In chapter 4, we saw (with the Harrod–Domar model) that full employment of the labor force and full utilization of productive capacity will take place only if natural and warranted growth rates coincide. Achieving this is very difficult, and discrepancies between these two rates would take the economy further away from equilibrium. In chapter 3, I discussed developing Asia's employment record: while some countries have done well and industrialization has led to the creation of employment (e.g., the newly industrialized economies), this is not the case in other countries (e.g., India, the Philippines). In Box 5.1, I argued that growth and structural transformation are related in a circular way: in general, countries become different as they grow, as they produce a different bundle of goods and services, using different inputs and new methods of production. And Marx and Keynes, despite coinciding in various aspects in their analyses of capitalist economies, reached different conclusions about the possibility of achieving full employment ( Mattick [1969] provides an excellent comparative analysis of Marx and Keynes).

In this chapter, I will discuss further obstacles, both political and technical, to the attainment of full employment. Today's developing countries must consider the impact of fast structural transformation—which includes industrialization, substantial reallocation of labor, imbalances across sectors, and technological change (e.g., introduction of new products and services)—if they are to devise sensible policies aimed at eliminating unemployment and underemployment, reducing poverty, and generating more prosperous and inclusive societies (Asian Development Bank 2007b).

I argued in chapter 6 that investment is essential in achieving the full em ployment of labor, and discussed three obstacles to the increase in investment. I argued that a large volume of public investment is needed. However, this solution faces serious political obstacles. Kalecki (1943, 138) asked, “[W]hy do not they [businessmen] accept gladly the ‘synthetic’ boom which the Government is able to offer them?” He argued that “the assumption that a Government will maintain full employment in a capitalist economy if only knows how to do it is fallacious” (1943, 138). Kalecki gave three “reasons for the opposition of the ‘industrial leaders’ to full employment achieved by Government spending” (1943, 139): (i) the opposition against government spending based on a budget deficit and the dislike of government interference in the problems of employment;

In chapter 4, we saw (with the Harrod-Domar model) that full employment of the labor force and full utilization of productive capacity will take place only if natural and warranted growth rates coincide. Achieving this is very difficult, and discrepancies between these two rates would take the economy further away from equilibrium. In chapter 3, I discussed developing Asia's employment record: while some countries have done well and industrialization has led to the creation of employment (e.g., the newly industrialized economies), this is not the case in other countries (e.g., India, the Philippines). In Box 5.1, I argued that growth and structural transformation are related in a circular way: in general, countries become different as they grow, as they produce a different bundle of goods and services, using different inputs and new methods of production. And Marx and Keynes, despite coinciding in various aspects in their analyses of capitalist economies, reached different conclusions about the possibility of achieving full employment (Mattick [1969] provides an excellent comparative analysis of Marx and Keynes).

In this chapter, I will discuss further obstacles, both political and technical, to the attainment of full employment. Today's developing countries must consider the impact of fast structural transformation—which includes industrialization, substantial reallocation of labor, imbalances across sectors, and technological change (e.g., introduction of new products and services)—if they are to devise sensible policies aimed at eliminating unemployment and underemployment, reducing poverty, and generating more prosperous and inclusive societies (Asian Development Bank 2007b).

This final chapter (before the conclusions) deals with the role of education, in particular with issues: (i) knowledge as a public good that produces externalities; (ii) the “low-skill, low-tech map”; and (iii) education, unemployment, and structural change.

In Solow's (1956) neoclassical model, saving rates do not affect longrun growth. The latter is determined by the exogenously given rate of technological progress. Diminishing returns to capital in this model mean that higher savings lead to a decrease in interest rates to the point where the economy saves to keep up with technological progress. Therefore, no matter what the incentives to save are, long-run growth will be at the rate of technological progress. The key issue here is whether diminishing returns to capital do set in. The so-called new theories of growth developed since the 1980s claim that this is not the case if one considers capital in a broader sense. One possible cause is that people have incentives to accumulate human capital, e.g., knowledge of new technologies that economize on labor. This way, diminishing returns may not accrue to physical and human capital together. Diminishing returns require one factor to be in fixed supply (e.g., labor), but profit-seeking entrepreneurs might find out ways to get around the constraint of the fixed factor. For example, they will seek out new technologies that economize on labor. This way, technology responds to incentives.

But technology has two peculiar features. First, technological knowledge is likely to leak from one individual to another, akin to the Keynesian multiplier. This is what economists refer to as externalities. Second, technology delivers the most when high-skilled individuals match with each other. The negative implication is that low-skilled people can be left out of the process and be stuck in a trap (discussed in Box 15.3).

During the last few years, terms such as “harmonious society” in the People's Republic of China (PRC), “sufficient economy” in Thailand, and similar terms in other countries across Asia, have made their way into the discourse of policy makers. The message in all cases is similar: development is more than growth. The Commission on Growth and Development (2008) in its Growth Report also echoes the same sentiment. The Government of India, for example, boasts to have fostered “inclusive growth.” By this it means that the budget has increased allocations to school meals or rural road-building. The high-growth policies implemented across the region since the 1960s were successful and led to increases in per capita income and dramatic reductions in poverty, contributing to closing the gap with the developed world. But today a feeling has spread that policies and objectives need to be revised as citizens across Asia demand more than growth. Inequality, productive and decent employment, the environment, health, and climate change are becoming increasingly important in the agendas of policy makers. Institutions such as the World Bank and the Asian Development Bank also acknowledge the issue and argue that growth and globalization have to be inclusive.

