Friday, April 03, 2015

The social revolution in Uttar Pradesh

The social revolution in Uttar Pradesh 

-  Swaminathan S. Anklesaria Aiyar

The media remains full of stories of caste oppression, inequalities and lousy economic and social indicators. Without doubt, dalits remain close to the bottom of the income ladder. Nevertheless, the new study reveals huge improvements in economic and social terms, based on questions to capture realities that dalits themselves view as important . The survey covered all dalit households in two blocks in UP, one in the relatively prosperous west (Khurja) and one in the backward east (Bilariaganj), between 1990 and 2008.
The dalit proportion with pucca houses rose from 18.1% to 64.4% in the east and from 38.4% to 94.6% in the west. TV ownership improved from virtually zero to 22.2% and 45% respectively. Cellphone ownership increased from almost nothing to 36.3% and 32.5% respectively.
Fan ownership, curbed by electricity shortages, rose to 36.7% and 61.4% respectively . Bicycle ownership has become ubiquitous, up from 46.6% to 84.1% in the east and from 37.7 to 83.7% in the west.
A motorcycle symbolizes high rural status . Dalit ownership of two-wheelers improved from almost zero to 7.6% and 12.3% respectively. NSS consumption surveys consider purchases only in a short pre-survey period, and so miss durables acquired over the years.
In times of distress, dalits historically mortgaged jewellery to upper caste lenders. The proportion that does so has dropped from 75.8% to 29.3% in the east and from 64.6% to 21.2% in the west.
Dalits have switched from inferior foods (broken rice, jaggery ras) to superior foods (whole rice, pulses, tomatoes). The proportion eating roti-chutney for lunch, socially viewed as low-class food, has fallen from 82% to just 2% and 9% in the two zones. The proportion of kids eating the previous night’s leftovers plummeted from 95.9% to just 16.2% in the east. The proportion eating broken rice fell from 54% to 2.6% in the east, and from 22.7% to 1.1% in the west.
Per capita availability of dal in India has been falling. So it’s heartening that dalits consuming dal are up from 31% to 90% in the east, and from 60.1% to 96.9% in the west. This may be one cause for rising dal prices.
Consumption of jaggery ras, usually drunk by the poorest, has collapsed. Meanwhile dalit consumption of packaged salt, elaichi and tomatoes has shot up.
Critics say the poor have been bypassed by economic reforms. But in this dalit survey , 61% in the east and 38% in the west said their food and clothing situation was “much better.” Only 2% said their condition was stagnant or worse.
Traditionally, dalits were mainly agricultural labourers. In the reform era, they have diversified into non-traditional work. Migration and remittances have become engines of empowerment.
The dalit proportion benefiting from migrant relatives is up from 14% to 50.5% in the east, and from 6.1% to 28.6% in the west. More revolutionary, the proportion running their own business is up from 4.2% to 11% in the east and from 6% to 36.7% in the west. The proportion in agricultural labour has plummeted from 76% to 45.6% in the east and from 46.1 to just 20.5% in the west.
What has driven these changes? The dalits themselves say the changes began 10-15 years ago, in the reform era. UP has lagged well behind the fast-reforming states. Yet in the five years 2003-04 to 2008-09 , its average GDP growth has accelerated to 6.29%. This is well behind the national average, yet not far from the 7% generally viewed as the “miracle-economy” threshold. Per capita income is growing almost 10 times faster than in the Nehru-Indira era, and dalits are sharing the new prosperity.
The authors see the last two decades as an economic reform era. But this period has also seen the meteoric rise of the Bahujan Samaj Party, which could be an even stronger driver of dalit economic improvement.
Mayawati has been chief minister four times, and has obliged all bureaucrats and other lobbies to ensure that dalits get their fair share of benefits. This is reflected not just in higher dalit ownership of TVs or cellphones , but in transformed social relations. Dalits can now look upper castes in the eye, and nothing will be the same again. Spelling out the social changes in UP merits an entire column. That will be next week’s topic.

