Globalization

The following is a reproduction of a discussion I had with my friend. The essay is my reaction to India Unbound, a book by Gurcharan Das.

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This essay is very long. I hope I don't bore you with it. Probably, if we have a discussion, in future, I'll concentrate on one or few aspects. Also, probably, I could have split it into a number of essays.

Let me have a shot at a reaction to India Unbound. Again, let me first give some general remarks, then go into details.

Zeroth, let me say that I liked it and would be reading it in more detail, again. It is one of a series of books I am planning to read to make sense of the Indian political and economic scene. If you have more ideas of books like that, I'll be happy to try them.

I'm interested in globalization, the few books which I've read are: Making Globalization Work by Joseph Stiglitz , In Defense of Globalization by Jagdish Bhagwati and Development as Freedom by Amartya Sen. I've also read a lot of Noam Chomsky's work on markets and globalization.

India Unbound talks about two things. a) Nehruvian socialism b) The neoliberal reforms of 1991.

First, let me make a few observations. The whole book is written in an entertaining, anecdotal form. While anecdotal evidence is useful, it's dangerous, at least in principle, because you can sort of validate any theory on the basis of anecdotes. There are a lot of endnotes, and I plan on going through them in detail.

Next, the book concentrates on the manufacturing / knowledge-based sector generally. There's very little, almost no mention of the agricultural sector. This is significant. It's a reflection of Das's background which is mostly in the manufacturing sector and management. While the manufacturing sector is important, it's very important to have a perspective of what's happenning in the agricultural sector which employs 600 million people with another 200 million indirectly affected by it. In view of this, I find the book having a very narrow perspective. In coming to a decision between "socialism" and "capitalism" (I'll explain the quotes in a second), it's quite important to have view of all the implications.

The dominant theme throughout the book is one of "freedom". I agree with that, in principle. For instance, in his book Development as Freedom, Amartya Sen argues that (I'm oversimplifying a bit here), freedom can be thought of as both the end and the means to development. To take a concrete case, consider one of the areas in which Sen has written about extensively, famines. He points out that there has been no substantial famine in any country which has a multiparty democracy and a relatively free press, like post-independence India. But, for example, during Mao's Great Leap Forward in the 1960s, communist China experienced massive famine, killing 10-15 million people. There is, in my view a very good case to be made for increasing the freedom of people in the world.

Let me make a few comments about "socialism" and "capitalism".

Socialism is a broad theory. The main element of socialism is control by the people, both in the political and the economic sphere. The relevant principle for economics is "workers control of the workplace". The principle is simple (we may argue whether it's right or wrong), "the people who are involved in production ought to own it".

Now, there are different approaches to socialism. They can be broadly classified as "statist" or "non-statist", depending upon how important the role of the state is.

"Nehruvian socialism" was a statist approach to socialism. We can ask ourselves if it fulfilled the aim of having worker control of the workplace. In my view, it largely failed in this task. The industry was controlled by bureaucrats, not the workers. That's an important distinction.

Capitalism is also very broad. The idea is that people should be free to choose and the decisions on production are to be made through a market mechanism based on supply and demand.

There are many issues regarding capitalism, but we can say that the two of the dominant issues are that of corporations and importance and fairness of the market. I'll give you my view.

What exactly is a corporation? Well, corporations are basically dictatorships, with a more or less hierarchical structure with orders going from top to down. There is, broadly, a worker class and a management class and these are hierarchical structures. The exclusive goal of the corporations is to have large, growing, sustainable profits for its shareholders. That's fine, but we have to be clear about what it is. Corporations are not accountable to anyone else except its shareholders. For example, if Coca-Cola sets up a plant somewhere, it's not accountable to the local people, but only to its board of directors. That's the basic setup. How fair it is, we can argue.

A related issue is the market mechanism. There are many critiques of markets. I find, in India Uncut and many of the other blogs a feeling that "markets know best" and freedom means cutting down on govt. power while encouraging private enterprise. I'd urge you to read the books of Joseph Stiglitz, Nobel Prize winner and former chief economist of the World Bank, on what he calls "market fundamentalism". His main contribution is "information theory of economics", where he shows that, under conditions of imperfect information, (that is, always), markets don't lead to efficiency. Markets will produce too little of some things, like basic research, and too much of others, like pollution.

For example, just look at the main innovations of the American economy, to name a few, internet, communication, airlines, drugs, biotech. Let's take the internet. As you know, the internet was basically a product of the publicly funded Pentagon system. It was basically set up in the 1960s and there was important research, mainly in universities till about mid 1990s when it was handed over to the private sector. Since then, its character has changed (whether for the good or not, we can argue). Earlier, the buzzword was "information superhighway", now it's "e-commerce".

Let me make a general statement. Markets, by themselves, don't produce enough of basic research. For example, just look at India. Where were the main centres of excellence in the past? - IIT, IISc, ISI. They are relatively autonomous institutions, but are funded by the govt. There are many other centres of learning, like NIIT, Aptech. What's your view of them? I'd like to hear them.

