PRABHAT PATNAIK AT MADHYAMGRAM

ECONOMIC LIBERALISATION - LESSONS FROM THE INDIAN EXPERIENCE

Prabhat Patnaik

INDIA’S economic experience since the beginning of economic liberalisation constitutes a resounding refutation of “mainstream” (bourgeois) development theory. On the basis of official data during this period there has been a remarkable acceleration of the growth rate of GDP, together with a striking increase in the incidence of absolute poverty, a combination which no strand of bourgeois theory can explain. Let us look at the data first, and here we need not spend time on the growth rate data since there can be no two opinions about the conclusion that the growth rate has accelerated. There may be problems with the data, but none whatsoever with the inference from the data.

But on poverty data the government (Planning Commission) has been so dishonest in drawing inference that a brief discussion is in order. Right from the beginning of poverty estimates in India, the definition of poverty has been the following: those who access an energy intake of less than 2400 calories per person per day in rural areas and less than 2100 calories per person per day in urban areas are poor. Now, every year for a small sample and every five years for a large sample, we have direct information on this. On the basis of that information we can directly estimate poverty (this is an estimate of absolute poverty), and this has been going up precisely during the period when growth rate is estimated to have accelerated.

The government however wants to fudge this issue. So they devise all kinds of indirect measures of poverty that show the poverty ratio to be going down! And when they are asked: why should people be accessing less food grains and less calories if they are becoming less poor, the answer they give is that precisely because they are becoming better off they are diversifying away from food grains to other expenditure items and hence accessing lower calories. In their argument in other words lower calories are a reflection not of impoverishment but of betterment, which not only runs contrary to the very assumption underlying the poverty measure devised originally by the Planning Commission itself, but flies in the face of common sense and of all international experience.

WORSENING INCOME DISTRIBUTION

International experience clearly shows that if we plot per capita real income on one axis and per capita foodgrain consumption on the other, taking both direct and indirect consumption together (the latter via processed food and animal feed), then foodgrain consumption rises with income until a fairly high level of income (much higher than what the bulk of Indians earn) and then flattens out. And the same is true of calorie intake as well. And what is more, income seems to be the main determinant of foodgrain consumption, explaining the bulk of observed differences across countries; no other variable (except by inference income distribution within countries) appears to matter much. It is a clear law therefore, observable everywhere in the world, that if people’s income rises their total foodgrain consumption, and calorie intake, also rises, until it flattens out at a high level of income. It follows that if we find in some country over some period a decline in calorie intake and also in foodgrain consumption per capita (on which we have unambiguous official data in India), then the bulk of the people must be actually becoming worse off, i.e. poorer, in that country over that period.

Putting it differently, if we have a country where the rise in per capita real income is accompanied by a decline in per capita foodgrain intake, then it must be that the income distribution within that country is worsening over that period, to a point where the bulk of the population is becoming absolutely worse off even as the per capita income, which is a mere average for all, is rising. This is exactly what has been happening in India during the last twenty years. And this constitutes a puzzle which bourgeois development theory simply cannot explain.

This theory, in its crudest form, states that as per capita income rises there is a “trickle down” such that everybody becomes better off, in which case absolute poverty must decline with rising per capita income. This same conclusion is often drawn from a more sophisticated version of the theory, which sees poverty as a “trap”. Countries and peoples get “trapped” into poverty and cannot get out because in their state of poverty there are forces of circular and cumulative causation which prevent such getting out. For instance if the capital per head in a country is low, then labour productivity is low and hence the wages of the working people are low which makes them poor. But they cannot get out of this poverty, because there being a floor to per capita consumption (subsistence), a low output per head (labour productivity) entails minuscule savings and investment, and hence a continuously low level of capital per head and hence of output per head. Poverty in short breeds poverty; it constitutes a trap from which countries cannot get out. This argument is often used as justification for “foreign aid” which, it is claimed, constitutes an external force applied to countries to get them out of the poverty trap. This argument too however states that if output per head could rise, then the country in question could get out of the poverty trap, a conclusion exactly analogous to what the crude “trickle down” theory states.

