"A Failed World View": an EPW (January 31, 2009) article by Amit Bhaduri

Dear Friend,

The attached article by Amit Bhaduri has appeared in Economic and Political Weekly, January 31, 2009. An abstract is as follows.

Abatract: It is remarkable that despite the inexactitude of economics as a body of knowledge, which should have left enough space for some if not several contesting economic ideologies, over the last 20 years or so all the major political parties in India cutting across the spectrum from the Left to the Right largely converged to a very similar point of view on economic management. Would the current global financial and economic crisis give us the courage necessary to re-educate ourselves to view the "logic of the market" more logically?

You may read this article, if you have not.

With regards,
S. Purkayastha.
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Sumitra Purkayastha
Bayesian and Interdisciplinary Research Unit
Indian Statistical Institute
203 B.T. Road. Kolkata 700 108. INDIA
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A Failed World viewAmit Bhadurion full capital account convertibility to in­tegrate the Indian financial system com­pletely with the global capital market, butnow he talks of insulating India. As amatter of fact, until the global financial crisis gripped the world, our “dream team”of policymakers including the currentprime minister, deputy chairman of theplanning commission and the then financeminister insisted on speedier liberalisa­tion of the financial sector with measures like capital account convertibility, greaterpresence of foreign banks and insurancecompanies with freedom to shift funds.Now they want to take credit for beingprudent and slow in introducing reforms,making the nationalised banks safer, etc.Politicians may be right in believingthat public memory is short, but perhaps they would find that it is not that short!Women and men in practical affairs pre­tend to know and change posture to suitthe situation, but it should be the job ofeconomists to call the bluff. We have notdone too well on that count. As a well­known economist once said, “Some know­ledge of economics is useful, if only toguard against being fooled by other econ­omists”. Amidst the global financial crisis and the quick U­turn taken by our so­calledeconomictechnocratsinthegovern­ment, I am often reminded of the intrinsicwisdom of this statement.inexactitude of economicsIt is remarkable that despite the inexacti­tude of economics as a body of knowledgewhich should have left enough space forsome if not several contesting economicideologies, over the last 20 years or so all the major political parties in India cuttingacross the spectrum from the Left to theRight largely converged to a very similarpoint of view on economic management.While differentiating themselves mostlyby rhetoric, they came to subscribe tothe view that globalisation, market­basedliberalisation and corporate­led industri­alisation are inevitable compulsions foreconomic development in India. Conse­quently,theyallsoughtforeigninvestments and funds on whatever terms, accepted World Bank­IMFviewsofgrowthandequity,and engaged in a race to the bottom byBased on the Foundation Day Lecturedelivered on 29 December 2008 at the InterUniversity Centre for Astronomy and Astrophysics, Pune.Amit Bhaduri (abhaduri40@hotmail.com) is with the Council for Social Development, and the Jawaharlal Nehru University, New Delhi.It is remarkable that despite the inexactitude of economics as a body of knowledge, which shouldhave left enough space for some ifnot several contesting economicideologies, over the last 20 yearsor so all the major political parties in India cutting across the spectrum from the Left to the Right largely converged to a very similar point of view oneconomic management.Would the current global financial and economic crisis give us the courage necessary tore­educate ourselves to view the “logic of the market” more logically?A badly kept secret among econo­mists should be shared withnon­economists. Economic the­ory, insofar as it consists of results derived logically from clearly stated premises, ismostly precautionary knowledge whichwarns against unfounded economic pro­positions. Very rarely, is it positive know­ledge for guiding policies. There is an evenmore fuzzy area of economic knowledgewhich infers from quantitative datathrough statistical techniques and histori­cal analogies. Such knowledge is evenmore tentative, yet essential in a subjectlike economics where controlled experi­ments are impossible. With data generated over time subject to observational error,bias, and random shocks, we would dowell to remember the saying of the Greek philosopher Heraclitus, a rough contem­porary of Buddha, “It is never possible tostep twice into the same river”.As a body of inexact knowledge, eco­nomics requires us to be intellectuallymodest and that leaves little room for in­flexible views. And