The social revolution in Uttar Pradesh

Last week, this column highlighted major economic improvements for dalits in Uttar Pradesh, based on a research paper by Devesh Kapur and others (Rethinking inequality : Dalits in UP in the market reform era). But the real dalit revolution has been in social status, far more than economic.
In material terms, inequality (technically measured by the Gini coefficient) in UP has always been low — less than in Kerala or the national average. UP’s problem has always been social inequality, not consumption inequality. The good news is that social inequality is being transformed. The practice of seating dalits separately in upper caste weddings is down from 77.3% to 8.9% in eastern UP, and from 73.1% to 17.9% in western UP. The proportion of non-dalits accepting food and water at dalit households is up from 1.7% to 72.5% in the east and from 3.6% to 47.8% in the west.
Many dalits in eastern UP were locked into thehalwaha (bonded labour) system, which Jagjivan Ram once called “a remnant of slavery” . This has virtually disappeared : the proportion is down from 32.1% to 1.1%. The proportion of dalit households doing any farm labour has plummeted from 76% to 45.6% in the east, and from 46.1% to just 20.5% in the west. Encouragingly , the proportion depending on their own land is up from 16.6% to 28.4% in the east, and from 50.5% to 67.6% in the west. Tubewell ownership is up substantially , but remains modest.
Dalits are leasing land from upper castes. Those who were once labourers on upper caste land now insist on a share of the crop. The proportion in sharecropping is up from 16.7% to 31.4% in the east and from 4.9% to 11.4% in the west. In western UP, cases of dalits alone lifting dead animals are down from 72.6% to 5.3%. Once dalits ploughed the land of upper castes with bullocks. Today, they are getting their own land ploughed by upper caste tractor drivers. Economic reforms have created major new opportunities in urban areas, facilitating dalit migration to towns and back. This has broken their dependence on rural landlords and moneylenders. The resulting labour shortage has raised the bargaining power of dalits.
The proportion of dalit families working locally as masons, tailors or drivers — all non-traditional occupations — is up from 14% to 37% in the east and from 9.3% to 42.1% in the west. Even more revolutionary is the rise of dalit business families, from 4.2% to 11% in the east and from 6% to 36.7% in the west.
Political parties shout themselves hoarse over job reservations. Yet, the dalit family proportion in government jobs has actually fallen from 7.2% to 6.8% in the east, and risen marginally from 5% to 7.3% in the west. Clearly, job reservation has not been a key factor in UP’s social revolution.
Once, dalit babies were not midwifed equally by dalits and non-dalits . The proportion equally delivered has shot up from 1.1% to 89.9% in the east. Earlier non-dalit and government midwives rarely came to dalit homes for deliveries, but the proportion is now up from 3.4% to 53.4% in the east, and from zero to 3.6% — still very low — in the west.
Dalit households where most or all kids go to school are up from 28.8% to 63.4% in the east and from 21.7% to 65.7% in the west. Girls’ schooling is up from 10% to 58.7% in the east and from 6.8% to 56.9% in the west. As a form of social assertion, dalits are adopting elite consumption patterns. Their use of toothpaste , shampoo and bottled hair oil has soared. Earlier, only one-third of dalits in the east and virtually none in the west used cars or jeeps for wedding baraats, but today virtually all do. The proportion serving laddoos to baraatis is up from 33.6% in the east and 2.7% in the west, to almost 100% in both cases.
The data shows that despite major improvements , dalits are still far from achieving equality in status or income. Caste oppression and inequalities remain. Nevertheless, the changes constitute a social revolution, sparked by both economic reform and the rise of the BSP.
In the survey, dalits themselves emphasized that their social well-being had advanced even faster than their material wellbeing . Self-respect and dignity are vital for the downtrodden. Mayawati’s statue-building spree is a form of status building.
Amartya Sen has talked of freedom as development . This means not just more consumption but more voice, access to accountability , access to influential networks and livelihood choice, access to good governance, and physical security. The traditional castebound village in UP denied all these to dalits. Those shackles are breaking apart.
-Swaminathan S. Anklesaria Aiyar

Towards the end of poverty

The world’s next great leap forward

Towards the end of poverty

Nearly 1 billion people have been taken out of extreme poverty in 20 years. The world should aim to do the same again

IN HIS inaugural address in 1949 Harry Truman said that “more than half the people in the world are living in conditions approaching misery. For the first time in history, humanity possesses the knowledge and skill to relieve the suffering of those people.” It has taken much longer than Truman hoped, but the world has lately been making extraordinary progress in lifting people out of extreme poverty. 

Between 1990 and 2010, their number fell by half as a share of the total population in developing countries, from 43% to 21%—a reduction of almost 1 billion people.
Now the world has a serious chance to redeem Truman’s pledge to lift the least fortunate. Of the 7 billion people alive on the planet, 1.1 billion subsist below the internationally accepted extreme-poverty line of $1.25 a day. Starting this week and continuing over the next year or so, the UN’s usual Who’s Who of politicians and officials from governments and international agencies will meet to draw up a new list of targets to replace the Millennium Development Goals (MDGs), which were set in September 2000 and expire in 2015. Governments should adopt as their main new goal the aim of reducing by another billion the number of people in extreme poverty by 2030.

