Governing the markets: Chinese style of Capitalism

The end of Chinese civil war in 1949 heralded the socialistic revolution under the leadership of Mao Zedong. Mao's Cultural Revolution followed by series of dramatic economic failures brought China's membership of the United Nations, and permanent membership of the Security Council. Socialism in China (1949-78) was pursued under very unfavorable conditions. Soon after Mao's death in 1976, Deng Xiaoping quickly seized the power and led the economic reforms of significant magnitude and scripted the end of 'Maoist' path of development in China. This was the beginning of China's 'mixed economy' "with an increasingly open market environment, a system termed by some as "market socialism". "Next 30 years (1978-2008) of capitalist reforms eclipsed the 29 years (1949-78) of struggle for socialism [EPW, December 27, 2008]."

"What China has witnessed over the last 30 years is the development of capitalism in the name of building 'socialism with Chinese characteristics'."

• China's "market reforms" began in agriculture with the process of de-collectivisation. The communes were dismantled and the peasants exposed to market forces under the "household responsibility system".
• Industrial enterprises in the communes were turned into "township and village enterprises", the market-oriented public enterprises under the purview of local governments based in townships and villages.
• Deng Xiaoping's "open door" policy resulted in dramatic increases in the flow of foreign trade and foreign direct investment (FDI), and the development of special economic zones (SEZs).
• After 1984, administered pricing gave way to market pricing, i.e. market alone became the sole force to control prices.
• In 1992, the mass privatization of state-owned enterprises got underway.
• In 2002, Capitalists were allowed to become members of Chinese Communist Party (CCP).

The period 1978-2002 saw 10% economic growth and the share of exports in GDP reached 35% from just 5% in1978. During this period China was "willing to sacrifice anything in the pursuit of profit", it even privatized the healthcare system! the inequality voices raised during the revolutionary period (until Mao's death in 1976) "were de-politicised in the sense that grievances have been channeled towards the legal system". In 2002 Chinese leadership realized that, "the market mechanism is not only an accelerator of economic growth, but also a double-edged sword that can recklessly cut ethical ties between individuals and various social groups and transform people into creatures who pursue maximum self interest[Shaoguang Wang, EPW, December 27, 2008]." Thus, it was perceived that, "market can serve only as a means to improve people's welfare but not as a goal in itself."

The “grasping the large and letting the small go” policy of 1997 brought significant changes in the central policy. These reforms included efforts to corporatize state-owned enterprises (SOEs) and to downsize the state sector [wiki]."(The “grasping the large” indicated that policy-makers should focus on maintaining state control over the largest state-owned enterprises. “Letting the small go” meant that the central government should relinquish control over smaller state-owned enterprises). "The current Chinese leadership, Hu Jintao - Wen Jiabo, upon coming to power in 2002, put forward a new development paradigm calling for building a "Harmonious Society" with more balanced development across regions and sectors. The paradigm, laid out in detail in the 11th Five-Year Plan (2006-2010) stressed sustainable growth, "putting people first", and making development pro-poor and pro-rural [Carl Riskin, EPW, December 27, 2008]."

It is interesting to note here that, when some of the smartest economists around the world were contemplating about the possible global economic crisis, as we are seeing now, China was busy regulating the market forces for it's own sake and to build "Harmonious Society". China's huge foreign exchange reserves and it's ability to arrest capitalistic forces in a balanced manner saved it from current global crisis. More over "China is now being courted to inject funds into distressed US financial institutions" in order to help US to overcome the crisis!

China's revolutionaries like Mao Zedong contemplated socialistic state, but China never became a truly socialistic state (Cultural Revolution and later Deng Xiaoping's rule dismantled socialistic framework in China). China exploited capitalistic forces for higher profits but never became a capitalistic country. China's Communist ideology was never truly Communist as it was originally theorized by Marxists. It seems to me that, "Communist China" represents both socialistic and capitalistic tendencies with "Chinese style and characters"!

This post is based on special articles carried in Economic and Political Weekly, December 27, 2008 issue.

Digital divide is beginning to end?

This article is based on Professor Jeffry Sachs work, The Digital War on Poverty.