yet, exactly the oppo­site happens. Driven by ideology or vestedinterests, politicians, captains of industry,media men, spokespersons of the cham­bers of commerce, labour unions and evenacademic economists posture with abso­lute confidence, often to mislead the pub­lic for their own interest, and convenientlychange suddenly, again to suit their inter­est in a changed situation. Flexibility inviews is necessary in economic policy­making, but only if one is willing to learnhonestly also from one’s past mistakes.The problem with most politicians sud­denly changing their views is that theychange only their posture, but not theirideology. Their interests remain the same.Otherwise, how can we explain our primeminister telling a captive audience that heforesaw the current financial crisis 18months ago, while on 18 March 2006 hetold a global audience that the ReserveBank of India would prepare a road map
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perspectiveJanuary 31, 2009EPWEconomic & Political Weekly36offering competitively favourable terms toattract large corporate houses to the states where they were in power. In short, theTINA syndrome that, “There Is No Alter­native”, gripped economic action as well as imagination. For the traditional Left,recent history explains part of it. Thefailure of Soviet style bureaucratic central planning, U­turn of officially socialist Chinaand Vietnam in embracing capitalist stylepolicies undermined confidence in old­fashioned socialist ideas. Economic suc­cess stories of countries like South Korea,Singapore, Taiwan, Malaysia and HongKong pointed to attractive possibilities.Nevertheless, in the orchestrated cele­bration of the market economy, one tends to forget that this story is one­sided. It isinconvenient for a pro­market economistto remember that most countries of sub­Saharan Africa, of Latin America, of cen­tral Asia underwent dramatic economicstagnation or decline for several years byembracing the same principle of market­based liberalisation (Angus Maddison,The World Economy: A Millennial Perspec-tive, Paris, 2001).With economic history seldom givingunambiguous answers, economic theoryhas to play a critical role in making our in­exact knowledge appear more plausible inthe service of economic ideology. The ide­ology of the self­regulating free marketthat came to rule the world and is com­monly known as neoliberalism has its ori­gin in the idea of perfect competition as the prototype market form. We all knowmarkets involve buying and selling, activi­ties which are organised under certainrules that vary enormously, say from theweekly village market to the stock ex­changes in Dalal Street or Wall Street.Economists study the properties of themarket organisation by taking a perfectlycompetitive market as their point of refe­rence. Under highly unrealistic assumptions,which rules out, for instance, all forms of uncertainty and banishes the unknownfuture from the analysis, some results areobtained. It is shown that an equilibriumset of prices exists which simultaneouslyclears all markets by equating demand and supply. The prices in equilibrium corre­spond to an efficient arrangement in thesense that the production of no commo­dity can be increased further withoutdecreasing the production of some other,and no participant in the market can dobetter either as a producer or consumer,without someone else becoming worseoff. The powerful ideological metaphoris that of the invisible hand of the self­regulating market leading the society of selfish individuals to an optimum. This is indeed a most spectacular case of self­organisation, where neither any interven­tion of the state nor any concern for thecollective expressed in social norms liketrust and fellow feeling is needed to reachthe optimum economic state. MargaretThatcher, the former prime minister of Britain and the main architect of theneoliberal world view famously echoed this sentiment by claiming that there isno society, only individuals.Flaws in ‘perfect competition’However, even this mythical land of per­fect competition is flawed on its ownterms. The optimum equilibrium that is shown to exist under idealised conditions does not guarantee that the distribution of income in the society would be toler­ably good. To appreciate its practical implications, remember demand depends on the purchasing power of individuals, so a grotesquely unequal distribution of income under competitive conditions might mean millions of children dying from easily treatable diseases like malaria and TB, while most expensive hospitals in the metropolis provide state of the art treatment at a price which only the rich can afford. Villages go without sanitation and drinkable water, but selected areas of cities might pride themselves with world class luxury apartments and glittering malls. And yet, by the logic of the market any such equilibrium would still be con­sidered optimum because it allocates resources efficiently, and the poor in the city slums or in the villages cannot be made better off without hurting the rich in the cities.A deeper logical flaw is that the stabilityof the equilibrium in a competitive marketis not guaranteed without imposing fur­ther stringent conditions, and it remains unspecified how long it would take to con­verge to it. This is a political catch. Adecision­maker in a democracy, say a primeminister, can always say that economicGyan
