considered adequate for a decent human existence. It is not an employment problem, it is an income problem. Guaranteeing employment when the actual guarantee should be income is asininity of degree one.
How one goes about solving a problem depends on the nature of the problem. Is the enormous poverty in India due to the production-population imbalance (too many people, too little stuff produced) or is it due to the production-distribution imbalance (enough stuff but badly distributed)? Let’s do some arithmetic.
India’s per capita production per year of stuff denominated in money terms is US$500 or so; that is, between a dollar and two dollars a day per head. (Let’s not go into the PPP measure of income which needlessly muddies the matter; it requires a separate chapter to fix that confusion.) Clearly India suffers inadequate aggregate production because even if that was distributed perfectly evenly, each one of the more than billion people of India would be desperately poor. While maldistribution of this inadequate aggregate production seriously compounds the problem that the poorest face, clearly the more fundamental problem is that India just does not produce enough for the population that it has to support.
Indians are poor because India’s aggregate production is inadequate and therefore the solution has to begin with increasing production. Let me repeat that: we don’t need increased employment; we need increased production. And only after having produced more, we need to distribute that production better so that those who have little income can get more. Any policy which increases employment and which decreases aggregate income is therefore the most insane policy that an economy can have. It is my contention that the REGS increases employment and decreases aggregate income. And that will lead to increased poverty, as I argue below.
The REGS aims to increase employment alone and is not aimed at increasing either production or production capacity. The REGS terms state that laborers cannot use any labor saving devices if they are being paid under the scheme. Basically, if a large hole needs to be dug, you could employ one person to use a mechanical shovel and do the job. Or you could have 100 people use hand-held shovels and do it. Or you could employ 1000 with tablespoons, or 10,000 people with toothpicks to do the job. In the end only one hole gets dug but you employ more people. If by digging the hole we increase our aggregate production of stuff by Rs 1000, then the income from the employment per capita is Rs 10 per shovel-wielding worker, Rs 1 per person with a tablespoon, etc.
If the REGS does not increase the amount of stuff produced, then it essentially is an income transfer scheme. If the economy was already producing what it needed to produce, and all it needed was proper distribution of the production, then an income transfer scheme is great. Otherwise, it is better to use the labor to increase production and use the increased production to raise the incomes of those who are poor.
If there are projects that are worthwhile – that is, they increase the production of stuff or increase the capital stock – then these should be undertaken and the labor needed employed. I take it for granted that India has such projects, from building the infrastructure to educating its masses. Resources are required for these projects. The opportunity cost of diverting resources (around Rs 50,000 crores, or $10 billion a year) to schemes that essentially produce nothing nor add capacity is the value of projects that will not get done as a result.
For $10 billion, for instance, you could educate the hundreds of millions who need basic literacy and numeracy. There are enormous benefits to doing this which otherwise don’t arise when you are merely using labor to dig holes in the ground using bare hands.
There are other insidious effects of the REGS. First, it makes the people dependent on the government. Everyone cannot live on handouts – someone has to produce stuff. Handouts depress initiative and drive. Second, it increases the opportunities for bureaucratic and political corruption. Third, sets a precedent for political parties to continue to make irresponsible promises to people to win elections. Fourth, it will compound the population problem because increased incomes at the subsistence level increases fertility.
In conclusion, the economy needs to produce more stuff if it has to lift people out of poverty. Stuff gets produced by intelligently combining land, labor, and capital on projects that are efficient and have strong backward and forward linkages. Digging holes in the ground bare handed does not make any real difference. The REGS guarantees further poverty.
Post Script: The scheme is variously called National Rural Employment Guarantee Scheme (NREGS) and Rural Employment Guarantee Bill (REGB). Amit Varma had earlier posted on this blog his article on REGB in the AWSJ.
Opportunity cost is a fundamental concept in economics. For a brief discussion, please see my post on Casting Spells to Fix a Broken Car.