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Global Capitalist Clrisis:

A Marist Perspective
Edited by
Sitaram Yechur
APeops Democracy Public:ation
ISBN: 978-81-906218-2-3
November 2009
Published by
Peoples Democracy
15 Talkatora Road
New Delhi - 110001
Progressive Printers
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Price: Rs. 150/-
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
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
-Prabhat Patnaik
14. Global Trade in a Time ofCrisis 7
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
-CP Chandrasekhar
21. le Ongoing Indusial Recession
- Jayati Ghosh
2. Capitalisms Open Secret
-C P Chandrasekhar
2. Contol Frauds
- 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
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.


CPI(M)'s Su
estions For
Indian People
TE CPI(M) has urged upon the UPA govemment to abandon its fs
cal fundamentalist approach and instead focus on increasing the pur
chasing power of te comnion man. This is the only way to overcome
the adverse impact of the unfolding global economic crisis on our
economy and people.
CPI(M) Polit Bureau .niember Sitaram Yechury released a set of con
crete suggestions on protecting Indian people from the global economic
crisis in a press conference at AG Bhavan on November 72008.
Fau1ting the Manmohan Singh govemment for not ackowledging the
real cause of this global crisis -te barptcy of neo-liberal globalisation
-Yechury advised it to at least follow the likes of Fukuyama Sarkozy
Merkel and even Obama who have a11 called for restructuring capital
ism. He said the fundamental problem with the govemment is its wrong
diagnosis of the current crisis due to which its wrong prescriptions are
fai1ing to yield results. They are barking up the wrong tree. The weak
ness lies with the borrower and not lender. Increasing liquidity in the
system will not solve the problem as long as the borrowers capacity
and solvency are increased. And for this the govemment should gener
ate employment strengthen agriculture and thus generate demand".
He termed as illogic the govemments relying upon one single policy
instrument to achieve twopolicy goals -controlling infation and re
versing growth slowdown
Yechury lambasted the govemments refusal to bring down the prices
of diesel and petrol by Rs 4 and Rs 2 respectively in view of the huge
drop in the intemational oil prices (from around $140 per barrel to be
low $60 per barrel). He contrasted this to govemments decision re
ducing the price of Aviation Turbine Fuel (ATF) by a whopping Rs 26
per litre in the recent past. Along with this the excise duty on ATF has
been reduced by Rs 1.80 per litre. This is nothing but giving a bonanza
to corporates at the expense of people" he said and announced that
this wiIl be mae an issue in the polls to the fve state assemblies.
Yechury objected to prime minister meeting only the corporate bigwigs
and bankers to discuss policy responses while not caring to interact
with either the state govemments trade unions or other organisations
representing sections of the people who are facing the brunt of the
adverse effects of the crisis. He demanded a wide ranging dialogue
with all sections of people by the govemment before taking policy deci
Below we give the full text of the press release issued at the press
It is clear by now that the global fnancial crisis has graduated into a
global economic crisis of serious proportions. The advanced economies
are set to experience a protracted recession and the developing coun
tries across the world including the Indian economy wi11 also be ad
versely affected.
The UA govemments responses to this evolving situation however
have been extremely disappointing. Ever since the govemment has come
out of its initial state of denial the measures adopted by it refect on the
one hand a sheer lack of comprehension of the causes behind and the
proportions of the current crisis and on the other hand a proclivity to
wards appeasing myriad fnancial interests and cororate lobbies. The
fact that the UA goverment is relying upon.only one policy instru
ment namely the interest rate to both control inflation as well as re
verse the growth slowdown beays the illogic behind its policy para
digm. It is a rudimentary lesson in economic theory that two policy
goals cannot be achieved using a single policy instrument.
The UA govemment has so far chosen to meet only the corporate
bigwigs and bankers in order to discuss policy responses; neither have
the state govemments nor other political paies trade unions farmers'
organisations and other organisations representing crucial stakeholders
been consulted. It is indeed sange that at a time when the neo-liberal
vision of putting corporate profts over peoples interest and relying
upon trickle down economics' is getting discredited across the world
the economic managers of the UPAgovemment are clinging on to it. In
this backdrop the CPI(M) is putting forward a set of concrete sugges
tions in order to tackle the adverse impact of the global recession on the
Indian economy and protect he interests of the people.
Broad-based Growth through Fiscal Stimulus
A special fscal package should be announced by the cental
govemment directed at increasing public expenditure in ways
which increases the income and consumption of the working
people especiaIly the vulnerable sections and ensure broad
based growth .
This is an appropriate time to expand the fscal defcit not only
by the central govemment but also the state govemments. The
FRM Act should be scrapped and a comprehensive debt re
lief scheme for the stte govemments adopted to encourage
them to adopt expansionary fscal stances.
Protecting Existing Jobs
Protection of domestic jobs must be the priority of the govem
ment in the backdrop of the global recession .
. :.
The govemment should announce a moratoriumonjob or wage
cuts in the organised sector in the interest of the national
economy since such job or wage cuts would ftirther depress
demand and aggravate the situation. The extant labour laws
should be duly invoked by the state govemments to prevent
retrenchments and lay offs .
The burden of cost adjustent shod first fall on profts and
executive pay which have ballooned during the recent period.
India. requires an Incomes Policy whereby executive pay is
linked to prices and the minimum wage eamed by workers.
Specific Measures to Boost the Real Economy

The goveinment has to undertake massive public investment
directed at sectors which are employment intensive and ca
pable of creating employment demand for those likely to lose
j 0 bs in the export-oented sectors

Employment Guarantee: The NGA should be strengthened
and extendeOd to the urban areas. Extending the period of guar
anteed employment beyond days should also be consid

Agriculture: Foodgrains production has to be encouraged and
public procurement operations expanded for a11 mor crops
across the county. The a11ocations for the Food SecityMis
sion and the Rashiya Krishi Vikas Yojana should be enhanced
substantia11y. Public investment in irigation also needs to be
stepped up substantia11y. For cash crops like cotton and oil
seeds import protetion should be accorded through hiler tar
if. Protection should also be extended to cash crops like rub
ber cashew etc. to prevent sharp fa11s in prices.

Fod and Fuel Prices: The hikes in the prices of diesel and
petr by Rs 4 and Rs 2 respectively must be withdrawn with
out further delay in view of the sharp fa11 in intemational oil
prices (which have fa11en below per barrel). The PDS needs
to be universalised and sengthened drastica11y by reducing
the issue pfice so that subsidised foodgrains can reach every
settlement in the country. This is essential for boosting con
sumption demand in the economy.

Retail Trade: With slower growth in consumption the busi
nesses of sma11 and unorganised retailers are bound to be hit
atTectng their livelihood. I this backdrop allowing big organised
retailers to expand their businesses and capture greater market
shares would only aggravate the situation. A policy to 5ict1y
regulate the operations of domestic corporate retailers and re
strict their unbridled expansion is urgent1y required.

Small-Scale Industries: Crisis affecting the sall-scale indus
tries would cause massive job losses and affect livelihoods on a
1 1
massive scale. The g<verment needs to dese sector -spe
cifc relief pacagesespeciay for expo-rieed and labour
intensive sectors like garments and leather keeping the inter
ests of the small-scale industries and their workers in mind.
The relief packages should inc\ude rescheduling of bak credit
as well as direct subsidies and should also incentivise job pro

Tarif Protection: In order to ensure that the derand injected
into the economy through public investment does not leak out
through increased imports increasing custor duties should be
considered. Further tariff concessions under NAMA or enter
ing into stucturallyunequal tade ageements like the proposed
EU-India FTA should be ruled out.
Tightening Financial Regulation and
Reviving Development Finance
Regulation should be sengthened in the fnancial sector and
state control over fnance need to be reasserted in order to
revive development fnance. While curbing reckless flow of
credit to fuel elite consumption and asset price bubbles credit
should be directed towards employment intensive sectors like
agiculture and small-scale industries.
Capital Account Convertibility: Measures undertaken to
liberalise the capital account as per the Tarapore Committee
recommendations need to be reversed and stict contols reim
posed on the outflow and infl ow of capital.
.:. Paicipatory Notes: PNs which are non-transparent deriva
tive instruments used by the FIIs to invest moncy in the Indian
capital market on behalf of undisclosed entities and individuals
should be prohibited. Allowing spcculative hedge funds and other
dubious cntitics to invcst in Indian markets without ny adher
ence to disclosure norms is the antithesis of prudential regula
ton .
Banking and Insurance Sector Deregulation: The gover
ment Should abandon the moves to fuher deregulate the bank
ing and insurance sectors through legislation like the Banking
Regulation (Amendment) Bi1l the State Bank of India (Amend
ment) Bi1l and increasing the FDI cap in the insurance sector
from the present 26 per cent to 49 per cent.
.:. Pension Rrms: Pension reforms should be abandoned by
the UPA govemment and the PFRD A Bill scrapped. The Pen
sion Scheme for govemment employees should be reworkedto
ensure minimum guarateed pension.
New Contradictions and Problems
Sitaram Yeclur
Intervention of Sitar.am YechiIry in the 10.h International
Meeting of the Communist and Worker's Parties
21-23 November 2008 Sao Paulo Brazil
be curent crisis of intemational financial capital that spearheaded
imperialist globalisation in the last two decades is by much estimation
far graver than any other crisis in the history of capitalism. Te crisis is
still unfolding id i ful1 rlmifications will be realised only much later.
Many feel that we as Marxists mu feel resoundingly vindicated that
KarlMarxspeneative analysis of capitalism has once again proven
itself to be ue. Marxists do not derive satisfaction for the vindication
of their world view and revolutionary analysis at the expense of the ruin
and misery of millions of victims of this capitalist crisis. As Marx him
self once said Nothing human is alien to me". Marxists work to en
sure that te common working people are not subjected to such inhu
man epidations being.at the mercy of the rule of Capital. ls shal1
happen only when we change the wor1d" not remaining satisfed with
the corectness of our nterpretation of the world".
Marxism-Leninism is inherently materialistic creative and intinsical1y
dialectical. It is hence supremely anti-dogmatic. I is a world-view that
embraces the vision of liberation d expresses emancipator ideals. I
is a tool for understanding and analysing the multitude'of phenomena
that constitute changing historical situations. It is a guide to action that
defines programmatic 0ectives for the peoples struggle against al1
for of exploitatiori subject to the necessary adaptations as required