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perspectiveEconomic & Political WeeklyEPWJanuary 31, 200937reforms are about to produce results with­out specifying the time horizon. Like adictator, the competitive market cango on promising without delivering, as itis without accountability within anyspecified time period. In this sense themarket as an institution has no accounta­bility except for the largely make­believeideology of self­regulation. This is thefundamental difference between themarket and democracy insofar as in ademocracy, there is some reckoning at thetime of elections. I need only to remind youthat market­based reforms did badly inIndia on that count. The slogan of “shiningIndia” crashed in the last general election,and the present prime minister, widelyconsidered the guru of India’s market­oriented reforms, could not personallywin an election.Enthusiastic reliance on the marketmechanism as the main driving force of efficient resource allocation and growthby the government accentuated poverty tocreate rumblings outside the electoral process in the countryside which oftenspills over into desperate fury and despair.More than 1,00,000 farmers have com­mitted suicide over the last decade or so.According to government estimates, some125 districts, spread over 12 states, and covering more than a quarter of the land mass mostly in the central part of India, is affected by extremist Naxalite activities.The dalits (16%) and the adivasis (8%), ap­proximately one quarter of the population,provide the main support to these move­ments, suggesting a combination of eco­nomic and socially oppressive factors as amajor cause. Despite near double­digitgrowth for more than a decade and a half,available estimates suggest that more thanone­third of the Indian population live insub­human poverty (a recent World Bank estimate puts nearly 42% as absolutelypoor by international standard), morethan three­fourths of the population has adaily purchasing power of less than Rs 20a day, nearly half the children are under­nourished and many crippled by under­nourishment, anaemia is on the increaseamong women, and food deprivation inthe countryside has not decreased in thelast two decades. And all along the logic of the market has been encouraged bygovernment policies to work relentlesslyagainst the poor majority through threemajor routes.slow Growth in employmentFirst is the extraordinarily slow growth inregular employment. Regular employ­ment in the organised sector over the lastdecade or so grew at only about 1%, whilethe rest of the average 6 to 7% growth inGDP came from the growth in output perworker or labour productivity. In contrast,during the earlier decades, when GDP grew on an average at less than 4%, regu­lar employment grew at the annual rate of 2%. The recent drive to increase labourproductivity is related to globalisation. In­ternational trade means increasing theimportance of the external compared tothe internal market, while corporationscompete in the export market mostly bycutting costs to increase their inter­national competitiveness. This usuallymeans shedding labour force throughmechanisation. For instance, if the labourforce in a corporation is downsized to half at the same wage, labour cost per unit of output would also be halved. Let one ex­ample suffice to illustrate how this process is working in practice. Tata Motors in Punereduced the number of workers from35,000 to 21,000 but increased the pro­duction of vehicles from 1,29,000 to3,12,000 between 1999 and 2004, imply­ing labour productivity increase by a fac­tor of four. The aggregate picture broadlyconforms to this. According to the Eco-nomic Survey of the government of India(2006­07), total employment in the organ­ised sector declined from 28.2 million in1977 to 26.4 million in 2004, because themuch talked about growth of the privateorganised sector under the reform policiesof the government hardly compensated for the decline in employment by the pub­lic sector. Another telling piece of evidenceagainst the belief that corporate­led in­dustrialisation and greater direct foreigninvestment would promote more employ­ment came from the headlines of The Times of India (7 July 2008). Long hailed as most dynamic in these respects, a re­cent comparison of the various states of India suggested Gujarat and Maharashtrahave been among the slowest growingstates in terms of creating either non­agricultural or manufacturing jobs.With regular employment opportuni­ties growing far too slowly compared