People's Democracy

YECHURY'S LECTURE ON GLOBAL FINANCIAL CRISIS

'Massive Dose Of Public Investment Is  The Only Way To Stimulate Growth'

The following is the text of the speech that Sitaram Yechury delivered at the sixteenth Lal Bahadur Shastri memorial lecture on �Global Crisis and Indian Response� on January 11, 2009 at National Museum in New Delhi.

THE current crisis of international financial capital that spearheaded globalisation in the last two decades is, by many estimations, far graver than any other crisis in the history of capitalism including the great depression of 1929. The crisis is still unfolding and its full ramifications will be realized only much later.

Many feel that we, as Communists, must feel resoundingly vindicated that Karl Marx�s penetrative analysis of capitalism has, once again, proven itself to be true. Marxists do not derive satisfaction for the vindication of their analysis at the expense of the ruin and misery of millions of victims of this capitalist crisis. We work to ensure that the common working people are not subjected to such inhuman trepidations being at the mercy of the rule of Capital. This shall, however, happen only when we �change the world�, not remaining satisfied with the correctness of our �interpretation of the world�.

Capitalism, in the wake of this crisis, has embarked on a spate of nationalizations that would have surprised the former socialist USSR. When the time to defend capitalism from such a crisis comes, all ideological attacks against the State, public property or nationalization with the accompanied extolling of the virtues of private capital and their laser beamed God - market � are mercilessly abandoned.

Britain that heralded modern privatization has socialized today most of its banking sector. (Recollect that Margaret Thatcher once said, �It is not the business of the government to be in business�.) USA is pumping in an overall $ 2.5 trillion of tax payers� money to shore up its financial system. France�s Nicholas Sarkozy, says, �Laissez-faire is finished�. There is a profound paradox here. Defending capitalism, in this present crisis, means greater State intervention. The paradox, however, is only superficial. The fact remains that the capitalist State has always defended and enlarged the avenues for private profits. These bailouts, as the future will testify, are designed precisely to first save and then to create new avenues for profit generation.

This crisis is an inevitable consequence of the path of globalisation that was unfolding in recent decades.

Globalisation and its ideological underpinning � neo-liberalism � arose under conditions of gigantic levels of capital accumulation and (it is a law that as capitalism develops, there is a centralization and concentration of capital) the emergence of globalisation of finance capital. It has specific features. The present process is not a nation-state based finance capital engaged in struggle with rival nation-states. In a sense, it has transcended the nation-state. This, however, is not to suggest that the relevance of the nation-state and its sovereignty has ceased, as some seek to argue.

It is, however, important to note that the present day finance capital is globally instantly mobile sucking in finance capital from individual countries dominated by finance capital originating from the advanced countries. Further, this finance capital is more pre-occupied in its search for quick speculative gains rather than its amalgamation with industrial capital leading to economic development. It, therefore, truly represents the parasite that thrives at the expense of real economic growth.

The emergence of this finance capital is an important factor that explains the relatively low growth rates accompanied by high unemployment rates in the advanced countries over the last decade or so. This happens because in order to appease international speculators, there is a competitive reduction in tax rates and restrictions on the size of the fiscal deficit. In other words, governments are forced to cut back expenditures and thereby deflate both employment and domestic demand leading to lower rates of growth.

This, in turn, leads to a situation where the advanced countries turn to the third world economies looking for greener pastures. The imposition of neo-liberal policies serves this purpose of removing obstacles to the free operation of internationally mobile finance capital. In addition, it seeks to impose a new form of international division of labour, this time not through direct colonial occupation but through coercing third world economies to dovetail to their interests. It is the consolidation of this process over the last decade that laid the basis for the current crisis.

Two important features of globalization, however, require attention to understand the present crisis. First, this process has been accompanied by growing economic inequalities both within countries between the rich and poor and between the rich and the poor countries. Secondly, globalization has given rise to the phenomenon of `jobless growth�. This is so because the trajectory of profit-maximisation invariably replaces human labour by investing more in developing technology rather than developing human resource capacities. The growth of employment, during this period, has always been lower than the GDP growth rate globally.

Both these features put together meant that the purchasing power of the vast majority of the world�s population has been declining. Now, capitalism inevitably plunges into a crisis when what is produced is not sold. Under these circumstances, the only way that capitalism can sustain its levels of profits is by encouraging people to procure loans whose spending will maintain the levels of economic activity. However, when the time comes to repay these loans, there is the inevitable default.

This is precisely what happened in the USA in the current sub-prime (loans given at interest rates lower than the prime rates initially to lure borrowers, only to be re-set higher later or loans given to borrowers whose credit worthiness is suspect.) crisis leading to large scale defaults.