As a creative science Marxism-Leninism identifies the tendencies and

directions of development. I doing so it provides the possibilities for
popar rss intvention in these developments in the pursuit of estab
lishing an exploitation-free society.
It is hence incumbnt upon all Marxist-Leninists to make a concrete
analysis of the concrete conditions both intemationally and domesti
cally in each country and on that basis to cha out the course of human
liberation. Capitalism as Marx has shown is a system that is based on
the exploitation of rn by man and nation by nation. I can never be a
crisis-free system. Hence the te emancipation of hurnity fom such
miseries is possible only through a liberation from the capitalist system
Two decades ago the capitalist world was in a state of delirious eupho
ria in the build up to tearing down the Berlin Wall. This was accompa
nied by vituprative ideological offensive: End ofHistory End ofIdeol
ogy etc. There was great delight at the collapse of this wall that
symbolised in many ways the Cold War and world socialisms power
to confront imperialism in all respects. The collapse of the Berlin Wall
has been eclipsed by the virtual deletion of capitalisms so far consid
ered impregnable wall- the Wall Steet. The big fve' global invest
ment banks - Bear Stems Lelunan Brothers Merrill Lynch Morgan
Stanley and Goldman Sachs - that led and lorded over the world of
imperialist globalisation have either been liquidated or severely emas
Such has been the gravity of the crisis that the most unabashed votary
of capitalism Te Economist describes it as capitalism at bay". Re
fering to the spate of bailout packages advanced in various westem
capitals it says that the future points towards a larger role for the
State and a smaller and more constrained private sector" and hoping
profoundly that this will not happen".
World capitalism has embarked on a spate of nationalistions that would
have surprised the former socialist USSR. When the time to defend
capitalism fom such a crisis comes all ideological attacks against State
or public property and nationalisation with the accompanied extolling of
1 5
the virtues of private capital and their laser beamed God - market -
appear to be mercilessly abandoned.
Britain that heralded moder privatisation nationalised today most of
its banking sector. RecoJ1ect that Margaret Thatcher once said It is
not the business ofthe goverment to be in business". USA is pumping
in 2. 5 tiIJion of tax payers' money to shore up its financial system.
Frances Nicnolas Sarkozy says Laissez-faire is fnished". There is a
profound paradox here. Defending capitalism in this present crisis
means greater State intervention. This may be a paradox for capitalisms
ideologues but the fact remains' that the State of the ruling classes has
always defended and enlarged the avenues for super private profts.
We in India have our own experience of the State establishing the
public sector to promote private capitalism. At a later stage with this
objective largely achieve the State embars on large-scale privatisation
again to benefit private capital. All this is done behind the illusory mask
of States neutrality! lese bailouts as the future will testif are
designed precisely to frst save and then to create new avenues for
proft generation.
This crisis is an inevitable consequence ofthe path of globalisation that
was unfolding in recent decades. In 1993 the CPI( M) had organised an
interational conference at Calcutta with the participation of 25 Com
runist and Workers Parties fom al1 over the world to underline the
continued relevance ofMarxism in understanding contemporary world
realities. At the frst inteational meeting of communist and workers'
parties organised in 1998 in Greece discussing the role of the Commu
nist Parties in the current conditions we presented the following:
The main new element in the present phase of capitalist development
is the emergence of globalisation offnance capital. It has specifc fea
tures in our opinion which distinguish it from the period when Lenin
analysed imperialism. The present process is not a nation-state based
fnance capital engaged in struggle with rival imperialist nation-states.
In a sense it has tanscended the nation-state. This however is not to
suggest that the relevance of the nation-state and its sovereigty has
ceased as some seek to argue.
It is however important to note that the present day finance capital is
highly globally mobi1e sucking in fnance capital fom individual coun
tries dominated by fnance capital originating fom the advanced coun
ties. Further this fnance capital is more pre-occupied in its search for
quick speculative gains rater than it amalmation with industial capital
leading to economic development. It therefore truly represents the
parasite that thrives at the expense.ofreal economic growth.
The emergence of this fnance capital is an important factor that ex
plains the relatively low growth rates accompanied by high unemploy
ment rates in the advanced countries. This happens because in order to
appease intemational speculators there is a competitive reduction in
tax rates and restrictions on the size ofthe fscal defcit. I other words
govemments are forced to cut back expenditures and thereby defate
both employment and domestic dCd leading to lower rates of gowt.
This in tum leads to a situation where the advanced counties tum to
tethird world economies and intensif exploitation. The imposition of
neo-liberal picies serves this purpose of removing obstacles to the
fee operation of inteationally mobi1e fnance capital. I addition it
seeks to impose a new form of intemational division of!abour this time
not through direct colonial occupation but through coercing third wor1d
economies to dovetail to imperialist interests." It is the consolidation of
tis process over the last decade that laid the basis for the current
Mars analysis of capitalism tells us that as capitlism develops there
is the tendency for concentration and centalisation of capital. As he
said over a period of time there wil1 be fewer and fewer but larger
. and larger capitalists". Accumulation under capitalism is thus a coer
cive process. 80 is the process of technological innovations. Without
either ofthese the capitalists cannot suive the rat race where the big
fish consumes the small fsh. It is this processes that has led to the
inteationalisation offnance capital to ntic leve\s hiterto unkow
in capitalisms history. It is this process of globalisation that irerialism
utilises to seek its political objective of economically recolonising the
developing counties.
Two important features of globalisation however require attention to
understand the present crisis. First this process has been accompanied
by growing economic inequalities both within countries between the
rich and poor and between the rich and the poor countries. The Human
Development Report. 2007-2008 confrms this with indisputable sta
tistics. Forty per cent of worlds population liviJg on less than $ 2 a day
accounts for 5 per cent of global income while the richest 20 per cent
accounts for three quarters of world income. More than 80 per cent of
theworlds opulation lives in countries where income differentials are
widening. Secondly globalisation has given rise to the phenomenon of
'obless gowth. l is is so because the tectory of proft Himisation
invariably replaces hum labour by investing more in developing tech
nology rather than developing human resource capacities. The growth
of employment during this period has always been lower than the GDP
growth rate globally.
Both these features put togeter mean that te purchasing power of the
vast majority of the worlds population has been declining. Now capi
talism inevitably plunges into a crisis when what is produced is not sd.
Under these circumstances the only way that capitalism can sustain its
levels of profts is by encou
ging people to proure loas whose spl ding
will maintain the levels of economic actity. However when the time
comes to repay these loans there is the inevitable default.
This is precisely what happened in the USA in the current sub-prime
(Ioans given at interest rates lower than the prime rates initially to lure
borrowers only to be re-set higher later or loans given to borrowers
whose credit worthiness is suspect) crisis leading to large scale de
Defaults should not have really come as a big surprise. Te Wall Street
Joural reported on October 1 2 2007 that the wealthiest one per cent
of Americans reportedly eaed 21 . 2 per cent of all income in 2005.
This increased fom 19 per cent in 2004 and exceeded the previous
high of 20.8 per cent in 2000. I contast the bottom 50 per cent eamed
1 2.8 per cent of all income which was less than 1 3.4 per cent in 2004
and 13per ct in 2000. The consequce of such gowing inequalities
would lead according to Merrill Lynch to a fall of$360 bi1Jion in con
sumer spending during 2008-09. Obviously Merrill Lynch now emas
culated did not take its own assessment seriously.
Capital in search of higher profts continuously creates new cotIodi
ties through which it expands its market operations. As Marx had said
production not only creates 0ects for the subjects but also creates
suects for the 0ects. The present day advertising industry is testi
mony of this. Under the rule of interational fnance capital capitalism
creates new fnancial commodities. One ofthese that has played havoc
and generated the current crisis is the trade in derivatives.
According to theBank offterational Settlements as of September
2008 the total vlue of derivative tade stood at a staggering $ 600 plus
ilIions. This has grown from $ 100 iIlion in 2002. Thus this shadow
economy is 1 2 times larger than global GDP ( $ 50 trillion) and more
than six times larger than the actual tading in shares in te worlds
stock exchanges ( $ 100 tillions). While these are the fgures fom te
ofcial commodity exchanges it is variously estimated that the total
value of fnancial exchanges including in derivatives whose tade takes
place even outside of te commodity exchanges was a staggering 40
times te total global GDP. I is this speculative fnancial bubble pumped
to infate to infnity that had to burst and it did.
Reams of analysis seek an explanation for this crisis (obfuscating the
systemically inherent dynamics of the capitalist system) i the greed of
a few a violation of some ethical. norms a la Nobel laureate Paul
Krugmans moral hazard"or the lack of tansparency and the)eak
ness of regulatory mechanisms and credit rating agencies.
KarlMarxs penetrating analysis of capitalism is reportedly being sold
much more in the west capitals today t y time in recent memory
(profts are to .be made through these sales too!) Mar shows that
despite appearances of decisions. and choices being taken or made by
'fee individuals capitalism functions on the basis of laws that operate
independently of the wiII or desire of individual capitaIists. Take the
issue of exploitation under capitalism. Exploitation takes place in the
capitalist production process irespective of the morality of the capi
talists as the value of the product produced by labour is always greater
than the value this labour power (measured as wages) commands in
the market. This surplus value generated by the labour process under
capitalist production is the source of proft whose maximisation is the
raison de
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To suDise: under globaliztion with sharp decline in the purchasing
power in the hands of the majority of the worlds population fnance
capital in its eagemess for quick profts chooses the specative route
bf artfcial1y enlarging purchasing pwer by advancing cheap (subprime)
loans. Profts are made while these loans are spent but when repay
ment is due comes default ruining the loan taker also crippling the
system. To put it simply as seen above this is precisely what happened
on a gigantic scale. Capitalisms supreme diabolic irony lies in the fact
that in the name of protecting those who have already been ruined the
banks and fmancial institutions are baile out using Upayers resources!
Indeed privatization of profts and the nationalization of losses! I the
proess intensifing exploitation further.
Mar sUmmarises the inherent dynamics of capitalism and its historical
direction: "The monopoly of capital becomes a fetter upon the mode of
prouction which has sprung up and fourished along with and under it.
Centalisation of the means of production and socialization of labour at
last reach a point where they become incompatible with their capitalist
integent. This integument is burst asunder. The kell of capitalist
private property sounds. The expropriators are expropriated." In the
absence ofa powerfl socialist politcal alteative however capitalism
reemerges fom every crisis through new expropriators by desoying
a part of the productive forces to keep intact or create new proft
avenues rather than using these resources for peoples we1fare. The
true inhuman character of capitalism.
Clearly therefore the curent phase of imperialist globalisation and its
ideological constct-neo-libralism-appas to haver its fll couse.
Whatever be the form and content of its restucturing capitalism is
inherently an exploitative and a crisis-ridden system. This is engen
dered in its fundamental contadiction between its social nature of pro
duction and the individual nature of appropriation. As the CPI)s
Progamme notes: Despite the fact that the inteational correlaton of
forces favour imperialism at the end of the twentieth century anq capi
talism continues to deve10p productive forces with the application of
new scientifc and technological advances it remains a crisis-ridden
system apa from being a systeI of oppression exploitation and
iustice. The only system which is an altemative to capitalism is
The inetability of capitalisms colIapse is not an automatic process.
Capitalism has to be overtrow.An erroneous understanding only blunts
the need to constntly sharpen and strengthen the revolutionary ideo
logical struggle of the working clas and its deiisive intervention under
the leadership of a party wedded to Marxism-Leninism -the suec
tive factor without which no revolutionary transformation is possible. I
those countries where this process is advancing like in Latin America
we have already seen the electoral defeats of the neo-liberal forces.
I the absence of the advance of the revolutionary movement capital
ism wilI remerge in a different fonn to consolidate its predatory search
for profts. As Marx and Engels said in the Communist Maniesto: the
bourgeoisie cannot exist without constntly revolutionising the instu
ments of production and thereby the relations of production and with
that the whole relations of society". But such a reemergence of capital
ism would be at a tremendous cost. Remember the geat depression of
1929 laid the foundations for the rise of fascism.
AlI the efforts that we are witnessing today-the bailout packages fscal
policy measures etc as spelt by the G-20 summit are efforts by the
capitalist class to reform the system' and retain their hegemony at any
cost and ensure that people do not t to a socialist altemative. Though
there were statements made by Frice and GeIy accusing US and
Britain as responsible for the crisis they are together in their efforts to
save capitalism and prevent the advance of Left. The current capitalist
crisis tellingly de. monsates the vacuity of the etemality" of capital
ism. No amount of reform of capitalism can make it an exploitation fee
system. The only way for hUitys liberation fom this exploitation is
the establishment of a socialist system.
le objective conditions 8opening up pssibilities which we can utilise
in stengthening the popular movements for ending a system based on
exploitation of man by man. It is imperative to utilise the objective situ
ation and intervene to advance the movement for social emancipation.
Only few days back the entire world had obseed the 91 st anniversa
of the October Revolution .. The experience of socialism in the 20
century demonstates that the disintegation of the USSR and forer
socialist countries in Eastem Europe negates neither the revolutionary
science of Maism-Leninism nor te pursuit of the soialist ideal. Leam
ing fom its experiences and drawing the corect lessons fom its disin
tegration we have to cay forward the stggle for socialism. This
requires as noted above the sharpening of class struggles to advance
the popularrevolutionary movement. This advance in the immediate
context wi11 have to be taken forwatd in eah of our counties wnile
workng for the convergence of the worldwide anti-globalisation move
ments into a mighty anti-imperialist peop1es movement.
The Balloon Bursts!
Sitaram Yec1lUr
THE super profts being reaped by intemational fnance capital was
ofen portrayed as a bal100n that could inflate to infinity. The periodic
crises like the col1apse of the South Asian Tigers" in the 1990s or the
col1apse ofUS hedge fund Long Ter Capital Management a decade
ago and the insolvencies of major fnancial giants in these years of the
21 st centur were al1 eated as minor ruptures that could be repaired
like punctures in a tyre. Given the unsustainable character of
globalisation the bal100n had to burst and that it did.
Lehman Brothers Holdings Inc. the fourth largest US investment bank
with $613 billio of debt has fle for bankuptcy. The 158 year-ld fir
had the reputation of surviving the rail road bankuptcies in the second
half of the 19th century and the Great Depression of the 1 930s. The
fact that it has col1apsed now is leading many to conclude that the
curent crisis of intemational fnance capital is deeper than the Great
The matte however does not end here. Merril1 Lynch had to enter
into a distess sale with the Bank of America for $50 billion. The insur
ance titan American Intemational Group (AIG) Inc. has tumed to the
US Federal Reserve and the state of New York for assistance. At the
time of going to press the US Federal Reserve has agreed to an $85
bi11ion bailout for AIG to avert a possible fnancial crisis worldwide".
Clearly this slide to disaster is not going to stop here. The crisis is
bound to intensify affecting us in India very severely as wel1.
The Lehman bankuptcy has reportedly wiped off more than Rs 2000
crore from the market valuation of Indian companies in which the US
fnancial giant made equity investments. Mei11 Lynch which had
global assets of around $2.5 trillio had R 347095 crore in India as its
assets at the end ofMarch 2007. It has been present in India since 1984
and has six major ofces employing over 600 people. Its future is now
under a big question mk.
Both Lehman and Merrill Lynch succumbed to the sub-prime mort
gage crisis that they helped create in the frst place. This crisis is an
inevitable consequence of the path of globalisation that is unfolding in
recent decades.
Two important features of globalisation require attention. First this
process has been accompanied by growing economic inequalities bot
within countries between the rich and poor and between the rich and
the poor countries. The Human Development Rort 2007-2008
confrs this with indisputable statistics. Forty per cent of wor1ds
population living on less than $2 a day accounts for 5 per cent of global
income whi1e the richest 20 per cent accounts for three quarters of
wor1d incone. More than 80 per cent of the wor1d5 poplation lives in
counties where income differentials are widening.
Secondly globalisation has given rise to the phenomenon of jobless
gowth. The gowth of employment has always been lower than the
GDP growth rate globally. Both these features put together mean that
the purchasingpower of the vast majority of the world5 ppulation has
been declining. Now capitalism inevitably plunges into a crisis when
what is produced is not sd. Under these circumstances the only way
that capitalism can sustain its levels of profts is by encouraging people
to procure loans whose spending wi11 maintain the levels of economic
actity. However when the time comes to repay these loans there is
the inevitable default.
This is precisely what happened in the USA in te curent sub-prime
(loans given at interest rates lower than the prime rates) crisis leading
to a shatp fall in housing prices with large defaults on home loans. lis
adverse1y affected fnancial frs that held derivatives on home loans.
Some of these have already gone bankupt and many others are on the
brinkof such fate. The size ofIosses on sub-prime home loans is esti
mated at $400 biIIion. What goes unreported however is that those
who do not repay loans are ruined.
s should not reaIly come as a big surprise. 7e Wall Street Joural
reported on October 12 2007 that the wealthiest one per cent of Ameri
cans reportedly eamed 21.2 per cent of aIl income in 2005. This in
creased fom 19 per cent in 2004 and exceeded the previous high of
20.8 per cent in 2000. In contast the bottom 50 p cent eamed 12.8
per cent of aIl income which was less than 13.4 per cent in 2004 and 13
per cent in 2000. The consequence of such growing inequalities would
lead according to MerriIl Lynch to a faIl of$360 biIIion in consumer
spendingding 2008-09. This only means that the crisis wiII intensif.
Obviously MerriIl Lynch did not take its own assessment seriously.
While the rich have been eaming their super profits by urging the poor
to take loans the resultant crisis fom the faIl has inevitably hurt those
very sections ofthe poor further.
The buren on the global poor has been compounded by a massive rise
in the prices of foodgrains and petoleum products. This can mainly be
explained by speculation in the foodgains commodity exchanges. lis
is directly related to and tiggered by the sub-prime home loan crisis
that has led maya global fnancial giant to bankuptcy. In order to cut
their losses global speculators have chosel) to shif their operations of
derivative tading to the commodity exchanges.
Derivatives are shadow fnancial insuments that include futures op
-tions forwards trading. If one buys or seIls a share in the stock market
then it is actual tade. However if one buys or seIls the option to buy
or nt to buy a share then it is derivative ade. The seIler of the option
beIieve it or not need not own that share. Likewise the buyer need not
pay the fuII money for the share. Such speculation in the global com
modity exchange markets is playing havoc with food and oil prices.
According to the Bank of Intemational Settlements as of December
2007 the total value of derivative trade stood at a staggering $5 16 tril
lion. This has grown fom $100 i1Iion in 2002. Thus this shadow
economy is 1 0 tmes larger than global GDP ($50 illion) and more than
fve times larger than the actual tading in shares in the worlds stock
exchanges ($ 100 trillions).
Any govemment of the day is duty bound to take measures to y and
insulate ourselves on such global speculation and protect the 1ivelihood
of our people. After all if inflation is a global phenomenon so is bird fu.
Do we not take measures to protect ourselves fom the spread of this
disease? Likewise it is incumbent upon the UPA goverent to shield
ourselves fom such massive global speculations.
At least now the UPA govemment must realise that without the ban
ning of speculative forard/futures trading in essential commodities
thernaay price rise canot be contained. Likewise t should imme
diately abandon all policy measures seekng to further Iibera1ise Indias
financial sector in the name of reforms. Tus the moves to increase
the volumes of foreign fnance capital in our insurance sector permit
ting foreign banks to acquire Idian private banks etc will only create
avenues to bail out the intemational fnance capital from the crisis by
offering new avenues for investents and proft making. Tis how
ever would put at risk the life-Iong savings of a lare number ofIndians
which are curently lodged with the Indian fnancial institutions. Re
member that the bulk of the assets of insurance giants like AIG Inc. are
the pension funds of workers and employees. Te bankuptcy of the
frm means the ruination ofthe 1ives of millions of employees and work
ers. Te UPA goverent must immediately abandon its proposed leg
islation to privatise pension funds.
Te Indian economy and the people must be protected from this crisis.
Three of the Wall Steets fve big independent investent banks have
disappeared in less than six months. What India needs is not more of
fnancial liberalisation but less of it. Te UPA govemment would do
weIl to cOlltinue to accept Lefs obj ections to these reforms in the
interests ofthe Indian economy and the Iivelihood oftur people.
Neo-Liberalism On the Brink
Of Failure
Prabhat Patnaik
Neo-liberalism is in obvious retreat. Its three main components viz.
trade liberalisation fnancial liberalisation and enforcement of sound
fnance" through the avoidance <f signifcant fscal defcits are in the
process of being negated everwhere. President Obamas exhorting
his countmen to buy American" and wanting to penalise companis
resorting to business outsourcing are the frst steps towards protection
ism. The acquisition of State contol over large chunks of the financial
sector in the US and the UK reverses the trend towards fnancial
liberalisation; and even nationalisation" in the sense of the total dis
possession of curent owners and large creditors of fnancial giants is
being discussed as a condition for putting tax-payers money into capi
talising them. Icreases in fscal deficits through various stimulus pack
ages are much in vogue. Neo-liberalism at present is clearly pass.
The real issue however is whether this represents only a passing phase
until the crisis has blown over and things have retumed to norl" r
the end of the road for neo-liberalism. The adherents of neo-liberalism
believe this retreat to be temporary. They expect the fnancial secto
once norlcy" has retumed to be re-privatised; they expect that
Obamas protectionist rhetoric wi1l reniain only rhetoric; and they ex
pect fscal defcits to narrow once the economies are out of recession.
But even in their best-cas scenario there can never be a retum to
square one. What the crisis has done is to demonstrate to everone that
the unfettered functioning of markets can bring disaster; hence even
.fer the crisis is ove whenever it is there wi1l be much greater regu
lation of fnancial markets. The need for regulation is an issue on which
both the Americans and the Europeans agree notwithstanding their
differences over whether the fscal stimulus should get priority over
regulation or the other way around. The crisis has certainly destroyed
the credibility of the neo-liberal ideology; and this wil\ have a lasting
impact even in the best-case scenario for the proponents of neo-liberal
But in fact the crisis wil\ not be over soon and that is precisely because
of the residual legacy of neo-liberalism which is the ideology of inter
national fmance capital whose hegemony notwithstanding all te jolts it
has taken is not so easy to shake of. And paradoxically the lingering
influence of neo-liberalism derived from the continuing hegemony of
fnance capital wi1I threaten neo-Iiberalism to an even geater extent
over time precisely by makng the crisis more protacted.
The obvious panacea for the crisis is the iection of demand into the
system through public expenditure; the injection of liquidity alone is not
enou since both fnancial institutions and individual wealth-holders
simply absorb all such injected liquidity wthout stimulating private de
mand a easier credit. The reason for this Iies in their excessive\y high
liquidity preference at present induced by the crisis itself (some have
called this situation a Iiquidity trap"). And if such injection of demand
rou1 public expnditue is to be efectve then it is better done tou1
a coordinated expansion of such expenditure across a host of major
economies rather than by individual economies in isolation. But inter
national finance capitl does not like such a coordinated expansion; not
surprisingly there is no sign of it. The US and China have armounced
fscal stimuli but the US stimulus is too small to make much diference
to the world (and China is not yet in a position to make much diference
anyway). Europe refus to launch let alone coordinate any sigificant
fisal stirtulus.
Finance capitals antipathy towards any expansion of public expendi
ture or indeed towards any assumption of a proactive role by the State
except when such activism is directed towards its own interests is
well-kown. I 1929 when the Liberal Party leader L10yd George on
Kes adce had asked forte launching of public works proges
fnanced by govemment borrowing for combating unemployment in
Britain the British Treasury under the influence ofBritish finance capi
tal had summarily tumed it down. Likewise all proposals for a coordi
nated expansion of govemment expenditure across major countries
mooted for instance by a group of German trade unions and also by
Keynes himself were shot down even in the midst of the Great De
pression of the 1930s. Ideed Keynes remained a neglected fgure in
his own country prior to the war. Even Roosevelts New Deal whih is
often supposed to have been inspired by Keynesian ideas was a pretty
tepid affair in the beginning. le moment an increase in public expendi
ture through a larger fiscal deficit had started off a recovery in the US
Roosevelt under pressure fom fnancial interests cut back the fscal
defcit precipitating another recession in 1937 om which the US
economy fnally came out only when war preparations began towards
the end of the decade.
Notwithstanding the availability ofthe Keynesian prescription capital
ism recovered fom the Great Depression only through war prepara
tions. Japan was the frst to overcome Depression through the re-ar
mament drive of its military-fascist regime and was followed by Ger
many afer the Nazi takeover. Liberal capitalist economies overcame
Depression only towards the end of the thirties when tey began
ing against the fascist threat. And the reason for this persistence of
Depression lay in the fndamental opposition of fnancial interests to
enlarged public expenditure (an opposition overcome only under
fascism where they directly control State power in alliance with
fascist upstarts and where larger public expenditure is in any case for
The reason for this opposition lies above all in the fact that any proac
tive role ofthe State in operating a capitalist economy underines the
social legitimacy of the capitalists: if the State can run enterprises ef
fectively ifthe State is required for the smooth running of the system
then why have capitalists at all? lis question acquires even greater
pertinence in the case ofthose capitalists who represent fnancial inter
ests and consttute in Keynes' words functionless investors" anyway.
Hence resicting the role of the State to merely promoting its own
interests (whose promotion is made out to be necessary for society as a
whole) is what fnance capital always wants.
This opposition was overcome in the post-war years only because of a
relative weakening ofthe position offnance capital. The war changed
the core1ation of class forces in advanced capitalism: there was a cer
tain dec1ine in the social and plitical weight of fnance capital and a
coresponding increase in that ofthe working c1ass which marked the
ascendancy of (old-sty)e) Social Democracy and paved te way for the
introduction.ofKeynesian dernd management. But with the process
of centa1isation of capital giving rise to the formation ofhuge blocs of
fnance and u1timtely to the phenomenon ofglobalistion of fnance"
fnance capital in the new garb of intemational fnance capital re-ac
quired the strength to overcome Keynesian demand management and
usher in the regime of neo-1ibralism and globalisation. Finance capita1 s
opposition to State activism in short never disappeared eVen in te hey
day of such activism.
This explains why intemational fnance capital even at this moment is
less than happy with fscal stimuli in the form of1arger State expendi
ture (which for politcal acceptabi1ity at large have to be directedto
wards the welfare of the people). It would rater have the State usjng
public fnds to bail out" the fnancial system (without disturbing te
position ofte 0ers) unti1 te next bubble" comes along to initiate
recovery. (I is instuctive in this ontext that in India whi1e the govem
ment has accepted the need for a larger pub1ic expenditure stimulus it
has def1y ied to use this stimulus for larger viabi1it gap funding"
under PPP i.e. for putting more public money in capitalists hands).
This opposition to fscal stimuli will certain1y delayrecovery which will
prolong te distess of workers thrown out of jobs and of peasants ad
petty producers suffering fom adverse terms ofade. This wi11 bring
home to people in an even more stark fashion the bitter consequences
of neo-liberalism snufng out any remaining chances of its makng a
comeback. Finance capitals opposition to any abandonment ofthe neo
liberal tenets. therefore wi11 paradoxically undermine even further the
prospects of sval ofneo-liberalism. But then capitalism not being a
planned system is always characterised by such paradoxes.
There is an even deeper reason apart from the peasive demand for
regulation" and the fact that the crisis is Iikely to be a protracted one
why neo-libera!ism has reached the end of its tether. Any capita!ist
economy with free" asset markets especially fee" fnancia! asset
markets is rrked by the foration and bursting ofbubb!es" in such
rrkets. While the formation ofbubb!es" strengthens the boom the
bursting of bubb!es" p!unges the economy into a s!ump. It recovers
from the slump only when some extemal" source of demand i. e. ex
tema!" to the regime of fee market capita!ism" itself happens to be
present. Throughout its histor therefore whenever capitalism has had
such an extema! crutch it has perfored well on average even as
bubb!es" have been formed and burst i.e. even through the phenom
enon ofthe superimposition ofbubb!es". The booms in such situations
have been pronounced while the slumps have been re!atively short or
shallow since the extema! crutch has been used to lif the system out of
such s!umps. On the other hand whenever such an extema! crutch is
absent the system witesses Great Slumps following the bursting of
I the pre-frst world war period capitalism had the crutch of the so
called exnding fontier". Millions ofEuropeans migated to temper
ate regions ofwhite sett!ement !ike the United States of America Aus
ta!ia New Zea!and Canada and South Afica and captured !and by
ing away the original iIabitants. leirdirect and indirect dernds
for goods and services in their new habitats including for infastuc
tle kept up the leve! of aggregate dernd in world capitalism and
even gave rise to substantia! capita! export fom the o!d capitalist coun
ties much of it fnanced through the extaction of surplus fomopica!
co!onies Iike India.
This process came to an end with the frst world wa

so that the inter
war period may be seen as one where capita!ism did not have any such
extema! crutch. It had lost its earlier crutch but had not yet deve!oped
any new crutch. Not surprisingly it experienced the Great Depression
in this period. With the bursting of the 1920s bubble" the s!ump that
set in cou!d not be alleviated through reCQurse to any extemal crutch
since the old crutch did not exist and nothing new had taken its place.
Keynes prescription that State expenditure shou!d provide a demand
stimu\us was an attempt to give capitalism a new extera\" crutch.
The pro\onged boom ofthe post-war period was a resu\t ofthe fact that
the system had acquired this new crutch. But with the demise of
Keynesian demand management afer the emergence of interationa\
fnance capita\ and the institutionalisation of neo-\ibera\ regimes capi
ta\ism was once again \ef without an extera\ crtch exact1y like in the
inter-war period. Not surprising\y with the collapse ofthe bubb\e" of
the 1 990s it is plunged once more into a Depression that is reminiscent
ofthe Depression ofthe 1930s. Unless it can fmd a new exteral crutch

the system wi1l remain submerged in crisis

with small ups and dows
around a basical1y stagnant state.
Such a new crtch realistically can only be State expenditue but witin
a new regime that overcomes the infrmit of te old Keynesian re
gime. For instance the coordinated fscal stimulus mentioned ear1ier
may have to be institutiona\ised in some manner so that it becomes a
pCnent feature ofwor1d capitalism rather than bing merely an epi
sodic arangement to counter slumps. But capitalism is not a planned
system; what new crutches become avai1able to it is not simply a mat
ter of developing some ideas and putting them into practice. As men
tioned earlier in the context of the emergence of Keynesianism the
arangements that come into being under capitalism are ultimate\y the
outcome of class struggle; and where such suggle leads society