tothe number of job seekers, more and morepeople are being pushed into the unorgan­ised sector. Agriculture, in particular, has become even more overcrowded. Accord­ing to the National Sample Survey (61stround), approximately 110 million agricul­tural workers (out of a total workforce of400 million) found employment for 209days in 2004­05 compared to 220 days in1999­2000. People desperate for a liveli­hood join the ranks of the so­called self­employed in the unorganised sector, thefastest growing category, marked by longhours of work with negligible earnings,lack of any social security or labour pro­tection and extensive use of child labour.More than half the hawkers of Kolkata,and more than one­third of the hawkers of Amhedabad belonging to this category of the self­employed are retrenched indus­trial workers, now threatened once morewith the corporatisation of retail trade inthis era of globalisation in the name of economic efficiency. This vast informal sector is increasingly becoming a refugefor people devoid of all hopes, and re­minds one of the hell imagined by thegreat Italian poet Dante. On its gate is written, “You enter this land after aban­doning all hopes”.The second reason for growing inequal­ity lies in the style of economic manage­ment pursued by the government. Whileopportunity for regular work is growing ata grossly insufficient pace despite a highgrowth rate of output, the government has become increasingly weary of spendingmore for social welfare like health, educa­tion, public distribution and social secu­rity for the poor. Government expenditureremained more or less steady around 22%of GDP throughout 2000­07, with healthreceiving 1.4% and education receiving2.9% of GDP, on the average. The apparentreasons given are lack of “money” and poor public delivery system for social serv­ices. However, these are superficial justifi­cations, and there is a more compellingreason which has come out into the opendue to the financial crisis. Globalisation of finance made the government highly sen­sitive to the moods of the stock marketand the financial sentiments of major play­ers in that market. Even after the recent
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perspectiveJanuary 31, 2009EPWEconomic & Political Weekly38dwindling, India still has a relatively largeforeign exchange reserves ($250 billion),but unlike China which has been enjoyingexport surplus for several years, our re­serves come mostly from capital inflows exceeding balance of payments deficits,like deposits from non­resident Indiansand portfolio investments by various in­ternational financial institutions. Theseare far more fickle in nature and can bewithdrawn at a relatively short notice if the mood of the financial market turns sour. A main thrust of the pro­marketgovernment policy has been to keep thefinancial market happy by being on theright side of the International MonetaryFund and the World Bank insofar as they have a central role in shaping inter­national financial opinion for banks,credit­rating agencies, and other financial institutions. This means following theireconomicguidelinesinformulatingpolicies.As a result, the government minimised its welfare spending by letting it stagnateas percentage of GDP even during theyears of high growth. The cost of thissqueeze of expenditure on social secu­rity, education and health falls mainly onthe poor who cannot turn to the marketdue to lack of purchasing power andjob opportunities.style of industrialisationThe third route is paved by the style of in­dustrialisation the government has in­creasingly adopted. It amounts to extend­ing various privileges to the large corpora­tions by the federal and state govern­ments, irrespective of their professed po­litical colour as incentives for promotingcorporate­ledindustrialisation.Land acquisition by the states (land is a statesubject under the Constitution) for “publicpurpose” has become its politically mostvisible aspect. The central government all along has provided the legal and logistical support for land acquisition, and the origi­nal 1894 Land Acquisition Act proclaimingthe “eminent domain” status for the statewas significantly revised successively in1952, 1963, and 1984 to give greater powerto the government to acquire land for thedefence sector, companies, cooperativesand public sector companies. The presentgovernment has brought two related bills (of the Land Acquisition Amendment Act,and Rehabilitation and Resettlement Act,both under consideration of parliamen­tary standing committees) to extend inmany ways further the reach of the gov­ernment. They are all linked directly orindirectly to a view of the model of development for three major purposes,namely (a) mining, (b) land for industrialsites, and (c) Special Economic Zones (SEZs). First, consider the mineral richusually forested land acquired mostlyfrom the tribal populations, concentrated heavily in Jharkhand, Bihar, Chhattisgarhand Orissa. As has