Take a bow, capitalism

Nobody in the developed world comes remotely close to the poverty level that $1.25 a day represents. America’s poverty line is $63 a day for a family of four. In the richer parts of the emerging world $4 a day is the poverty barrier. But poverty’s scourge is fiercest below $1.25 (the average of the 15 poorest countries’ own poverty lines, measured in 2005 dollars and adjusted for differences in purchasing power): people below that level live lives that are poor, nasty, brutish and short. They lack not just education, health care, proper clothing and shelter—which most people in most of the world take for granted—but even enough food for physical and mental health. Raising people above that level of wretchedness is not a sufficient ambition for a prosperous planet, but it is a necessary one.

The world’s achievement in the field of poverty reduction is, by almost any measure, impressive. Although many of the original MDGs—such as cutting maternal mortality by three-quarters and child mortality by two-thirds—will not be met, the aim of halving global poverty between 1990 and 2015 was achieved five years early.

The MDGs may have helped marginally, by creating a yardstick for measuring progress, and by focusing minds on the evil of poverty. Most of the credit, however, must go to capitalism and free trade, for they enable economies to grow—and it was growth, principally, that has eased destitution.

Poverty rates started to collapse towards the end of the 20th century largely because developing-country growth accelerated, from an average annual rate of 4.3% in 1960-2000 to 6% in 2000-10. Around two-thirds of poverty reduction within a country comes from growth. Greater equality also helps, contributing the other third. A 1% increase in incomes in the most unequal countries produces a mere 0.6% reduction in poverty; in the most equal countries, it yields a 4.3% cut.
China (which has never shown any interest in MDGs) is responsible for three-quarters of the achievement. Its economy has been growing so fast that, even though inequality is rising fast, extreme poverty is disappearing. China pulled 680m people out of misery in 1981-2010, and reduced its extreme-poverty rate from 84% in 1980 to 10% now.

That is one reason why (as the briefing explains) it will be harder to take a billion more people out of extreme poverty in the next 20 years than it was to take almost a billion out in the past 20. Poorer governance in India and Africa, the next two targets, means that China’s experience is unlikely to be swiftly replicated there. Another reason is that the bare achievement of pulling people over the $1.25-a-day line has been relatively easy in the past few years because so many people were just below it. When growth makes them even slightly better off, it hauls them over the line. With fewer people just below the official misery limit, it will be more difficult to push large numbers over it.

So caution is justified, but the goal can still be achieved. If developing countries maintain the impressive growth they have managed since 2000; if the poorest countries are not left behind by faster-growing middle-income ones; and if inequality does not widen so that the rich lap up all the cream of growth—then developing countries would cut extreme poverty from 16% of their populations now to 3% by 2030. That would reduce the absolute numbers by 1 billion. If growth is a little faster and income more equal, extreme poverty could fall to just 1.5%—as near to zero as is realistically possible. The number of the destitute would then be about 100m, most of them in intractable countries in Africa. Misery’s billions would be consigned to the annals of history.

Markets v misery

That is a lot of ifs. But making those things happen is not as difficult as cynics profess. The world now knows how to reduce poverty. A lot of targeted policies—basic social safety nets and cash-transfer schemes, such as Brazil’s Bolsa Família—help. So does binning policies like fuel subsidies to Indonesia’s middle class and China’s hukou household-registration system (see article) that boost inequality. But the biggest poverty-reduction measure of all is liberalising markets to let poor people get richer. That means freeing trade between countries (Africa is still cruelly punished by tariffs) and within them (China’s real great leap forward occurred because it allowed private business to grow). Both India and Africa are crowded with monopolies and restrictive practices.
Many Westerners have reacted to recession by seeking to constrain markets and roll globalisation back in their own countries, and they want to export these ideas to the developing world, too. It does not need such advice. It is doing quite nicely, largely thanks to the same economic principles that helped the developed world grow rich and could pull the poorest of the poor out of destitution.

Monday, September 02, 2013

A letter to Mr.Tariq Ali

To : Mr.Tariq Ali

Dear Sir,

I heard your excellent speech about journalism, whistle-blowers at Chennai.
It was an eye-opener in many ways.

I can call myself as a 'neo-liberal'  (but opposed to neo-conservatives) and
of course disagree with you on some issues (and not all issues).

1. You have clubbed neo-conservatives like Bush & Co, Heritage Foundation, etc
along with neo-liberals (a loosely defined term). They are bitterly opposed to
each other in many important matters like foreign policy, Iraq invasion, abortion, 
secularism and Christian fundamentalism,  military spending, etc.