CO-OCCURRENCE OF INCREASING GROWTH & POVERTY

Neither of these versions however can explain the co-occurrence over time of an acceleration of the growth rate and an increase in absolute poverty. Of course the poverty trap argument, instead of being applicable to countries, could be extended to groups inside the country, in which case an argument may be constructed to explain the co-occurrence of increasing growth and persisting poverty in the following manner: within a country there may be particular groups that are stuck in a poverty trap, so that even as the country as a whole may be escaping from such a trap these groups continue to remain poor. But there are three obvious problems with this argument: first, while it may explain the coexistence of increasing growth with persistent poverty, it cannot explain increasing growth with increasing poverty (unless increasing poverty has been a long-term trend with these special groups, which however is not true of the groups getting impoverished over the last two decades in India). Secondly, this argument may hold at best for some small isolated groups but not for the bulk of the population of a country. (In rural India it must not be forgotten for instance that the proportion of the population with intake less than 2400 calories per person per day increased from 74.5 per cent in 1993-4 to 87 percent in 2004-5, which indicates mass impoverishment and not just impoverishment in pockets). Thirdly, the argument does not explain why in a period when the country as a whole is growing and yet some groups continue to remain poor, the government does not intervene to release them from the poverty trap in which they are caught. This therefore brings us back to the basic point we started with: no version of “mainstream” development theory can possibly explain the Indian experience over the last two decades.

For an explanation of our experience we have to turn necessarily to Marxian categories. In any economy where a capitalist sector co-exists with a pre-capitalist sector, especially peasant agriculture, the growth of the former entails a growing demand for not only resources (like land) but also of goods (foodgrains, whose output itself is adversely affected by land diversion) from the latter. If output is not growing adequately then an increase in demand from the capitalist sector can be met only out of existing output, by snatching away a part of it through various methods of primitive accumulation of capital. If this larger expropriation of output by the capitalist sector from the pre-capitalist (peasant agriculture) sector were to be accompanied by a transfer of labour from latter to the former, then the availability of goods per capita in the latter would not shrink; but if there is no such transfer of labour then the per capita availability of goods in the latter would shrink, causing absolute impoverishment in the latter. And such absolute impoverishment also keeps down, and even reduces, the real wages of workers in the capitalist sector itself by lowering their reservation wage and hence bargaining strength. It follows that in any situation where growth under capitalism is accompanied by a stagnant pre-capitalist sector subjected to intensified primitive accumulation of capital, and is unaccompanied by much increase in employment in the capitalist sector itself, there must be an increase in absolute impoverishment, of the work-force not only in the pre-capitalist sector but also in the capitalist sector itself. And any increase in the growth rate in the capitalist sector in such a case (which would express itself as an increase in the economy’ growth rate) will be accompanied by increasing absolute poverty.

These conditions for the co-occurrence of increasing growth with increasing poverty are precisely the ones that have obtained in the Indian economy in the period of economic liberalisation. The fact that such liberalisation which entails an increase in the stranglehold of corporate and financial interests on the State precludes State support for peasant agriculture, resulting in its stagnation, is well-attested to by the Indian experience. This, together with the diversion of land away from food grains to other uses and the absence of any yield-raising innovations (which too require State support), has meant that the last two decades have witnessed a decline in per capita output of food grains in the Indian economy, reversing the increasing trend that had been introduced after independence. At the same time there has been little absorption of labour into the growing capitalist sector: taking the two decades as a whole, organised sector employment has scarcely increased at all, and between 2001 and 2008 (the latest year for which data are available) it has even fallen in absolute terms. It follows then that we have a combination of primitive accumulation of capital with little labour absorption by the capitalist sector, which is the recipe for absolute impoverishment accompanying increasing growth.

There is a whole array of government spokesmen, from prime minister Manmohan Singh downwards, who do not tire of repeating the need for higher growth. This chorus about the growth rate has become even louder now because the twelfth plan is being discussed. But it is clear from the above that this higher growth will only be accompanied by a further increase in the magnitude of absolute poverty in the country, unless the neo-liberal policies are changed, for which the class orientation of the State needs to be altered.

