July 2001 Edition
Market-Driven Economic Policies and Social Ramifications
Are Economic Growth Rates always indicative of Standards of Living?
As economic growth rates have plummetted throughout the world, India (like the rest of South East Asia) has not escaped the impact. Growth rates have been reluctantly pruned to about 5% for the year, and may have to be revised further downwards if an anticipated post-monsoon pick-up in consumer consumption and industrial manufacturing fails to materialize. While, booms and busts are endemic to "free-market" or capitalistic economies, sections of the Indian media had sought to convey the impression that the switch to greater "market freedom" would result in a continuous economic boom. Even a series of natural disasters such as the Orissa cyclone, the severe drought in one-third of the country, and the Gujarat cyclone did not do much to dampen the optimism of the economic pundits. Until early this year, it was routine for economic analysts in the Indian media to trumpet the achievements of the "liberalization decade" with smug satisfaction, and dismiss critics of unplanned and misdirected liberalization as left-wing idealogues out of step with "economic realities".
Advocates of Indian liberalization had long argued that growth rates in the Indian economy had been crimped due to unnecessary restrictions on capacity increases (through government fiat under the "license" Raj). The consumption boom that followed the lifting of capacity constraints certainly lent credence to their arguments. But recent economic trends suggest that the growth in consumption may not be entirely sustainable. The spurt in urban consumption in the decade of the 90s had been preceded by two decades of slowly expanding personal savings at the top end of the Indian economy. In addition, although investment in agriculture and the rural infrastructure had never been quite adequate, it had been substantially greater than what it has been in the last decade. Consequently, a series of good monsoons coupled with all-around improvements in Indian agriculture (achieved in the previous decades) helped in expanding rural demand as well. A third factor that helped stimulate demand was the unprecedented boom for highly skilled mental labour from India driven largely by off-shore investments in software and hardware design.
However, it is doubtful if these factors will continue to play as important a role in propelling the Indian economy forward. As already noted by several analysts, as Indian industry has become more globally competitive, it has learnt to manufacture more with fewer people. As a result, much of the growth in industrial output has been achieved through the more intensive applications of advanced machinery and labor-saving tools. In and of itself, this is a sign of considerable progress. However, it does have important social consequences. It means that demand for industrial labour has not increased at the same rate, and there have not been concomitant increases in industrial job opportunities. With industrial employment barely keeping up with the increase in population, future increases in personal consumption in the urban areas will be heavily restrained by lack of increases in overall purchasing power.
There are also several structural impediments to increases in rural incomes. Already India is one of the most densely populated nations in the world. Pressure on land is already very high and existing water resources have been depleting at an alarming rate. Even with a switch to more sustainable agriculture and water-management policies, it is unlikely that improvements in agricultural productivity can take place at previously seen rates. In any case, much of the increase in rural incomes has come about as a result of the artificially engineered increases in grain procurement prices that have generally favored relatively better-off farmers in the Punjab, Haryana and Western UP belt. Not only are these constantly rising grain procurement prices unsustainable, they are extremely unfair to the vast majority of Indians who are grain consumers, not producers, and whose incomes don't go up as a result of government fiat.
Recent reports on consumer behaviour have highlighted that though the Indian "middle class" may be as large as 300 million (others put this figure much lower) Indian consumers are also very "frugal". This is an obvious consequence of the generally low level of wages that various categories of Indian workers receive. Consider that a senior manager with 15-20 years experience might at best earn 2000$ a month - less than what most industrial workers (or even experienced service workers) earn in the US, Europe or Japan. Average incomes are of course considerably less, and all categories of Indian workers and agriculturists earn less than one-fifth of what corresponding categories might earn in the US, Europe or Japan. In many instances, the income ratios might be 10 or 15 times lower in India.
This means that unless there are significant policy shifts, the only engine to propel future demand growth will be the IT sector where incomes are relatively higher and have been growing faster than the national average. While all the IT pundits and industry gurus are predicting an early turn-around, only time will tell if the anticipated growth rates actually materialize. So far, all indications are that the IT recession in the US, Europe and Japan is not over, that it may even deepen, and that even if a recovery takes place, it may be a rather anaemic recovery and it may take several years before capital spending in IT-related activities achieves anything close to the high growth rates seen in the last decade.