2. Economic freedom certainly promotes political freedom and civil liberties. It 
is not a cliche or mere rhetoric of the 'right' as you said. Best example is Chile 
and India. India is now more democratic and free than 70s when 'socialists' 
dominated the political scene and Indira was the PM for more than 17 years. 
Corruption and bad governance are major issues today, but we need not 
'fear' the PM today like in those days, when enormous amount of economic 
and political power was concentrated in New Delhi. Media today in India is more 
freer than those decades. Esp electronic and internet media. Suppose if Indian 
govt had not liberalised many sectors in India from 1991, I could not be mailing 
you now ; and internet, computers and telecom would be still at the level in 
today's Myanmanr.

In Chile, as Milton Friedman argued correctly, free market policies under the 
dictator Pinochet subsequently created new social dynamics which destroyed his
dictatorship and ushered in democracy. The emergence of new middle class, wealth
and opportunity for upward mobility by poor created this change.

from M.Friedman's speech about Chile :

"..The economic development and the recovery produced by economic freedom in
turn promoted the public's desire for a greater degree of political freedom exactly
what happened, if I may jump from one continent to another, in China after 1976
when the regime introduced a greater measure of economic freedom in one sector
of the economy, agriculture, with great success. That, too, generated pressure for
more political freedom and was one of the major factors underlying the
dissatisfaction that led to Tiananmen Square.

In Chile, the drive for political freedom, that was generated by economic freedom
and the resulting economic success, ultimately resulted in a referendum that
introduced political democracy. Now, at long last, Chile has all three things:
political freedom, human freedom and economic freedom..."

I am an entrepreneur with nearly 25 years of experience in many sectors. I have
seen the dramatic change in India in these years : reduction of poverty levels,
unemployment levels, etc. I come from a small textile town in Tamil Nadu and
know something about the poverty levels, standard of living in the 70s and 80s.
when compared to today's India.

The is no viable alternative to the much maligned 'neo-liberalism' ; Yes, it is an 
imperfect system, but so far man has not invented a better one !

And an article I wrote about the fallacy of labour theory of surplus value :

Thanks & Regards

Dear Sir,

In continuation with my earlier mail about you speech in
Chennai, you spoke about the corporatisation of media and
reduction of free press now. But the following points need to

be discussed :

1. In the heydays of socialism in India, esp under Indira
Gandhi, when corporate taxes were raised to confiscatory
rates of 98 % (for highest marginal rate), all media house
and other corporates were under the mercy of govt ministers
and bureaucrats. As it was impossible to operate honestly,
tax evasions was rampant and hence the threat of income
tax raids were always hanging over the heads of media
houses. There was acute shortage of news print and foreign
exchange (due to closed economic polices and license raaj).
Hence the print media was totally under the thumb of the
govt, unlike today. Moreover as there was not much private
sector (like today), in those days the major part of advertisement
revenue was from ad from govt and govt run companies. Hence
there was less freedom for media then when compared to now.
No wonder the quip about media during the emergence of
1975-77 :'When they were asked to bend, they crawled' !!

2. There was total govt monopoly in electronic media then.
only doordarshan and AIR. No private channels were permitted
until 'neo liberalsim' in 90s. and no private telecom and airlines
too. Hence communication was restricted while the govt run
TV was totally a propaganda instrument of the govt. Today,
with hundreds of channels, we get all kinds of news and views.
Certainly current situation is much much better than the 70s.

3. Poverty levels were terrible until the 90s due to stagnant
economy. In spite of doubling of population levels to 1.25 billion
today, poverty ration is reducing fast due to the much maligned
'growth'. Pls refer to the front page report from The Hindu :

Poverty levels down by 15% in eight years

And this rapid change is due to implementation of 'neo-liberal'
polices. Hence sweeping generalisations about neo-liberalism is
wrong, esp in Indian context.

And finally a word about your tirade against Montek Singh
Ahluwaliah. He and Manmohan Singh saved India during the
1991 balance of payments crisis. But for their vision and hard
work in those critical years, India would have become bankrupt
(like Zimbawae recently) with soaring hyper inflation and hunger.
History will record their contribution more accurately. You may
disagree with them, but to label them as 'conservatives' is

Sir, you mentioned about the misuse of the term 'reforms'
whenever economic issues are mentioned. But more misused
are the terms 'progressive' and 'conservative' ; these are mere
labels which assume a lot. And the term 'conservative' is
unfairly stuck on many idealists right simply because the are
pro-market. Conservative means to conserve the status quo
and against any change, esp of standard of living of the poor.
Nothing can be farther from truth. The present neo liberal
polcies of the 'conservatives' are applied in most parts of the
world, not because of any 'imperialistic' conspiracy, but simply
because they are now deemed as rational and better than old
polices of statism. And these conservatives are more
'progressive' in their outlook than the real 'progressives'.