Courtesy: People's Democracy

“BRINGING BACK” BLACK MONEY

Prabhat Patnaik

THERE have been periodic demands, the latest being from Baba Ramdev, that “black money” from India which is stashed in Swiss banks should be “brought back” and used for development purposes. This money of course does not have to be physically brought back; all that is required is a nationalisation of those deposits, ie, a change in the ownership of deposits in certain accounts in Swiss banks from their current holders to the government of India. When the government obtains ownership over those deposits then it will have to transfer this ownership to the Reserve Bank of India (since the deposits are in foreign exchange) and obtain rupees in return, which it can spend as it likes.

But as is obvious from this process, there is no difference in terms of macroeconomic consequences, apart from just one which will be discussed shortly, between the government’s spending money acquired from the Swiss Banks and its spending money freshly printed by the RBI against government securities (or what is called “deficit financing”). The one and only difference between the two cases is that Swiss bank deposits are in foreign exchange, and hence they will be available with the RBI for future imports, while the government securities against which deficit financing is undertaken, are incapable of financing any imports.

True, these securities too can be converted into foreign exchange: if the government floats an equivalent amount of securities in foreign financial markets and uses the foreign exchange proceeds to draw down the securities it has with the RBI, then it would have substituted foreign exchange in the place of government securities in the RBI’s portfolio. But even in this situation, a difference between the two cases will still remain, since the foreign exchange acquired from Swiss Banks will be the government’s own property, while the foreign exchange obtained by floating government securities abroad will be only borrowed money.

If the government does acquire this foreign exchange from Swiss Banks in a crackdown on black money, then the situation is exactly analogous to its obtaining reparations from a foreign government, like Britain and France had got from Germany after the first world war. The rupees obtained by the government against this foreign exchange, which it will sell to the RBI, are available with it for development expenditure. When they are spent they increase aggregate demand in the economy. On the other hand this foreign exchange lying with the RBI can be used for imports; or putting it differently, domestic nationals can go to the RBI with rupees, purchase foreign exchange with them and use them for importing, which would augment supplies in the economy.

The money obtained from Swiss Banks therefore can boost both aggregate demand and aggregate supply, which is why it need not aggravate inflationary pressures in the economy. By contrast, if government expenditure had been met through deficit financing, that would have raised only aggregate demand, and unless the economy was demand-constrained to start with (so that an increase in demand would itself bring forth supplies), inflationary pressures would have got aggravated.

Money obtained from Swiss Banks thus would appear to be a sound source of financing development expenditure. There are however certain problems even in this case that one must reckon with. The best way to appreciate what is a basic problem here is to imagine that the commodity for which demand increases as a result of increased development expenditure is one that cannot be imported because its supplies are meagre in the world market itself. In such a case, even while the use of the Swiss bank money for development expenditure increases demand for this commodity in the economy, its supply cannot increase, despite foreign exchange being available; this would aggravate inflationary pressures in the economy. Swiss Bank money in this case will be no different in its inflationary consequences from deficit financing.

REVERSE DISINCENTIVES FOR PEASANT PRODUCTION

In reality, there is indeed one such commodity, namely foodgrains. The expenditure of Swiss Bank money, if undertaken in a manner, as it should be, that puts purchasing power in the hands of the working people, will increase the demand for foodgrains. In the world market however not only are foodgrain stocks low, thanks to heavy US diversion of foodgrains for bio-fuels, but foodgrain prices are also rising rapidly. What is more, if India approaches the world market for imports, then this very fact will give a boost to speculation and send world foodgrain prices skyrocketing. The use of Swiss Bank money in this case, other things remaining the same, will only aggravate the already acute food price inflation in the country.

To say this is not to suggest that Swiss Bank money should not be used for development expenditure for the benefit of the people, but that other things must not remain the same. In particular, if Swiss Bank money is used for development expenditure, then there must be appropriate supply management measures for foodgrains that ensure that the people are not hit by any aggravation of food price inflation.