While it is possible that a sustained recession may lead to a faster shift of IT activites from the US, Europe or Japan to India - it is not immediately clear if such shifts will be adequate to compensate for the all-round stagnation in the high-tech sector. It is therefore difficult to see how the consumer boom of the last decade could be replicated in the upcoming decades. It is little wonder that sections of the business media are now beginning to sound alarm calls about the state of the economy and it's potential for sustained growth in the future.
However, so far, there has not been any serious anlaysis of the trajectory of the Indian economy or on the policy direction taken by the government. Neither has there been any comprehensive look at the relationship between economic growth rates and improvements in living standards.
Consider an article by Jonathon Rowe titled "A misguided quest for 'productivity'" that appeared in the Christian Science Monitor (June 28, 2001). In this essay, the author bemoans the American obsession with "productivity" without regard for the value of what is produced and whether it contributes to human happiness. "We Americans are not lacking for products. Our basements and garages are groaning. A warehouse industry has arisen to hold all our stuff. Yet they tell us that the benchmark of our economy remains whether we can turn out still more stuff per hour. Is that scientific principle, or fetish?"
Fortunately, India has not yet reached the stage of where most Indians possess more things than they can use or enjoy. Most Indians own very little, and consume very little by American standards. Nevertheless - there is an important point in these remarks: that increased production is not an end in itself. For instance, Jonathon Rowe observes that if increased consumption always led to greater happiness, Americans ought to be the happiest people in the world, but in fact, they are amongst the most stressed. Bemoaning the loss of leasure in American life, he writes: "As for increasing leisure, could someone please tell us where it went? The more we pursue it the more it seems to disappear." Criticizing the American obsession with growth for growth's sake, he points out that growth may in fact be subtractive under some circumstances. The increased consumption of heavier personal transport vehicles such as SUVs may in fact be a negative to the extent it adds to air pollution and waste of limited energy resources (over and above that of a smaller and lighter car). Hence, improved productivity of a product that is unnecessary or of mixed value to begin with is of little social consequence. In a particularly damning quote concerning such trends in America, he quotes Thoreau who once said: "We Americans are enchanted with "improved means to unimproved ends."
While it may be premature to bring such criticism home to India, it might be worthwhile to take note of such criticism of the American economic model, especially since it appears to have bewitched so many Indian economic analysts and media pundits. As more and more Indians attempt to replicate (without question or concern) the American model in India, such characterizations about the American "way of life" should be of particular interest to policy makers in India.
The US in fact, has the dubious distinction of the world's highest per-capita crime rate, the world's highest per-capita incarceration rate and the highest rate of personal litigation. America also has the world's largest defence industry even though America has never been attacked or invaded on it's own soil by any other nation! Yet, both America's legal and defence industries make important contributions to the size of the American GDP - and to American growth rates! America's lawyers and defence analysts and engineers contribute significantly to the country's "GDP" because they come with an enormously expensive price tag, - but they are more an indication of a society that is constantly quarreling within and without - a society that is not really at peace, either with itself or with the rest of the world.
In fact, there are numerous examples of economic activities that have little socially redeeming value that can contribute significantly to a nation's GDP. Consider the tobacco and alcohol industries. The consumption of both tobacco and alcohol (beyond moderation) have numerous adverse health effects - and often the potential to ruin and destroy families. Yet, they are included in a nation's GDP numbers. When an advertizing company seduces people to buy things they really don't need, that too is counted as part of the growth in GDP even though much of the labor that went into creating that seductive ad was socially unnecessary. This is not to say that all advertising is wasteful - new products do need introductory literature, and well-written and well-designed product availibility announcements can serve a socially useful role in connecting genuine buyers to producers. But much of advertising today is based on sheer seduction.
So much research has gone into the psychology of the "consumer" that ad agencies have become very adept at inducing the sale of products wth dubious social benefits simply through their association with symbols associated with erotic pleasure or sensual happiness. While most packaged foods, cosmetic aids and fashion accessories sold in this manner may not be exactly harmful, one can certainly debate whether the resulting benefits are commensurate with the levels of social labor and investment that went into their creation. Of course, from the perspective of the "free market" anything that can be sold for a profit is a "valuable" product - but it may not be necessarily so from the perspective of an unbiased consumer. The barrage of advertising pressure that every one is subjected to in these times allows little room for most consumers to make truly intelligent choices. In today's "free market", consumption (under the powerful gun of sophisticated advertising) is hardly of anyones "free choice" or natural volition.