What is inclusive growth? Although the term has not been formally defined, Ali and Zhuang (2007, 10) claim that a consensus is emerging as to what it means: “growth with equal opportunities.” In a related paper, Ali and Son (2007, 1–2) further argue that inclusive growth is “growth that not only creates new economic opportunities but also one that ensures equal access to the opportunities created for all segments of society. Growth is inclusive when it allows all members of a society to participate in, and contribute to, the growth process on an equal basis regardless of their individual circumstances” (Box 1.1 and Table 1.1 on the PRC).

In this book, I discuss the implications of inclusive growth for policy making in developing Asia. If the term inclusive growth is a useful concept, how should it be interpreted in developing policies? What sort of policies should be implemented to achieve it? What are the constraints and tradeoffs? And finally, can it be achieved?

From Bangalore to Melbourne

My interest in Indian overseas students has its origins in earlier research that I conducted for my MA thesis in 2003. At the time, I was interested in the question of how working in the Indian IT industry of Bangalore (a highly modern and transnational work environment) influences life outside the office and vice versa. For this reason, I had rented an apartment in the HSR-Layout, close to Koramangala, a hip and upcoming neighborhood in Bangalore famous for its numerous IT companies. The complex itself was located on the Outer Ring Road, a very busy and dusty road that led to all sorts of construction sites nearby. At one such site, a fly-over was being built to alleviate the busy traffic coming in and out of the city via Hosur Road. I would often pass by this site, either by auto-rickshaw or on foot, on my way to an interview and notice how the whole project was taking shape everyday. Here, I realized, India was ‘developing’; here it was ‘growing’, ‘happening’. On the corner of the same crossing where the fly-over was being built, Indian computer giant WIPRO had one of its many offices. The company's main campus was located at Electronics City, though, which could be reached from there in about half an hour by auto-rickshaw. Electronics City houses a number of other important IT companies, the most famous being Infosys.

Lessons to be Learned and Understood

In the previous chapter, it was described how for many Indian students newly arrived in Australia, the first opportunity to meet the local Indian community came at the Holi celebrations held at the temple at Carrum Downs. Having arrived in Australia, matters such as finding a place to live, looking for jobs, etc., have to be taken care of. Those students with contacts (family, friends or acquaintances) in Australia often lost touch with them once they had found a place to live. Reasons varied from being too busy with ‘other’ things to simply not being interested in maintaining the contact. Aside from these reasons, though, it also appeared as if this was never supposed to be the case anyway. These contacts were never meant to remain long-lasting ones, something that was inherently understood from the start. This is rather surprising. The way international discourses and narratives on issues such as assimilation and integration take shape, one could argue that, in general, migrants are understood not only to have strong ties with people still living in the place of origin but to further strengthen these ties once they have migrated. Newcomers are imagined to quickly integrate in already locally established groups of migrants with whom they share a similar national/cultural background. Why then does this not appear to happen in the Australian case?

Into the Great Wide Ocean

It is a cold, windy day in September; the wind joyfully plays with the women's saris and causes the thin fabric of kurta pyjamas to flap around shivering male legs. We are all watching the spectacle from the pier: two men in snow-white kurtas are making their way into the ice-cold ocean water, carefully balancing a beautifully decorated clay idol of Lord Ganesh over their heads. When they are barely able to keep their heads above the water, they submerge the idol. There is applause, pictures are taken, but most of all relief is in the air as we can all go back inside now. Spring may be on its way but, on this cold Saturday afternoon, it still seems far away. When I make my way back into the community center of Seaford, a distant suburb about an hour by train from the CBD, I notice that the place is already packed with Maharashtrians. Waiting in line for the traditional sweets that are being handed out, I chat a bit with Rajesh, one of my regular informants. Although he came to Australia as an overseas student, once arrived he has discovered that he could have already applied for PR back home (‘offshore’), as he already met the necessary requirements with the right skills and required number of years of work experience.

In chapters 5 and 6, I argued that inflation can potentially damage developing countries because it erodes the purchasing power of wages and shifts the burden of financing development to workers. This is unethical and conflicts with the idea of inclusive growth. In this chapter, I address the following three questions: (i) Can full employment be achieved without inflation? (ii) How high does inflation have to be to represent a serious problem? (iii) What causes inflation? This discussion serves as prologue to the discussion of monetary and fiscal policies in the next chapter. As the discussion in chapter 6 made clear, price increases that lead to real wage reductions (especially for the workers at the bottom of the wage distribution, for whom low inflation is a public good of special importance) are inconsistent with the notion of inclusive growth, and measures should be taken to combat it.