Mobile revolution could provide logistics to wage war on poverty, says Professor Jeffry Sachs, Special Adviser to United Nations Secretary-General on the Millennium Development Goals. The Economics professor, at Columbia University, noted that, the digital divide is beginning to end.

The flow of digital information through mobile phones is reaching masses, even in the poorest countries. This digital flow is bringing revolution in economics, politics, and society. Today, mobile phones are becoming pervasive. Mobiles cost so little that almost anyone can afford them. From auto-rickshaw drivers keeping in touch with regular customers to carpenters giving appointments through the mobile phone, even blackmarketeers at cinema halls have now discovered the worth of this innovation.

On the other hand, the rural poor now have access to wireless banking and payments systems. For example, Kenya’s famous M-PESA system allows money transfers through mobile phones. e-Governance initiatives in India are worth noting. Innovations in mobile technology are promising and can cut across the boundaries to change the lives around.

Mobile phones these days have huge potential to change the lives around. "The information carried on the new networks span various areas like public health, medical care, education, banking, commerce, and entertainment, in addition to communications among family and friends”, says Professor Sachs. He also notes that, extreme poverty is almost synonymous with extreme isolation, especially rural isolation. But mobile phones and wireless Internet can end that isolation. Once we end this isolation, economic development can be achieved through innovations in mobile technology. He also hints the end of digital divide through market forces.

If the mobile revolution is used innovatively it can have unprecedented impact on education, banking, commerce, and entertainment, health care and various other areas.

Inflation rate and the blemished calculations

"Inflation is when you pay fifteen dollars for the ten-dollar haircut you used to get for five dollars when you had hair." - Sam Ewing.

Official calculations indicate that inflation is hovering at 8%, the actual effect seems to be far more than what it is. The current method of calculating the inflation rate doesn't give the complete picture of our economy. India's method of calculating the inflation rate has some 'serious flaws' in it. India uses the Wholesale Price Index (WPI) to calculate and then decide the inflation rate in the economy. "WPI does not properly measure the exact price rise an end-consumer will experience because, as the name suggests, it is at the wholesale level." How? Its evident from the dilemma of the UPA government. Oil is costing $130 per barrel, twice what it was a year ago, and India is importing 70% of its oil needs. In spite of dramatic rise in oil prices, government is not willing to raise the oil prices because of its effect on already rising inflation rates. "Under the present system of subsidised domestic pricing for petrol, diesel, kerosene, and the LPG, the country’s public sector oil marketing companies (OMCs) lose more than Rs.500 crore a day. If domestic prices for oil products rise, inflation, which is already high, will increase even more. With the 15th general election due within a year, the political consequences are feared. But if prices are left untouched, the fiscal deficit will increase, again with inflationary consequences"[The Hindu]. Thus government can control (just) the inflation index and say that "rates are within our limits and government need some time", but in reality prices are hitting the sky. Food prices have reached the historic high and common man is in a huge dilema. Common man, to whom inflation affects the most, doesn't even understand what inflation actually means in broader perspective, but he only feels the heat of inflation when he is forced to pay some extra bucks for his daily bread.

Its high time for India to retrospect its (inflation calculation) basics. Inflation index should focus on common man and not on the wholesale prices. India is the only major country that uses a wholesale index to measure inflation. Most countries use the Consumer Price Index (CPI) as a measure of inflation, as this actually measures the increase in price that a consumer will ultimately have to pay for. Some economists believe that government of India urgently needs to change its method of calculating the inflation rate. There are some advantages of using WPI and Consumer Price Index to measure the inflation, but there are large number of drawbacks using these methods.

Here is the quick understanding of the terms [source]:

WPI is the index that is used to measure the change in the average price level of goods traded in wholesale market. In India, a total of 435 commodities data on price level is tracked through WPI which is an indicator of movement in prices of commodities in all trade and transactions. It is also the price index which is available on a weekly basis with the shortest possible time lag only two weeks.

CPI is a statistical time-series measure of a weighted average of prices of a specified set of goods and services purchased by consumers. It is a price index that tracks the prices of a specified basket of consumer goods and services, providing a measure of inflation. CPI is a fixed quantity price index and considered by some a cost of living index. Under CPI, an index is scaled so that it is equal to 100 at a chosen point in time, so that all other values of the index are a percentage relative to this one.