Defaults should not have really come as a big surprise. The Wall Street Journal, reported on October 12, 2007 that the wealthiest one per cent of Americans reportedly earned 21.2 per cent of all income in 2005. This increased from 19 per cent in 2004 and exceeded the previous high of 20.8 per cent in 2000. In contrast, the bottom 50 per cent earned 12.8 per cent of all income which was less than 13.4 per cent in 2004 and 13 per cent in 2000. The consequence of such growing inequalities would lead, according to Merrill Lynch, to a fall of $360 billion in consumer spending during 2008-09. Obviously, Merrill Lynch, now emasculated, did not take its own assessment seriously, busy as its executives were in giving themselves handsome perks and bonuses.

Capital, in search of higher profits, continuously creates new commodities through which it expands its market operations. As Marx had said, `production not only creates objects for the subjects, but also creates subjects for the objects�. The present day advertising industry is testimony of this. Under the rule of international finance capital, capitalism creates new financial commodities. One of these that has played havoc and generated the current crisis is known as the `derivatives�.

Derivatives are shadow financial instruments that include futures, options, forwards trading etc. If one buys or sells a share in the stock market, then it is actual trade. However, if one buys or sells the option to buy or not to buy a share, then it is derivative trade. The seller of the option, believe it or not, need not own that share. Likewise, the buyer need not pay the full money for the share.

According to the Bank of International Settlements, as of September 2008, the total value of derivative trade stood at a staggering $ 600 plus trillions. This has grown from $ 100 trillion in 2002. Thus, this shadow economy is 10 to 12 times larger than global GDP ($ 50 to 60 trillion) and more than six times larger than the actual trading in shares in the world�s stock exchanges ($ 100 trillions). While these are the figures from the official commodity exchanges, it is variously estimated that the total value of financial exchanges including in derivatives, whose trade takes place even outside of the commodity exchanges, was a staggering 40 times the total global GDP. It is this speculative financial bubble, pumped to inflate to infinity, that had to burst, and, it did.

Reams of analysis seek an explanation for this crisis (obfuscating the systemically inherent dynamics of the capitalist system), in the greed of a few, a violation of some ethical norms, a la Nobel laureate Paul Krugman�s �moral hazard� or, the lack of transparency and the weakness of regulatory mechanisms and failures of credit rating agencies.

In Das Kapital, Marx concluding his chapter on the genesis of the industrial capitalist states: �Capital comes dripping from head to foot, from every pore, with blood and dirt�. He buttresses this with a quote, in a footnote, from a worker and trade union leader T J Dunning : �With adequate profit, capital is very bold. A certain 10 per cent will ensure its employment anywhere; 20 per cent will produce eagerness; 50 per cent, positive audacity; 100 per cent will make it ready to trample on all human laws; 300 per cent and there is not a crime at which it will scruple, nor a risk it will run, even to the chance of its owner being hanged.� It is this pathological drive to maximize profits at any cost, the inherent character of the capitalist system and not the individual greed of some or weakness of regulatory mechanisms that is the root cause for the present crisis.

If profits were reemployed into enlarging productive capacities, then through the consequent employment generation, the purchasing power of the people will grow leading to larger aggregate demand, which, in turn, would give a further impetus to industrialisation and growth of the real economy. The gigantic accumulation of international finance capital, however, given the inherent laws of capitalism, supercedes this process, seeking predatory profits through speculation. It, in fact, decimates this process by enveloping it under the speculative financial bubble. This is similar to when monopoly capital emerging from free competition, decimates the latter completely.

To summarise: under globalisation, with sharp decline in the purchasing power in the hands of the majority of the world�s population (like the growing hiatus between `shining� and `suffering� India), finance capital, in its eagerness for quick profits, chooses the speculative route of artificially enlarging purchasing power by advancing cheap (subprime) loans. Profits are made while these loans are spent but when repayment is due comes default, ruining the loan taker, also crippling the system. To put it simply, as seen above, this is precisely what happened on a gigantic scale. Capitalism�s supreme diabolic irony lies in the fact that in the name of protecting those who have already been ruined, the banks and financial institutions are bailed out using tax payer�s resources! Indeed, privatization of profits and the nationalization of losses!

In the meanwhile, independent sovereign countries like India can protect only by insulating ourselves from such massive speculation. To a large extent, if India has been spared a full throttle devastation, it is because the Left parties prevented the current UPA government, during the last four years, from embracing greater financial liberalisation. Even our worst detractors are forced to admit this, though most reluctantly!

It would, indeed, be suicidal if the government embarks, as it appears to do, on a path of relaxing the regulation on the flow of international finance capital in the name of injecting greater liquidity into our economy. This is expected to generate greater expenditures and, hence, boost aggregate demand, thus, fuelling growth. This process cannot be done through importing speculative capital. This needs to be done through greater public investments generating employment and, thus, feeding the cycle of demand led growth.