often been pointed out,these are some of the richest lands in thecountry where the poorest live.Mining and the poorA piece of revealing statistics shows thatmining displaces typically the poorest inthe country, the adivasis or tribals whoconstitute some 8% of the population butaccount for nearly half of the people dis­placed in the name of development. Thestate apparatus takes recourse to silentviolence in various ways. Forcibles acqui­sition of land and dispossession takesplace often through manufactured consentof the gram sabhas at gunpoint to complyformally with the legal requirements ofthe Panchayat Extension to Scheduled Areas Act (1996) relating to tribal areas.The “public” purpose is granting posses­sion to “private” corporations of the ironore rich land in Chhasttisgarh, Jharkhand,Madhya Pradesh, bauxite rich land of Orissa, prospect of diamond mine in Bas­tar, etc. Memoranda of Understanding(MOUs) between the large private corpora­tions and the concerned state govern­ments are seldom revealed despite appli­cations under the Right to Information(RTI) Act. The mining land taken from thelocals at a unilaterally announced lowcompensation price (that is frequently notpaid) is handed over to large corporationsand industrial houses often with support­ing infrastructure provided by the govern­ment at public cost by displacing morepeople. A telling instance of public­privatepartnership is the proposed SEZ compris­ing 45 villages in Raigad district of Mahar­ashtra, which has been recently rejected almost unanimously in a referendum heldin 22 villages. While the government had the area under notification for acquisitionfor a “public purpose”, in that very samearea agents of the Ambani companies were privately trying to acquire land ille­gally with direct help from the Mahar­ashtra government.Is all this is done only to pursue a modelof industrialisation, or does large moneyalso change hands benefiting our political class and many bureaucrats in this process? This is at least a part of the story behind thephenomenal growth in corporate wealthand dollar billionaires in the country inrecent years. Available statistics show thatin hardly four years, between 2003­04and 2006­07 the market value of capital of the companies listed on Bombay Stock Exchange grew almost 300%, while until the recent stock market crash India withthe majority of its population desperatelypoor could perversely boast of the highestnumber of dollar billionaires after theUnited States. The logic of a liberalised market mechanism buttressed further bystate power to help the private corpora­tions is relentlessly creating unprece­dented inequality in India along with highgrowth. Sub­human poverty for millions and billions of dollars for a handful of citi­zens has become the name of this gamecalled development.Growth Driven by richFor this growth process to remain eco­nomically viable over time, slow growthof domestic purchasing power of the ma­jority of the population must be counteredby a compensating expansion either of ourexports or expenditure by the rich. How­ever, because our exports exceed imports and we buy more from the foreigners thanwe sell to them, the net contribution of theforeign trade sector to the expansion of demand in our economy is negative. As aresult, this anti­poor pattern of growth is being sustained by a rapid expansion ofincome and expenditure by the richergroups in society (a maximum of the top20 to 25%). The increasing inequality en­tailed in such a process of high growthmeans that the corporations sell theirproducts and realise handsome profits byconcentrating mostly on the productionof goods consumed by the richer sectionsof the population. As a result, some 75%of Indians with a daily per capita pur­chasing power of less than Rs 20 have
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perspectiveEconomic & Political WeeklyEPWJanuary 31, 200939virtually no place in this corporate­led modern economy as consumers. Theirspace as small rural producers or as small businesses in the unorganised sectoralso shrinks, as the goods produced forthe high end of the market can mostly beproduced only by corporations (e g, cars,refrigerators, air conditioned malls, state­of­the­art hospitals, etc).Thus, growing inequality and lack of employment opportunities are coupled,and an output composition oriented to­wards a rich minority of this country tendto exclude the majority of our fellow citi­zens and often destroy their livelihoods.The big dams that we build, the electri­city that we generate, the world class cit­ies that we strive for divert even non­reproducible natural resources. Thelarge corporate houses use them effi­ciently to produce and sell to the richprofitable products , but their efficientutilisation of natural resources imply theexclusion of the poor both as producersand as consumers. The process of growthis sustained by growing inequality, andinequality reinforces growth in a mutu­ally supportive