Some more examples. We hear a lot about R&D in American drug companies. First, a huge amount of investment is through the publicly-funded university system. Next, we can look at what it has produced. Keep in mind that R&D in drug companies is huge. We can look at the different products which have come out in the past 10 years. I don't have an accessible source for this, this is coming from memory from Making Globalization Work . The large majority of products are the so-called "lifestyle products", like Viagra or skin lotions or stuff like that. There are very few products for important diseases like cholera or malaria or other things. Again, I'm not saying that the system is useless, but we have to be clear about what it is and whether this is what we want it to be. The overwhelming majority of patents are for slightly different molecules which some other company has not patented.

Summarizing, in my view, the role of the govt. is not just to keep law and order etc, but an active interference is required for markets to function well. Like building infrastructure, like roads and universities. Like education and health. It also has its seamier side, like US govt. interfering in Iraq to protect its oil. In fact, the American system is basically a "state capitalist" system. Again, we can argue as to whether these kinds of interferences are ethical or effective or whatever, but its clear (to me) that they are required and expected.

For example, you might have done macro-eco? Remember Keynesian economics? Keynes' contribution was in periods of slow growth or recession, the govt. can stimulate the economy my massive intervention. Stiglitz places Keynes' contribution as the most important in the history of capitalism.

Let's get back to India Unbound.

India's Human Development Index places it at 126th in the world, comparable to sub-Saharan Africa. In view of this, we can safely claim that a) was a failure.

Let's look at b). "Neoliberalism". Let's take the 1991 reforms in India. In India Unbound, Das gives an anecdotal view of the role of Chidambaram, Narasimha Rao and Manmohan Singh. I still know very little of the background, but, in my view, the reforms were mainly a product of the "structural adjustment" programs of the World Bank and IMF. Manmohan Singh etc. were only responding to the pressures of the institutions due to the financial crisis. Thus, the reforms only lasted for 2-3 years and haven't been pursued very strongly after that. (We can see that in the current govt., when Manmohan Singh is the PM).

Anyway, it's a fine point. We can agree, I think, that the role of these financial institutions was at least as important as Manmohan Singh etc.

This raises a few questions: (The questions are arranged in decreasing order of my knowledge about them. I still need to know a lot about all of them).

a) What's the history of neoliberal reforms around the world? What was the role of the World Bank etc. in this? Do the western countries follow these rules?
b) The "Asian Tigers", in South East Asia. What was their strategy in their period of growth in the 1980s? Was it comparable to neoliberalism?
c) What about China? What's going on there?

Let me address these questions.

a) First, let's look at the theory of neoliberalism. The "structural adjustment" programs, also called the "Washington Consensus" - namely the consensus between, World Bank, IMF and US Treasury dept. (that's what it is - the US dominates these institutions). What do these entail?

In a "free" market, there are basically two kinds of freedom, freedom of movement of labour and freedom of movement of capital. Neoliberalism refers mainly to free movement of capital, not labour. In fact, as the US is passing more and more draconian immigration laws, freedom of labour is severely restricted. Let's look at the Washington Consensus policies.

The main measures are fiscal conservatism, namely, less govt. expenditure in many areas. Also, it involves privatization of many public-sector industries. It involves the strategy of export promotion instead of "import substitution". It involves cutting down or eliminating tariffs. Let's look at what liberalization theory says.

According to theory, the economy will be a dynamic one, with jobs continously being created and destroyed. The economy will move from low wage/low-productivity jobs to high wage/high productivity jobs. There will be both import and export of the same commodity, for example, rice. India both imports and exports rice depending upon where the market is.

The country as a whole will benefit (in theory), but there will be some losers. The losers being the unskilled and low-wage workers. This is what the theory says. How ethical it is, we can argue.

For example, Stiglitz points out, that in most developing countries, unemployment rates are very high. The "dynamic" economy, when it destroys jobs, the workers don't move on to high-productivity/high-wage jobs, but simply add to the unemployed force.

In theory, even a moderate liberalization of labour would have many times the impact than the liberalization of capital. But, since the big capital countries tilt the playing field to their own liking, it's capital liberalization which is being implemented.

That's the theory, what's the practice?

My main source on this is Making Globalization Work. In the book, Stiglitz says this: With globalization, development is possible, but not inevitable. Most economists agree that the Washington Consensus policies have failed.

Why did he say that? Let's look at the history. I'll concentrate on four areas: Latin America and Central America, East Asia, Russia after the fall of the Berlin Wall and India.

i) Latin America and Central America are the areas where the Washington Consensus policies were tried extensively. I'll mix up politics and economics in this, because, in my view, they're both important in this and I feel that they're two aspects of the same thing.

Let's first concentrate on South America. Let's take Argentina, one of the cases which Stiglitz discusses in his book.

