With trouble mounting on the three fronts of food, finance and the real economy, nothing, it seems, can avert a world depression.
We live in interesting times: a global food crisis coexists with an unprecedented financial collapse and a recession which may well turn into a depression. The roots of this conjuncture lie in the deregulatory market-oriented, expenditure-deflating policies of the dominant neo-liberal regime, implemented for over a quarter century.
What is the connection between the different crises? The economic dogmas of finance capital, when they shape public policy, produce highly deleterious effects on the real economy. Faced with agricultural recession and unemployment, policymakers in 1929, all deflationists to the core, pressed through with repeated rounds of expenditure reduction to achieve balanced budgets. This pushed the world into the Great Depression. Britain’s ability to maintain external lending by appropriating India’s exchange earnings collapsed as the earnings declined, marking the demise of the Gold Standard. Keynes’ argument that the theory underlying deflationism was wrong and that expansionary policies should be followed went unheeded until much damage had been done.
The ascendancy of finance capital from the 1970s has seen exactly the same misguided expenditure-deflating policies, with the same incorrect theory being peddled by the International Monetary Fund (IMF) and the World Bank, that public investment ‘crowds out’ private investment — with much less of an excuse for such intellectual infantilism seven decades after the General Theory, than there was in 1929. States have shown an insensate obsession with inflation-targeting regardless of unemployment and have undertaken repeated IMF-guided cuts in public spending, thus lowering the level of material economic activity.
The destructive impact was strengthened by additional measures, to practise monetary austerity, reduce the ratio of fiscal deficit to GDP, put caps on wages, retrench labour from enterprises, devalue currencies, and open up developing economies to free trade and capital flows. The GDP growth rate of the developing economies halved between the 1970s and the 1990s. India saw cutbacks in investment, public spending and credit to small producers after 1991: the textile industry was plunged in crisis, and foodgrains output growth rate fell from the pre-reform 2.8 per cent to 1.7 per cent in the 1990s. In the last eight years it has gone below 1 per cent even after factoring in last year’s record harvest — per capita grain output is declining faster than ever before.
Market-oriented policies have been attacking small producers worldwide, leading to shortages of necessities such as food and textiles, while promoting consumer credit for white goods and durables as the service sector boomed. Global annual grain output per head fell from 335 kg to 310 kg between the periods of 1980-85 and 2000-05. Textile spending per head has been falling from already low levels in the developing world, which has seen the worst form of rising income inequality — an absolute decline in the real income of the masses. Despite long-term food output decline, the inflation rate was at a historic low until recently. In India, the Consumer Price Index of Agricultural Labour rose only 11 per cent between 2000 and 2005, precisely when per head grain output was falling and large grain exports took place.
The answer lies in the sharp compression of aggregate demand. Since the very same expenditure-deflating policies which reduce output growth also reduce aggregate demand through rising unemployment and a severe squeeze on mass incomes, the result was demand adjustment to material shortages. Inflation did not occur because mass purchasing power was falling faster than output was falling, and the punishment was being absorbed by millions of peasants and labourers in the global South who were more hungry and had less to wear over time. In sub-Saharan Africa, declining per head income has so reduced foodgrain demand — below 135 kg per head annually with an average calorie intake of 1,800 or less a day — that populations can tip over into famine any moment with the current food price rise.
In India and China, too, despite 6 to 8 per cent annual rise in per head income, grain demand per head taking both direct use as food and indirect use as feed has fallen drastically — in India from 178 kg net in the early 1990s to only 157 kg by the triennium ending 2004-5. The food part of cereal demand in China fell from 204 kg to 166 kg comparing three-year averages centred on 1992 and 2002, while the food plus feed demand fell from 263 to 230 kg. China has seen the diversion of grain-growing land to cotton and its abnormally high savings rate reflects the squeeze on rural mass incomes, which it has been trying to reverse in the last two years.
Both the neo-conservative George Bush and the progressive Paul Krugman are thus incorrect in saying that increased total demand for grain from the new-rich in China and India accounts for the current food crisis. On the contrary, per head cereal demand has fallen in both countries drastically, while the world’s highest grain consumer is the U.S. with nearly 900 kg per head. No doubt, with unchanged income distribution demand would have risen sharply. A demand projection to 2020 by Bhalla, Hazell and Kerr, assuming 1993 income distribution, gives us a total net cereal demand by 2007 in India of 219 million metric tonnes. But actual demand by 2005 was a massive 62 tonnes lower owing to loss of mass purchasing power.
The trigger that has made the global grain shortage explicit through sharp inflation from 2006 is the subsidised diversion of grain to ethanol production in the countries of the North. The U.S. will quadruple its maize conversion to ethanol to 110 tonnes by 2009 compared to 2003. Global grain surpluses have disappeared. For years the developing countries were urged to divert their land to produce that would fill supermarket shelves in the advanced countries in exchange for foodgrain imports. Many countries from the Philippines to Botswana were persuaded by the IMF to dismantle their food procurement and distribution systems. Nearly 40 of these grain import-dependent countries have seen food riots. The United Progressive Alliance government, too, was doing its best to run down procurement and undermine the Food Corporation of India (FCI), until the food price rise forced it to draw back from the brink last year.
The counterpart of increasing hunger and impoverishment in the global South is the repeated credit-financed consumption booms in the North, created by the artificial stimulus of frenzied speculative financial activity. Grossly tumescent finance has been given freedom to licentiousness by the same central banks in Europe and by the Federal Reserve in the U.S. They are now scrambling to avert a slide to the abyss once the public has lost confidence in financial institutions. ‘Injecting liquidity’ in itself is no solution to the impending depression: they need to reverse deflationary policies. But the IMF, while lending to Iceland, has again laid down tight money and expenditure cuts as conditions and will do the same with Pakistan, Hungary and Ukraine.
With global recession worsening as India’s exports reduce, unemployment is rising further in all economic sectors. Hot money outflow has already led to rupee depreciation, and rising domestic fertilizer and fuel prices are cancelling out any benefit from price rise for peasants. Millions of wage and small salary earners are reeling under food price inflation.
The solution to our problems has to be a multi-pronged one. First, we need an urgent Grow-More-Food campaign because our grain output per head has fallen drastically. Second, we need large-scale public investment in forms which will add to the supply of basic necessities. The Prime Minister is off the mark in talking of infrastructure investment at present, by which he means wide roads and big bridges. This will have the same effect as producing guns, adding to the financing burden while not adding to the supply of necessities whose prices are skyrocketing. Third, the FCI and the commodity boards need to go in for effective market intervention to stabilise prices both for the producer and the consumer. Fourth, genuine implementation of the National Rural Employment Guarantee Programme (NREGP) with at least a Rs.25,000-crore annual allocation and works aimed at assured irrigation will help revive mass demand for food and textiles, and substitute a growing internal market for a faltering external one.
In recessionary times the capitalist world has always needed a leading country which either lends abroad to keep up demand, or keeps its market fully open to the inflow of distress goods. Far from lending, the U.S. is the world’s largest debtor, and with its steel tariff and numerous non-tariff barriers it is protectionist. The likely next President, under the pressure of rising job losses, has promised to keep jobs at home. The crisis-ridden erstwhile world capitalist leader is not capable of leading, and there is no new leader to take on its functions: nothing, it seems, can avert a world depression. Nor can the burden of adjustment continually be passed on to the global South whose masses have been pushed down too far already to go down further without famine and turmoil.