manner. The Swedisheconomist Gunner Myrdal had called it“cumulative causation”, somewhat simi­lar to the engineer’s system of strongpositive feedbacks, the evolutionary bio­logist’s symbiosis between two species,and perhaps the notion of autocatalysisin chemical reactions.silence of the MajorityWhile all this has been happening around us for quite some time, most of us refusedto see it. The mainstream English lan­guage media, largely owned and control­led by large corporate houses, conditionus continuously to turn a blind eye and be­lieve that the virtual economy of thehourly fluctuations in the stock market is far more newsworthy than the growinginequality, despair and fury engulfinggradually the countryside. Most econo­mists who should have known better,fuelled this perception and cheered politi­cians in power for the rapid emergenceof India as a global economic power; and,of course, politicians in power never tireof congratulating themselves for theirown achievements. When the marketboomed they took credit for liberalisingthe market, then as the market crashed they took credit for not liberalising themarket! They took credit for forcinglabour market flexibity of “hire and fire”rule; when the market crashed the primeminister begged the captains of industryin a specially called meeting not to fireworkers near the time of elections. This hypocritical politics has been going onas business as usual until the recentglobal financial crisis shook deeply theconfidence in self­regulating free marketcapitalism with its global reach. Thecomfortable thought that more economicreform to deregulate the market andspeedier integration with global marketwould lead us rapidly towards an optimal economic state is no longer fashionable.Like their counterparts in the US and Europe, pro­market reformers of yesterdayare now looking for cover; they who hadopposed it now want more supervisionand regulation of the market in India.However, this is only passing, because as an old English rhyme says: “Those whoare convinced against their will/Are of thesame opinion still.”Neoliberalism has merely gone out of sight, but not out of mind. Vested interests crystallised around corporations aremerely on the defensive at the moment.We are still being misled to support amodel of corporate­led industrialisationfinancially helped by the state in difficulttimes as the way to our economic develop­ment, without questioning its relevance inthe Indian context. A deep­seated habit ofthinking inculcated by the globalisation,privatisation and liberalisation rhetoricsstill wants us to believe that this marketfundamentalism, practising develop­mental terrorism selectively on the poor,will ultimately help them as high corpo­rate growth trickles down.subversive QuestionsTo keep our conscience comfortable, itclaims that the market can substitute forsocial ethics by deciding what is profitableto produce, and who should be in chargeof production. So we no longer questionhow without extensive public action and state intervention in favour of the poor, inthis country of overwhelming poverty thelogic of political democracy of one­adultone­vote can be compatible with the logicof the market dictated by the rich withmany more votes with their higherpurchasing power than the poor. Theseare almost subversive questions; and yet,the ability to pose them is the first step toliberate ourselves from the ruling systemof conventional economic wisdom that has failed us so badly despite the big show ofproducing precise technocratic economicknowledge, helped by various vestedinterests including the distribution of adisproportionately large number of Nobel Prizes to make market­oriented economicconservatism academically respectable.Long ago in the introduction of his famous allegorical novel, The Animal Farm,George Orwell had warned us that Britishdemocracy is not very different from thetotalitarian monster he was describing inhis book. Unpopular ideas, he said, can besuppressed without the use of force withtwo methods. First, the press is owned bywealthy men (read corporations thesedays!) who have every reason not to wantcertain ideas to be expressed. And thesecond reason, Orwell said, is a good education. If you have gone to the bestschools (read specially the top manage­ment and economics schools), it has beeninstilled in you that there are certainthings it would not do to express or evento think about. Aided by the media, oureducated middle class showed its excellenteducation until recently by banishing all sceptical thoughts about the efficiencyand intrinsic wisdom of the market, andthe virtues of corporate­led high growthunder financial globalisation.Would this global financial crisis giveus the courage necessary to re­educateourselves to view the “logic of the market”more logically? For, at times the unin­tended effects of history can be beneficial.available atDelhi Magazine Distributors Pvt Ltd110, Bangla Sahib Marg New Delhi 110 001Ph: 41561062/63