Product Markets,

Employment and Poverty


What factors may tighten the demand constraint on the growth of domestic output of wage goods? A possible increase in the import propensity of the sector, an increase in  after-tax share of profits to capital arising from a decline in the tax rate on profit income, and a simultaneous downsizing of the employees in the public sector, may be the factors at work. (Remember, like in the BBC serial, Yes Minister, downsizing of government employees often entails an ‘upsizing’ of government officials!).

What about the level of employment in the wage good sector? Where the labour process is organized with no slack for the workers, and the nominal wage rate is given, it is a change in the price of the imported raw material that leads management to substitute that material with labour or vice versa, as the case may be. Thus, ceteris paribus, an appreciation of the exchange rate leads to substitution in favour of the imported raw material, thus increasing the labour productivity (lowering the labour input coefficient), and lowering the level of employment in the wage goods sector. But it is hard to think that this may be the case if we are considering labour and say imported fertilizer in the cultivation of food-grains. However, in the case of food-grains, “pricing to market” assumptions for imports in a liberalized environment may not be realistic. Here, import price competition, especially when the exchange rate is appreciating, can raise the import propensity very significantly to create a demand constraint for domestic output, in turn putting a downward pressure on employment. The demand constraint can be countered if the outputs of the non-wage good producing sectors are stepped up, especially of the export good. We will come to export-oriented growth creating employment possibilities a little later. The adverse impact on employment may feed on the incidence of poverty. Of course, we need to bring in the population growth rate, the labour force participation rate, and the distribution of wages/earnings among working class and poor peasant households.

Before we move to the role of finance, let us deal a bit with the export sector and the possibility of export-oriented growth creating employment. The neo-classical economists stress this a great deal. Their argument is based on analysis of the distribution of the gains from trade in a Heckscher-Ohlin-Samuelson framework. That logic makes the demonstrations at Seattle during the ministerial meeting of the WTO last year, the result of an unholy alliance between the “Northy” worker and the “Southy” capitalist, conspiracy indeed! But let us get back to our account. The “labour problem”, in general, as the Indian power elite view it, is sought be resolved by first scrapping the Contract Labour Act, 1970, and removing chapter 5B in the Industrial Disputes Act, 1947. For exports, FTZs with de facto no interference of the government in favour of labour has now virtually come on the ‘reform’ agenda. The problem of how to increase the export revenue however would remain. The biggest problem is the pressures from finance capital to implement a monetarist monetary policy and a “strong” domestic currency value. This brings us to the so-called villain of the piece.


Global Finance


The villain of the piece in many an open economy macroeconomic story is global finance. Speculating on the rise and fall in the value of financial assets, real estate, natural resources and public enterprises is the name of the capitalist game today. A rise in asset values fan the flames of speculation; the resulting increase in hunger for credit to finance financial transactions in turn further pushes up financial valuations, fanning more vigorously the speculative flame. Demand creates its own supply, and so the supply side gets into action, with the supply of financial instruments (the new ones, financial innovation, they like to call it), since competition heats up in the wake of possible quick profit opportunities. The competition here is in the financial system, between and among banks, non-bank FIs, investment banks, etc., even between the financial systems of different nations, with the non-financial firms increasingly into the act. Cash rich corporations use their cash reserves in the markets for corporate control of banks, non-bank finance companies, and insurance firms, Indian State or privately owned. They even buy up stock market operators. The centre of focus shifts from the productive sphere to the trading and multiplication of financial assets. The value of these assets is based on the expectation or assumption that the financial markets will continue to inflate those asset values.

From the 1990s, financial markets like that of India have been put in the bracket of “emerging markets” by the International Finance Corporation of the WB group. They have been “emerging” and then “submerging” and again in a cycle “emerging” on the financial radar screens of the huge institutional funds, funded by Northern money. As Doug Henwood, the author of the very readable book Wall Street, making a point about the extraordinarily volatility of the so-called emerging markets, puts it:

It doesn’t take much Northern money to drive up prices ten - or a hundred fold - nor does it take much to generate a panic exit and a stunning collapse in prices.