whether to a prolonged deadlock or to some new capitalist arr1ge
ment or even to a system beyond capitalism altogethe cannot be pre
dicted beforehand. What is clear however is that the piod ofwide
spread acceptace of the neo-liberal capitalist arrangement is over.
The Paradox of Capitalism
Prabhat Patnaik
JOH Maynard Keynes though bourgeois in his outlook was a re
markably insightful economist whose book Economic Consequence
o[the Peace was copiously quoted by Lenin at the Second Congress
ofthe Communist Intemational to argue that conditions had ripened for
the world revolution. But even Keynes mSJltS could not fully compre
hend the paradox that is capitalism.
I a famous essay Economic Possibi1ities for our Grandchildren" writ
ten in 1930 Keynes had argued: Assuming no important wars and no
important increase in population the economic problem may be solved
or be at least within siJt of solution wt a hundred years. smeans
that t!1e economic problem is not ifwe look into the future the perma
nent problem o[the human rce (emphasis in the original).
He had gone on to ask: Why you may ask is this so startling? It is
startling becimse if instead oflookng into the future we look into the
past we fnd that the economic problem the stuggle for subsistence
always has been hitherto the most pressing problem ofthe human race . . .
Ifthe econon1ic problem is solved manknd wiI1 be deprived of its tradi
tional purpose." He had then proceeded to exan1ne how mankind could
fruitfully use its time in such a world.
True afer Keynes had written there has been the second world war
but thereafer manknd has had six and a half decades without any
important war" of the sort that could interupt what he had called the
era ofprogress and invention". And the rate ofpopulation growth has
also not accelerated to a point that can be considered to have invali
dated Keynes' pren1ise. And yet i we take mankind as a whole it is
as far from solving the economic problem as it ever was. True there
has been massive accumulation of capital and with it an enormous .
increase in te mass of goods availab1e to mankind; and yet for the vast
majority of mankind the struggle for subsistence" that Keynes had
referred to has continued to remain as acute as ever perhaps in some
ways even more acute than ever before.
To say that this i s only because not enough t ime has passed that over a
slilt1y longer time period Keynes vision wil\ indeed t out to be true
is facile. The fact that the bulk of mankind continues to face an acute
strugg1e for subsistence is not a matter of degree; it is not as if the
acuteness of this stggle for this segment of mankind has been lessen
ing over time or that the relative size of this segment has been 1essen
ing over time . We cannot therefore asse that the passage of more
time will lif everybody above this stuggle.
Likewise to say that while enormous increases have taken place in the
mass of goods and services available to manknd (the increase in this
mass being more in the 1ast hundred years than in the preous two
thousand years as Keynes had pointed out) its distibution has been
extremely skewed and hence accounts for the persistence of the struggle
for subsistence for the majority of the worlds population is to state a
mere tautology. The whole point is that there is something structural
O the capitalist system itse/ the same system that causes this enor
mous increase in mankinds capacity to produce goods and services
which also ensures that notwithstanding this enorous increase the
struggle for subsistence must continue to be as acute as before or even
more acute than before for the bulk of mankind.
Keynes missed this stctural aspect of capitalism. His entire argument
in fact was based on the mere logic of compound interest i.e. on the
sheer fact that if capital increases say 2 percent per annum the capi
tal equipment of the world will have increased by a half in twenyears
and seven and a half times in a hundred years". From this sheer fact it
follows that output too would have increased more or 1ess by a similar
order of magnitude and mankind with so much more of goods at its
disposal wou1d have overcome the struggle for subsistence . The
reason Keynes assumed that an increase in the mass of goods would
eventual1y beneft everyone lies not just in his inability to see the
antagonistic nature of the capitalist mode of production (and its antago
nistic relationship with the surrounding universe of pettyproducers) but
also in his belief that capitalism is a mal1eable system which can be
moulded in accordance with the dictates of reason by the intervntions
of the State as the representative of society. He was a liberal and saw
the state as standing above and acting on behalf of society as a whole
in accordance with the dictates of reason. The wor1d he thought was
ruled by ideas; and correct and benevolent ideas would clear1y trans
late themselves into reali so that the increase in mankinds productive
capacity would get natural1y transfored into an end of the economic
problem. If the antagonism of capitalism was pointed out to Keynes
he would have sirply talked about state intervention restraining this
antagonism to ensure that the beneft of the increase in prodQctive
capacity reached al1.
The fact that this has not happened the fact that the enorous increase
in mankinds capacity to produce has translated itself not into an end to
the struggle for subsistence for the wor1ds population but into a plethora
of al1 kinds of goods and services of little benefit to it fom a stockpiling
of araments to an exploration of outer space and even into a system
atic promotion of waste and lack of utlization or even desuction of
productive equipment only underscores the limitations of the liberal
world outlook of which Keynes was a votary. The state instead of
being an embodiment of reason which intervenes in the interests of
society as a whole as liberalism believes acts to defend the class inter
ests of the hegemonic class and hnce to perpetuate the antagonisms
of the capitalist system.
These antagonisms perpetuate in three quite distinct ways the struggle
for subsistence in which the bulk of manind .is caught. The first cen
tres around te fact that the level of wages in the capitalist system
depends upon the relative size of the reserve ary of labour. And to the
extent that the relative size of the resrve ary of labour never shrinks
below a certain threshold level the wage rate rerins tied to ; ne sub
sistence level despite sigificant increases in labour productivity as nec-
essarily occur in the era of progress and innovation". Work itselfthere
fore becomes a struggle for subsistence and iemains so. Secondly those
who constitute the reserve ary oflabour are themselves destitute and
hence condemned to an even more acute struggle for subsistence to
eke out for themselves an even more meager magnitude of goods and
services. And thirdly the encroachment by the capita1ist mode upon the
surrounding universe of petty production whereby it displaces petty
producers grabs land from the peasants uses the Wmachinery of the '
State to appropriate for itself at the expense of the petty producers an
amount of surplus value over and above what is produced within the
capitalist mode itself in short the entire mechanism ofprimitive accu
mulation of capital" ensures that the size of the reserve army always
remains above this threshold level. There is a steam of destitute petty
producers forever flockng to work within the capita1ist mode but un
able to fnd work and hence joining the ranks ofthe reserve army. The
antagonism within the system and vis--vis the surrounding universe of
petty production thus ensures that notwithstanding the massive in
creases in manknds productive capacity the struggle of subsistence
for the bulk of manknd continues unabated.
The growth rates of world output have been even greater in the post
war period than in Keynes' time. The gowt rates in particular capital
ist countries like India have been of an order unimaginable in Keynes'
time and yet there is no let up in the struggle for subsistence on the part
of the bulk of the population even within these counties. In India pre
cisely during the period of neo-libral reforms when output gowth rates
have been high there has been an increase in the proportion ofthe rural
population accessing less than 2400 calories per person per day (the
fgure for 2004 is 87 percent). This is also the period when hundreds of
thousands of peasants unable to carry on even simple reproduction
have committed suicide. The unemployment rate has increased not
withstanding a massive jump in the rate of capital accumulation; and
the real wage rate even of the workers in the organized sector has at
best stagnated notwithstanding massive increases in labourproductiv
ity. I short our own experience belies the Keynesian optimism about
the future of mankind under capitalism.
But Keynes wrote a long time ago. H
working of the system better (afer all Marx who died the year Keynes
was bom saw it) but perhaps his upper class Edwardian upbringing
came in the way. But what does one say of pople who having seen
the destitution-'high gowth" dialectics in the contemporary worId still
cling to the iIIusion that the logic of compound interest will overcome
the economic problem of mankind"? Neo-liberal ideologues of course
propound this iIlusion either in its simple version which is the 'tickle
down" theory or in te slightly more complex version where the State
is supposed to ensure through its intervention that the benefts of the
growing mass of goods and services are made available to all thereby
alleviating poverty and easing the stuggle for subsistence.
But this iIIusion ofen appears in an altogether unrecognizble for.
Jeffey Sachs the economist who is welI-kown for his administation
of the so-calIed shock therapy" in the former Soviet Union that led to
a veritable retogression of the economy and the unleashing of massive
suffering on mi llions of people has come out with a book where he
argues that poverty in large parts of the world is associated with ad
verse geographical factors such as drought-proneness desertifcation
infertile soil and such like. He wants global efforts to help these econo
mies which are the victims of such niggardliness on the pa of nature.
The fact that enormous poverty exists in areas where nature is not
niggardly but on the contary bounteous; the fact that the very bounte
ousness of nature has formed the basis of exploitation of the producers
on a massive scale so that they are engaged in an acute struggle for
existence precisely in te midst of plenitude; and hence the fact that the
bulkof the worlds population continues to struggle for subsistence not
because of nature s niggardliness but because of the incubus of an
exploitative social order are alI obscured by such analysis. Keynes '
faith in the miracle of compound interest would be justife in a socialist
order but not in a capitalist one.
The End of the Illusion
Prabhat Patnaik
NEO-LIERALISM specialised in selling an illusion name1y that the
unfettered functioning of markets both commodity markets and fnan
cial markets constituted the best economic arangement for a society.
This illusion had been buried in the 1930s by the eperience of the
Great Depression and by the theoretical endeavours ofJohn Maynard
Keynes a British Liberal and Michael Kaleck a Polish Marist. But it
was resurrected to serve a specific purpose. This resurrection had noth
ing to do with any theoretical demonsation of the invalidity of the
Keynes-Kaleck propositions. True the Keynesianprescrition forthe
rescuing of capitalism had tumed out to have been prob1ematical as
indeed one would expect with any Liberal panacea for capitalism; but
this is not the same as saying that the Keynesian analysis of the i11s of
capitalism had been proved wrong. The resurrection therefore was a
theoretical sleight-of-hand.
Behind this resurection were fnancial interests re-acquiring hegemony
in a new incamation after the setbacks faced by them during the De
pression war and immediate post-war years. Keynes had called for the
euthanasia of the rentier" and the socialisation of investment". I his
view the basic fault of the market mechanism was that it could not
distinguish between enterprise" and speculation" so that the unfet
tered functioning of markets made the livelihood ofthe common people
dependent on the whims of a bunch of speculators. Capitalism whose
survival he had wanted could not in his view survive ifthis grievous
fault was not rectifed through the institutiona1isation ofState interven
tion in crucial spheres re1ating to its functioning. Resurgent fmance capi
tal in its new globalised" garb starting from the late sixties took its
revenge on Keynes and decided to put the c\ock back. It sold" or
imposed through agencies like the IMF and the World Bank its free
market ideology all around the globe. While Keynes had wanted f
nance to remain national so that nation-States could have the autonomy
to pursue employment-promoting policies globalised" fnance forced
nation-States to open their doors to its unfettered movements and jus
tifed it by invoking the illusion of an eficient ee market.
This illusion is now over. Two momentous recent developments com
ing one afer the other have fnished it of though only one of these has
caught serious attention. And this is the threat of collapse of the US
fnancial system and with it an unprecedented fnancial crisis in the
capitalist world. But the other was no less serious and that related to
the unprecedented upsurge in oil prices ( and associated with it food
prices). Both developments are the outcome of speculation in one case
speculation that made some fnancial paper worthless. in the other
case speculation that caused a flight from fnancial paper as suh
into commodities viz. oil futures ( that had a spill-over effect on
foodgrains). In what follows we shall look only at the frst of these
deve1opments since that is curently in focus.
This crisis a fall-out of the sub-prime lending crisis in the United States
is exceedingly serious. Alan Greenspan the forer boss of the Federal
Reserve calls it the crisis that happens once in a century. His succes
sor Ben Bemanke has frankly admitted we have no control any
more". The top fve investent banks in the US have ceased to exist in
their previous fors: Bear Steams got tak over through govemment
facilitation some time ago; Meril Lynch was taken over by the Bank of
America under the govemments beni supervision; Lehman Broth
ers an investent bank with a 1 58 year d history declared itself bank
; and Goldman Sachs and Morgan Stanley have decided to trans
for themselves into ordinary depsit-receiving banks. Investment bank
ing as a phenomenon in Wall Street is over. Two other fnancial giants
Fannie Mae and Freddie Mac have got nationalised to prevent their
collapse; and AlG the worlds largest insurance company has survived
for the present through the injection of funds worth $85 billion from the
govemment but this is meant only to give it time during which it liqui-
dates some of its assets to resucture itself into some sort of viable
existence. These deve1opments any single one of which represents a
severe tectonic disturbance have all occured within a few days of one
another. Little wonderthen tat te wor1d of intemational fnance capi
tal is rocking. The question naturally arises: why has this happened?
The capitalist wor1d is invariably punctuated by fnancial crises which
necessarily accompany the cyclical crises irespective of whether the
latter are caused by financial or non-financial factors. 80 the fact of
tbere being a fnancial crisis in which some fnancial firs go under is
not in itself surprising. But there are three additional factors which have
been at work in the recent period each of which contributes towards
makng tbe fnancial crisis potentially far more debilitating and hence in
their totali ty explain the fnancia earthquake we are curentIy observ
Thefirst ofthese relates to the short-sighteness of speculators. Dur
ing any asset price boom the beliefthat it would go on for ever gradu
ally gathers momentum; as a result tbe awareness of risk comes down
and more and more risk positions begin to be taken. Hence instead of
such an asset-price boom getting uncated eatly in which case the
potentiall yestabilising impact of such tncation on te fmancial sphere
would also be Iimited it persists making the financial system more and
more fagile until the end ofthe boom catches the entire fnancial sys
tem in an acute crisis.
The sub-prime crisis illustrates this point. As tbe reaI estate boom in the
United 8tates got underay the euphoria about it began to increase.
Financial firms became more and more reckless about supporting it.
Credit was available to all and sundry at one point up to the full value of
the property being acquired which itselfwas never carefully assessed ..
To say this is not to argue that credit-giving institutions ould becon
servative in accommodating borowers but merely to underscore the
fact that they are swayed by speculative considerations which make
them reckless. They give credit in anticipation ofrising house prices
since they expect this rise to continue. And when ofor one reason or
another the rise in house prices reaches a plateau the borrowers are
caught short. To pay back their loans many of them are then forced to
sell their property which brings down propey prices. Finally the time
comes when the value ofthe assets against which the loans are given is.
way below the magnitude of the loans themse\ves. This is when the
financial papers representing directly or indirect1y c\aims upon real
estate are worth only a fraction of their face value and the fnancial
world gets into a crisis.
The second factor relates to the emergence of a vast derivatives"
market. A loan say for the acquisition of a piece ofhousing property is
typically thought of as a bilateral arrangement between the lender and
the borrower. I a modem financial sector however the risks associ
ated with any loan are no longer bome exclusively by the lender but
themselves become a marketable commodity. These risks are passed
on to others through the derivatives" rrket who in tum pass them on
to sti11 others and so on. All this however does not mean that the risks
themselves disappear or diminish; what it means is that there is a sys
tematic undervaluation ofrisk since nobody quite kows what the risk
associated with his!her portfolio of assets actually is. This piece off
nancial innovation" therefore has the same effect as the frst factor
mentioned above namely it leads to an underestimation ofrisk during
any boom in asset prices which makes such booms more prolonged
and more pronounced and the subsequent'collapse in the asset prices
more precipitous and hence more calamitous for the world offnance.
The third factor has to do with goveniment intervention. Whenever
such a fnancial crisis involving giants in the American financial mar
ket looms large on the horizn the govemment steps in to bail out these
giants. Such govemment action may well be dictated by the desire to
avoid a recession but the awareness that the govemment wi11 prode a
bai\"out also works in the direction ofmakng fnanciers reck1ess mak
ingthem underestimate risks and hence promoting speculative bubbles
in the asset-price markets whose bursting becomes even more debili
tating than if financiers had been more cautious and less confident of a
govemment bai\-out. Economists refer to this as the moral hazard"
problem. Govemment intervention compounds the moral hazard"
Saying this may give the impression that since goverent intervention
compounds the problem the problem lies with such intervention and not
with the market itself. But the failure ofthe market lies precisely in the
fact that it provides the govemment with such a catch-22" situation
where if it does not intervene then it has to tolerate a reession but if it
does intervene then it makes things worse for the future.
I short the tendency of capitalism to face crises because of specula
tors behaviour which Keynes had written about has got greatly ac
centuated in contemporary capitalism. Such specation has the even
tual consequence of making fnancial papers of one sort or another
c10se to worthless and this fact threatens not just a few fnanciers but
the entire system through a domino" efect. Till now we have seen
financial crises brought on by such speculative behaviour occurring in
paicar parts of the world in East Asia in Russia in Latin America
etc.; in other words fnancial papers relating to these countries had
become near-worthless. No we are seeing a fnancial crisis arising
fom the fact that financial paper relating to a sector within the me
tropolis namely the housing sector becoming close to worthless. The
implications ofthe latter of course are far more serious but the taste of
the problem is something which the world has already had.
The illusion of the market being efcient" may have been given up in
the metropolis but in India brav\ attempts are being made to make it
persist. The importance of govcmment intervention is being played dow.
But the simple fact remains that govemment intervention has become
absolutely necessary for sustaining the system that has become utterly
fragile because ofthe free O that speculators enjoyed in a free mar
ket. And this interention takes the for ofthe govemments buying or
providing loans against certain fnancial papers at values that the mar
ket would not accord them for if this was not the case then there
would be no bail-out".
The Indiari finance ministers attitude has been quite striking. While
c1aiming that India will not face the damaging consequences of the
financial crisis a fact for which it is not Chidambaram but the
opponents offnancial liberalisation" notably the Lef that should take
credit he goes on to add that India s drive towards financial
Iiberalisation" wi11 continue! Here we have an obvious cse of irrespon
sible bravado which becomes possible precisely because his statnents
carry not an iota of analysis.
I the US itself even though the govemment is bailing out" the fnan
cial giants it wil1 be under popular pressure to infict some punitive
measures upon them in the for of a change of management and
possibly ownership. But the bailing out" even if it manages to prevent
a severe financial crisis wi11 certainly not prevent a recession which
appears to have already set in. The state of credit wi11 continue to be
dificult for sometime to come which wil1 only worsen the recession.
Even the fnancial crisis wil1 not be over with the current bail-out"
package. Afer the Bear Steams episode every one thought that the
worst was over but it wasnt. The same perhaps is tue of the present.
The system of course wil1 recover but the for in which it wil1 do so is
unlikely to be the same as before. And this wil1 open up newpossibilitie
The Threat of Global Recession
C P Chandrasekhar
AS this article is being written expecttions are that the US Federal
reserve would cut interest rates by a quaer to half a percentage on top
of an unscheduled and unprecedented 0.75 per cent cut it announced
recently. This panic response is because of growing fears of a reces
sion in the US that would be steeper and longer than recessions expe
rienced in the recent past. When on the 20th ofDecember last yea the
US Department of Commerce released fgures indicating that GDP
gowth in the US had accelerated (to 4.9 per cent) during te third
quarter (July to September) of 2007 the celebration was tempered.
Growing evidence of a housing slump and a credit squeeze suggested
that the economy was bound to slow down in the last quarter. But
nobody was speaking of a recession then.
More recently a series of data releases have ntensifed fears of a
recession in the US. On Januar 4 the Bureau of Labour Statistics
reported that the unemployment rate in the US had risen to 5.0 per cent
in December whi1e nonfarm payroll employment had remained more or
less unchanged. Home sales had reportedly declined by 20 per cent
nationally during the year to November 2007 and median house prices
had fallen by 1 2 per cent in Califoria and 10 in per cent in Florida
though only 3 per cent natinwide. This has begun to tell on consumer
spending which had been spurred during the housing boom by the illu
sion ofincreasing wealth that rising home prices created. According to
the Financial 1imes Merrill Lynch has estirted that consumer spending
could fall by 360 billion during 2008-09.
When the news gets gloomy panic spreads. On the 18th of Januarythe
S&P 500 closed at 1325 down almost 6.5 per cent fom 1 416 four
days earlier and from its previous peak of 1 565 on October 10 2007.
Not wanting to be seen as napping the US Federal Reserve chairman
Ben Bemanke told the Budget Committee of the US House ofRepre
sentatives that a package of anywhere between $50-150 Ii1lion-a rather
wide margin-would be a reasonable" stimulus for an economy being
pushed into recession by the housing crisis and the !nancial collapse
that had accompanied it. Soon thereafter almost on cue president Bush
announced a package involving $145 billion in tax relief for individuals
and businesses ostensibly to provide a shot in the ar" for the economy.
Details ofthe programme are yet to be proded but expectations are
that taking a leaf out of a similar package adopted in 2001 it would
offer a one-time tax rebate to individuals and write-offs against invest
ment in equipment for businesses.
I 2001 and 2002 the Bush adminisation had similarly sought to boost
the economy with a personal tax rebate that put between $300 and
$600 in the hands of individual households and followed this up with tax
incentives for businesses investing in plant and equiprent. Treasury
secretary Henry Paulson has made clear that the adrinistration be
lieves that that policy not only worked but worked quickly. This is seen
as justifying this attempt at a repeat perforance.
There are three features of this recipe for revival that need noting.
First it hopes to encourage individuals and households to keep spending
despite the write down in the value oftheir housing and fnacial assets
by giving them a one-time tax windfall. This borders on the optimistic
inasmuch as a lot ofpast household spending in the US had been f
nanced with debt resulting in a steep decline in household savings rates.
Individuals may use the windfall to repay debt rather than opt for addi
tional spending. Moreover ifthe $360 billion consumptin hit forecast
by Merrill Lynch is anywhere near tue even the whole ofthe Bush
rescue package is inadequate.
Second the package is presented in a way which conceals the role of
speculation and outrit financial fraud in triggering "the curent down
tur. Rather the downtum it is being eated by the administration as
one more unavoidable cycle under capitalism. In the apologetic lan-
guage of president Bush the story runs thus: In a vibrant economy
markets rise and dec1ine. We cannot change that fundamental dynamic.
Yet there are also times when swift and temporary actions can help
ensure that inevitable market adjustments do not undermine the health
ofthe broader economy. This is such a moment."
Since those responsible for the downtum are likely to be tax-paying
individuals themselves and employees or owners of tax-paying busi
nesses the package rewards them without in the frst instance having
hauled them up for their erors of commission and omission. Moreover
there is a real danger that the tax benefts on ofer and the ones offered
since the Bush administation took ofce in 2001 would be made per
manent before this president leaves ofice. A crisis created by a section
of the rich is being used to reward the rich at the expense of the exche
quer. The implications ofthis bias in policy for income disibution are
all too obvious. The wealthiest 1 per cent of Americans reportedly eaed
21 .2 per cent of all income in '2005 according to data fom the Intemal
Revenue Service. This was an increase in share relative to the 19 per
cent recorded in 2004 and exceeded the previous high of20.8 per cent
set in 2000 at the peak of the previous bull market in stocks. As com
pad with this the bottom 50 per cent eamed 12.8 per cent of all
income which was less than the 1 3.4 per cent and 1 3 per cent recorded
in 2004 and 2000 respectively (Te Wall Street Joural October 12
Finally the package does not consider the option of increasing govem
ment spending. Govemment spending coupled with expanded unem
ploytent benefts would ensure that the fscal stimulus would increase
demand immediatly. This can be quite crucial if a recession is indeed
imminent. As Bemanke himself noted in his deposition before Con
gress: To be useful a fiscal stimulus package should be implemented
quickly and structured so that its effects on aggregate spending are felt
as much as possible in the next 1 2 months or so." Combining expendi
ture increases with income benefits or tansfers to the middle class and
the unemployed would ensure that the rescue does not prove inequalising.
But that clear1y is not a matter for concem
These features of the package notwithstanding govemments and in
vestors outside the US hope that it would succeedin its prime intent
combating a US recession. This is because they rightIy fear that ifUS
does experience a shar downtum a global recession would foIIow.
Some like the authors of the WorId Banks annual Global Economic
Prospects rport for 2008 are more optimistic. They argue that global
growth which slowed from 3.9 to 3.6 per cent between 2006 and 2007
would faII only marginaIIy to 3.3 per cent in 2008. This is because ro
bust expansion in developing countries partly compensates for weaker
results in high-income countries". Needless to say the Bank itseIf senses
an element of excessive optimism that derives from assuming tat the
processes of growth in deveIoping and high-income economies are un
related leaving growth in the South insulated from any recession in the
North especiaIIy the US. I quickIy goes on to say that: Several seri
ous downside risks cast a shadow over this sof landing for the global
economy. Extemal demand for the products of developing countries
could weaken much more sharply and commodityprices could decline
if the faItering US housing market or further fnancial turmoil were to
push the United States into a recession. Altematively monetary au
thorities might overeact to the current cIimate ofuncertainty and over
stimulate the economy. This would be particularIy dangerous for deveI
oping counties ifthe bulk ofthe resulting liquidity were to move into
rapidly growing developing regions provoking the same kind of
overinvestent conditions that arose in the US housing market."
Given the role ofhigh growth in China and India in shoring up global
growth the impact of a US recession on the global economy would
depend on the effects it would have on these two counties in particu
lar. That could be significant given the dependence of growth in these
counties on US demand. For over a decade now Chinas merchandise
exports to the US have amounted to a little more than a fifth of its
merchandise exports to the worId as a whole. And in Idias case while
the share of merchandise exports to the US were at similar levels tiII
2002 they have been dec1ining since and stood at 17 per cent in 2006.
These are large proportions and a recession in the US is bound to
adversely affect the volume of exports and the pace of growth in these
But even this does not capture the whole story. As Catherine Mann of
the Institute for Inteational Economics puts it China is a value-added
weigh-station for production ultimately destined for the United States
and to a lesser extent Westem Europe. To some degree the explosion in
intraregional tade in Asia is not from home grown demand but rather
still depends ultimately on exporting to the US market." That is China
is the location for the fnal reprocessing of capital goods intermediates
and raw materials imported into the country fom elsewhere in Asia
before being sent on to the US. A slowing of exports to the US from
China would slowthe inta-regional trade inAsia that drives the regions
Further in Indias case the US is also an exte

ely important markei

for its exports of services that have come to account for a large share
of total exports fom the county. In 2006-07 the exports of sofware
and business services from India amounted to as much as 40 per cent
ofIndias merchandise exports. Around two-thirds of these exports are
directed to the Aericas especially the US. Here too a slowdown in
the US can have damaging consequences.
The dependence on the US rrket of these two key deve\oping coun
tryrivers of global gowth stark1y iIIustates the irlications of a slow
down of growth in the US for the world economy. To b ve therefore
that a US recession Wb partly compensated for by robust growth
ines counties is to iore te ature of global interdependence. Not
surprisingly most govemments are willing to discount the implications
ofthe Bush administrations eforts at combating recession for national
and global inequality so long as they serve to stall or reverse the down
Lengthening Shadows of
Global Recession
Editorial People 's Democrac
THE count is paying a very high cost for the state of denia! ofboth
the Congress and the 8JP on the irpact ofthe g!oba! econoric reces
sion. Mired as they are in the neo-!ibera! rindset both are living in an
illusion that the curent recession is a case ofthe nor! rise and falI of
the capita!ist business cycle. The current recession as we had repeat
edly shown in these colurs is caused by the structura! inadequacies
ofthe capitalist syster and is therefore a crisis ofcapitalisr and not
due to lack of or faul regulations or excessive geed by a few cap
tains of interational fnance.
WorId 8ank5 G!obal Econoric Prospects (GEP) 2009 says: What
began six ronths ago with a rassive de-!everaging in fnancial rrkets
has tumed into one of the sharpest global econoric contradictions in
rodem history". It continues to say: Globa! GDP is expected to con
tact by 1 .7 per cent in 2009 which would be the frst decIine in world
output on record".
The deceleration in econoric growth in low-and riddle incore coun
tries as a group is expected to ratch the deceleration in high-incore
countries. The deveIoping world is antcipated to see growth falI fror
5. 8 per cent in 2008 to 2.1 in 2009 a drop of 3.7 percentage points
sirilar to the falI in high-incore econories (drop of3.7 per cent fror
0.7 per cent to rinus 3.0 per cent). This highly synchronous grwth
collapse cannot be solely explained by trude linkages but iIIus
ates also that developing countries have been directly hit in their do
restic econories by the fnancial crisis. The reversal of capital fows

col1apse in stock markets and in general the de!erioration i n financing
conditions have brought investment growth in the developing coun
tries U a hall. and in many developing counlries investmenl is sharply
declining." (emphasis added)
This is precisely what we had analysed and anticipated in these col
umns in the past. On this basis we had argued that unless there is a
quan!um leap in public investments domestic demand and employment
canno! be shored up. Without this the economy cannot be stimula!ed
for growth and to prevent the slide to recession . Unfortunate ly the
Manmohan Singh govemment has paid little heed to this. We had even
stated both on the floor of the parliament and outside that the general
elections cannot be used as an excuse to postpone such a decision as
this would have damaging and possibly irreversible impact on our
Given their state of denial this refusal to sharply increase public invest
ments has had its inevitable effect in the sharp drop in our industrial
output. India s industrial output dropped to an alarming minus 2.3 per
cent growth in March 2009. Of this the manufacturing sector which
has nearly 80 per cent weightage in the Index of Indusial Production
(IIP) fel1 by a whopping minus 3. 3 per cent.
Foreign D irect Investent (FDI) in India has been estimated to have
dropped by over 55 per cent - fom $4.4 billion in March 2008 to $2
billion in March 2009_ lndia s expos have declined for the sevnth
consecutive month in April 2009 amounting to a fal1 of 33 per cent.
Similarly imports contracted by 35 per cent. While this may narrow the
trade deficit the export targets for 2008-09 are much less than even the
revised scaling down done by the commerce ministry.
Notwithstanding the bombastic claims made reglrding India s GD P
growth rates by the govemment the GEP has estimated the current
growth rate this year to be 5.5 per cent projected to fal1 to 4 per cent
next year. Apa fom having a devastating impact on employment
(with reports of various agencies indicating that over a crore of jobs
have already been lost and many lakhs retuming from foreign lands
having lost jobs there) this sharp fal1 in the growth rate has increased
the level of pove in India with the GEP estimating that we are now
only ahead of Sub-Saharan Africa in tenns of popation below the
poverty line with over a quarter oflndians living in extreme poverty"
living on less than $1 .25 a day. ln tens of purchasing powerparity this
taIIies with the estimation ofthe A1jun Sengupta Report of78 per cent
ofIndians living on less than Rs 20 a day.
Given this reality check of our economic fundamentaIs it is c1ear that
the lndian people need to brace themselves for much harder economic
conditions in the near future. This can be prevented only by the new
goverent substantiaIly hiking public investment that wiII generate both
employment and demand whiIe at the same time building the much
needed economic and social infrastructure in the country.
Another World Deprssion?
Finance Capita and Neo-Defationism
Utsa Patnaik
THE capitalist worid is i tu oil with widespread fnacial crisis bank
ruptcy of the largest investment and insurance corporations massive
injection ofstate fnds to avert banking collapse stock market declines
worid wide capital fight and the onset of economic recession in the
US and the Euro-zone. The US is in recession and the Euro-zones
expected 2009 gowth rate has been revised down fom 1 .9 to 0. 1
percent. There is downtum in employment in countries closely inte
gated through trade with these industrial regions especially in China. A
number of countries have already seen capital fight and curency de
preciation of such severity that they have been forced to tum to the
IF (Iceland Ukaine Pakstan ) or enter into emergency fnancal
arangements (Hungary South Korea). Many obseers call it the se
verest crisis since the Great Depression. Reportedly world leaders are
pouring over the works of not only J M Keynes but also ofKarl Mar in
a desperate search for a way out.
There are certainly many points of similarity of the present situation
with that in the late 1 920s. A recession in world agriculture fom 1925
preceded manufacturing slowdown and the 1929 stock market crash
similarly there has been agrariandepression in the developing worid for
a decade before the 2008 crash. However this pervasive agrarian de
pression has been entirely igored by economists who cannot see the
connection between increasing pov in te global South and the world
of high finance. Another point of simi1arity is the underining of the
position ofthe world capitalist leader. From the mid-1920s Britain the
then capitalist leade found it increasingly dificult to maintain extemal
lending to support growth abroad whi\e keeping its own markets open
to imports. The US the present world capitalist leader similarly fnds its
position severely undermined: it is unable to shore up demand in the
world hy keeping its own market open and expanding at an adequate
rate. Despite borrowing massively from other countries to sustain its
import-dependent consumption it is now unable to avoid domestic re
cession. This is the stuff of serious crisis when the capitalist leader can
no longer lead efectively and there is no substitute leader or set of
institutions in si1t.


