Académique Documents
Professionnel Documents
Culture Documents
A Marist Perspective
Edited by
Sitaram Yechur
APeops Democracy Public:ation
ISBN: 978-81-906218-2-3
November 2009
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Contents
CPI(M)s Suggestions For Protecting Indian People 07
2. New Contradictions and Probler 13
- Sitaram Yechur
3. The Balloon Bursts!
- Sitaram Yechury
4. Neo-Liberalismon the Brink ofFailure 2
-Prabhat Patnaik
5. The Paradox ofCapitalism 3
-Prabhat Patnaik
6. The End of the Illusion 3
-Prabhat Patnaik
7. le rreat ofGlobal Recession 4
-CPChandrasekhar
8. Lengthening Shadows ofGlobal Recession 49
- Editorial People s Democracy
9 Another World Depression? Finance Capital and
N eo-Deflationism 5
- Utsa Patnaik
10. Finance Capital and Fiscal Defcits 5
-Prabhat Patnaik
11. The Truth About Finance and Markets 6
- Jayati Ghosh
12. Is the Crisis Transforming Global Finance? (
-C P Chandrasekhar
13. le Global Financial Comunity
7
-Prabhat Patnaik
14. Global Trade in a Time ofCrisis 7
-CPChandrasekhar
15. How Greedy Speculators Contol Commodity Prices 8
- Jayati Ghosh
16. Global and Local Infation i the Context
ofRising Urban Poverty 8
- Utsa Patnaik
17. Capitalisms Logic: Profts Before Peop1e g
- Editorial People s Democra
18. Greed as a Explanation ofCrisis 10
-Prabhat Patnaik
19. How the US is Pul1ing Down Asian Economies 105
- Jayati Ghosh
20. B10wing Bubbles at the Bust
lW
-CP Chandrasekhar
21. le Ongoing Indusial Recession
115
- Jayati Ghosh
2. Capitalisms Open Secret
121
-C P Chandrasekhar
2. Contol Frauds
126
- Jayati Ghosh
24. Growth For Whom?
- Editorial People s Democrac
2. I Search of a Real Stimulus 133
-Jayati Ghosh
26. Mi Stimulus Package: Barking up te Wrong Tree 137
-Editorial People s Democrac
27. Govts Must Inject Demand into the Economy Directly 140
-Prabhat Patnaik at UN
28. Is the Present Crisis Ricardian? 146
-Prabhat Patnaik
29. Ln and Marxist Economics 151
-Prbhat Patnaik
30. Cna and World Capitalist Crisis 16
-C P Chandrasekhar
31. Capitalism Socialism and Crisis 16
-Prabhat Patnaik
32. Socialismand Welfarism 171
-Prahat Patnaik
33. World Capitalist Crisis and Growing Racist Attacks 176
- Sitaram Yechury
3. Challenging Imerial Finance 179
-C P Chandrasekhar
35. Imerialist Logic Not Acceptable 18
-Editorial People s Democracy
36. Is the GlobalRecession Over? 18
-C P Ch'ndrasekhar
37. Is te World Capitalist Crisis Over? 192
-Prabhat Patnaik
38. Finance Capital Reasserts Its Supremacy At G-20 197
-Prabhat Patnaik
39. The Requirements of A New Resere Currency Regime 20
-Prabhat Patnaik
40. The Economics of the New Phase ofImerialism 20
-Prabhat Patnaik
Preface
The world is into the second year of recession since the outbreak of
eonomic ad fnancial crisis whose intensit is unpalleled sincete
Seond World War. A imprssion is being create now that te crisis
is getting over. But the current world capitalist crisis is such that if it
does not appear in one particula for then it will appea in a diferent
for. I essence the capitalist cris.is is inherent in the system and its
virulence is not likely to subside.
The crisis has afected the people world ove and there have been
attempts by imperialism to shif its burden to people in the under
developed countes and te working people ofte develope nations.
The CPI () throu its mouthpiece Peoples Democrcy has been
analysing the causes ad shifing contours of this crisis over the last
two yea. Aseletion of such matera has been collete in tis volume
with the belieftat te ana1ysis prsente h will be an aid in adv.lCing
te strugle against the capitalist system.
54
and expansionary picies should be fol1owed in the actual situation of
unemployment went unheeded until a great deal of damage had been
done.
The ascendancy of finance capital from the 1 970s has seen exact1y the
same misguided expenditure defating policies with the same incorrect
theory being peddled by the Fund and Bank that pub1ic investment
crowds out private investment which assumes ful1 emplo)nent -with
much less excuse for such intel1ectual infavtilism seven decades after
the General Teo\ than there was in 1 929. States have shown an
insensate obsession with infation targeting regardless of unemployment
and have undertaken repeated Fund-guidedcuts in public spending thus
lowering the level of economic activity in the material output sphere.
The destructive impact was strengthened by additional measures taken
to practice monetary austerity reduce the ratio offscal defcit to GDP
put caps on wages retrench labour from enterprises devalue curren
cies and open up developing economies to fee trade and capital fows.
The GDP growth rate of developing economies halved between the
1 970s and 1 990s. India saw cutbacks in investment public spending
and credit to smal1 producers afer 1 991 : the textile industry was pluged
in crisis and the food grains output growth rate fel1 fom the pre-refor
2.8 per cent to 1 .7 per cent in the 1 990s. In the last eight years it has
gone below 1 per cent even afer factoring in last years record har
vest. Per capita grain output is declining faster than ever before.
DECLlNING PER CAPITA CONSUMPTION
Market oriented po1icies have been attcking smal1 producers wor1d
wide leading to shortages of necessities like food and textiles while
promoting consumer credit to te e1ites for cars whit goods and duables
marketed by foreign corporations as the service sector boomed. Glo
bal annual grain output per head fel1 fom 335 kilo!am to 31 0 kilogam
between 1 980-85 and 2000-05. Texti1e spending per head in real ters
has been fal1ing from already low leve1s in the deve10ping wor1d which
has seen the worst fonn of rising income inequality an absolute dec1ine
in the real income Of the masses. Long-ter food output decline should
have produced infation long ago instead the inflation .rate was at a
historic low until recent1y. In India the ConSumer Price lndex of ag
cultural labour rose only 1 1 percent between 2000 and 2005 precisely
55
when per head gain output was fal1ing and large grain exports took
place. The answer lies in the sharp compression of aggregate demand.
Since the very same expenditure defating policies which reduce output
growth also reduce aggregate demand through rising unemployment
and a severe squeeze on mass incomes the result was demand adjust
ment to material shortages. Infation did not occur because mass pur
chasing power was falling faster than output was fal1ing and the punish
ment was being absorbed by millions ofpeasants and labourers in the
global South who were more hungry and had less to wear over time.
In sub-Saharan Africa declining per head income has so reduced
foodgrain demand -below 135 kilogram per head annually with aver
age calorie intake of 1800 per day or less - that populations can tip
over into famine any moment with current food price rise. In India and
China since per head income has been rising at 6 and 8 percent annu
ally total grain demand per head taking both direct use as food and
indirect use as feed should have risen sharply. Yet it has fallen drasti
cally - in India from 178 kilogram net in the early 1990s to only 157
kilogram by the tiennium ending 2004-5. The food pa of cereal de
mand per head in China fell om204kilogramto 166 klogramcompar
ing three-year averages centred on 1992 and 2002 whi\e the food plus
feed demand fel1 from 263 to 230 kilogam. China has seen diversion of
grain growing land to cotton and its abnorally high savings rate re
f1ects the squeeze on rural mass consumption which it has been !ying
to reverse in the last two years.
Both the neoconservative George Bush and the progressive Paul
Krugman are thus incorrect in saying that increased total demand for
grain from 1e new-rich in China and India accounts for the current
food price rise. o the contrary per head cereal demand has fallen in
both countries drastically while the worlds highest grain consumer re
mains the US with nearly 900 kilogram per head. No doubt with un
changed income distribution demand would have risen sharply. A de
mand projection for Idia to 2020 by Bhalla Hazell and Ke (published
by the Interational Food Policy Research Institute) assuming 1 993
income distribution gives us a total net cereal demand of 21 9 mi11ion
tonne by 2007. But actual demand was a massive 62 mil\ion tonne lower
owing to loss of mass purchasing power.
56
The trigger which has made the global grain shortage explicit through
sharp infation from 2006 is the subsidised diversion of grain to ethan
production in the global North. le US will quadruple its rize conver
sion to ethanol to 1 1 0 million tonne by 2009 compared to 27 mi\lion
tonne in 2003. Global grain stocks have disappeared. For years the
developing countries were urged to divert their land to growing prod
ucts ranging from gherkins to roses for flling supermarket shelves in
advanced counties in exchange for foodgrain imports. Dozens of coun
tries fom Philippines to Botswana were persuaded by the IMF to dis
mantle their food procurement and distribution systems and rely on the
global market. Nearly fourty ofthese grain import-dependent countries
have seen food riots in the last year. The UA govemment too was
doing its best torun down procurement and undermine the FCI until the
sharp food price rise has forced it to draw back from the brink last year.
The counterpart of increasing hunger and impoverishment in the global
South is the repeated credit-financed consumption booms in the global
Noh created by the artifcial stimulus of frenzied specative fnancial
activity in jacking up asset. values and forcing credit far beyond the
borrowers' capacity to repay. The personal debt ofUS citizens is now
reportedly only 2 percent less than that countrys GDP. lo mi\lion
persons will lose their homes in 2009 owing to foreclosures in the US.
The same iresponsible mode\ has been intouced in our country where
every blandishment is offered by banks to the middle classes to live
beyond their means and low cost credit is easily available for cars and
consumption durables while millions of peasants and artisans are starved
of affordable credit for production and driven to ruin and suicide.
Financial institutions in the Nor have been given total feedom to market
innovative fnancial instruments' which is an euphemism for unethical
practices unsecured lending and specation. Grossly tumescent specu
lative finance has been encouraged in its licentiousness by the very
same central banks in Europe and by the Federal Reserve in the US
which are now scrambling to avert a slide to the abyss once the public
has seen the lack ofprobity ofthe managers ofthe system lost conf
dence in financial institutions and are cutting back spending. Injecting
liquidity into the banks in itselfis no solution to the impending depres
sion - they need to reverse deflationary policies. But the IF while
57
lending to Iceland has once again laid down tight money (18 percent
interest rate) and expenditure cuts as conditions and will do the same
with Pakistan Jungary and Uaine.
GROW MORE FOOD CAMPAIGN NEEDED
The period 1 993-4 to 2004-5 has seen sharp rise in unemployment rates
in bothrural and urban India according to NSS data. With the start of
global recession Indias exports of goods and services will reduce un
employment rise further and incomes decline in all economic sectors
whether it is the cofee grower the diamond processor or the garments
exporter. Hot money outflow has already led to rupee depreciation and
rising domestic fertiliser and fuel prices are canceling out any beneft
from price rise for peasants. Millions ofwage and small salary eamers
are reeling under food price inflation.
Before the situation deteriorates further measures to counter the ad
verse trends need to be introduced. First we need an urgent Grow
more-Food campaig because our grain output per head has fallen dras
tically. s is also impacting output oflivestock products badly byrais
ing feed cost so we see sharp infation in milk and animal products
prices. Second we need large scale public investent in forms which
wil/ add to the supply 01basic necessities. The prime minister is off
the mark in talking of infrastructure investment at present by which he
means wide roads big bridges and airports. This will have the same
effect as producing guns adding to the burden on the people while not
adding to the supply of necessities whose prices are socketing. rd
the FCI and the commodity boards need to go in for effective market
intervention to stabilis price both to the producer and consumer. Fourth
genuine implementation ofthe NREGP with at least Rs 25000 crores
annual allocation and works aimed at assured irrigation wi1l help to
revive mass demand for food and textiles and substiute a growing
intemal market for a faltering extemal one. Fifth once there is good
riddance to hot money further hemorrhage of capital should be stopped
by instituting capital contols.
I recessionary times the capitalist world has always needed a leading
county which either lends abroad to keep up demand or keeps its
market fully open to the inflow of disess goods. Far from lending the
58
US is the wor1ds largest debtor. Some bourgeois economists are wist
fully requesting China with its mountainous reserves to help the US.
But since Chinas extemal exposure through trade to the industrial wor1d
is very. large the recession wi1I affect it badly and eventually may well
reduce its capacity to lend. As regards keeping its markets open the
US with its steel tariff and numerous non-tariff bariers has tumed
protectionist some time ago. The president-elect under the pressure of
rising domestic job losses has promised to penalise outsourcing and
keep jobs at home. The crisis-ridden wor1d capitalist leader is no longer
capable ofleading and there is no new leader to take on its functions:
nothing it seems can avert wor1d depression. Nor can the burden of
adjustment continually be passed on to the global South whose masses
have been pushed down too far already to go down further without
famine and civil strife.
Finance Capital and Fiscal Deficits
Prablat Patlaik
ONE ofthe central paradoxes in economic theory relates to the hostil
ity that financial interests in a mode capitalist economy systematically
display towards any picy of enlarged State expenditure fnanced by
borrowing even though such expenditure increases capitalists profts
and wealth.
Let us suppose that the govemment undertakes a larger borrowing
financed public expenditure programme and that all borrowing is from
domestic sources. Then coresponding to the increase in govemment
borrowing there must be an equivalent increase in the excess of pri
vate savings over private investent. Since private investment expen
diture is more or less given in any period a result of past investent
decisions a rise in govemment borrowing creates an equivalent
increase in private savings. Since such savings depend upon post-tax
profts (surplus) there must be a rise in post-bx profts (surplus);
and what is more this rise is some multiple ofthe rise in govemment
borrowing.
A example wiIl clarify the point. If say one-half of post-tax private
profis (surplus) is habitually saved then a rise in govemment borrow
ing by Rs 100 at base prices wil\ raise private surplus by R 200 at base
prices in order to generate Rs 100 of private savings to fnance itself.
This wil\ happen in a situation ofless than full employment through an
increase in output and employment while the base prices themselves
remain more or less unchanged; in a situation of full employment"
(supply constraint) this will happen through proft infation squeezing
out forced savings" from the workers. Te capitalists as a whole in
60
other words ear an additional amount that is a multiple ofthe
increase in government borrowing
ADDITIONAL PROFIT
I his book How to Pay for the War the well-Iown English econo
mist John Maynard Keynes had called this aditional proft ofthe capi
talists a booty" that fell into their lap. He was talking about increased
goverment borrowing to fnance war expenditure in a situation where
the scope for raising output and employment was limited and he was
assuming that the whole ofthe additional profts accruing to capitalists
was saved. I such a case if goverment expenditure rose by Rs 100
then there would be inflation that would squeeze workers' consump
tion and simultaneously boost profts. Hence while the actual resources
for meeting war expenditure came from the workers whose consump
tion was reduced by an equivalent amount the capitalists wealth in
creased by R J 00 despite their having done nothing. It is as if the
goverment snatched away Rs 1 00 from the workers put it in the lap.of
the capitalists and then bon:owed these Rs 1 00 fom them. The real
sacrifice" for the war in other words was made by the workers while
capitalists' wea1th went up gratuitously. The unfairess" of this had
prompted Keynes to argue that even if the goverment had to snatch
away Rs 1 00 from the workers the capitalists must not be handed this
amount as a booty" i.e. war expenditure must be fnanced through
taxes.
I Keynes' example supplies could not be increased and hence the rise
in profits occurred through infation. But if supplies can be increased
then larger govement borowing sti11 increases the magnitude ofprof
its but through an increase in ouut not prices. Larger goverment
borrowing in short invariably boosts capitalists profts and wea1th.
WHY INSIST FOR SOUND FINANCE
But this brings us back to the question that if a borowing-fnanced
increase in govemment expenditure hands over a booty" to the capi
talists that is some multiplier (greater than or equal to one) times this
expenditure increase then why are the financial interests opposed to
such an increase? Why for instance do they favour the principle of
61
sound fnance" and insist on the passage of Fiscal Responsibility
legislation everywhere to limit the size ofthe fscal defcit?
One can give certain obvious economic explanations. The frst is the
fear ofinfation. Larger govemment expenditure by raising the level
of aggregate demand will cause infation which will lowerthe real value
of a
1
1 fnancial assets something which fnance capital obviously dis
likes. This explanation is not without weight but it fails to explain why
the opposition to borrowing-fnanced govemment.expenditure should
persist even in the midst of a Depression when the increase in aggre
gate demand is likely to cause almost exclusive output adjustment with
very 1ittle impact on prices.
The same holds for the other possible economic explanation for their
opposition namely a far of worsening of balance of payments and
hence of a qepreciation of the currency which again would lower the
value offnancial assets but in ter of other currencies. A whole lot of
measures however ranging from import contiols to increased extemal
borrowing are available to the govemment that is stimulating the
economy. These measures can keep the fear of any curency depre
ciation at bay. The fear of currency depreciation therefore cannot also
be an adequate explanation.
It follows then that economic explanations for the opposition offnance
to increased borrowing-fnanced govemment expenditure are inad
equate. The real basis of the opposition is political. As the Marxist
economist Michae\ Kalecki had once retarked profts are not every
thing for the capitalists; their class instincts too are important. And these
class instincts tell fnance capital that a proactive expenditure policy of
the State even for the purpose of demand management is detimental
to the long-ter ability ofthe system in general and ofthe fnancial
class inpaicular.
The mythologypropagated by capitalism is that the unfettered fuction
ing of the system gives rise to a state of full employment where the
resources are efcient1y allocated. This myth of course cannot be sus
tained since even the most die-hard believer in the ideology of capital
ism cannot deny the real-life existence ofperiodic Depressions and the
virtually perennial state of demand-constraint that afict the system.
62
Depressions are usually explained in bourgeois theory in tenns of a
setback to the state of confdence" of the capitalists. It follows then
according to bourgeois theory that if a capitalist economy is doing poorly
then the remedy for it lies in providing geater support and concessions
to the capitalists so that their confdence will revive and with it the
economy.
STATE OF CONFIDENCE"
But if govemment expenditure can be used to revive the economy then
the state ofconfidence" ofthe capitalists ceases to b fparamount
of importance. The very fact of the economys revival wi\l itse\f if
anything bolster their state of confdence"; and even iftheir state of
confdence" is not revived fully the govemment can stil\ stabilise the
economy at a high leve1 of employment. What is more since the ad
verse effect of govemment measures for reducing income and wealth
inequalities in society like profit taxation or propey taxation on the
state of confdence" ofthe capitalists can be counteracted by govem
ment expenditure so that unemployment need not result from such
measures the govemment can adopt them with impunity. Thus a gov
emment that can use public expenditure to sustain the level ofactivity
in the economy need not bother much about the state of confdence"
of the capitalists and hence can bring about far-reaching changes in the
system inc\uding where necessary the induction of public enterprises.
There is no reason why such public enterprises should be any less ef
fcient" than private enterprises in an engineering sense i.e. in tenns of
physical input use; but even i fperchance they are an economy with
public enterprises functioning c\ose to 'full employment" wil\ stil\ have
a larger volume of goods at its disposal for given input endowments
than a free market capitalist economy. In short the ocial legiti
macy" ofcapitalism gets seriously compromised by the fact that
State expenditure can take the economy to near1 employment
irrespective ofthe 'state ofconjdence " ofthe capitalists.
I a modem capitalist economy the barometer for the state of conf
dence" ofthe capitalists is the state of exuberance ofthe stock market
i.e. the state of euphoria ofthe fnancial interests. IfState expenditure
can sustain a near-full employment level of activity in the economy
63
then the exuberance ofthe fnancial capitalists ceases to be a matter of
much concem. Govemments can pursue whatever policies they con
sider socially desirable without having to concem themselves with the
impact of such policy on the exuberance ofthe fnancial capita1ists.
True the maintenance of the economy at near-full.employment may
cause accelerating infation because of the exhaustion of the reserve
army of labour but govemments under working class pressure may
become emboldened to attempt to resolve such problems through even
more radical measures such as prices and incomes picies
nationalisations workers' management offactories etc. Once the state
of confdence" ofthe capita1ists is given the short shri ft then there is
nothing to prevent the economys ideogical slide" to radical social
engineering and even to socialism.
DIRECT BEARING ON RECOVERY
It is vital for finance capital therefore that the ideological weight ofthe
proposition that the 'tate ofcodence" ofthe capitalists is cru
cialfor the well-being ofsociety is not diminished one iota for which
the proposition that State expenditure can boost employment with
impunity must be attacked no matter how flawed in logic the attack
may be.
This fact has a direct bearing upon the question of recovery from the
current wor1d recession. The need for increasing govemment expendi
ture for overcoming this recession is wide1y recognised. And it is also
recognised that it is better for recovery if this increase in govemment
expenditure is coordinated across the major countries rather than being
sequentially undertaken in 8uncoordinated manner by individual coun
trles.