In the Indian context, where resources are scarce, and incomes limited, these points do become relevant, even though most Indians consumers are generally cautious in making their purchases. While most Indians may not go out and buy expensive things they don't need merely due to subliminal media suggestions, the power of advertising can have an impact on discretionary spending and can also result in changes in value systems and personal tastes - particularly so on that small minority of Indians that has the extra income to spend.
Take the recent fascination with cars. For people to really enjoy the use of a personal car, a country must have enough land for wide roads and large parking lots. And that's exactly how every automobile ad in India shows off new cars. Cars for the Indian market are shown scurrying along wide and vacant highways in dreamy countryside settings, completely unrelated to the actual Indian reality or experience. After all, some of India's most scenic destinations aren't even connected by motorable roads, and virtually all Indian cities are so densely populated that even newer residential and commercial areas are planned with narrow roads and limited parking facilities. There is thus something very surreal about the Indian media's glamorization of the car.
But it is not only the media, but captains of Indian industry and politicians who have also been hooked by the so-called magic of the private car. Much of the emphasis in this liberalization decade has been on the personal car. Chief Ministers of different states have vied with each other in offering concessions to car manufacturers to set up plants in their states. But no one seems to have paid any attention to the actual economics of owning and running a car. For most Indians, just the running costs of a car are so prohibitive that even with suitable credit facilities, the option of owning a car becomes prohibitive. It is little wonder that the demand for cars has tapered off after a very short-lived boom.
A decade after liberalization, the monthly sale of cars has fallen off to about 45-50,000 a month. Although each car may contribute 7-8000 dollars (or more) to the national GDP - consider how so few Indians are be able to afford a car. Even assuming a car lasts for 12-15 years - it means that only 6-8 million Indians, (and still fewer households) enjoy the benefit of a private car. But imagine, if the country produced better means of public transportation. Assuming that a mini-bus costs only three times as much to produce as a car, and assuming that the average mini-bus seats about 30 people (or more) comfortably, there is a ten-fold increase in transportation options.
Even discounting all the problems and headaches of owning a car in India, it is obvious that a car only raises the standard of living for a small minority. But improvements in public transport raise the standards of living across the board. This means that a more significant increase in the average standard of living becomes possible with a small but decisive shift in priorities in the direction of improved public transport, to speak nothing of the environmental gains, and reduced need for expensive imported energy resources. However, this improvement in the overall standard of living may not show up as dramatically in the GDP numbers.
Related to this point about car ownership is how even as economists frequently discuss issues of economic productivity and economic efficiency - by which they usually mean the productivity and efficiency of human labor, they don't really look at the efficient use of other resources, that in fact may be more scarce such as energy resources. Why look only at whether an economy can produce a car "efficiently"? Why not look at transportation efficiencies in a broader and holistic way. Is the private car an efficient means of transportation in the first place?
What does it mean to be very "efficient" at producing something that isn't that efficient when it comes to meeting overall social needs. Of course, this is not to say that the car doesn't have it's merits and utilities - but it is pertinent to raise the question of it's utility in the daily transportation needs of the vast majority of Indian commuters.
And this is just one example of a glaring disconnect between economic growth and it's linkage to all-round social well-being and the overall quality of life. We can also find examples that illustrate the reverse case where an activity may have a low price tag but significant long term social value.
Consider how this decade of "liberalization" has marginalized cultural activities that may have a much more profound impact on human happiness, quality of life and social harmony, than the increased consumption of coca-cola, or imported whiskey and cosmetics. Good literature, a great play, an inspiring music recital, a trip to the museum or art gallery, a picnic in a well laid out public garden, a rousing folk dance at a popular public venue - each of these activities may potentially be of much greater value to human health and happiness than their calculation in the country's GDP. But when market fundamentalism takes over, such activities are relegated to the background - their power to relax, entertain or enlighten is forgotten, diminished or obscured.
