India and the Washington Consensus

Ever since 1967, the Jawaharlal Nehru Memorial Lecture has been organised almost every year in the month of November at Teen Murti House by the Jawaharlal Nehru Memorial Fund.

The latest lecture was delivered by Prof. Joseph E. Stiglitz of the Columbia University. Stiglitz, a world-renowned economist and Nobel Laureate, has been well known in India for his clarity and conviction of views. His books are widely read and discussed among not only economists but also the wider circle of intelligentsia. Whether as the Chairman of President Clinton’s Economic Advisory Council or the Chief Economist of the World Bank, he never hesitated in calling a spade a spade, come what may.

It was not surprising that his lecture was almost ignored by the Indian media though it was attended by persons who manage the affairs of the country. Both Mrs Sonia Gandhi, the chairperson of the UPA as well as the Fund, and Prime Minister Dr Manmohan Singh were present throughout. Yet, it was not given any attention. Maybe the moneybags and their hirelings in the media did not like people at large to be informed of serious doubts being raised by Stiglitz about the ideological basis of the economic reforms going on in the country since the beginning of the 1990s. This ideological basis has been widely known as the Washington Consensus and its ten points, enunciated by John Williamson and thrust upon the developing nations by the IMF, World Bank, US Department of Treasury and so on at the behest of the US Administration.

Let us now turn to what Stiglitz says. He admits that India has registered impressive performance in recent years. To quote, “India, the world’s largest democracy, should be proud of the successes that it has achieved over the past 25 years, and even more so of its growth in recent years. GDP per capita in 2009 was 2.3 times what it was in 1990, and, at least according to World Bank data, poverty has been reduced from just short of 50 per cent of the population in 1994 to 42 per cent in 2005. Yet India cannot rest on these laurels. There are still more than 400 million in poverty, and per capita income is still less than half of that of China in purchasing power parity.”

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THE most urgent questions before India are: how can it sustain the pace of its growth and bring its fruits to people at large? In other words, it has to examine carefully whether its present economic policies are leading to the well-being of its citizens and the benefits of the growth are being equitably shared. These questions cannot be brushed aside because “Events of recent years have called into question long-standing presumptions, the conventional wisdom in much of the world about the right answers to these questions. The set of ideas known alternatively as the Washington Consensus, market funda-mentalism, or neoliberalism has failed in the very country from which those emanated. The institutions and policies that were put forth as examples for others to follow have failed: they failed to produce sustainable growth, and the fruits of what growth occurred went to a few. Today, most Americans are worse off than they were in 1999, well before the previous recession. Even before the crisis, trickle-down economics—the notion that so long as growth is ensured, all will benefit—was discredited. But American growth had not only been anti-poor; even the middle class has suffered. There is ample evidence of social distress that goes beyond these economic indicators—one of the highest murder rates in the world and the highest rate of incarceration in the world. Other factors contributing to individual well being—like social connectedness —also seem to not be faring well.”

Soon after the Second World War, the process of decolonisation began and a large number of erstwhile colonies emerged as independent nations. The most important question before them was how to make their hard-won political freedom secure and meaningful to their people so that they could remain united and integrated and overcome their poverty and sufferings. One may recall how so-called experts from the West and their hirelings in India pontificated that this goal was impossible to achieve. The size of population and its rate of growth were supposed to be the biggest boulder to overcome. Industria-lisation was frowned upon as it was supposed to go against the theory of comparative advantage. Hence India was told to remain confined to agriculture and cottage and small industries. Agriculture was supposed to bring peace and tranquillity besides ‘small was beautiful’. Gandhi was sought to be pitted against Nehru.

One school of thought in the West came out with the idea that countries like India lacked capital and the global capital markets were imperfect. “Hence, what was required was the creation of a bank—the World Bank—to facilitate the flow of funds and help developing countries undertake projects that would raise income per capita.” Obviously, the West tried to solve its own problems with the help of this strategy. It wanted to preserve the newly-Independent countries as market for their goods and avenues for the investment of their surplus capital. To keep them under control and see that they did not go out of the discipline imposed on them, the World Bank and IMF were brought in.

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INDIA under Nehru, however, did not accept all this and wanted to develop itself on the basis of its domestic savings, internal market and its own human resources, basically in the interests of its own people. It did forge economic relations with the then Soviet Union and other countries that agreed not to sabotage its basic strategy. One may recall how attempts were made by vested interests to sabotage the strategy and bring it in disrepute. A section of media, certain political parties and groups, the bureaucracy and business circles did their utmost to spread disinformation about and subvert the Nehruvian strategy. To give an example, the Industrial Policy of 1956, which aimed at overcoming regional imbalances and existing socio-economic inequalities, was sought to be ridiculed as bringing in the ‘Licence-Permit Raj’.