But no such initiatives for recove can be undertaken because of the
opposition ofthe fnancial interests to fiscal deficits. 1t is sigifcant that
at the G-20 meeting in end-March there was no mention of any fscal
stimulus let alone of any coordinated fscal stimulus. While in the im
mediate afermath of the financial crisis in September and October
there was much talk of a coordinated fscal stimulus
that talk has died
down now. True the United States and China have announced what
64
appear at first sight as sizeable fscal stimulus packages. But the actual
stimulus in the United States at least as distinct from the increase in
fscal defcit caused by the maintenance ofgoverment ependiture
in the face ofa decline in tax revenue is quite small. ls is because
much ofthe increase in federal govemment expenditure announced by
the Obama administration as pa of its stimulus package will merely
offset the curtailment in govemment expenditure in the various states
ofthe US on account ofthe decline in their tax revenues.
By contrast the bail out" package to the fnancial system in the United
States is estimated to exceed $ 1 0 trillion. The strategy at present there
fore seems to be to sustain the fnancial system and wait for the next
buble" to appearrather han to revive the ral economy directlyough
fscal stimuli. The consequence of this strategy will be a prolonged
period of recession and unemployment with much hurn suffering; but
this only underscores the power of the fnancial interests in contempo
rary capitalism where even a crisis ofthis magnitude engendered by
their functioning leaves this power undinlnished.
The Truth About
Finance and Markets
ati Ghosh
THIS is not th
best oftimes for those who make a living out ofbeing
tnancial intermediaries. Recent times have seen more than an appar
ent meltdown in some major financial markets such as that ofthe Uted
States. ley have also witnessed an unprecedented amount of analysis
of how tnancial markets today actually work and ofen devastating
expose oftheir many flaws. And some ofthis analysis comes not only
from those who are well kown to be critical of allowing too much
feedom to tnancial agents but als6 from the practitioners themselves.
Thus several recent books have drawn on the personal experience of
the authors to describe and critique the actual workings .of different
fnanial markets especially banking and stock market activity. It ts
out that despite all the talk of ncient markets" fnancial markets
continue to suffer fom most ofthe imperfections that economic theory
described several decades ago. Ofthese the many problems relating to
asymmetric (or unevenly distibuted) information tu out to be the most
virulent and create conditions where fnacill market arenot onlyprone
to fequent failure but are also deeply inequalising.
Two books in particular are worth noting. PhilipAugarworked formore
than 20 years with two British securities frms as an intemational in
vestment banker interacting closely with Wall Steet. His fascinating
book e Greed Merchants: How the Investment Banks Pldyed the
Free Market Game (Penguin Books 2006) is full of all te .detailed
insights that only an insider could have provided.
66
George Soros is if anything an even more famous fnance insider -
chairman of a highly successful intemational investment fund and the
ackowledged guru of investors and fund managers across the world.
His most recent book is e New Paradigm for Financial Markets:
1e Credit Crash of2008 and What it Means (Public Afairs New
York2008).
INHERENT FRAGILlTY
The extaordinary thing is that both books make remarkably similar
points about the inherent fragility confict of interest and need for regu
lation of fnancial markets. Thus they both contadict quite stongly the
prevailing establishment wisdom even in the face of evident crisis.
Augar notes that inequality lies at te heart of the modem fee mar
ket." His book focuses on some inadequately discussed features -
the dark comers of recent investment bankng history" -that inc1ude
the very high retums that accrue to a small number of large banks
despite the variable quality oftheir advice. Augar explains this in terms
of the state of competition in the industry which he sees as highly
igopistic ad the integrated model of investment banng that gives
some large frms a strong competitive edge. I addition flexible man
agement and a ruthless approach to customers competitors and regu
lations" has allowed a few of the large banks to reap exaordinarily
high profits which are camoufaged to some extent because some pa
ofthe profts i s shared OUt as excessive1y high employee compensation.
Amorpart ofthe problem is that banks and other fnancial institutions
now offer more than the standard range of products such as bank
loans; commodities and urrency dealings prime brokerage services
real estate financing and proprietary trading and investment in fnancial
assets. They also tend to offer advice on debt and equity share issues
mergers and acquisitiollS and fnancial restucturing; research on equi
ties and equity derivatives sales and tading for institutional investors
(including hedge funds); and the same for boilds and bopd derivatives.
This generates huge corlficts of interest between the different func
tions that investment banks have taken on in recent times. There are
conflicts of interest between the investment banks and the regulators
67
between the financial interests and the media and so on. And these
conficts are seldom or inadequately regulated. This has enabled a few
corporations and individuals not only to exert inordinate infuence over
both business and govemment but also to acquire immense wealth in
the process. And this has essential1y been at the cost of capital issuers
and smal1 investors including workers who have saved for the future
by putting their money into pension funds.
80ros extends such arguments by using his theo
r
of"reflexivity" which
is based on the understanding that business decisions are never based
on complete kowledge and that these decisions themse\ves affect the
environment which has been taken into account in makng them.
The housing bubble in the U8 which has led to the current fnancial
problems of rjor banks resulted first from such a refexive" connec
tion since the willingness or incentive to lend to less-preferred (or sub
prime) borrowers infuenced the value of the col1ateral (in this case
houses). But the recent cycle is also different fom those fom the
past even if not completely unique. This in tum al10wed the develop
ment ofwhat 80ros cal1s the longer-term super bubble. This was sti\l
based on credit creation even if it involved many more sophisticated
fnancial instruments. This trend gained momentum and continued as
long as it did because ofthe basic misconception that rrkets are per
fect and should be regulated as little as possible themselves. 80 80ros
argues that rrket fndamentalism (which can be dated to the 1980s)
generated the super bubble.
ASYMMETRIC STRUCTURE
Things get worse because of the moral hazrd generated by govem
ment picies. Every time the banking system is endangered or a
recession looms the fnancial authorities intervene bailing out the
endangered instimtions and t
r
ing to stirInnate the economy
-
So
fi a
c
players do not suffer fom their own mistakes and are tempted
therefore to repeat them. AI\ this is made worse by the globalisation of
fnancial markets the progressive removal offnancial regulations and
the acce\erating pace of fnancial innovations.
80ros argues that globalisation matters because it has 0H asymmetric
68
structure. It favours the United 8tates and the other developed coun
ies at the centre of the fnancial system and penalises the less-devel
oped econores at the periphery." Te resu1ting unequal relationship
between the centre and the periphery has allowed for the fow of capi
tal fom the less developed to the developed. Tis supported the credit
fnanced investent andconsumpton boom in the centre and played an
important role in the development of the super-bubble. For these rea
sons 80ros advocates a system whereby authorities keep the market
under scrutiny and some degree of control."
But even tis may not be enough if Augars arguments about pervasive
conflicts of interest are to be believed. Tese have spread across the
system creting ethical gey ares where ayting goes. Media is clr1y
implicated especially in bui1ding up speculative bubbles through the in
cessant encouragement to buy. But the role of regulators is no less
problematic since top regulators are usually appointed fom among the
group of senior bankers and banks in tur tend to hire former regula
tors.
80 the current shocks in the fnancial system may well portend losses
tat hit smaller investors hard even as the big players manage to retain
their high1y proftable bottom lines.
As Auga points out in his preface If you look hard enough the games
that are being played in American capital markets can be found wher
ever you live. And if you look hard enou1 you will fnd that you to are
paying the price."
Is The Crisis Transforming
Global Finance?
C P Chaldrasekhar
ATER much dithering 10ts ofhigh drama and much effort to avoid the
inevitab1e for fear that it wou1d straighacket capitalism goverments
in the deve10ped industia1 countes have taken the frst rajor neces
sa step to begin reso1ving the fnancia1 crisis. They have efective1y
nationa1ised a 1arge pa of the private banking system. The process
began in the UK where the Gordon Brown administration stepped be
yond what Bush was wil1ing to do and announced tat it wou1d resort to
an equity injection" to buy ordinary and preference shares worth f37
bil1ion in three ofthe biggest banks in the county: Roya1 Bank ofScot-
1and L10yds TSB and HBOS.
Existing shareho1ders have the option ofbuying back the ordinary shares
fom the goverment. But if they do not as seems 1ike1y then the gov
ement wou1d have a stake of60 per cent in RBS and 43.5 per cent in
the combined entity that wou1d emerge afer the ongoing merger of
L10yds TSB and HBOS. This c1ear1y amounts to State takeover which
brings with it new obligations. The three banks wil1 not be ab1e to pay
dividends on ordinary shares unti1 they have repaid in full the 19 bi11ion
in preference shares they are issuing to the goverment. The Treasury
would appoint 3 new RBS directors and 2 directors to the board ofthe
combined L1oyds-HBOS to oversee the goverment5 interests. And
there would be restictions on executive salaries and bonuses tat had
ballooned during te years of the specu1tive boom.
The decision to nationa1ise was forced on the U goverment because
it rea1ised that the prob1em facing segments ofthe banking system was
not just one of inadequate 1iquidity resu1ting from the frezing" ofedit
70
markets due to fears generated by the subprime crisis. Rather credit
markets had fozen because the entities that needed liquidity most were
those faced with a solvency problem because ofthe huge volume of
bad assets they carried on their balance sheets. To lend to or buy into
these entities with small doses of money was to risk losses since that
money would not have covered the losses involved in cleaning up their
balance sheets and yet keeping these banks viable. 80 money was hard
to come by. This is disastrous for a bank because rumours of its vulner
ability trigger a run that devastate its already damaged finances.
STATE TAKEOVER
What was needed was a large injection of equity to recapitalise these
banks afer taking account of losses. Wherever the sum involved was
small a private sector buyer could play the role otherwise the State
had to step in. Thus in the case of some banks recapitalisation through
nationalisation was unavoidable because as U chancellor Alistair
Darling put it this is the only way when markets are not open to
certain banks they can get the capitalisation they need". Others such
as Barclays hope they can attact private investors so as to avoid being
absorbed by the govemment. I expects to raise :6.6 bil1ion fom pri
vate investors but the prospects are not certain given the fact that it
has decided not to pay a fnal dividend in 2008 so as to save : bil1ion.
That may not be the best signal to send to prospective investors.
What needs to be noted however is that nationalisation i s not the end
ofthe matter. I addition the U govemment has chosen to guarantee
all bank deposits independent oftheir size to prevent a I. It has also
decided to guarantee inter-bank boroWg to keep credit flowing as
when needed.
Once the U decided to take this radical and comprehensive route
others were quick to read the writing on the wall. What followed was a
deluge. Germany with an estimated bill of E470 billion Fran with
E340 billion and other govemments with as yet unspecifed amounts
pitched in with plans to recapitalise banks with equity iections
besides guaranteeing deposits and inter-bank lending. The banking
system was being saved through State take-over not just with State
suport.
71
Finally the US which was seeking to avoid State acquisition and had
already decided to use as much as $700 billion to address the financial
crisis by buying out impaired assets that were seen as choking the f
nancial system fel1 in line . I too has decided to use $250 of that
money to acquire a stake in a large number of banks. Half of that
money is to go to the nine largest banks such as Bank of America
Citigroup Wachovia and Morgan Stanley. The minimum investment
will be the equivalent of one per cent of risk-weighted assets or $25
billion -whichever is lower. With capital adequacy at a required 8 per
cent this is indeed a major recapitalisation. Further the govemment
through the Federal Deposit Insurance Corporation is guaranteeing all
deposits i non-interest bearing accounts and senior debt issued by banks
insured by the FDIC.
However the conservative infuence has ensured that this intervention
is biased in favour ofBig Finance. The support comes cheap: banks will
pay a dividend ofjust 5 per cent for the frst fve years onlyafer which
the rate jumps to 9 per cent. During that time they have the option of
mobilisingprivate capital and buying out the govemment. Interestingly
the govemment is not takng voting rights and would be able to appoint
directors only if the bank misses dividend payments for six quaers.
Wile there are restrictions on payment f dividends to ordinary share
holders before clearing the govemments clait and limits on executive
compensation the govemment only reserves the right to convert 15 per
cent of its investments into common stock. In sum the American initia
tive overseen by Henry Paulson an old Wall Street hand fom Goldman
Sachs has virtually coled the banks to accept a govemment pres-
ence unlike what seems true in the U and Europe.
DESPERATEATTEMPT
Whether it occurs in pa-punitive fashion or as a sop the back-door
pa or full takeover of major private banks is a desperate attempt to
stall the fnancial meltdown in the advanced economies resulting from
the decision to allow private fnancial players unfettered freedom to
pursue profts at the expense of all e1se. That freedom which came
with the financial liberalisation of the 1 980s and after spawned new
institutions and instruments -collateralised debt obligations special
investment vehicles credit default swaps and the like -that were all
72
aimed at expanding credit irrespective of risk packaging such debts
into products and selling the associated retums and risks. The process
ensured high retus in the form of fees and commissions which came
to be more important than interest income. The net result of this was a
tendency on the pa of all players to believe that they were fee of the
risk because it had been transferedeven though branches. ofthe same
firm had made huge leveraged investents in those kinds of assets.
This disease also aficted the conventional bankng system which was
risking the money of depositors through its involvement directly or
indirectlyin all stages ofthe speculation-fed expansion. When the bubble
burst the banks were faced with collapse and depositors' fnds to
gether with the all-important role that the banks need to play in a mod
em economy were impaired threatening a deep recession or depres
sion in the real economy.
While this threat has forced govemments to drop their neo-conserva
tive bias against State ownership and markets that hollered at govem
ment intervention in the pashavow applauded such action the threat
of recession has not receded. Even if the banks are safe though there
is no definite guaranteels yet there are many other institutions varying
fom hedge and mutual funds to pension funds that have suffered huge
losses both from te subprime fasco and the stock market crash erod
ing the wealth of many. The effects of that wealth erosion on invest
ment and consumption demand are onlynow unravelling indictingthat
there is much to be told in this story as yet.
The Global Financial Communit
Prabhat Patnaik
LENl in Imperialism had talked about a fnancial igarchy presiding
over vast amounts of money capital through its control over banks and
using this capital for diverse purposes such as industy; speculation;
real estate business; and buying bonds including of foreig govem
ments. The fnance capital tat Lenin was talking about belonged to
p
articular powerful nations; corespondingly the oligarchies he was re
ferring to were national fnancial igarchies. He talked for instance of
French Geran British andAmerican financial oligarchies. But in the
curent epoch ofglobalisation" whn finance capital itselfis intera
tional in character the controllers of this intemational fnance capital
constitte aglobalfnancial oligarchy. lis global fnancial igarchy
requires for its functioning an'army ofspokesmen mediapersons pro
fessors bureaucrats technocrats and politicians located in different
counles.
A COMPLEX ENTERPRISE
The creation of this army is a complex enterprise in which one can
discem at least three distinct processes. Two are fairly saightforward.
If a country has got drawn into the vortex of globalised fnance by
opening its doors to the free movement of fnance capital then wiIIy
niIIy even well-meaning bureaucrats politicians and professors wiII
demand; in the national interest a bowing to the caprices ofthe global
fnancial oligarchy since not doing so wiII cost the coun dear through
debilitating and destabilising capital fights. The task in short is auto
matically accomplished to a large extent once a country has got trapped
into opening its doors to fnancial fows
74
The second process is the exercise ofpeerpressure. Finance ministers
govemors of cental banks top fnancial bureaucrats belonging to dif
ferent coutries when they meet tend increasingI to constitute what
someone has described as an epistemic community". They begin in
creasinglyto speak the same language share the same world view and
subscribe to the same prejudices the same humbug of finance" (to
use Joan Robinsons telling phrase). Those who do not are under te
mendous peer pressure to fal1 in line; and most eventually do. Peer
pressure ry be buttressed by the more mundane temptations that Lenin
had described ranging fom staightforard bribes to lucrative offers
ofpost-retirement employment but whatever the method used con
fonnism to the humbug" that globalised finance dishes out as true
economics becomes a mark of respectability" .
But even peer pressure requires that there should be a goup of core
ideologues of fnance capital who cxert and manipulate this pressure.
The peers" themselves are not fee-floating individuals but have to be
goaded into sharing a belief-system. There has to be therefore a set of
key intellectuals ideologues thinkers and stategists that promote this
belief system shape ai1d broadcast the ideology of fnance capital and
generally look afer the interests of globalised fnance. They are not
necessarily capitalists or magnates; but they are close to the fnancial
rgnates and usual1y share the spoils". The fnancial olirchy proper
consisting ofthese magnates together with these key ideologues and
publicists offnance capital can be called the global financial commu
nity". le function ofthis global fnancial community is to promote and
perpetuate the hegemony of intemationaI fnance capital. And here the
most critical issue concers the relationsh 01this global finan
cial community to the politics 01particular countries.
To say that the World Bank and the IF are the main breeding gound
for these key figures who are pa ofthe global fnancial community
and mediate the relation between particular counties and globalised
finance is to state the obvious. True the Fund and the Bank are not the
only insti.tutions; there are sundry business schools and depart lents of
economics ofbusiness admisttion and offinance in prstgiousAnglo
Saxon universities. But even for the products ofthe Iatter institutions
the Fund and the Ba
75
TRANSFORMED RELATI ONSHIP
The relation. between the key ideologues of fnance capital and the
govemments of the various countries has itself undergone a majotans
formation in the more recent perio. Earlie these ideologues were trans
planted from the Fund and the Ba as part of an implicit conditionality
to the ministries of fnance in different countries and the whole effo
was to ensure that they functioned to promote the interests of intema
tional fnance capital while remaining fee fom political intervention.
They operated in short as career bureaucrats; govemments might come
and go elections might make people throw off'neo-liberal" rulers and
replace them with the critics ofneo-liberalism" who had hitherto oc
cupied oppositional space. But neo-libralism" persisted notwithstand
ing such changes in goverment because key bureaucratic positions
continues to be occupied by members of the global tnancial commu
nity" either the same ones serving ever new govemments or new ones
that came with goverment change but fom the same fock. And there
were various instuments devised to ensure that the new govemments
couldnot interfere in their functioning such as the Fiscal Responsibility
legislation that tied the hands of govemments or the so-calJed indepen
dence ofthe central bank that took a whole range of economic policies
outside the purview of elected.govemments or the sheer hard-selJ of
something calJed development" that was just a euphemism for the
neo-liberal agea.
But with the Fund and the Bank getting increasingly marginalised as
intemational lenders and hence as the gendarme of intemational t
nance capital owing mainly to the paucity offunds at their disposal this
placing-Fund-Bank-employees-innance-ministries" strategy though
stilI practiced has needed to be supplemented by more forthright mea
sures whereby members ofthe global tinancial community are directly
inducted into political appointments. From occupying bureaucratic posi
tions within an overarching pitical process they have started moving
directly into political positions.
THE CASE OF OBAMAS ADMINISTRATION
Obamas political appointees 1nc\ude people like Rubin Geithner
and Summers who are indubitably members of the global funcial
76
community and who collectively are in complete charge of economic
matters in the Obama administration. Bushs replacement by Obama
has merely led to the replacement of Paulson by Geithner. The Wall
Steet giant to which one ofthem is loyal may be different from the one
that commands the others loyalty but each of them is loyal to some
Wall Seet giant and is a true exponent of the ideology of fnance
capital. Larry Summers another political appointee who had occu
pied an important position in the Clinton administation has been re
inducted into the Obama administation hang occupied the postion of
the president ofHarvard University for a while in between. He report
edly eamed $8 mil\ion last year $5.2 million fom a leading hedge fund
D E.Shaw and $2.77 mil\ion fom forty speaking engagements before
executives of banks and fmancial frms. Lecture fees of this order
amounting to about. $70 thousand per lecture are not paid merely for
satisfing intelIectual curiosity or quenching the thirst for kowledge.
They r a pay-of for preaching te ideology of fnace capital for
imparting to neophytes the be!ief system shared by the members ofthe
global fmancia\ community. I is of some interest to kow tat 8Clintons
teasury secretary Summers had tumed down all suggestions for regu
lating hedge funds c\aiming that those who operated such funds were
smart and sophisticate enough to invest prudently!
How people like Summers Geitlmer and Rubin come to occupy such
important political positions within the US system is pretty obvious.
American presidential elections require massive amounts of money a
good chunk of which invariably comes fom Wall Steet. The story
doing the rounds for a while was that Obama had got most ofhis funds
fom small donations of$I OO each gamered trough the intemet; but
this was complete nonsense. Obama \ike others before him had also
tapped Wall Steet and the appointment ofthe trio who had organised
Wall Steet fnance for him was a quid pro quo. The elevation of mem
bers of the global fnancial community to Othe American economy
therefore should cause no surnse.
SITUATION IN INDIA
What is more surprising is the way the fnancial community has insinu
ated itse\finto political positions even in a county like Idia which had
a prolonged anti-imperia\ist struggle whose legacy sti1l remains and
77
where politics admittedly electoral politics is taken very seriously by
the people. The case ofManmohan Singh is too well-kown to be re
counted here but in recent years members of the financial community
have been smuggled in through the Rajya Sabha route into the nations
politics and kept in readiness for importantpolitical positions. None of
them has ever participated in any political activity; none of them has
ever won an election on the basis of popular mandate; and none of
them has ever even been particularly loyal to the pitical party which
nominates them. Nonetheless they emerge as key political figures and
promote even within a system marked by universal adult suffrage the
interests ofinteational fnance capital.
