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Mainstream, Vol XLVIII, No 26, June 19, 2010

Powerful Exposition of the Western Economic Model’s Instability and Inadequacy

Sunday 20 June 2010, by B P Mathur

BOOK REVIEW

Global Economic Crisis—A People’s Perspective: Fiasco of Neo-liberalism; Alternative Survey Group; Daanish Books, Delhi; 2009; pp. 257; price: Rs 450.

Margaret Mead, a distinguished social scientist, had observed that “A small group of thoughtful people could change the world. Indeed, it’s the only thing that ever has.” It is this spirit that has inspired a group of dedicated scholars to bring out uninterruptedly for the last fifteen years an Alternative Economic Survey, questioning the direction of the government’s economic policies, under the aegis of the Alternative Survey Group (ASG). The Group, under the leadership of Prof Kamal Nayan Kabra, has now brought out a very perceptive and timely book titled, Global Economic Crisis. The authors include distinguished scholars such as Prof Arun Kumar, Prof V. Upadhyay, Prof Rajinder Chaudhary and several others. The book questions the current neo-liberal economic philosophy under which power and prosperity remain concentrated in the hands of a few, while the vast majority of people particularly in the developing world are trapped in poverty and deprivation. The book calls for a change in the prevailing economic order under which the society’s resources are cornered by a few powerful private, family and corporate, empires who misuse them for their own selfish needs and deprive the masses of their legitimate share in the national wealth.

The global economic crisis, which started in 2008 with the USA as its epi-centre and whose contagion effect has spread all over the world, including India, has led policy-makers to abandon the philosophy of free and unbridled markets. In order to revive the economy, the USA, Britain and other developed countries have poured billion of dollars of public money into the economy and have reverted to Keynesianism as an economic ideology. The state’s direct intervention in the economy is in direct opposition to the ruling economic philosophy of the last three decades, which was characterised by an ideology of free markets, deregulation, liberalisation, privatisation and globalisation with the state exercising minimal interference in economic activities. The philosophy derived its inspiration from what is known as the Chicago School, whose chief protagonist was Milton Friedman and was powerfully advocated by World Bank, IMF and WTO. The ideology, known as the Washington Consensus, was given practical shape by Ronald Reagan in the USA and Margaret Thatcher in the UK in the 1980s when they came to head their respective governments. The current global economic meltdown has exposed the hollowness of the philosophy of unfettered capitalism with its belief in free and unregulated markets.

The philosophy of free markets led to deregulation of the US financial system which saw explosive growth. Its hallmark was securitisation under which the investment banks created a variety of new and innovative products. They pooled asset-backed securities, divided the pool into risk tranches, added a dose of leverage, and then repeated the process several times over. The derivative market grew at a stunning pace and stood at $ 596 trillion by December 2007, eight times the size of the real economy. Warren Buffet, the world’s most successful investor, had warned that the derivative markets are weapons of mass destruction. A little known investment device, called ‘credit default swap’, had spiralled from under a trillion in 2000 to $ 58 trillion in 2007. As countries abolished foreign exchange controls, there was massive trading averaging $ 3.2 trillion a day. In the year 2007 the total amount of currency trading stood at $ 1168 trillion, seventeen times the world GDP. The foreign exchange was not bought for the purpose of spending it in the country where it is a legal tender, but for reselling it, swapping it, or taking a bet on its future.

The innovation of modern finance generated great profits for its participants. The faster the money went round, the larger the financial sector loomed in the rich countries’ economies. The share of financial-service industry’s profit in the total American corporate profit, which was around 10 per cent in the early 1980s, jumped to more than 40 per cent at its peak, before the downslide began. Yet all the profit was cornered by a handful of people at the top, creating vast inequality in the society. From the 1930s to the late 1970s the wealth disparities in developed countries declined sharply, but the globalisation of finance reversed this trend. The top 0.1 per cent of the Americans earned 77 times of the income of the bottom 90 per cent in 2006, compared to 20 times in three decades from 1947 to 1979. Between 2000 to 2008, while the GDP per capita grew by 10 per cent, the median household income declined by four per cent. The chief executives and top managers of the financial companies and MNCs secured for themselves fabulous salaries, bonuses and incentive payments which had no relation to the profit of the company. Horrific stories of their drawing astronomical payments running into millions of dollars and maintaining lavish lifestyles with private jets and palatial villas at exotic holiday destinations, appeared in the press everyday. The bankers and fund mangers were not doing anything useful, they were simply shuffling money around to nobody’s profit but their own. It was pure greed that was driving top corporate managers in America with disastrous consequences for the economy.

