[OPE-L] Development with Dignity: A Case for Full Employment by Amit Bhaduri

From: Rakesh Bhandari (bhandari@BERKELEY.EDU)
Date: Wed Mar 22 2006 - 03:17:32 EST


EPW Reviews
March 11, 2006
An Integrated Totality

Development with Dignity: A Case for Full Employment
by Amit Bhaduri;
National Book Trust, India, 2005;
pp 107, Rs 45.

Prabhat Patnaik
The dominant discourse in economics in India 
today has a surreal air about it. The economy is 
claimed to be prospering, even though hundreds of 
peasants are committing suicide across the 
country; the rate of growth is claimed to have 
climbed to dizzy levels, even though the 
unemployment problem is becoming daily more 
acute; the economy is claimed to have 
successfully broken through the barrier of the 
"Hindu rate of growth", even though the rate of 
employment expansion is lower today than it was 
during the "Hindu rate" phase; poverty is claimed 
to be getting reduced, even though per capita 
food absorption in the country as a whole is down 
to the level where it was on the eve of the 
second world war; and India is claimed to be 
emerging as an economic superpower, even though 
75 per cent of the rural population (in 
1999-2000) was getting less than 2,400 calories 
per person per day compared to 56 per cent in 
1973-74. A discipline, whose practitioners saw 
themselves, in Keynes' words, as the "conscience 
keepers" of the nation, is being sought to be 
reduced to a ragbag collection of fanciful 
notions commonly held by the urban affluent. A 
discipline whose intellectual demands are so 
great that even the physicist Max Planck was 
impressed by the difficulty of doing it, is now 
sought to be reduced to a set of platitudes which 
can be repeated ad nauseam in public.
But all those who despair at the direction which 
both the country and the discipline are taking, 
should rejoice at the publication of this little 
book. One of the most outstanding macroeconomists 
of the country has put forward a set of proposals 
for the pursuit of an economic strategy that 
would bring to the people "development with 
dignity". And in so doing, he has restored to an 
extent the dignity which the discipline had lost 
by merely becoming part of the great upper class 
celebration.
The book is noteworthy because Bhaduri suggests 
an abandonment of the obsession with the usual 
catch-phrases, like "growth rate", "efficiency", 
"leaving things to the market"; he starts instead 
from the other end, namely, the immediate 
provision of full employment and the basic needs 
of the people within a democratic framework. The 
catch-phrases just mentioned are supposed to be 
the instruments for achieving the basic social 
goals; typically however they start taking 
precedence over these goals themselves whose 
achievement recedes further into the future. This 
dishonesty is rejected by Bhaduri, who suggests 
instead a direct and immediate move towards these 
goals. The book is devoted to a discussion of how 
this can be done.
Basic Propositions
His basic propositions can be schematically set 
out as follows. First, India must strive for a 
developmental process that focuses neither on the 
growth rate as such, nor on income transfers to 
the poor as such; growth and distribution 
have got to be integrated as parts of the same 
process. This interweaving of growth 
and distribution cannot be effective, however, 
unless it confronts simultaneously the structural 
inequalities of Indian society rooted in caste, 
gender and religious discrimination.
Second, even if we make the extravagant 
assumption that the market arrives at an 
"efficient" outcome, this outcome relates to a 
particular distribution of purchasing power among 
the market participants. To pretend that the 
basic needs of the people would be met "in due 
course" through the functioning of the 
"liberalised" market is dishonest; a democratic 
government must assume direct responsibility for 
providing the most basic needs of the people such 
as food, shelter, clothing, clean water and 
health care. The point is not whether the state 
should follow "pro-" or "anti"-market policies; 
the point is to combine the two institutions in 
the most imaginative manner to serve the needs of 
the people within a democratic polity.
Third, an obsession with cutting costs to become 
internationally competitive and achieve a high 
growth rate of exports, as a means of increasing 
the output growth rate, is equally 
counterproductive. It leads to the phenomenon of 
"jobless growth" which is a hindrance to the 
removal of poverty and to meaningful democracy. 
Improving the purchasing power in the hands of 
the people, and enlarging the size of the 
domestic market, are ways of breaking out of this 
syndrome. What is essential is to achieve an 
appropriate mix of home and export demand instead 
of one-sidedly emphasising the exclusive 
importance of export demand, for which measures 
like labour market flexibility, downsizing of the 
labour force and restraint on wages 
are undertaken, with invariably adverse 
consequences for the poor.
Fourth, it is essential to overturn the criterion 
that should be used in deciding the optimal 
