Sunday, March 2, 2008

Economic Growth: A Meaningless Obsession?

By Amit Bhaduri, B.N. Ganguly Memorial Lecture; CSDS, Delhi, November 2006.

We are living in India at a time when the media is continuously transmitting confusing, even conflicting, economic signals. If we restrict ourselves to the English language print as well as electronic media, our comfort level is likely to be high. The economy is growing at a high rate, the stock market is booming, our foreign reserve is at a comfortably high level, and freer trade is bringing to our doors a variety of goods and services simply unimaginable even a couple of decades ago as a mark of the benefits of globalization. What is more, we are daily reminded that India is poised economically and politically as an emergent world power.

We are told by the ruling political establishment, and reminded continuously by the media, that India’s growing international stature has been possible due to the process of globalization. Despite its many shortcomings, we are further told, if less directly, that we need to play the game according to global rules set largely by the United States. Our edge in information technology would place us economically in a position of advantage in an era of outsourcing. Politically, our changed stance in international relations is signified by the nuclear deal this government would like to make, and our uncritical support for combating global terrorism, neglecting conveniently the question whether terrorism feeds on the very processes by which it is being fought.

If we are able to look a little beyond our middle class noses, beyond the world painted by mainstream media, the picture is less comforting, less assuring. Contradictory signals appear in the same media, even if they are usually given far less prominence than they deserve. These opposing signals have begun to clash with greater intensity, and the noise level is getting louder by the day. India is doing well in many ways, and yet, at the same time, a sense of unease is rapidly growing. Once one steps outside the charmed circle of a privileged minority expounding the virtues of globalization, liberalization and privatization, things appear less certain.

A sense of unease mixed with growing popular despair, rage and resistance seem to be engulfing a large part of our countryside. Look at one such index of despair. Going by conservative official statistics, between 2001 and 2006 in the four states of Andhra, Karnataka, Kerala, and Maharashtra more than 9000 farmers committed suicide. Look also at another index of rage. According to the estimate of the Ministry of Home Affairs, some 120 to 160 out of a total of 607 districts are ‘Naxal infested’. Supported by a disgruntled and dispossessed peasantry, the movement has spread to nearly one fourth of Indian territory. And yet, all that this government does is not face the causes of the rage and despair that nurture such movements; instead it considers it a ‘menace’, a law and order problem to be rooted out by the violence of the state, and even congratulates itself when it uses violence effectively to crush the resistance of the angry poor.

These are unmistakable symptoms of a process that I have come to believe is generic. The way we have been accustomed to think of urbanization, industrialization and ‘development’, and have accepted unquestioningly the logic of globalization and liberalization through the market, will only intensify this process. The contradictory economic signals will grow louder until they overwhelm us completely. Not thinking afresh about development might seem convenient, even pragmatic for the time being, but in effect will only make the problem less manageable later.

In the meantime, however, this apparent quest for higher economic growth in the name of development will serve the interests of large corporations, receive accolades from the IMF and the World Bank for our decision-makers in power, and get high credit ratings from international financial firms, while the ground reality steadily worsens. For the sake of higher growth, the poor in growing numbers will be left out in the cold, undernourished, unskilled and illiterate, totally defenceless against the ruthless logic of a global market dominated by large corporate interests.

This is not merely an inequitable process. High growth brought about in this manner does not simply ignore the question of income distribution, its reality is far worse. It threatens the poor with a kind of brutal violence in the name of development, a sort of ‘developmental terrorism’, violence perpetrated on the poor in the name of development by the state primarily in the interest of a corporate aristocracy, approved by the IMF and the World Bank, and a self-serving political class. After Singur, one cannot even say that the traditional Left has anything better to offer.

A massive land grab by large corporations is going on in various guises, aided and abetted by the land acquisition policies of both the federal and state governments. Destruction of livelihoods in the name of industrialisation, big dams for power generation and supposedly irrigation without adequate supporting canal systems in many cases, modernisation and beautification of our cities by demolishing slums among others, are examples of how development can turn perverse and systematically against the poor people.

Until September 2006, the Board of Approvals Committee of the Ministry of Commerce had approved 267 Special Economic Zones (SEZ) projects all over India. Land area for each of these projects ‘deemed foreign territories’ ranges from 1000 to 14,000 hectares. So far for only 67 multiproduct SEZs, as much as 1,34,000 hectares have been earmarked, mostly by state industrial development corporations. Similarly, mining rights are being granted to the corporations mostly over tribal lands. The tribals are not allowed by their customary laws to sell land individually, but the state governments, aided and emboldened by federal government policies, are acquiring land to give away to corporations.

