Category: Development Economics

What Can Indian Economists Learn From Sismondi’

Although J.-C.-L. Simonde de Sismondi (1773-1842) lived in Geneva and wrote on economics, history and public policy, his concerns about the role of political economy is valid even today, especially for India. Marx considered Sismondi to be the last classical economist. Sismondi engages with the economics of Adam Smith, David Ricardo and J B Say in his 1819 work New Principles of Political Economy: Of Wealth In Its Relation to Population. This work has been translated into English by Richard Hyse in 1991 (available at Google Books). According to Sismondi, the objective of Political Economy is to ensure that majority of the population live a happy life.

Indian realities

Sainath informs us that India has seen over a quarter of a million farmers’ suicides between 1995 and 2010. The total figure according to National Crime Records Bureau (NCRB) is 256,913. And, since 1998, at least 15,000 farmers have committed suicide very year. More unsettling is that fact that the total number of farmers have been declining significantly. In Andhra Pradesh, it is alleged that 90 farmers committed suicide, that too, in rain-fed areas, in the last few weeks.

The inflation of food articles has reached double digits. Food inflation doubly affects the actual cultivators. Since, the prices are fixed by the Government (minimum support prices), the price rise does not benefit the actual cultivators. Secondly, their ability to purchase their usual consumption basket also falls when price rise. It is in this context that M S Swaminathan’s reminders need to be understood. He rightly asserted: ‘If agriculture goes wrong, nothing else can go right for this country.’

Very recently, Dreze and Sen pointed out the nature of the asymmetrical growth that is driving India with a majority of the population living without access to basic amenities. They concluded their article in the Outlook by stating that one of the ways forward is to have a ‘radical broadening of public discussion in India to development-related matters’rather than keeping it confined to simple comparisons of the growth of the gnp, and naive admiration (implicit or explicit) of the high living standards of a relatively small part of the population. An exaggerated concentration on the lives of the minority of the better-off, fed strongly by media interest, gives an unreal picture of the rosiness of what is happening to Indians in general, and stifles public dialogue of other issues.’ In other words, how much has the socio-economic condition of majority of the Indian populace (who happen to be farmers and weavers) improved’

Sismondi

In the hurry to build sophisticated DSGE models and while working out monetary and/or fiscal solutions to inflation and economic growth, it is often forgotten that actual human livelihood is at stake. How can Indian agriculture not be a necessary component of the curriculum in economics’ Within economics, steep walls which cannot be crossed exist between agricultural economics, macroeconomics, monetary economics, labour economics, development economics, etc. The so-called specialization in these fields (to be understood as literature which is not easily accessible or comprehensible to an economist from another field) has reached alarming levels. Sismondi says the following on the nature of economic inquiry:

However, I believe I should protest against the manner, so often superficial, so often false, in which a work on the social sciences is judged in the world. The problem which they offer to resolve is tangled in quite another way than those that arise from the natural sciences; at the same time it appeals to the heart as well as to reason. The observer is called upon to recognize unjust sufferings that come from man, and of which man is the victim. We cannot consider them coldly and pass them over, without seeking some remedy‘(Sismondi 1819: 13).

Maybe, the idea of modern science does not allow investigators to be moved by the ‘object’ under study. Nevertheless, as Sismondi reminds us, economic problems and their solutions affect people (who are not ‘objects’) in a significant manner. The state of Indian farmers and weavers is certainly to be given attention, especially in terms of livelihood building, through providing employment and incomes in a dignified manner.

The following lines from Sismondi echoes what Dreze and Sen recently pointed out as regards Indian growth:

If they find a tremendous accumulation of riches, an improved agriculture, a prosperous business community, manufactures which multiply without end all products of human industry, and a government that disposes of almost inexhaustible coffers, as in England, they call the nation opulent that has all these things, without stopping to inquire whether all those who work with their hands, all those who create this wealth, are not reduced to mere subsistence; whether every tenth member among them must not apply each year to the public welfare; and whether three-fifths of all individuals, in a nation that is called rich, are not exposed to more privation than an equal proportion of individuals in a nation called poor (Sismondi 1819: 22).

In India, the wealth creators, the farmers, are forced to live below even ‘subsistence levels’ as Sainath’s commentary on farmer suicides indicate. Even though we have 53 agricultural universities in India, their contribution to the farming population is circumspect. Three to four decades before, working on agricultural economics and debating issues related to agriculture was fashionable and ‘important’. Today, it is even more important but, perhaps, not very attractive. In fact, the Government admits that the farm sector has been neglected.