policy mix. It is not the degree of international 
competitiveness or the magnitude of growth rate 
that should be our yardstick in deciding on 
policy but the provision of a legal minimum wage 
with socially productive work at full employment, 
and the only organisational form within which 
this can be achieved is through decentralisation 
to the elected bodies at the village and town 
level.
Fifth, the argument that the "government cannot 
do it", which derives from the presumed absence 
of resources with the government, is completely 
erroneous. In any economy where unutilised 
capacity, unsold foodgrain stocks, unused foreign 
exchange reserves and unemployed labour coexist, 
the government can safely undertake larger fiscal 
deficits without causing any inflation. And if 
the worry is about the debt servicing obligations 
set up by such deficits, then it is better to 
print money than to emit interest-bearing debt. 
The Fiscal Responsibility and Budget Management 
Act which advocates a uniform cap on fiscal 
deficits in all seasons is a piece of unwarranted 
legislation that should be abandoned.
Sixth, enforcing accountability on the government 
can be done through decentralisation of 
decision-making, where the poor, armed with the 
right to information, can keep a vigil over the 
deployment of resources earmarked for their 
benefit; but the presumed absence of 
accountability and infirmities of the government 
cannot be made excuses for preventing the 
government from undertaking measures to achieve 
development with dignity.
The fifth point mentioned above deserves special 
notice and defines the theoretical setting of his 
approach. The orthodox theory underlying 
neoliberalism necessarily presumes, without 
always saying so, a perennial state of "full 
employment", in the sense of the absence of any 
demand constraint. The case for balancing the 
budget is derived from this presumption. Any 
non-monetised government borrowing, it is 
claimed, can only give rise to a "crowding out" 
of private investment, and hence a lowering of 
efficiency in the economy; and "monetised" 
government borrowing can only cause inflation.
'Humbug of Finance'
The argument that government borrowing from the 
"market" crowds out private investment is not a 
new one. It was advanced in 1929 by the British 
Treasury against Lloyd George's proposal, put 
forward on Keynes' suggestion, for setting up 
public works, financed by government borrowing, 
for overcoming unemployment which, even then, had 
stood at 10 per cent. The Treasury white paper 
had argued that in an economy at any time there 
was a "fixed pool" of savings; and if the 
government took more of it through its borrowing, 
then less remained for private investment and net 
capital exports.
If one gets away from the "fixed pool" idea, and 
takes savings to be a positive function of the 
interest rate, then the Treasury argument has to 
be modified. "Crowding out" in such a case would 
not be complete but only partial. The interest 
rate would rise to a point, on account of 
government borrowing, where there would be some 
"crowding out" and some increase in savings; the 
two together would equal the amount of fiscal 
deficit.
The fallacy of this argument lay in the fact that 
savings also depend upon the level of income. If 
savings are taken as a "fixed pool" or as a 
function of the interest rate alone, then the 
implicit assumption is that income, and hence 
employment, is given and non-augmentable, i e, 
the economy is at full employment. The Treasury 
view in short was arguing against a policy of 
overcoming unemployment through fiscal deficit, 
by assuming that unemployment did not exist at 
all!
As against the Treasury view, Richard Kahn had 
argued in his famous 1931 article that an 
increase in the fiscal deficit, far from 
"crowding out" private investment (we ignore net 
capital exports), generated through a 
"multiplier" process, at any given interest rate, 
a larger output and employment in the economy, 
such that private savings at this larger output 
exceeds private investment by an amount exactly 
equal to the fiscal deficit. Indeed, private 
investment is likely to increase within this 
period itself, or in subsequent periods, on 
account of the larger output, in which case we 
have "crowding in" rather than "crowding out".
Even at full employment, a fiscal deficit still 
"finances itself" through inflationary forced 
savings from the working masses (coming to the 
hands of the capitalists through a "profit 
inflation" and generating an excess of private 
savings over private investment), so that the 
question of "crowding out" does not arise even 
here. But in a demand constrained system a larger 
fiscal deficit causes neither any inflation nor 
any "crowding out", no matter how it is financed 
(whether through printing money or through 
"market borrowing"). To perpetuate poverty and 
unemployment in this situation in deference to an 
absurd and erroneous theory (which Joan Robinson 
had called the "humbug of finance") is totally 
unacceptable. This point has been made by several 
writers belonging to the Left. But the fact that 