Thursday, March 14, 2013

Fallacy of Karl Marx’s Das Capital : Labour theory of surplus value

Fallacy of Karl Marx's Das Capital : Labour theory of surplus value

'Exploitation of the workers' is the moral basis for all forms of
leftist ideologies and Marxism. This concept has permeated the
collective conscience of human kind in the past 200 years like no
other concept before. The moral basis provided by this concept had
caused more deaths, mayhem, mass murder, suppression of human rights,
stagnation of economies and corruption than any other ideology
including Nazism or any religious dogma. But the whole basis for this
concept of exploitation of the surplus value of labour by the
capitalists, which is derived from Karl Marx's magnum opus "Das
Capital' is an invalid and disproved hypothesis.

Marx argued in Das Capital that the one and only source of profits
(which accumulate into capital subsequently) is the exploitation of
'surplus' value of labour for which the workers are not paid. He
evokes complex mathematical models to 'prove' this hypothesis. But
when this 'value' is translated in prices, the theory looses its
validity. According the Das Capital, profits are derived solely from
the surplus value of labour. He makes no allowance for the
enterprising and organising skills of the 'entrepreneur-capitalist' ;
But we shall see that the profits are created solely by the
entrepreneur's abilities and hard work.

The following projections are put forth by Marx based on labour theory
of surplus value :

1. Profits tend to fall within a business cycle as well as in the long
term due to come due to competition among capitalists who will
innovate and introduce labour saving machines to reduce cost of
production. As the surlplus value of the labour is the only source for
profits, introduction of more machines that displace labourers will
reduce the profits.

2. Each business cycle will be progressively worse than the previous
one and at the end of each business cycle, the smaller firms will be
bought out by large firms which will grow in size.

3. The standard of living of the workers will always tend to border
the subsistence levels and can never ever increase to reasonable

4. As the troughs of each business cycle tends be lower than the
trough of the previous cycle, this downward spiral of the whole system
will ultimately end in a massive collapse of the capitalistic system
itself from which the socialistic state will emerge.

But the economic history of the world since Marx's time has not
progressed as per the above projections. Business cycles have not
worsened in the way he predicted nor did profits fall with the
introduction of labour saving machines. Most importantly the standard
of living and working conditions of the workers have improved
dramatically in the past 150 years ; Especially in the developed
nations in Europe, N.America, Japan, S.Korea, Taiwan, etc. Even in the
developing nations like India, China, Chile, Botswana, etc the average
standard of living of the proletariat has improved a lot in the past
60 years.

All these results contradict Marx's hypothesis and hence it can be
assumed that the basis of his theory : surplus value of labour itself
is invalid. For the workers are always paid first according to the
market value of their labour, while the capitalist-entrepreneur may or
may not get the rewards for his risk taking and entrepreneurial
abilities. Some practical points that need to be explained by
Marxists are :

1. Assuming two or more similar companies engaged in the same industry
are located within the same industrial estate with similar capital
structure, machineries and labourers, the output, profitability and
growth of each unit varies considerably. Assuming the labour
productivity is the same for all the workers in this area, then what
can be the explanation for the sharp difference in the efficiency,
output, and profit margins of these companies ?

2. What explains the very high profit ratios in many industries which
had dramatically reduced the labour component in their production
costs by introducing automation and innovative machineries during the
course of a few decades. For example, in agriculture and textiles in
developed nations, in spite of the tremendous shift of populations
from these sectors to other sectors as a result of introduction of
enormous machines, the profitability in these sectors had not fallen
proportionately. Marxists may try to explain this paradox by arguing
that the surplus labour that went into the manufacturing of these
machines are the reason. But this again gives rise to the same
question about those industries that produce capital goods. No valid
and empirical proof exists for this theory !

3. According to Das Capital, the net surplus value in a system is
constant (and will vary with the variation of the workers population
only) ; But in reality the 'surplus' within many systems have
increased exponentially while the workers population had not grown
proportionately. Hence how did this exponential growth of total
surplus value occur ?

Any worker turned entrepreneur (there are many) would vouch for the
fact that it is the entrepreneurial ability that makes the vital
difference in the performance of the firm. All these worker turned
entrepreneurs had started their lives as workers, working along
millions of similarly placed workers. But some of them managed to save
and / or get into partnerships with co-workers to start small firms
which ultimately grew into giants. All the corporate giants in this
world were once tiny start ups fired by the sheer enthusiasm and
determination of those pioneers. Can anyone name any company which is
continuously existing in its present size and form for many centuries
? Petrochemical giants, pharma majors, automobile majors, IT majors,
companies like Walmart, CNN, Dell, Sony, Apple, Virgin Atlantic, etc :
all were founded by pioneering individuals with nothing but their bare
hands. Their legal heirs had expanded these companies into giants over
the decades.