Why no to Wholesale Price Index (WPI)? [rediff]

1. WPI is supposed to measure impact of prices on business. But we use it to measure the impact on consumers. Many commodities not consumed by consumers get calculated in the index. And it does not factor in services which have assumed so much importance in the economy.
2. More than 100 out of the 435 commodities included in the Index have ceased to be important from the consumption point of view. For example, a commodity like coarse grains that go into making of livestock feed. This commodity is insignificant, but continues to be considered while measuring inflation.
3. WPI does not properly measure the exact price rise an end-consumer will experience because, as the name suggests, it is at the wholesale level.
4. The WPI ignores services for which the consumer pays a lot out of his monthly budget.
   

Why no to Consumer Price Index (CPI)? [wiki accessed on 24th May, 2008]

1. Consumers' expenditure abroad is usually excluded; visitors' expenditure within the country may be excluded in principle if not in practice.
2. The rural population may or may not be included.
3. Certain groups such as the very rich or the very poor may be excluded.
4. Saving and investment are always excluded, though the prices paid for financial services provided by financial intermediaries may be included along with insurance.
5. Black market expenditure and expenditure on illegal drugs are often excluded for practical reasons, although the professional ethics of the statistician require objective description free of moral judgments.

For some extent CPI looks better than WPI because,

1. It's a price index that tracks the prices of a specified basket of consumer goods and services, providing a measure of inflation.
2. CPI is a fixed quantity price index and considered by some economists as a cost of living index, which means it can give some idea about cost of living.
   

So, which method should we follow?

I feel that, neither WPI nor CPI can clearly give the picture of inflation in a country. They have more drawbacks than the advantages. However, these methods can be improved to reflect the inflation in an acceptable way. For example,

1. India constituted the last WPI series of commodities in 1993-94; but has not updated it till now and economists argue that the Index has lost relevance and can not be the barometer to calculate inflation. The base year should be changed appropriately, say 2004-05.
2. There are many 'not so important' commodities listed in the WPI calculation. All unimportant commodities can be dropped from the list and some important commodities should be introduced in the list.
3. Currently there are only 435 commodities listed in the WPI Calculation. This number is meagre considering the size of our economy. This number should be increased significantly or better if it's doubled, so that the base for calculation will be much wider.
4. In case of WPI, the index is made available weekly, this has huge impact in the market and might give raise to misleading speculations. So WPI index should be released once in a month or at least for every fortnight.
5. The accuracy in the pricing should be of highest standards so that even slightest variations can be avoided.

You can add more to the list. But one thing is clear, we definitely need reforms in calculating the inflation rate. Inflation doesn't affect the profligate consumer, but it has the huge potential to kill common man. A poor who used to get two meals per day may find it difficult to get even a single meal when inflation is hitting the sky.

Related External Links

1. 10 nations with highest inflation - Zimbabwe's inflation rate has increased 355,000%. In Zimbabwe, A sausage sandwich sells for Zimbabwean $50 million. A 15-kg bag of potatoes cost Zimbabwean $260 million. But then, Zimbabwean $50 million is roughly equal to US$ 1!
2. Hindustan Times - Fuel hike inevitable, inflation crosses 8%, At $135, oil set to put inflation on fire - Looks like oil is the fuel for inflation too!
3. Myths about inflation - rediff.
4. CPI, WPI-based inflation gap widens -Times of India.
   

Theory of "High growth - Low poverty" - A Mirage

"Faster growth rate is essential for faster reduction in poverty. There is no other trick to it", said Dr. Muhammad Yunus, the Nobel laureate. India has been growing fast at the handsome rate of 7-9%[...], but "it continues to have anywhere between one third to one fourth of its population living in subhuman, absolute poverty", more over, the most hurting fact is that the unprecedented inequality due to the high growth rate. To put it in simple terms, rich is getting richer and the poor is getting poorer. Worst part is, poor spend more than the rich on some basic necessities (The Hindu reported that, "Poor spend more than others on cooking fuel"[source]).