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The authors of the book point out that economic instability is built into the capitalist market economic system. Arun Kumar and Rama Rao Suresh have constructed theoretical models to elusidate how the current financial system is inherently unstable leading to periodical boom and bust. The solution lies in investing in real economy, in physical infrastructure, in creating jobs. Girish Mishra has graphically traced the history of economic cycles from 16th century onwards, and draws the conclusion that the economic meltdown is inherent in the capitalist economy. The claim that the market system makes efficient allocation of resources is belied by the ground reality. The stock markets are largely the outcome of manipulation, rumour-mongering, animal spirit and irrational exuberance. The gullible masses suffer when stock markets crash, as happened in the USA when whole life savings of ordinary, hapless investors were wiped out in the wake of the financial meltdown.

The recent developments in the USA and Western Europe show that the existing economic model, which depends on continuous growth in production and consumption of material goods, is inherently unstable. Despite injection of massive public money the USA and West European countries continue to be bogged down with severe unemployment which is running to more than 10 per cent of the workforce. The massive public debt of Greece and other southern European nations such as Spain, Portugal and Italy has threatened the stability of the European economy. To save the economy of Greece, the EU has given it a massive bailout package, but this has put a question mark on the future of the Euro itself. The European Union countries are threatened with double dip recession whose contagion effect may spread to the global economy.

Post-1991 liberalisation of the economy, India has been blindly imitating the Western economic model. The benefit of economic growth is cornered by a small minority who lead an opulent life-style, while the vast majority continue to live, in poverty and deprivation. According to Forbes, the number of billionaires in India doubled to 52 in 2009, their combined net worth reached $ 276 billion or a quarter of the country’s GDP. As per data in the UNDP’s Human Development Report (2007-08), while the poorest 10 per cent had three per cent share of the national income, the richest 10 per cent enjoyed a disproportionate 31 per cent share. Studies by ADB show that the disparity in income has been increasing over the last two decades. The National Commission for Enterprises in Unorganised Sector (NCEUS), chaired by Arjun Sengupta, has found that 83.6 crore Indians are poor and vulnerable, living on less than Rs 20 per day and have hardly experienced any improvement in their living standard since the early 1990s.

The above puts a question-mark on the current model of economic development. We need to ask: Growth for whom? At what cost? Paid by whom? V. Upadhyay says that the fetish with growth should cease. Growth should be inclusive, improve the standard of the common man, provide him employment and should be environ-mentally sustainable. Rajinder Chaudhary lends a fresh perspective by bringing the issue of morality in the economic calculus by citing Ruskin and his seminal work Unto This Last. Ruskin gave importance to the human side of labour, who has a soul and should be provided a living wage, and pleaded for ‘a kind of commerce which is not selfish’. Mahatma Gandhi was greatly influenced by the ideas of Ruskin. Gandhiji believed in ‘simple living and high thinking’ and expounded a philosophy of trusteeship where productive resources should be used for the larger benefit of the society. There is little doubt that the capitalist market economy with its blind pursuit of profit based on ruthless competition, reveals the worst traits in human beings, such as greed and selfishness, and completely ignores the ethical and humane dimension of life.

The authors of the Global Economic Crisis have forcefully brought out the inadequacy of the present economic model, but have not come out with an alternative framework. It is obvious that we cannot go back to the command economy and socialist model of the type practised by the erstwhile Soviet Union and East European countries, where the means of production and distribution were controlled by the state. While propagating the virtues of socialism, the economists for a long time suffered from the illusion that the ‘state’ acts as a platonic guardian of the people. They forgot that it is the politician and bureaucrat who control the machinery of the state and their main aim is to exercise power and authority with scant regard to people’s welfare.

Today the biggest challenge facing the policy-makers is to put in place an econmic model which will promote equitable development, abolish poverty and provide decent, dignified living to every Indian. The authors of the book deserve credit for setting in motion a debate regarding the urgent need to construct a new model of development, which will bring prosperity, hope and cheer to India’s teeming millions.

Dr B.P. Mathur is a former Deputy Comptroller and Auditor General and Director, National Institute of Financial Management, New Delhi. He can be contacted at email: drbpmathur@gmail.com

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