With its two faces, government has all along shown remarkable energy and efficiency when it comes to acquiring land forcibly from the peasantry, but remains reticent, bound by bureaucratic red tape, when it comes to acquiring land for resettling the poor and displaced. Recall that the year 2006 almost began with the police shooting down in cold blood twelve tribals in Kalinga Nagar, Orissa, when they resisted their land being handed over to the Tatas for mining. The acquisition price of their land was reportedly about one-tenth of the price at which the government gave it to the Tatas, and even that was well below the market price.

The Panchayat Extension to Scheduled Areas or PESA Act of 1996 requires gram sabhas to be consulted for land acquisition. And yet, in Jharkhand, and in Orissa, this has either been systematically ignored or, as a recent report from the field documents, the police surrounds the gram sabha meetings and threatens the ordinary members, forcing them to agree to the proposal of giving up their lands at throwaway prices (Down to Earth, 31 October 2006).

The Left Front coalition in West Bengal led by Buddhadeb Bhattacharya is in the distinguished company of Mulayam Singh in claiming that the exact nature of the land acquisition deal in Singur and Dadri respectively cannot be revealed to the public under the Right to Information Act because these are ‘trade secrets’, Yet a local TV channel reported, uncontested by the government, that the West Bengal government gave Rs 140 crore in compensation, while the Tatas will give only Rs 20 crore for the land, that too five years later, without stamp duty and with provision of free water.

We are indeed living in a globalized age. With their global reach, the large corporations, national and multinational, have reached almost all politicians who differentiate themselves by their rhetoric, but not by their actions. Academics and media persons have joined the political chorus of presenting this developmental terrorism as a sign of progress, an inevitable cost of development. The conventional wisdom of our time is that There Is No Alternative, the TINA syndrome in the development discourse.

There is a hidden script to this TINA syndrome. The ruling ideological design of development is that the corporations will deliver us from poverty by raising the rate of economic growth. The IMF, the World Bank, and the Asian Development Bank tirelessly propagate this ideology in various guises. Now we have Marxist politicians and theoreticians propagating the same. Our China-haters of yesterday have become today its greatest economic admirers in this process. ‘China’s path is our path’ is a slogan that sits equally well in New Delhi, Kolkata, Mumbai, Ahmedabad or Lucknow! And yet this so widely agreed upon model of development is fatally flawed. It has already been rejected and will be rejected again by our democratic polity, for it fails to deliver us from poverty economically, and is also unsustainable environmentally.

Three different variants of this broad ideology can be identified from the various experiences in the contemporary developing world. In the first variant, some countries with significant deposits of valuable natural resources like oil enter into an implicit political arrangement with the United States. They ensure the supply of oil, receive petrodollars in return, and recycle them through multinational banks to engage multinational corporations for the development and modernization of their economies. The US as the military superpower ensures that these regimes of questionable legitimacy, upholding such agreements, are kept in power, irrespective of whether it is a democracy or not. Saudi Arabia, and many other Gulf states are the prototypes of this model.

Some have speculated that Sadam Hussain in Iraq faced American aggression when he had the delusion typical of many dictators that he could wield independent power by refusing such an arrangement. This has been the operative model in many oil and natural resource rich countries, which an American academic recently described as ‘the curse of natural resources’. However, he conveniently forgot to mention the role the US and multinational corporations play in perpetuating this curse. Understandably, the US gets worried when this model is rejected by Hugo Chavez in Venezuela, and now increasingly in Bolivia, Argentina and to a lesser extent in Brazil.

In the second variant, massive commercial borrowing from international banks is done by a willing national government for the purpose of development. This is encouraged and usually coordinated by the IMF and the World Bank by engaging multinational corporations, leading to various expensive, ambitious giant projects, typically according to rules of consultancy and contract fixed by the World Bank. Almost inevitably the country is caught in a debt trap. Many countries of central and Latin America, with Argentina as a prime case, have been examples of this variant of the development model against which they are now reacting.

On the surface the first and the second variants differ because in the former case the country is usually a net international lender, while in the latter it becomes a net international borrower. However, in both the first and second variants, a mutuality of interests binds together the multi-national banks and corporations, led by the IMF and the World Bank and a willing domestic government, which depends either militarily or economically (often both) on outside support.

However, there is a third variant which differs in so far as it injects a strong element of statism in the developmental process. In this case state-led or state-sponsored corporations are created and nurtured to compete with multinationals under active government support, especially in the world market. At the same time the government tries to attract direct foreign investment, either through these corporations, or in areas where the government corporations are not the preferred option for some reason. Nevertheless, the government becomes a ruthless promoter of the corporate entities in search of higher growth, irrespective of how it affects the interests of the people.

This is a case of state-led corporatism, and today’s China seems to fit this description reasonably well. South Korea, despite the obvious differences in the political and geo-political situations and dependence at an earlier stage on foreign borrowing, might have traversed a similar path. However, the reliance on developmental terrorism by the state on behalf of the corporations is not any less in this third variant of development, and a dictatorial form of government fits it rather naturally.