As on May 2nd 2008, Inflation touched 42-month high at 7.57% (where the "tolerance limit" is 5.5%, according to RBI). When the economy is struck by inflation, the first person to feel the heat is common man. How? First, the consumption basket of the rich is different. The likes of Anil and Mukesh Ambani do not compete with the poor people as much as people like me do for their consumption basket. Second, super-rich people save more than merely rich people, putting downward pressure on prices[...]. "Since 2000-01 to date, each additional percent growth of GDP has led to an average of some 2.5 percent growth in corporate profits. India's high growth has certainly benefited the corporations more than anyone else"[EPW, April 19, 2008]. More over the number of Indian billionaires rose from nine in 2004 to 40 (yeah, four and zero), more than many richest countries like Japan, France, Italy and even China! [source]. Also, "India is second only to the US in terms of combined total wealth of its corporate billionaires coexisting with the largest number of homeless, ill-fed and illiterates in the world"[EPW, April 19, 2008]. The market friendly policies of government have passed the benefit of high growth to corporate sector and the poor are made to bear the burden of so called GDP (economic) growth.

In his budget speech, Finance Minister said, "Our human and gender development indices are low not because of high growth but because growth is not high enough"[Budget Speech 2007]. Our FM might have achieved high growth rate, but so far, has it changed the way poor live in country side? Has it created more jobs for the needy? Has it at least brought down the number of absolute poor? Certainly not. Here are the facts [source, EPW].

1. "We have state-of-the art corporate run expensive hospitals for the rich, but not enough money to control malaria and tuberculosis which requires INexpensive treatment. So they continue to kill the largest numbers." My own village still do not have the hospital, not even a primary health centre! And of course, we have high growth rate.

2. India is experiencing a jobless growth, i.e. increase in GDP growth with decreasing (or stagnant) employment rate. When our growth rate was just 4%, the employment growth rate was little over 2%. In recent times, though India is experiencing a growth rate of 7-8%, the growth of regular employment has hardly exceeded 1%. This means, most of the growth, some 5-6% of GDP, is the result of higher output per worker, i.e. productivity and growth comes from mechanisation and longer work hours. So, you can imagine the misery of unemployed common man (due to the high growth rate).

3. Regarding government's agricultural policies, the number of suicides in Vidharbha, Andra Pradesh, Karnataka and other states would give you the better picture. To give you the practical example, in most of villages (including mine), the electricity is available only in the odd hours like midnight. So farmers have to wake up in the middle of the night for irrigating their crops. Water and electricity are taken away from farms in the critical agricultural seasons to supply posh urban urban localities and industries. Recent Rs. 60,000 crore loan waiver will do no good for the actual farmers in the long run[earlier notings].

I am not sure why government still believe that "high growth will soon be trickling down to poor." It is evident from the contemporary situation that the high growth is bringing unprecedented inequality and never succeeded in bringing down the absolute poverty. Our FM and PM's theory of "High grwoth-Low poverty" seems to be just a myth. "India is said to be poised to become a global power in 21st century, with the largest number of homeless, under nourished, illiterate children coexisting with billionaires created by this rapid grwoth."

So, what do you think should be done? I believe,

1. The idea of inclusive growth should get out of the papers and come into reality. Some of the programs/policies which create rural employment should be given higher priority and should be implemented in all parts of the country. Thanks to NREGS, at least it is making some difference.

2. Instead of loan waivers, the money should be invested in building rural infrastructure and strengthening the rural credit structure. This would help the agriculture and farmers in long term.

3. The taxpayers' money should be judiciously used to improve the basic amenities like health, education, home. Policy implementation needs to be strengthened. How? Read it here.

4. Policy making should not be focused around vested interests and pressure groups, rather, popular participation in policy making should be given the higher priority.

Mr. Prime Minister, Take your statement back or go home

I am shocked to read this statement by our prime minister today. It basically mean that, as rightly put it by Ravikiran Rao, "Increasing income disparity is just the right approach to controlling inflation." PM wants to curb inflation even at the cost of "equality", one of the fundamental right enshrined in our constitution. PM's idea of cutting salaries at lower level and increasing it at higher level can help him curb the inflation,

First, the consumption basket of the rich is different. The likes of Anil and Mukesh Ambani do not compete with the poor people as much as people like me do for their consumption basket. Second, super-rich people save more than merely rich people, putting downward pressure on prices.[Ravikiran Rao]

You can imagine the fate of common man if our govt implement this irrational idea.