Unemployment and Inflation

Many economists have long accepted that a trade-off exists between unemployment and inflation (rate of change of money wages). This trade-off is summarized statistically in the Phillips curve. The degree of trade-off and the interpretation varies depending on the theory. Perhaps with the exception of the New Classicals (who think that the trade-off is an illusion), most economists believe in some sort of Phillips curve, namely, that unemployment will fall if demand expands faster than the economy's long-run productive capacity, and that if demand keeps on expanding faster than the economy's long-run productive capacity then, in the long run, inflation will rise.

Founded in 1893, the Gaelic League gave birth to a cultural patriotism in Ireland similar to that experienced throughout contemporary Europe, citing a national language as evidence of a nation's right to independence and statehood. Under fi rst President Dr Douglas Hyde, the League sought to revive the Gaelic language and culture of Ireland. Largely confi ned to a minority of speakers to the northwest (Connaught) and the southwest (Munster) of the island, the League raised the plight of the language to national awareness, while stimulating renewed interest in the Irish nationalist cause.

Before the League's formation, Irish language and culture played little part overall in the ambitions of Irish separatists. As R. V. Comerford suggests, outside a few cultural societies and patriotic reading club members, the language mattered little to late nineteenth-century republicans. For instance:

[T]here was no Fenian policy on language, other than an implicit assumption that English was and would remain the language of power and politics in Ireland.The movement's newspaper, the Irish People (Dublin 1863–6) had displayed very little explicit interest in any aspect of cultural nationalism, although the editor, John O'Leary, was later to claim credit for service to that cause by his ruthless exclusion of reams of bad patriotic verse submitted by readers.

During the last few years, terms such as “harmonious society” in the People's Republic of China (PRC), “sufficient economy” in Thailand, and similar terms in other countries across Asia, have made their way into the discourse of policy makers. The message in all cases is similar: development is more than growth. The Commission on Growth and Development (2008) in its Growth Report also echoes the same sentiment. The Government of India, for example, boasts to have fostered “inclusive growth.” By this it means that the budget has increased allocations to school meals or rural road-building. The high-growth policies implemented across the region since the 1960s were successful and led to increases in per capita income and dramatic reductions in poverty, contributing to closing the gap with the developed world. But today a feeling has spread that policies and objectives need to be revised as citizens across Asia demand more than growth. Inequality, productive and decent employment, the environment, health, and climate change are becoming increasingly important in the agendas of policy makers. Institutions such as the World Bank and the Asian Development Bank also acknowledge the issue and argue that growth and globalization have to be inclusive.

As discussed in chapter 5, given that a large share of output or of the labor force is still in agriculture in many Asian countries, any development program will have to consider the situation in this sector. The traditional literature on structural change argues that the key to the development of agriculture is the transfer of resources, labor particularly, into industry and services. I have argued that insofar as the other sectors of the economy do not absorb fully the surplus labor in agriculture, conditions must be improved in the countryside to achieve full employment of the labor force. The transfer of labor to other sectors requires investment (to lift the capacity constraint discussed in chapter 2) for industrialization.

Given that it is very difficult for the market to achieve full employment due to the political and technical problems discussed in chapters 4, 6, and 13, and assuming national policies have shifted toward the achievement of full employment, one could ask if governments in developing countries could and should act as employers of last resort and contribute to this objective directly. Suppose, for example, that due to the use of efficiency wages (Stiglitz 1976), during downturns firms lay off the least skilled workers. What can society do? As noted in chapter 11, William Vickrey (1996) proposed a program of “savings-recycling public employment” to achieve full employment.

World poverty is closely related to unemployment and underemployment. This is especially the case in developing Asia, where about 500 million unemployed and underemployed people have to cope without significant government welfare support. Recently, institutions such as the World Bank and the Asian Development Bank have started using the term inclusive growth in setting their policy agendas. In this book, Jesus Felipe argues that if policy makers across developing Asia care about inclusive growth defined as growth with equal opportunities, then achieving true full employment should become the paramount objective of Asian governments.

The best strategy to reduce poverty in developing Asia is to introduce a set of policies that will generate full employment. While a number of policy initiatives will be useful—particularly those that target productivity improvements in agriculture and stimulate investment in industry, and those that condition the broader macroeconomic environment (monetary, fiscal, and exchange rate policies)—the key is to coordinate their implementation to ensure that they pull the economy toward full employment.

This policy mix is important because ongoing structural change, the key to development, makes the attainment of full employment a moving target and governments are continually confronted with political and economic choices that at times seem to be conflicting. But at all times, the policy process must aim at ensuring that there are enough jobs available to meet the needs of the labor force.

Agriculture remains the largest employer in many Asian countries, including the two largest developing economies, i.e., India and the People’s Republic of China. It is thus clear that any viable development plan must place special focus on agriculture. Any such plan has to involve investment initiatives that improve agricultural productivity and alternative job creation strategies that provide opportunities for rural workers displaced by technological advances. These job creation initiatives must take into account the effects of structural change if full employment is to be achieved. Localized job creation programs will also be necessary to ensure that urban structures are not flooded with workers displaced from the modernized agriculture sector.