a macroeconomist of Bhaduri's eminence is 
emphasising this, should be a matter of 
gratification.
The havoc wreaked by the "humbug of finance" is 
evident most clearly in the recent administration 
of the food economy. Despite reduced grain output 
growth, excess public stocks of foodgrains 
started building up from 1998 as purchasing power 
fell owing to expenditure cuts by the government. 
By July 2002, we had 64 million tonnes of 
foodgrain stocks, of which 40 million tonnes were 
surplus stocks. If the government had put 
purchasing power in the hands of the rural poor 
through employment works financed by deficit 
financing, then a substantial amount of it would 
have come back to government agencies like the 
FCI; whatever was spent on private sector 
products would have generated larger output in 
the private sector without causing any inflation. 
In short, the question of there being any 
"crowding out" or inflation on account of 
deficit-financed employment-generation projects 
simply did not arise. And yet the government 
undertook no significant additional employment 
generation for fear of enlarging the fiscal 
deficit; and foodstocks continued to rot in the 
government godowns, until 19 million tonnes were 
dumped at prices below those charged to the BPL 
population at home on the international market, 
where they were used as animal feed in the 
advanced countries.
Overall Logic
The different suggestions made by Bhaduri are 
interrelated; they constitute an integrated 
totality, not a mere list from which some may be 
arbitrarily picked, while others are left out 
"for the time being". And this integrated 
totality can be realised only through the agency 
of the state, albeit a democratic state 
driven by the will of the people. Three 
questionswhich immediately arise are left 
unanswered, perhaps for good reason.
The first relates to the political process 
through which the state can acquire such an 
agency role. The author's reasoning here could 
well be as follows. The state can be made to 
acquire an agency role, through the intervention 
of the people in a democratic polity, provided 
such intervention is not snuffed out through 
theoretical obfuscations like "There is no 
alternative", "The state has no resources for the 
provision of basic needs", "The economy cannot 
afford to compromise on efficiency" and so on. 
The first task in the process of activating 
popular intervention therefore is to impart some 
clarity on theoretical issues by blowing away 
such obfuscations, which is what the book tries 
to do.
The second relates not to any political process 
but simply to the characteristics of a regime 
where the state can play such an agency role. For 
instance, can the state play an agency role of 
the sort that the author visualises without 
imposing tighter controls over capital flows? And 
how tight should these controls be? What sort of 
trade controls may be necessary? To be sure, 
there cannot be one particular regime frozen in 
time within which "development with dignity" can 
be striven for; the requisite regime itself will 
have to keep evolving, as well as the programme, 
in a recursive manner as newer problems arise and 
newer challenges faced along the path of 
"development with dignity". Nonetheless the 
initial requirements in terms of regime 
characteristics can be analytically explored, 
though getting into these issues would perhaps 
have taken the author beyond the self-imposed 
limits of the book.
The third question is this: if instead of the 
integrated totality suggested by the author there 
is an attempt at implementing bits and pieces of 
it, would it necessarily represent advance? To my 
mind the answer is clearly "no", and the point 
can be illustrated with reference to 
decentralisation. If decision-making is 
decentralised to lower-level elected bodies 
without a corresponding devolution of resources, 
then it is likely that these bodies would 
actually turn to foreign donors like the ADB and 
the World Bank for funds, which, instead of 
creating conditions for the autonomy of the state 
(of which these bodies are very much a part) and 
hence its agency role, would have precisely the 
opposite effect of enfeebling and dismantling the 
state, making it even more incapable of 
undertaking any agency role. Instead of economic 
decentralisation we would have had economic 
disintegration. The author's argument in other 
words has an overall logic underlying it; to read 
it mechanically, simply as a list of things to be 
done, would be erroneous and grossly unfair.
A reviewer always runs the risk of looking in a 
book not for what the author is concerned with, 
but for what he himself is concerned with - a 
tendency which can be unfair to the author. 
Instead of pursuing my own hobby horses further, 
I should conclude therefore by saying that this 
is a "must read" book for anybody concerned with 
the Indian economy. It is the first in a series 
of similar monographs being planned by the 
National Book Trust (NBT). The NBT must be 
congratulated on this venture.
Email: ppat@del3.vsnl.net.in















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