Above all the fundamental similarity in both cases Iies in the domina
tion of fnance over industry and the pursuit of economic policies
favouring fnance capit.al at the expense of growth ofthe real economy
particularly the output ofbasic necessities required by the masses. The
dogma of balanced budgets marked the domination of fnancial inter
ests in the 1920s. The domination of fnance in the modem world and its
ideology kown as neo-liberalism' has been evident since the 1970s.
We might as well call it neo-deflationism for the ideology of finance
capital always involves policies defating the level ofmass demand.
Today a global food crisis coexists with unprecedented fnancial col
lapse and a recession which may well tum into a depression. The roots
of this conjuncture of triple crisis lie in the deregulatory market ori
ented expenditue-defating policies ofthe dominant neo-Iibral regime
irplemented for over a quarter century. What is the connection be
tween the different crises? The economic dogmas of fnance capital
when they shape public picy always produce highly de\eterious ef
fects on the real economy. Faced with agicu1tural recession and unem
ployment fnance ministers
in eve country in 1929 all defationists to
the core pressed through with repeated rounds of expenditure reduc
tion to achieve balanced budgets thus raising unemployment further
reducing production and pushing the world into depression. Britains
abilityto maintain long-ter extemal lending to the indusalising world
had depended heavily on its appropriating Idias large export eamings
and this abi1ityto lend collapsed as the eamings declined sharpl mark
ing the demise of the Gold Standard. Keyness argument that the theory
underlying defationism was wrong since it assumed full employment


and expansionary picies should be fol1owed in the actual situation of
unemployment went unheeded until a great deal of damage had been
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.
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
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.
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
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.
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
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
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
other words ear an additional amount that is a multiple ofthe
increase in government borrowing
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
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.
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
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 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.
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
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
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.
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
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
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.
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
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
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
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.
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
ing to stirInnate the economy
fi a

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
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
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
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.
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
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.
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
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
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
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
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
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.
Obamas political appointees 1nc\ude people like Rubin Geithner
and Summers who are indubitably members of the global funcial
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.
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
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
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
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-
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

libralistion itself. This in t implies that assessments of the extent of

desynchronisation cannot rely merely on evidence on the differential
distribution ofthe slowdown in GDP growth or increase in unemploy
ment but must examine changes in the rate of growth and patter of
worId tade as well.
Trade data at a global leveI is released with a lag when compared with
data on GDP and in the case of some countries even when compared
with employent and unemployment data. Not surprisingly it was only
in July that the data on interational trade trends during the frst quarter
of2009 in the G7 counties and the worId economy was released by the
OECD Secretariat and the WorId Trade Organisation respectively. To
recall while the slump in production in the developed countries has
been wit us since the end of2007 it was in the last quaer of2008 and
the frst quarter of2009 that the crisis was most intense. And whatever
evidence we have about the crisis moderating and even possibly bot
toming out comes fom the second quarter of the year. So the most
recent evidence on interational trade tends relates to the period when
the recession was possibly in its most intensive phase.
As the WTOs World Trade Report 2009 notes: Signs of a sharp
deterioration in the global economy were evident in the second half of
2008 and the frst few months of2009 as worId ade flows sagged and
production slumped frst in developed economies and then in develop
ing countries. Although wor1d trade grew by 2 per cent in volume terms
over the course of2008 it tapered off in the last six months of the year
and was well down on the 6 per cent yo1ume increase posted in 2007."
The most important trend the evidence points to is the sharp contraction
in imports into (and of course exports fom) the G7 counties. The
decline in import growth re\ative to the preous quarter which was
c10se to 6 per cent in the 1ast quarter of2008 jumped to 1 0.5 per cent
in the frst quaer of2009. This trend seems to be generalised across
the G7.
The contaction in import growth on a year on year basis was even
sharper. The quarter-on-previous-quarter and year-on-year rates of
growth of imports stood at -9.5 and -23.3 per cent for Gerany and -
1 1 .8 and -1 9 per cent in the cas of the US. With the G7 countries
accounting for 40 per cent of global merchandise imports this must
have had a severe contactionary impact on global economic actity.
The slowdown was not resicted to merchandise ade a10ne. Com
pared with the previous quarter the va1ue of imports of goods and ser
vices into OECD countries measured in seasonally austed current
price US dollars dropped sigifcant1y in the frst quarter of2009even
ifless sharplythen the volume ofgoods imports. The figure fell by 15.2
per cent. O a year-on-year basis the value of imports of goods and
services dec\ined by 27.9 per cent. Thus the sharp drop observed in Q4
2008 continued in Q1 2009 thou bothcomisons gos fell much
more sharply at about twice the rates than those of services.
The effects of this slowdown on countries like China were visib1e in
2008 itse1f Chinas merchandise exports in constant prices which gew
by 22 and 1 9
5 per cent respectively in 2006 and 2007 collapsed to 2.5
per cent. lnteresting1y the impact on lndia-a countr much less de
pendent on merchandise exports for growtlwas far 1ess dramatic
with the growth rates standing at 1 1 13 and 7 per cent respectively.
The impact on Chinas exports was particularly sharp in certain product
categories. Exports of ofice and te1ecom equipment fell by 7 per cent
in the fourth quarter of2008 as compared with the same period ofthe
previous year. This occured despite the fact that these exports grew at
an average rate of 17 per cent during the frst three quarters of 2008.
According to the WTO exports of this category of items to the United
States fell even more sharply registering a 13 per cent decline in the
fourth quarter (of2008) afer growth of 10 per cent in the third quarter.
Overall exports of Chinese manufactured goods to the United States
increased just 1 per cent over the previous year afer growth of 14 per
cent in the third quarter."
This is signifcant given the role of this product group in the hi-tech
manufacturing sector in China. In the mid-1 980s the hi-tech sector was
completely dominated byte Radio television and communications equip
ment sub-sector which accounted for almost two-thirds of all hi-tech
manufacturing value added. Since then the production of Ofce and
computing machinery has been rising rapidly so that by 2005 it ac
counted for 39 per cent of hi-tech value added while that of Radio
television and communications eqipment had fallen to 43 per cent. I
sum inforation technology hardware is central to Chinas hi-tech ex
port success and an important contriutor to incremental manufactur
Indias production and. export stucture is diferent. I part Idias os
tensible resilience in the face of the global crisis reflected in a much
smaller proportionate decline in its GDP in 2008 (1.4 percentage points
on 9.3 percent) relative to China (2.9 percentage points on 1 1 .9 per
cent) appears to be because of its much smaller export dependence on
manufacturing. In recent years Indias export dependence has been
much more in kowledge intensive services than manufacturing. But
this per se does not make the coun immune to the effects of the
global downtum. World imports of commercial services recorded an
increase in annual growth rates fom 12 per cent in 2006 to 1 8 per cent
in 2007 only to see a dec1ine in that rate to 1 1 per cent in 2009. And
Indias principal market the United States recorded a decline in the rate
of gowth of imports of commercial services fom 12 per cent in 2006
to 9 per cent in 2007 and further to 7 per cent in 2008. Moreover
Indias interest is in the tade in commercial services (as opposed to
anspo and tave1 seices) and here the rates of growth in these
three years were 16 22 and 10 per cent respectively. That is even the
global trade in services is sharply slowing down in areas in which Idia
has an interest. Yet this is better than the absoJute contaction in the
volume ofmerchandise imports.
The real point is that exports in general and therefore the exports of
services constitutes a much smaller proportion of GDP in India tan
merchandise exports constitute in Chinas GDP. Hence it is not Indias
less damaging perfoIce in the export area that would count but the
performance of the domestic market and domestic demand.
Seen in this light . the argument that even if the G7 economies espe
cially the US continue to bounce along the bottom te global economy
can record a sigificant recovery because of a ret to high gowth in
China and India does not seem to have much basis. This would require
in the frst instance a shar shift in China fom growth dependent on
extemal markets to gowth dependent on domestic consumption. Sec
ondly mechanisms must exist in both China and India for a retum to
hi1 gowth based on domestic demand without spuring inf1ation. And
third this process must be accompanied by an increase in imports into
hese countries fom the rest of the world without destabilising move
ments in the balance of payments and in curency markets especially
in the case of lndia.
If this combination of factors does not play out there is unlike1y to be a
ret to high gowth in these two large economies which could help
lif the global economy without aggravatingpre-existing global imbal
ances. On the other hand if there is any revival of growth in these
economies because of a leakge ofthe demand enerated by the State
fnanced stimulus being experimented with in the US U and else
where in the G7 imbalances both in terms ofthe global distibution of
growth and the global balance ofpayments would only intensif. This
would intensif curent demands for a dose ofprotectionism. Not sur
prisingly the World Trade Report from the W has among its focal
themS the chalIenge of ensuring that the channels of tade remain
open in the face of economic adversity." This in its view requires the
design ofwell-balanced contingency measures" to deal with a variety
ofunanticipated market situations withtherit balance between fex
ibiIity and cominitments" in trade agreements. If contingency mea
sures are too easy to use the agreement wilI lack credibility. Ifthey are
too hard to use the agreement may prove uns(able as goverents
soften their resolve to abide by commitments. But the current con
juncture seems to be one where such balance would be near impossible
to achieve.
How Greedy Speculators
Control Commodity P:ices
Jayati Ghosh
ON feature ofthe exaordinary year that has ended was the exteme
vo1atility ofoba1 commodity makts. Because econorc ana1ysts have
become so short-silted each ofthese rapid movements has been over
interpreted as reflecting stuctura1 changes in g1oba1 demand and sup
p1y rather than conjunctura1 forces that are 1iab1e to change.
For examp1e when g1oba1 prices i oil and other commodity markets
zoomed to statospheric 1evels by the rdd1e of2008; we were to1d that
it had nothing to do wit specu1ation. Ernent'economists joined bank
ers fnancia1 market consu1tants and even po1icymakers in emphasising
that these price rises were a11 about fndamenta1s" that reflected rea1
changes in demand and supp1y rater tan te market-infuencing ac
tions of a bunch of 1arge p1ayers with fnancia1 c10ut and a desire to
proft fom changing prices.
I oil markets we were wamed tat the dire predictions of the peak
oi1" doomsayers were fna11y coming to pass. I g1oba1 food markets the
rise in prices of stap1es was corectly identifed to be at 1east part1y
re1ated to the medium-ter picy neg1ect of agicu1ture by govem
ments especia11y in the deve10ping word b e ro1e of specu1ation in
commodit futures enab1ed by fnacia1 deregu1ation was denied.
Furter it was a1so gued that the real gainers ofthis process were the
direct producers: not on1y oil exporting counties but sma11 farmers pro
ducing foodgains that were becomghiy va1ued intetiona11y. le
commodity price boom was supposed to tans1ate directly to income
gains for such producers to the point where some govemments even
argued that there was no need to prode any protection to agiculture
since cultivators were already gaining from high crop prices.
But the subsequent co11apse of commodity prices -both oi1 and non-oil
-has shown how wrong the earlier explanations were and how litt1e
pmary commodity proucers are likely to have gained especia11y sr11
producers in the developing wor1d.
For prirry commodities as a group a11 the price gains ofte period
January 2007 to mid-2008 were wiped out by the later fall in prices. Oil
prices in November 2008 were back to the nominal level of January
2007 which implies a decline in real terms. And non-oi1 commodities
specifca11y agricultural raw materials and metals were lower even in
nominal tems.
Te likelihood of agicultualists benefting fom such a short-lived price
boom is therefore unlikely. Indeed it is likely that they could face op
posite effect: farmers shifting acreage in response to pce increases
could fnd that prices have crashed by the end ofthe growing season.
Consider for example the case of cotton the most widely planted non
food cash crop that directly affects the livelihood ofmil1ions of farers.
This price had fa11en sigifcantly in the past few years so that in Janu
2007 it was less than 60 per cent ofthe leve1 reached in 2005. The
price started to increase around the middle of2007 and by March 2008
had increased by 44 per cent compared to May 2007. But afer that
peak there has been quite a shar crash in prices injust a few months
such that in November 2008 the price was actua11y lower than it had
been in January 2007!
Such volati1itycan be only very partially be explained by real changes in
demand and supply. It is tue that there was an increase in demand
fom China the wor1ds foremost garent exporter around the middle
of 2007. But the rapid price thereafer was because speculators took
Similar1y whi1e the ongoing global recession has affected demand for
clothing and therefore for cotton the clapse in prices cannot be ex-
plained only by tis dec\ine but is also the result of speculators ofoading
their stocks.
The point is that cultivators who had responded to the price signals of
the short-livd boom to sowmore cotton wi11 now fnd themselves stuck
with a crop whosc price has nearly halved injust eight months.
The other mor cash crops that dominate cultivation are all oilseeds
and here too very volatile and sharp swings in prices are evident over
the recent perio. All the major cookng oils-palm oil soybn l and
rapeseed oi\-show continuous and substatial increases January 2007
onwards followed by sharp dec\ines in te second-half of 2008. The
sharpest rise and fall occurred in the palm oil price -increasing by 208
per cent in March 2008 and then declining by 62 per cent such that the
price in November 2008 was more than 20 per cent lower than it had
been in January 2007.
Once again cultivators who opted to sow these crops when their prices
were at their peak would now have to face a completely different envi
ronment with very different confgrations of costs and prices that could
easilymake the cultivation process fnancially unviable.
Among the agricultural prices that matter the most of course are
foodgain prices. The most exteme trends have been evident ir rice
prices which were broadly stble increasing only gradually through
most of 2007 but then exploded to increase by more than two-and-a
half.times between January and May 2008. Rice prices have fallen
thereafer but are sti11 80 per cent higher than they were at the start of
Some of this is attributable to the fact that the wOrld trade market for
rice is re\atively thin compared to total production as most rice-produc
ing counies are also major consumers oftheir own output. The sharp
rise in prices in early 2008 can be paitly attibuted to the export bans
imposed by two major exporters: India which the previous year ex
ported around 5 mi11ion tonnes and Egypt which exported around 2
mi11ion tonnes out of total world exports of around 1 8 mi11ion tonnes.
Once again however speculative pressures are likely to have pushed
up trade prices well beyond anything that could be explained by
demand-supply imbalances.
Wheat prices also more than doubled between January 2007 and March
2008 and declined subsequent1y althou1 they are still 16 per cent higher
than they were at the start of the period. Maize prices went up less
sharply but continued to increase until June 2008 but thereafer fell so
sharly that the maize price is now belowwhat it was in January 2007.
While world trade prices ofthese foodgains did fluctuate dramatically
and have now fallen in ways that will adverse1y affect exporters of
these crops retail prices of these grains have not come down in most
developing country markets. Therefore we have a strange situation in
which both the direct producers and the fnal consumers appear to be
worse offbecause ofthe volatility.
I another context it could be concluded that speculators have gained
fom this boom-and-bust price cyc1e but given the chaos in global f
nancial markets even such a conclusion may not be warranted. A weird
example then of a negative sum game in global capitalism.
Global and Local Inflation
in the Context of Rising
Urban Poverty
Utsa Patnaik
THE recent sharp rise in the prices of necessities has caused won
and captured everyone5 attention. As many as 37 counties have re
cently seen food riots by the urban poor faced with near doubling of
prices in a matter of months. The attention being paid only now to the
issue should have been given much earlier to the under1ying cause of
the inflation which is not of short duration but has been maturing for
years and by the same token this inflation will not now easily abate
with short-term measures alone. The basic cause lies in the slow-dow
in the growt of agicultural output and in particular food gains output
which had fallen below the population gowth rate over the past two
decades in almost every poor developing couny in the wor1d including
in Idia over its ffeen years of neo-liberal refors. Nor has the food
gns output in advanced counties risen enough to compensate for the
dec1ine in developing counties. FAO data show that the average an
nual world cereal output takng the three yearperiod 1979-81 was 1573
million tonne for a 1980 world population of 4435 million. By the three
year period 1 999-01 average annual wor1d cereal output had increased
only to 2084 mi11ion tonne for a wor1d population of 6071 mi11ion in
2000. Thus wor1d cereal output per head of pQpulation declined from
355. kg in 1980 to 343 kg in 2000.
What do neo-liberal refors have to do with declining agricultural and
especially declining food grains growth in developing counties? First
there is decline in growth. These Fund-Bank guided reforms always
entail macroeconomic dation that is a cut-back in investment and
development expenditures by the goverent . and this has been imple
mented in country afer county - in many Latin American and Sub
Saharan Afican countries the process started as far back as the late
1 970s while in India it started later from 1 991 . Amountain fempirical
evidence. has been compiled by the Fund itself showing the results -
declne in investment rates and slow down in growth in most counties.
The slow-down is for the economy as a whole in most counties other
than India and per capita real output has actally been falling in over 30
developing countries since the early 1 980s (concentrated mainly in sub
Saharan Africa). In India the slow down has mainly afected agricul
ture which sti11 suports over two-thirds of the population. The fact of
the tertiary sector growing rapidly has led many to close their eyes to
the siifcant decline in agricultural all-crop gowth. ln .short neo
Iiberal rrms hit directly at the material productive bas ofthe
economy particularly agriculture which supports ever other ac
tivity. There is an argument makng the rounds that Idias highoverall
growth no longer has a link with agricultural growth. I is forgotten that
every person with rising income wi11 eat and drink more wear more
clothes demand larger living space and travel for work and pleasure
and all these activities (inc\uding the last one oflate) produces demands
on land directly and for its products. Undermining the agricultural base
ofthe economy is like boring holes in the foundations of a bui1ding over
a long period until it is fatally weakened and ready to clapse at the
frst serious shock
Second there has been endemic structural shif away from food grains
to expo crops. Every developing county has been urged by the Fund
Bank and the WTO to open up to free trade to promote its agricultural
exports even when the dollar price per unit of exports. may be falling
because. so many countries are made to compete with each other. In
short they are urged to be on a backward bending supply curve to
provide supermarkets in advanced countries with a cheaper and cheaper
supply ofthe goods which the cold temperate advanced counties can
not produce at all or can (nly produce in limited volumes. Given con
stant sown area this has meant the diversion in country afer country of
food crops producing land to exported.cash crops and in many cases
has led to absolute fall in food output.
In India 8 mil1ion hectares offood crops 1and has been diverted to ex
port crops since 1991 and investment in food grains research and ex
tension work has'noticeably declined. The aim and strategy ofthe ad
vanced countries has been to promote an intemational division of!abour
where our more product-diverse land resources are increasingly used
to satisf the demands both of the fat cattle and rich consumers of
these advanced counties for a large variety ofproducts ranging fom
soya cake (a cattle feed cncentrate) to asparagus fom gherkins to
roses. Given unchanged sown area this leads to a downtum in food
gtains output for our own population. In India the food grains gowth
rate was 2. 8 percent per year in the pre-reform decade of the 1980s
well ahead of the population gowth rate of about 2 percent. It fell to
1 .7 percent over the decade of the 1 990s and in the first 6 years of the
present centu (imium ending 2000-1 compared to that ending 2006-
7) it has come down to an abysrl 0.34 percent. Per head of popula
tion for the frst time since Idependence for any lenh oftime food
gain output dec1ined over the 1990s and has been falling even faster in
the last few years. But all this has been shrugged aside by picy mak
ers as being of no consequence for food security which they have rede
fned to mean not se1f sufciency but access to imports. Developing
countries are told they should open up to grain imports fom advanced
counties to make good any domestic shortfall and oflate it is the US
Department of Agriculture which has been estirting our food output
and telling us that we need to import.
Deve10ping country govemments have obliged the advanced counties:
like the ear1y Kalidasa cutting away at the branch on which he sat they
have been busy destroying the food security oftheir own populations.
The advanced country strategy has succeeded. Further in country af
ter count under Fund-Bank advice domestic foodgains procurement
and distribution systems have been Odown or wound up completely
since the 0ective has been to open up markets in them for advanced
county surluses of grain and dairy products. In Idia the frst step
running own the PDS was targeting - . access to cheap food being
denied to large segments of the actually poor who were arbitrarily la
belled non-poor. The second step was U cut allocations of food grains
fom the central pool to many states. The third step is to narrow the
access to the PDS further. A pat
edly recommended the removal ofthe so-called APLpopulation most
of whom are actually poor entirely fom accessing the PDS.
Until the current global food crisis started erupting a few months ago
our govemment was busy faci1itating the entry of the food transnational
corporations for promoting contract farming in export crops to supply
advanced country supermarkets telling farmers they should diversify
their output away fom food gains and sending the economic sigals to
ensure this namely freezing procurement price for foodgrains and run
ning down the quantity procured.
The countries where food riots are now taking place have become
substantially food import dependent some years ago owing to these and
similar policies they have already foolishly implemented. Why was no
attention paid to the alarming fall in per head food grains oUtput and
availability in our own country which has been going on for over a
decade? 1 have been tacking this and writing repeatedly about it some
would say ad nauseam since 1992. Our pitical classes sat with their
hands 1ded and quiet1y watched the destruction of our food security
where they did not actively aid it. Ofwhat use is it to rant and rave now
over rising prices without even at this late hour making the slightest
attempt to understand the baslc cause which is essential for taking
effective steps to redress the worsening situation?
The reason for the inaction in retrospect seems to be an intellectual
failure. People readily urtderstand food price infation but they do not it
seems understand that there can be a serious situation of growing real
shortage owing to per head oUtput dec1ine which does not show itse\fin
inflation sole\y because mass purehasing power and hence per head
demand is falling faster than oUtput per head is faJling. Inflation was
unusually low until two years ago -the consumer price index for agri
cultural labourers rose a mere 1 1 percent betwen 1999-00 and 2004-
05 even though per head food grain oUtput was falling fast and the food
crisis was growing - but this very low inflation rate was because the
adjustent taking place was through declining food intake and increas
ing mass hunger since employment and incomes particularly in rural
areas was falling. Neo-liberal expenditure deflating measures reduced
incomes at the same time that they reduced output. We are.in a classic
depression scenario in rural India.
The long-term global dec1ine in per head cereal output mentioned ear
lier from 355 kg ii 1980 to 343 kg in 2000 should norma11y have pro
dced global inflation as we11 since per head income rose over the same
period and the demand for cereals always rises as income rises. Cere
als are not only directly consumed but are converted to animal products
through use as feed converted to processed foods and also used in
industrial production -including oflate ethanol production. Only one
fifh of the nearly one ton of grain that the average US citizen con
sumes is directly consumed the rest is consumed indirectly. There is a
si11y argument by some writers that people in this count have diversi
fied consumption away fom grain to animal products (milk eggs etc)
so per head grain output decline 'does not matter. This is like saying that
a sharp dec1ine in per head coal output does not matter because people
have diversife away from using coal to elecit which merely shows
that the ptson does not kow that over four-fifhs of electicity is gen
erated fom coal.
The long-term imbalance produced bydecelerating food output growth
and fa11ing per head output in the world economy during the 1980s and
through the 1990s became invisible to people because no Unusual infla
tion was seen on the contary ice deflation occurred in many devel
oping countries precisely owing to the Fund-guided income defating
mechanisms depressing mass incomes and hence effective demand
discussed above in virtua11y a11 developing countries. The peasant
and labour both rural and urban in developing countries world wide ate
less and less and absorbed the punisqment while urban inte11ectuals en
masse seemed to be conceptua11y blind and igored the problem in their
writings. Owing to this suppression of inflation via reduction of mass
demand the gravity of the situation was not understood by them or by
most observers. A shock or tigger was required to make the long-ter
imbalance and decline in nutrition explicit and this shock has now come
largely courtesy Mr Bush and his Iraq misadventure fom the steep
global oil price rise which has little chance ofbeing reversed and con
sequent lge scale diversion of grain to bio-fuel prouction in advanced
The model offree ade and export specialisation trust on developing
counties now stands explicitly discredited. Having given up their own
foo d secu rity for expo rt or ientation a nd on the promise of access to
foo d impo rts fom a dvance d countries wher e do developing counties
an d In dia go now when w ith the large sca le diversion of foo d gains to
fuel pro duction in the No h g lobal foo d stocks have disappeare d an d
there is spira Iing foo d price in ftion. For us there are on ly two altema
tives. One is the co rect one of a Grow more Foo d campaign f the
same u rgency as we ha d a fer Wo rl d War 11 because our .per hea d
foo d o utput has plunge d back to the level of 50 years ago an d we can
only import now at an exorbitant price. The secon d reactionary a lter
native propose d by a we ll ko w economist in a te lev ision interv i ew on
Apri l ll was that the NG P shou ld be given up -the re was no point
in encouraging income generation an d more deman d since foo d supp ly
was a lre dy less than deman d. In short let there be more unemp loy
ment more income de fation an d more hunger as a means of dea Iing
with foo d shortage an d containing in fation.
Much as they may wish to do so even the kown Fun d- Bank men in
the UAgov ement we dde d to de flationary i deology will not dare to
fol low this economists reactionary a dv ice a year before the e Iections. .
But nor is th govemment taking the co rect a ltemative path of an all
out Grow more Foo d campai g. The urgency of such a campaign will
become even more clear when we see that not on ly has rral pove rty
risen but u rban pov ty an d un der -nut ition shows substantial rise be
tween 1993- an d 2004-5 long before the cu rent in fation got un der
way . There is just no scope for hurting the rral an d urban poor further
without descent into foo d nots or even famine.
As regar ds rral poverty the percentage of people not ab le to spen d
enou g on foo d to reach 2400 calories daily intake (the o fcial nu i ton
norm) rose fom 75 percent in 1993- to 87 percent in 2004-5. The
percentage below 2200 calo ries intake rose fom 58.5 near ly 70 per
cent. O fcial poverty estimates are much lower an d show a spu rious
dec line because frst its own nut ition norms are not app Iie d to ca lcu
late the poverty line rather the cost of a r ee deca de ol d fxe d con
sumption basket is simply up date d using a p rice in dex. This proce dure
has le d to a cumulative un derestimation of the poverty line until by
2004-5 it stoo d at less than Rs 12 per day -which cou ld buy at most
1 kg of rice an d not basic foo d an d non -foo d requirements which
required over double this or Rs 26 per day to be spent. (Detailed discus
sion ofrural poverty With state wise estimates is available in my paper
in the July 28 2007 issue of Economic and Political Jekly).
I is not generallyrealised that while urban poverty was actually sliltly
dec1ining before 1993-94 afer thi over the economic reforms period
urban poverty shows a steep rise by 2004-5 in all expt one of the
states containing the national capital and four major metos iliough the
rise is less in other states. le bulk of the rise in urban poverty has
come afer 2000 even though the inflation rate was very low during
2000 to 2005. The main reason is the impact of second-generation eco
nomic reforms involving much higher cost of medicines and health care
transport and utilities which forced down food expenditure by those
whose real incomes were stagnant and reduced nuition. We think of
foo as the priority item of spending for fue poo but ifthe very precon
ditions for eaming income become costly (transport to workplace com
bating ill-health) then even the poor have no altemative but to cut back
further qn food spending.
Table 1 shows that urban Maharashta is the most expensive place for
the poor where they have fared worst. There is a massive se fom
52.5 percent to 85 percent in the population unable to access through
their spending even 2100 calories per day fue oficial urban nutri.tion
norm. Over halfthe urban population has gone below the lowest nuti
tional level 1 800 calories compared to just over a quarter a decade
earlier. I-migration fom rural areas and other states does not explain
the scale of the worsening which is mainly on account of the people
already fuere. At the risk ofbeing accused of economic reductionism 1
would argue that this indicates the fertile ground proded for the cur
rent resurgence of fascist sons-of-the-soil pe movements attacking
non-Maharashians. The real reasons for increasing distess of the
urban poor are not addressed and outsiders are made the scapegoats.
I prosperous Delhi the poverty ratio has risen by 22 points from 35 to
57 followed c10sely by urban West Bengal where the rise is by near\y
20 points fom 49 to 68.5 percent. In both there is increase in povert
depth with more people moving under the lowest intake level 1 800
calories. Tamilnadu With the highest initial urban poverty has shown a
marnal rise by 1.5 points only and has been overtaken by Maharashtra
with the highest current urban poverty. There is a marginal decline in
the percentage below 1 800 calories in Tamilnadu but it sti11 has almost
two-ffths of urban population not able to obtain even this very low
energy intake. It may wel1 be imagined what rapid food price inflation
would mean for the mi11ions who have already moved into deeper un
der-nutrition in the major meos and towns located in these states.
The situation ofthe Scheduled Tribe and Scheduled Caste population is
substantial1y worse (see Table 2 AI1-India estimates only). In rural In
dia the position ofthe STs has worsened most with 44 percent moving
below 1 800 calorie intake compare to 30 percent a decade ear1ier. In
urban India by 2004-5 three ffths of the STs and two-thirds ofthe SCs
had moved below 1 800 calories energy intake whereas for the general
population the situation had actual1y marginal1y improved. Rapid food
price infation wil1 immiserise these deprived social groups who are
already subject to severe under-nutrition.
Direct Poverty Estimates for selected states Urban India
1993-94 and 2004-05
Daily Calore Intake 2400 2400 2100 2100 1800 1800
1993-94 2004-05 1993-04 2004-05 1993-94 204-05
1 . MonthJy peapita Expenditurc reuired for Calorie intake
Delhi 650 3400 445 1150 330 710
Mm 835 3500 558 1750 295 885
Tamilnad 677 1940 440 1180 308 680
W. BengaJ 650 2350 365 1165 230 515
AlI-lndia 635 1785 395 1000 253 510
2 PaccMage fPe5ns in