Mr. Prime Minister and his team vociferously speak about Aam Admi (the common man), but in reality it seems like they don't keep Aam Admi's interest in mind while making some crucial decisions like this. "Dr Manmohan Singh has done immense harm to India’s future. The evil that he has done will live long after him. The good was interr’d with P V Narasimha Rao’s bones. Corporate India would do well to ignore the shameless moral poseur. Yes, it’s late in the day for this government. But Dr Singh should go."[Acorn]

Bridging between planning and implementation

"No matter how beautiful the blueprint of the programme is, a defective implementation of it will make nonsense of the whole programme."*

Independent India has (arguably) seen unprecedented innovations in the policy 'formulation' for socio economic development. Some of the policies and programs could taste the sweet of success but (again, arguably) most of them failed to 'change the lives around'. Some policies helped governments to win elections and some brought down the governments. Every government, while launching a new policy/programme, dreamt of 'changing the lives around', but nevertheless, failed to do so. Why? Why did programs like National Extension Service(NES), Food for Work Programme(FWP), Employment Guarantee Scheme(EGS), Women Development Programme(WDP), Jawahar Rozgaar Yojna (JRY, some pandits say it was a success) etc.. have failed to achieve the desired results? When these programs were drafted, most of the experts in the government and academia thought that they would significantly change the socio economic conditions of rural India. Well, nothing much happened. Why?

As a matter of fact, the actual problem in developing countries is not that of policy formulation but of implementation. Deeply institutionalized corruption, inefficiency, maladministration, non-accountability have deep rooted in Indian Democracy. "Little attention is paid to the subject of policy implementation by policy decision makers while it is often taken for granted that once a policy is adopted by government it must be implemented and the desired goals achieved."*

Why policies fail in implementation stage?

1. Problems in identifying the "actual poor".
2. Target beneficiaries are not allowed to contribute to the formulation of the policies that affect their lives.
3. Some programmes get the final shape with catchy slogans (Example Gujrati 'asmita') just before the elections and, most of the time, will be shelved after the elections.
4. Over-ambitious policy goals to attract the mass attention and win the elections, which ultimately end up in haphazard implementation.(Example, recent Rs. 60,000 crores loan waiver policy, which of course has adverse consequences).
5. Apathy towards programmes (which are in implementation stage) commissioned by previous regimes due to ego clash.
6. Lack of awareness about the programmes and lack of publicity.
7. Lack of funding or some times the lapse of govt funds due to the unawareness of funds.
8. Failure of the policy makers to take into consideration the social, political, economic and administrative variables when analysing for policy.*
9. And of course, bribery, corruption, inefficiency, non-accountability and maladministration.

Most of the policy makers and bureaucrats sitting in New Delhi have never seen the ground reality. Some of the rural development programmes have been commissioned without testing their local suitability. Also, green signal was given to some policies without even verifying the prerequisites of policy implementation. For example, in case of small and marginal farmer development programmes in 60s, the policy "should have been preceded by land reforms but that was not done. For instance, well-digging activities had been undertaken without consolidating the land holdings!"

What should be done?

1. Target beneficiaries should be involved at the formulation stage in order for them to have an input in what affects their lives. This will also give them a sense of belonging and, therefore, a sense of commitment.
2. There must be effective communication between the target beneficiaries and the implementors of policy programmes.
3. The culture of discontinuing a policy once there is a change in government should be discouraged because even though government comes and goes, administration is continuous. There should be continuity in policy except if the policy is found not to be useful to the people.
4. Provision should be put in place for adequate monitoring of projects, as poorly monitored projects will only yield undesired results.
5. For any government to be judged to be administratively competent, there must be evidence of bridging the gap between the intention of a policy and the actual achievement of the policy.*

Okay, all said and done, How can we achieve them?

The most conspicuous solution that I can think of is, bridging the gap between policy formulation and policy implementation. Policy makers sitting in capitals do not have sufficient data about the ground realities which are, unfortunately, specific to each region. Data collected from local bodies and surveying agencies (for example, NSSO) are not adequate/satisfactory. I believe this is the most important reason why our policy makers comes up with innovative policies which most often end up in haphazard implementation.

How can we build the gap between policy formulation and implementation?