Argentina was one of the poster children of the IMF. The IMF gives grades to countries as to many factors like credit worthiness, macroeconomic health etc. Argentina was an A+ student. It carried out "structural adjustment" programs extensively. The result of these policies was that it went deep into debt. It kept on falling into a deeper and deeper debt crisis and then finally its new president just said - NO. It just refused to pay its debt. That was the biggest default in IMF history.

With the default and the rolling back of many of the structural adjustment programs and massive state intervention in the economy, Argentina did something no-one expected it to do. It grew. It grew 7-10 percent, a very healthy growth rate, comparable to India and China.

Let's look at Central America - Guatemala, Nicaragua, Haiti, Honduras, Mexico. I'll be talking generally here, but I'll go into details on any country if you want.

Just imagine, what kind of image do you have of these countries? I'd think, an absolute symbol of destruction. The first four countries have been so systematically destroyed that there's little hope of recovery. Mexico is a somewhat different case.

For instance, around 60% of Haitian children are suffering from malnutrition and probable brain damage. It's the poorest country in the hemisphere. Similarly, Nicaragua, the second poorest country in the hemisphere.

The result of these policies is that there have been left-of-centre governments throughout Latin America. People have become disenchanted with IMF policies. Latin America once constituted 80% of IMF's clients. Now it's less than 1%.

b) Let's look at Russia. Russia was the object of "shock-therapy", which is a sudden transition to a market economy from communism. Let's look at what happenned.

The few years after the fall of the Berlin Wall were a catastrophe for ordinary Russians. Incomes fell 40%. Poverty rose 10 times. Inflation and unemployment soared. There were a huge number of oligarchs created, with massive capital flight from the country. You might have read about Roman Abramovich, the Russian oil tycoon who purchased the Chelsea football club and a number of county estates in the UK. The IMF lent more money, it all flew out.

Nobody wants to go back to the repressive communist regime, but the Russians are asking, what kind of economy is this?

ii) Next, let's look at East Asia. In East Asia, there are very strict controls on speculative capital and capital flow. In Singapore, there's the death penalty for capital flight. That takes care of that.

What was the strategy of the East Asian "tigers"?

I'm still learning about Japan, Korea, Taiwan etc. But it's clear that the states intervened massively in the economy. First, as Sen notes in his book, the conditions before the economic "miracle" were already there. These countries had very high literacy rates (primary education was extremely important) and social welfare programs. In these countries, Sen notes, development came first, then growth. These countries had a well-developed population which was ready to be put into manufacturing high-tech goods. In contrast, we can see what India's literacy and health standards are. Also, there are many studies of Japan, where the Japanese MITI (Ministry of Trade and Industry) worked very closely with the industries and ignored many market rules (for example Japan always runs a trade surplus, which means that there is a corresponding trade deficit somewhere in the world). I'm still studying this, but it's clear that Japan and the other tigers ignored market rules and had massive state intervention.

You might have read about the East Asian financial crisis. It was again due to IMF policies. As Stiglitz notes in his book, these countries already have a very high savings percentage. (Like Korea saves around 30% of its GDP, China 40%). They already had the resources and the citizens could spend money to stimulate the economy. But instead, they borrowed money from the IMF (and crucially other private investors) and freed up capital flow. For a while there was boom, then sentiment changed and massive capital flight took place.

iii) India: Let's look at what India is. A large majority of India is involved in agricultural sector. This is where Das's book is very weak, as I mentioned. Note that liberalization theory says that the unskilled, low-wage workers would be hardest hit. In theory, these people can be compensated, because the country as a whole benefits. But in practice, this seldom occurs.

I'm still studying the effect of liberalization on Indian agriculture. It's by no means pretty. Let me illustrate one of the main issues which you may have heard about.

The EU and US have massive subsidies for domestic farmers. In the US, a big share of the subsidies goes to the large agricultural corporations, which is a form of "corporate welfare". Despite these huge subsidies, farmers are leaving agriculture. One European farmer quits every minute. There's that old joke that it's better to be a cow in Europe than a farmer in India, because a cow gets a $2 subsidy per day. 70% of India lives under $2 a day.

These subsidies are a big reason why the agricultural market is unfair. You might have read that India and Brazil had made this one of the main issues in the WTO negotiations.

The effects of neoliberal policies are still being studied, but the World Bank estimates that there would be massive rural-to-urban migration.

http://www.zmag.org/sustainers/content/2007-07/08sharma.cfm

I don't know how balanced or accurate this is, but you can look at that.

In about 10-15 years more than 400 milliion people in India would be migrating to urban centres. You can imagine the slums in Delhi and Bombay. Now imagine them being much worse. Around 40-60% of people in states like Tamil Nadu, Andhra etc. would be migrating to urban centres because they can't live on subsistence agriculture any more. You might have read about the farmer suicides in Andhra. More than 25,000 farmers have committed suicide in India, since 1997.

These are things which are also part of globalization. We should be looking at them too when we talk about India's growth and "superpower" status. Globalization has many possibilities, but we must be aware of its implications.