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-
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
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
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
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
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.
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
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
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
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.
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
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.
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
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.
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
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.
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.
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.
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.
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

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
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
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
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.
In the event the so-cal1ed stimulus package has three major compo
nents. The
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
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
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.
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.
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.
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.
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
Chart 1: Index of industrial production



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.
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 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.
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
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

domestic inudstial deceleration although it ry indeed have an ad

verse impact soon. But there has also been an explosion in imports
which suggests that import competition could have affected domestic
production of rny rnufactured goods.
The rapidly growing import bill is only partly a result of the high oil
pces thatprevailed overmost of2007 and the earlypart of2008. Non
oil imports also increased aided not only by more liberalised trade but
also by the appreciation of the rupee in 2007.
Table 2 shows that non-il imports for the period April-May 2008 com
pared to the same period in 2007 increased by near1y a quarter. Within
that certain sectors showed very high rates of increase in import val
ues much more than the gowth of domestic production suggesting
some amount of import penetration in a wide range of manufacturing
This in t suggests that the deceleration of indusy may have re
sulted fom the inability ofthe govemment to ensure the macro man
agement of the economy in a complex global situation. The rush of
foreig capitl into Idia was acutal\y sou1t by the govC enl wheter
in the form of (subsequent1y fck1e) portfolio investments or by encour
aging Idian corporates take on more extemal commercial loans. This.
inflow led to upward pressure on the rpee and this combined with
trade lieralisation to encourage more import penetation .. 80me ofthis
must defnitely have damaged actity and employment among Indian
producers especial\y the smal\ scale producers who still account for
1 1 9
Increase in Import Values (in Rs Crore)
Year-on-Year for April-May 2008 (percent)
Total imports
Non-il imports
Textile products incI garments
Chemical products
Med & pharma products
Artifcial resins & plastics
Metal goods
Machine tools
Non-electical machinery
Electical rchinery
Electronic machinery
Transport equipment
Professional equipment
Other miscellaneous imports

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
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
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




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
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

n a reality. And speculative stock or real estate market bubbles are

justified by reference to song fundamentals. On the other hand any
downtum in growth or the markets is characterised as a corection.
Buoyant indices or markets are always a sign of stength. Depressed
markets or stock market downtums are presented either as necessary
but minor corrections or as problems govemments must resolve with
out hurting private incentive.
This blinded vision partly results fom the need to legitimise a system
that weighs in heavily on the side of capital and profit at the expense of
workers petty
roducers and the se1f-employed. It also signifies the
ideology that dominates the new ownership" economy in which it is
not what you eam but what you own that defnes your economic status
and sense ofwel1-being. Ifthe speculative route to expanding owner
ship is closed then the legitimacy of such a system would be under
chal1enge. Public policy aimed at regulating financial and real estate
markets that constitute the fu1crum ofthe ownership economy must be
delegitimised so that these markets themselves are legitimised.
Even if taken for granted by many today the notion fthe ownership
economy is relatively new. Its coming can be dated to the rise of f
nance and the simultaneous boom in real estate markets. This raised
the possibi1ity that even those with relatively smal1 savings who could
not make Iumpy investments in acquiring capitaI assets could through
the mediation of stock and reaI estate markets make acquisitions that
grow rapidly in size because ofhigh rates of appreciation in value.
But if this route to wealth is to be popular enough to rke financial and
reaI estate rrkets the symboIs of the new capitalism it must not be
seen as endangered by coIIateral damage" Iike rising inequality or per
sisting or worsening poverty that threatens to destabi1ise the traj ectory.
What is more active stock and reaI estate markets require that there
must be enough people who are convinced that high rates of apprecia
tion are not just based on sel aionaWsoon bereversed but
on fndamentals that would prevail over any corrections that may re
sult in downturts. The perennial state of denial refeed to above is
therefore the ideology that sustains and legitimises neo-liberal growth
sategies dominated by the requirements of finance capita1. Until of
course a crisis forces a partial or complete course correction.
1 23
Consider for exa!l1ple Indias stock markets whose perforance was
being unambiguously celebrated when it was experiencing a boom. The
Sensex which closed at just above 10000 on June 21 2006 rose rapidly
thereafer and despite fuctuations closed at above 20000 on Decem
ber 1 1 2007. This doubling ofthe index over a period of1ess than 18
months was obviously symptomatic of a surge in speculation driven in
part by FI infows consisting largely of capital from entities 1ike hedge
funds exploiting the participatory notes route to speculate in the Indian
market. However the favour of the reporting at that time was to claim
that the stock market was riding on song fundamentals ostensib1y
reflected in the close to 9 per cent growth the economy had been reg
istering over a four-year period.
Moreover wealthas measured by market values or market capitalisation
was not seen as just that much paper money but as an indicator of tue
economic stength. The newspapers were fIIed with stories ofthe rise
to maturity of the Indian stock market as refected in fgures on agge
gate market capitalisation ofthe bi11ionaires that India was adding to
various league tables of the global rich and of the rapidly increasing
size" of1eading Indian frs that were now bOIowing money abroad
to fnance new acquisitions. Indias arrival was not heralded so much
by the presence ofIndian goods in wor1d markets but by the participa
tion of Indians in the obal ownership economy and by the sharp in
crease in the paper wealth being accumulated by individuals and frs

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.
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.
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.
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
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
This book ( e Best Way to Rob a Bank Is to Own One: How
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
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
and moral hazrd. According to Biack T
is environment creates a

reshams Law" dynamic in which perverse incentives drive good
underwriting out of circulation."
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.
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
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
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.
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

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
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
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.
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

barkng up the wrong tee. These tax

concessions may reduce prices but they do not in any way enhance
the avaiIable disposable incomes in the hands ofthe people. Unless this
increases no amount of tax cuts and bailout packages for the corporate
sector wiII help in reviving the economy. On te contrary ifthe same
R 30000 crores were to be spent directlythrough public investment in
say constuction of rural roads the employment that this could gener
ate would enlarge domestic demand when people spend their salaries
1 38
which in t wou1d stimu1ate tJe economy. True to their c1ass nature
the UPA goverent targets re1ief for the corporates and not for the
peop1e. In the process it continues to keep peop1e with 10w 1eve1s of
purchasing power. Until this changes no amount of tax relief interest
rate cuts and bai10ut packages wi11 stimu1ate the economy.
A c1assic examp1e is the airline sector. The corporates have been given
massive concessions inc1uding a steep reduction in the prices of avia
tion fe1 which now costs ironica11y 1ess than the price ofpeto1 and
diese1 for the common man. Despite a11 this air passenger tafc has
not improved and the corporates continue to make 10sses. Passenger
trafc can on1y increase when peop1e have the money to buy an air
ticket. Un1ess this is ensured no amount of concessions at te top wi11
stimulate the economy. They may however beautify corporate
Further the range of consumer durab1es whose prices may reduce as a
resu1t ofthese Wcuts are essentia11y consumed by Idias middle c1ass.
The disposable income in their hands has been severe1y squeezed with
the global me1tdown of the stock markets and significant cuts in their
take-home pay packages. This is for those who are fortunate to have
not lost their jobs. Under these conditions to expect the midd1e c1ass to
increase its consumption or to tr and entice them to buy goods that are
now marginally cheaper is to live in a foo1s paradise.
As we have been arguing in these columns in the past the on1y way to
meet the devastating impact of the global capita1ist recession is to
sigificantly hike public investets which wi11 provide large-scale em
p10yment en1arge domestic demand and at te same time improve our
woefu11y inadequate socia1 and economic infastucture. However as
noted above being te to their own class interests the Idian ruling
c1asses seek to frst protect the corporates.
In stark contrast the CPI(M)-led Left govemments in 'est Benga1
and Kerala he announced smui
aggregate demand tough increased govemment speding. This is the
most affective way t combat the recessionary conditions rather than
offer public money for bai10ut packages. The Kerala govemment has
announced a package which is equa1 to 5 per cent of the states GDP.
1 39
This goes into expenditures on public works irrigation water supply
and housing schemes. This is nearly 1 0 times in percentage terms te
fscal stimulus packages announced by the cental govemment which
amounts to only 0.5 per cent ofthe' GDP.
SimiIarly the West Bengal Lef Front govemment has announced a
fiscal social welfare package of over R 5 106 crore O nearly 1 .5 per
cent of the states GDP. This includes increased spending on public
works and housing schemes whiIe providing immediate relief to the
toiIing sections. This s done by providing rice at R 2 per kg for the
entire BPL population loans for selfhelp groups and self employment
schemes at a low interest rate of 4 per cent and various schemes for
the farmers aimed at increasing productivity and providing crop
If within the severely resticted limited powers of the state govem
ments this is possible then surely the cental govemment could.have
employed BsimiIar pro-people stategy. This is where the class difer
ence lies. While the priorities of the rling classes is to protect their
interests frst byputting profts before people the priority of the CPI(M)
and the Lef is to put the interests ofthe people above everything else.
If this shif in the policy direction is to be ensured at the national leve\
then the anti-communal forces pitical altemative to such UA poli
cies must be made victorious in the forthcoming general e\ections.
Govts Must Iect Demand
into the Economy Directly
Prabhat Patnaik
Below we give the text of the presentation made by Professor
Prabhat Patnaik at the United Nations on October 30 2008 on the
present global fnancial crisis. (Sub-headings have been added - E
DISCUSSIONS of the current world economic crisis tend to focus
exclusively on the bursting of the housing bubble in the United States.
This no -oubt is the immediate cause of the crisis but under1ying its
peration is the fact that the stimulus for booms in contemporary capi
talism has increasingly come fom such bbles. The US whose size
and steg make it in the curent regime of tade liberaJisation te
main determinant of the pace of expansion of the wor1d economy as a
whole has increasingly come to rely on such bubbles to initiate and
sustain booms. The dot-com bubble whose bursting had caused the
preous crisis was followed by the housing bubble which started a new
boom. lis has now come to an end precipitating a major fnancial
crisis and initiating what looks like a major depression reminiscent of
the 1930s.
John Maynard Keyes writing in the midst of that Depression had
located the fundamental defect of the fee market system in its inca
pacity to distinguish between enterprise" and speculation" and hence
in its tendency to gt dominated by speculators interested not in the
long-term yieJd on assets but 0y in the short-tm appreciation in asset
values. Their whims and caprices causing sharp swings in asset prices
determined the magnitude ofproductive investent and hence the level
of aggregate demand employment and output in the economy. The real
lives of mil1ions of people were determined by the whims of a bunch of
speculators under the fee market system.
Keynes wanted this link to be severed through what he called a com
prehensive socialisation" of investment whereby the State acting on
behalf of society always ensured a level of investent in the economy
and hence a level of aggregate demand that was adequate for full
employment. This prescription entailed not only a jettisoning of the fee
market system in favour ofState intervention but restraints on the fee
global mobilit of fnance since meaningful State intervention could not
be possible if the nation-State faced interationally-mobile capital.
Finance above all must be national" he had said ifthe State had to
have the autonomy to intervene meaningfully in the economy.
The process of globalisation involving above all the globalisation of
finance which began during the period ofKeynesian demand manage
ment itself has undermined Keynesian demand management in the
capitalist countries and removed a whole host of regulatory measures
that characterised the Keynesian regime. Boosts to aggegate demand
have oflate come increasingly fom the stimulationofprivate expendi
ture associated with the creation ofbubbles in asset prices rather than
fom an adjustment ofpublc expenditure within the context ofreason
ably stable asset prices. The reliance on bubbles in short has acted as a
substitute for the earlier regime ofKeynesian demand management; it
is management trough the creation and sustenance ofbubbles rather
thanthrou1 the pace of public spending; Not surprisingly the fequency
of fnancial crises associated with the bursting of these bubbles has
increased geat1y afer 1973 and we are now even headed for a major
Govemments in advanced countries have still not recogised tis onset
of a crash. They have proceeded on the assumption that the injection of
liquidity into the system is all that is needed. It was thought initially that
this injection could be achieved through te govemment purchase of
toxic" securities but widespread opposition to that scheme has now
made most govemments accept the idea of injection ofliquidity in lieu
of equity .e. throu1 the pa-nationalisation of fmancial institutions.
1 42
But injection ofliquidity even in this D er is not enough. Credit wil1
not start f10wing simply because banks can access more liquidit. There
has to be adequate demand for credit for viable projects by solvent and
worthwhile borowers. And this is not happening. First the injection of
liquidity does not improve the solvenc of frms saddled with toxic"
securities so that the risk associated with lending to them remains pro
hibitively high. And secondly quite ap fom tis the anticipation of a
Depression makes borowers chary ofbotrowing and lenders chary of
This anticipation in t derives fom several factors: irst the bursting
of one bubble is not necessarily succeeded by the immedite fortion
of another so that some recession of a more or less prolonged duration
is in any case inevitable. Secondly the ver scale of the current fnan
cial crisis is such as to entail an anticipation of a prolonged recession.
And thirdly since the recession has already started the prospects of
crisis-prevention now trou1 te usual monetary instuments (includ
ing liquidity injection) appar distinctly dim e scenaio in which ten
dencies towards increased liquidity preference on the part of private
individuals and institutions and a downward slide in the real economy
mutuallyreinforce one another has already arted urolding itself and
will continue for a prolonged period unles govemments now act to
inject demand into the economy directly apart fom iecting liquid
ity. Until this happens on a large enough scale the Depression will
The third world counties will not escape the effects ofths Depression.
True many of tem whose inancial systems are still not sufciently
opened up" and hence have not been contaminated" by any links to
toxic" securities will escape the direct impact ofe world fnancial
crisis (thou1 even they cannot escape some sympathetic' movements
in their financial markets as well). But they certainly will have to face
the impact of fue Depression of the real economy. Their export eam
ings bot merchandise and invisibles will b hit causing unemloyment
and output contaction on the one hand and foreign exchange crisis
exchange rate depreciaton and accentuated infation on the oter. (le
latter will be aggravated by the outfow of speculative capital that had
. 1
come in earlier to the newly emerging marketsder the auspices of
Foreig Institutional Investors).
1o areas are of special concer here. One is the inevitable decline in
the terms oftade for primary commodities that wiII occur in a Depres
sion which wiII push cash-crop growing peasants into even greater
distess and destitution and into even larger rss suicides. (hese have
been already occurring for some time on a disturbing scale in counties
like Idia). The second is the loss of food security over much of the
tird world that wiII inevitably occur. There are at least three mutuaIIy
reinforcing reasons for this: frst the loss of foreig exchange earings
oWing to the decIine in exports and in the terms of tade wiII cause a
decline in foodgain avaiIability in food-importing counties owing to a
decline in their import capacity. Secondly even if food avaiIability is
somehow maintaine the decIine in the incomes of exporting peasants
and smaII producers and ofthose afected by the rise in unemployment
wiII mean that large masses of people wiII simply lack the purchasing
power to buy necessary food. And thirdly ifthe terms oftrade ofnon
food primary commodities declierelative to food as has been happen
ing for some time now then both the above problems wiII be greatly
There is a tagic irony here. The booms fed by asset price bubbles not
only did not beneft the large mass of peasants petty producers agi
cultural labouers crafsmen and indusial workers in te third worId
but were actuaIIy accompanied by an absolute deterioration in their
Iiving standards. This happened not despite the.boom but because of it
in a number ofways. First with the interIinking of global financial rr
kets asset price booms in the US tended to produce stock maret booms
ad more generaIIy fnancial sector booms even in third worId coun
ies where banks and other fnancial institutions withdrew fom pro
ductive sector lending to speculative lending fom rural to urban lend
ing and fom agriculture and srII-scale sector lending to consumer
credit to the afuent and loans against securities. This darged the
productive base of the peasant and srII-scale sector. Secondly the
changed role of te State in te new dispensation where it was more
1 44
concemed with supporting the fnancial sector boom and in maintaining
the confdence ofthe investors" than with sustaining peasant and petty
production entailed a withdrawal of State support fom the latter sec.
tor: input subsidies the price support system essential public invest
ment and State spending on rural infastcture and on social sectors
were all drastically curtailed; and without them the entire small pro
ducer economy became submerged in crisis.
A simple statistic .illustates the point. I 1980 the per capita cereal
output in the world was 355 kilograms. By 2000 it had fallen to 341
klograms. Tis absolute decline in per capita cereal outut meant also
an absolute decline in per capita cereal consumptjon for the wor1d as a
whole. But since per capita cereal consumption taking both direct and
indirect consumption into account increased for the advanced coun
ies the oyeral1 decline for the wor1d as a whole was caused by a
massive decline in the third wor1d counties where even countries like
China and Idia which experienced remarkably hi1 GDP gowth rates
did not escape this tend.
le fact tat this decline in per capit cereal output in te wor1d economy
was not accomanied by any rise in relative cereal prices (in fact be
tween these two years
he tC of tade of cereals vis-a-vis n
facturing in the wor1d economy decline by 4pe ewhene
per capita income in the wor1d economy was increasing quite notice
ably suggests that the squeeze on the purchasing power of the masses
in the third wor1d was even. geater. Te oter side ofthe speculative
boom occurring in a deregulated and fnancially-interlinked capitalist
wor1d therefore was a drastic squeeze on the living standards of the
masses especially in the third wor1d (which incidentally is one reason
whythe locomotive" analogy ofen given forthe US economysrole in
the wor1d economy is so inapposite: tis locomotive while pulling some
coaches pushes back some others).
But even though the masses .suffered fom the effects of the specula
tive boom they would also suffer additionally fom the effects of
its collapse. We do not have a symmet here between the efects
of booms and of depressions and herein lies te tagic irony of the
It is c1ear from the above that the need ofthe hour is notjust the iec
tion of1iquidity into the world economy but aIso in addition the injection
of demand. This can occur only through direct fscaI action by govem
ments across the world. For activating govemments for this controI
over cross-border capitaI fows is essentiaI for otherwise govemments
wiII continue to remain prisoners to the caprices of gIobaIIy-mobile specu
Iative fnance capital. The sectors where govemment spending wilI go
up wilI of course vary from country to country but the generaI objective
of such spending must be the reversaI of the squeeze on the Iiving
tandards of the ordinary people everywhere in the world that has been
a feature of the world economy in the Iast severaI years. In the United
States govemment spending may have to take the form of increasing
the sociaI wage and Iarging welfare state activities generaIIy increasing
infrastructure expenditure and to making more funds available to states
through federaI transfers. But in India China and other third world
countries in addition to welfare state measures Iarger govemment ex
penditure has to be oriented towards a substantiaI increase in agricuI
turaI especiaIIy foodgrains output.
Taking the world economy as a whole the new growth stimulus wiIl
have to come not fom some new speculative bubble but fom enlarged
govemment expenditure that dirctIy improves the Iivelihoods ofthe
people both in the advanced and in the developing economies and that
is geared towards improving the foodgrain output of the world through
a revamping of peasant agiculture (and not through corporate farming
since that would reduce purchasing power in the hands of the peas
antry and perpetuate its distress). In short the new paradigm must
entaiI a foodgrain-Ied growth strategy (on the basis of peasant agricuI
ture) sustained through Iarger govemment spending towards this end
which simultaneously rids the world ofboth depression and financiaI
and food crises. The trade and fnanciaI arrangements of the world
economy have to be oriented towards achieving this rather than being
made to conform to some a priori free market principles that have the
effect ofpushing the world economy into fnanciaI crises and sIumps
and the peasanty and smaIl producers ofthe world into destitution both
during the booms and aIso additionaIly during the sIumps.
Is The Present Crisis Ricardian?
Prabhat Patnaik
DAVI Ricardo the outstanding predecessor ofMarx had sualised
the process of capital accumulation getting constraned by the non
availability of adequate supplies of land. As accumulation proceeded
and the demand for wage goods primarily foodgrains increased cti
vation would have to be carried out on less and less fertile land where
yie1ds got progressively lower. Given the fact that a subsistence wage
in temis offoodgrains had to be paid the lower yields meant a dec1ining
rate of proft in agricultue. And since the difculty of obtaining a unit of
output from agriculture increased relative to industry the price of
foodgrains would rise relative to industrial goods which given that a
subsistence wage in terms of foodgains had to be paid in indust too
would push down the rate of proft in indust as well. Thus according
to Ricardo te rate of proft would dec1ihe over time and wouJa eventu
ally fall to zero bringing accumulation to a stop. He called this state of
affairs the stationary state".
Though land was what he focused on Ricardos agument can be ex
tended to any exhaustible natural resource. This exhaustibility would
make the relative price of these resources rise bringing the process of
capital accumulation eventually to a halt.
Many would see in the current capita1ist crisis a Ricardian denoue
ment. They would see the skyrocketing food and oil prices which are a
cntl feature of the current. crisis as the necessary fall-out of the
prcess of accumulation hitting against natural constraints. Ideed Pro
fessor Paul Krugman ofM 1 T who writes a regular column in the New
York 1mes that is reproduced in several Indian newspapers has been
arguing this for some time. The relative prices of food and fue1 accord-
1 47
ing to Krgman wil1 never again go back to what they were prior to the
curent infationary upsurge and this is because easily available land
and easi!y tappable oil sources no longer exist.
Marx though a great admirer of Ricardo differed fom him on his
reasons for the falling rate ofprofit. The precise detai!s ofthese differ
ences need not detain us here. But central to these differences was one
of perspective. The Ricatdian theory focused on a particar sector
with a particular set of specifcities as underlying the fal1ing rate of
proft while Marxs ow theory of the fal1ing rate of proft emphasised
social relations the relations within and between classes as underly
ing this phenomenon. Ricardos theory in short was a nature-based as
opposed to a societ-based explanation of crisis. I was use-value
centred and not social-rlations-centred as Marxs as. The ques
tion naturally arises: has Ricardo been vindicated over Marx afer all
by the current world capita1ist isis? Is the current crisis a Ricardian
one afer all or is there something essential1y societal underlying it?
The fact that the current high in foodgrain prices is not the result of
some natural 1imit being reached for foodgrain production but is the
outcome of a drastic squeeze on the peasanty which has made even
simple reproduction in the peasant economy impossible has already
been argued in ticles published in People s Democrac earlier. le
stagation in foodgain output at the world level which has characterised
te present century has been the consequence of a drastic income de
fation on the peasant which is a characteristic feature of capitalism.
This feature was temporarily kept in abeyance in the years immediately
following decolonisation but has resurfaced with a vengeance with the
phenomenon of globalisation. I Kerala to take a familiar example the
loss of proftabi1ity i agiculture during the years ofobalisation (which
is the consequence of income def1ation arising fom the neo-libral po1i
cies being pursue) has greatly increased the amount ofIand being kept
fal1ow. The same story is repeated elsewhere. I is not the shortage of
land but the fact that cu1tivation no longer pays which is responsible for
the output stagnation that is now causing the price rise in foo.dgrains.
I such a case the latter-day Ricardians would argue this price rise is
1 48
really quite innocuous. I will by restoring agricultural proftability in
crease output and thereby negate itself. I short they would say ifthe
current crisis is not a Ricardian one then it is not much of a csis at
al1. Rather it is a mere tansient phenomenon a mechanism for re
establishing equilibrium a minor episode in the zig-zg course through
which balance is maintained between different sectors in capitalist
But this is an eroneous perception. The rise in price does not merely
restore sectoral balance within a given unchanged set of social rela
tions; it profoundly alters the social re\ations themselves. The increase
in agricultural proftability wil\ not so much increase peasant produc
tion as stimulate a displacement of the peasanty by corporate capital
entering agriculture. This if it succeeds wil\ be a further act of expro
priation (or income deflation) ofthe peasantry which will reduce de
mand and thereby negate inflation at the epense ofthe peasant