Admitting that the government is neglecting research in the farm sector, the agriculture ministry has sought more funds in the next Five Year Plan (2012-2017) for significant jump in food grain production.

But, focussing on aggregate food grain production is clearly insufficient. One needs to look at the ‘production conditions in Indian agriculture’. As Sismondi points out very clearly

Commercial wealth is augmented and distributed by exchange; and even the produce of the ground, so soon as it is gathered in, belongs likewise to commerce. Territorial wealth, on the other hand, is created by means of permanent contracts. With regard to it, the economist’s attention should first be directed to the progress of cultivation; next to the mode in which the produce of the harvest is distributed among those who contribute to its growth; and lastly, to the nature of those rights which belong to the proprietors of land, and to the effects resulting from an alienation of their property (Sismondi 1819: 133).

In 1974, Krishna Bharadwaj published a book Production Conditions in Indian Agriculture. In the same period, economists such as Amit Bhaduri, Ashok Rudra, Amartya Sen, K N Raj, C H Hanumantha Rao, Pranab Bardhan, etc wrote extensively on various aspects of Indian agriculture. The issues Sismondi pointed out were discussed and debated. Bharadwaj points out the significance of examining property relations, technology, local patterns of power, etc. Moreover, she notes that non-economic variables such as tradition, customs, caste and religion determine the economic position of a farmer and thereby determines their income and asset levels. The rise in food inflation has prompted many commentators to hold employment guarantee schemes (NREGA) responsible. If agriculture generated adequate incomes (to maintain a decent and dignified life) employment guarantee would not be necessary. In other words, employment on and off farm cannot be treated as independent of each other. Further, in India, markets are interlocked through both price and non-price links (with the Government playing an ambiguous role). These interlocked markets are exploitative as it denies the following freedoms to the agricultural farmer, who is very much an entrepreneur.

(1)” What to produce’

(2)” How much to produce’

(3)” For whom to produce’

(4)” When to sell the produce’

Conclusion

As Sismondi reminds us, we cannot ignore the majority of the Indian population who do not have access to the basic necessaries of life. Agriculture provides livelihood to more than half the Indian workforce. A farmer is an entrepreneur who produces food, the most basic of all commodities. Although, it might not be academically fashionably and profitable to study Indian agriculture but as Sismondi notes: ‘We cannot consider them coldly and pass them over, without seeking some remedy.’

Urbanization in India: What does it mean’

 

In the recent past, there have been a lot of discussions and commentaries on the merits of urbanization in India. In addition to this, we also hear about the poor, rather pathetic, living conditions of migrants who work in urban spaces, there are pressing environmental concerns especially regarding air and water pollution, public transport is in a disarray, etc. The latter concern has led to the rise of ‘new’ areas of learning and research such as urban studies, urban economics, urban ecology, urban sociology and urban planning. These are extremely important areas of learning considering the fact that urban centers attract both labour and capital. This blog post tries to understand some economic issues relating to the process of urbanization that is taking place in India. In particular, we seek to understand the limits of urbanization and in the process we try to know what it means to achieve economic growth.

According to the World Bank, ‘Urbanization is not a side effect of economic growth; it is an integral part of the process.’ ‘McKinsey states that ‘Urbanization is critical to India’s development.’ Further, Ministry of Urban Development, Government of India notes that ‘It is important to note that the contribution of urban sector to GDP is currently expected to be in the range of 50-60 percent. In this context, enhancing the productivity of urban areas is now central to the policy pronouncements of the Ministry of Urban Development. Cities hold tremendous potential as engines of economic and social development, creating jobs and generating wealth through economies of scale. They need to be sustained and augmented through the high urban productivity for country’s economic growth. National economic growth and poverty reduction efforts will be increasingly determined by the productivity of these cities and towns.’

From the above excerpts, some important assumptions (or rationales) for promoting urbanization can be understood.

(1)”’ Economic growth is synonymous with urbanization.

(2)”’ India has to urbanize in order to attain economic growth and development.

(3)”’ Urban spaces need to be promoted because they generate about 50% of the Indian GDP.

(4)”’ Cities are potential engines of economic and social development.

‘Economic growth

In a macro sense, economic growth refers to the sustained growth in national output ‘ GDP. However, for policy purposes it is important to look at per capita GDP. This is a proxy for looking at how much on income an average person possesses. The objective of economic growth (and economics) is to ensure that all individuals are employed (who seek work), have adequate food, have access to drinking water, transport, etc. In no way should we consider the objective of increasing GDP to be our aim. It is a necessary means to an end- better life.

