Sunday, June 15, 2014

Emerging Economies, Free Trade and Poverty

Poverty alleviation has been on the global agenda for the last seven and half decades. The World Bank, Asian Development Bank, United Nations, several developing nations and Developed Nations have made it as an important agenda. But the US, Japan, Germany and even China that registered consistent high growth during the last two decades could not be free of the poor. Asian Development Bank that has been spending billions on the agenda of poverty alleviation has poverty dancing right in front of its huge mansion in Manila. It could not show case even a small nation rid of poverty. Poverty can at best be reduced and not eliminated – this is one lesson that the economic history teaches us.

All the conferences on poverty alleviation throughout the World are held in Five Star or Seven Star Hotels and in Air-conditioned Conference Halls for hours and days together. Intellectuals gather to discuss their poverty and other’s poverty. Goals in one name or other and common agenda across the nations – e.g., Millennium Development Goals – are discussed and settled. Several researchers, bureaucrats, government and non-government organizations, donor institutions etc., decide to spend billions of dollars on the agenda. So much is the scope for employment provided by the poor across the world. Poor are the biggest employers in the world. Interest keeps renewing on poverty alleviation agenda – and now with focus on emerging economies and free trade. This paper is divided into two parts: part 1, dealing with free trade and emerging economies and Part 2, dealing with poverty with specific reference to India.

Part 1: Free Trade and Emerging Economies
A word or two about free trade becomes imminent to relate to the poverty alleviation agenda. The IMF and the World Bank have preached long the structural transformation followed by liberalization of trade and export-driven agenda. They prescribe cutbacks, “liberalization” of the economy and resource extraction/export-oriented open markets as part of their structural adjustment programmes. Privatization accompanied by reduced protection to domestic industries, currency devaluation to keep the dollar in its prime trading position, increased interest rates, elimination of subsidies particularly those that offer guarantees to the poor, food security measures, are some of the glaring measures and these would precisely ensure that the emerging economies inviting such adjustment programmes depend upon them continuously and the poverty that actually gets accentuated in the process, is kept high on the economic debates.

One analyst succinctly puts it: “The impact of these preconditions on poorer countries can be devastating. Factors such as the following lead to further misery for the developing nations and keep them dependent on developed nations:
• Poor countries must export more in order to raise enough money to pay off their debts in a timely manner.
• Because there are so many nations being asked or forced into the global market place—before they are economically and socially stable and ready—and told to concentrate on similar cash crops and commodities as others, the situation resembles a large-scale price war.
• Then, the resources from the poorer regions become even cheaper, which favors consumers in the West.”
The other effects are that capital flows become more volatile and the bottom of the pyramid, gets wide leading to social unrest.

“In the worst cases, capital flight can lead to economic collapse, such as we saw in the Asian/global financial crises of 1997/98/99, or in Mexico, Brazil, and many other places. During and after a crisis, the mainstream media and free trade economists lay the blame on emerging markets and their governments’ restrictive or inefficient policies, crony capitalism, etc., which is a cruel irony.”
Developed countries grew rich by selling capital intensive products at high price and buying labour-intensive products at low price. This imbalance of trade increases the gap between the rich and the poor. A country’s ability to purchase imported goods declines when the purchasing power of a country’s exports declines. Emerging economies would not be able to fund the sustainable development programmes without incurring huge fiscal deficit. These deficits are calculated in relation to the Gross Domestic Product – a measure that fails to reckon many products and processes that happen in the economy. A case in instance: In India, all the deals in scrap and waste are on cash and carry basis running to millions of rupees and they do not get into the national accounts. There are many other such items in the services sector as well – the services of many doctors, lawyers and the unrecorded sales in jewelery shops .

Most developing economies depend on primary commodities as their main source of revenue and these account for about half of their export revenues and such primary commodities are very few in numbers.