without necessarily causing much increase in output But it wil1 suc
ceed if at all only through an intense unleashing of c\ass confict. I
short looking at the current situation either in ter ofthe reaching of a
natural limit or as a mere episode in a cyclical process through which
peasant agriculture and citalst industry co-exit and grw side
by-side is misleading. What we are seeing is the unfolding of a drama
embedded in social relations.
But while the story under1ying the food crisis need not be re-told here
the question arises: what about the rise in the wor1d price of oil? That
sure\y has nothing societal about it and owes its origin entirely to the
fact that no new oil-sikes have been made recently while the cost of
extaction at the margin has been going up. The answer to this question
is almost exactly the answer that Marx had given to the Ricardian propo
sition about going fom more fertile to less fertile land. s Mar had
argued never happened. A the margin of cultivaton expaded some
times more fertile land came under cultivation sometimes less; land
that was considered more fertile for the cultivtion of some crops was
less fertile for others. Hence there is no monotonic increase i the
marginal cost ofproduction in agiculture evluated in real ter.
1 49
Analogously there is no necessary monotonic increase in real extrac
tion costs at the margin in the case of oil. A period of increase in extrac
tion costs may be followed by one of decJine if new oil strikes are made
as they well may be. At this very moment for instance there is a belief
that Canada is perched on enormous oil reserves. There is therefore no
presumption in favour of a Ricardian denouement here.
But there is a further fact. Almost everyone is agreed that the massive
increase in oil prices at present is caused to a great extent by specula
tion. Paul Krugn questions the signifcance of speculation on the
grounds that there is no noticeable increase in inventories as should
happen if the actual price became higher than what non-speculative
demand and supply would dictate. But the demand for oil is not particu
larly sensitive to price in the short-run so that the same demand-supply
balance can be reached at a whole range of altemative prices i.e. there
can be signifcant upsurges in prices without any noticeable inventories
being held. Which ofthese altemative prices actually prevails depends
upon the strength of the speculative forces as expressed in the price in
the futures market i.e. upon expectations about the future. Hence the
reason why the current oil prices have shot up is because expected oil
prices have shot up.
Now expected pces may shoot up because of expected shortages.
ley may also shoot up as a consequence of increases in the current
prices i.e. because of current shortages. l the latter case where a
causation opposite to what was mentioned above is also working i.e.
from curent to expected prices a veritable price spiral may result with
increases in current and expected prices feeding on one another and
causing this price upsurge. But there is no reason to believe that the
present increase has anything to do with such a spiral. The general
view is that in the absence of speculation the world oil prices should be
ruling at around $50-60 per barel. If instead they are ruling at $140 per
barrel then this is because there is a solid tangible factor having to do
with structural changes occurring within capitalism which is directly
influencing the expected prices of oil and this is the weakening ofthe
dollar which is a societal fact a la Marx and not a natural one a la
The world capitalist economy requires a stable medium for holding its
wealth stable in the sense that the value of this medium in terms of
commoditie should not be expected to go down. Traditionally one com
modity namely gold was chosen to perform this role but over time the
curency of one of the counties which is supposed to be as good as
gold" has increasingly played this role. Its main characteristic consists
in the fact that its value in terms of the world of commodities is not
expected to fall to any significant extent. This was ensured earlier e.g.
under the Gold Standard or the Bretton Woods system by tying its
value to that of gold. But afer Nixon snapped the gold link ofthe dollar
in 1 971 we live in a world in which there is no such explicit backng in
ter of gold or any other commodity for the curency in terms of
which the bulk of the worlds wealth is held. There is however an
implicit backi.g and that backing is provided by the stability of its
value vis a vis the one commodity which is cental to a modem capital
ist economy vz. oil.
The stength of the dollar its acceptability as world money" hinged
upon the fact that its value in terms ofthe most important commodity
vz. oil was expected to remain unchanged. This explains inter alia the
US desperation to control the worlds oil reserves frst by attacking
Iraq and then attempting to browbeat Iran.
Ironically however the very fact that this effort has backfred has led to
a rise in oil prices in terms of dollar to start with and hence to a loss of
confidence in the dollar though of course the recurring US current
account defcits have played their role in this process. This accounts for
the shif fom dollar to oil in futures trading and hence the rise in the
future price of oil which in tum reacts back upon is current price.
Put simply more and more wealth-holders are shifing fom dollar-de
nominated assets to c1aims on oil as the means ofholding wealth. And
this accounts for the phenomenal rise in the price of oil. How this crisis
is going to deve1op whether it will lead to a change in the role of the
dollar or whether the dollar will continue to remain as world money and
if so under what circumstances remains to be seen. But the fact is that
we are witnessing a deve10pment which has little to do with any natu
ral limits imposed upon capitalism as Ricardo had visualised.
Lenin And Marxist Economics
Prabhat Patnaik
ALLLenins theoretical contributions to Marxist economics were meant
as interventions in the struggle for correct revolutionary practice; they
were not dissertations developing Marxist economics as such. The con
tibutions are far-ranging but are located within a comon perspective
that characterised Lenin namely his view of the revolution as a con
crete project. This required the delineation of a road map between the
here and now" and the revolution; an examinatiop. of the relationship
between the proletariat and the other classes in society; and also the
perception of the revolution as a process that unfolded through stages.
This view of the revoltion as a concrete project underlay Lenins
theorisation ofthe revolution in a backward" society like Russia. At a
later stage it also enabled him on the basis of his understanding of
imperialism to theorise a world revolutionary process (which he ar
gued during the First World War had come on the historical agenda)
byunifng the two rin revolutionary strands ofthe twentieth century:
the proletarian revolutionary strand ofthe advanced countries and the
national liberation (or the democratic revolution) strand ofthe oppressed
and backward" counties.
Marxs theoretical opus arguing that the development of capitalism
created the conditions for its own revolutionary supersession by social
ism had clearly visualised this revolution as occurring in the advanced
capitalist world. In their writings on colonialism Marx and Engels did
anticipate the possibility ofan anti-colonial revolution in countries like
India but did not explore the relation of such revolutions in the periph
e to the socialist revution. Late in his life Marx had ted his atten
tion towards Russia and had agreed with Vera Zsulich that a direct
transition was possible fom the Russian vi11age commune system
(mi to socialism but only ifsocialism triumphed in Europe to help the
Lnin while also stressing the centality ofthe European socialist revo-
lution visualised an interlinked world revolutionarproess where even .
counies less capitalistically developed could move through stages
towards socialism helped by the European socialist revolution no mat-
ter where the revolution occurred frst (the chain" in whic capitalist
imperialism tied the world he argued would breakat itsweakest link").
The exact cIass-nature stage and tasks of the revolution in each coun
and how it would progess had to be worked out even for countries
with underdeveloped capitalism
For Russia Lenin believed that the village communes had disintegated
making way for capitalist development so that the Zasulich vision of a
direct transition from mir to socialism had lost relevance. The develop
ment of capitalism was proceeding apace in Russia because of which
the working class had emerged as the main revolutionary force. The
Russian bourgeoisie having arrived late on the scene and threatened
by the working class was incapable of carrying forward the demo
cratic revolution in particular the ovehrow of Czrism and the sei
zure of feudal estates as the bourgeoisie had done in France for in
stance during the French Revolution. Hence the working cIass had to
do the job ofthe bourgeoisie ofleading the democratic revolution and
moving on to socialism rallying to itself at each stage substantial sec
tions of the peasantr (the composition of the peasant allies differing
from one stage to the nex.
Much ofLenins economic writings ofthe pre-war period were meant
to establish this perception. Since the Narodnik economists had been
arguing that the narowness of the home market in Russia arising fom
the poverty of its people made capitalist development impossible in
that country Lenin given his argument that Russia was developing capi
talism to the point that the mir had been effectiveIy destoyed engaged
in a theoretical debate with them where he used Marxs expanded
reproduction schemes.
Lenin made three basic points: frst the market was simply the out
growth of the process of division of laboUT in the economy. When we
move fom a situation where the peasant household also engages in
craf production to one where peasants specialise in agriculture and a
separate group of producers undertake craft production we Octo
have the emergence of a market. Secondly there may be imbalances in
the production undertaken by different branches some producing in
excess of demand and others producing less than demand but such
imbalances giving rise to crises are an inherent feature of capitalism.
The system proceeds through crises rather than being rendered an im
possibi1ity because ofthem. Thirdly the imbalance between production
and consumption is a hallmark of capitalism which keeps the workers
at an abysmal standard of living. To argue fom this that the system
cannot develop at all is illegitimate since the aim ofproduction in capi
tllism is not to cater to consumption. Indeed the departnertt 1 produc
ing means of production of various knds can and does grow quite
independent1y ofthe department 2 which produces the means of con
sumption by catering to its own intemal requirements that keep grow
ing because of the rising organic composition of capital.
Lenins discussion ofthe market question was no doubt influenced by
Tugan Baranovski who had argued that capitalism was characterised
by production for productions sake" and had believed in Says Law;
but to see Lenin as merely echoing Tugans argument is erroneous. He
himself remarked that the dynamics of capitalism he sketched by put
ting numbers to the reproduction schemes was not meant to capture
reality": since the Narodnik economists had argued the impossibility
of capitalism" it was enough for him to show its possibility" which is
what he did. (He was producing in other words a counter-example" to
the Narodniks). It follows that Oskar Langes later criticism that the
entire Marxist discussion on the market question at the tum ofthe cen
tury was mared by the fact that it simply put numbers to reproduction
schemes without postulating a plausible investment behaviour and
thetefore settled nothing