Urbanization is understood as an increase in the population of urban spaces. This also means that there is a growth in employment, capital inflow, infrastructure, etc. In turn, such large increases in population will result in an increased pressure on resources ‘ water, space, housing, transportation, office space, air, etc. Communication seems to be the only one which has relatively negligible supply problems.

Given this, how can the Central Government or Planning Commission argue that urbanization is the way to go forward’ This means ‘ fatten urban spaces and neglect rural areas! Both, as we know, are not desirable. Fattened urban spaces will present a whole new set of issues to tackle with; neglecting rural areas will mean that agriculture and those dependent on agriculture (around 60% of India) will not be encouraged. Clearly, this does not increase the well being of majority of Indians. More importantly, it is illogical and unwise to argue that urbanization is (or leads to) economic growth. Yes, it leads to economic growth, but only in a very superficial manner and not in any substantive way.

India: Rural and Urban

As per Census 2011, 69 % of Indians live in rural areas and only 31 % in urban spaces. It seems to be the case that the policy makers are interested in improving the ‘urban spaces’. This does not necessarily include improving the living conditions of the majority of Indians. It is strange how language plays a dividing role too: urban habitats versus rural areas! It is true that the urban sector contributes roughly around 50% of India’s Net Domestic’ Product (NDP). The remaining comes from rural India which comprises majority of the populace. As for agriculture, rural areas contribute 94% (for the year 2004-05) of total agricultural output. So, if urban areas are targeted at the cost of rural areas, those employed in agriculture, which is a very difficult occupation, are going bear the brunt.

It is strange that the Government and policy makers (including private think tanks) argue that cities are potential engines of economic growth, when 60% of Indians depend on agriculture for their livelihood which is mainly located in rural areas. This tendency of policy making to favour any method which just boosts the numerical value of GDP without any qualitative change must be stalled. By qualitative change, I refer to improvements in quality of life ‘ food, shelter, education, water, health and so on.

According to a recent paper (July-August 2011) by Gilles Pison in Population & Societies, India is expected to become the most populous country by 2050 and will overtake China. Yes, we have heard that India has been blessed with the demographic dividend; but we must remember that it is no dividend unless there are employment opportunities, and they should not just be in urban spaces. This paper also notes that India records the highest number of deaths under age one ‘ 13,96,000.

Hence, the Planning Commission has considered it imperative that the next 5 Year plan will include urbanization as a key challenge. This, however, is a myopic strategy and especially because of the neglect of agriculture. In addition, employment generation should be the key challenge. Jayati Ghosh also argues in a similar fashion in a recent article of hers. She points out that ‘The number of urban settlements has increased from 5161 in 2001 to 7935 in 2011, an increase of 54% that dwarfs the 32% growth in urban population.’ This means that urban statistics have swelled up because of a reclassification and not mainly because of rural-urban migration. This key information poses further problems for policy makers; actually, it poses problems only for the ‘concerned’ policy makers!

Conclusion

To sum up, it would be disastrous to formulate policies which targeted the urban spaces at the cost of rural areas. The objective of economic policies must be to improve the well-being of the people and not to increase the percentage of GDP by a few points! In fact, even in France and Europe, when the process of urbanization began in the early 18th century, agriculture was neglected. However, a group of economists known as Physiocrats argued that agriculture cannot and should not be neglected as it will lead to a downfall of the economy (see more). It is time that we realized the interdependence present in the economy between rural and urban areas and also high time we acknowledged the significance of creating employment opportunities to the majority of the population.

Economics: The Study of Commodities

The study of commodities has been central to economic theory. Mercantilists considered gold, a commodity to be wealth. Later economists argued that an increase in commodities, both agricultural and manufactured, implied an increase in wealth. The increase in the production of commodities is still the most widely used indicator of economic growth/progress. This indicator is none other than the real GDP. In 1985, Amartya Sen published a book titled Commodities and Capabilities. In this work, Sen challenges the dominant view in economics regarding the role of commodities, i.e. he maintained that an increase in commodities cannot be taken as the sole factor in assessing economic development. Sen emphasised the importance of examining capabilities, which subsequently led to the creating of the Human Development Index (HDI). This post discusses the rationale behind economists’ obsession with commodities. It also examines Sen’s critique of commodities and how his (Aristotelian) concept of capabilities differs from it. This post concludes by arguing for a strengthening of classical economics, which studies the production, distribution, exchange and consumption of commodities, for the considerations of ethics can be easily integrated into this approach.

