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.
ON
GOVERNMENT’S
ROLE
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”.
NAILING
DOWN
THE
LIE
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.
WRONG
PRESCRIPTION
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.
People's Democracy