There are of course, criminal elements among capitalists and corporate
who misuse the loopholes in the rule of law, especially in the
developing nations which have high levels of corruption and cronyism.
But these are exception rather than the rule. Generally in nations
where the rule of law is upheld systematically and where the ethics
remain high, (like in Scandinavian nations, etc) the misuse by
companies are rare. But Marxists usually cherry pick these exception
to paint a distorted picture while glossing over the terrible crimes
caused by their socialistic alternative to the system.

It is always the risk taking, hard working and pioneering effort of
the entrepreneur that makes the difference. Nothing else ; neither
government 'help' nor 'looting' from the public nor wars. These
pioneers are heroes and not the villains (who exploit the workers)
that they are portrayed to be by the Marxists. I salute them all.
All the nations which had allowed full freedom for these innovators
and pioneers to get along their vision, without blocking their
entrepreneurship in any manner had prospered over the centuries, while
all those nations which did the opposite stagnated and remained
impoverished. Indian and Japanese experience since 1947 are the
prime examples for this basic difference.

However the myth of 'exploited' workers still wreck havoc and is very
difficult to eradicate from the minds of emotional idealists who only
see the sharp contrast between the poor and the wealthy. Only way to
eradicate poverty and usher in prosperity on a mass scale is thru a
free market system based on liberal democracy along with a welfare

Tuesday, October 09, 2012

World Economic Crisis – causes and solutions

World Economic Crisis – causes and solutions

The financial meltdown that started in 2008, which originated in the subprime mortgage market in US housing sector ultimately threatened the entire world economy and we have still not recovered from it fully. The root causes are :

1.US government’s ambitions in promoting home ownership among all sections of its citizens, for which government backed financial giants Freddie Mac and Fannie Mae were created and subsidized. This incentivized the private sector banks to dump the ‘toxic assets’ into the willing hands of the government entities. Also tax concessions were given for the incentivizing home loans to subprime categories, whom otherwise would not have been serviced by the lenders.

2.The interest rates in US markets were artificially held down to near 1 % levels from the years 2000 to 2004 (and even after) by the US Federal Reserve Board with the objective of ‘pulling up’ the economy from the recession caused by the dot com bubble collapsing in 2000. This unleashed the mother of all credit booms as the real rate of interest was higher than the rate set by Federal Reserve.

3. The US government budget deficits rose continuously to fuel the unsustainable levels of spending for defense, social security and for the Iraq and Afghan wars. US trade deficits (net of imports over export revenues) too rose to alarmingly high levels. All these should have depreciated the value of US dollar in an ideal currency market. But the exporting nations like China, Japan, OPEC (which sells most of its oil to US) artificially propped up the value of the US dollar (so as to help their export booms) by buying US treasury bills limitlessly. If (a very big IF) this has not been done, US dollar would have sunk like stone and hence the US consumer and government spending would not have reaching these crisis levels. But as US dollar is the reserve currency of the world and most of the international trade and investments are done in dollars, this self correction of currency values that is the basis of any undistorted market did not occur in currency markets of the world.

4.The wall street banks are held as the prime villains in this drama. But this is only partially true. They could act recklessly not because of lack of regulations but mainly due to the unprecedented money supply created due to the above three factors. The entire world was awash with unsustainable money supply in those booming years.

5. Creation of the Euro currency in Europe was another major blunder which exuberated the distortions to an ideal money market. The corrective measures that come to play in a undistorted currency market (where the value of a nations currency is determined by the inherent strength of its economy, its budget deficits, inflation and interest rates) could not happen within Euro areas as well as in US money markets.

The US and the world seem not to have learnt any worthwhile lessons from this major crisis and in future similar booms and busts will recur as public memory is short and economic illiteracy is widespread.

The corrective measures that should be put in place now are :

11.    Massive reduction in US budget deficits by reducing US military and other expenditures. Closing of government backed housing loan mortgage institutions.
22.    China and other Asian exporting nations should abandon (or at least reduce) the distortions they create in artificially propping up the US dollar. Especially the Chinese role in this is huge and unsustainable in the long run.
33.    Euro currency should be abandoned in a calibrated manner or otherwise the Euro area will collapse due to internal contradictions in the long run. This will pull down the world economy when it occurs. Ireland and Spain suffer needlessly due to Euro while basically they remain solvent and were growing economies in the past.
44.    All the nations should try to reduce their budget deficits and contain unwanted and wasteful expenditures, especially military spending. (this is a tall order and idealistic, but if it continues unabated then crisis will recur)

Thursday, September 09, 2010

Food Vs Clothing in India

There is a great deal of debate, reports and analysis
about the shortage of basic needs in India,
esp about food, healthcare and education needs.