These concerns are not new.
Political economist Adam Smith in his magnum opus ‘Wealth of nations’- dubbed as a Treatise on Capitalism was highly critical of the mercantilist practices of the wealthy nations, while he recognized the value of local industry and the impact of imported manufactured products on local industries:
“Though the encouragement of exportation and the discouragement of importation are the two great engines by which the mercantile system proposes to enrich every country, yet with regard to some particular commodities it seems to follow an opposite plan: to discourage exportation and to encourage importation. Its ultimate object, however, it pretends, is always the same, to enrich the country by the advantageous balance of trade. It discourages the exportation of the materials of manufacture, and of the instruments of trade, in order to give our own workmen an advantage, and to enable them to undersell those of other nations in all foreign markets; and by restraining, in this manner, the exportation of a few commodities of no great price, it proposes to occasion a much greater and more valuable exportation of others. It encourages the importation of the materials of manufacture in order that our own people may be enabled to work them up more cheaply, and thereby prevent a greater and more valuable importation of the manufactured commodities.” (Emphasis Added) We notice therefore that the free markets are preached while mercantilist interventions in markets are practiced.

In April 2001, Greg Palast conducted an interview with Joseph Stiglitz which was published in the British newspaper Observer and Guardian.
The World Bank talks of “assistance strategies” for every poor nation using careful country by country investigations. However, as reported in the article, “according to insider Stiglitz, the Bank’s ‘investigation’ involves little more than close inspection of five-star hotels. It concludes with a meeting with a begging finance minister, who is handed a ‘restructuring agreement’ pre-drafted for ‘voluntary’ signature.”

Stiglitz then tells Palast that after each nation’s economy is analyzed, the World Bank “hands every minister the same four-step program” (emphasis added), described in the article as follows:
1. Privatization: the programme is endorsed as it provides scope for corrupt politicians to sell the State silver on a platter and transfer at least 10 percent of the ill-gotten money to undisclosed Swiss bank accounts. Stiglitz asserts that the Us government knew about it at least in one such case: in the 1995 Russian sell-off: “‘The US Treasury view was this was great as we wanted Yeltsin re-elected. We don’t care if it’s a corrupt election.’” (Emphasis added)

2. Liberalization of Capital Markets: Stiglitz describes the disastrous capital flows that can ruin economies as being ‘predictable’, and says that ‘when the outflow of capital happens, to seduce speculators into returning a nation’s own capital funds, the IMF demands these nations raise interest rates to unsustainable levels of 30-70 percent.

3. Market-based pricing: This Stiglitz calls, “the IMPF riot.” We have seen the consequences in India: safe drinking water is either priced or bottled and sold post liberalization. Prior to 1990 we had no mineral water bottles as the only safe drinking water in India.

4. Free Trade: This is a version dominated by the World Trade Organization and the World Bank. Stiglitz likens this to the opium wars. US and Europe created barriers to sales of farm products in Asia, Latin America and Africa while barricading their own markets against the Third World Agriculture. They talk about rule-based global mechanisms and the media always feels shy of asking what these rules are and who framed them, when? They are “devised in secrecy and driven by an absolutist (absurd) ideology. Parentheses mine.
Commenting on Doha WTO Conference in November 2001, Raj Patel gave a harsher description of the structural adjustments and trade related policies as ‘weapons of mass destruction.’
I would not like to sound so cynical and harsh for the reason that these free trade policies have come to bear on the manufacturing sector certain product and packaging standards, environmentally friendly policies and emergence of a robust services sector that gave fillip to new generation employment as also increase in wages and salaries that pushed the unwinding of traditional labour markets.

How do we build the poor as building bricks for growth of the economy? Most of the poor are categorized as unorganized sector as they do not have a common articulation of the problems. Everyone else speaks for them, thinks for them and acts for them. In the process, their assets do not get cognizance and they also get most often undervalued. The low collateral value gets them nowhere with the lending institutions. They become prey for MFIs who charge highest risk price for the money lent. The modern western economic model is ill-suited for developing countries: be it Thailand, Indonesia, Philippines, Bangladesh, Pakistan or India.