The manner in which the crisis is tackled defines the priorities. Recollect, some ways of emerging from the 1930�s depression led to the rise of fascism! One way to resist such horrifying possibilities is to put people before profits while tackling the crisis. The current bailout packages announced across the globe, however, do the opposite. Even the New York Times was constrained to point that the $ 700 billion bailout package �helped strengthen bank balance sheets� but did not �mandate new lending or support specific investment projects in the United States�. Such bailouts help finance capital which, in the first place, created this crisis and does not prevent a recessionary slide. 240 thousand jobs were lost in October, plus another 593 thousand in November, in the USA. A job loss of over 2 million is anticipated for 2009.

In sharp contrast, China has announced a two-year $ 586 billion of public investment. This is designed to improve people�s welfare through projects like low cost housing, strengthen infrastructure and re-build areas devastated by natural disasters like earthquakes. The consequent employment generation would boost the aggregate domestic demand fuelling growth. Consider this example : the planned expansion of 10,000 kilometers of railways, as a part of this package, by the end of 2010 will employ 6 million people and would require 20 million tonnes of steel and 120 million tonnes of cement. Such public investment, China expects, will offset the negative impact of sharp fall in exports caused by the global recession.

What is happening in India? Compared to a 13.8 per cent growth in the manufacturing sector in October 2007, it is minus 1.2 per cent in October 2008. For the first time in fifteen years, India�s overall industrial production recorded a negative growth of minus 0.4 per cent. Similarly, exports that contribute around 22 per cent of our GDP fell by 12.1 per cent. India�s much famed IT sector with annual revenues of over $ 50 billion accounting around 16 per cent of exports estimates a fall of over 50 per cent of its revenues. The FIIs who put in $ 17.4 billion last year have virtually vanished leading to a crash in the stock market. The rupee has weakened by about 20 per cent against the dollar despite the RBI selling upto $ 2 billion a day.

All this is leading to large-scale closures of export units and layoffs of workers. The consequent decline in the purchasing power amongst the people will further depress growth. This may well push India also into a recession. Under these circumstances, however cheap credit may be made with lower interest rates etc, there will be very few takers. What is required is a massive dose of public investment to generate employment, domestic demand, thus stimulating growth. The prime minister has announced a Rs 20,000 crore investment programme. This translates into a meagre $ 4 billion.

This gross inadequacy must be urgently corrected. A massive public works programme will only help us in improving our woefully inadequate infrastructural facilities. India has the world�s second biggest road network of 3.3 million kilometers. However, the much tom-tomed national highways are only 2 per cent of the total and only 12 per cent of them (8,000 kms) are dual carriage ways. By the end of 2007, China had nearly 54,000 kms of four or more lanes roads. Similar inadequacies are there in other crucial sectors. Last year, peak demand for electricity outstripped supply by nearly 15 per cent. According to the World Bank, 9 per cent of India�s potential industrial output is lost due to power cuts. Nearly 60 per cent of Indians do not have direct electricity connections. Last year, we added only about 7,000 mw compared to 1 lakh mw added by China.

There is so much to be done in the field of social infrastructure. Nearly a thousand children die every day due to preventable illness. Only 13 per cent of the sewage is treated. 70 per cent of our people do not have access to a proper toilet. Over 50 per cent do not access to potable drinking water. Half of enrolled children dropout from schools by the age of 14. Enrollment in higher education is variously estimated to be between 7 to 13 per cent only. Yet, this is sufficient to create waves of fear in the western capitals of an Indian cerebral takeover. 54 per cent of Indians are below the age of 25. If we can give them proper health, education and employment, then they shall build a new better India.

The current global crisis can well provide this opportunity for India. With the domestic savings rate rising to 35.5 per cent of the GDP, resources must be marshaled to put in place a massive programme of public investment. This is how we must convert this crisis into an opportunity.

Let me conclude by leaving all of you with a provocative thought. 2009 is the bicentenary of the birth of Charles Robert Darwin. 2009 is the 150^th anniversary of the publication of the earthshaking Origin of Species [original title: On the Origin of Species by means of Natural Selection, or the Preservation of Favoured Races in the Struggle for Life (1859)]. In its fifth edition, Darwin first uses the phrase `Survival of the fittest�. Not the strongest, not the most intelligent, but the fittest. The species which adapts (naturally, not consciously, as Darwin always emphasised) survives. In human civilisation such adaption, however, has to come consciously. Are we, as a nation, prepared to convert this crisis into an opportunity?

# The imposition of neo-liberal policies serves this purpose of removing obstacles to the free operation of internationally mobile finance capital. In addition, it seeks to impose a new form of international division of labour, this time not through direct colonial occupation but through coercing third world economies to dovetail to their interests. It is the consolidation of this process over the last decade that laid the basis for the current crisis.

# It would, indeed, be suicidal if the government embarks, as it appears to do, on a path of relaxing the regulation on the flow of international finance capital in the name of injecting greater liquidity into our economy. This is expected to generate greater expenditures and, hence, boost aggregate demand, thus, fuelling growth. This process cannot be done through importing speculative capital. This needs to be done through greater public investments generating employment and, thus, feeding the cycle of demand led growth.