Recent news coming from India should be of interest to Nepal. Prime Minister Dr Man Mohan Singh has launched a series of reform initiatives to bolster the economy. The reshuffle in the Indian cabinet is widely interpreted as an attempt to create a relatively younger team committed to execute the reform agenda aimed at giving traction to the economy. This act follows the announcement of some economic decisions in the face of opposition even from a coalition partner—TMC led by Mamata Banerji—which left the government in protest.
The reform measures included raising foreign investment cap in insurance, provident fund and aviation businesses, opening multi-brand retail sector to foreign multinational corporations and raising petroleum prices. Concerned at the rising phenomenon of twin deficit—fiscal and current accounts—the Finance minister announced a fiscal consolidation plan to reduce the fiscal deficit to 3 percent of GDP, almost half the present level. The policy, if implemented, will significantly, if not wholly, eliminate India’s ballooning subsidy on food, fertilizer and fuel, and result in disinvestment of some public undertakings.
These are bold and significant decisions for a government facing general election in the near future. Risk of antagonizing the retail traders representing significant voting bloc cannot be dismissed. The general public is traditionally fed in populist rhetoric against foreign economic domination and exploitation by multinational corporations. To counteract the opposition, the ruling party has organized rallies in support of its recent moves. For the government, it was a question of protecting the economic gains made over the decades following the liberalization policy starting 1991, and reviving the economy which was losing momentum after achieving around 8 percent growth for about a decade. Reduced FDI inflow, increasing current account and fiscal deficits, and currency depreciation were affecting growth prospects and credit ranking in the global financial market with prospect of immediate downgrade. The investment community was clamoring for more reforms.
Recall the earlier days, when Indian National Congress led by Jawaharlal Nehru and subsequently by Indira Gandhi in its hey days followed a policy regime which gave limited scope to private sector and FDI in the name of socialism and poverty removal. Insurance business, aviation and major banks were nationalized and transnational corporations were looked at with suspicion. The MRTP Act was passed to effectively bar industrial houses from expanding their business. The policy, instead of reducing povery, accentuated it. The policy ended, in Gurucharan Das’s words, in combining the worst sides of both systems—“controls” of socialism and “monopolies and lobbies” of capitalism. This realization led to policy reversal in 1991; when inward-oriented public-sector-led policy started making way for outward-oriented and liberal paradigm.
This pushed the Indian economy to an era of high growth, making it one of the emerging economic powers globally. Privatization, deregulation and disinvestment, rather than nationalization, control and licensing, became the buzz words. The socialist goal of the Indian National Congress did not change; the mean to achieve it did. The state-led development approach had failed to produce more than the historic the 3.5 percent Hindu growth rate (as economist Raj Krishna called it), which failed to generate investment surplus required to reduce poverty and backwardness. On the other hand, countries which had pursued market reforms and open door policy to private investment achieved higher growth, generated surplus, and invested more in education, health, rural development, roads and other welfare programs and wiped out poverty.
Capitalism has a proven record for growth and surplus creation. Capitalism today is not what it used to be in the early days. Modern capitalism is not free from progressive taxes and other regulations and controls to ensure fair play, protect environment and labor rights, and minimize social costs. In today’s world when even communist countries have chosen the capitalist path, the question is not whether capitalism is necessary. The question is how to further humanize it.
Karl Marx, the father of scientific socialism, considered capitalist development the prerequisite for socialist revolution. He considered the inevitability of class struggle for proletarian revolution, in view of the exploitative nature of capitalism. Marx did not foresee the possibility of capitalism reforming itself. But contrary to his prediction, capitalism refused to die in Europe because of its capacity for reformation. In a democracy with rule of law, free press and adult suffrage, capitalism was forced to shed its original exploitative character. Social democrats believe in achieving socialist objectives through legislative process and democratic means. Democracy’s propensity for redistribution and regulations together with trade union movement have resulted in social insurance, health care and other welfare measures to address the shortcomings of capitalism. European experience shows capitalism wedded to social justice can ensure both growth and social justice.
One stark example of the evolution and transformation in the western socialist thinking is the British Labor Party in recent history. Tony Blair amended article four of the Labor Party constitution to abandon its attachment to nationalization and embrace market economics. The genesis of revisionist thinking goes back to the seminal work by the Labor leader and thinker Anthony Crosland in 1956, The Future of Socialism, which argued that the traditional socialist thinking founded on nationalization and public ownership, was mistaken, since these are simply one possible means to achieve end. He argued that post-war capitalism has fundamentally changed and it was possible to pursue socialist goal under it. The later-day transformation of the Party into a New Labor under the leadership of Tony Blair and Gordon Brown was heavily influenced by Crosland’s work. Anthony Giddens’ Third Way pushed this revisionist line even further. The Third Way was an attempt to create a synthesis between capitalism and socialism, with emphasis on social justice, equality of opportunity and the use of market mechanism to deliver efficiency and social justice.
BEHIND WESTERN SUCCESS
The acclaimed historian Niall Ferguson, backed by extensive narrative of the last 600 years, writes in his brilliant book Civilization: West and the Rest, that the Western countries, prior to the threshold year 1500, were much behind the civilization of the East. Since then, particularly after renaissance and reformation, the Western civilization developed values based on individual freedom, private property, and rule of law and free trade, which led to its ascendancy over much superior regimes of the East.
These virtues included science, democracy, competition, work ethics, consumerism and medicine, which the East lacked. The dynamic effect of competition-led expansion of trade and commerce across continents, technological improvement enhanced productivity and income in Europe, whereas political monopoly and inward oriented policy in the East was retarding growth. Reformation and the rise of Protestant work ethics taught the West not just to work, but also to accumulate capital. The new Protestant work ethic became: people ‘live to work’ instead of ‘work to live’. This work ethics provided the foundation of modern capitalism. Ferguson warns that the Western domination will end, when they lose their monopoly and fall behind in these attributes.
This is the first of a two-part article, the second of which will be published on Nov 24 (Saturday). It will lay out the implication of the ideas discussed above in Nepal’s context.