Classical Political Economy or the Surplus Approach

Here our other conversation with LP Rochon, about the chapter on Classical or Surplus approach authors. My co-author, Suranjana Nabar-Bhaduri and I talk about the Real Bills Doctrine, Bullionism, Say's Law the implications for theories of crisis. And about several authors, Smith, Ricardo, Tooke and more.

Not sustainable: India’s trade and current account deficits

New paper by Suranjana Nabar-Bhaduri published by PERI. From the abstract:

India’s trade balance and current account have shown persistent deficits for a major part of its post-independence period. Since the mid-2000s, trade deficits have increased perilously, with a sharp rise in both oil and non-oil imports. This has increased the magnitude of the current account deficit, as net earnings from services and remittances have been insufficient to offset the trade deficits. India has relied on remittances, services exports and capital inflows to finance these deficits. This paper argues that all three sources entail elements of fragility. The recent global economic slowdown, economic recession in Europe, slow economic recovery and low growth forecasts for the US and Europe, and the potential Dutch disease effects of remittances raise questions on whether services exports and remittances can continue to generate sufficient earnings to sustain these deficits, especially if they continue to increase. Relying on remittances and capital inflows for financing ever-rising trade deficits also carry risks of financial fragility, especially with short-term capital inflows becoming more prominent in the Indian economy. Policy efforts aimed at improving the competitiveness of merchandise exports to reduce the magnitude and persistence of these deficits seem to be the need of the hour.

Read rest here.

Is India on the verge of a BOP crisis?

Last week Krugman pointed out quite correctly that India is NOT on the verge of a Balance of Payments (BOP) crisis. Yes the rupee has depreciated sharply and the current account deficit is somewhat larger than what would be the comfort zone. Yet as he noted, foreign denominated debt is very low and, one should add, reserve coverage is reasonably large.

That does not mean that everything is fine. As noted here before (and here by Suranjana Nabar-Bhaduri, and a longer paper here), the development strategy in India, based on service-led growth, does suffer from significant limitations.

But obviously it is preposterous to argue, as the The Economist does, that more liberalization can in the long run, by attracting investors, reduce the limitations of the BOP constraint. In particular, services (think of call centers as the exemplar case) do not lead to higher wages for Indian workers in the long run, but rather to lower service costs for foreign corporations. Besides, even service exports have been unable to promote exports, and India has depended on remittances to finance the persistent trade deficits.

So contrary to what The Economist says India is NOT particularly vulnerable to the financial turbulence in developing countries financial markets. The graph below from The Economist should have made that clear.

Note that almost all developing countries, China being the exception, have had significant depreciations in more recent months. This has more to do with the increasing interest rates on long term bonds in the US after the Fed indicated that the bond buying policy might be close to an end, that with the particular situation of any of these countries.

India’s Growth Model: A Need for Change

By Suranjana Nabar-Bhaduri (Guest Blogger)

India has been cited as an example of an alternative development strategy under which economic growth in the early stages of development is service sector-led rather than manufacturing-led. The international press has heralded its exemplary growth performance, projecting it as one of the emerging market economies that will take over the world economy. As expected in the process of development, the share of the agricultural sector in GDP has decreased over time. However, the share of the manufacturing sector has not shown any significant increase. Rather, the services sector has emerged as the main contributor to India’s economic growth, especially since the 1990s. Evidence suggests that between 1993 to 2007, more than 60 per cent of the increase in India’s GDP was driven by an increase in services GDP. This growing importance of the service sector is partly the result of a meteoric rise in services exports, mainly software and information technology (IT)-enabled services. This performance has been greatly associated with the offshoring process in the developed world, and India’s ability to provide English-speaking workers at relatively lower wages. India’s trade balance and current account have shown persistent deficits, and it has relied on earnings from services exports, remittance inflows, and capital inflows to sustain these deficits.

When one evaluates the ability of this current growth path to generate inclusive and sustainable development, the picture is far from promising. The contribution of the IT-enabled services and the IT industry to employment generation has been miniscule, given the size of the Indian workforce, and the fact that a major part of this workforce remains rural and unskilled. While the total estimated size of the Indian workforce is more than 450 million, total employment in these services is only around 2 million workers. The rest of the employment in the services sector has been in low-productivity self-employment services in the unorganized sector. Furthermore, employment in IT-enabled services and the IT sector falls way short of the annual increment of around 12 million in the Indian workforce. 65 per cent of India’s population of nearly 1.2 billion people is now below the age of 25, leading to the emergence of a young population, a fall in the dependency ratio and a rise in the worker-population ratio. Without concrete policy efforts to accelerate the growth and expansion of agriculture and manufacturing, India cannot tap into the demographic advantage of a relatively young population by providing productive employment for both expanding output, and making the process of growth more inclusive. Equally important, there remain the questions of meeting the needs of food, clothing, investment and industrial products that must constitute a large part of consumption before a sufficiently high standard of living can be attained.