Critics of "Nehruvian Socialism" have routinely decried it for it's low growth rates but it is often forgotten that both Indira Gandhi and Jawaharlal Nehru made sincere albeit insufficient efforts at reversing the cultural and environmental desertification that had been inflicted on the nation under colonial rule. The creation of the Sahitya and Lalit Kala Academies, All India Radio's patronage of classical and folk music, the expansion of Indian Museums and Art Galleries, the effort (albeit very limited) to document and save India's archeological heritage, the support for folk and classical dance, the creation of the various cottage emporia and craft facilitation centres, the setting aside of nature and wild-life reserves, the creation of public gardens and most importantly - the numerous centres for higher learning and fundamental research - all of them contributed to the nation's progress in ways that cannot be measured by looking at GDP statistics alone.
The liberalization decade has not only failed to make such contributions, it has also created an environment where people have stopped appreciating cultural activities. They have also been trained to devalue those activities that can only bring about gains after long gestation periods such as activities in scientific and social research. It is often forgotten that India's present strength is in no small measure a result of the many direct and indirect benefits of earlier investment in public institutions of higher learning and advanced scientific and technological research.
Today, the scale of the Indian economy is such that higher levels of investment in cultural and educational activities are not only possible but imperative. As a nation makes progress on the economic front - the full benefits of that progress can never be fully realized unless there are corresponding advances in social culture. India has a particularly rich archeological and historical legacy - and only a fraction of it has been adequately documented and properly preserved. It has a rich heritage in art and music that risks being drowned out by commercial interests. Yet many so-called Indian nationalists are more concerned with the resurrection of obscurantist religious ideas and the pseudo-science of astrology than a real appreciation of the concrete physical legacy that survives very tenuously, and may disappear without active intervention.
It must also be noted that economic gains without parallel improvements in the fair and just distribution of the economic surplus can and does lead to heightened social tensions. Properly guided, such dissatisfaction can lead to the restructuring of society on a more advanced and equitable basis. But when such fissures are ignored or neglected, they can result in increases in violent crime, acts of arson and vandalism, and periodic anarchic outbursts that may seem very irrational, but may be triggered by underlying social and economic factors that are viewed as discriminatory or unfair.
Those who attack "Nehruvian Socialism" forget that the extreme levels of economic deprivation that prevailed in India required the positive intervention of the state to ameliorate the sorrows of the Indian masses. Food rationing was essential in controlling hunger, low-cost public housing was needed to limit homelessness, and public dispensaries were required to control common diseases, early deaths and epidemics.
GDP growth rates of the 60s or 70s may now seem low - but these low growth rates were also accompanied by numerous government initiated welfare measures whose consequences cannot be readily accounted for by looking at GDP data alone because invariably such government social welfare schemes were priced below their real market value. Government investment in public housing, health facilities, cultural and recreational activities, public parks and gardens, and numerous other public services were priced at levels much lower than what the private sector might have charged for such services.
Although many of the government's social welfare schemes have now gone awry due to gross mismanagement, bureaucratic bungling and corruption, the absence of such services has been especially telling on the poor whose standards of living have fallen due to the loss of such public services due to their direct or indirect privatization.
In spite of the many and grave errors, decades of planned investment facilitated in creating balanced industrial development, especially in states like Bihar and Orissa, that had suffered the worst of colonial rule. Without state intervention, it is highly doubtful that India's middle class would have reached it's present size, and a market for goods and services created that the liberalization decade was able to take advantage of.
All this is not to unconditionally defend all aspects of public policy that guided the so-called era of "Nehruvian Socialism". Neither are such remarks intended to tout "Nehruvian Socialism" as a panacea for current ills, or as the ultimate solution for India's future progress. But it is more to bring attention to important aspects of social well-being that were at least partially or half-heartedly addressed in the early decades following independence. Today, issues such as social equity, social well-being, and cultural advancement have been literally erased from the public consciousness. "Nehruvian Socialism" has been replaced with a brand of market fundamentalism that attempts to reduce all human progress to a single statistic - the GDP growth rate.
For centuries, the economic product of humanity was fairly limited. And in proportion to the survival and comfort needs of humanity in the colder parts of the world, one might even say it was woefully inadequate. The industrial revolution and the capitalist economic system that was borne as a result brought about vital and dramatic improvements in the quality of life of the people in Europe, US and Japan. Now, many of these gains are also being enjoyed by a growing proportion of the populations in other developing nations such as S. Korea or Brazil. But it should be noted that prior to the industrial revolution, conditions in India were not as backward. A relatively mild climate meant that both caloric requirements and needs for clothes, shoes, home insulation, artificial lighting, and so on were much less. As a result, the people of India like others in tropical and sub-tropical Asia lived much better than their counterparts in Europe.