In spite of their best efforts, the vested interests could not succeed though they could bring in distortions in the formulation of policies. However, they got a golden opportunity when the Soviet Union collapsed, the socialist camp disintegrated and the NAM became extremely feeble. It was stressed that the scarcity of capital was not the main hurdle in the way of the development of these countries. What was required was “right policies”, which, in the words of Stiglitz, “usually meant the Washington Consensus, neoliberal, market fundamentalist policies”.

In the context of India, not only the set of policies and programmes, pursued since the days of Nehru were termed wrong but they were also ridiculed and declared the root cause of the slow pace of economic growth, christened as the ‘Hindu Rate of Growth’. The role of the state in the economy was declared as the main factor leading to bureaucratisation and acts of corruption. The ‘Licence-Permit Raj’ was declared to be a major hurdle in India’s onward march. An eminent jurist, taking the cue from the Laffer’s Curve, came out with a book declaring India as the highest taxed nation and wanted the marginal rate of taxation to be drastically reduced to check both tax evasion and tax avoidance and wipe out the problem of black money! Public sector enterprises were said to be a drag, and disinvestment, leading to complete privatisation, was declared as the way out.

The two non-Congress governments, led by V.P. Singh and Chandra Shekhar, bankrupted the country so much that it had to mortgage its gold reserves to the Bank of England to tide over the foreign exchange crisis. The next government, headed by P.V. Narasimha Rao, had to accept the Washington Consensus. Thus began the phase of LPG or liberalisation, privatisation and globali-sation. Since then a number of governments of different ideological complexions have come and gone but the implementation of the ten points of the Washington Consensus has continued unabated. From the Hindu Right to the Communists have all shared power, but no effective voice has ever been raised against their disastrous consequences.

Over the years, regional imbalances have increased, socio-economic inequalities have widened and the exodus of manpower from villages to urban areas has accelerated. The virus of corruption has not spared any segment of the society, be it at the top or the bottom. In spite of the reduction in the rates of taxation and banishing the Licence-Permit Raj, we daily hear of new scams. Inflation is threatening to take on the prefix ‘hyper’ and this terrifies people when they think of its political consequences in the light of what happened in Germany some eight decades ago.

Stiglitz told his audience without mincing words: “Even before the recent crisis provided the nail in the coffin of neoliberalism, these ideas had been thoroughly discredited: their intellectual premises had been undermined, and almost without exception, the most successful countries, the countries in East Asia, followed a markedly different course.”

Questioning the theoretical basis of neoliberalism/ Washington Consensus policies, Stiglitz underlined: “They were predicated on the notion that markets by themselves were efficient and stable, and that the benefits of growth would trickle down to all citizens. Even before developing countries were exposed to these new policy experiments under the aegis of the international financial institutions, both theory and evidence had called into these beliefs. My own work on the economics of information (with Bruce Greenwald) had shown that the reason that Adam Smith’s invisible hand often seemed invisible was that it was, in fact, not there. Markets with imperfect and asymmetric information and incomplete information were not efficient—and since all markets are characterised by imperfect and asymmetric information, this meant that markets were essentially never efficient. We should have learned from the Great Depression that not only are markets not necessarily efficient, but they are also not stable and self-correcting (at least, not in the relevant time frame). We have now learned these lessons again.

“The experience with the Washington Consensus policies has now further undermined each of its central policy tenets. For instance, deregulation and liberalisation may not improve efficiency and stability. Indeed, the only period in which market economies have not been subject to financial crises was the three to four decades after the Great Depression when the United States and other countries imposed strict banking and financial sector regulations. These decades happened also to be a period of rapid growth, with fruits widely shared.”

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IT needs to be noted that the policies flowing from Washington Consensus have not brought in economic growth with equitable distribution of its fruits. There is no question of stability as is evident from all sorts of anarchic trends and movements like Naxalism. Religious fanaticism and terrorism of various varieties have been raising their heads. As has been noted, corruption and scams seem to be everywhere and there is an increase in criminal activities. In spite of the fact that a staunch votary of “trickle-down”, is heading the Planning Commission, there is no evidence of its occurring in India. Stiglitz is perfectly right when he says: “Trickle-down economics never had much empirical support, but in recent years, it is an idea that has fared particularly badly. In the United States, for instance, between 1999 and 2009, real median household income in the United States fell by 5 per cent. Today, most Americans (and let me stress that: most Americans) are worse off than they were a decade ago. All of the benefits and more have gone to those at the top. We have had trickle-up growth, not trickle-down. Today, between a fifth and a quarter of all income goes to the upper 1%. Inequality in wealth is even worse.”

It is high time that the Indian National Congress that has recently entered its 126th year of its existence and its leader should have some retrospection and see whether the Washington Consensus-inspired economic policies are carrying forward or negating its legacies.

(Courtesy: Z Net)

The author, a well-known economist, used to teach Economics at Kirorimal College, University of Delhi before his retirement a few years ago. He can be contacted at gmishra@girishmishra.com