Economic Highlights
New Delhi, 13 September 2013
UNCTAD Wisdom
REVIVE FARM SUBSIDY, END FDI
By Shivaji Sarkar
1991’s process of economic reforms
is coming to an end with its rejection by the United Nations Conference and
Development (UNCTAD). It has not only severely criticized the present economic
model but has called for enunciation of a new world order by taming the
financial sector, reducing dependence on foreign direct investment (FDI),
shunning the model of export-oriented development and bringing labour, public
sector and agriculture back into focus.
Notably, for world trade and
business to grow it calls for reintroduction of subsidies for the farm sector. Self-reliance
has to be the motto of growth for the Third World
economies is the undercurrent of the UNCTAD. In fact, the UN body foresees the economic
crisis deepening with further contraction of world economy as activity in most
developed countries is still reeling under the impact of 2008 crisis, including
insufficient job creation, wage compression and the still incomplete process of
balance-sheet consolidation. It notes the major reason for the crisis “has been
the dominance of the financial sector over the real sector”. Indeed, business
cannot go on as it has, for it can no longer deliver growth.
Importantly, the UNCTAD in its
flagship Trade & Development Report (TDR)
2013 has come down severely on the Breton Woods institution-supported
economic model without naming it. According to it, the present crisis is the
result of ignoring labour in the name of “greater flexibility” of labour market
and “wage flexibility”. It has led to wage suppression, worsened income
distribution and posed a threat to social cohesion. Wages have lagged behind
productivity growth in the past two decades. It not only suppressed domestic
demands but has led emerging economies into deep financial and currency volatility.
In the first place, greater
inequality of income distribution led to the economic crisis. The solution is
being seen in an “incomes policy” aimed at accelerative consumption growth which
could contribute decisively to restoring national economies (like that of India) and the
global economy to a stronger and more balanced growth path.
The UNCTAD calls for a change from
the “overall expansionary though unsustainable nature of global growth so far”.
Export-oriented strategies are no longer viable, as this growth model has led
to many problems of reduced wages, and activated lobbies that competitively
campaigned for currency devaluation in emerging economies.
It also warns against easy credit
policy for boosting consumer demand. This could pose danger to the emerging
economies as it would lead to excessive debt and household insolvency. A number
of developed countries have witnessed this in recent times, is UNCTAD’s
justification.
Therefore, the panacea is in
boosting domestic demand through public sector investment and growth in
employment in this sector. There is also a need to change (lower) the tax structure
and reorientation of public expenditure to increase purchasing power. This
would increase aggregate demand from household demand. The activities could be
sharpened with the public sector providing an incentive to entrepreneurs in
increasing real productive capacity.
In short, UNCTAD calls for a shift
from corporate profit-oriented development to large base of medium and small
scale entrepreneurs. This would widen income distribution as against
concentration of incomes in some pockets. Ultimately, it would bring down
social disparity. It states: “If many developing and transition economies
simultaneously give domestic demand a greater role, their economies could
become markets for each other, fostering regional and South-South trade and
thus further growth for all”.
The study clearly avers that the US’ stimulus to
industry has not helped. This is more or less what new RBI governor Raghuram
Rajan states. The slowdown in the economy, he
says, was paradoxically the effect of substantial fiscal and monetary stimulus
that its policymakers had injected into its economy in the aftermath of the
2008 financial crisis. The resulting growth spurt led to inflation, he has
stated.
Much
of the slowdown is contributed by the dominance of financial institutions in the
post-Lehman crisis, the TDR says. It led to lopsided demand and convoluted
economic order. Therefore, developing and transition economies have now been
asked to adopt “a cautious and selective approach towards foreign capital
flows”. Such foreign fund flows through conduit of powerful political lobbies have
tended to create macroeconomic instability, currency appreciation and recurrent
“boom and bust financial episodes” – something reminiscent of the series of
scams rocking the Indian economy since 2008 Commonwealth Games to the latest
Coalgate scandal to the rupee being on a roll.
Indeed,
such foreign flows are expensive. Besides, it leads to large repatriation in
terms of profits, technical fees and other outgo. Instead, these economies are
now being told to rely more on domestic sources of finance, the most important
being retained profits and bank credit. This will lead to productive economic
activities, job creation and less vulnerability to global economic shifts.
In
subdued words it has asked emerging economies to be apprehensive of the US quantitative
easing (QE). (The QE in reality means printing currency notes. Since 2008, the US has printed
trillions of currency notes. It is devastating developing economies by large
flow of short-term investments and withdrawals creating bubbles across the
world. This has enormously reduced the US’
current account deficit – in other words the US is trying to prosper at the cost
of economies of poor countries).
This
has happened as the financial system remains unregulated creating both monetary
and financial instability. Through regulation and strong government controls
the financial system, especially banking, has to be restructured. This would
require a larger role for central banks (RBI), development banks and
specialised credit institutions.
The
UNCTAD also calls for larger role for agriculture for overall productivity
growth. This would increase activity in countries with large rural sector, as
in India,
that has many small producers. This would also boost domestic consumption and
spread economic activity to the so far neglected sectors, something various
farmers’ organisations have been demanding for long.
Productivity
in the agricultural sector can also be enhanced, says the report, through
public (not private or corporate) investment in agricultural research, rural
infrastructure and publicly assisted agricultural support organisations.
It
calls for revival of many dismantled organisation in the wake of the 90s
structural adjustment programmes. Low-cost financial support, even through
subsidies, to small-scale farmers, self-employed in rural and urban areas could
turn the world economy and spread benefits to wider sections of the society.
Expressing
strong disapproval of marginalising the farm sector, the TDR calls for
protecting farmers – for overall productivity growth - against the impact of
competition from highly subsidised agricultural products imported from
developed countries (something the Food Security law aims at). Will India please
pay heed.--- INFA
(Copyright, India News and Feature Alliance)
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