Importance of academia in technology building is unanimously accepted. Similarly, I believe, academia should be involved not only in policy research and formulation but also in policy implementation. Just as it is mandatory for a medical graduate to serve in rural areas at least for one year after graduation, the students of social sciences or any other related discipline must be made mandatory to do projects/assignments related to socio economic development of rural India. For example, If a student is studying 'rural credit structure' in a local university, he/she can be assigned to collect 'authentic' data related to rural credit system in the area surrounding the university and such 'authentic' data collected must be used by policy makers to make better decisions while formulating the policies. The ideas and innovations generated out of such assignments/projects should be rewarded and showcased in the surrounding area. This will not only create awareness in the region, but also facilitate to understand what is more suitable for that particular area. So, the academia can act as a bridge between policy formulation and implementation by providing the data at a very first step. And yeah, its just another idea, but not the only idea. There may be better ways to do this, you are most welcome to suggest one.


But this kind of ideas will have better impact in long term. Definitely not short term solution like Rs. 60,000 crores loan waiver given by present government, which I think is just a political strategy. The same money should have been used in building the rural infrastructure and more importantly strengthening the rural credit structure which would have benefited farmers in long term. Strengthening the rural credit system can liberate farmers from money lenders' obligations which in turn could improve economical conditions of the farmers. The government should stop this political blackmail during the elections and should focus on "actually" changing the lives around.


*I had collected these data from my previous reading. I don't remember the sources. My apologies for not providing the appropriate links.

The complete 'Fundaa' of Budget

I had been working "hard" for few days to write an article about terminologies, planning, execution, and just everything (can I say all fundaas?) about annual budget of the GOI. I was almost done with my preparation, but Economic Times disappointed me with its fabulous, most authentic, pictorial depiction of the budget fundaas prepared by experts. It's a must read for everyone. Perhaps this is the simplest possible explanation you can ever find about budget. Take a deep breath, sit back, spend some time to read this poster on ET.

BUDGET Why and How

Ready, Set, Grow: Is our growth rate good enough?

Even before Darwin said "Survival of the fittest", "the struggle for existence" was pervasive. This struggle was always won by the one who had more "strength", need not be just physical. Some people are born with "strength", some acquire it, some keep struggling for the rest of their lives. Consequently the same "strength" determines their tag, namely "rich" or "poor". This differentiation can be seen at any point of time in the history, contemporary world is no different. We live in a world where some people feel uncomfortable if they do not eat in a five star hotel, where as some people are not even capable of getting a cheap food on the foot path. That is inequality, the biggest enemy of any economy; to be more specific, of any developing economies.

According to the Human Development Report of The United Nations, richest 20% have 74% of the total income and and the poorest 20% have just 2% of the total income! 1.2 billion people in the world (19%) fall below the poverty line (BPL) i.e. people earning less than 1$ per day. Not only this, huge regional differences in income distribution is the matter of concern. Out of 630 million people in Africa, 420 million people fall below poverty line. On the other hand, out of 1130 million people in OECD countries, there is not even a single citizen earning less than 1$ per day!! (HDR 2005). This is one important reason why most of the economist conclude that "Rich is getting richer and poor is getting poorer".

Considering the Indian scenario, successive governments at the center always claimed that the poverty has reduced by certain percentage. But (according to govt sources) the absolute number remained same. That means over a long period of time, number of people starving in India remains same! Despite decent development measures, poverty in India is widespread. More over, poverty and unemployment go hand in hand. Absolutely no doubt, Indian population is "one of the many reasons" for the twin problems of poverty and unemployment. By the time you finish reading this sentence, seven kids are already born in India! Finance minister says "our human and gender development indices are low not because of high growth but because growth is not high enough". But does the "high growth" reduce the pervasively existing poverty in India? Some economists say Indian economy is already overheating, meaning unsustainable growth and hence high growth rate alone cannot solve the problem of poverty. India also faces the problem of "jobless growth", meaning high unemployment in spite of high growth rate! Thus, high growth rate is "necessary" but not "sufficient" in the Indian context. Proactive measures to ensure socio-economic development, economic policies to curb inequality and the sustainable "good enough" growth can pave the way to solve the twin problems of poverty and unemployment.

The question is, can "India Shine" in fighting against these twin problems despite the odds?