This entails at least two things: first, the increase in development expenditure that Swiss Bank money would enable the government to undertake, must be so planned that it raises foodgrain output in the country within a short period. In other words, the projects financed by this money must have as their primary objective a rapid increase in the country’s foodgrain output, for which a whole range of disincentives for peasant production that have been created during the neo-liberal era must be reversed. Secondly, since an increase in foodgrain output will take time, no matter how quick-yielding the new projects may be, in the very short run inflationary pressures have to be handled through the use of domestic stocks, which in turn requires, both for this purpose, as well as for the long-run, an extensive procurement-cum-public distribution system to be put in place.

In short, even if the government obtained Swiss Bank money through a nationalisation of the deposits of black money-holders, it would not ipso facto be in a position to spend that money with impunity, unless it took a number of steps undoing the damage to the peasant economy, and to the foodgrain economy in particular that the neo-liberal regime it has been promoting has inflicted. And if it does take those steps, then it need not even wait for Swiss Bank money; deficit financing too will not have any greater inflationary consequences than Swiss Bank money in such a case.

The fact that the government does not have the least intention of either revamping the peasant economy or ensuring food security for the people is obvious from its actions. Throughout the current period of rapid food price increase, the government has resorted to foodgrain exports and continues to hold substantial stocks, which are rotting in the open, rather than distributing them among the famished poor, despite strictures from the Supreme Court. In 2008 for instance, when food prices were escalating steeply, 14 million tones of foodgrains were exported from India and another 17 million tones were added to government stocks! A total of 31 million tonnes in short were withdrawn from domestic availability in a year of acute inflation! With such an attitude on the part of the government, even if Swiss Bank money is obtained for expenditure, it will only end up aggravating the inflationary crisis.

RETREAT FROM NEO-LIBERALISM, CRUCIAL

Putting the matter differently, the “bringing back” of black money and its use for the purpose of development presupposes, on the part of the government, not only the courage and political will required for such “bringing back”; it also presupposes a retreat from neo-liberalism in crucial spheres. Baba Ramdev and his supporters talk only about “bringing back” black money; they never talk about the whole set of complementary measures, involving a retreat from neo-liberalism, that must be put in place if this “brought back” black money is to be used for development. To be sure, “bringing back” black money itself will require a degree of State activism that will be frowned upon by international finance capital; but making use of the “brought back” black money will require additional measures of State activism which are further anathema for it. But precisely for that reason, anyone who is serious about the confiscation of black money accounts in Swiss Banks, must also ask for complementary measures, so that this demand for confiscation does not remain just hot air.

Government expenditure on development, incidentally, is never held up for the lack of something called “money”. Resource mobilisation by the government does not consist simply in the mobilisation of “money”. When “money” is raised through taxation, the presumption is that real resources are being released in the process. The command over such resources is coming into the hands of the government which can then use them as it deems fit. But it is these real resources that actually matter, not something called “money”. Because of this, Michal Kalecki, the renowned Polish Marxist economist had said: “the financial problem of resource mobilisation is nothing else but the real problem of raising foodgrain output”.

When we talk of “bringing back” Swiss Bank “money” we must not fall into the error of looking at “money” as if it was the real resource. True, it represents command over real resources, but translating this command into actual real resources in the case of certain crucial commodities like foodgrains may be problematical, which is why State activism in foodgrain management may become necessary. The real obstacle to putting in place such a regime of foodgrain management lies in neo-liberalism. Overcoming neo-liberal constraints, rather than obtaining “money” as such, lies at the heart of the problem of increasing development expenditure. If these constraints can be overcome, then deficit financing too can generate the “money” for such expenditure, even if Swiss Banks yield nothing.

To be sure, tax evaders, black money holders, and all those who flout the law of the land, must be punished through a confiscation of their illegal wealth. But making proper use of this wealth will require an economic regime that breaks out of the neo-liberal straitjacket.