It has been generally argued that India’s trade and current account deficits can be financed and sustained by earnings from services exports, remittances and capital inflows, particularly portfolio investment inflows. Though India is nowhere close to a balance of payments crisis, this argument neglects the constraint imposed by external demand. There is no guarantee that the strong export performance of India’s services can be indefinitely sustained, and generate sufficient foreign exchange earnings to finance rising deficits. The major destinations of India’s IT-enabled services exports, and the main sources of remittances (since the mid-1990s) have been the US and Europe. The slow economic recovery in the US, economic recession in Europe in the backdrop of the Euro crisis and the possibility of tighter immigration laws in Europe have the potential to significantly affect India’s exports of services and remittances. Even the potential to significantly increase receipts from the Middle East, another major source of India’s remittances, has narrowed with the slowing down of the oil boom in these countries in the late 1990s and early 2000s, and the plateauing out of the Indian diaspora in this region with respect to size and economic scope. Moreover, short-term inflows such as portfolio investment appreciate the real effective exchange rate, and further widen trade and current account deficits. The persistence of large trade deficits, can, over time, reduce investor confidence, ultimately resulting in a reversal of inflows and speculative attacks on the domestic currency.

What the Indian economy strongly needs are proactive policy efforts to be directed towards accelerating the growth and expansion of agriculture and industry. This calls for more research and development (R&D) programs through public-private partnerships; credit policies that will make it easier for industrial entrepreneurs to replace outdated or inefficient capital equipment; the establishment of more development financial institutions and subsidies to firms for investing in R&D. Public investment, education policies, vocational training programmes and government procurement policies need to be directed to the increase of labor skills and well paid, high- productivity jobs that reduce the needs for imports, and the dependence on services exports, remittances, and volatile capital flows. There is also a need for more comprehensive employment generation initiatives through infrastructural development and rural development programs. India’s development strategy needs to be one that promotes the growth of the domestic market in order to raise the living standards of its population without hitting the external demand constraint. It should not merely seek to integrate into global markets through a reliance on low-wage services exports, implying the exploitation of its workers, for the benefit of global consumers.

(Originally published in Spanish in Página/12 with information on the author here)

More on the Indian Economy

By Suranjana Nabar-Bhaduri

Recent months have seen public concerns being voiced about the incipient slowdown in the Indian economy. Manufacturing output grew at only 0.1 per cent in April; the Indian rupee has been on a downward spiral since late 2011; exports have fallen; and capital inflows have been inadequate relative to India’s current account deficits. India’s GDP growth has declined to a nine-year low of 6.5 per cent in the financial year 2011-12.

The current situation draws attention to issues surrounding India’s services-led growth development strategy, and its persistent trade and current account deficits. It will hopefully provide a much-needed wake-up call to Indian policy-makers to undertake policies beyond “reforms”. A recent paper emphasizes that India’s services-led growth entails questions of long-run sustainability with respect to its balance of payments (BOP) and has a limited ability to raise the living standards of the population as a whole.

Read the rest here.

Free Trade and Inclusive Development

By Suranjana Nabar-Bhaduri

One of the central elements in the development of any country is the creation of economic activities that transform the production structure by significantly increasing labor productivity, or the amount of production per worker. By helping to absorb more people into quality employment, the creation of such activities helps to generate a more inclusive and sustainable path of long-run economic growth. While economists and policy-makers accept the necessity of this transformation, there are differing views on the policies that developing countries should follow to achieve this transformation.

Many Western countries and institutions, such as the International Monetary Fund (IMF) and the World Bank, argue that minimizing the role of the State in economic activity, and opening up the economy to external markets is vital to achieving this transformation. But other economists (e.g., Prebisch 1959, Cimoli and Correa 2002, and Ocampo 2005) stress that active industrial and employment generation policies are also essential ingredients for this transformation, and that it is necessary to complement liberalization with such policies.

Read the rest here.