Similar examples can be cited fom a host of other countries. Every
where members ofthe global fnancial community are implanted upon
the pitical process to look afer economic affairs" which means to
promote and protect the interests of intemational fnance capital by
ensuring that the neo-liberal picies are caried on. This dialectical
interaction between traditional politics on the one hand and the mem
bers ofthe financial community implanted upon it on the other consti
tutes one of the most significant aspects of contemporary bourgeois
life.
Marxists when they speak of bourgeois democracy' are often ac
cused of resorting to hyperbole. Democracy" afer all is democracy";
why talk ofbourgeois" democracy and peoples" democracy? True
one must never pooh-pooh bourgeois democracy since of all the pos
sible forms of bourgeois rule it is the one that gives the people the
widest possible scope for organising themselves into a force of resis
tance. But the limitations of bourgeois democracy the sham that the
bourgeoisie is forever attemting to reduce it into are equally palpable.
Tis county is at present engaged in a remarkable electoral exercise
but once the results are out the jockeying to ensure that the economic
levers 6fthe county continue to remain in the hands ofthe members of
the global fnancial community wi11 be equally intense. It is as if afer
the people have spoken the real game will begin to ensure that their
words count for nothing. Winning elections is not enough; defeating this
post-election game acquires even greater signifcance.
Global Trade in a Time of Crisis
C P Chandrasekhar
WH the worId wel1 into the second year of a recession whose inten
sity is unprecedented in the period since the Second WorId War two
questions are receiving considerable attention. The frst of course is
whether the evidence of a decline in the rate of contaction of output
and rate of increase in unemployment in the US the G7 and elsewhere
in the worId is a sign that the recession has touched bottom. The second
is whether there is evidence of a degree of desynchronisation of the
incidence and intensity of the' crisis across counties. The latter it is
argued would help some countries see as shock-absorbers by reduc
ing the intensity of the crisis as wel1 as endow the system with sources
of growth that could ensure recove once the recession has bottomed
out. China and India are two countries that are ofen refered to in this
context.
The case for desynchronisation is dificult to rke in a globalised and
more integrated worId for three reasons. First globalisation implies that
integation of econores through trade is substantial1y more than it used
to be so that a downtum in one pt ofthe globe would quickly transmit
itselfto other regions and countries. Second globalisation resuIts in the
creation ofmuIti-country production platforms for various fnal goods.
This creates intemational production chains so that 8increasing share
of trade is not the cross-border movement of products fom different
indusies and activities or even of dissirlarproducts fom technologi
cal1y sirlar industries. Rather a significant part oftade is intra-indus
try and involves the movement across borders of semi-fnished prod
ucts at different stages of processing. When a recession hits any par
ticular industry and reduces the volume of tade in that area the de-
79
rived demands for the inputs at different stages ofthe production chain
fall spreading the effects of the recession globally. Finally trade
liberalisation has removed quantitative restictions and reduced import
duties across-the-board in most countries. Depending on the extent of
trade liberaIisation the relative importance of the domestic market in
driving growth has decIined to different degrees in different countries.
This implies that unless countries alter the degree of protection they
resort to using the domestic market as a foil against the effects of a
decline in trade is dificult to ensure. And opting forprotection at a time
of crisis would only invite retaliatory action fom trade paners.
These fetures ofade i a globalised world imply that desynclironisation
leading to some countries serving as shock absorbers and even sources
of stimuIi for growth depends on the degree of globalisation and
3
o
o
vnty
Delhi 82.5 35.0 57.0 19.5 24.0
Maharashta 85.5 96.0 52.5 85.0 27.0 52.0
Tamilnadu 87.0 90.0 69.0 70.5 42.5 39.0
W.Bengal 80.0 93.0 49.0 68.5 18.0 21 .5
AlI-India 82.5 88.5 57.0 64.5 25.0 22.5
Source: Calculate from NSS Reports 402405 for 1993- and Reports 508 513 for 2004-5
The position shown by these data on urban poverty has been getting
worse in the last four years. There is no time to lose. The govemment
has claimed a record food grains output of227 mi!1ion tonne for 2007-
96
08 an unprecedented 1 1 mi1lion tonne more than the previous year
which is probably an overestimate designed to dampen infationaryex
pectations among taders. Even if farmrs are indeed responding to the
belated rise in central procurement prices during the last year and in
creasing output which is a welcome development and even ifwe take
227 m.t. as correct total food grains output has risen by ls than 5
percent between the triennium ending in 2001 compared to that ending
in 2008 whereas population has risen by over 10 percent. It is time for
all thinking and progressive people to atone for past inaction and come
together to forulate an effective action pla the starting point of which
must be an urgent Grow more Food campaig in every state combined
with the revival and efective functioning of the public distribution
system.
Table2
Pover among ST and SC Populations
1993- and 2004-5AI-India
........ .....
Daily Calorie tak 2200 2200 180 180
KUKL /993-4 2004-5 /993-4 2004-05
Percent of Persons th
Intake blow spified level
1. ST 73.5 82.5 30.0 +.0
2. SC 70.5 79.0 27.0 33.0
3. General 58.5 69.5 20.0 25.0
UKN
Dil Calorie /ntak 210 2100 180 180
/993-4 2004-5 /993-4 2004-5
Percentage of Persons with
Intake blow spcifid level
1 . ST 67.5 81. 0 33.0 61.5
2. SC 75.0 87.5 39.5 66.5
3 General 57.0 64.5 25.0 22.5
...............................
Source: ATable 1 and NSS Reprt 422 for 1993-4 and Reprt 514 for 204-5.
Capitalism' s Logic:
Profits Before People
Editorial People's Democrac
NAY exact1y two years afer a global fnancial collapse that hit the
world with a severity not seen since the great depression of the 1 920s
and 1930s two giant fnancial corporates of the collapsed Wall Street
emerged fom te rins. J Morgan Chase announced a record $ 2.7
billion prfit i te sondqerof2009. Eier another giant Goldman
Sachs reported record gains in the
.
same quaer.
This they have done at the expense of one ofthe biggest rescue opera
tions by the State under capitalism. They have benefted fom billions
of dollars ofbailout packages fom the ordinary tax payers funds and
cheap goverent fnancing to c\imb over. 1 9 US big banks received
over $ 140 bi1lion and president Obama in his budget proposals for this
year is seeking the US Congresss approval for as much as $ 750
bi1lion to prop-up the fnacial system.
These reported profts however do not suggest a tur around in the
recession or tiding over the isis. Recovering on the basis ofthe cush
ion provided by the govWent J Moran took over t former Wall
Seet giants - Bear Stears and Washington Mutual - last year in two
goverment assisted transactions. o the other hand scores of re
gional and 5mall banks continue to collapse all across the USA. 53
have failed 50 farthis year and the Federal Deposit Insurance Corpora
tion expect5 many more to follow.
At the other end ofthe spect the US deparnt ofLabours website
98
shows an unemployment rate of 16 per cent for Febrary 2009. US
experts estimate a rate of 25 per cent of healthy American men be
tween ages 16 and 6 as not workng. OU manipulation of fgures
te employment rates are depressed. One expert says These games
allow the US govemment to report a current unemployment rate ofjust
8. 1 per cent even though its ow data of unemployed Americans who
want to work indicates an unemployment rate of around 20 per cent".
Another report suggests that the 16 per cent unemployment rate ofthe
Labour Bureau means that over 24 milIion people were unemployed
for May 2009. Ofcial records report that the USA lost 247000 jobs in
Ju1y 2009 alone. Iterestingly there is also a report that the productivity
of the workers has shot up by more than 6 per cent in the second
quarter of 2009. Tis has been climbing throughout the recession.
Clearly much ofthis is because ofthe depression ofwages. Growing
unemploymnt and depression of real wages is the gif for the workng
p
eople 8comaed to the gif ofhuge bailoutpackges fr te corpotes.
On the other hand nine of the fnancial frms that were among the
largest recipients ofthe baiJout packages paid more than 5000 ofteir
taders and bankers bonuses of more than $ 1 milIion apiece for 2008
according the New YorkAttorey General. In January this year presi
dent Obama calle financiaJ instittions shamefI for giving there\ves
nearly $ 20 biI1ion in bonuses when the economy was faltering and the
govCent was spending billions to bailout tnancial institutions. Ob
ously this doesnt seem to have had any impact on these financial insti
tutions. The bonus pools of these nine banks that received bailout
packages this year was $ 32.6 bilIion whiJe their cumulative losses
were over $ 81 bilIion. They will once again get bailout packages to
cover these losses.
This is the capitalist way of emerging fom recession by putting profits
before people. While common people continue to get ruined Wpay
ers money continues to be doled out in unprecedented amounts to baiJ
out the corporates. Additionally the US govemment has also Iowered
its interest rates to near zero in order to he\p the corporates with cheap
credit. This is the capitalist way of emerging fom the crisis which in
the first place they have create at the expense of intensifing the
economic exploitation ofthe people.
99
Instead if such huge amounts involved in the bailout paages were
utilised through public investments this would have resulted in large
scale generation of employment. lis in tu would have contributed
to enlarging the aggregate levels of domestic demand which in t
would have boosted sustainable growth ofmanufacturing. This would
have been an approach that would have put people before profts. Simi
larly instead of giving bailout packages if tese fnancial cororates
were outrightly nationa1ised then such manifestations of nauseating
capita1ist vices such as bonuses to executives' could have als<been
prevented.
However to expect a humane solution under capita1ism is not merely
nave but is unscientific. For capitalism is a system whose raison d etre
is the maximisation of profits. This can only happen wit greater ex
ploitation ofthe workng people. Clearly the popularstuggles for bail
out packages for the people rather than corporates must be mounted as
an integral part of the overall struggle for the socia1ist alteative to
capitalin.
Greed as an Explanation
of Crisis
Prabhat Patnaik
THER is a very common view that the current fnancial crisis ofthe
capitalist wor1d and its fall-out in the for ofthe most severe slump
since the Great Depression ofthe 1930s are a consequence ofgeed"
on the pa of the fnancial sector. This view has even entered the
thinking of many progressive intellectuals. To talk of greed as underly
ing the crisis is certainly not incorrect but it is not enough. Greed" or
grabbing the maximum for oneself in any given situation is not some
exceptional tait that fnanciers in the last few years suddenly displayed.
I is cental to capitalism; the system fnctions precisely through the
greed of the capitalists. In fact Adam Smith the founder of classical
economics drew attention to the paradox that the system as a whole
functioned benevolent1y (so he thought) even though fnctionaries of
the system the capitalists were motivated exc1usively by their own
self-interest (a euphemism for greed"). His predecessor Mandeville
in his Fable of the Bee had gone even fher underscoring how
private vice" produced public viue".
But those who explain the crisis in terms of greed" ofen do not
emphasise that eed" is what activates capitalism in its entirety that it
is not some abhorerrt tait exhibited by a few people in some excep
tional circurtances but. what drives the system all the time. Now
since this is not said and sinc the totality of speech consists ofboth
what is said and what is not said the geed" explanation by being
incomplete is also wrong and misleading.
It suggests as if it was possible for capitalism to have escaped this isis
if only the greed of some fnanciers could have been conolled as ifthe
101
crisis had nothing to do with the structural aspects of capitalism but only
with the avoidable excesses committed by some fnanciers. I suggests
an implicit distinction between capitalism rrked by excessive geed
and capitalism sans such greed between as it were good" capitalism
and bad" capitaIism and attributes crises to bad" capitaIism. Te
crisis then becomes the resuIt of an aberration of capitalism not of its
basic character: if only such greed" were eschewed capitalism would
be crisis-free.
GREED - ESSENCE QF CAPITALlSM
lis suggested explanation is fundamentalIy wrong. Those accused of
excessive geed" were doing nothing more than simply maximising
their gains which is what aII capitalists are supposed to do. I fact
rximising gains is supposed in economic theory to constitute ratio-
.
nal" behaviour on the pa of capitalists. So what is caIIed greed" is
not as we have seen an aberration; it is the essence of the behaviour
of the capitalists. AlI capitaIism is Iike this; there is no good capital
ism".
KarI Marx had in fact gone further in this matter. I his view greed"
or so-caIIed rational behaviour" was not merely a general feature of
capitalism; it was actually forced on the capitalists. The capitalists
did not have a choice in the matter since any capitalist who is non
greedy" would faII by the wayside. Capitalists maximised gains not out
of indivioual voIition but as a matter of necessity. I the Darwinian
stggle in which alI capitaIists competing against one another were
involved any one who did not rximise gains and hence feII behind in
the race of accumulation would go under. The process of centaIisation
of capital whereby as Marx put it one capitaIist kilIs many" neces
sarilymeant that large capital displaced srII capital; there was intense
pressure on every capital therefore not to rerin smalI but to grow
large instead for which it had to accumulate capital. For accumulating
capital surplus value had to be eamed to te maximum possible extent
i.e. gains had to be maximised. That was the essence of capitalist
behaiour thepursuitofa rationality peculiato it whence it foIIowed
that a rejection ofthis rationality" was possible only with the replace
ment of capitalism by socialism.
1 02
Ideed the same geed" which is supposed to underlie the slump is
what underlay the preceding boom as well. I other words since gee"
drives the system it cause both booms and slumps. The manner in
which it does so is as follows. Boor in capitalism as is well-kown
are supported by bouts of euphoria or speculative excitement". An
initial rise in asset prices gives rise to expectations of a further rise
which makes wealth-holders precisely because the are 'reedy"
demand more of the asset and hence causes an actual further increase.
And so the process goes on creating a speculative bubble. Of course
the decision to demand more of an asset depends not only upon its
expected price appreciation but also upon the evaluation of the risk
associated with holding more of it. But the same euphoria that makes
wealth-holders expect a continuation of asset price increases also gives
rise to 8 underestimation of risk. I is this phenomon of euphoric
expectation of capital gains net of risk premium that makes for bubbles
given the geed" (or the rationality") of the wealth-holders.
CONSEQUENCESFOR REAL ECONOMY
Arise in asset prices caused by such a bubble however has important
consequences for te real economy. The rise in asset prices improves
the wealth position of the asset holders which increases their consump
tion expenditure. In the case of fnancial assets since it makes raising
fnance easier it enlarges investment expenditure. In the case of all
producible assets such as houses for instance since the rise in asset
price makes it exceed the cost of production there is Iarger demand for
newly-constucted assets and hence Iarger production of them. Thus
the asset price bubble raises aggregate demand and hence output and
employment well beyond what it would have been in the absence of
such a bubble.
If for some reason however the rise in asset prices comes to an end
then speculators start deserting the asset Iike a sinking ship. The re
verse mechanism sets in with expenditure shrinkng for two analyti
cally distinct reasons: the frst is simply the operation in the opposite
direction of the very forces mentioned earIier that served to accentuate
the boom. The second is through the credit system. As asset prices fall
those who have borowed fom banks fnd therelves becoming insol
vent which in tur makes the banks insolvent. Credit therefore dries
103
up and in exteme cases as during the Great Depression of the 1930s
even depositors become chary ofkeeping their deposits with an insol
vent banking system. The peasive desire down the line is to hold
cash rather than private debt and in exeme cases the preference 'is
for currenc and not even bank deposits. This desire too is govemed
by te need to cut losses the obverse of maximising gains i.e. ofgreed".
Hence in contemporary capitalism with its developed fnancial rr
kets specation which is necessarily rampant plays as important a
role in accentuating the boom as it does in precipitating a crisis. Specu
lators like all other capitalists are driven by greed". It is their greed"
which causes pronounced booms just as it is their greed" which causes
severe crises because ofwhich it is best ifwe forget the word greed"
and see the cyclical phenomenon as a whole inc1uding the occurrence
of severe crises as being embedded in the system itse\f.
BOOM-BUST CVCLE & GREED"
Some may fee\ that while the crisis itselfhas to be located in the modus
operandi of the system itself its severity this time is caused paly by
the fact that the development of the enormous derivatives" market
rde investment banks feel less exposed to risk. They sold off their
risky assets experienced an I-am-all-right-Jack" syndrome and went
in for the acquisition of more risk assets which were again sold off
and so on. While they felt less risk the risk to the system as a whole
kept cumulatively increasing. Or lookng at it from the point ofview of
the system as a whole there was a systertic understatement ofrisk
because of the development of derivatives" so that when the crash
came it was all the more severe. And since such behaviour which
amounts to duping the system for maximising ones own gain goes
beyond the normal modus operandi ofthe system (where the question
of duping does not necessarily arise) it can surely be characterised as
greed".
Even this however would not be scientifically coect for at least three
reasons. First hedonistic maximisation which is the essence of capital
ist rationality" does not concem itself with whether the system is being
duped. It does not stop short of duping the system. If as a capitalist 1
can rke more money by duping the system then it is rational on my
1 04
part to do so. Hence there is no special greed" involved in duping the
system. Duping the system if it is possible to do so for gain is pa of
tional behaviour". Second it is not even the case that the Wall Steet
investment banks tat were selling of their loans in the derivatives"
rrket were consciously duping the system. I was more a case of the
anarchy ofthe financial rrket makng everybody unaware of the risks
that were piling up rather than any particu1ar group consciously duping
some other group. Since all ofthem would get blown up ifthe fnancial
system collapsed under the risks being piled up the fact that the invest
ment bankers behaved as they did was more a refection of the anarchy
of the system than of any special greed" on their part over above what
is commonplace under capitalism. Third investent banks behaviour
no rtter how we choose to characterise it was as much responsible
for the prolonged boom as it was for the slump.
It is a feature of bubbles-led growth" that the more the boom is pro
longed the greater is the sevety of the crash. The underestimation of
risk owing to the introduction ofderivatives" was responsible for the
strength of the boom: asset prices kept rising and rising (which they
would not have done to the same extent if risk had been accurately
assessed) because of which the real economy too benefted in terms of
output and employment gowth. Precisely because of this very fact
however when the crash came it was all the more severe.
Thus whichever way we look at it the geed explanation" simply will
not do. If greed" is defned as not being co-terinus with capitalist
rationality" then it is simply wrong to attribute the crisis to greed
since that implies that the crisis has nothing to do with the nature of
capitalismperse. lfgreed" is taken to be co-terminus with capitalists'
ratioalit" then there is nopoint talkng about greed" per se. Which
everwaywelookat it the geed" explanation lacks justifction which
is but another way of saying that a scientifc analysis of capitalism in
crisis must be substituted for sheer moral indignation.
How the US is Pulling Down
Asian Economies
Jayati Ghosh
HOW short is public memory -0 at least the memory ofthose who
hold forth to the public in the media. Only a few months ago we were
being sold complacent stories about the decoupling" of Asia from the
Wester economies by animated analysts waxing e10quent about how
China and India had already emerged as alterative growth poles" for
the global economy. Anyone who contested that rosy picture was de
cried as a doom-driven pessimist who could not ackowledge that the
world economy had fundamentally changed.
AlI that misplaced enthusiasm has now vanished and the same market
analysts are now mouthing despair. Evidence is mounting that far from
being an alterative growth pole China has been very badly affected
- lts expos are down and the consequent deceleration of growth has
dramatically affected indusal employment. It even threatens to drag
down the rest of Asia as the regional production chains now face stag
nant or declining demand. 80 if anything the Asian region is the worst
affected within the developing wor1d.
FALLlNG GROWH
As a resu1t growth forecasts are being revised sharp1y downwards
across theAsian region
.
According to the Interationa1 Monetary Fund
(IF) developing economies in Asia which as a group grew at 10.6
per cent and 7.8 per cent in 2007 and 2008 respective1y are now ex
pected to grow at just 5. 5 per cent or 1 .6 percentage points 10wer than
what was projected as recent1y as November 1ast year. Te three growth
engines in Asia the A8EAN-5 China and India a1so now seem to be
1 06
badly afected by the crisis. The ASEAN -5 economies whicho grew at
6.3 and5.4per centin 2007 and2008 ar nowprected to gow at 2.7
per cent in 2009 (down 1 .5 percentage points fom the November 2008
estimates). The coresponding fgures for China are 13.0 9.0 and 6.7
per cent (1.8 percentage points) and for Idia are 9.3 7.3 and 5. 1 per
cent ( 1 .2 percentage points). Moreover the IF has predicted a dam
aging immediate future for South Korea with its economy projected to
contact by four per cent this year.
Estimates fom national sources and elsewhere are less pessimistic
than the I but there is consensus that outside the US it is Asia where
the recession is biting most. According to ofcial Chinese fgures more
than 20 million rual migant workers have lost teir jobs ad reted
homes as a result of global economic crisis. By January 25 2009 1 5.3
per cent of Chinas 1 30 million migant workers had lost their jobs.