does not really apply to Lenin who was inter
ested only in rebutting the Narodnik argument about the impossibility of
capitalism. He succeeded in this an in the process also drewattention
like Tugan-Bara
1 54
that department l 1argely produced for itself) even as the wage-bil1 and
hence the department 2 languished. (Kalecki was to argue . Jater that
military expenditure by the State could play the same role. as the rise in
CN in providing a market for department 1).
The fact that capitalism was developing in Russia despite the Narodniks
insistence on its impossibility was shown by Lenin in his c1assic study
e Development 01Capitalism in Russia. The implications of this
for the forthcoming Russian Revolution were spelt out in his Two Tac
tics 01Social Democrac in the Democratic Revolution where he
argued tat the bourgeoisie is incapable of carrying through the demo
cratic revolution to its consU tion whi1e the peasantry is capable of
doing so" (under the leadership of the proletariat). Hence the prole
tariat must carry the democratic revolution to completion allying to
itseJf the mass of the peasantry in order to crush the autocracys resis
tance by force and paralyse the bourgeoisie s instability. e proletariat
must accomplish the socialist revolution allying to itself the mass of the
semi-proletarian elements of the population so as to crush the
bourgeoisies resistance by force and paralyse the instability of the peas
antry and the petty bourgeoisie."
Cenal to this conception was a distinction btwe the di ferent agaian
classes and the role they played in the process of agarian change. I
soieties embarkng late on capitalist development the burgeoisie tou1
incapable of breaking up feudal estates as the consummation of the
democratic revolution required could enter into an alliance with the
erstwhile feudal lords to deveJop what Lenin called a semi-feudal capi
talism" of which the
junker capitalism" of Germany was an example;
this was ir contrast to peasant capitalism" which represented a more
broad-based more vigorous and Iess oppressive capitalist development
that would ensue with the break-up of feudal estates. The bourgeoisies
incapacity to follow the peasant capitalist" path meant that the demo
cratic aspirations of the peasany could be fulfI1ed only under the lead
ership of te proletariat.
Lenin at that time had argued for the nationalisation of 1and" as the
sequeJ to the break-up of feudaI prope which would rid the produc
ers of the burden of absolute ground rent" and hence encourage ac
cumulation; it was only at the time of the Bolsh
1 55
changed his position to argue that the break-up of feuda1 estates
should lead to the ditribution ofland to the peasants something which
the Lef Social Revolutionaries heir to the Narodnik tradition had been
Te issue of cIass diferentiation within the peasantry also central to
the conception of the two-stage revolution was to occupy him much
since the relevance of this conception went far beyond Russia and it
underlay the Comintems analysis ofbackward" societies. I his pre
liminary draf theses to the Second Congress ofthe Comintem Lenin
put forward a criterion based on labour-hiring to distinguish between
different peasant c1asses which was to form the basis of all subsequent
analyses ofthe issue including the celebrated one by Mao Zedong.
Lenin saw the frst world war as a cIimacteric for capitalism which
heralded the aival of the world revolution on the historical agenda.
Marxs famous remark that at a certain stage of the development of a
mode of production the propertyrelations characterising it become fet
ters" upon the further development ofproductive forces had naturally
raised the question: how do we kow when this fetters" stage has
arrived? Or more general1y when can a mode ofproduction be said to
have become historicaIly obsolete? The revisionist" tradition in Ger
man Social Democracy had argued that this obsolescence would mani
fest itself in a tendency towards the breakdown" of the system; and
since there were no signs of such a breakdown" the. working c1ass
had to reconcile itselfto the fact that capitalism would continue that it
should strugg1e on1y to improve its economic lot within the system and
that Marxism accordingly had to be resed". The revolutionary tradi
tion in Germany epitomised by Rosa Luxemburg argued against this
that the system did inevitably head for a reakdown"; but in the pro
cess it accepted the problematic ofthe revisionists that the proof ofthe
obsolescence ofthe system lay in its tendency towards a breakdown" .
Lenin broke with this problematic and saw the war as epitomising the
moribund" nature of capitalism. It gave workers a stark choice: they
had either to kiIl feIlow workers across tnches or t their guns against
their capitalist exploiters (whence the Bolshevik slogan t the impe-
rialist war into a civil war"). He developed his theory of imperialism
both to explain the war and to defne the moribund nature of capitalism
of which the war was an expression.
Lenins theory of imperialism is much misunderstood. The commonest
misunderstanding is to attribute to Lenin an underconsumptionist posi
tion and the view that imperialism is a dece to counteract this ten
dency. It is because of this interpretation .that several authors later ar
gued that Keynesian demand management of the post-second world
war prio had made Lenins theory ofimerialism obsolete. But Lenin
thou1 intellectually indebted to Hobson was not an underconsumtionist
like the latter. Ideed Lenins theory is not a functional" theory of
imperialism at all i.e. imperialism is not perceived by him as providing
an antidote to any picular tendency of capitalism.
Ior Lenin imperialism is monopoly capitalism. The process of
centralisation of capital leads to the emergence of monopolies in the
spheres ofproduction and fnance which in tum reinforce each other to
the point where a small fnancial igarchy staddling the spheres of
fnance and industy decides on the disposal ofvast masses offnance
capi tal". These igarchies are nation-based and integated with their
nation-states creating a personal union" among those presiding over
industry finance and the State in each ofthe advanced capitalist coun
tries. The competition which always exists between capitals now takes
the form of rivalries for the acquisition ofeconomic territory" between
these powerful financial oligarchies each backed by its nation-State.
The acquisition ofeconomic territorys notjust because ofits actual
usefulness as markets or sources ofraw materials or spheres offinan
cial investent; it is. because of its potential usefulness from which
rivals have to be kept out. And when the quest for economi c terri tory"
has succeeded in dividing up the entire world onlyre-division remains
possible which can be effected through wars. The era of imperialism
which is monopoly capitalism is characterised by wars.
Lenins concept offnance capital has been variously criticisd: that it is
based on a confusion between stocks" and flows"; that it osci1lates
between Hobson notion of high fnance" (characteristic of Britain
where financial and industrial interests were rather distinct) and
Hilferdings notion of fnance capital" or capital controlled by banks
and employed in industry" (characteristic of Germany where industrial
and fnancial interests coalesced). These criticisms however miss the
point ofLenins theory. The stocks" and flows' distinction assumes
significance only within an underconsumptionist perspective where
capital exports in the sense of an export surplus fnanced through an
extension of credit can be a source of boosting aggregate dernd. 1
short fows" matter from the point of view of aggregate demand;
capital exports as a reflection of portfolio choice with no accompany
ing export surplus do not affect aggregate demand. Once we detach
Lenin from underconsumptionism this criticism that he did not distin
guish between stocks and flows ceases to matter. Likewise since Lenin
sought to characterise a whole phase of capitalism covering the speci
ficities of a number of countries his use of somewhat elastic and
overarching concepts can scarcely invite criticism.
His theory though exteme1y simple in its economic conception and
almost unexceptionable within its context (on which more later) was
rich in capturing the variety ofrelationships of domination that imperial
ism entai1ed. The attempt atreparttioning of an already partitioned world
took complex forms (1eaving aside war): colonies semi-colonies un
dermining the sovereignty of nominally independent countries and ac
quiring hegemony over even (apparently hegemonic) colonial powers
Iike Portugal. Lenins theory opened up the wor1d of intemational rela
tions to Marxist analysis.
Lenin had attempted in 1908 to explain revisionisin in the European
working class movement by suggesting that the influx of petty produc
ers dispossessed by capitalist competition into the ranks ofthe prole
tariat brought with it an alien ideology that constituted the soil for revi
sionism. But in lmperialsm takng a cue from some.remarks ofEngels
he explained revisionism in terms of a section ofthe working class and
m paicular its trade union leadership getting bribed out of the
superprofts" eamed by the monopy combines. Lenins position here
must be distinguished fom later arguments based on unequal ex
change" which have gone much further in c1aiming that the advanced
county proletariat is pa ofthe exploiting segment itself: he not only
resticted the perceived benefciaries of imperialist exploitation to a
narrow statum but linked the phenomenon to monopoly. Theories of
1 58
unequal exchange that do not invoke monopoly are ill-founded: they
lack validity if the metropolis and periphery are not specialised in par
ticular activities but they cannot explain such specialisation in the ab
sence of monopoly. The Leninist emphasis on monopoly is a more frit
ful approach to the issue even ifthe circle ofbeneficiaries is sought to
be widened beyond the narow stratum.
I Imperialism Lenin had criticised Kar1 Kautskys invoking of the
possibility ofthe joint exploitation ofthe wor1d through peaceful agree
ment by intemationa11y united fnance capital as ultra-imperialism".
His argument had been that any such ageed division ofthe wor1d among
the difrent fnance capitals assuming it came about would reflect
their relative stengths at the time; but uneven development endemic to
capitalism would necessarily alter these re1ative strengths giving rise
to conflicts that would burst into wars. Ultra-imperialism" could only
be an inter1ude of truce between wars. Many have argued on te basis
ofpost-war experience that the Kautskan perception rather than the
Leninist one has come to pass and inter-imperialist rivalries have be
come less intense under Pa Americana.
Two points however have to be noted here: first we have of late not a
unit among dirent nation-based and nation-State-aided fnance
capitals as Kautsk had sualised but a new interational finance
capital and hence a new imperialism which is a product of frther
centalisation of capital and the removal ofrestictons on cross-bordei
capital flows i.e. ofthe process of globalisation offinance. What we
have today in short is a new phenomenon that tanscends altogether the
Kautsk-Lenin conjuncture. Secondly the emergence ofintemational
fnance capital whi1e restraining wars among imperialist powers has
not prevented wars. The types ofwars have changed but wars persist
in a11 teir viciousness. The prsent conjuncture is different from Lenins
but his opu remains the benchrk against which it has to be analysed.
Lenins voluminous post-revlutionary writin rerin immensely sig
nificant and require separate and more exhaustive teatent. As the
Civil War ended the period of War Communism" gave way to the
'ew Economic Policy" whichopened up the possibilit of a capitalist
1 59
tendency that had to be kept in check through the pretarian State
retaining contol over the commanding heights of the economy. Tis
emphasis on the centralised State as a bulwark against capitalist resto
ration has beep seen by many as containing the seeds ofthe subsequent
decay of the system. Lenin accordingly has been seen as the conscious
progenitor ofthe centalised system that got perfected in the Stalin era.
But this is a misreading of Lenin whose basic libertarian vision of so
cialism never deserted him even as the centalised State apparatus
was being built to protect the beleaguered Soviet Union afer the pros
pects of a Geran revolution had faded and Lenin was beginning to
look eastwards to China and lndia.
This libertarian vision outlined in The State and Revo/ution written in
August 191 7 which visualises the proletarian State as withering away
from the very dayofits formation was reiterated in October 1 91 7 in his
remark: we can at once set in motion a state apparatus consisting of
ten ifnot twenty million people". Even at critical moments afer cir
cumstances had forced him towards a centalised state apparatus his
interventions such as against the militarisation oftade unions sprang
from this librtarian sion. And even afer Soviet democracy had ceased
to exist Lenin was concemed that the Pa at least must not become
a centalised bureaucratic force whence his last struggle" for taking
steps to prevent the bureaucratisation of the Party. He saw with geat
clarity and prescience that the pursuit ofdemocratic centralism" (the
organisational principle ofthe Leninist party) in a society emerging fom
feudal autocracy can easily degenerate into bureaucratic centralism.
The image ofLenin as apotheosising centalism against the libertarian
promise of socialism is a false one.
China and World Capitalist Crisis
C P Chandrasekhar
FOR a very long time now the US has been te main engine of gowth
in the global capitalist system essentiallythrough its voracious demand
for imports which have caused sigificant increases in export growth in
both other developed countries as well as the developing world. Te
most recent global recovery which has been associated with rising pri
mary commodity prices as well can also be taced at least partly to the
effct of increased US consumption spending driven by what now have
emerged as unsustainable expansions ofprivate debt through the sub
prime loan market.
But the recent boom has had another important element: the rapidly
growing demand for imports emanating fom Asia and most particu
larly from China. It is this feature that has allowed several commenta
tors to be more reIaxed about the intemational implications of a US
slowdown. From the London Economit to the fnancier George Soros
a number ofvoices have argued that the emerging economies ofChina
and India will take up the slack in intemational demand and provide an
altemative growth pole for the world which will prevent an intema
tional slowdow.
As it happens the Indian economy is still simply to small in global trade
to have much of an impact in this way even though its recent growth
rates have been higher than the intemational average. But the Chinese
economy is significantly larger and it also plays a much larger role in
worId trade. Hence it could well provide such a positive impetus if it
continues to grow at the same rate as the recent past.
Since there has also been a substantial diversion of Chinese trade
1 61
towards developing Asia it b more likely to play such a role in that
region than anywhere else. So it is worth examining recent trends in
Chinese trade to see what they indicate for such a potential dynamic
role ofChina at least in theAsian region. (In what follows the data all
relate to merchandise ade and are taken from the IF Balance of
Trade Statistics.)
From an examination of the recent direction of exports from China it is
evident that all the talk of diversifcation of export markets is rather
overplayed. Even in the most recent years the developed economies
continued to play the dominant role as export destination accounting
for around 55 per cent of Chinese merchandise exports. Exports. to
developing Asia on the other hand are not only much lower at around
34 per cent but also appear to have fallen compared to the late 1990s.
However within the developed countries there has certainly been a
shif away from Japan and towards the US and the EU. Exports to the
US alone continue to account for more than one-ffth ofChinas total
Within developingAsia the most important export destinations are pre
dictably in East Asia (which here includes the counties of Southeast
Asia). However the share of East Asia has fallen in recent years.
Meanwhile while exports to other parts of developing Asia have in
creased they remain very small in relation to
total exports.
The big change however and the reason why many analysts are se
ing such potential for China as an altemative gowth pole is in the
sources of imports. The data show that the share 'of the developed
countries has collapsed in recent years and been overtaken by imports
from developing Asia. Indeed this region now accounts for 46 per cent
ofChinas merchandise imports.
Within this region the most sigifcant source of irorts has been South
Korea and its share has also increased in recent years. But the largest
increase has been in imports from Taipei China which is now almost as
important as South Korea. I is worth noting that these countries have
become more signifcant sources of imports into China than oil-export
ers and primary commodity suppliers despite all the talk of China
1 62
driving world demand in such sectors.
There have been increases in import shares from Malaysia and India as
well but they sti1l remain rather sma11 in overall importance in Chinese
80 what exact1y is going on? Why have some other Asian countries
become such impoant suppliers for China ev though they are not so
sigifcant as expo destinations? This is best understoo by lookng at
the commodity composition ofChinese trade.
I is clear that two sectors have dominated in Chinese exports in recent
times. The one that is talked about most ofen is textiles and textile
products and it is certainly evident that these exports have increased
drartically in dollar ters nealy tipling in the four years afer China
joined the WO and increasing by more than 55 per cent in the two
years afer the MFA resictions were withdrawn.
However the really humungous category of exports is the broad head
of machinery appliances and equipment' which covers a range of
durable and semi-durable products intended for both industial and do
mestic use. These exports have ipcreased in value by nearly four times
in just fve years. I 2006 this categor at $414 bi1lion accounted for
43 per cent of Chinas merchandise exports.
I is worth noting that it is exactly this same category that also domi
nates imports and has shown the largest increase in the recent period.
Iports of rchinery appliances and equipment have been much more
signifcant ii absolute value terms than even imports of mineral
products including oil. In 2006 they accounted for 41 per cent of total
Chinese imports.
What we get therefore is a picture of China emerging as a major
processing destination for rchinery appliances and equipment using
imports of intermediates and parts fom the developing counties in the
Asian region to produce fnal goods for export to the developed coun
ties ofthe West. The patms ofimports and exports ofthis category
have been broadly similar with China emerging as a net exporter in this
category afer 2003. The total volumes and values involved are huge
and even net exports were as much as $86 bi1lion in 2006.
1 63
So China is very clearly increasingly involved in a re10cative production
network with other developing economies in Asia which has involved
massive increass in imports from those countries to be processed and
then exported. However the problem is that the final destination re
mains the North and within that the US and to a lesser extent the EU.
If demand for Chinese exports fom the US and the EU slows down as
wi11 be likely with a US recession this wi11 not only affect Chinese
manufacturing production but also Chinese demand for imports from
these Asian developing countries.
So with current trade pattems China is unlikely to become an altema
tive growth pole for the world economy or even for the Asian economy.
For that to happen a different economic strategy would be required in
China which would change both the domestic production orientation
more towards the home market and the extemal orientation more to
wards trying to diversify exports to other developing counies.
This is both eminently possible and greatly desirable in the curent con
text given the enormous foreign exchange reserves held by China and
the fair1y large trade surpluses that continue to be hm. It is even pos
sible to think of a Marshall Plan-style aid plan by China for developing
counties who w'luld then import its manufactures. Of course all this
would imply significant changes in the intemational economy that do
not immediately seem likely but a fnancial crisis in the US could even
concentate the minds ofChinese policy makers in this desirable direc
Capitali "m Socialism and Crisis
Prabhat Patnaik
A COMMON view of the current fnancial crisis of capitalism holds
that it is essentia11y an aberration. Sone attibute this aberration to spe
cifc mistakes committed in the past for instance by the US Federal
Resere with regard to monetary polic. Some hold the lack of ad
equate regulatory mechanism as being responsible for this abeation.
Paul Krugman the current years Nobel laureate blames it on insuf
cient supersion ofthe financial system. And even Joseph Stiglitz the
we11-kow radical economist and Nobel laureate characterises it as a
system failure" a ter which makes the crisis a phenomenon that in
principle could have been avoided with impunity. This entire perception
however is untenable. 1e crisis is a result not ofthe failure ofthe
system but ofthe system itsel; it is a part ofthe mode ofoperation
ofcontempora capitalism rather than being unrelated or extra
neous to i.
Ia fee market" regime asset markets tend to be subject to specu\a
tion. Speculators buy assets not because ofthe yield on these assets but
because they expect its price to appreciate in the coming days. They
have no long term interest in the assets and are concered exclusively
with capital gains. Since buying today to se11 tomorow entails carying
te asset during the intervening period for which a carying cost" has
to be incured the assets most suitable for speculation are those whose
carrying costs are low; and these are typica11y fnancial assets which
have virtua11y zero carying costs (requiring only a few taps on com
puter keys to effect a11 necessary ansactions). Financial asset mar
kets therefore are always subject to massive speculation.
1 65
Speculation generates bouts of euphoria or speculative excitement"
which have the cumulative efect ofpushing up asset prices. A initial
rise in some asset prices caused no matter how.gives rise to expecta
tions of a further rise and hence to an increase in the demand for the
assets in question which actual1y raises their prices further; and so the
procss feeds upon itself and we have asset price bubbles". Such
bubbles" typical1y characterise financial assets which as already
mentioned are particularly prone to speculation; but they are not con
fined to fnancial assets alone (as the housing market bubble" in the
United States has just demonstate
Such bubbles" have an obvious impact on the real economy. The rise
in asset prices fed by speculative euphoria improves for individuals who
own these assets the estimation of their wealth position and hence
causes an increase in their consumption expenditure and thereby in
employment. Likewise such a rise in asset prices where the assets in
question are producible causes an increase in investent expenditure
on these assets which leads to their larger production and hence to
larger employment. I short speculative euphoria in the asset markets
makes the boom in the real economy stimulated by whatever had caused
the initial rise in asset prices more pronounced and prolonged.
Precisely because of this however if for some reason the asset price
increase wanes or comes to a halt specators attempt to get out of the
assets in question causing a crash in the asset prices. This causes a fal1
in aggregate expenditure on goods and services; a col1apse in the state
of credit as banks face insolvency; and a possible col1apse even in the
inclination of depsitors for holding bank deposits (since tey fearbanks
insolvency) as had happened during the Great Depression. I short
there is a col1apse of the. state of confidence al1 around and hence a
corresponding increase in liquidity preference; i.e. there is a disinclina
tion to hold any asset other than pure cash or in exteme cases only
currency and of course claims upon the government which is
considered to be the only safe and reliable borower. Not al1 crises
display this severity; but to a greater or lesser extent these features
mark any crisis.
Speculation therefore has the effect of making the boom more pro
nounced and prolonged; but it has also the effect of precipitating a
1 66
severe crisis as distinct from a mere cyclical downtur. I the absence
of speculation the boom in the real economy wi11 be a much more trun
cated and tame affair. But precise1y because it is not a tame afair it is
followed by a crisis.
Two tonclusions follow fom the above analysis. First since.specula
tion is endemic to modem capitalism where financial markets play a
mor role speculation-engendered euphoria and the consequent pro
nounced booms togetherwith the crises that invariably follow are also
endemic to moder capitalism. Bubbles" constitute in other words the
mode ofoperation of the system. Bubbles" together with the crises
that follow their collapse are not a system-failure"; they are the sys
tem. Secondly ifbubbles" are to b eliminated and speculation is to be
curbed then it is not enough to put in place some regulatory mecha
nisms; an alterative instrument for generting pronounced booms
in the real economy has to be found for otherwise the economy
would remain perennially sunk in stagation and large-scale mass
The altemative instument suggested by John Maynard Keynes the
well-kown English economist was State intervention through fscal
measures to ensure that the level of demand remained as close to full
emloyment as possible. Keynes' suggestion made in the 1 930s during
the Great Depression was stongly opposed by fnance capital which
always opposes all State interention that does not promote its own
exclusive interest. The Keynesian remedy got accepted only in the post
warperiod when the balace of c1ass forces had shifed with the workng
c1ass which had made immense sacrifces during the wa acquiring
greater social and political weight and fnance capital experiencing a
corresponding weakening of its position forced to make concessions.
Over time however this balance changed once again. Centralisation of
capital" and the formation oflarger and larger blocs of fnance capital
during the period ofKeynesian demand management itse1f forced open
the barriers imposed on cross border fnancial f1ows. Finance capital
consequently acquired the nature of internationl fnance capital
through a process of globalisation of fnance". Since the whims of
interational fnance capital necessarily had to triumph over the au
tonomous predilections the nation-State in order to avoid capital f1ight
Keynesian demand management" was rejected and neo-liberal capi
talism emerged triumphant again bringing back the era of speculative
financial crises leading to real crises in the capitalist wor1d. This is the
phenomenon we are current1y witessing a phenomenon that has been
compared with the Great Depression ofthe 1930s.
One ofthe halImarks ofthe 1930s Great Depression is that the Soviet
Union the only socialist economy of the time had been completely
unaffected by it. I fact when capitalism had been aficted by the
severe crisis the Soviet Union had experienced such unprecedented
economic construction that it had completely got rid cfunemployment.
This fact as is well-kown had so impressed a whole generation of
Indian freedom fghters like E M S Namboodiripad that they had
embraced Communism because ofit.
This contrast arises oWing to a fundamental difference between the
mode of operation of the two systems. A socialist economy is funda
mentally immune notjust to specufation-induced crises but to alI crises
arising fom a defciency of aggregate demand. This fact is recognised
even by staunch opponents of socialism like the Hungarian economist
Janos Komai who calls capitalism a demand-constrained system" and
socialisma resource-constrined system" where the available resources
are fully utilised without being constained by insufcient demand.
A socialist economy of course has the usual fscal instrument suggested
by Keynes for overcoming defciency of aggregate demand unlike a
capitalist economy where the use of this instrument requires overcom
ing opposition from fnance capital and where even when the instru
ment is perchance used there is a limit to its use arising from the fact
that the system being based on antagonism needs a suficient1y large
reserve ary of1abour to prevent infation and maintain work disci
pline". But even apart from this a socialist economy can overcome
defciency of aggregate demand in another way which brings out its
basic character.
I any economy where in any period the money wages are given the
production of a certain output requires a certain unit cost of production
1 68
to be incured. The ter defciency of aggregate demand" or insuf
cient dnand" simply means that the level of demand in the economy is
such that this output can be sd only at a price that falls below this unit
cost of production plus the customary profit margin. When this hap
pens then in a capitalist economy firs cut back on output so that
there is unemployment; and this gives rise to a further reduction in
demand since the workers' demand shrinks owing to unemployment;
and this causes a further reduction in output and employment; and so
the process refered to as the multiplier" effect of the initial outputl
employment decline goes on and the economy is caught in a crisis.
I a socialist economy however since frs are socially owned the
State can issue a directive asking them to lower prices whn they ini
tially fnd that the demand for output at the base price i.e. at the price
equal to the unit cost plus proft margin is less than the output. While
issuing this directive it can assure the frs that any losses they make
wil\ be covered from the State budget. I such a case frs simply
lower their prices to clear the market and there is no quetion 01any
unemployment to start with and hence no question 01any multi
plier ct . Putting it diferently in a capitalist economy any decrease
in demand gives rise to ouut adjustment" and hence employment
austment in a socialist economy it can give rise only to price adjust
ment" and keep output unchanged.
Why does this difference arise? When price adjusts downwards since
the money wage rate is given there is an increase in the real wage rate.
So a socialist economy faced with a decline in aggregate demand gets
rid of it by raising real wages of workers i.e. by raising the demand of
the workers. But a capitalist economy precisely because it is based on
class antagonism where the slightest increase in the wage rate is bit
terly opposed by capitalists wil\ never raise real wages to get rid of
demand defciency. This is why any such deficiency gives rise to output
austment and hence mass unemployment.
But now we come to the real crux of the matter. It was mentioned
above that the socialist State while directing firs to reduce prices to
clear markets would assure them that any losses they incur would be
covered by the State budget i.e. that they would get a State subsidy to
cover their losses . . The question may be asked: how does the State
1 69
fnance these losses? And the answer interestingly is that for all lhe
frms taken logelher there will be no losses. 1 other words while
lhe Stale issues this directive it winever be actually called upon U
make any additional budgetary provisions for subsidies. True firms
in the aggregate wil\ make less profts after price austment than they
otherwise would have done in the absence ofthe original defciency of
aggregate demand; but the wil/ make prIs in the aggregate all
Ihe same. The State may at the most have to divert the profts of some
firms to cover the losses of others but it wil\ have to make no additional
provisions. This follows fom the fact that since profts n any period in
a socialist economy are more or less synonymous wth the savings of
the economy and since (ignoring extemal borrowing/lending) invest
ment in any period must equal savings as long as investment remains
positive profts in the aggregate must remain positive no matter whal
the level ofaggregate demand.
A socialist economy being both free of anlagonism (so that real wages
can be raised) and free of anarchy (so that some frms' profts can be
diverted to cover others' losses) has thus a mode of functioning that
makes it in principle immune to crises caused by the defciency of
aggregate demand which afict capitalism.
So far we have discussed the inner workings of a socialist economy
that is unconnected with world capitalism through ade and fnancial
relations. Since the Soviet Union in the 1 930s was unconnected with
wor1d capitalism and even later had only tenuous links it remained
actually immune to crises of aggregate demand. But what can be said
of a socialist economy that is closely linked to thecapitalist wor1d throu1
trade and financial relationships? Does such an economy continue to
remain immune to crises of aggregate demand especially those ema
nating from the capitalist wor1d?
1 an economy where all important means of production are socially
owned the answer in principle should sti1l be yes". When exports of
such an economy decline it is always open to it to raise domestic
demand either through the fscal route suggesied to capitalism by
Keynes i.e. through larger State expenditure or through larger
workers' consumption via a rise in the real wage rate caused by the
lowering of prices for a given money wage rate as discussed above.
Since the rationale ofthe socialist economys participation in the world
market is that it has general\y lower prices than the capitalist world (at
the prevailing exchange rate) which after al\ is why it is able to out
compete the capitalist counties and have burgeoning tade with them
any further lowering of its domestic prices in response to the re
dernd owing to world recession should cause no leakages" in the
for oflarger imports. Such reduction in other words should boost its
own domestic dernd and if anything even help somewhat in coun
tering export dec\ine. Likewise if it provided a larger fscal stimulus as
China has announced it would then the main impact of such a stimus
should be on its own
omestic demand. I short the socialist weapons
against crises mentioned earlier remain intact even when the socialist
country has trade relations with the capita\ist world.
Of course switching fom export production to production for the home
rrket may take some time during which there may be tansitional
unemployment but this is very different from the unemployment
encountered in capitalist countries during a crisis.
Te problem however may arise fom a different source namely when
in the process of entering into relations with capitalist countries the
socialist economy has also accommodated within its midst a large pri
vate sector owed by powerful capitalists fom home and abroad. There
would be resistance fom them to the use ofthe standard socialist weap
ons against crisesjust as there is resistance fom capitalists in capitalist
counties to the use of similar weapons and indeed for the very same
reasons. It fol1ows in such a case that the capacity of the socialist
economy to thwart a crisis arising from the defciency of aggregate
dernd depends upon the strength ofthe socialist State in confront
ing the opposition ofthe interal capitalists to the socialist mea
sures against the crisis.
Socialism and Welfarism
Prabhat Patnaik
SOCI ALISM consists notjust in building a humane society; it consists
not just in the maintenance of full employment (or near full employment
together with sufcient unemployment bene fits); it consists not just in
the creation of a Welfare State even one that takes care of its citizens
from the cradle to the grave"; it consists not just in the enshrining of
the egalitari a ideal. It is of courseall this; but it is also something more.
Its concem as Engels had pointed out in Anti-Duhring

