People's Democracy

(Weekly Organ of the Communist Party of India (Marxist)


No. 44

November 04, 2012


The Economist Falters in Prescribing Medicine


R Arun Kumar


THE Economist had come out with an exhaustive Special Report on global inequalities in its issue of October 12, 2012. It did not confine to reeling out facts about the status of current global inequalities. It compared them with the policies pursued by various countries. It urged the world leaders to come out with something that “promises both fairness and progress”. It ended by proposing its own set of prescription, 'true progressivism'. According to the Report, the crux of its 'true progressivism' is, putting an end to cronyism and investing in the young.


The Report identifies cronyism not only in countries like India, but also in the rich world, the US. According to it, 'in the rich world cronyism is hidden', while in the other parts, it is more open and brazen, like what we are witnessing in India.


Commenting on the rise of inequalities in India and China it states, “Part of this rise was both inevitable and welcome, a natural consequence of the end of Maoist communism in China and Fabian socialism in India”. This statement is loaded with the ideology of the Economist, an unabashed capitalist journal, and its natural hatred for socialism and communism. The other and most important thing that this statement indirectly conveys is that with the introduction of neo-liberal reforms in India, the opening of the economy and tagging to 'globalised' world, inequalities rose. This, in fact, is an important confession coming from the unapologetic votary of globalisation and neo-liberalism.




The Report analyses the question of government's role in income distribution. On the situation in India, it says “One problem is cronyism. As in the Gilded Age in America, capitalism in today’s emerging markets involves close links between politicians and plutocrats. India is a case in point. From spectrum licences to coal deposits, large assets have been transferred from the state to favoured insiders (emphasis added) in the past few years. Many politicians have business empires of one kind or another. Rich businessmen often become politicians, particularly at the state level. Raghuram Rajan, an Indian-born economist at the University of Chicago who recently became chief economic adviser to India’s government, has pointed out that India has the second-largest number of billionaires relative to the size of its economy after Russia, mainly thanks to insider access to land, natural resources and government contracts (emphasis added). He worries that India could be becoming “an unequal oligarchy or worse”. As the Report itself states and quotes, cronyism in India is consolidating wealth in the hands of the few.


To understand the class bias of the Economist, we need to now look at what it has got to say on China. “In China cronyism is even more ingrained. The state still has huge control over resources, whether directly through state-owned enterprises, monopoly control of industries from railways to mining or the distorted financial system, where interest rates are artificially depressed and access to credit is influenced by politics. The importance of the state means that the beneficiaries tend to be close to state power”.


It goes on and analyses the measures introduced in China and compares them with India. This deserves an extensive quote from the Report because much of the discussion in our country whenever a new economic policy initiative is introduced starts by saying that 'this is what is being done in China'. “In China the 'Great Western Development Strategy' has poured vast sums into infrastructure in the western provinces. More recently the government has made a big effort to improve rural social services. Almost 100 per cent of China’s rural population now have basic health insurance and a majority have basic pensions. Inequality between urban and rural areas has recently stabilised and that between regions has begun to fall slightly (emphasis added), but from an extraordinarily high level”.


On the steps initiated to increase the purchasing power of the toiling people, the Report states: “In the past couple of years several Asian economies, from Thailand to Vietnam, have introduced, or expanded the reach of, minimum wages. China’s minimum wage, which is set at the provincial level, rose by an average of 17 per cent last year”. Let us honestly review if this is what the government of India too is doing in our country. Did it do anything in the recent past to increase the wages of our workers, except use police force to suppress them? Has it done anything substantial to identify and initiate policies to reduce the regional imbalances in our country? If at all these were done, would we be witnessing once again the rise of separatist movements in our country?


The Report itself contrasts the policy direction and says, “China has boosted social services in rural areas. Indonesia and most recently India have cut fuel subsidies”. Need anything be added, except: “In India a big problem is the lack of job creation. Unlike China, where the surge in factories assembling goods for export brought millions of migrant workers into the formal urban labour force, India’s formal workforce has barely grown since 1991. More than 90 per cent of Indians are still employed in the informal sector. Even in manufacturing, most people toil in one-room workshops rather than big factories. Productivity is lower, workers find it hard to improve their skills and their incomes rise more slowly”.