FALLlNG EMPLOYMENT
India too has made a feeble effort at estimating the impact ofthe down
tum on employment. A ofcial survey by the Labour Bureau focuses
on eight sectors (mining textile & textile garents metals & metal
products automobile gems &jewellery construction tsport and the
IIPO indu5y) to arrive at an estimate of job IOS5. I these sectors
it sampled units employing 1 0 or more workers. The sey covered
2581 ofthe sampled 3000 units.
Based on this limited sample the total estimated employment in all the
sectors covered by the survey went down fom 16.2 million in Septem
ber 2008 to 15.7 million during December 2008 implying a job loss of
about half-a-million. The actual decline in employment if coverage and
methods were better is like1y to much higher.
However the survey does suggest that employment fell in every month
during this periodo Afer September 2008 employment in all industries
dec1ined at an average rate of 1 .01 per cent per month. A comparison
of emplyment in expo and non-export units indicates that employ
ment declined at an average monthly rate of 1 . 1 3 per cent in the case of
the forer as opposed to 0.81 per cent in the latter pointing to the
direct role of the global slowdown.
107
FALSE NOTION
So te noton that Asa had decoupled" from the West was.clearIy
rstaken. This notion itselfwas ideologicaIIy driven: based on the view
that the pace and nature ofmarket-fiendlyreforms inAsia had stength
ened these economies and delivered an Asian century". When sp
tics pointed to the EastAsian fnanciaI crisis they were countered with
the view that 1997 was an aberation that resulted fom cronyism" or
some such intangible and not fom Iiberalisation and gIobaI integration.
Over the Iast two decades the shif towards more open strategies has
indeed tansforedAsia5 relationship with the rest ofthe world. While
the region was ealier home to a few mercantilist exportriented econo
mies like Japan South Korea and Taiwan in time every Asian economy
including the biggest was Iookng for a market abroad with some like
China proving extemely successful in manufacturing and others like
Idia in services.
GREATER INTEGRATION
Moreover while Asia could be proud of a high degee of regionaI inte
gration through trade and invetment fows this integation refected
not the decoupling of Asia fom the resf of the world but the creation of
an export platfor in which multi-ount production networks created
products that were targeted at worId markets. Production pro
esses
were segmented and each segment Iocated at appropriate sites that
generated intermediate products that were combned at the fnaI Ioca
tion (such as China) to be shipped abroad. The other impact of the
process ofliberalisation and integration was a sharp increase in foreig
investent. A concortant ofthis inf0w was the liberalisation ofrles
regarding the presence and operation offoreign frs including fnan
ciaI fr Iike banks merchant banks insurance companies hedge fnds
and private equity frms. CapitaI inf10ws in many countries in the region
were far in excess ofthat needed to fnance their current account def
cits. In fact some counties with curent account surpluses were aIso
recipients ofIarge capitaI inf1ows.
Given such integration it is not 5urprising that an Asia that was experi
encing robust growth til\ recentIy has been affected quite adverse1y by
108
the global fnancial and economic crisis. As the fnancial crisis unfolded
foreign fnancial investors in need of capital to cover losses and meet
margin cal1s at hom unwound their positions in Asia resulting in a col
lapse in stock markets in many Asian economies. Counties like China
India and Vietam which had seen their stock markets outperforming
their global competitors" were also the ones that recorded the steep
est falls. The outf1ow of capital put pressure on many curencies forc
ing Central banks to unwind a pa of their reserves. A liquidity and
credit contraction ensued. Foreig fnancial institutions that were 10-
cated in these countries and were facing difculties in global markets
had to downsize or close leading to ripple effects in domestic econo
mies. Domestic fnancial institutions exposed to sub-prime mortgage
related assets recorded large losses. Final1y the global economic reces
sion slowed export growth in these increasingly export-driven econo
mies. Al1 this generated an Asian version of the global financial and
economic crisis which is what the collapse in aggregate gowth fgures
refects.
Blowing Bubbles at the Bust
C P Clandraseklar
WIH the elections behind it the govemment has chosen to unveil the
promised second instalment ofthe economic package that it claims wil1
stimulate a slowing economy. Given the global fashion these days some
media obsee have wrongly described this as the centes second
fi
scal stimulus" pacge. The package is not fscal but more mon
etary in nature with little emphasis on increasing govemment spending.
Such an increase in a context when tax col1ections are expected to be
short of targets would require additional defcit fnancing or credit
fnanced spending by the centre. Very clear1y unlike govemments in
many other counties in the world the UPA in India has not shed the
fscal conservatism that is the centepiece of its neo-liberal economic
ideology. I is reticent to increase the fscal defcit even in the current
circumstances of declining inflation and slowing growth.
COMPONENTS OF THE PACKAGE
In the event the so-cal1ed stimulus package has three major compo
nents. The
fi
rst is a set of measures to be adopted by both the Reserve
Bank of India and the govemment that are aimed at reducing interest
rates and increasing the access to credit of frms state govemments
and individuals. The repo rate or the rate of interest on the borowing
by banks fom the RBI has been reduced by one percentage point to
5.5 per c.ent. In addition banks are being encouraged to lend to the
private sector through a number of measures including: a reduction in
the Cash Reserve Ratio or the cash balances they need to hold by half
a percentage point to 5 per cent of deposits; a reduction in the reverse
repo rate or the interest they can eam by lending to the RBI rather than
1 1 0
th e pu bJic from 5 to 4 p er c ent ; and a promis ed r ecapita Jisation of banks
with a gov emment conti bution of Rs 20 000 cror e ov er two y ears so
as to enhanc e th eir cr edit d eliv ery capaci t. Banks ar e also to be coax ed
into l ending with guarant ees on loans to small and micro ent erpris es
and high er cr edit targ ets.
I is not just domestic fnancial institutions that dom estic bo row ers ar e
exp ect ed to tap. Acc ess to cr edit from for eign sourc es has a lso been
enhanc ed by : (i) scrapping th e int er est rat c eiling on ext emal com
mercial bo rowings (ECBs) mad e throug h th e approval rout e; (ii) al
lowing ECB for inv estment in commercial r eal estat e in th e form of
int egrat ed townships ; (iii) p ermitting non- bank fi nancial compani es
(B F Cs) d ea Jing exc1usiv ely with in fastuctur e fi nancing to acc ess
ECBs ; and (iv) raising th e c eiling on F I inv es tent in rup ee-d enomi
nat ed cor prat e bonds fom $ 6 billion to $ 1 5 billion. I domestic editis
unavaila bl e or exp ensiv e
borrow fom a broad " is th e slogan.
Th e s econd s et of measur es incorporat ed in th e packag e aims to g et
stat e g ov emments and th e 1ndia 1n fastuctur e Financ e Company Lim
it ed (ICL) to boow to fnanc e capital esp ecially in fas tctur e ex
p end itur e. Stat e gov emments would now be allow ed to r esort to addi
tional mark et borrow ing of 0.5 p er c ent of th e Gross Stat e Domestic
Product or around R 30 000 cror e to fnanc e capital exp endit ur e. 1n
sum whil e th e c ent e is unwilling to incr eas e sp ending bas ed on addi
tional borrowing it is willingto l et stat es t ae that rout e and pr es ent it as
P of a c enal pac kg e". Th e oth er compon ent of pu blic d efi cit
fnan ced sp ending is to come fom th e ICL which ha ng been p er
mitt ed to rais e R 10 000 cror e trough th e issu e of tax f ee bonds by
March 31 2009 would now be allow ed to rais e an additional R 30 000
cror e throug h similar bonds to fnanc e infrastructur e projects.
Finally a third compon ent of th e pac kg e is dir ect ed at spurring th e
d Cd for automo bil es. Stat es ar e to be provid ed assistanc e up to
Jun e 30 2009 und er th e Jto buy bus es for th eir ur ban ns
port syst ems . Buy ers of commercial v ehicl es betw een January and
March this y ear ar e being o fer ed th e ben efi t of acc el erat ed d epr ecia
tion of 50 p er c ent. And banks ar e now al 10w ed to suppo NB F Cs with
cr edit for purchas es of commercial v ehicl es.
1 1 1
INVITATION TO BORROW & SPEND
Put these measures together and what we have is an element of com
pulsion on banks and fnancial institutions to lend and an invitation to
different economic actors to borow and spend. This includes borow
ing in foreig exchange to fnance expenditures in areas like real estate
which are unlikely to yield foreign cuency revenues that can be used
to meet future repayment commitments.
This stcture of the so called stimulus" package is shocking to say
the least since it would only strengthen the kind oftendencies that gen
erated the crisis in the developed counties in the frst place. I is now
widely accepted that the fnancial and real crisis in the US and other
OECD counties occurred because of an easy money and cheap credit
regime intoduced in a world of deregulated and rapidly proliferating
finance. This provided the basis for a credit-fnanced housing and con
sumption boom tat was speculative in character and was self-propel
ling tiII such time as defaults began. That is the speculative fnancial
boom that went bust was not an independent and isolafed phenomenon
but contributed to and drew sustenance om a debt-fnanced real
economy boom. As a result even though the crisis frst appeared as a
sub-prime housing loans problem it soon snowballed into a full-fedged
fnancial crisis that had severe recessionary implications for the real
economy.
Moreover once the crisis occured and needed to be addessed it be
came clear that merely pumping Iiquidity into the system or reducing
interest rates was inadequate to get the economy going again. The end
ofthe fnancial boom was accompanied by a sharp contaction ofpri
vate sector demand on the one hand and the threat ofinsolvencies on
Wall Seet and Main Steet on the other. The govemment therefore
had to step in to both rescue failing frs and fuel demand directly. s
made a fscal stimulus the focus of policy leading to the curent revival
ofKeynesianism in the US and parts ofEurope.
WRONG DlAGNOSIS
Seen in the light ofthat experience the stimulus package that has been
put in place over two phases in this county implicitly presumes that
Idias case is diferent. The problem here it is being suggested is in-
1 12
deed one of inadequate liquidity of costly credit and of an unwillingness
to lend. And it is being presumed that eforts to address these issues
directly would not put lndia in a situation where it too would be using a
speculative bubble to drive a real economy recovery and paving the
way for a financial meltdown that would that would abort or subvert
that recovery.
There are however clear indications tat such assumptions are unwar
ranted. To start with even if not as yet in a debt-driven crisis lndia is
substantially dependent on private credit to sustain growth. The so
called economic refor" which included both fscal refor tat lim
ited capital expenditure by the State and fnancial libera1isation that re
focused bank lending in favour of retail credit did tansfor the ec
tory of growth. If earlier public spending was the principal stimulus for
gowth this was substituted with debt-financed housing investmlt and
private consumption. lis required a relaxation ofthe terms on whiCh
and the volumes in which debt was available to households and te
private sector. I the event the share of retail credit in the total ad
vances of the banking system has increased substantially and te direct
and indirect exposure of the banks to sensitive sectors like the stock
market and real estate has increased considerably. That is lndias re
cent near nine percent growth rate was also fuelled by debt whih has
made this countrys financial system vulnerable to large scale default.
INTO A DEBT SPIRAL
Yet what the govemment is attempting now is to coax cajole and force
banks into lending even more in the hope that tere would be enough
borowers who would use that credit to revive fagging domestic
demand and make up for sluggish expos. The oective appears to be
to further inflate the embryonic credit bubble to prevent gowth fom
slipping sharply.
ln the process it is not just the banks households and corporations that
are being directed into a debt spiral; so are the state govC ents who
have been permitted an additional R 30000 crore ofborowing. ln a
perio when tax revenue colletions are tuing sluggish when resource
devolution from the cente to the states is biased in favour ofthe centre
and when an impending pay revision is likely to strain the states capac-
1 1 3
ity asking them to borrow and spend to help a recovery even when the
cente holds back is inded bizarre. What is needed is the transfer" of
more resources from the cente to the states since spending is Jikely to
be quicker at the state level helping stall the slump and paving the way
for recovery. But no such transfer is forthcoming since the centre is
holdingbackon its spending.
The centres reluctance to spend has also resulted in B strange of.
budget transaction in which it is willing to forego tax revenues to help
the IICL to mobilise up to Rs 40000 crore that will then be used to
leverage and supplement private or pubJic sector investent i infra.
stucture. It is by no means definite that such investment would be
forthcoming in the midst of a down tum. o the other hand there are
obvious dangers of adding tOl'rivate debt exposure in this fashion. It
would have been far more adsable for te govemment to undertake
the expenditure and at least partly meet it with the revenues that it
would have gamered through taxation when the recovery occurs.
PUTING FOREIGN RESERVES IN PERIL
Finally as noted above the packge not merely relies on infasuctural
investent fnanced wit domestic debt but encourages such spending
financed with extemal commercial borowing. This not mereJy adds to
the det spiral but involves a currency mismatch inasmuch as
infastuctural projects are unlikeJy to yield foreig exchange revenues
that can be used to meet interest and amortisation commitents pay
able in foreign exchange. On the other hand with global interest rates
being much lower than domestic rates fir may not adequately take
account of exchange rate risks and opt for foreig borowing whenever
available. This could lead to solvency probler ifthe rupe deeciated
sharply and stain Indias foreign reserve position if the exodus of for
eig capital continues.
What does this reliance on private debtfinanced spending to igger a
recovery indicate? One ofthe lessons that has come out ofthe global
crisis is that ifbig financial firms are lightly regulated and permitted to
discount risk when seekng profits then it is likely that the govemment
would have to nationaJise them because letting them fail (as happened
with Lehman Brothers and did not with AIG) could have adverse
1 1 4
systemic effects. The impIication was clear. Embracing deregulation
and a minimal role for the State by relying on debt-fnanced private
consumption and investment as part of a neo-Iiberal sategy leads up to
a crisis-induced reteat fo neo-liberIism in the form of nationaIisation
and State-fnanced bail outs. Capitalism could possibly do better by
discarding neo-IiberaIism and providing a role for the State many con
servative commentators began to argue. This is however a lesson that
is dificult to absorb to the UA govemment steeped in neo-Iiberal ide
ology. And that together with the fact that Indias crisis is still in the
rkng possibly explains the bizarre for that Idias ofcial stimu
lus" takes.
The Ongoing Industial Recession
ati Ghosh
THE industial slowdown is now accepted as fact by most policy mak
ers and observers ofthe Indian economy. Yet ofcials ad commenta
tors Seem to blame it on extemal factors: most obviously .the global
financial crisis originating in the US economy the consequent eonomic
slowdown and now rece3sion in the US the European Union and other
developed country markets and the associated impact upon exports.
DECLlNE HAS ALSO DOMESTIC CAUSES
It is certainly tue that the bad news fom abroad - which shows no
signs of easing up -has impacted upon domestic stock markets inves
tor expectatons and the exporting industies in particular. But it is also
unfortunately the case tat our own economy has been showing sev
eral causes for concem even before that extemal bad news started
pouring in. There was the accelerating infation which particulaly hit
food and other items of essential consumption and recently exacer
bated by the increase in petol prices. In additon there have been sigs
of decelerating gowth especia11y in industia1 activi ld tese cannot
be ascribed only to reduced expo orders but are more likely to have
domestic causes.
Consider the index of indusa1 productio presented in te chtalong
side (with base year 1993-94). he general index peaked in March this
year f11 quite sharply thereafer and subsuently has been 'more or
less flat at the lower level. This pattem essentia11y reflects the behaviour
of the manufacturing index which accounts for around 80 percent of
the weight ofthe general index. Such a pattem tends to be obscured by
the standard way of presenting the industial growth data in terms of
year-on-year monthly rates.
1 1 6
250
230
2J0
19
170
50
Chart 1: Index of industrial production
~M|o|n
=M;nufattrir
~||etr|otv
~Goa|
l
~
What is especially disconcerting is the evidence on electicity produc
tion which shows hardly any increase at all but simply fuctuations
around a flat tend for the past 1 8 months. Since elecicity stil1 remains
substantially undersupplied and its shortage can create supply bottle
necks for other production this stagnation is wort noting.
Te use-based c1assification industal proucton suggests tat te slow
down in growth is spread across several important sectors. Both basic
goods and intermediate goods which have stOlg backward and for
ward linkages with other industial actity have been stagnant and
hardly increased at all over the past one and a halfyears. The produc
tion of capital goods shows much greater volati1i with a sharp in
crease in March 2008 but dec1ine thereafer fom that peak.
WIDESPREAD DECELERATION
Consumer goods are the most likely -and the first -to be directly
affected by slowing demand in domestic and export markets. This too
is not a recent problem but one which has been clearly evident in te
economy at least since te beginning ofthe current calendar year. The
production of consumer non-durable goods which account for te bulk
1
1 1 7
of consumer goods (wit more than 80 percent weight) peaked in Janu
a 2008 and has fal1en continuously since then. Consumer durables on
the other hand had benefted fom a credit-fnanced boom that had
e\ements of unsustainability that are eeri1y simi1ar to the US credit
driven consumption boom. The signifcant expansion ofretai1 credit
especial1y credit card debt and hire purchase schemes had generated
demand for consumer durables and automobi1es but such credit-driven
expansion became increasingly problematic as interest rates increased
and lenders became more concemed with the viabi1ity oftis rapidly
growing consumer debt.
TABLE 1
Year-on-Year Growth of Index of Industrial Production
for Particular Sectors (ercent)
Food products
Beverages tobacco and related products
Cotton texti1es
Wool si1k and man-made fbre textiles
Jute and other vegetable fbre texti1es
(except cotton)
Texti1e products (inc1uding wearing apparel)
Wood and wood products; fumiture and fixtures
Paper & paper products and printing publishing
& allied industries
Leather and leather & fur products
Basic chemicals & chemical products
(except products of petroleum & coal)
Rubber plastic petreum and coal products
Non-metal1ic mineral products
Basic metal and al10y industies
Metal products and parts except machinery
and equipment
Machinery and equipment other than
tansport equipment
Transport equipment and pas
Other manufacturing industies
Sept. Apr-Sep
2008 2008
5.2 -1.4
1 1 .7 23.3
-9.3 -0.5
1 .4 -0.2
-0.4 -5.s
- 1 .9 3.8
-9.7 -10.4
8.3 3
-8.6 -0.3
-3.6 6.1
-3.4 -4.2
-0.6 0.6
5.6 6.2
12.8 1 .3
16. 1 9.8
16.8 12.8
1 0.5 - 1 . 1
1 1 8
Table 1 shows that this deceleration was widely spread across diferent
manufactuing sectors. Indeed only the chemicals rchinery and trans
port equipment sectors appear to still be growing even if at slowcr
rates.
What explains this trend of deceleration even before the outbreak of
global fnancial crisis? One partial explanation can be found i te move
ment of imports and exports over the same period. In fact exports have
been growing throughout tis period. 80 a fall in aggregate export de
rnd because of the global slowdown cannot yet be blamed for the
Soue: DG&S
around one third of rnufacturing GDP and much more than two thirds
of manufacturing employment.
Then the global rise in food and fueI prices was allowed to impact upon
prices in India. In respon'e to this instead of managing these specifc
items the goverment raised interest rates as an anti-inflationary mea
sure. This had the effect of further damaging the prospects for indus
tia1 actity. A11 this happened before the subsequent outflows of captial
!ed to a rapdi1y depreciating rupee -but by then te darge had been
done.
It is pointless to blame exteral forces for all . this because none of
tese processes was necessary within India. There was no need to
encouage and then sufer the efects of mobile capital flows that brou1t
in resources that were not even going to be used. Instead capital in
flows could simp!y have been contolled to prevent upward pressure on
120
te exchange rate. lnflation could have been rnaged by frrst recogising
the essentially spculative and therefore temporary nature of te global
fuel and food price rises and then addressing the specifc management
ofthese sectors within the economy.
Unfortunately this previous mismanagement has worse consequences
than simply the evident indusal deceleration. It has also weakened
the economy even before it faces the full impact ofthe global recession
and the fnancial turoil. I is a depressing commentary on the eco
nomic management of a goverment that is supposedly led by econo
mists.
s
n
e
C
C P Chandrasekhar
AS the deadline for the next election nears one question that needs
addessing is whether it would serve as a much needed second refer
endum on the knd of economic policies that te previous NA and the
curent UPA govemments have followed. At the moment pitical de
bate in the county is focused on issues like the nuc1ear deal and signs
ofheightening communal polarisation. But underlying these tends is a
clear rightward shift in the agenda of the leading political formations
epitomised by the neo-Iiberal policies that have been pushed by them
for close to two decades now. The damage wought by those neo
liberal economic policies are reflected in a crisis in agricultue a high
rate of infation a volatile exchange rate increasingly fragile financial
markets ad the likely ret to much slower growth. Unfortunately
these issues are not being debated adequately as yet in the Iup to the
election in a country whose strength lies in its vibrant democracy. One
reason is the. concerted effort by the govemment the media and sec
tions ofthe elite that benefit from neo-liberalism to hush up those out
comes.
STATE OF DENIAL
This deficit in Indias pitical democracy is in keeping with the larger
effort ofthe elite in capitalist democracies across the world to keep the
inequalising and destabilising effects of the new capitalism dominated
by fnance under a shroud. Contemporary capitalism is in a perennial
state of deniaL Icreasing inequalities associated with higher growth
are atibuted to institutional changes that are reincentivising produc
tion. Persisting poverty is dismissed as being a statistical quirk rather
122
th
.
