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Perils of Liberalization

By Chandra Kishore

India has a proud history of fighting liberalization and foreign intervention of its economy. But in 1991 its government decided it was time to start liberalization, but without fulfilling social objectives.

Expansion of foreign trade is not useful unless it serves the actual needs of the people. Terms of trade (TOT) is a vital factor in economic activities, and in the world of trade it is important to see what is one’s real gain. The fact is that Indian goods and services generally sell very cheaply in North America, Europe and Japan while the products of leading industrialized countries sell dearly in India.

India’s TOT deteriorated since 1991. Devaluation of the rupee lowered India’s TOT by 23 per cent at one stroke in July 1991. The devaluation enhanced the cost of imports in rupee terms while export declined in dollar terms.

India’s main exports are leather goods, textiles, readymade garments, gems, jewellery and engineering materials. These constitute about 60 per cent of the total export volume. The dollar price of four of these categories of goods has declined since 1991 while the volume of exports has increased in all cases. On the import front, except petroleum, the prices of all commodities have increased in dollar terms. The price of petroleum has remained low in the international market. For Indian importers, the cost of imported goods is further accentuated by the devaluation of the rupee. The net effect has been a rise in the import cost which has fed and fuelled the general rise in prices of domestic products.

There is no point to be jubilant over the quantitative expansion of such an unequal business. In fact, the beneficiaries of India’s trade liberalization are those who buy Indian goods with dollar and those who earn dollar selling foreign products in the Indian market. From these unequal terms of trade, actual benefits accrue to most powerful nations and powerful monopoly companies. Not long ago, when India was integrated with the international market during British colonial rule, there were record rates of quantitative expansion of trade in indigo, tea and gray cloth but ultimately it proved disastrous for the Indian indigenous economy.

Social needs

The market forces of liberalization do not pay any attention to the fulfillment of social needs. The volume of production is determined solely by the needs of the international market. In ancient times, the people of this subcontinent maintained trade relations with Persia, Java, Kampuchea and many other countries, but production in those days was oriented to meet the needs of the community. The British colonial regime however established a new type of trade relation that destroyed the basic rural economic base of India.

Today again the votaries of liberalization are calling for free market operations. Under the free market strategy players in the global market reap a rich harvest while ordinary people suffer tremendously.

The 20th century world economic order shows that globalization is thoroughly compatible with imperialism and genocide. It is a well established fact that Western powers fought the Gulf War in order to secure their oil interests. In Iraq alone it is said that 500,000 babies died owing to trade sanctions following that war. Perhaps the real reason for continuing the sanctions against Iraq for so long was to prevent the collapse of international oil prices. In fact, wherever there is involvement on the part dominant industrialized forces “against dictatorship” or “in favor of democracy and human rights” the intelligent reader should first of all look for indications of an underlying trade motivation.

It is wrongly construed that liberalization means trade without control. The fact is quite different. Data shows that the biggest monopolists and multinational corporations control the lion’s share of India’s foreign trade. The more resourceful manipulate the levers of market forces and create conditions to force small manufacturers to sell their produce at cheap rates and supply in bulk to the foreign purchasers. In this way the very large majority of the profits generated from such export is shared between foreign purchasers and certain Indian sellers who control the internal trade.

The key problem of India’s trade with the rest of the world is that it takes care of a few at the cost of the majority. Globalization brings about an unequal economic status. Growth of trade and expansion of economy does not entail corresponding rise in the well-being and economic status of the people. On the contrary, the exchange value of Indian labor and its produce decline in proportion with the growth of trade. And as a result the living standard of the majority goes from bad to worse.

The free market ideology support trade deficit year after year as a healthy policy for developing countries and bridge this deficit with external debt and foreign direct investment (FDI). Since liberalization started in 1991 India’s debt has mounted from $10 billion to more than $70 billion. At present (1997) it stands close to the $100 billion mark making India the second largest debtor state of the world. Undoubtedly the FDI bridges the trade deficit but few people realize that foreign investors add obligations in the form of repatriatable profits, technical know-how and other charges.

