|
|
|
| Sunday, 17 July 2005 |
 |
|
 |
Features |  |
| News Business Features Editorial
|
Bringing
economic and political democracy closer
(Dr. N. M. Perera memorial lecture this year was delivered by Prof. Amit Bhaduri of Jawaharlal Nehru University, New Delhi, India, in Colombo. Following are the excerpts): Continued from last week The traditional way out of this dilemma of reconciling political with economic democracy, especially in a poor country, is to assign to the state the role of doing the balancing act between the two. And, this cannot be done only by making the market more competitive or efficient. The state has to intervene directly. It is a well known proposition in economic theory that even under the most idealised conditions of so-called perfectly competitive markets, there is no guarantee that the market system will produce a reasonable distribution of income. In other words, the equilibrium outcome resulting from perfect competition is unconcerned with the distribution of income. And, if that distribution happens to be unacceptable, the state has to act to give an economic voice to the poor. However, the problem goes deeper. Even under those idealised circumstances of perfect competition, economic theory can only demonstrate that such an equilibrium unconcerned with income distribution, would exist; but it cannot be shown that the market system must necessarily guide the economy towards it, and even if it does, how long will it take to reach. There are, therefore, two important negative messages to be learnt from mainstream economic theory itself. First, even under the best of circumstances we cannot expect the market to solve reasonably the income distribution problem of the society, implying that it is not the job of the market to bring economic and political democracy closer in a poor country. Second, even though the competitive market is capable of allocating resources optimally, there is no reason to assume that this optimum will be attained within any well-defined, and known horizon of time. However, there is also an important message on the positive side which we need to bear in mind. Unlike centralised bureaucratic planning, and non-democratic political systems, the market system is subject to a degree of self correction. When resources continue to be allocated very inefficiently, the mechanism of demand and supply tends to correct it. However, what is does not correct is the pattern of demand generated by a particular distribution of income. In simpler terms, it means that the market dictates what goods to produce according to purchasing power, and may end up producing efficiently bottled mineral water in many varieties beyond the reach of the poor, while the villages go without drinkable water. Ideological Given these inherent problems of the market mechanism, it would have been more honest to face them candidly, and look for workable solutions. But politicians, and their economic advisors hardly do that these days; instead they take a convenient ideological short-cut, almost invariably encouraged by organisations like the IMF and the World Bank. Naturally it is convenient for a politician if (s)he can make the abstract institution called 'the market' responsible for sorting out our difficult economic problems. And, this is especially convenient, because the solution to be provided by the market has no definite time horizon. So a politician can always go on claiming that until the next round of reforms is carried out, the economic performance cannot improve. And, like the promise made by a dictator, that next round always lies in the future! However, there is a silver lining in all this. Even if the market as an impersonal institution remains unaccountable within any definite time horizon, and can get away with the promise of delivering, a politician in a democracy cannot. He or she remains accountable, at regular intervals at least at the time of the election. And it is this accountability of the politician which we have to learn to use, to make in turn the market system accountable. This is the real challenge of our time. The either-or debate between the market and the state is largely a non-issue. The core issue is how to enrich the market system with the functioning of a political democracy in a developing country, and vice verse. In order not to be misunderstood, let me emphasise that it does not merely mean "market-friendly" policies; instead it means policies through which both these institutions of the state and the market might reinforce one another in the common objective of bringing economic and political democracy closer. I would like to highlight what appears to me some of the basic aspects of these policies. They seem to me politically feasible, but governments and politicians, often with encouragement from economist and organisations like the IMF and the World Bank, tend to ignore them, because they are not compatible with the new orthodoxy guided by the free market philosophy. First, we must realise that economic globalisation implies two types of openness, openness to international trade and direct foreign investment about which we hear a lot these days, but also openness to internaitonal financial markets about which we hear far less in usual political discourses. Greater openness to trade essentially means an increase in the relative importance of the external or foreign vis-a-vis the internal or domestic market. Since no country, particularly no developing country, can influence the overall size of the external market, and the volume of world trade, this means that each country tries to get a bigger share of the international market taking the overall size as given. In this respect countries resemble individual corporations fighting among themselves over market shares, and the distinction tends to get obliterated between micro-economic management relating to a single firm or corporation and macro-economic management involving different economic units in an economy. Its most obvious consequence is a fallacy of composition, namely to assume falsely that what is true for an individual part is also true for the whole system. Thus, if one country succeeds in having an export surplus and a bigger share of the market, it must necessarily imply that another country must be import surplus, losing a share of its market. It is a zero sum game where all can not win at the same time, and if the strategy succeeds for some, it must fail for others. This problem gets particularly aggravated for developing countries, as they fight with each other over market share in similar, low-skill labour-intensive products like textile, leather products or primary products like tea, jute etc. And, it is particularly unfortunate, that the IMF typically recommends devaluation for increasing exports to several developing countries almost at the same time, overlooking this obvious fallacy of composition. Fallacy However, the fallacy of composition of imagining that the economy can be managed like a single large corporation goes deeper. An individual corporation increases its profit and market share by cutting costs typically in two ways; either by restraining wage or by raising labour productivity. But the fallacy is obvious if all firms cut their wage. Not only that no firm gains relatively, but domestic purchasing power, and the size of the internal market gets reduced. Similarly increasing labour productivity by shedding labour, so-called 'downsizing' has a similar effect if pursued by many firms at the same time. It increases output per worker, and there might be more to sell, but the domestic market shrinks. The claim that the excess product arising from a reduced domestic market can always be sold in the foreign market is not at all a satisfactory answer. As already pointed out, given the size of the international market there is a blatant fallacy of composition in believing that all countries can achieve an export surplus. What is more, wage and self employment together have a far greater weight than export in the domestic product of almost all countries. Therefore, the same percentage reduction in the earnings in wage and earning in informed self-employment would, usually require a disproportionately large increase in exports. For instance, several estimates from different sources suggest that textile export of China will have to grow at some massive 37 to 40 per cent per year for several years, if its loss of domestic market due to joining the WTO in this sector is to be compensated. So, even if China succeeds, it is easy to imagine its adverse consequences on other textile exporters of say from south Asia. And, this is precisely what the fallacy of composition is all about when each individual developing country relies in isolation on the export market. To escape from this fallacy of composition, developing countries have reorient their policies from focusing on increasing their external market share through various cost-cutting measures to increasing the size of their internal market. The size of the domestic or internal market, unlike that of the external market, is not given because, the level of domestic purchasing power depends to a significant extent on government spending, and also on the rate of employment generation giving purchasing power to the poor. Next: Synergy between the state and the market |
|
| News | Business | Features
| Editorial | Security
| Produced by Lake House |