It has not taken long for all these illusions to be dashed by the market.
Between January 8 and JY 8 2008 the market fell fom a peak of
20873 to 13454 or by 35 per cent. Measured in dollar terms the market
capitalisation of Indian stocks is repoed to have faIIen by 46 per cent
between January 1 and July 4 2008 as compared with 25 per cent in
the case of South Korea 24 per cent ih the case of Hong Kong 3 per
cent in the case of Brazil and just 0.5 per cent in the case of Mexico
(Business Line July 6 2008). Vietnam is the only country in Asia that
fared worse than India and China followed c10se behind India with a 42
per cent decline.
124
I is important to remember that China Vietam and Idia are the cur
rently celebrated growth miracles in Asia having displaced the East
Asian NICs fom that pedestal in the years that foIIowed the 1997
financial crisis. Financial markets in these new gowth miracles are the
ones that have been talked up by intemational finance and te intema
tional meia leadingto an unprecedented bom especiaIIy in the years
since 2003 when there has been a surge in cross-border capital flows.
And it is the fnancial markets in these growth miracles that are now
floundering the most ev though real economic grow in these coun
ies is stiII better than elsewhere in the developing worId.
COLLAPSE OF STOCK PRICES
The impact of the market's decline oi the personal wealth of Idias
super-rich has been along expected. 1ines. o January 8 there were
reportedly 522 biIIionaires in Idia many ofthem among the Forbes'
listing of the worIds richest. By July 4 the Busines Standard (July 5
2008) reported that the number had faIIen to 421 with 1 01 erstwhile
bilIionaires having experienced a 20 to 65 per cent erosion in their net
worth that had reduced them to milIionaires. AII because ofthe 35 per
ce faII in th Sensex; Those who have been worst affected (ev1 if
not damaged because their real wealth is large enough) incIude some of
the most celebrated new capitalists" ofIndia. Anil Ambani sutered"
a loss that inore than halved his wealth fom R. 253567 crore to Rs.
1 1 5878 crore. His estanged brother Mukesh lost more than 30 per
cent. Gautam Adani took a beating that ripped 58 per cent ot the value
of his assets. And G M Rao saw as much as 65 per cent of his net
worth vanish into thin air.
For those who celebrated the rapid rise in the Sensex in the 1 8 months
prior to January 2008 this coIIapse of stockprices market capitalistiQn
and paper weaIth must have given cause enough to sit back and take
stock. The decline in alI three was not only large but extemely sharp by
historical standards. What should have accompanied that faII is a sense
of disquiet that was as intense as the euphoria that accompanied the
bubble. This would have forced a reassessment ofthe so-caIIed boom
a rethink of the policies that facilitated the speculative surge which
created the bubble and the adoption of corrective measures that can
prevent similar trends in future.
125
But that does not seem to be the outcome. I fact other than aggegative
assessments ofthe kind noted above there has been little reporting of
the losses that have been incurred in this period when fnancial markets
have been rendered more complex by liberalisation. A occasional re
port ofprovisions being made by certain banks to account for expose
to sub-prime losses or a rare and unclear description oflosses made in
foreign exchange hedging by an exporting frm is all we get. But when
the association of chartered accountants demands more ansparent
reporting of derivatives exposure to keep shareholders and accountants
informed or when exporters fom Tirupur demand the intervention of
the RBI to get banks to share with them losses fom trading in deriya
tives that they claim they never understood and whose risks they were
never informed of it becomes clear that there is much that is being kept
out ofthe public eye.
This is not because these issues are too complex to write about or
explain. I is because those who can and should do the explaining are
part ofthe unspoken consensus to keep these maladies that afiict the
ownership economy dominated by fnance away fom the public eye. If
they are reported explained and understood the legitimacy of the sys
tem would be under challenge. More importantly it would force a re
think ofthe neo-liberal picies that work unceasingly to expand proft
while keeping much of Indias wage salary and petty income eamers
at the same or even lower levels ofreal income.
But when the crisis tums intense as it did in many Latin American
counties during the last two decades policy reversal is a real possibil
ity. The persisting evidence of agrarian distress the more than 1 1 per
cent rate of inflation reports of declining profts and slowing sales the
widening tade and rrent account defcits and the collapse in the
markets that symbolise shining India suggest that India ry be nearing
one such ling point. The elections therefore may still tip the scales
against neoIibralism.
Control Frauds
Jayati Ghosh
THE Satyam saga gets more amazing by the day with more extaordi
nary revelations about the extent to which the Raju family was appar
ently able to siphon money out of the company they contol1ed. As the
murk details emerge it is tempting to bemoan the poor state of indus
t supeision in the Indian corporate sector and see this case as an
example ofhow India regulatory standards are not yet up to te stan
dards set in the West. Indeed that is how several analysts both in Inda
and abroad have already interpreted it.
But te tuth is that instances like te Satyam case are neither new nor
unique to India. Similar -and even more exteme -cases of corporate
malfeasance have abounded in the past decade across all the major
capitalist economies and especial1y in the US. And these were not ab
erations but rather alIst typical features of deregulated capitalist
markets.
PERVASIVE FINANCIAL CRIME IN CAPITALlSM
Furthermore there is also quite detailed kowledge about the nature of
such criminal tenoencies within what are supposedly orderly capitalist
markets. Four years ago at a conference in New Delhi te American
academic Bil1 Black spoke ofhow fnancial crime is pervasive under
capitalism. He kew what he was talking about: as an interesting com
bination of1awyer cologist and economist he had reently authore
a best-se1\ing book on the role of organised financial crime within big
businesses.
This book ( e Best Way to Rob a Bank Is to Own One: How
127
corporate executives and politicians looted the S&L industy" by Will
iam R Black University ofTexas Press 2005) was a brilliant expos of
the Savings and Loan scandal in the US in the ear1y 1980s. It received
rave reviews with the Nobel prize-winning economist George Aker10f
calling ita modem classic and praise coming from all quarters including
the then chairan of the US Federal Reserve Paul Volcker.
I his book Black developed the concept of
control faud" - fauds in
which the CEO of a frm uses te frm itse1f and his/her ability to
contol it as an instrument for private aggrandisement. According to
Black contol fauds cause greater fnancial losses than all other forms
of property crime combined and effectively kill and maim thousands.
Such control faud is greatly abetted by the incentives thrown up by
modem executive compensation systems which allow corpOate man
agers to subor interal contols. As a result the organisatiorbecomes
the vehicle for perpeating crime against itsel
U
lis was the underlying reality in the Savings and Loan scandal ofthe
ear1y 1980s that Black used to illustate the arguments in his book. But
it has been equally ue of subsequent fnancial scams that have rocked
the US and Europe fom the scandal around the Bank of Commerce
and it Itemational (BCCI) i te U i 1991 to te Enron Adelphia
Tyco Intemational Global Crossing and other scandals in the ear1y part
of this decade to the Plat Spa fnan1al mess in Europe to the
recent revelations around accounting practices ofbanks and mortgage
providers in the US in the cu ent fnancial crisis.
The pint is that such dubious practices which amount to fnancial ime
flourish during booms when everyones guard is down and fnancial
discrepancies can be more easily disguised. And this environment also
creates pressures for CEOs and other corporate leaders to show and
then keep showing good results so as to keep share prices high and
rising. The need becomes to maximise accounting income and so pri
vate market discipline" actually operates to increase the incentives to
engage in accounting faud.
This intense pressure to emulate peers in a bull market and deliver
good" results even ifthey are fake is a well kow feature offnan
cial markets which intensifies extant problems of adverse selection
128
and moral hazrd. According to Biack T
h
is environment creates a
G
reshams Law" dynamic in which perverse incentives drive good
underwriting out of circulation."
NEO-LlBERALlSM & FINANCIAL CRIME
Black further argues that the tendency for such control faud has greatly
increased because of neo-liberal policies that have reduced the capac
ity for efective regulation. According to him this operates in four ways:
First te policies limit the number and quality ofregulators. Second
the policies limit the power of regulators. I is common for the profts of
contol fraud to getly exceed the maximum allowable penalties.Third
it is common to choose lead regulators that do not believe in regulation
(Harvey Pitt as chairan of the SEC and more generally president
Reagans assertion that govemment is the problem"). Fourth it is
common to choose or retain corupt regulatory leaders. Privatisation
for example creates ample opportunities resources and incentive to
corupt regulators.
Neo-classical economic picy further aggravates systems capacity
prblems byadsing tat te deegulation desuervision and privatisation
take place very rapidly and be radical. These recommendations guar
antee that even honest competent regulators wi\l be overwhelmed.
Overall the invariable result is a self-flflling policy - regulation will
fail. Discreditingregulation may be pt ofthepla or te result may be
peerse unintended consequences.
Neo-classical policies also act perversely by easing neua1isation:
Looting control fauds are guaranteed to produce large fctional prof
its. Neo-classical proponents invariably cite these profts as proofthat
the reforms are workng and praise the entepreneurs that produced
the profts. Simultaneously there is a rise in Social Dawinism. The
fauds c1aim that the profts prove their moral superiority and the ne
cessity of not using public funds to keep inefcient workers employed.
T
h
e faudsters become the most famous and envied members ofhigh
sciety and use the companys funds to make political and charitable
contributions (and conspicuous consumption) to make them dominant.
In sum in every way possible neo-classical policies when they are
adopted wholesale; sow the seeds oftheir own desuction by bringing
129
about a wave of control faud. Contol frauds are a disaster on many
different levels. They produce enorous losses that societ (already
poor in many instances) must bear. They corrupt the govemment id
discredit it. They inherently distort the rrket and make it less ef-"
cient. When they produce bubbles they drive the rrket into deep inef
ficiency and can produce economic stagnation once the bubble col
lapses. They eat away at tust."
Blacks analysis is exemely relevant for India today. Not only be
cause it shows how widespread the problem has been n other coun
ties but also because it suggests that it could be much more wide
spread even in India than is curently even being hinted at. It is also
very important because it shows us how much ofthe problem is essen
tially due to policies of deregulating fnancial practices and imp!icitly
encouraging lax supervision ofen as part of the rstaken be!ief that
rrkets are good at self-regulation and can contol te ever-present
instincts of greed and te desire for indidual enrichent at the cost of
wider social loss.
Growth For Whom?
Editorial People 'sDemocrac
TE euphoria time for India Inc. continues. The sensex has now
breached the 21000 mk At the other end every 30 minutes a farer
s committing suicide somewhee across the county. The hiatus be
tween shining India and suffering India is not merely growing but is
galloping. This gowing divide is not only because ofthe inefciency of
the distibutive aspects in our economy atpreventan inc1usive gowth.
I is also not because te goverent of the day is insensitive to this
growing dide. The dide grows on the basis of a simple fact -under
te given conditions. for the rich to get richer the poor needs to get
poorer. This is the very logic of capitalism based on intensification of
economic exloitation.
Take for instance the continuing rise in the prices of essential com
modities. This heaps additional economic burdens on the people. But
at the same time infation is a policy instumert in the distbutive
aspect of the economy which increases the income share of the profit
eaer whle impoverishing te consumer. Inflation influences income
redistibution in favour ofthe rich.
All eforts by the Lef to mke the UPA govemment take measures to
contain tis price rise have only resulted in partial responses. The main
cause for te price rise of essential commodities has been the permit
ting of speculative forward/futures tading. Though afer considerable
pressure the govemment has removed pulses rice and wheat fom
these markets clearly this is not sufcient. All essential commodities
need to be removed fom such speculative tading. Simultaneously the
Public Distibuti System needs to be urgent1y strengthened. Instead
we see the reverse in practice.
1 31
Tere is a political fall out of such po\icy directions. The consequent
gowing popular discontent wil1 1ead to stronr anti-incumbencyduring
elections as has been seen tecent1y in Garat and Himachal Pradesh.
If the communal forces are to be prevented fom capita\ising on this
gowing discontent electorally then it becomes imperative that the policy
direction shif more favourably towards improving
p
oples welfare.
This also means that the pro-people measures in the Common Mini
mum Programme however reluctantly the UPA may have ageed to
need to be implemented in right eamest.
I this context it is indeed alarming that the National Rural Employ
ment Guarantee Scheme (NREGS) has failed to deliver to a large
extent according to the Compol1er and Auditor General (CAG). le
CAG conducted a performance audit of this scheme in 51 3 gam
panchayats spread across 68 of the 200 poorest districts chosen for its
implementation across 26 states. This shows that the average employ
ment generated betwecn Febrary 2006 and March 2007 wasjust 1 8
days as against the 100 days promised by te scheme. Only 3.2 per
cent ofthe registered househds could avail of 100 ys of employ
ment. Clear1y there is gross inefciency surely high levels of corp
tion apart fom diversion and misutilisation of funds.
If this is the efcacy of the delivery system then even the most well
meaning pro-people initiatives can be prevented fom de\ivering some
benefts and relief to the poorest of the poor. The NEGS was ex
tended this year to 330 disicts and fomApril 2008 tis is to extend all
across the coun'. If this is the state of its implementation then it can
only extend further benefts to the corupt rich at the expense of te
nal poor. Further widening the divide.
It is hence imperative that the UPA goverment step in to plug tese
loopholes and rae the deliver systems work more efcient1y if it
doesnt want the communal forces to further beneft politically and
electorally. Additionally the pro-people promises made in the Common
Minimum Programme which continue to r=in only on paper need to
be implemented urgent1y. I this context thou1 the National Deve\op
ment Council has fnalised the Eleventh Plan the fortcoming annual
budget must be uti1ised to prioritise and concentate on those areas
aimed at improving peoples welfare.
132
Take for instance the employment situation in the county. The Elev
enth Plan contains a separate chapter on employment which shows
that leave alone the backlog ofunemployment in the country the em
ployment growth has lagged behind the growth ofthe workforce during
the Tenth Plan period. Thus the backlog ofunemployment is increas
ing. What is required is massive doses of public investment that can
provide large-scale employment and at the same time also build the
much-needed economic and social infastructure. Though the Elev
enth Plan envisages a 120.5 per cent increase in plan expenditure over
the Tenth Plan the fact is that during the Tenth Plan only 82.5 per cent
ofpr<ected investment could take place.
Thus if these targets need to be reached then resources need to be
mobi1ised aduately. This however is being planned not through in
creases in tax revenues but throu the reduction in non-plan expendi
tures particularly subsidies meant to ve some re\iefto the poor. On
the other hand according to the fnance ministry estimates during the
Tenth Plan period R 2.35 lakh crores were denied to the exchequer
thanks to a host oftax concessions. Instead of removing these conces
sions that only beneft the rich the Eleventh Plan talks in tC of
imposing further burdens on the common peop\e" through cuts in non
plan expenditures and subsidies. The hiatus between the two Idias
that we spoke of earlier is thus set to widen further.
Further resource mobilisation needs to be beefed up through the wid
ening of te tax base in the count. We began by refering to the stock
market boom. But remember not a paisa of W is paid by those who
are eaming huge unprecedented profts due to this boom. While this
may increase the number ofIdian billiomiires the billions required to
improve the 10t ofthe common Idian is being denied through such tax
concessions. As we have been advocating all along through these col
u s the forthcoming budget must consider the intoduction of a 10ng
er capital gains W.
1t is therefore necess that popiIlar pressure must be stengthened
for a change in the policy direction in favour of improving peoples
welfare during the remaining tenure of this UPA govemment. This is
imperative not only to improve the lot of the vast millions of common
Indians but is also necessary to prevent the communal forces fom
exploiting the popular discontent for their electoral advance.
In Search of a Real Stmulus
Jayati GllOsh
NOW that the economic slowdow is clearly making itself felt in both
economic actity and employment the cenal goverment has fna11y
decided to do something about it. The touble is that the economic pack
age announced on December 7 is simply too feeble to go very far and
even combined with the monetary picy measures announced earlier
is unlikely to reverse the overa11 decelerating tendency.
S far the goverment had focussed on the fnancial side of the cur
rent crisis. There were measures to infuse liquidity into a bankng sys
tem that had becOle very consained by reducing the Cash Reserve
Ratio and te Statutor Liquidit Ratio Vreduce interest rates by brin
ng
down repo and reverse repo rates" and to provide some reliefto non
bank financial institutions pticul. insurance compaies. These were
confdence-building Ineasures that were apparently necessary because
(despite oficial clain1s to the contary) the Indian bankng system had
in a less severe fonn several of the fagilities that undennined the US
banks.
But the monetary measures that were supposed to deal with the credit
crunch a11 proved to be lacking because they did not accept the need to
deal with the ' liquidity tap characteristics of the curent economic
situation. Banks are unwilling to lend to any but the most credit
worthy potential borowers but such potential borrowers are unwilling
to borow because of the prevailing uncertainties and expectation of
slowdown. Meanwhile a11 other enterprises even those who desper
ately require working capital just to stay afloat find it increasingly
dificult to access bankcredit even as they face more stringent demand
conditions.
134
In such a situation reducing interest rates does not solve the basic
problem of tightened credit prosion even though it )lay marginally
reduce costs for those who are able to access bank credit. Some of the
measures seemed to be more designed to push up the stock market
than to revive the real economy. But already in addition to the credit
crunch the slowdown h.as led to very rapid deterioration in market con
ditions facing many producers: for example expoers especially small
scale producers; the constuction indust which is a very large em
ployer; most of all agriculturalists producing cash crops whose prices
have collapsed.
So it has been c1ear for some time that a fscal stimulus is essential and
it was almost a mystery why the govemment took so long to announce
one. Ideed te rather pathetic attempts ofthe prime minister and ex
fnance minister to dec1are that they had anticipated the global down
tum by inc1uding a large fscal defcit in the annual budget (when in fact
it was no more than the result of some pre-election sops ofered out of
pitical exigency) even led some to suspect th no new fscal package
would be forthcoming. Of course this would be absurd -but then the
saitjacket of neo-liberal economic thinking has created even geater
absurdities in the past.
Anyway the cenal govemment did fnally announce a fscal package
which was by then much-awaited. But unfortunately the promised fs
cal expansion is a rather small one - only up to Rs 20000 crore of
diret additional spending through the Planning Commission in unspeci
fed areas. This is les than 0.5 per cent of GDP a tiny fscal input
which is too small to be really countercyc1ical or even to change the
expectations ofprivate agents in any meaningful way.
This direct spending is combined with a tax cut measure on domestic
duties - the ad valorem Cenvat rate is to be reduced by 4 percentage
points. This will have an impact in tCof supporting economic activ
ity only if producers respond by cutting prices and such price cuts
generate demand responses. But neither is inevitable. For example the
recent cut in the price of aviation fuel was not passed on to consumers
by the airline companies and even now only one carrier has promised
to reduce the aviation feI surcharge. So that particular measure simply
became an additional subsidy to shore up profts of airline companies.
13S
lt is not clear whether this Cenvat reduction will meet the same fate
reducing govemment revenues without generating more economic ac
tivity. But certainly it is tue that in times of economic uncertainty tax
cuts are much less effective in stimulating activit tan direct govem
ment expenditure.
Te other measures are really rather modest in scope and niggardly in
content. The only substantial measure directed to highly employment
intensive units in exporting sectors like textiles garments and leather is
a small reduction in the interest rate on export credit. In addition there
are some small tax concessions and a tiny (Rs 350 crore) addition to
export incentive schemes. Tese are hardly likely to counteract the
efect ofbig losses of export orders as the major markets start shrink
ing. What was required was a rhore serious and systematic attempt to
allow these indusies to keep producing at technologically efcient
leve1s and shif demand to other markets.
The mention of expanding the Indira Awas yana is surely welcome -
but note that the money for it is supposed to come out of the R 20000
crore paage rather than being additional to it. The measures to pro
vide more fnance and loan concessions for small borowers ofhome
loans are also we1come. Refnancing of small medium and micro en
terprises is important but how well the new mechanism will actually
function is not c1ear and the amount announced (R 7000 crore) is
relative1y small.
Some ofthe proposed measures make very little sense - for example
the elimination of eXPOrt duty on iron ore fnes and reduction of export
W on iron ore. There is really no reason why India should want to
incentivise the export of iron ore rather than encourage the domestic
processing ofit into steel.
But what is even more sigifcant is what the stimulus package leaves
out. lt is not just that the overall size of the package is too small to have
much of an effect. I is also that some of the most critical areas of
spending have been neglected.
State govemments have already started feeling the resource constaint
as their tax revenues are affected by the economic downt and they
1 36
are responsible for most ofte public services that directly affet people
such as those relating to agriculture and rural development health sani
tation education and so on. Yet there is nothing proposed to alleviate
the fscal crunch of state goverments who face a hard budget con
straint. 80 the overa11 conditions of1ife of the citizenry re likely to be
afected. Yet the centre could so easi1y have announced some mea
sures to provide fscal relief to the states to help them cope with the
adverse effects ofthe dowtur. 8uch measures could include reduc
ing interest rates providing more central funds and most of a11 relaxing
fscal responsibility norms that are inappropriate for the curent situa
tion and which the centre itselfhas already discarded.