But so far, i have not seen anything on the second most important
of the basic needs : Clothing

there is too much data on nutriciton deficiency, malnutrition, crisis in
agriculture, farmers sucides, food production, etc. But so far nothing
about clothing.

Clothing and textile industry has been allowed to evolve into full
fledged capitalistic model with economies of scale, etc after LPG.
Hence there is no supply constraints and prices too have
faller drastically when compared to the 70s and 60s. the poorest of
the poor are now better

and fully clothed than ever before. I guess for those who lived thru 50s, 60s
and 70s, witnessed torn and old cloths worn by poor and middle class.
Clothing was a luxury and owning terlin shirt was a prestige issue. Now,
a poor labourer can buy a piece of cloth (s shirt or saree) with his/ her one
or two day wages. I guess it cost more than these wage rates in the
olden days.

Can we have an informed debate about this ?

and land ceiling acts prevented Indian agricultre into evolving into full
fledged large corporate farms of 1000s of acres of size (or collective
farms of communist states). Only coffee and tea plantations have
been exemtped because they will not be viable on tiny or small
scale. But the logic behind allowing very large farms of coffee or
tea equally applies to other agriculture farms like paddy, wheat,
sugarcane, fruits, etc.

Any inputs about the comparisons between these two vital
needs : Food Vs Clothing in India ? I guess the entry of Reliance
made a big difference in this field..

Wednesday, September 23, 2009

Rajaji on Sri Sri Prakasa and Nehru’s policies :

Rajaji writes about Sri Sri Prakasa and Nehru's policies  :


Hear Sri Sri Prakasa, veteran patriot who can justly be called  
a born congressman whose disinterested attachment to the Indian
National Congress dates from the Home Rule movement up to date :


"For me, after fifty years in public life, the pain is intense
when I see what the private citizen has come to, and what power
has been vested in the hands of those who are in Government employ.


I certainly did not work for a Swaraj like that, and am sorry
that I am alive to see what is going on in my unhappy land. To
the rulers I would say that it is no fun ruling a people who have
lost all self-respect ; who regard the taking and giving of bribes
as a matter of course; abd who surrendered themselves to the
position that either one must get into Government and exercise
irresponsible authority, or be a slave to be exploited and
maltreated as may please the powers-that-be."


How much conviction and feeling there must be, one can imagine,
before the above could be written by a veteran Congress-man who
joined in the fight for Indian freedom with Mrs.Beasant first
and then with Gandhiji and served in parliament for many years
before he was appointed Governor of one state after another.
Sri Sri Prakasa is not the only one who feels in this way;
he is one of a great number of good people who feel the same.


Sri Jawaharlal Nehru, urged by patriotic impulse, and early
indoctrination committed the blunder of taking India out of
the path of humility and put it in the race for industrialization,
and did all he could to transform our ideology into that of
Soviet Russia. This was the fatal step that brought us to the
present position out of which it requires not only wisdom but
indomitable courage to save India. Social justice and removal
of disparities of opportunity and equitably distributed welfare
are great and worthy ends. But the fatal mistake was the plan
to achieve this by the shortcut of heavy borrowing and central
planning and permit-license-regime which has brought in its
wake all that makes Sri Sri Prakasa lament so bitterly.


December 18, 1965 Swarajya


Source : Satayam Eva Jeyate   Vol : III  page : 170

Monday, August 17, 2009

Financial crisis? No, capitalism as usual

Financial crisis? No, capitalism as usual

Swaminathan S. Anklesaria Aiyar

Dated: August 05, 2009

Just five months ago, when stock and commodity markets hit rock bottom, capitalism was viewed as seriously if not terminally sick. The Financial Times ran a series of articles labeled "The Future of Capitalism." Economists, politicians, and philosophers saw the Great Recession of 2007-09 as a historic watershed, and produced new visions of a changed capitalism.

Today, that looks like much ado about nothing. Stock markets are booming, commodity prices are rising, and shipping rates have tripled. Pessimists warn of rising defaults in credit cards, commercial realty and corporate debt, so we could have a double-dip recession. But markets believe the worst is over. Despite political and public outrage over "casino capitalism" the financial reforms being contemplated across the world are not fundamental.

Four months ago, pundits waxed eloquent about learning lessons for reform from the financial crisis. Today the greatest lesson of all seems to be that capitalism, with all its flaws, can cope with Great Recessions. We have always had financial crises and always will: that's the nature of capitalism. The system will always need reforms to keep pace with changing technologies and innovations. Yet it has proved its resilience. Mark Twain once said that rumours of his death were greatly exaggerated. The same can be said of capitalism.