Courtesy: People’s Democracy

LABOUR MARKET FLEXIBILITY

Prabhat Patnaik

ONE of the most persistent demands of the advocates of neo-liberalism in India has been for the introduction of “labour market flexibility”, by which they mean the absolute right of employers to hire and fire workers as and when they please, without any let or hindrance. The absence of such flexibility, they claim, has been holding up employment growth in the country.

There is, of course, no empirical evidence for this claim, a fact that even the more astute among the neo-liberal advocates of labour market flexibility will concede. And, in any case, in an economy like ours where the unionised work force which alone is capable of putting up any resistance to hire-and-fire-at-will is a minuscule proportion of the total work-force, there is presumably de facto labour market flexibility anyway, so that the meagerness of employment growth cannot possibly be attributed to the absence of labour market flexibility. Nonetheless the advocates argue that there are strong theoretical reasons to believe that the introduction of labour market flexibility will improve employment growth.

The basic argument they advance is quite simple. When an employer takes on a worker, if he or she is constrained to keep the worker on the pay-roll even in the event of a drop in demand in the future, then the adverse effect of such a drop on profits will be even greater than if the worker could be sacked under such circumstances. This means that the risk to the employer from taking on a worker, other things remaining the same, is higher in a regime of no-freedom-to-fire than in a regime of freedom-to-fire. This higher risk acts to the detriment of employment growth in several ways.

First, in a regime of no-freedom-to-fire, investment itself will be lower, other things remaining the same, than in a regime of freedom-to-fire. This is because the returns net of risk from any particular project will be lower in the former regime, owing to its higher risk, than in the latter; hence more projects will be unattractive from the capitalists’ point of view in the former regime compared to the latter, resulting in lower investment and, consequently, lower employment.

What is more, since the risk to the employers will be particularly greater in the former regime from the adoption of more employment-intensive techniques of production, the bias against such techniques will be particularly pronounced. Or looking at the matter differently, in a regime where employers have the absolute right to fire workers at will, not only will investment be higher, for any particular technique of production, but there will also be a bias towards more employment-intensive techniques of production, compared to a regime where they have no such right. Both these factors constrain the rate of growth of employment.

LOGICAL FLAW

Even at this level of argumentation, however there are two obvious problems with the above claim. First, this whole supposition that there is a multiplicity of techniques for producing a “given good” is a bit of a chimera. If a modern steel plant is to be built then there is a particular technology for doing so and there is not much scope for varying the employment-intensity within that technology; on the other hand it is true that backyard steel can be produced with a far higher employment-intensity than in a modern steel plant, but then for the purposes for which steel is typically required in the economy the outputs of the two cannot be deemed to be the “same”. So, this entire assumption of employment-intensities being different for the production of the “same good” is a bit of a red herring. A “good”, strictly defined, has only one particular technique of producing it at any particular time. In an economy, given its pattern of income distribution, certain types of goods are demanded, and they are typically produced with certain fixed techniques (or even when there is a multiplicity of techniques for producing a “good”, the employment-intensities do not vary much among them); labour market flexibility as such makes little difference to the choice of techniques.

Secondly, the introduction of labour market flexibility necessarily entails a weakening of the bargaining position of workers; it necessarily entails a death-blow to all forms of workers’ organisations like trade unions, since anyone attempting to organise the workers will be sacked forthwith. This in turn necessarily entails a reduction in the share of wages in the net output of the economy. And since a rupee paid out as wages creates more demand than a rupee that accrues as profit (of which a larger proportion is saved), such a shift in income distribution against workers, quite apart from being regressive in itself, results in a constriction of the domestic market, with an adverse effect upon employment for this reason. Besides, as suggested above, since goods demanded by workers typically tend to be produced by more employment-intensive methods, the generation of employment is constricted for this additional reason too in a regime of labour market flexibility.