Economics as a distinct form of inquiry begins with the works of Sir William Petty in the 17th century. Petty was interested in assessing the comparative wealth of England and Ireland. Some of the indicators he chose were the number of houses and population. The idea behind this being that a surplus of food results in more population and therefore more houses. Having a large population was considered to be beneficial to the state. His successor, Richard Cantillon, an economist par excellence, pointed out that wealth of a state is reflected in the quantity and nature of commodities it produces ‘ necessities, comforts and luxuries. This brief historical excursus is to point out the nature of economic inquiry, which is essentially an analysis of quantities and prices. Examples of quantities are employment, income, exports, investment, money supply, etc. Examples of prices are WPI, interest rates, foreign exchange rate, commodity prices, share prices, etc. That is, an analysis of commodities is an examination of quantity and price at the same time. Therefore, an analysis of commodities subsumes an examination of their production, distribution, exchange and consumption. Production includes the structure and relations of production; distribution pertains to the process and mechanism through which the incomes/surplus from production is divided among its participants; exchange refers to the mode and institution through which commodities are sold; finally, consumption illuminates the channels through which consumption of commodities aid production in the next period and how production in the current period aids current consumption. Thus, classical economists such as Petty, Cantillon, Quesnay, Smith and Ricardo were interested in the theory of production, distribution and exchange of commodities. Their interest was motivated by the need to find out ways of improving the general well-being of their respective societies.

According to Sen, the kind of analysis posited above looks at opulence as the sole indicator of economic development. A shift in economic analysis came about in the 1870s with the emergence of marginal analysis, independently developed by Jevons, Walras and Menger. Terms such as utility, choice, scarcity, margins, etc made inroads into economics. In fact, standard microeconomics texts are nothing but a combination of Walrasian and Marshallian economics. In any case, the maximization of utility began to be seen as the objective of individuals, for attaining economic progress. The internal justice of free markets was imbued to this form of economic analysis. Based on utilitarian principles, the maximization of utility by individuals was seen as a way to improve human well-being and welfare. This conception of development, according to Sen, emphasised the role of utility.

Both the above mentioned analyses, according to Sen, deal with ‘the relation between commodities and people’ (p. 1). The former approach argues for more commodities which leads to more production, which raises the incomes of the people and hence their consumption. The latter analysis points out that ‘more is better’ and hence availability of more commodities imply more utility. The idea of ‘more is better’ is intricately connected with their idea of economics, as a science of choice. Economics, for marginal/neoclassical economists, refers to the allocation of scarce resources amongst alternative uses, as Lionel Robbins points out. For Sen, both these analyses are limited, since they do not address the heterogeneity in the capabilities of different people, which leads to ‘a confounding of the state of a person with the extent of his or her possessions’ (p. 16). It is precisely this argument of Sen developed in his 1985 book which widened the scope of mainstream economics. I write mainstream economics because for classical economists, economics or political economy formed only one way of looking at growth/progress/development. For classical economists, as pointed out earlier, an analysis of production included the state or condition of the producer. The best example of this form of theorising can be found in Marx, the last of the early classical economists. However, with the advent of marginal analysis, the analyses of the structure of production took a backseat. The sphere of exchange came to the forefront and along with it the explanation of the formation of all kinds of prices and quantities through the apparatus of demand & supply.

It is interesting to note that the idea of capabilities has been intrinsic to classical economics. As mentioned earlier, an increase in the production of commodities translates into an increase in income generated. In contrast with neoclassical economics, the economic processes is visualised in a circular way as opposed to a one-way street. One needs to look into the structure of production to find out to whom (which class) this increase in income accrues (theory of distribution). However, the manner in which Sen develops his capabilities approach is rooted in mainstream/neoclassical economics ‘ via the sub-domain of welfare economics (See Benicourt 2002 and Omkarnath 2007). Although, Sen deserves credit for bringing back humanitarian concerns into the discourse of neoclassical economics. Omkarnath further points out that the capabilities approach rooted in the Walrasian tradition is static in nature, for it mainly concentrates on the formation of capabilities. Whereas, classical economics has numerous insights on the relation between capabilities and commodities. This sort of analysis calls for a careful examination of the structure of production, distribution and exchange present in various economies in the classical political economy tradition, which has more scope for including social, cultural and political factors as well as ethical concerns.