8imilar1y the food crisis has been forgotten in a11 the exeitement about
the financial crisis but food insecuty remains widespread and may
even be spreading given the signifcant rise in prices over the past two
years. While overa11 inf1ation has been easing food inf1ation in Idia
continues despite large food gain stoks. And the ral incomes of work
ers and cash crop cultivators have not kept pace with this. Poor or
inadequate nutition is already a big problem which wil1 deteriorate as
the downt worsens. Tis is a time to a110cate much more money on
expanding universalising and improving the functioning ofthe Public
Distibution 8ystem. This would at least partly a11eviate the problems of
those who are already at the margin of survival as we11 as those who
could be tipped over into poverty by recent economic processes. Yet
there is no mention of any such attempt in the package or of any ac
tions to address the problems of cultivators.
80 this is a partial half-hearted and essentially unconvincing attempt to
deal with an economic situation that is likely to worsen in the near
future. This mayl ie.becas tcental goverent iei not fu 1 11 y y
convinced 0e eedfo.r c1ear Keynesian measures or does not even
understand what these 'shQuld consist of. It is hard to see what else is
preventing the goverent fom acting more decisively.
Mini Stmulus Package:
Barking up the Wrong Tree
Editorial People Democrac
WHIE replying to the discussion on the interim budget in the Lok
Sabha the ofciating Finance minister announced yet another mini stimu
lus package. He did exactIy the opposite ofwhat he said while present
ing the interim budget. o that occasion he said that seeking a vote on
account does not permit any changes in the taxrates as these are
substantive decisions that ought to come in a regular budgt which only
the new govemment post-elections is entitled to do.
At the end of the debate in the Lok Sabha before the interim budget
was adopted amid objections and walk out by the Lef parties the min
ister announced a 2 per cent cut in the CENAT (excise duties) and a
2 per cent cut in service tax. It is estimated that this wiII cost the
exchequer R 30000 crores. ConsequentIy if the benefts of these
cuts are passed on to the consumer then the prices of a wide range of
commodities should decline. The UPA govemments logic it appears
is that this faJI in prices however marginal should boost sales thereby
providing a stimulus to the economy.
Once again the govemment is
ssue of climate change India.has once again for the frst time
accepted the target ofreducing global temperatures by 2 degre Cel
sius. The problem is not in accepting such a. target. The problem is in
the methods being thrust upon the developing world by the advanced
counies to achieve this.
Undoubtedly the global temperatures need to be brought down
otherwise the worst suferers would be the worlds poor.
Climate change will impact rainfall temperature and water availability
adversely affecting liveIihood ofbillions dependent on agicultue in the
world. Needless to add India would be one of the worst sufferers.
The melting of glaciers will affect the flows of river waters affecting
the lives of billions of people. Particularly the whole of South Asia
would be afected with the ietreat of the Himalayan glaciers. A 3-
1 86
degree increase in global temperature will displace millions due to
fooding. The warming ofthe seas and land would lead to the extinction
of one-third of our species.
The affects of such changes are already being fe1t. Some 262 million
people had been adversely affected by cIimate disasters annually be
tween 2000 and 1004. 98 per cent ofthese are in the developing coun
ies. Such poor people are ofen forced to sell their productive assets
or save on food healt and education creating life-long cycIes of
disadvantage" .
While the facts are startling and warant immediate global attention
and action the proposals to tackle the situation have become contro
versial. The advanced counties presce a 50 per cent obal reduc
tion in greenhouse gas emissions by 2050 compared to the 1 990 leve1s
for a sustainable future. To achieve this; it suggests that the developed
countries must cut their emissions by 30 per cent by 2020 gowing to
80 per cent by 2050. The developing counies are being asked to
reduce emissions by 20 per cent by 2050.
As against this India proposed that per capita emissions must be the
basis for a solution. For instance Indias per capita emission is 1 7
times less than that of the USA. USA today emits around 20 tonnes
per capita while Idia emits around one tonne per capita. Reducing 80
per cent in USA would mean an emission of three tonnes per capita by
2050. Reduction of 20 per cent in India would mean 0. 8 tonnes per
capita by 2050. Thus the threat to the planet and civilisation caused in
the first place by the advanced capitalist counties is now to be met by
the victims of this pattem of development -the developing counties -
by bearing a burden three times greater. This imperialist logic of
equality and justice cannot be accepted. India must insist that the
criteria ofper capita emissions must be the basis for a solution.
Any compromise on bot tese issues will only consig te vast majorit
of sufering India' to geater miser and 'poverty. Popular resistance
must be strengthened to ensure that this UA1 govemment does not
succumb to US pressures on both these counts.
Is the Global Recession Over?
C P Chandrasekhar
FIACE ministers of the G8 meeting at Lecce in Italy during the
latter part ofweek ending J une 14 were cautiously optirstic. The final
communiqu noted that i te afCth of eforts at financial stabilisation
and fscal stimulation there are sigs of stabilisation in our economies
including a recovery of stock markets a decline in interest rate spreads
(and) improved business and consumer confdence". But the ministers
cautioned the situation remains uncertain and signifcant risks remain
to economic and fnancial stabiIity".
There were two elements ofthe communiqu that pointed to a compro
mise between the differing perceptions of the US and UK on the one
hand and Germly and France on the other regarding the principal
problems and tasks at hand. The frst ofthese elements was the refer
ence to the persistence ofsignifcant risks" which was not there in the
original draf of the commurtiqu and was ostensibly inserted by those
countries (UK and US) who feel that it is not yet time to decide that the
recovery is here and the stimulus provided thus far has been adequate.
Moreover the mention of encouraging fgures in the manufacturing
sector" that fgured in the draf was dropped since it went against the
evidence that industial production in the eurozone area had falI by21
per cent in April relative to the corresponding month of the previous
year.
LEADING POWERS DIFFER ON EMPHASIS
The second ele1llent of the communiqu of interest is that it pushes for
going beyond thinking ofrecovery and formulating national level exit
strategies" for unwinding the extaordinary policy measures taken to
1 88
respond to the crisis." Te reference here is to the huge budget defcits
and high levels of public debt that many counties especiaIIy the US
have accumulated in the wake ofthe bail-outs and the stimulus pack
ages they have put in place. Though the US and U have played down
this aspect ofthe discussions there is clearly a difference in emphasis
among the leading powers on where te worId economy stands and
what is the immediate priority in terms of action.
The diference hinges quite cIearIy on. the extent to which diferent
sections believe that the worst is over. The reason for unceainty re
garding a potential recovery is that the fgures are yet to point to a
defnitive revival. As ofMay 2009 nearIy two years since the fnancial
crisis broke and a year-and-a-half afer the onset of the glob'al reces
sion the economic scenario remains uncertain if not bleak. The rate of
unemployment in le US which stood at less than 5 per cent in the frst
quarter of2008 had risen to 8. I per cent in the first quarter of2009 and
is estimated to have touched 9.4 per cent in May 2009-its highest rate
for the last 26 years. This possibly explains US pessimism. I is true that
the unemployment rate in the European Union had also risen from 6.8
to 8. I per cent between the first quarters of 2008 and 2009. But the
higher base level may be making the problem appear less alaring to
ruling goverents there than in the US infuencing their perceptions.
Outut growth too gives no cause for optimism. Quarter-on-quarer
growth rates of US GDP (as measured relative to the correspnding
quarter ofthe previous year) had declined sharply in the last quarter of
2008 and frst quarter of 2009 across the G7. This decIine was even
sharper in the U and the EU than the US). The crisis had cIearly not
gone away by the beginning of April despite signs of recovery in the
stock market. The disconcerting element is that this situation prevails
despite huge infusion of funds by G7 govemments. According to one
estimate the US Federal Reserve had by April 2009 ofered about
$12.7 tiIIion in guarantees and commitments to the US fnancial sector
and spent a little over $4 tiIIion in combatingthe crisis. As a result the
federal deficit has risen to more than 12 er cent ofGDP frightening
fscal conseratives who predict the onset of stagf1ation. The big thrust
seems to be over and the recovery is stiII not in sight. What it has
possibly done and even that is not certain is preve
OPTIMISM BASED ON
STILL TENUOUS EVIDENCE
1 89
Despite this evidence relating to the period till the last ful\ quarter for
which numbers are available speculation that the downtum has bot
tomed out and the developed world is on the verge of recovery prolifer
ates. This optimism is based on still tenuouS evidence including evi
dence that the rate of decline of economies is slowing. The most impor
tant of these is that the monthly decline in employment in the US is
dow sharply. J May 2009 nonfann payroll employment fel1 by 345000
whichi arounat average monthly decline overthe preous six
months and wel\ below the close to 750000 fal\ in January this year.
Associated with this fal\ in monthly employment declines is a fal\ in new
unemployment claims. Economist Robert Gordon of Northwestem
University in the US a respected analyst of growth and productivity
terids in the US has found that past recessions came to an end four to
six weeks after new unemployment claims peaked which they have
now done. So he conjectures that the business cycle wil\ find its trough
in May or June (Financial Imes June 3 2009). While these develop
ments are reassuring we should view them in the light ofthe fact that
the unemployment rate is at record levels and new unemployment claims
are still above the fgures they touched in the worst months of the last
recesslon.
A second cause for optimism is that US producers may be reaching the
phase of their inventory cycle where an increase in production is ine
table. By April wholesale inventories had fal\en for the eighth month
running as fnns cut back production to c1ear the excess inventories
generated by fa1ling demand. Having made those adjustents it is ar
gued frms are now in a position where they would have to step up
production especial\y if demand begins to stabilise. J other words the
argument is that since things are so bad they can only get better. But
the fgures do not support even this position. Thus afer seven months
of decline inventories in April fel\ 1 .4 per cent relative to the year be
fore and 6.4 per cent relative to the coresponding mont of the pre
ous year. That was because sales fel\ by 0.4 per cent in April led by
automobiles and parts. Sales of durable goods too were dow 1 .9 per
cent during the month and 23.4 per cent over the year.
190
The third potential cause for corort is the sig that relative to previous
months the dec1ine in production is slowing. The available evidence
shows that the decline in GDP relative to the immediately preceding
quarter which was rising ti11 the first quarter of 2009 seems to have
bottomed out in the US and to a lesser extent in the EU. What is more
this tend seems to be reflected even in the month-on-month annual
growth rates of industial production with the rate of decline in April
2009 relative to the coresponding month ofthe preious year showing
signs of reversing its hitherto continuous increase in the US U and
EU.
Whi1e this third factor may be adequate reason for optimism for some
there are two reasons why we should not read too much into this data.
To start with even if the downtum is touching bottom in terms of the
stabi1isation of the rate of decline the dec1ine could persist and the
economy could bounce alongthe bottom" as some analysts reportedly
speculate. That is there is no statistical" reason why a stable rate.of
dec1ine should automatica11y lead to lower rates of decline and positive
rates of growth in the cotning months or quarters.
Further it is unc1ear whether there would be adequate altemative stimuli
to sustain the recov when the efects of the already implemented
fscal stimulus wane. Govemments could hold back on providing any
fesh stimulus because of arguments of the kind espoused by conserva
tive economists representatives ofthe fnancial sector and even some
European govemments which emphasise the dangers of inflation. If
that happens recover would depend on the retum ofthe consumer to
Ihe market.
But here OO Ihe prognosis is nol a11 OO happy. Fears generaled by the
recession and rising unemployment and the increased desire to save to
make up for the decl ine in the values of accumulated housing and finan
cial assets is encouraging savings even in the US. According to a re
cent estimated of thc F eeral Reserve te net worth ofUS households
had fallen 2.5 per cent or by $1 300 bi11ion injust the first three months
of 2009. This comes on top of the 1 8 per cent fall in the preous year
which was the worst since the Fed began estimating household wealth
in 1 946.The net result is that household savings rates in the US are
rising and consumer spending was fa11ing in March andApril this year.
191
I the event many stiH remain sceptical. The Financial 1imes quotes
Martin Feldstein as saying that it is possible but unlike1y" that the re
cession is over. 1 think it is a more likely scenario that we are seeing
the favourable effects ofthe fscal stimulus" he reportedly said. That
for a while wi11 ofet the general diminished trend we have seen over
the past two quarters but it is a one-shot thing." Put otherwise there
could be more bad news ahead.
Is the World Capitalist
Crisis Over?
Prabhat Patnaik
A impression has got around in this county that the world capitalist
crisis is over. I is no longer font page news in newspapers. One scacely
hears a word about it on television. And now that the Sensex has crossed
the 15000 mark up from 9000 to which it had plunged a few months
ago everything appears fne to the Indian elite which has wasted no
time in spreading the cheerful news around. To be sure the Idian
elite is not alone in ha'ing this perception. An air of cautious optimism
peades even the elites in advanced counties which have been the
hardest-hit by the . crisis. They are .more cautious but optimistic
nonethe\ess.
Much ofthis optimism springs fom the behaviour ofsome fnancial
indicators notably the stok mrkets whose imact on the rel economy
though existent can be tenuous. o the real economy itself the most
optimistic position is that we may be nearing the bottom of te crisis
that things are unlikely to get worse which is very different of course
fom saying tat things ae back to normal". U British prime minis
ter Gordon Brown has taken s
o
lace fom the fact that tough unem
ployment in Britain is rising the increase in unemployment across pe
riods is coming down. Much the same was being said about the United
States until the month of June; but the increase in unemployment in
June was much higher than in May which put aid to even these hopes.
Even on curent figures therefore we cannot say we are at the end of
the decline.
193
THREE NEGATIVE FACTORS
There are three factors moreover each re1ating to the United states
(whose level of economic activity matters the most for the worId
economy) though similar phenomena may be occurring e1sewhere as
weII which militate against the downt itself coming to an end i.e.
which prevent the bottom itself being reached. The frst of these is
wage deflation i.e. the decline in the real earing per worker of the
employed workers themselves. Now the initial drop in the level of
aggregate der.and which triggered the crisis has been getting agga
vated by the decline in employment anyway; but this is further accentu
ated by the decline in the real earing per head ofthe employed work
ers. This tertiary drop in demand compounding the primar drop owing
to the initiaI jolt and te seconda drop owing to the decline in employ
ment wiII contibute to a further prolongation ofthe decIine in the level
of economic actity and employment.
Th second factor is the decline in the level of expenditures ofthe state
goverments in the US. While the federal goverment in the US is
aIIowed to I fscal defcits state goverments are not: when their
revenue drops as it does in a recession their expenditure too drops.
Now even though the federal goverment in the US has Ia massive
fscal defcit most of it has gone for shoring up te banks adding to
their cofers where the money Iies quietly but not generating demand in
te economy. That pa of the fsial defcit which constitutes federal
goverme!1t expenditure on goods and services and which therefore
adds to the level of demand in the economy is quite smaIl not much
more than the cun'ently-estimated decline in the expenditure ofthe state
goverments owing to their obligation to balance budgets; but if this
decIine persists and exceeds anticipations then this fderal fscal stimu
lus is likely to get swamped by the decline in state goYent expendi
tures.
The third factor consists in the fact that' even tis level offederal fscal
stimulus is unlike1y to b sustained overtime. Finance capit as is weIl
kown is opposed to any direct State interention in demand manage
ment: i t prefers sound fnance" i.e. the State balancing its revenue
with expenditure or at the most rnning a smaIl pre-determined mag
nitude of fscal defcit relative to GDP. So even the curent level ofthe
194
fscal deficit which te Obama adminisation is running is anathema
for fnance capital and the large number of conservative economists
and commentators who articulate its positions. The very suspicion that
the bottom has been reached if it gets spuriously confred by say the
unemployment fgure not registering an increase for a couple of months
wiII increase pressure on the federal govemment to cut down its fscal
defcit which wiII once more push the US economy back into a decline.
This is exactly what had happened in 1937 when afer the initial phase
of the New deal appeared to have ended the dedine started by the
Great Depression President Roosevelt was pressurised into cuttng back
the. federal fscal defcit with the result that te US economy plunged
once more into a depression fom which it recovered only through the
resurgence in military spending that marked the onset of the second
world war At present so stong is the pressure for cutting back on the
fscal defcit in the US that even if the bottom of the recession is not
reached president Obama wiII stiII fnd it hard to sustain the tmpo of
defcit spending; any suspicion that the bottom has been reached wiII
make the pressure iresistible pushing the economy back into a decline.
A WHOLE NEW CONJUNCTURE
AII this would suggest tat the crisis in the US is far fom over; and if
so then the crisis in the worId economy too is far fom over. But there
is a deeper reason why the crisis is not over and that is becaue
the crisis is not just a recessionary crisis as is common sup
posed. I fact the curent worId capitalist crisis is such that if it does
not appear in one paicular form then it wiII appear in a differentform.
Recession isjust one oftheforms in which it appears. lfthe recession
abates then the crisis will appear in a differentform namely that of a
sharp inflation affecting in pticular energy and food prices which
incidentaIIy is the form in which it had appeared before the recesion.
le crisis therefre must not be identife with only one particular form;
it nresents a who/e new conuncture. When we look at this con
juncture in its totality then it becomes cIear tat overcoming it within
the parameters of the capitalism we have kown tiII now does not
appea possible. To say this is not to say that pitalism wiII colapse
that never happens; nor is it to suggest tat th crisis wiII necessarily
195
persist in one particular form e.g. that the recession wilI never be over
come. The point being made is that c.apitalism as it has existed hitherto
has entered into a period of peIent crisis fom which the system
ry still emerge throug substtial restructuring (if it does not get
nscended altogether) but only afer a considerble time throulmuch
goping and the creation through such groping of an appropriatepoliti
cal balance of class forces that will carry out such restructuring. 1
short as in the inter-warperiod we are entering into a phase of capital
ism where a major qualitative tansition as distinct fom the mere play
ing out of its immanent tendencies has come on the agenda. Where
that tansition will lead will be decided u1timately by the outcome of
political struggle; but the conjuncture that has brought such a
transition on to the agenda is the crisis.
CHARACTERISTICS OF THIS CONJUNCTURE
What are the characteristics of this conjuncture and why has it come
about? I a modem capitalist economy as is well-kown ifthe level of
economic actity is pushed beyond a point then this gives rise to an
inflationry upsurge. This happens for a variety of mutualIy-reinforcing
reasons: as the relative size of the reserve army drops below some
treshold the workers bargaining stengt improves money wage clair
begin to mount and since capitalists price their products as a rrk
up" over their unit vaable costs inflation ensues. Likewise when the
level of activity increases beyond a point raw rterial ices begin to
climb which again get passedonh rough hiler prices calling forth
higher money wage claims (even to defend the prevailing real wages)
and hence once more escalating infation. This point beyond which an
infationary upsurge ensue ad which 1I0wing Joan Robinsons ter
minology one can call the inflationary barrier" sets a limit to the fea
sible lev of economic actity in a modem capitalist economy. le
actual level of economic actity can be less than this but not above
this in any period if capitalism is to remain viable. Now the conjunc
ture constituting the current crisis is characterised by the fact that
this inflationar barrier" has got lowered i.e. the level ofeco
nomic activit at which an jtionar upsurge will arise has got
reduced. The economy can perform below this leve as it is doing now
in the capitalist world but that constitutes recession. But as it gets out
196
of the recession precisely because the nflationary baier" has got
lowered it would soon get into an inflationary upsurge. Hence it is not
the recession alone that constitutes the crisis or inflation alone; it is
the tota1ity of the councture where getting out of one form of the
crisis entails getting into another form ofthe crisis.
This conjuncture has arisen because on the one hand there is an enor
mous concentration of finance capital lookng around for specative
gains which can move into particular commodity markets whenever
there is a whiff of possible scarcity or of the possibility of creating a
scarcity; and on the other hand the scope for an easy augmentation of
supplies has got exhausted in the case of a number of commodities. l
a whole range of agricultural commodities where production is carried
out by a mass of petty producers the very fact of their impoverishment
under a regime dominated by intemational fnance capital has made
supply augmentation difcult; indeed even simle reproduction on their
part has become difcult as is evident fom the vast numbers of peas
ant suicides in lndia. The withdrawal of State support which they en
joyed under the post-independence dirigiste regime but no longer do
under neo-1ibralism has pushed large numbers ofthem into unviability
where they cannot cope with the needs ofthe capitalist world economy.
ln the case of other commodities 1ike oil the end of the colonial ar
rangement has meant loss of control over this crucial resource by the
capitalist metopolis. Production is now contolled to a signifcant ex
tent by OPEC which no doubt is amenable to pressure by imperialism
but cannot just be dictated to by it. And imperialisms large-scale bid for
re-colonisation entailing a reacquisition of control over this resource
though persistent and continuing has I into rough weather. It is
this conjuncture that constitutes the crisis which must not therefore be
identifed only with its recessionay form.