It follows then that even if we accept the neo-liberal argument that when the employers lack the absolute freedom to fire workers, the level of investment is likely to be lower for this reason than it would have been if this freedom was available to them, we still have to offset against this the consequences of a regressive income distribution while evaluating the overall impact of such employers’ freedom on employment. And when we do so it is more than likely that the adverse effect upon employment of a regressive income distribution will outweigh the claimed positive effect: indeed we can see in front of our eyes how distributional shifts against the working population, which have accompanied India’s high GDP growth, have led to a change in the pattern of demand, and hence in the structure of output, that has been inimical to the growth of employment.

But let us take the logic of the neo-liberal argument itself, deliberately abstracting from these other powerful factors that offset in practice whatever validity it might have. There is a basic logical flaw in the neo-liberal argument itself. When it talks about risk-reduction for employers in a regime of free hire-and-fire, it makes the implicit assumption that the workers work with the same skill, dedication and intensity no matter what regime they are in. And this is patently untrue.

Indeed, ironically, it was common not very long ago to find explanations for Japan’s economic success-story, advanced by such reputed economists as Michio Morishima and accepted quite widely, which emphasised its practice of “lifetime-employment” and treatment of workers as if they belonged to a family represented by the corporation. Whether or not this explanation was a valid one for the so-called Japanese “miracle”, it recognised at least the importance of the issue of workers’ motivation in the process of capitalist production. The labour market flexibility argument does not recognize the issue of workers’ motivation at all.

TREATING WORKERS AS OBJECTS

If it did, then it should be talking not just of the one kind of risk it actually talks about, namely the risk to employers’ profit in the event of a drop in demand; it should also be talking of another kind of risk, namely the risk to profits from workers’ alienation and disgruntlement, from destructive wild-cat strikes, from anarchic angry acts of dismissed workers who are thrown to penury and distress. It should then be looking at the desirability of labour market flexibility by comparing at least the relative weights of the two kinds of risks.

But it does not do so. It does not in other words reckon with the issue of workers’ motivation at all. And the reason that the labour market flexibility argument does not reckon with the issue of workers’ motivation is because it believes that fear alone will be enough to make them work; their motivations are irrelevant. The threat of the “sack” and the perennial existence of an army of the unemployed into whose ranks the “sack” confines you, is enough to make you work to your full capacity. The question of eliciting work from you through providing appropriate motivations does not arise. With this fear-instilling mechanism in place, it sees workers as potentially reducible to inhuman objects appended to machines and no different from machines.

This reduction of the worker to the level of an object, as Marx had famously argued, is both the premise and the objective of capitalism. The beating down of the subjectivity of the workers, the process of reducing them to the status of proletarians where they are forced to abandon whatever freedom they had in their earlier occupations for a “mess of pottage”, the conversion of the human being into an appendage of the machine: this is what capitalism is all about. Neo-liberalism, with its insistence upon labour market flexibility, is nothing else but a reassertion of this elemental drive of capitalism.

The fact that neo-liberalism, which is the latest stage of capitalism, insists upon it, shows the vacuity of all talk of a “humane capitalism”, of “capitalism with a human face”, or of a capitalism that can at the same time provide scope for “freedom” and “creativity” to the workers. It reveals the fundamental spontaneity of the system that invariably seeks to set aside all interference with its elemental tendencies.

At the same time however it also shows the necessarily transient character of the system. The premise of capitalism that workers can be reduced to the status of objects no different from the means of production, has been as unrealisable throughout the history of the system as it has been persistently adhered to. Against the persistent attempt of capitalism to reduce workers to the status of objects, workers have as persistently asserted their subjectivity by forming “combinations”, keeping “combinations” alive through their sacrifices, and moving on to the terrain of political struggles.

The introduction of labour market flexibility, premised upon the presumption that workers are no different from objects, is an attempt at the same time to realise this presumption. This presumption however is fundamentally unrealisable, which indeed is why capitalism is necessarily transient: it is premised upon and seeks to realise in practice something that is essentially unrealisable. The struggle against labour market flexibility must be total and uncompromising, for if it is not, then the struggle will be there anyway but it is likely to take chaotic and painful forms.

Courtesy: People’s Democracy