References

Benicourt, E (2002), ‘Is Amartya Sen a Post-Autistic Economist”, post-autistic economics review, issue no. 15, September 4, 2002, article 4. http://www.paecon.net/PAEReview/issue15/Benicourt15.htm

Omkarnath, G (2007), ‘The Formation of Capabilities’, Indian Journal of Human Development, Vol. 1, No. 2, pp. 389-399.

Sen, Amartya (1985) [1999], Commodities and Capabilities, Oxford University Press: New Delhi.

Economic Growth in India: Some Considerations

It has been pointed out earlier in this blog that economic growth cannot be understood by merely looking at the rate of growth of GDP; and that an adequate explanation of economic growth needs to incorporate the ‘structure of economic growth’. This post builds on the idea that ‘structure of growth’ is of paramount importance by pointing out certain important aspects of growth, which have been put forward by Pulapre Balakrishnan in his new book (OUP, 2010), Economic Growth in India: History and Prospect.

Balakrishnan’s book questions several aspects of mainstream theorising on growth. Firstly, he emphasises that fact that, there can be no ‘universal model of growth and development’ (p. 29). Though, this point is very obvious to most people, economists still try to develop ‘scientific models’ which are general enough so that the varied growth experiences of different countries can be explained. In particular, the fact that there is no universal model has been shown by the growth experiences of countries like Japan and China. Maybe, unfettered competition and self-interest work in certain countries. In others, a one party system might work. Or, democracy coupled with active state intervention might be the solution for a few. The growth trajectory of a particular economy depends on its history, its people, its land, its politics, its institutions, its culture, its government, its media and so on. For example, it would be foolish to provide disproportionate sops and subsidies to the service sector, when majority of the population depend on agriculture. Whatever be the model of growth and development, it is of utmost importance that the inhabitants or the populace of that country has enough food to eat, proper clothes, access to safe drinking water, a proper house, a job, etc. In other words, the minimum requirements (which is historically, socially and culturally determined) of the inhabitants need to be met.

The recent past has witnessed a lot of debates on the juncture at which the Indian economy structurally transformed. Several years have been identified as break-points depending on the base year adopted, the kind of statistical test chosen, the nature of data, etc. There has been no consensus. Some identify 1991 as the point of change. Others argue that the growth process had begun as early as the late 1970s. Not surprisingly, these results also depend on what the economists think the role of the government is (or the role of the markets). However, Balakrishnan argues that the time period 1900 to 2005 ‘may be seen as setting the minimum agenda for an investigation of growth in the country’ (p. xxvi). This assertion is a noteworthy one, for it can aid in understanding the role of the government as well as the role of the market (understood as the competitive mechanism) in the economic growth process for over 100 years.

An examination of the process of growth from 1900 onwards is certainly a very difficult task. However, the merits of the hard work outweigh the costs. Systematic data collection in India begins from only around 1950s. However, by making use of the scattered accounts written by various travelers, historians, fiction writers, etc and from English archives, port records, and others, one could construct a narrative of the growth process. Unfortunately, most of the growth narratives of the Indian growth stress only on ‘numbers’. An analytical growth narrative, according to Balakrishnan, offers a better mode of capturing growth. It ‘may be seen as a theoretically informed empirical analysis of growth in a country over a specified period.’ (p. 36) However, this mode of analysis can become narrow if the ‘theory’ is only taken from economics. If the theory can be expanded to take in insights from related disciplines like history, political science, sociology and anthropology, the analytical growth narrative can provide a rich and comprehensive account of growth.

Such a growth narrative would also mean a shifting of research from the growth accounting based on production function to a more holistic one, which takes into account the structure of the Indian economy ‘ the divide between rural and urban, between men and women, between agriculture and services, between organised and unorganised, between English-educated and illiterate, between those who have access to computers and those who do not, etc. For, growth accounting based on production function suffers from numerous logical and conceptual issues. This method assumes that the contributions made by labour and capital (means of production) are independent, which in reality and accounting wise, is difficult to accept. This method also gets into trouble when it tries to incorporate rapid technological advancements.

From the preceding discussion, it is clear that there can be no universal model of economic growth and development. And, until a more comprehensive understanding of economic growth is presented by economic theorists, the urgency to find out a break point is of no use. Also, economic growth is a process which takes place over time; hence, a long term perspective is necessary to understand growth and to put forth the determinants of growth. Also, it is time to give up growth accounting based on the aggregate production function. To conclude, it is time that growth narratives are also put forth by other social scientists. And, why is it that discussions on economic growth remain the prerogative of the economists alone’