For all it's flaws, Indian society before colonization at least offered universal employment and a certain ammount of foodgrains to everyone - regardless of the "lowliness" of their occupation. Patronage of the arts and culture, of dance and music in the courts, (and in the havelis of the well-to-do families) was at par with the most civilized courts of the world, and in terms of the sophistication of their taste, the Indian courts were almost without parallel in the pre-industrial world.
But the success of European capitalism came in direct proportion to the immiserization of India. European capitalism thrived as India was sucked dry of it's material and cultural wealth. But at least in it's early stages, the growth of material products under capitalism in Europe and the US were consistent with their geographic and climactic needs. And since most of Western Europe (especially Britain) and the US lacked any substantial cultural history, the erosion of culture that takes place with the growth of commercial relations was not as serious an issue.
But in India, not only were precious aspects of the older legacy destroyed, the gains of the new system have at best trickled in meager droplets into India. Not only has capitalism not been a system of plenty, it has often subtracted from what existed before. (And this is in some measure true not only of other colonized nations but also of the more cultured nations of Central and Eastern Europe who escaped colonization). For all nations with a substantive cultural heritage, the invasion of unfettered market forces cannot be an entirely welcome phenomenon if it coincides with the destruction of many positive aspects of human culture (whether folk or classical), and replaces the relatively more advanced system of social ethics and social relations with relations driven exclusively on the basis of greed and acquisitiveness. (While the growth of democratic rights is a positive element in breaking down caste and gender-based discrimination and creating greater social equality, the heightened emphasis on commercial relations can have the opposite effect and increase the distance between social groups.)
It is therefore important to differentiate between the gains of social and technological modernization from the negative aspects of market fundamentalism. There is no doubt that for some parts of the globe, the industrial revolution has unleashed an avalanche of gains in productivity. For nations like India, the potential benefits of such gains cannot be ignored. But it is equally important not to turn them into fetishes, and become addicted to them without regard to their role in fulfilling vital human needs. India can neither ignore the power and promise of modern science and technology, nor divorce itself from critical debates and discussions concerning the utility, social value and just distribution of the products of the modern economy.
Although unrestrained believers of "market forces" have tried to argue that "market forces" eventually grow and adjust to fulfill all relevant human needs and desires, the actual record of building capitalism in every nation - even the US has involved some degree of state intervention in clear contradiction of unfettered "free market" policies (especially in times of crisis such as recessions or full-blown depressions). Even in the absence of serious crises, to the extent that it becomes obvious that these so-called market forces are failing to satisfy important social needs or perhaps taking too long in meeting them, it is perfectly reasonable to call for state or other effective intervention in the economy.
Those who find such interventionist ideas appalling might note that powerful financial interests are rarely content with letting market forces work "freely" in the world. They are more than willing to "intervene" - to manipulate the market through speculative activities, through corporate and currency raids on weaker rivals, through anti-competitive price fixing and price gauging, through cartelization of raw materials such as precious minerals and energy sources, and so on. In the real world, market forces are hardly neutral (as often touted by some economic theorists), but in fact, exceedingly vulnerable to manipulation by powerful financial interests that are able to buy media time and influence journalists and politicians, both through the power of suggestive coercion and through bribes and other material incentives.
As the world enters a new millennium, the burden of ensuring that economic growth results in corresponding improvements in quality of life (and across the board improvements in standards of living) rests on those who have faith in the present economic trajectory of the country. But the longer it takes for this path to yield the desired results, the greater will be the alienation and skepticism of those yet unconvinced or losing conviction.
Related Articles:
Unrestricted globalization - boon or hazard?
Foreign Direct Investment (FDI) - Unmentioned Pitfalls
Liberalization, Infrastructure and Quality of Life
Liberalization: where it has lead us and where it is headed
Also see this criticism of the governments
policy of grain procurement, price fixing and wrecking of the PDS: Starving the Poor
(Jean Dreze)
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