Finance Capital Reasserts
its Supremacy at G-20
Prabhat Patnaik
THERE was a briefperiod around October 2008 when the supremacy
of finance capital appeared to be under threat. British prime minister
Gordon Brown talked of nationa1isation ofbanks and of a fscal stimu
lus to overcome the crisis both anathema for fnance. Barack Obar
catapulted into the front-runners position in the US presidential race
because of the crisis appeared as a new incamation of Franklin
Roosevelt the author of the New Deal ofthe thirties even though he
himselfwas scrupulously si1ent on how to deal with it. The story that
Obars campaign was fnanced largely by intemet donations each
not exceeding $1 00 by mi11ions ofvoters raised hopes that this presi
dent not beholden to finance capital for his election wi11 be fee to
challenge it hegemony as the bulk of the American population dis
gusted by the shenanigans of fnance wanted him to do. And in the U
General Assembly Third Wor1d countries unanimously demanded a
changed financial architecture for the world economy where neither
the IF in tts old for nor its favourite shibboleths 1ike sound f
nance" libralistion" and stabilisation" (which actually accentuated
crises) would have any place.
That moment has passed. Intemational fnance capital has managed to
regroup its forces. Or more accurately the forces in its favour have
tumed out to be far more formidable than appeared at the time. The
German govemment had never been part of the forces opposed to
fnance anyway its fnance minister even pi110rying the fscal stimulus
plan as crass Keynesianism". But even Obama tumed out to have
been counted wrongly among the oppositional forces. The story about
198
Obamas campaig being fnanced by small donations was a sheer myth.
Wall Street fnded his campaign massively through intermediaries like
Rubin Geithner aI.d.Summers. And the io was duly rewarded upon
his assuming ofce by beirig appointed as the top economics team of
the new administation. Not surprisingly the bank bailout plan that
Geithner has announced is noting short of a scandalous use of public
money to bolster the fortunes of private fnanciers as Joseph Stiglitz
has shown.
Even Obamas fscal stimulus plan has tumed out to be a damp squib.
Ofthe total amount he proposes to spend for reviving the economy a
pa is for supporting the banks. The remainder which is really meant
for stimulating demand comes to $400 billion. Now the crisis which
entails reduced income in the economy also entails reduced tax rev
enue for the state govemments in the United States. The reduction in
tax revenue of the state govemments is estimated to be $400 billion.
Since state goverents cannot Ifscal defcits their expenditure too
must go down by $400 billion. Obamas fscal stimulus package there
fore merely ofets the reduction in expenditure of the state govem
ments having zero net impact as a stimulus for the economy. I would
prevent the aggravation of the crisis that would have occurred because
of the reduction of state govemments' expenditure but it would do
nothing to get the economy out ofthe isis. And the timidity ofObamas
fscal package is due to te pressure of fnance capital that is always
oposed to State pro-activeness in demand management and employ
ment generation (indeed to any State pro-activeness except that which
sees i O interest).
The latest example ofthe assertion of the supremacy ofintemational
fnance capital is the G-20 summit. The talk in the past had been not
only about a fscal stimulus but about a coordinated fisca/ stimu/us
i.e. about a host ofmajor economies simultaneously undeaking larger
expenditures as a means of stimulating demand. The G-20 summit was
deafeningly silent about this proposal. Instead it was reportedly caught
up in a debate between the Americans and the Europeans abotlt which
should have priority regulation offnanciaI markets or fscal stimulus.
Since regulation as such generates no demand and since fscaI stimulus
has in the process been quietly sidelined this means that ay coordi-
199
nated injection of demand into the wor1d economy has been shelved for
now. And as regards uncoordinated individual stimulus since te miti
est capitalist economys stimulus plan amounts as we have just seen to
a damp squib State intervention for overcoming the crisis has been
efectively given the go-by exactly as fnance would have Iiked.
EERIE SIMILARITY
There is an eerie similarity here to what had happened during the Great
Depression ofthe thirties. Then too a proposal for getting the wor1d out
of the Depression through a coordinated fscal stimulus among mor
countries had been put forard by many including Keynes and also a
group of German trade unionists. Had this proposal been accepted
perhaps fascism and war could have been prevented:But the intransi
gence offnance with its insistence on the principle ofsound fnance"
(i.e. balancing budgets) kilIed this proposal heaping massive miseries
upon the working masses ofthe wor1d in the form ofprolonged unem
ployment fascist teror and a savage War. We are witessing a re-run
of that script at least as far as the opposition of finance to a coordi
nated fiscal stimulus is concemed.
The most newsworthy announcement of the G-20 summit was the $1 . 1
trillion package ofhe1p ostensibly for the developing economies. This
he1p consists paIy of an increase in Special Drawing Rights of the
IF which wi1l be distributed on the basis ofthe existing quotas and
partly on support routed through the IF by the major counes. le
most amazing thng about this $1 . 1 trillion is that its exact distibution
across goups of counties is as yettotally u0w. The SoutAfrican
representative reportedly kept asking how much of it would actually go
to the Third Wor1d counties which are the most hapless victims .of the
crisis but Was given te cold shoulder. The general expectation is that
the bulk ofthis fund will go to the former socialist countries ofEastem
Europe and not the primary producing counties of the Third Wor1d
which are witessing massive deindustrialisation to boot. (I any case
ofthe new SDRs amounting to $250 bi1lio which will be distributed on
the basis of existing quotas Third World countries will get very little).
Since these former socialist counties are now members of the Euro
pean Community and have been demanding EC help in the hour oftheir
crisis the G-20 summit has in effect shifted the burden of supporting
200
them from the shoulders of the EC (where Germany was most re1uc
tant to pick up the bi11) to those ofthe G-20.
It is not just that the distibution of the $1 . 1 trillion assistance is un
kown; this distibution wi11 be routed through the IF and wi11 be ac
companied by I conditionalities". The I which in any case was
a dying organiSation owing to the paucity of funds at its disposal whose
stucture and modus operandi had been the object of much criticism
by Third Wor1d counties and whose refor was generally accepted
by most counties as constituting a precondition for its revival (if at all it
was to be revived) for playing a major role in the context of the curent
crisis has now been given a fresh lease of life in i eistingform. In
short the single most pressing demand ofthe Third Wor1d within the
agenda for democratisation of the wor1d fnancial sucture has been
rejected by G-20. This constitutes a most sigifcant victory for intema
tional finance capita1.
THIRD WORLD BETRAYED
This victory was made possible becaus. ofthe total beayal of the
cause of the Third Wor1d by those countries of the deve10ping wor1d
which happened to be represented at the G-20; and among them were
India and Brazi1. Indias role was particularly reprehensible. 1t not only
espoused the cause of intemational fnance capital with much enthusi
asm against the interests of the Third Wor1d and against te general
eforts to democratise the fnancial stuctures of the world economy
such as for instance characterised by the Stiglitz Commission report
but it actually even put up an ideological defence offnancial interests
going beyond countries like Britain in this respect. Prime minister
Manmohan Sing in his speech reprtely even cautione the assembled
de1egates against bank bashing"!
But the G-20 decisions do not by any means constitute the last word on
the subject. The nature ofthe world economic crisis is such that over
coming it requires an attack on the hegemony of intemational fnance
capital. As long as this does not happen the wor1d wi11 continue to
remain sunk in crisis. As in the thirties there might be mild recoveries
but these would again be followed by fesh onslaughts of crisis. The
anger against fnance capital wi11 only increase as a result; and the
201
more the assembled group ofG-20 world leaders ignore this anger the
more it will take forms that by-pass them. Some ofthem will leam to
respect this anger and act to assuage it; others will simply fnd the
ground slipping from under their feet. le current crisis in short is not a
minor hiccup in the fuctioning ofthe capitalist system that will go away
on its own afer a suitable time-interval; it is a defning moment for
capitalism much the way the 1 930s crisis was. Then as now there will
be many more twists and tums in the unfolding sequence of events; the
G-20 meeting constitutes only one of the early incidents in that se
quence.
What it does show.however is the determination of intemational fi
nance capital not to make any concessions even in the midst of a crisis
and the reach it has in making that determination count. Overcoming
the hegemony of intemational finance capital appears at frst sight to be
a relatively small and esoteric demand; but what the reassertion of.its
supremacy by intemational fnance capital has shown is that it is a
transitional demand" in the Leninist sense of immense signifcance.
The Requirements of a New
Reserve Currercy Regime
Prabhat Patnaik
THERE has been much demand of late for a new reserve currency to
replace te US. dollar. Te arguments in favour of such a dernd are
quite powerful: if one nations currency plays the role of a resere
curency in the world economy then this fact confers enorous advan
tages upon that nation which is not fair. I can in efect print money
which other counties are more or less obliged to hold. What is more
the obligation to hold this currency is not a result of extemal pressures
alone; it arises from each nations concem with its own self-inteJest. I
so far as counties already holding significant amounts of resees in
this curency or in assets denominated in it and their nationals hold
sigificant amounts ofwealth in such assets theycan not afford to rock
the boat by refsing to hold more of this currency since any such re
fusal leading to a fall in its relative value would entail a loss ofwealth
for them. The reserve currency country therefore can afford to I
current account defcits wit impunity. Not only would such defcits be
'automatically" fmanced but this very fact would also prevent any spcu
lative attacks on its curency. The reserve currency country conse
quently can aford to \ive beyond its means; it can when the world
economy is not dernd-constrained suck goods away fom other coun
tries to their deiment; and it can even fnance wars by implicitly forc
ing loans out of other countries. What is more the actions of its govem
ment and people deterine the rgnitude of newly created reseres in
the world economy.
The denial of such powers to a single county through the replacement
of the curent regime by an altemative one where the reserve cur-
203
rency is the liability of an inteational body constitutes a step towards
a more democratic global order. It also has the advantage that additions
to the stock of this new reserve curiency and the distribution across
counties of such additions can be decided upon collctively and con
sciously in keeping with criteria of faimess.
SEVERALPROBLEMS
Tere are however several problems with this suggestion. One relates
to the relative value of such a new reserve curency. Even if its re1ative
value is cially pegged to a basket of currencies maintaining it at
that level against the activities of speculators may well prove to be a
task beyond the capacity of the inteational body whose liability it is.
Te second problem re1ates to the possible adverse effect on wor1d
aggregate demand of the intoduction of such a new reserve curency.
And this is what the present note is conceed with.
The reserve cuency counts being in a position where it can spend
beyond its means is what actually rkes it undertake substantial ex
penditure that boosts the level fwor1d aggregate dernd. Ifthis ability
to spend beyond its means is undermined through the introduction of an
altative reserve currency then i actual expndine will be adversly
afected and together with it the level ofwor1d aggregate demand. With
the introduction ofan alterative reserve currency therefore an
alterative arrangement for boosting world aggregate demand mut
be simultaneously introduced.
This point relates to the question ofthe leadership role in the capitalist
wor1d. The reserve curency county is typically the leading country of
the capitalist wor1d such as Britain was during the pre-frst wor1d war
years and the US has been in the post-second wor1d war years. Its
currency being the reserve currency confers upon it the abilit to run
current account defcits with impunity. lts leadership role however con
sists in the fact that because of this ability it is also willing to run
current account defcits vis a vis at least the other major economies
especl1theewly-industrialising economies ofits time. Britain while
runing such a defcit vis a vis the newly-indusialising countries of i
time did not have an overall current account defcit because of its
economic re1ationship with the co\onies and its monopoly over shipping.
204
Te US the leading capitaIist county in the post-colonial worId does
not enjoy such advaritages: while running a deficit vis a vis the other
major counties including especiaIIy the newly-indusiaIising ones it is
forced to have an overaII curent account defcit that makes it the larg
est borrowing economy of the worId. While this is a major source of
potential problems for the world economy the fact remains that any
efort on the pa ofthe US to curtaiJ its curent account deficit within
the prevaiIing trade regime would reduce the level of aggregate de
mand in theworId economy.
NEED TO BOOST WORLD DEMAND
Hence while overcoming the unfaimess associated with one coun
the US assuming the leadership role the need for an altemative more
coIIective arangement for the discharging ofthis leadership role can
not be overIooked. If one aspect of the leadership role namely provid
ing the reserve curency is to be diferently organised then the other
related aspect of the leadership role namely boosting worId demld
has also got to be differently organised but organised nonetheless.
There are two basic ways in which in a worId with an altemative re
serve curency arrangement the level of aggregate demand can be
maintained. One is to boost the value of the Keynesian multiplier at the
worId level so that even ifthe original demand stimulus arising from
expenditures undertaken in the US economy weakens its adverse ef
fects on the world output and employment are counterbalanced; and a
simple way of increasing the value of this worId multipIier" is to force
surpl us countries either to reduce their surpluses by boosting their do
mestic absorption or to recycIe these surpluses as gants to the less
developed economies. A suggestion for doirg so with regard to incre
mental surpluses arising fom fiscal stimuli in the context ofthe crisis
was also made. The point is that any recycling ofsurlus. whether
total surplus or incremental surplus. boosts the value ofthe Keynes
Kahn multiplier at the level ofthe world econom. in the sense that
for any given vector of autonomous expenditures undertaken by coun
tries it raises world output and employment.
The other way to boost worId aggegate demand against the adverse
impact of the intoduction of a new reserve currency is to increase the
205
original stimulus itselfupon which the Keynes-Kahn multiplier oper
ates. This can be done through the placing of purchasing power grtis
in the hands of the less developed counties of the world through a
system of grants. These can be an earmarked portion each year of the
addition to the stock ofthe newly created reserve currency. Of course
this earmarked portion will need back-up in the form of extra holdings
ofthe rjor currencies ofthe wor1d; but the interational body creating
this new reserve curency can obtain the requisite extra amounts of
maj or curencies for providing this back-up.
Thus along with the new reserve curency arrangement there should
be a handing over of purchasing power grtis to the poor counties
eiter through a recyc\ing of surpluses ofthe surlus counties or through
the printing ofadditional money by the interational body creating the
new reserve curency or both.
What exact rules shod be fol\owed with regard to both these ways of
boosting wor1d demand can only be determined through experience.
But the need for boosting aggregate demand as an accompaniment of a
new resere reglme remams paramount.
The Economics of N ew Phase
of Imperialism
Prabhat Patnaik'
1. The process of capital accumulation can be conceptually envisaged
as occurring in two distinct and alterative ways. 1 shall call the frst of
these accumulation through expansion". Capital exists at any time in
numerous large and small blocs. w accumulation occurs throulan
expansion of each of these blocs though admittedly at very different
rates and without displacingproduction outside ofthe capitalist sector
(whether State production or pre-capitalist production) ten we have
accumulation through expansion". Mainsteam" gowth theory in all
its vrsions sees the process of accumulation clusively as accu
mulation through expansion". Marxian economics too recogizes that
accumulation over certain stetches oftime may take the predominant
formofaccumulation through expansion"'. As distinct fom this how
ever one can visualize an alterative process which 1 shall call accu
mulation through encroachment". Here certain blocs of capital grow
through the displacement (meaning either expropriation orpurchase at
throwaway prices" or snatching away the space) of other blocs or
through the displacement ofpre-capitalist production or through the
displacement of State sector roduction or through the sheer appro
priation of common resources tat have hitherto not fored pa of
private property.
To be sure these two processes are never fully separate in concrete
terms. Ideed one of Marxs basic propositions (Marx 1978 584-9)
was that the processes of capital accumulation of an increase in the
scale of prouction and of"centaliztion of capital" (of which the gowth
of one bloc of capital through the displacement of other blocs is an
207
important mechanism) were intertwined and mutually-relate processes
so that accumulation through encroachment" in the sense of cen
talization of capital" at any rate was always round the corer even
when accumulation through expansion" happened to be occuqing.
Encroachment through centralization" in other words was an integral
pa of the accumulation process .. Rosa Luxemburg (1 963) went even
further to argue that ncroachment " on the domain 01the pre-capi
talist producers was at aJl times an integral pa of the accumulation
process. These two phenomena namely encroachment upon the do
main ofthe pe producers and encroachment upon the domain of the
smaller capitalists have in any case a family resemblance between
them which Marx (1 978 71 4) had himseJf highlighted (though
unlike Luxemburg he saw the two phenomena as temporal1y separate
the frst being confned to the period of the primary accumulation of
capital").
But even though accumulation through encroachment" in the inclusive
sense ofthe term is always an integral pa ofthe accumulation pro
cess so that the pure reign of accumulation through expansion" is
rare and at best transitory a conceptual distinction between the two is
useful. And a crucial leature 01the new phase 01imperialism is a
vast increase in the relative importance 01 'accumulation through
encroachment ". To say this is not to claim that the more familiar phe
nomena such as expansion of the existing capital stock fnanced by the
f0w ofprofts technological progress embodied in new equipment or
innovations of altogether new spheres of production have ceased to
exist; it is mereJy to assert that alngside these familiar phenomena
(which in any case under1ie normal" centalization) there has been a
veritable upsure ofaccumulation through encroachment".
All over the capitalist world and especially in the third world disin
vestment" of State sector equit and privatization" of State sector
assets invariably at throwaway" prices is a pronounced phenomenon.
This is nothing e\se but private enrichment at the expense ofthe State
or private accumulation through an expropriation of State assets. Like
wise al1 over the capitalist world especially the third world public utili
ties like water and energy and public provisioningof social services like
education and health have increasingly become domains ofprivate sector
208
operation and hence provinces of private accumulation of capital. Min
eral resources the contol over which had been wrested by third world
States after de-colonization through bitter struggles are now once again
passing under the control ofMultinational Corporations the most clas
sic example ofthis being oil. Agriculture everywhere is being opened
upo multinational seed and marketing companies. Through a variety
of means ranging fom contact faring" (under which the peasants
get tied to MNCs); to ouight expropriation ofland; to purchase ofland
at throwaway pces" fom peasants reduced to penury under the
twin impact of higher input prices (more generally the withdrawal of
State support) and reduced outut prices; to the reduc!ion of peasants
to the status of inferior tenure-holders through the process of entap
ment in debt; through all these means agi-business catering to the
demand ernating from the advanced capitalist counties is displacing
peasant agriculture. Likewise the removal of protectionist barriers
erected by the third world nation-State is leading to an expropationof
small capitalists unable to withstand competitio of irorte goods prc
duced by the MNCs. And everywhere cmmon resources like forests
or water or pastures or fallow land under common use are increasingly
being taken over as private property. One can reel of examples of
each of these phenomena fom every coun; and they all fall under
the rubric of accumulation through encroachment" whose decisive
andpeasive emergence is a hallrrk of contemporary imperialism.
2. This burgeoning ofaccumulation throu encroachments intum
the direct result of the pursuit of neo-liberal" picies. N eo-liberal
ism" operates in this respect in two distinct ways. The frst way which
is much written about is the pursuit of policies that remove resictions
on the movement of goods and capital across borders. Trade liberal
ization" ousts srll domestic producers fom the market a!d generally
engenders domestic de-industializtion" (in the sense of increasing
unemployment throug shrinkng domestic industial activi
t)
;
and liber
alization of capital fows allows MNCs to buy up domestic producers
through a combination of carrot-and-stickmethods. The second way is
through the imposition ofdeflationary-policies" especially on govem
ment expenditure as part ofthe neo-liberal agenda. This by negati
209
global scale a shif in the terms oftade against the peasanand third
worId primary commodity producers who become easy preys for ex
propriation and a roIling back of the State sector which becomes in
creasinglyprivatized and whose domain gets opened up as a province
of private accumulation2 I short deflation is accompanied by accu
mulation through encrochment.
Tis defation needless to say is not confned to the third worId; it is a
global phenomenon. And the main driving force bhind it is intemational
fnance capital which has emerged in an aItogether new form in the
recent years. The global tendency towards the adoption of deflationary
policies has often been caIled a retreat ofthe State". This is a misno
mer: what we are witessing is not a reteat of the State" but a change
in the natue of its intvention fom intervention caie out in its guise
of a supra-class entity for the ostensible beneft of the people as a
whole" to intervention carried out in defence ofthe interests of inter
national fnance capital with the support of the latters local compo
nents which increasingly encompass the bulk of the large bourgeoisie
upper bureaucracy and a coIlaborationist globalized" elite.
Since the term fnance capital" was used extensively around the time
ofthe frst worId war by a host ofwriters like Hilferding Hobson d
Lenin it is worth emphasizing that contemporary fnance capital differs
fundamentaIly fom what those witrs had discussed (notwithstanding
the diferences among them)
.
First it has an overhelmingly speca-
tive character. This is diferent fom the fnance capital" ofthe earlier
period which was seen as the coalescence ofbank and indusial capi
tal (Lenin 1977 664) oras capital contoIled by banks and employed
byindusalists (667) and hence by implication puui 0etive
dictate by the fact of this link with indusy Secondly its behaviour is
noecssarily related to certain perceived statec interests specifc
.
and excIusive to the nation of its origin because of which caIling it
intemational" is more appropriate than identifing it in its different
fagmented forms as Geran" British" or American".And thirdly
it operates not in a worId broken up by inter-imperialist rivalry contib
utng to a furthe promotion and consolidation of such rivalr but rather
in a worId where such rivalry is muted and the ver intemational"
character of this fnance capital is inter alia an important factor behind
21 0
this mutedness (since it wishes to operate over an entire undivided
worl.