is with human
freedom with the change in the role of the people from being objects
of history to being its subjects for which all the above conditions of
society namely full emploent Welfare State measures a reduction
in social and economic inequalities and the creation of a humane order
are necessary conditions; but they are not even in their aggegation
synonymous with the notion of feedom. And hence they do not ex
haust the content of socialism.
The conceptual distinction between a humane society and socialism
comes through clearly if we look at the writings of the most outstanding
bourgeois economist of the twentieth century John Maynard Keynes
who abhorred the suffering that unemployment brought to the working
cIass. T.he objective of his theoretical endeavour was to end this suffer
ing by cIearing the theoretical ground for the intervention of the (bour
geois) State in demand management in capitalist economies. He was
passionately committed to a humane society and believed that the role
of economists was to be committed in this manner. Indeed he saw
economists as the conscience-keepers of society".
But at the same time Keynes was anti-socialist not just in the sense
that bourgeois intellectuals usually are i .e. of seeing in socialism an
1 72
apotheosis ofthe State and hence a denial ofindividual feedom but in
a more fundamental sense. He too would have seen in . socialism a
denial of individual freedom but his 0ection to socialism was more
basic and expressed in the following words: How can 1 adopt a creed
wlic prefertud to the fsh exalts the boorish proletariat above
the bourgeoisie and the intelligentsia who with all their faults are the
quality of1ife and sure\y car the seeds of all human achievement? . . .
It i s hard for an educated decent intelligent son ofWestem Europe to
fnd his ideals here unless he has first suffered some sange and horrid
process of conversion which has changed all his values." (Essays in
Persuasion. 1 931 ). Keynes' objection in other words was precisely to
the idea ofthe people becoming the subjects ofhistory. He was full of
humaneness; but he baulked at this idea of freedom that would trans
form the people led by the proletariat fom being 0cts to being
Even though welfarism and socialism are conceptually distinct there is
a dialectical connection between the two which had quite naturally
escaped Keynes and which constitutes the real Achi11es heel of his
theory. I is this dialectics which explains why the bourgeoisie is so
implacably opposed to the Welfare State and why Socialists must al
ways vigorously fght for a Welfare State within a bourgeois society.
And it is because of this dialectics that the Welfare State cannot be
come some sort of a half-way house" where the bourgeois system
can get stabi1ized and stay for ever: the bourgeoisie will always try to
roll" it back and the socialist effort must always be to defend it and to
carry it forard
The reasons for the bourgeoisies opposition to the Welfare State by
which is meant here the entire panoply of measures including State
interention in deman management to maintain full employment (or
near full employment) social security free or near-fee healthcare and
education and the use of taxation to restrict inequalities in income and
wealth are several. First it militates against the basic ethics of the
bourgeois system. Michael Kalecki had expressed this bourgeois ethics
ironically as: You shall eam your bread with the sweat ofyour brow
lInless you happen to have pvate means! " But his irony was directed
against the basic position expre5sed in much bourgeois economic lit
erature that the distribution of rewards by the spontaneous working of
te capitaIist system is fair" in the sense that each is rewarded ac
cording to hislher contribution from which it foIIowed that any interfer
ence with this distriblltion of rewards was lnfair". Hence societys
accepting the responsibiIity for providing a basic minimum to everyone
was contrary to the ethics of the bourgeois system and unfair".
Secondl precise\y for this reason the acceptance of welfarism amounted
to a no confidence" in the bourgeois system. If it got generaIIy ac
cepted that the working of the bourgeois system yie\ded results that
were inhumane i.e. callsed hardships that had nothing to do with any
delinqllency on the part of the victims then the social legitimacy of the
bourgeois system got ipso facto undermined.
It is the third reason however that is germane here. Wel fare State mea
sures improve the bargaining stength ofthe proletariat and other seg
ments of the working people. The maintenance of near-fuII employ
ment conditions improves the bargaining senh of the trade unions;
the provision of unemployment assistance likewise stiffens the resis
tance of the workers. The sack" which is the weapon dangled by the
bosses" over the heads of the workers loses its effectiveness in an
economy which is both close to fuII employment and has a system of
reasonable unemployment aIIowances and other fors of social secu
I short resistance by the workers and other sections of the working
people gets stifened by the existence ofWelfare State measures. The
famous BengaJi writer Manik Bandyopadhyay in a short story Chhiniye
Khayni Kyano (Why Didnt They Snatch and Eat?") asks the. ques
tion: why did so many people die on the steets without food in the
Bengal famine of 1943 when within a few yards of their places of
death there were restaurants fuII of food and houses wit pleniy of
food? Why did they not raid these weII-stocked places and snatch food
from them to save their Jives? His answer that the absence ofnourish
ment itse\f lowers the wiII to resist has a general validity. The wil\ to
resist gets stiffened the better placed the workers are materiaIIy; and
Welfare State measures contibute towards this stifening.
1 74
This stiffening of the wil1 to resist is itself a pa ofthe ansition fom
being objects to subjects. Hence welfarism and socialism though con
Ctually distinct are dialectical. linked. Socialists must support
Welfare State measures not just because such measures are humahe
not just because such measures benefit the working people but above
all because such measures stiffen the wil1 ofthe people to resist help
the process of changing them from objects to subjects and hence
contribute to the process of sharpening of c1ass stuggle. And since the
bourgeoisie wants precisely to avoid this since it wants the people
enchained in their object role since it wants them weakened cowed
down divided atomized and tansfxed into an empirical routine be
yond which they cannot look it caries out a continuous stuggle for a
'rolling back" of all We1fare State measures. Even when under te
pressure of circumstances it has had to accept in a certain context te
institutionalisation of such measures i efort is always to undo them.
The fact that Keynes did not see it and hence could not visualize the
collapse ofKeynesian" demand management under pressure fom the
bourgeoisie especially the fnancial ierests constitutes a weakess of
his social theor; conversely the fact that this collapse occurred only
underscores the stength ofthe socialist theory that he so derided. True
the collapse of Keynesian demand management occurred not within
the same political economy regime within which it had been into
duced. It had been intoduced within a context where the nation-State
was supreme and the area under its jurisdiction cordoned off fom fee
fows of goods and fnance; but it collapsed within a regime where
there was globalization of fnance and hence far feer flows of goods
and fnance. But this changed context only provided the capacit to
capital to roll back" Keynesianism; the fact that wished to do so
had to do with the insurmountable contadictions that the dialectics of
welfarism generated within the bourgeois order.
The foregoing has a relevance to the current Indian context. Under
pressure fom the Lef during the period of the Left-supported UA
regime a number of measures like the National Rural Employment
Guarantee Scheme had been adopted against stong opposition fom
the leading exponents of neo-liberalism within the govemment. The
fact that the same exponents subsequently claimed credit for these
measures is ironical; but let it pass. Not only do they c1aim credit for
these measures even whi1e quietly whittling down many ofthem (re
sticting the peoples access to food under the guise of a Right to Food
Act is the latest and most ironical example of this) but they actually
use these as the fg-leafto cover the pursuit ofblatantly pro-rich poli
cies. The govemment stokes the stock rrket to produce ovemight
biJIionaires; it hands over further largesse to these billionaires in the
name ofdevelopment"; but if anyone objects the response is: Dont
you kow? We have an NREGS in placel" The we1fare measures
even as they are being whittled down provide an alibi for doling out
largesse to the rich.
And these measures themselves are seen essentially as acts of gener
osity on the part ofthe govemment. Several ofthese measures like the
NGS are nominaly rights-based but in practice no different fom
the ear1ier programmes whose effectiveness depended basically upon
the discretion of the implementing govemment. Hence even as they
provide some succour to the poor and working people they confrm the
people in their role as 0ects. And the entire self -congratulatory dis
course that has developed among intellectuals loyal to the rling class
especially afer the elections where the Congess Party is supposed to
have done well because ofprogrammes like the NREGS is one that is
laden with this 0ectcation of the people.
The stifening of the wiII to resist among the people which Welfare
State measures can bring about has to be made practicaly effective
through the intervention ofthe Left since the Lefs agenda precisely is
to overcome the 0ectcation ofthe people. le Lef therefore must
both act energetically for the implementation of these Welfare State
measures like the NRGS preventing all backsliding on them by the
bourgeoisie and at the same time use the con!ext ofthe rterial succour
provided by such schemes to help in strengthening the resistance ofthe
people in intensifing c1ass stuggle and also in overcoming the 0ec
tcation intrinsically attached to such schemes themse1ves. The Lef
fghts not just for we1farism but for socialism with which welfarism is
dialecticallylinked but whose content is qualitative1y diferent.
World Capitalist Crisis and
Growing Racist Attacks
Sitaram Yechu
THE attacks in Austalia on Idian students continues unabated. This
has naturally caused both anguish and angst back in India. Our solidar
it goes out to the victims ofthe racist outrages inAustalia particularly
in Melboume. The Austalian prime minister and the govemment have
been giving th right assurance's but the racist attacks continue to take
place. I is only hoped that the will ofthe democratic civil society will
Ausalia had aggressively marketed itself as a lucrative education des
tination. This resulted in nearly a lakh of Indian students curently
studying in Australia constituting 18 per cent of the entire student com
munity there. They contribute nearly 2 bi1lion Austalian dollars (s
7500 cror annually to the Austalias GDP.
Migration leading to racist outages is fairly common. We have our
own domestic variety like what was witessed in Mumbai recently.
We had seen such expressions earlier in the North East as well. The
valry associated with the size of the share of the cake so to say is
norlly attibuted as the main reason for the locals outraging the
migants. Some have reaped political benefit like the Shiv Sena which
uses racism as its electoral mascot.
The record of racist abuses in Australia has been documented even by
Hollywood in the early 1990s. A sident racist campaign was launched
in 2004 under the slogan Australian universities for Ausalian stu
dents". During the last 12 months there have been as rny as 70
attacks on Indian students. The gory details need not be repeated.
However to attribute such attacks as an expression of racism alone in
the present context of global recession would be Iike missing the woods
for the tees. Racist outages are an expression of a deeper malaise.
Between January 2008 and January 2009 Austalias GDP growth rate
plummeted fom 4.2 per cent to 0.3 per cent. Te last quarter saw
company profts falling by 7.2 per cent. Business investent tumbled
at a record rate of nearly 9 per cent. Additionally this year has seen
one of Australis worst droughts. As a result of this unemployment
climbed to 5.4 per cent in April 20Q9 fom 3.9 per cent in February
2008. le Austalian Prime Minister has declared for the frst time
that the economy las moved into a state of recession. Tough the
Labour govWent in Austalia has begun disibuting a whopping 9.9
billionAustralia dollas to low income falies diretly clearly serious
problems of1ivelihood are affecting its people.
le century-old worlds automobile leader General Motors declaring
bankptcy indicates thatthe obal recession is worsening. e World
Bank has declared that the year 2009 will see the frst decline in world
output on record". How this recession will be tackld by the govem
ments in different counties wiU detine the nature of social conficts
that arise as various sections ofthe people scramble for their share of
the shrinkng cake. Bail out packages for the cororates however
necessary cannot go unaccompanied by huge doses ofpublic invest
ments tat will generate both employment and importantly domestic
demd. 1t is the latter that will provide the much-required stiinulus for
the economy. e way oftackling the present crisis must be based on
putting peop1e before profts and not the other wayaround.
This however requires the recogition that the path of neo-liberal
globalisation of recent decades has ended. Cororate India however
continues toremain in the neo-liberal mindset notwitstanding the col
lapse and bankuptcy ofits global hi priests. It is askng for speedier
refoff pticularly since this UPA govemment does not require the
support ofthe Lef. I is precisely because the Lef had prevented the
last govemment fom undertakng unbriddled fnancial refoffil Iike the
privatisation ofthe pension funds raising the cap on foreig investent
in the insurance sector bankng refors pennitting foreign banks from
virtually take over Idian private
It is also necessary to leam fom histor. The devastation caused by
the geat depression of the 1930s was met in different ways by differ
ent capitalist counties. One of these ways laid the basis for the rise of
fascism A Geo Dimitov underine in his speech at the Communist
Itemational in 1935 Fascism adaptsits dergogy to the peculiarities
of each county. And the mass of petty bourgeois and even a section of
the workers reduced to despair by want unemplo)nent and insecurity
of their existence fall victim to the social and chauvinist dergogy of
fascism." Further he explained how it is in te interests of the most
reactionary circles ofthe bourgeoisie that fascism intercepts the disap
pointed masses who desert te old bourgeois parties. But it impresses
these rsses by te vehemence of its attacks on the bourgeois govem
ments and its ireconcilable attitude to the old bourgeois paies" .
Te large-scale unemployment created by the csis was a huge army
that was mobilised by fascist dergogy heralding Hitlers rise to power.
Na fascism was also the most exteme expression of racism -Aan
suprercy. Its horific consequences ofthe concentation camps and
the second world war continue to haunt us even today. Te building of
the fascist war machine was probabl the biggest economic stimulus
of that time. The question therefore is not one of giving 'a economic
stimulus. le question is what type of economic stimulus is given tat
does not engender authoritarian d fascist tendencies.
Popular pressures must be mounted to ensure that such ways of meet
ing te capita1ist economic recession are prevented. This can only
happen when the govCents of diferent counies are forced through
popular pressure to embark on a path of takng a quantum leap in public
investents to build and sengthen the social and economic inastuc
ture. In te meanwhile a11 eforts must be made to ensure that ug
uncivil and anti-democratic expressions like racist abuses are
contained on te basis of decisive deterent action by the authorities.
Challenging Imperial Finance
C P Chandrasekhar
ON December 9 2007 in a move that went relatively urtnoticed in
Idia seven South American countries signed an agreement that could
have important implications for the dominance asserted by the IF and
World Bank in developing countries. That agreement declared their
intention to form the Banco del Sur (Bank ofthe South) a pet prect of
the president ofVenezuela Hugo Chavez. President Chavez has seen
it as an important means of reducing the influence of the IF and
World Bank in imposing neo-libral economic policies with adverse con
sequences upon developing counties. While it has global aspirations
the curent focus is on Latin America where it is also seen as part of
the moves towards greater regional integration and reduced depen
dence upon the United States.
The seven counties that signed the agreement in early December were
Venezuela Bolivia Argentina Ecuador Brazil Paraguay and Uruguay.
(The surprise new entant Colombia whose leader is a close ally ofthe
US asked to join but later pulled out presumably under US pressure.)
While these counties have divergent interests and aspirations with re
spect to the Bank the move refects a general disillusionment with the
role of the Itemational Finance Institutes (I1s) in the region. These
include not only the IF and the World Bank but also the Inter-Ameri
can Development Bank (IB) which has some paicipation fom Latin
American countries but is dominated by the US. I has generallyadopte
the same approach and picies as its larger counterparts.
1t is general kowledge that the IIs record in te region is less than
1 80
admirable. In the 1 980s when the extemal debt crisis forced several
large debtol countries in Latin America to tum to the IF it imposed
severe. and misplaced monetarist austment policies that led to a
dramatic fall of incomes and growth potential such that the period
became kown as a lost decade" for the region. In the 1 990s the IIs
encouraged very rigid macroeconomic picies as well as policies of
privatisation with inadequate regulation that worsened already very
unequal income distibution and damaged possibilities of increasing
aggregate productivit.
The crisis management record is also abysmal. Mexico in 1 995 and
Argentina in 2001 for example both suffered more as a result ofthe
wong policies imposed upon them by the IIs. And the World Bank
has routinely pushed market-based and private solutions in areas such
as education and health even when the consequent problems are al1 too
wel1-kown and recommended privatisation ofsocial resources includ
ing mineral wealth as the route to reducing public debt and increasing
efficiency". This has only helped increase the stranglehold ofthe US
and othet imperialist powers in the region
The exaordinary thing is that the IIs appear to have leamed very
little fom their past mistakes. Nor do they seem to recogise that they
deserve to have very little say in determining policies given how little
they have actual1y contibuted to development fnance in recent years
not only in Latin America but in the developing world as a whole.
Indeed in the Latin American region the changing nature of intema
tional capita1 markets has meant that the IIs - and ofcial fnance
genera!jy -have been not just minor but actual1y negative net contribu
tors to resources foi development. Net fnancia1 fows (infows minus
outfows) to the Latin American and Caribbean region have been domi
nated by private equity flows (and within that incidental1y by FDI rather
than portfolio fows). Net ofcial debt fows (or foreig aid") have
been quite volatile negative in many years (and clearly so fom 2004
onwards) and therefore hardly contibuted to development fmance. Until
2004 they also appeared to follow the debt cycle established by private
creditors which is surely the opposite of what was required or could be
1 8 1
Within ofcial fnance flows the role of the IIs has been even less
positive. Net finance fows fom the IF to the region as a whole have
fuctuated wi1dly but general1y been negative. I fact the only three
years when it was positive refected the impact of the large bailouts
provided to Argentina during its major financial crisis and II-ided
economic implosion. For most of the recent period the IF has been a
large recipient ofrepayment flows from counties in the region receiv
ing net inflows to the tune oftens ofbi11ions of dolls every year.
Of course it could be argued that the IFs mandate is to lend to
counties in distress and therefore it may even be a good s1 that it is
not engaged in net lending to the region. The same argument does not
hld for te World Bank which is supposed to be the basic source of
development finance. The net amounts proded by the World Bank to
the region since the late 1 990s have been paly and since 2002 they
have been negative as wel1. Even the IB - the other large multilateral
creditor -has been receiving net inflows fom te region.
le only consistently positive -albeit re1atively smal1 -source ofnet
fnance has come from bi1ateral aid -and in recent years this has been
dominated by intra-regional assistance as oil-rich countries like Ven
ezuela have proded fnance for smaller countries. It provided around
$2.5 bi11ion to help Argentina repay its IF loan early and is currently
offering $500 mi11ion to reduce the debt crunch in.Ecuador and $1 .5
bi11ion to stabilis the economic situation in Bolivia.
The Banco de1 Sur would institutionalise such ad hoc arrangements
and lending. The plan is to raise $7 bi11ion in paid-in capital from mem
ber counties. S. far Venezuela has offered to put \in $1 .4 bi11ion and
Argentina $350 mi11ion (or 1 0 per cent ofits reserves). However gov
emment financing alone wi11 not be sufcient. To become a real alter
native to the IIs the Banco del Sur would have to leverage this capital
toraise funds from the market and lend out to borrower counties. That
in tum wi11 require the ability to access capital markets as a preferred
borrower so as to keep interest rates low for its own borowers.
Despite the sceptics there is no question that this is a ve favourable
time for such an initiative given the resources within the region tat
could be tapped. Since 2003 the aggregate curent account balance of
the region has moved fom deficit to splus. Ofcial foreign exchange
reserves have also been growing rapidly and currently more than $200
billion of such reserves are invested outside the region. More si1ifi
cantly the balancing item" of the balance of payments data which
includes not only erors and omissions (a proxy forprivate capitaI fli1t)
but also net acquisition of foreign assets including outward FDI has
been increasing by substantial amounts every year.
Of course much remains to be sorted out before te Banco del Sur can
become operational including questions like the govemance stucture
lending famework membership criteria the type of loan guarantees
expected the appointment of senior managers and safeguard policies.
Te member counties are reported to have different ectives as well.
Venezuela and Bolivia see it as an altemative to the IF which would
also provide balance of payments fnancing. Brazil envisages a more
limited role for the Bank of servicing te infastuctue investent needs
of an expanded Mercosur. Several of the smaller countries probably
just want an altemative source of development fnance that will be less
bureaucratic and more sensitive to local needs than the Washington
based IIs.
U1timately the creation of the Banco del Sur is part of a broader tend
withinLatinAmca of govCents increasingly distancing themselves
fom the IIs that are widely perceived as too biased in favour ofUS
interests and too insistent on providing rigid and undesirable policy ad
vice. Such a distancing is of course fuer bad news for the IIs since
they are now themselves facing fnancial problems because of a cut
back in their lending operations!
But it is also bad news for the US whose sphere of influence will be
considerably undermined by such moves. I addition ifLatin American
govemments also start to move their reserves out ofUS dollar holdings
that will add to the pressure on the dollar and to US interest rates
perhaps intensiting the credit crunch that is alreidy under way.
1 83
Terefore we should expect a backlash and counter-moves to this ini
tiative quite soon both from the US administration and fom intema
tional fnancial circles. But ifthis plan succeeds even partially it is an
important source of hope for the rest of the deve10ping wor1d. And
meanwhile it will also be interesting to see ifthis competition in devel
opment fnance forces the Bretton Woods institutions out oftheir com
placency to to reinvent themselves so that they can actually contib
ute useflly to the development of the South.
Imperialist Logic Not Acceptable
Editorial Peop!e's DemOCrlc
AS repoed in these colunms earlier the stategic relationship betwen
Idia and the USA is fast reducing Idia into a subordinate ally ofUS
irerialism. This is evident in many spheres like forcing Idia to be part
ofthe global Nuc1ear Non-Proliferation architecture etc. There are two
areas however where such succumbing to US pressures will mean
greater disaster for the overwhelming majority of the Indian people
who are already goaning under the burdens of the neo-1iberal eco
nomic policies. These are related to Idias positions and resistance to
the demands of the industialised world in the ongoing Doha negotia
tions in the WTO and on the issue of combating c1imate chan
o the Doha round of negotiations Idia has for the frst time accepted
the time-table drawn up by the industialised world to conclude these
by 201 0. Even prior to the reported assurances given to Hi1Iary
Clinton when she visited Idia recently (this is also hinted at in the
joint communique issued afer her meeting with Indias Exteral
Afairs minister) Commerce minister on the eve ofhis departure to
Washington in June this year has in an interview to the Reuters an
nounced that the impasse has been broken" ove the WTOs long
continuing Doha round of tade talks. There were various reasons
that led to this impasse in July 2008. Te disagreements relate to
NAMA (Non Agricultural MarketAccess) and importantly on agicul
ture. The issues of domestic support and export subsidies are conten
tious between the developed and the. developing world. But what
really broke the talks was the dispute over special safeguards mecha
nism for agriculture.
Thi s is a very serious issue as far as we in India are concered.
Unless these safeguards are frly negotiated we shall be exposing
our farmers to ruination in the fae of unbridled access given to the
developed world to dump their highly subsidised agricultural products.
Surely the concems for farers' distress suicides and the granting of
loan waivers cannot be accompanied b

succumbing to the pressures

ofthe developed world by making our agricultural sector completely
In June 2009 the Caims Group (1 9 countries accounting for more than
25 per cent of worlds agricultural exports) met with a fresh resolve to
conclude the Doha talks that began in 2001 . Both the US and Indian
Commerce ministers were invited to participate as observers. India
had earlier objected to inadequate safeguards for Indian farmers which
found support from a large riumber of developing counties which led
amongst others to the impasse in the frst place. Now O)lr Commerce
minister is hosting a ministerial conference in India on September 3-
2009 to break te impasse.
With the global recession intensifing; the developed countries would
seek their way out of the crisis by adopting protectionist measures
domestically and seeking to prise open the markets of t developing
world to receive their exports Any compromise by India thus can
only spell ruin for our people.
On the

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
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
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
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.
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
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.
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
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
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.
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
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
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.
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
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.
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
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
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-
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.
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
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.
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
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
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-
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.
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.
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.
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
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
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
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
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
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
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
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
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
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
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
'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
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
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
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
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
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

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
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
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
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-
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
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.

Marx (1974 263) tall ofthis constant expansion of capital hence

also an expansion of production on the basis of the old method of
production which goes quietly on while new methods are already
being introduced at its side . . ".
F or a more extensive discussion of the implications of global defla
tion see Patnaik (2003).
3. Marx (1 974 1 1 8) had written: It i s therefore quite possible and
under a developed system of capitalistproduction even inevitable
that the production and increase of the portion of constant capital
consisting of fxed capit:" , machinery etc. should considerably out
stip the portion consisting of organic raw materials so that' de
mand for the latter grows more rapidly than their supply causing
their prices to rise." Defaton according to our argument is re
sorted to eveh before such price rise can actually occur.
4. For the role of defation in te colonial context see U.Patnaik (1999).
5. Professor Hicks had asked this question at te Golden Jubilee Con
ference ofthe Idian Statistical Institute Ca1cutta (see Bose et.al.
1984). His answer was as follows: infation occu through a series
of price-hikes and for an average economic agent since eve
price-hike other than his own appears directed against him
(even if he is not a loser at the end of the entire round of price
hikes) infation appears to be a more menacing phenomenon than
unemployment; goverments take this perception ofthe economic.
agelts into account and hence for political reasons are more con
cerd about infation than unemployment. Professor Hicks ama
teurish invocation of agents psychology however appears tame
and unconvincing.
6. Since the inter-war years were a period of protacted crisis for
capitalism and hence in a sense abnormal" our reference to
normal" pre-Keynesian policies refers to pre-frst world war
7. For a discussion of the role of colonies like India in settlirig British
balance ofpayments see S.B.Saul (1970).
8. Foran elabrate discussionon this see Pataik(1997 Chapter 1 1).
Bose D.K. et.al. ed. (1984) Proceedings ofthe Golden Jubilee Con
ference ofthe lndian Statistical lnstitute Statistical Publishng Soci
ety Kolkata.
Kalecki M. (1 943) Pitical Aspects of Full Employment" Po/itical
Quarter reprinted in Kaleck (1971).
Kaleck M. (1971) Selected Essays in the Dnamics ofthe Capita/ist
Economy Cambridge University Press Cambridge.
Kaleck M. (1 972) Interediate Regimes" in Selected Essays on the
rowth ofSocia/ist and Mied Economies Cambridge University
Press Cambridge.
Keynes J.M. (1 949) The General eory ofEmployment Interest
and Mone Macmillan London.
Lenin V.I. (1977) Iperialism the Highest Stage ofCapitalism" in Se
lected Work (3 Volumes) Vo1. 1 Progress Publishers Moscow.
Luxemburg R. (1963) The Accumulation ofCapital Rout1edge Pa
perback London.
Marx K. (1 974) Capital Vo1.i Progress Publishers Moscow.
Marx K. (1 978) Capital Vol.l Progess Publishrs Moscow.
Patnaik P. (1 997) Accumulation and Stability Under Capitalism
Clarendon Press Oxford.
Pataik P. (2003) The Retreat 0 Uedom Tulika Delhi.
Pataik U. (1999) Expo Oriented Agiculture and Food Security in
Developing Countie and Idia" in The Long Tranition Tulik Delhi.
Saul S.B. (1970) Studies in British Oersea Trade Liverpool Uni
versity Press Liverpool.