In years ahead, financial regulation will definitely increase. But this will change capitalism's profile only slightly, since the financial sector was the most regulated one even before the crisis. Hedge funds, the least regulated financial entities of all, survived the crisis without bailouts, even as banks, the most regulated entities, suffered badly. Regulation does not prevent all crises: Japan had the most regulated financial sector among developed countries but suffered a lost decade in the 1990s. Lesson: while the future will see more regulation, financial crises will still happen.

Stiffer capital adequacy norms look certain, to check the excessive leverage of the last decade. Yet history suggests that financial innovation will ultimately find ways round regulations. Bank regulation was ultimately circumvented by a shadow banking system, and off-balance sheet vehicles. Expect ultimate circumvention of the new regulations. This will not be entirely a tragedy. The gains of financial innovation may initially be eclipsed by losses, but the losses are typically checked after a fiasco whereas the gains become permanent.

In future, most derivatives will have to be traded through a clearing house, ending the counterparty risk that sank the asset-backed securities market. Despite criticism, securitization will continue with modifications. Banks will be able to securitise mortgages subject to retaining a certain proportion of mortgages they originate, a safeguard against excessive risk-taking in mortgage origination.

Some flaws will not be reformed at all. A special US problem is that its mortgages are non-recourse loans: the lender can get back the house after a default, but cannot go after the other assets of the borrower. This encourages massive willful default. Mortgage lenders in India, Europe and most countries, can go after other assets. But US politicians portray the entire housing bust as an evil perpetrated by lenders on innocent home buyers, and this political theatre avoids making borrowers accountable too. This carries the seeds of a future bust.

Politicians rail against excessive executive pay, and pay curbs have been instituted in companies being bailed out. Yet there is no move to fundamentally change payment structures in solvent companies. Some reformers want bonuses to be clawed back after a fall, but in many cases the employees may have left, and it is difficult to pinpoint accountability for innovations several years after they arise.

There is vague talk of reducing the global imbalances that exacerbated the crisis, but no sign of a credible remedy. Neither the IMF nor Financial Stability Forum have the requisite powers to check future imbalances. Asian countries still want to build high reserves as insurance, perpetuating global imbalances. This too has the seeds of a future bust.

Politicians want to check future bubbles, but are unclear how to do so. There will always be differing opinions on when exactly a boom becomes a bubble. Besides, bursting an asset bubble without damaging the overall economy is problematic. High interest rates will check a housing bubble, but will also hit corporates and consumers, and may cause a recession. Imposing stiff margin requirements to check a stock market bubble might drive money into other assets and cause bubbles there.

In sum, no major overhaul of capitalism seems on the cards. The rapid transition from despair in March to the stock market boom today suggests that the markets don't really see the need for great change. The existing system has survived the Great Recession, and that is seen as Great News.

Is this because humans are utterly myopic? No, moaning and groaning about the failings of capitalism are really part of political theatre in a recession. In my youth, the Communist Party would meet delightedly during every recession and proclaim that capitalism was now in its final death throes. Even after the collapse of communism, dirges are still sung by other parties. The singing ends abruptly as economies pick up again, and turns out to be more a recession ritual than an anthem for reform.

Recessions are viewed by the public as outcomes of policy blunders, as tragedies that cost jobs and production. That's certainly true. But recessions are also essential correctives to the excesses inbuilt in a capitalism system driven by animal spirits, innovation, the search for higher returns, and euphoria. The system works through creative destruction. This entails boom and bust, greed and failure, euphoria and panic, fast growth and recession. Recessions and financial crises may look like blemishes of capitalism, but are actually integral to its process of creative destruction.

So, even after reforms, expect more financial crises and recessions in the future. We would be wise to institute reforms that reduce the risks, but even wiser to understand that the risks cannot be ended without ending enterprise and innovation too.


Thursday, July 16, 2009

The bogey of "inequality"

Dear Friends,
I am amused and irritated whenever i read and hear about the cry
"...growing inquality of incomes" etc whenever people comment about
liberalisation, etc.
I am not an economist and not much aware of economic theory.
But shouldn't the net poverty ratio and absolute number of people
in poverty be the most important criterion when we discuss about
"growing inequality" ?
Suppose a nation has 100 % people below poverty line and
all living on one square meal a day ; and another nation has
10 % people below poverty line, 80 % middle class and
10 % in rich category. Statistically, the first nation has
most equality of income and what not, than the second
nation. So which is better ?
I suppose, theoritically, with relative statistics, it
is possible to prove that war torn and starving Rawanda or
Sudan has less 'income inequality' than, say Sweden.
there is similar talk about China and India. But both these
large nations are much much better when compared to
Relative statistics ?

a reply from my Professor :
Dear Athiyaman,

At this URL you would get technical reasons for what you had stated so
clearly and elegantly in understandable English on inequality.  You will
have to (free) download the article from the site.