Comparing the Gini coefficients of both the countries and nailing down the lie that India is doing better on this count, it quotes the fountain-head of economic liberalism and no friend of China, the World Bank: “Inequality in India, for instance, is often said to be lower than in China. But China’s Gini coefficient of 0.48 measures inequality of income, whereas India’s official Gini of 0.33 measures consumption. Peter Lanjouw and Rinku Murgai of the World Bank calculated an income Gini for India which, at 0.54, is much higher than China’s and close to Brazil’s”. The Report, as we have already seen, states that Brazil, starting from a much higher inequity graph, is progressing rapidly towards reducing poverty by increasing minimum wages and income distribution. India isn't.


Indian policies are much similar to the US, which the government desperately is trying to imitate in all aspects. No wonder, thus economic policies, inequalities and cronyism too maintain a similarity.  The Report states, “America’s social spending has rocketed”, not upwards but downwards, and “it is now worth some 16 per cent of GDP”. In our country too social spending is steadily rocketing downwards, as the State is increasingly withdrawing itself from social obligations for the private players to step-in. This is glaringly visible in both education and health sectors.


Another most glaring similarity is in the tax policies of both the US and India. Let us once again see what the report has got to say. “Financiers have also been among the biggest winners from changes to America’s tax code. The country’s top rate of income tax has been repeatedly slashed since 1980, from 70 per cent to 35 per cent. By itself, that reduction has not greatly affected average tax burdens at the top (since there have been enough loopholes to ensure that few people paid the top rate). America’s richest have gained more from reductions in the capital-gains tax, which is now only 15 per cent. Private-equity moguls have done particularly well, since the tax code allows them to classify their income as capital gains”.


And further, “America’s system could be more progressive and much more efficient if its politicians were less wedded to 'tax preferences'. These exemptions, which include interest paid on mortgages up to $1million and contributions to gold-plated health insurance, are now worth some $1.3 trillion, or 8 per cent of GDP. Most are hoovered up by the wealthy and the upper middle class. More than 60 per cent of all tax preferences flow to the wealthiest 20 per cent of Americans, with only 3 per cent going to the bottom quintile...If you combine tax expenditures and entitlements, America’s efforts at redistribution look even more perverse. The government lavishes more dollars overall on the top fifth of the income distribution than the bottom fifth”.


The Report quotes Irwin Garfinkel, Lee Rainwater and Timothy Smeeding who authored Wealth and Welfare States, a book comparing America’s safety net with those of other countries: “the federal government 'spends' four times as much on subsidising housing for the richest 20 per cent of Americans (via the mortgage-interest deduction) than it spends on public housing for the poorest fifth”. The Report concludes the discussion stating, “it (American tax system) is riddled with deductions and loopholes, most of which favour the wealthy, so it is both less progressive and much less efficient than it could be”.


Is this anything different from our tax code? The bias in Indian tax policy is exposed time and again. More than 5.26 lakh crores of rupees tax concessions are given to the wealthy. Direct taxes are low and indirect taxes go on increasing. The loop holes in tax system are sought to be legalised now by the recommendations of the Shome committee. Deducing from the conclusions of the Economist, we can conclude that with these set of policies income inequalities in our country are going to be further aggravated.


Remember, “America’s presidential election is largely being fought over questions such as whether taxes should rise at the top, and how big a role government should play in helping the rest”. Conservative Romney is for minimum taxes on the rich and minimum role for government in social sector. Opinion polls are predicting that though the Americans are dissatisfied with Obama, they might once again vote for him because of this conservative attitude and blatant class bias of the Republican candidate Romney. The results must thus be closely watched by the Congress party in our country which is championing a similar conservative attitude.




The Economist which brought to light all these facts and analyses in its pages, fails to prescribe the correct medicine for the malaise, it 'discovered' with such a great difficulty. The Report itself pointed out the role played by labour unions in forcing the government to initiate steps to reduce income inequalities. It even points to the Swedish experience, where seven of ten are unionised and with this power are able to prevent the inequalities from further increasing. But its prescription is for further weakening the 'rigid' labour laws – both in Europe and India, a contradictory position to the historical experience. This shows its desperation to protect its class interests.


Another such prescription is for further reducing subsidies, in spite of the experiences which it itself had pointed out. Similar is the suggestion to reduce the role of government, as it wants to happen in China. Heartlessly, it wants the governments to reduce their spending on the elderly, as it is 'unproductive'. And of course, the rich should not be taxed.


Experience shows that the prescription instead of curing the disease actually deteriorates the patient's condition and accentuates death – here, increases the inequalities. It is not 'true progressivism' but 'true regression'. To wipe out inequalities from the world, what is really necessary is to fight for a systemic change. Capitalism needs to be replaced. And it can be.