The Indian case could have been complicated by a functioning democracy, and the political compulsions of coalition governments at the Centre as well as in several states. However, there seems to be a remarkable degree of political convergence on the model of development that elections change governments without changing the model accepted for development. The first variant of a highly resource-rich country is clearly not available to India. The third variant of strong statism is also realizable only to a limited extent, given the compulsions of democracy in a land of overwhelmingly poor people. Therefore, all governments that have recently been in power at the Centre as well as at the state level, irrespective of their professed political colour, meander somewhere between the second and third variants.

In other words, our notion of how to develop has come to be based on a design of massive international borrowing with greater presence of multinationals, encouraged by the IMF and the World Bank. At the same time, attempts are being made at creating more favourable conditions for domestic corporations through measures like special economic zones (SEZ), granting of indiscriminate mining rights on tribal land, corporate farming by dispossessing poor peasants and so on.

However, beyond a point, these two variants of development are fundamentally incompatible in the Indian case. A policy of massive borrowing under the supervision of the IMF and the World Bank necessarily requires an extremely multinational corporate friendly economic climate. This would also clash with the independent growth of indigenous corporations, particularly when they both target the domestic market. The case of China is misleading in this respect in two ways. First, because the nature and extent of support the Chinese government can give to its state sponsored corporations or to particular foreign investors, and differentiate among them, if necessary even in terms of a malleable legal system, is not possible for a government, particularly when it follows the path of borrowing heavily under IMF World Bank supervision. They have largely to comply with the intentions of those agencies.

Second, the single-minded ruthlessness with which the Chinese system can follow its objective of corporate led growth, at times by changing laws or suppressing the rights of ordinary people, is fortunately not yet possible in our system. And yet, the higher the growth rate achieved through this route of promoting corporations as the bulwark of growth, the greater would be the level of developmental terrorism, while we would be fed on a lie that higher the growth, the sooner the problem of poverty would get solved. We would also be told that efficiency promoted by liberalization, reform and international openness would raise growth to solve the economic problems of the common people over time through greater integration with the world market.

It is worth explaining why the above argument is false. Since globalization tends to increase the relative importance of the external vis-à-vis the internal market, the thrust of the strategy is to exploit the greater dependence on the world market through exports and direct foreign investment and other capital flows. However, since the size of the total world market is beyond the control of any individual nation state, especially India, the case is presented for focusing on increasing the share of exports by the country in the world market.

On the economic front, this has to be achieved through greater international cost competitiveness, by measures like wage restraint, banning workers’ right to strike, tax concessions, higher labour productivity through downsizing of the labour force, privatization at prices favourable to the private parties, cheap allotment of prime agricultural land to industrial houses in the name of industrialisation, mining rights on tribal land, and a host of similar measures. The basic economic theme unifying all these measures is the notion of ‘internationally competitive cost effectiveness’ that would be achieved by the corporations at home. In effect, it boils down to applying the logic of corporate management by treating the whole economy as a giant corporation which would increase its international market share by out-competing rival trading nations through cutting costs.

Politically it is dangerous to treat a country of India’s diversity as a homogeneous corporate interest. The economic reasoning is flawed, because the micro-logic applicable to individual corporations involves a serious macro fallacy. At the most obvious level, it ignores the uncomfortable fact that all countries cannot be winners at the same time in the zero-sum game for producing an export surplus through competitive cost cutting, because a larger share by some countries in the global market must mean a smaller share by others. As a matter of fact, India has been an import surplus economy with an excess of imports over exports of goods met through capital inflows, which has been sufficient in recent years to even build up a relatively large foreign exchange reserve. However, they are mostly short-term capital inflows and portfolio investments.

Such capital flows in the Indian context are not merely NRI deposits and a greater demand for stocks by registered institutional investors like international banks and mutual funds. They also come from other less transparent sources as participatory notes (PNs), routed through registered financial bodies. The PNs now (October 2006) constitute over half (about 52 per cent) of total inflows. For the time being these inflows contribute significantly to the stock market boom, but can turn into outflows with even greater ease leading to a financial downturn, panic and crash. As already mentioned, instead of raising the money at home, a lenient attitude towards borrowing abroad has been a crucial element. The option of raise money at home through deficit financing was foreclosed through a Fiscal Responsibility and Budget Management Act in 2003, in line with the conventional wisdom of the IMF. So the government can now claim that it can only raise money through privatization or inviting foreign capital. But the script for crippling the economic role of the government goes deeper.