Now, the Deutsche and London (the LSE) bourses, with the backing of the NASDAQ, have announced a merger; in an action-reaction framework we can say that more such mergers are likely to follow. Also, currency trading

online, with a movement towards multi-bank virtual platforms composed of the world’s largest banks is to be expected soon. The global virtual casino is within reach!

In the 1990s, foreign institutional investment (FII) funds, like the large Indian FIs, exercise their market power, especially in the field of corporate takeovers. Speculation is of course one of the main attractions of any stock market, but the FIIs are adept at sharp practices, and like other influential players, get privileged placements, manipulate the secondary market to their advantage on the basis of privileged information, engage in questionable practices, etc. The stock markets in India are not known to positively contribute to better resource allocation, and are widely believed to worsen the distribution of income and wealth. They have not had any positive effect on the investment rate or the efficiency of investment, and are known to have limited the scope for an expansionary monetary policy. Ajit Singh of the University of Cambridge points to the danger of such flows:

A sudden withdrawal of foreign portfolio flows for totally extraneous reasons could lead to a negative interaction between two inherently unstable markets, the currency and the stock markets, which could also do enormous damage to the real economy.with the advent of the market for corporate control, the stock likely to play a much more prominent role in the real economy, arguably to the latter’s considerable disadvantage (our emphasis).

Overall, we assign a negative role to the activation of the stock market by short-term international capital flows, as also a negative impact of increasing the instability of the economic system. The presence of opportunities for large speculative capital gains not only depresses investment in the economic sense, but also reduces the value of the multipliers and introduces a negative trend in the economic system. In this sense, the part of savings within firms, that part which is used by treasury managers to play the markets, and not merely ‘rentier savings’, introduces a negative trend in the system. But with an investment function that simultaneously incorporates business cycle effects, long-period effects of changes in class income distribution, saving propensity, degree of utilization of fresh capacity, and process technology, as well as the (net negative) effect of ‘rentier saving’, mainly from abroad, it all depends. Expectation of a relatively greater return on speculative investment may have a negative effect. But, an increase in the class distribution of income in favour of profits, access to technological developments that are labour-saving and have a lower incremental capital output ratio, and, a greater access to long-term foreign capital, can, theoretically at least, compensate to spur private investment.

Capital account convertibility - where residents will have the freedom to convert their domestic asset base to foreign currency at any time and play around in the assets markets of the world at their prerogative, and, do this back and forth at their sweet will - would be disastrous. Imagine such an eventuality and its likely longer-term impact! With certain assumptions about the population growth rate, the labour force participation rate, and the distribution of wages/earnings among working class and poor peasant households, sectoral workforce distribution, rural-urban population distribution, one may even predict an  increase in urban poverty.  Already, the power elite is viewing democracy as a burden. This elite wants to “roll it back”. Of course, the power elite in India, like their counterparts elsewhere, have always been uneasy with the equal (at least on paper) distribution of voting power.

Neo-liberal peripheral capitalist development in the “open” Indian economy of the 1990s has reproduced mass poverty. It would be appropriate, given the stress we have placed on short-term financial flows and their link with the productive sphere, that we conclude with what one of the most penetrating social critics of 20th century capitalism, Paul Sweezy, wrote about the role of finance in the US economy after the crash of 1987 :

‘‘(The) center of focus shifted from the production of goods and services to the buying, selling and multiplication of financial assets.(With the) absence of a base in surplus valuemoney capital amassed becomes fictitiouscomes from the sale and purchase of paper assets, and is based on the assumption that the asset values will be continuously inflated(Here we have) the fallacy of an unending upward movement of asset values(All this) exposes the irrational kernel of the system. (The)  mess is due to capitalism’s ruthless pursuit of wealth by any and all available means, whether or not these have anything to do with satisfying the needs of human beings.’’

The reality may be depressing, but it may be appropriate to conclude on an “optimism of the spirit”. A history of capitalism from a Polanyian perspective perhaps tells us that a planned movement (in the interests of the apex of power and wealth) towards laissez faire inevitably generates a counter-movement. Vast sections of humanity, who are the victims of the former, struggle to protect their livelihoods and their habitat (natural and social) from the destructive tendencies of the market mechanism.