The heart of the problem is that most people cannot access capital due to the under-developed legal system, particularly in terms of property rights. It is good to look at history: The Anglo-Saxon world of the 19th Century when pioneers in North America needed to legitimize their land they had grabbed and businesses they had set up. Similarly, during the same period, European nations used legal means to shelter themselves from the negative effects of globalization, a process that led to their eventual integration. Although Latin America has gone through trade liberalization and economic reforms the majority of its people remain poor. The dead capital of the poor generates less wealth because it lacks least legitimacy. When Ganges or Brahmaputra floods the villages and dismember them, the poor in the villages do not get habitation where they were earlier staying. Altogether new villages with the same name spring up. But the poor would have no titles to either their house property or farmsteads. It is the rich and powerful, the politician and the bureaucrat nexus that assigns ownership to land for the losers in the bargain. The property rights of the poor become severe casualty. Same is the case with many tribal farmers. In the bottom-up process, if the poor are involved in development initiatives, capital of a new order gets built up. Several government designed projects to help the poor have shown up only poor results.

Part2: Poverty in Indian Context
There will always be some gravitational forces that would contribute to reduction of poverty as a natural phenomenon. How much of it effort intensive and how much is gravitational needs to be established through detailed micro studies and there are quite a few. . Then why so many trumpets blow around it?

Under the guiding principles of IMF, Africa’s income dropped by 23% in a single year.
Coming to India, six decades ago poverty rate was put at 47% of the population. By 2011-12 it came down to 30%. The nearly 350mn poor equals population of Africa. The whole world is eying Indian markets because of the growing emergence of the middle class population. The recently released International Comparison Program (ICP) data have provided an independent, international validation of the poverty line fixed by the Suresh Tendulkar committee, which is being reviewed by the C. Rangarajan committee for a likely revision. A summary of the ICP Report confirms the poverty line at Rs.30.2 per capita per day or Rs.906 per capita per month (2011-12 on PPP at Rs.15.1 in 2011 to $1).

The ICP is a worldwide statistical operation involving 199 countries and agencies such as the World Bank. It produces internationally comparable price and volume measures for the Gross Domestic Product (GDP) of countries. It had ranked India’s GDP behind only that of the U.S. and China. But in terms of per capita GDP, India was ranked 129th.”

Ministries of Rural Development, Agriculture, Social Welfare, PDS etc have introduced over 150 schemes targeting the poor and spent billions of rupees in the direction of poverty alleviation. Subsidies and Grants, soft loans and even distribution of assets adorned the wage employment, self-employment, rural infrastructure, social security and food security schemes. The expenditure in administering these schemes has been around 30-40 percent of the budget outlays year after year. The claims of reduction of poverty across the States are varied. Most Advanced States have the bottom of the pyramid growing.

Requirements of the poor have vastly changed. It is not belly hunger. It is information hunger that has overtaken the persons. From scavenger earning a daily wage of no less than Rs.50 to a daily wage earner under Mahatma Gandhi National Rural Employment Guarantee Scheme (MNREGS) holds at least one mobile if not two. He finds the money for the chip and regular updates and even pays Rs.30 for a favourite tune on his mobile. But he/she is not prepared to spend for healthy food and safe drinking water or health insurance. The tastes in villages have also vastly changed. Those using soap nuts for head bath in villages today use a small shampoo sachet costing Rs.2 to serve for wife and husband once a week. Primordial needs have vastly changed. These changes should be recognized while drafting schemes for the poor.

The Human Development Index measured in terms of high literacy rates, low infant mortality rates, low school drop-out rates, availability of safe drinking water, good health and hygiene in terms of easy accessibility of medical and paramedical services has been high in certain low growth States and vice versa in high growth States. The traditionally poverty-stricken States characterized as Bihar, Madhya Pradesh, Odisha, Rajasthan and Uttar Pradesh have even after bifurcation into smaller States and economic development are still showing up high poverty rates. Each Scheme floated by the Government – State or Centre – has grown to be an empire ruled by self-centered politicians. The scheme is implemented independent of other schemes. Schemes like Rajiv Awas Yojana, Rajiv Grameen Vidudikaran Yojana, Provision of Latrines, Sanitation scheme do not get delivered to the same beneficiary although the target group of each scheme is the same poor.