At the same time however any focus on fnance capital" no rtter
of what sort ofen conjures up an entity which is separate and de
tached fom the world ofproduction so that focussing on this entity
gives the impression as ifthe other entities like MCs have somehow
become of secondary importance. This impression is erroneous. The
fnacial stucture is a superstucture on capitalism not detached fom
it but enmeshed with it putting its own imrint upon it so tat the MCs
for instance do not become secondary but themselves become
fnancialized" imbued also with the desire for speculative gain. I ad
dition they also gain fom te opling up ofthe world to the fe flow of
commodities and capital throu1 the process ofaccumulation through
encroachment". In short te reIevant distinction at the top ceases to be
one between industy and finance or between produtive capital and
speculative capital or between entepreneurs and rentiers. The possi
bility of accumulation through encroachment" (including at the ex
pense of small domestic capitals within the metopolis) brings about a
commonality of purpose among all of them which overcomes these
disCtiOns.
At the same time tere is a palpable.slowing dow ofthe growth ofthe
world economy on account ofthe global pursuitof deflationarypolicies.
Ideed this slowing down is precisely the oter side ofaccumulation
through encroachment". The period ofprotacted post-war boom (the
so-alled Golden Age of CapitaIism") was by contast a period when
such encroachments wee coraratively limited a prominent State sector
made its appearace everywhere and tird world economies behind
protectionist bariers recorded rates of gowth unprecedented in their
recent history. The universaliztion ofneo-liberal policies ad the ubiq
uitous pursuit of defation which refected the rise to prominence of
inteational fnance capital changed all that. Keynesian demand man
agement policies which underlay the protacted post-war boom presup
posed national capital contols (a necessary condition for the activism
ofthe nation-State in rtters of aggegate demand output and employ
ment) and a suppression of rentier interests itin the nation (Keynes
(1 949 376) had asked for the eutanasia of the rentier" whom he
211
characterized as the functionless investor"). The conjuncture within
which Keynesian demand management policies fourished (marked by
greater political assertion by the working cIass) and the global regime
produced by this conjuncture (the Bretton Woods system) ensure the
satisfaction ofthese conditions. But the emergence ofte new for of
intemational fnance capitl duringthe GoldenAge" period itself con
tibuted inter alia to a cange in conjuncture.
I retospect the period of the post-war boom must be seen as an
aberration in the noral" functioning of capitalism brought about by
the very substantial threat posed in the pst-war context by sociaIist
working class and third worId nationalist pitics to the very survival of
metopolitan capitaIism rather than as a new knd ofnoral function
ing" as so many writers at the time had imagined. With the change in
conjuncture and the subsidence ofthese threats capitalism resumed its
policies ofsound fnance" te orthodox role ofthe State" and 'accu
mulation throu1 encroachent" ofwhich the palpable faII-out today
arehi1 levels ofunemployment and an open aggessive drive towards
a re-oloniztion ofthe third world with the help ofthe local coIIaborat
ing bourgeoisie.
3. Why it ry be asked does capitalism adopt sound fnance" as i
normal State polic le usual answer to this question is given in temtS
of the antthy 01jnance capital towards an interventionist State
ensuringhi1 levels ofactivity. The fact that intetional fnance capi
tal is in a dominant position in the contemporary worId economy can
then explain both whysound fnance" has come back into vogue afer
te Keynesian interIude and also why it is so efectiveIy enforced:
fnance being interational if a nation-State chooses to ignore 'ts
caprices andjettisons sound fnance" and deflationism in pursuit of
higher employment then fnance wi1l move out ofthe county precipi
tating a liquidit crisis and bringing the govemment to its kees. lis
fact keeps nation-States in thraldqm to the caprices of intetional
fnance capital. But then the basic question remains: why does fnance
capital have this antipathy at aII and oppose Keynes-style interention
ism?
Three obvious answers can be given to this question: frst a high level
of actity brings in its tain the fear of infatiQn and exchange rate
21 2
depreciation which in a wor1d typical1y characterized by non-indexed
rates of ret on fnancial assets fightens speculators. Given this fact
it is nt surprising that they feel comfortable with lower levels of activ
ity. Secondly cuts in State expenditures and fscal defcits are typical1y
accompanied by disinvesteht and privatiztion ofState assets which
can then b bought up for a song" by rentiers and fnancial interests;
and the same is tue of the assets of small capitalists too. lis fact also
underlies fnance capitals preference for deflationary policies as op
posed to Keynes-style expansionary ones. Tirdly as Kalecki (1943
1971) had argued long ago capitalists in general do not want the level
ofactivity and employment to become toohi1" for then te workers
wil1 get out of hand" and te sack wi11 10se its meaning". And they
certanly do not want a hi1 1evel of activity to be brout abouttough
State investment and hence through the existence of a State sector
since the social legitimacy ofcapitalism gets undermined by the
existence and functioning ofa State sector. If this is tue of capital
ists general1y then it is infnitelymore tue ofthe fnancial interests who
constitute in Keynes phrase functionless investors" with very teuous
social 1egitimacy to start with anyway.
But the opposition of fnance capital alone cannot explain capitalisms
preference for defationism especially when indusial capital no mat
ter how much it ideologicalIy dislikes State actism in matters of em
ployment stads so much t gain fom it (at least unti1 a level of em
ployment is reached where te workers get out of hand"). Tere is
however a powerful additional factor which also contributes to
deflationism. Let us now't to it.
A capitalist economy cannot fnction without a stable medium ofhold
ing wealth. I an idealized textbook picture of isolated national
economy this role is perfored by mone backed by the State. But i
the concrete wor1d economy te money of one particular economy
typicalIy the most powerful capitalist economy of te time is chosen to
constitute this medium. Its de jure stability used to be assured but not
anY longer by linking it to gd which has histrical1y been te most
favoured medium ofwealth holding; but its de facto stabi1it is assured
whethernow or earlier by ensuring inter alia tat comm.ty prices do
not rise inordinate1y in terms of it. Tis requires frst that te domestic
213
'orkers i n the leading economy must not get too strong" to precipitate
a wage-price spiral on their own and secondly that primary commodit
prics must be kept in check so that no wage-price spiral is precipitated
on this score. This latter requires not just contol over raw material
sources but additionally contol over wor1d demand through defla
tion3. I the colonial period this defation was specifcally targeted to
wards the colonies and third wor1d economies4. I the period ofhege
mony ofintemational fnance capital this defation is general encom
passing both developed and third wor1d economies and excluding only
the leading economy itself (at present the U .S.) whose curency being
as good as gd" places it underno obligation to pursue defationary
policies.
For this reason defation and sound fnance" have always been a pa
of the baggage of capitalism. The question is often asked: why do the
govC ents of metopolitan capita1ist economies choose infation con
tol as an objective over higher employment5? The answer is that they
really have no choice in the matter: infation control is essential for the
stabilit of the wealth-holding medium and hence for the stability of
capitalism; if in the process of achieving price-stability much higher
levels of unemployment are generated then they simply have to be
accepted and imposed upon the working class.
The caprices ofintemational fnanc! capital therefore fmd spontaneous
expression in the policies being imposed all over the world by the lead
ing capitalist economy of our time. This action ofthe latter on the other
hand is not a whimsical or capricious one. It is to presere the value of
the wealth of a vast number of wealth-holders including citizens of
other capitalist economies. It commands support therefore even in
economies being defated both because te financial interests located
within these economies prefer defationary policies and also because
the preservation ofthe value ofwea1th through the preseration ofthe
value of the leading currency is important for all. The leading economy
in this sense acts as the champion of the interests of intemational f
nance capital of all its aliquot pas" located within the various na
tional economies including those ofthe third wor1d eVen though the
result of its actions is high unemployment aggessive re-coloniztion
. relative stagnation ofthe wor1d economy and
21 4
4. We have so far highlighted certain features of the new phase of
imerialism by contasting it with the period ofKeynesianism and S\lg
gested that it entails a throwback to te more noral" pre-Keynesian
capitalist policies of deflation accumulation through encroachment"
and colonial-style predatoriness6 Let us now tur to a major
dince between the pre.Keynesian period and the new phase of
imialism.
We talked earlier of the fact of the currency of the leading economy of
the capitalist world in a paicu\a historical epoch being considered de
facto ifnot dejure as good as gd" and constituting for this reason
a stable mediu ofwealth.holding for the capitalist world as a whole.
For an economy and hence its currency to occupy this position it must
have superior military and hence economic might. Notwithstanding
this might however it invariably experiences afer a certain stage a
current account dcit vis a vis the other major capitalist econo
mies. A important condition for the stabi\it ofte capitalist system is
that when such defcits arise the leading economy must lear to live
with them. If it did not persist wit having such defcits and thereby
accommodating the products of the other major capita\ist economies
within its own (and i satellite"s) market then the growthprospects of
these economies would be damaged leading to intensifed protection
ism stuggle among capita\ist powers disruption of te inteational
monetary system and an enve\oping ofthe capita\ist world in serious
economic and po\itical crises. Indeed the leading role" of the leading
capitalist economy consists precise\y in its williness and ability to
tolerate such persistent defcits vis a vis the other major capitaist econo
mies and thereby keep the system as a whole going.
Jritain had continued to have large tade and current account defcits
vis a vis Continental Europe throughout the late nineteenth and early
twentieth centuries and with te U.S. in the pre-frst world war period
(when the U.S. started repaying its debt); and this wil1ingness on her
part to persist with the curent account defcit vis a vis these newly
indusalizing" economies ofthe time was a condition for the continua
tion of the diffusion of capitalism to these new centes for the suival
ofthe Gold Standard and for the sustenance ofte long late-Victorian
and Edwardian boom. Likewise the U.S. has for several years been
215
running a persistet current account deficitnotjust with the other major
capitalist counties notjust with the newly industrialing counties" of
today like China and East Asia but in fact with the entire rest of the
wor1d taken together. And herein lies the difference.
Whi1e running a persistent current account deficit vis a vis the mor
capitalist economies of the pre-frst wor1d war years Britain did not
bui1d up any debt against herself. On the contar she used her colonial
possessions Iike Idia against whom she built up a contrived current
account surp/us not only to settle her current account defcit vis a vis
the major capitalist economies but even to make substantia/ capita/
eports7 These capital exports were to the temperate regions ofWhite
settlement vis-a-vis which the tropical colonies like India had substan
tial current account surpluses.
The two main fors ofthe contrived" current account surplus which
Britain had visavis Idia were: the drain ofwealth" (so called by the
anti-colonial economists in Idia at the start ofthe twentieth entury) or
the impounding and transfer to the metropolis of a pa of the surplus
value produced in India under the head Home Charges" which were
supposed to represent payment for the import ofgood administration"
by India; and the deliberte keeping open" ofthe Indian market for the
import ofBritish texti1es even at the expense ofjobs ofIndian artisans.
(In fact Bri tains current account surplus vis a vis India kept
growing until it assumed enorous proportions during the first wor1d
war but the changed correlation of forces after the war entailing
inter a/ia a massive Japanese thrust in the Idian market apart fom
the growth of Indias own industial sector closed this option for
Britain and was a major factor behind the breakdown ofthe Gold Stan
dard and the instabilitie oqhe inter-war period culminating in the Great
Depression.8)
The U.S. by contast having no colonies to drain" surplus away from
is sinkng into debt. Its current account deficit is not just vis a vis the
rjor capitalist countries or vis a vis the newly-industia1izng" econo
mies oftoday; it is vis a vis the rest ofthe world as a whole.
Of course if the rest of the wor1d were to be wi11ing for ever to fnance
the current account deficits of the U.S. by simply adding to its dollar
21 6
reserves (as several Asian economies notably China have been do
ing) then the U.8. should have little cause to worry about this growing
debt. But dollar reserves ear a pittance and sooner or later the holders
of such reseres would wish to tade them for more lucrative American
assets. Allowing such a shif would entail a denationalizton" ofAmeri
can assets which the U.8. 8tate would be opposed to; on the other
hand not allowing such a shift would jeopardize the position of the
dollar and plunge the U.8. economy and indeed the system as a whole
into a profound crisis. The U .8. therefore cannot be unconceed about
its gowing exteal debt. But each of the policy options avilable to it is
faught with serious consequences.
1f it curtails its curent account defcit by defating its own economy (it
has been under no compulsion as yet to defate for the sake ofap
peasing interational fnance capital since its curency being consid
ered as good as gold" puts it on a different footing fomother capital
ist economies) then it will precipitate a domestic as well as a global
recession. 1f it curtails this defcit by imposing protectionist measures
then the entire tade and fnancial regime that has been bui1t up of1ate
wil1 become unsustainable which again will threaten the economic and
pitical stability of capitalism. I cannot also curtail this defcit by de
preciating the dollar since apt fom being difcult to achieve in a
wor1dwith market determined elchange rates" this wil1 induce infa
tionary pressures and entail wealth losses both ofwhich wil1 jeopar
dize the position of the dollar as the reserve currency and threaten
the stability of the system as a whole. Not surprisingly therefore it is
trying to achieve the same end of reducing its curent account defcit
by coercing Asian economies like China to revalue their currencies
upwards.
I a wor1d characterized by deflationary goverment policies where
fscal defcits except in the leading country are eschewed any such
revaluation ofexchange rates amounts however to solving the
problem ofthe leading count by ercing a reduction ofactivit
in the revaluing economies. The point is obvious: imagine a wor1d
with only two economies the leader" and the other". Using sub
scripts 1 and 2 respective1y for these two economies since
(1-8)
1
(8-1)2
21 7
where the l.h.s. i s the current defcit of economy 1 a revaluation of
curency by 2 reduces the net export demand for its products and hence
output and savings. As a result the r.h.s. is reduced which in t means
a reduction in the l.h.s.; that is the net borowing ofthe leading economy
is brought down with no reduction rather on the contrary an increase
in its activity through the imposition of a reduction in activity in 2. The
leading economy therefore reduces its borowing compared to what it
might have been otherwise witesses an ncrease n ts activity and yet
ensures that wealth-holders who hold ther wealth in its currency or
currency-denominated assets experience no actual capi losses. (True
the value of the other currency has gone up relatively but the value of
the leading curency in ters of commodities has not gone down as
might have happened ifit had depreciated instead ofthe othe currency
appreciating). It is not surprising therefore that the U .S. is recommend
ing currency apprecation to the Asian economies in particular with
whom t has substantial current defcits.
Such appreciation however would convert the curent global defation
into a veritable recession. The difference between the pre-frst worId
. war years and today consists therefore in this: unlike in that period
when the lead!ng capitalist power could draw on the expropriated sur
plus value of colonies to offset its own current account defcits vis a vis
the major capitalist powers and hence keep the.system going today the
leading c
F
Pita1ist powers current account defcits are vis a vis alI goups
of counties since it has no colonies ofthat kind to draw surplus values
fom; and even a re-coloniztion ofthe third worId is unlikely to yield a
drain of surplus value" on the requisite scale (and might instead be
come an ulcer" like Iraq has become for the U.S.). Manknd has pro
ceeded beyond the stage where old-fashioned colonial drain" of the
kind that the British imposed on India can be caied out with impunity.
What this means is the folIowing: the system can be kept going at its
current low growth rates but a price for it has to be paid in the for of
growing U.S. indebtedness. If the latter is to be curtailed then currency
appreciations may have to be imposed on a host ofunwilling econo
mies and even if they do succumb to pressure the global deflation
would t into a veritable slump. Even ifthe leading economy is able to
insu
218
system as a whole does not get engulfed in a crisis. The new phase of
imperialism in short has brought the system to the brink of a major
CS1S.
5. The vew that the new phase of imperialism is associated much
.
more than before with accumulation through encroachment may be
accepted by many but its implications are not always understood. AlI
accumulation as M had argued is associated \ith the growth of
pover if for no other reason then at Ieast owing to the fact that an
enlargement of capitaI would necessarily go hand in hand with an abso-
Iute enlargement in the size ofthe reserve army; and the reserve army
above all is the site for poverty and destitution. But when accumulation
takes the form to a pronounced degree of accumulation through en
croachment then the growth of poverty which accompanies the pro
cess of accumulation must be even more serious. And yet what is re
markable about te new phase ofierialism is tat itjustifies te adoption
of neo-liberaI policies which is a euphemism for bringing countries un
der the hegemony of intemationaI fnance capitaI in the name ofelimi
nating povert. State sector assets are privatized in the lame of im
provng efciency" which is supposed to usher in faster growth and
eliminate poverty; State assistance to the peasantry is done away with
in the name ofmaking the peasantry adjust betler to the market oppor
tunities opening up so that it can experience higher gowth and hence
reduce povey; deflationary policies are imposed in the name of accel
erating private investment and hence gowth in the economy which
would supposedly impact favourably on poverty: Wreductions are sup
posed to attract foreign investment and promote enterprise while a fs
caI defcit is supposed to crowd out" private investment. Ideed the
entire obsession with the stock market is justifed by the cIaim that
market sentiment" must be buoyant for high growth to occur and for
pove" consequently to go down.
This entire line of argument is based on faIsehoods. Not only is there no
positive association between favourable market sentiments" and higher
investment and gowth (the theoreticaI link between the two in any
case had been demolished by the cognition of the role of effective de
mand) but what is more when the growth process is the fall-out of
accumulation through encroachment the cIaim that higher growth re-
219
sul ts in povey reduction becomes a baseless one. If Latin America
and Africa where even the gowth claims are extremely modest pro
vide c1assic illustations of the poverty-accentuating effects of neo
libral policies Idia to does precisely the same notwitstnding claims
ofhigh growth in her case under the neo-liberal dispensation.
Just one fgure would suJce to make the point. The proportion ofthe
rural population in India which had a consumption level of less than
2400 calories per person per day was 75 percent in 1 999-2000 com
pared to 56 percent according to simi1ar data in 1 9973-74 (neo-liberal
picies were intoduced in India from 1990-91 onwards). Even ifwe
take the FAO recommended bare minimum necessary consumption of
1 800 calories per person per day then while there were only three
states in 1 999-2000 where more than one-third of rural population could
not even meet this minimum the number of such states in 2004-05 has
increased to eight. The accentuation of rural poverty in India during
precise1y the years of the neo-liberal regime when growth rates are
claimed to have been rerrkably high underscores the vacuity ofthe
arguments justifing neo-liberalism in the name of fghting poverty.
ut t is not only in the mattr ofpoverty that the new phase ofimperi
alismperpeates an ideological faud; the very theoretical premises on
which the policies it imposes are argued are illegitirte. And yet these
false premises are asiduously promoted everywhere through the teach
ing and research in the discipline of economics with the backng ofthe
goverents of the major capitalist economies of the F and the
World Bank and of the inherent conservatism which the
professionalization ofthe discip1inc brings n its wake. The new phase
of.imperialism converts economics fom a scientifc discipline to an
ideological tool for imperialist hegemony. Al1 the measures which it pro
poses in the name of efciency" promotion of growth and pove
removal are based on the acceptance of Says Law and hence the
premise of the impossibility of a defciency of aggegate demand. The
defationism imposed by te very same policies which presume this
however serves to perpetrate and perpetuate this very defciency of
aggregate demand.
6. The new phase of imperialism on the one hand tums large segments
of the third world bourgeoisie into col1aborators. I several of these
220
counties the stuggle for decoloniztion had been fought under the Iead
ership of the domestic bourgeoisie or proto-bourgeoisie which after
independence had tied to pursue a path of relatively autonomous capi
talist development. While aIIying iteIfwth domestic landlordism while
corromising with the big capitalist powers it hadnonetheless retained
a degree of autonomy. Using the post-colonial State to promote capital-
ist development and pursuing non-alignment in foreig picy which
enabled it to use the Soviet Union to keep imperialist pressures in check
it had managed to adhere to this path wit a consistency which misled
even an acute observer like Kaleck (1972) into believing that such
regimes (which he chacterized as intermediate" and mistakenly
thought were being led by the petty bourgeoisie) were a durable phe
nomenon ofte contemporar world. But the inteal contadictions of
such regimes combined with the coIIapse of the Soviet Union and the
emergence of inteational fnance capital keen to prise open thif/i world
economies altered the perspective ofthe third world bourgeoisie. From
a position of relative autonomy it moved towards geater coIlaboration
with imperialism; and fom a dirigiste economic stategy it moved to
embrace neo-liberalism. The hiatus was no longer between the third
world nation and irerialism as was the case during and foIlowing the
stuggle for independence but between imperialism with its local bour
geois collaborators on the one hand and the mass ofworkers peasants
agcultual labourers pettproducers and smaIl capitalists on the other.
Perhaps te most signifcant feature of the new phase of imperialism is
the squeeze it imposes on the rural economy of the third world coun
tries where the bulk of the population of tese counties lives. I is this
fact which also provides the principal source ofresistance to imperial
ism in its new phase.
Notes