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

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.
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