Financial Inclusion – a major initiative with commercial banks in the forefront since 2005 – moved only a shade better in 2012 according to Inclusix – an index developed by CRISIL. Branch penetration, deposit and credit penetration have been brought under one metric in Inclusix. This index clocked 42.8 on a scale of 100. But the disparities stare at us: Southern States accounted for 58% of the credit accounts. The bottom 52% of districts has merely 2% of bank branches. The Bank Correspondents (BCs) have a long way to go in taking the poor closer to the Banks’ door steps. There are unresolved issues between the BCs and Banks. The instrument is not robust enough to go near the goals of financial inclusion. Commercial banks proved that their pie does not lie in these efforts and they preferred to go slow. The Mor Committee recommendations tended to be more academic.
But are we desperate? Certainly not. Every problem has solution if we search for the solution in the area of the problem. Centralised schemes and existing delivery instruments have to be modified. While the poor live in rural areas and urban slums the schemes and resources originate from the Central Government and State Governments. But the very identification of the poor – visible in villages – have to be identified in villages and the lists of such persons should be displayed with their requirements – housing, safe drinking water, sanitation, education, electricity, health and insurance duly tabulated. Against these requirements the concerned officers should mention when and how these needs would be met and the government releases would be reaching their bank accounts. Against each name the bank account number has also to be mentioned. Various existing Schemes should all be combined into no more than twenty schemes and should be directed at the remedying poverty irrespective of caste or creed. The Budget for such schemes should be released timely online to the Villages for implementation within a month after the approval of the budget by the Parliament/Legislature. If the identified poor does not have a bank account, the nearest BC/Bank branch shall open a savings bank account and a Rupiya Card with a limit of Rs.50000 shall be issued within a fortnight after the list is cleared by the Gram Panchayat.

At the Village level social audit of each such scheme should be done once in 3months by an independent agency. The Audit results shall be thereafter put on the website of the State Government as is done for some schemes even now. There must be a Lok Pal type agency recognized as equivalent to a quasi judicial body to enquire into the errands of the officials for the release of grants or subsidies or loans under various announced government schemes and punishment awarded at the village level within one month and no enquiry into the lapses should take beyond two weeks. Lok Pals’ verdict should be made beyond appeal when alone justice will be delivered fast. Necessary legal jurisprudence should be put in place. It is possible to distance poverty but certainly not possible to eliminate it. Efforts and sincerity should not be found wanting.

I will conclude by saying that It would do well for the UN to have not fifteen MDGs but take to just two or three; provide resource required to achieve them; monitor their achievement once in every three months; render the technical support required, if need be. Such goals according to me would be provision of safe drinking water; universal primary education; and protecting women’s property rights. Further, ‘Financial inclusion has still to travel miles and miles more to see the smiles on the faces of the poor!’ Regional imbalances would take time to set right. But economics is often driven by politics.

India, at the moment, is jubilant. The new Government under Narendra Modi with an agenda of development and good governance has just assumed charge with hopes riding high. His ride on such massive mandate not making him complacent should ere long push the economy to reduced poverty and increased dispersed wealth as opposed to the built-up of billionaires in Parliament and State Legislatures that was generated by the IMF-World Bank driven strategies leading to highest limits of tolerance to corruption and inefficiency. In fact the population of rich in the country has been estimated to be the population of UK.

This is no time for war and this message has gone round well with SAARC on the very second day of the new Government when Modi and his few ministers met with the SAARC chiefs on economic agenda. Hopefully, the emerging model of India’s development would be watched keenly by the emerging economies in reducing poverty.

Presidential Address to both the sessions of the new Parliament mentions it all:
“Poverty has no religion, hunger has no creed and despair has no geography. The greatest challenge is to end the curse of poverty in India. My government will not be satisfied with mere ‘poverty alleviation’ and commits itself to the elimination of poverty”.

Text of the talk delivered at the International Conference on Free Trade - Opportunities and Challenges held at the IICT by Andhra Mahila Sabha, Hyderabad on the 13th June 2014.