Arguably, the present phase of globalization began around the middle of the 1970s with the deregulation of major capital markets in the rich industrial nations. As a result, the volume of private trade in foreign exchange today, facilitated vastly by fast electronic transfers around the world, is a staggering daily volume of some 1.2 trillion (i.e., million million) dollars. Less than two per cent of this is needed at the most for financing exports and imports, and even less for financing the current level of direct foreign investment.

The daily volume of private trade in foreign exchange can easily overwhelm the foreign exchange reserve of any central bank. The combined reserve of all the central banks of the world put together is less than a couple of days’ total volume of private trade in foreign exchange. Theoretically speaking, the entire reserve of all the central banks in the world could be wiped out by hostile private trades in a few days. This predominance of private finance capital has become by far the single defining characteristic of the modern phase of globalization.

No wonder, all individual governments feel vulnerable and India, with its almost insignificantly small stock market or a relatively soft currency, feels particularly vulnerable. The rupee and Dalal Street can be set in an uncontrollable downward spiral due to capital flights triggered off by the speculation of a few important private players in the foreign exchange market. Mercifully, the Indian capital market is still not totally free; bringing in finance is generally easier than taking it out, but this government considers it a priority to make the market freer through capital account convertibility.

Even in the present situation, if a few major foreign institutional investors turn hostile and take out a part of their financial investments from the Indian market, it would dramatically bring down the stock market and the exchange value of the rupee. Even worse, it might trigger off a panic among ordinary investors who would then follow like a herd of sheep to turn it into a full-fledged financial crisis. Therefore the government remains wary of sending unfavourable signals to the financial markets, and many developmental issues become subservient to this consideration.

The Fiscal Responsibility and Budget Management Act in the name of ‘sound finance’ is one of its important signals of comfort to the stock market. In these circumstances, the government with support from the media can pretend to be doing very well economically by keeping the large private players in the capital market happy through sending the right signals with enthusiastic indirect support of the IMF and the World Bank. When the IMF or the World Bank says economic liberalization is good, privatization is a must, but large government expenditures or fiscal deficits are bad in all circumstances, our governments take the soft option of falling in line. The move to make the capital account convertible, a favoured IMF recommendation, would only further tilt the balance in this direction.

Unlike a visible external debt trap, under globalization the invisible trap of international finance requires maintaining a rising stock market through capital inflows from foreign financial institutions, induced by financial market-friendly policies approved by the IMF and the World Bank. Typically, however, the resulting policies are anti-poor.

This reasoning is not mere academic speculation and fits the facts. The stock market went up in a frenzied bubble (ultimately resulting in the Harshad Mehta episode) to show its approval of economic reforms in 1992. The stock market suffered a massive post-election crash in 2004 to register its nervousness about reform, until market-oriented politicians were put in charge of the coalition government’s economic policies. In the Indian context, the anti-poor thrust of this style of economic management is shown up in election verdicts.

It is no accident that economic policy-makers playing by this script are repeatedly rejected by the people in the elections. The Congress dominated coalition, which prided itself in ‘reforming’ the economy, lost the general election in 2000. Manmohan Singh, who was credited with initiating reforms, failed to win a seat in the Parliament. The BJP led coalition, which saw India shining through the glasses of the stock market, did no better in the general election of 2004. Particularly telling was its electoral disaster in Andhra. The lesson of our democracy should be clear. Those who tie the well-being of the Indian stock market with the well-being of the people should not expect to win elections. And yet, by agreeing to a flawed model of development, all political parties are closing our real options.

The political challenge facing India is clear. It is not how to achieve still higher growth, but how to impart a greater democratic content to our growth by following a different course of development. Higher economic growth spreading developmental terrorism without democratic content has to be downgraded as meaningless, not even desirable. We must consider instead growth as an outcome of the process of involving the people through gainful employment and expanding their opportunities for livelihood. This requires focusing on employment generation, and judging growth performance in terms of its ability to generate productive employment to include even the poorest and most marginalized citizens in our society.

By this yardstick, the high growth performance of neither India nor China has been impressive in recent years. In India the rate of employment growth has actually been lower in the recent high growth era than in previous decades when the economy grew more slowly. The reason for this dismal performance on the employment front is the emphasis in isolation only on labour productivity growth, which is an outcome of the obsession with cost-cutting corporate style of economic management in the name of efficiency and international competitiveness without taking into account its impact on employment growth.

It is time we got rid of this dangerous obsession based on the false premise that India’s development can be led by corporate and international financial interests. Our focus must shift instead to a time-bound programme for full employment with growth as the consequence not the cause of full employment. It is possible to devise such an economic programme, not as a utopia, but as reasonable economics feasible even within our political context (see, Development with Dignity by Amit Bhaduri, National Book Trust, Delhi, 2005). The intellectual challenge, indeed the compulsion of our times is to be able to work out this alternative with honest courage, without excess baggage of the political ideology of either the Right or the Left.