Professor Ajit Singh of Cambridge University has drawn attention to five crucial aspects of liberalization, which policy makers should not ignore. The five points are:

· Experience of industrialized countries in the 1980s
· Lessons of the East Asian liberalization
· Experiences of Latin America
· Implications of these international experiences for India
· The difference between real economy and money

The experience of industrialized countries (OECD) speaks volumes against the fetish of liberalization. The rate of growth of the advanced West sine 1980, research revels, is 50 per cent on the earlier period ending in the 1970s dominated by economic regulations. Productivity in the West has fallen since the 1980s and mass unemployment has resurfaced for the first time since the 1930s. In 1994 alone, 35 million, i.e. 15 per cent of the labor force, were unemployed in the West. Compared to this between 1955 and 1973 the advanced West enjoyed almost full employment. Even the argument favoring technology as a labor saving device to enhance productivity seems to have failed to deliver. In short, liberalization has led to a fall in demand, rise in impoverishment and falling growth rates.

Since the 1980s the U.S. has successfully imposed its hegemony via Fund-Bank prescriptions on a number of advanced western countries. The result of this is now becoming clear. Demand has fallen as Keynes remains out of fashion and the full potential of growth and equity cannot be realized due to policies of liberalization foisted upon these countries by Washington.

The case of East Asia bolsters the argument favoring strategic integration with the world economy and cautious liberalization. The region’s economic history proves that countries like Japan and South Korea have become exemplary because of selection and restrained liberalization. Japan, for instance, always followed varying policies towards exports and imports. The latter was strictly controlled while the former was vigorously promoted. In both countries the state plays a crucial steering role in economic development, the market is controlled in national interest, foreign direct investment was discouraged and technology sensibly copied. Those who quote China as a wonder of liberalization should realize that the country carried out land reforms, achieved literacy and secured health for all and a sound self-reliant economic base before opting for liberalization. America almost wholly repudiates structural adjustment, which is being welcomed by India. In the 1980s most of Latin America followed a U.S.-sponsored consensus on issues of liberalization, globalization and structural adjustment. Despite massive inflows of FDI and other loans, by the end of the 1980s a dramatic fall in growth rates were revealed.

Before the Mexican bubble burst, its rulers did everything the IMF, World Bank and the U.S. dictated. But the colossal inflow of capital did not stop a tumbling real economy. In Mexico (1980-90) GPD grew at one per cent whereas in 1960-70 it grew at seven per cent. Argentina recorded a negative growth (- 0.4 per cent) between 1980-90. Peru followed with – 0.2 per cent, Bolivia recorded – 0.01 per cent, and even Brazil slumped to 2.7 per cent. The story of Latin America as a whole is one of unprecedented devastation.

In sum, contemporary economic history teaches three unforgettable lessons in the field of liberalization. The East Asian paradigm underlines a policy of promoting domestic industry, health and education, globalization of science and technology, selective imports and restrained liberalization with emphasis to create more and more agro- and agrico- (post- and pre-harvest) industries based on local resources of raw materials and manpower.

The second lesson is to decentralize the economy and planning at the grass roots level.

The third important lesson emanates from Latin America where the harmful policies of U.S.-sponsored structural adjustment triumphed during the 1980s.
India’s trade need to be set on a new footing just as the economy needs transformation from rich men’s paradise to poor men’s emancipation. This can be brought about by combining modern technology with the vast resources to meet the basic requirements of every individual. It will build a new system of production and exchange relations to create self-reliant zones. The result will be a people’s economy to serve the actual needs of the people. Thus India’s trade with the rest of the world will become a tool for well-being of all – both in India and abroad. Such a qualitative transformation is the prerequisite for Indian people to feel happy about the quantitative growth of exports and imports.

What should be produced in a the country, what should be exported to the rest of the world and which needs of the local people should be satisfied, are the basic parameters to determine whether any economy serves its people or not. The economy of all countries need to be restructured to ensure that the interests of producers and consumers are harmonized with each other and with the general interest of both local and world society. While seeking any opportunity to open the door to such a transformation, in economic relations those who care about the future of society ought to resist the imposition of the free market dogma only to share the fragile economy of their country already plundered by the onslaught of liberalization. The fight for self-reliance in India is the fight for economic liberation of all societies, and the fight for economic self-reliance elsewhere is a fight for economic liberation of Indian society.

Edited from Prout Weekly, New Delhi, India
April 16, 1997

Copyright The author 1999