Friday, October 3, 2008

An Haunted History is going 2 Repeat

They have waited until something has cracked and then at the last moment have sought to prevent total collapse." Those words, which could so easily have come from one of the congressional representatives who this week voted down the proposed federal bail-out of the American banking industry, were spoken by Franklin D Roosevelt in 1932.
A precipitous collapse in stock market prices, millions defaulting on mortgage repayments, an unpopular president blamed for neglecting the plight of ordinary Americans. As the current economic crisis in the US unfolds, many people are asking whether this is history repeating itself. Are we witnessing a rerun of the stock market crash and subsequent Great Depression? What lessons can be, or should have been, learned from that earlier national emergency?
"The past," once observed Pulitzer prizewinning author Robert Penn Warren, "is always a rebuke to the present." And there are certainly clear parallels between the present crisis and events of eight decades ago. In both cases, the economic collapse came after a period of political dominance by the Republican party. The 1920s saw three successive Republican politicians elected to the White House: Warren G Harding, Calvin Coolidge and Herbert Hoover. These administrations shared a fervent commitment to laissez faire capitalism, encouraging growth through tax cuts, low interest rates and minimum business regulation. Coolidge encapsulated Republican faith in the free market economy in the aphoristic observation: "The business of America is business."
Similarly, the last three decades have been a period of renewed Republican party hegemony, interrupted only by the two terms that Bill Clinton served as president. Successive administrations have championed the growth of commerce unfettered by government regulation. Even Clinton, a political centrist who abandoned many of the progressive legacies of Democratic presidents such as Roosevelt and Lyndon B Johnson, did little to control the excesses of Wall Street.
In the 1920s, as now, political leaders created the conditions that precipitated economic crisis. In both instances, a lack of effective regulatory oversight fostered a climate of reckless speculation on the stock market. And just like the federal government in 1929, the current administration failed to see the emergency coming.
"I have no fears for the future of our country," boasted Hoover at his inaugural address in March 1929. "It is bright with hope. We shall soon be in sight of the day when, God willing, poverty will be banished from this nation." Seven months later, the stock market crash precipitated an economic crisis unprecedented in the nation's history.
In a speech last November, George Bush emphasised the continuing growth of the American economy. "Sure, there's some challenges facing us," he complacently suggested, "but the underpinnings of our economy are strong." Even as warnings that the country was heading towards disaster became louder, the president emphasised his administration was "on top of the situation". Given his earlier optimism, the recent televised address in which Bush predicted that the US faces a "long and painful recession" was a painful admission of his lack of foresight.
The American economy still has a long way to fall before it reaches the depths of the Great Depression, of course. The US is technically still not even in a recession, and only just over 6% of American workers are out of a job. The economic situation is nonetheless hurting many ordinary Americans who are losing their jobs, finding themselves with little disposable income and defaulting on mortgage loans. It is also important to recall that Americans did not experience the worst excesses of the Great Depression until some years after the stock market crash. We may not yet have felt the full force of the current crisis.
The suffering that followed the crash of 1929 was appalling. From 1929 to 1933, farm income halved, industrial production stood at 40% of capacity and unemployment rose to one in four Americans. Hungry men and women lined the streets for their next meal from the local soup kitchen, homeless people huddled in hastily erected shantytowns on the outskirts of many cities, and thousands hitched rides on railroad cars in search of a job.
The collapse of the agricultural economy drove farmers from the land. Dust storms and evictions displaced more than a million rural labourers, whose plight John Steinbeck portrayed in The Grapes of Wrath. Industrial and manufacturing workers fared no better. The coal and textile industries were first to suffer, but were soon followed by other sectors of the economy. Homeless families in Arkansas huddled in caves; others in California found refuge in sewers. "We saw want and despair walking the streets," observed a Chicago social worker, "and our friends, sensible, thrifty families, reduced to poverty." The American birth rate fell to its lowest level while the suicide rate reached its highest.
The anguish of the American people is captured in the thousands of letters they wrote to the White House in search of help. One woman from New York State sent a letter to Eleanor Roosevelt in which she asked for a loan to buy clothes for her new baby. "Please, Mrs Roosevelt," she begged, "I do not want charity, only a chance from someone who will trust me until we can get enough money to repay the amount spent for the things we need." As proof of her sincerity, she enclosed in the envelope two of her dearest possessions, a ring worn by her mother and another given to her as a gift by her husband.
For African Americans things were even bleaker. The collapse of the cotton market led to the displacement of thousands of black sharecroppers in the southern states. Many migrated to urban areas but racial discrimination restricted their access to jobs and government relief programmes.
Once again, minorities, still overrepresented among America's poor, have borne the brunt of the economic burden that now afflicts Americans. Sub-prime mortgage lenders aggressively targeted minorities who otherwise were unable to afford their own homes. According to the Harvard University's Joint Centre for Housing Studies, 55% of African Americans and 45% of Latinos who became homeowners in 2005 did so through sub-prime mortgages, compared with only 17% of whites.
The sub-prime mortgage crisis has hit minorities hard, with many suffering foreclosures. Last year, the National Association for the Advancement of Colored People filed a lawsuit against sub-prime mortgage lenders it accuses of "institutionalised racism" because of their predatory behaviour. Janet Murguia, president of the National Council of La Raza, a Latino civil rights organisation, similarly affirms that high-interest loans to poorer minorities are "eroding the hard-earned wealth our communities spent decades fighting for".
In 1929, there were few safety nets to catch people whose livelihoods collapsed. With his New Deal, Roosevelt revolutionised the role of government as a provider for the dispossessed through the introduction of such measures as the minimum wage, unemployment relief and aid to dependent children. Despite swingeing cuts to the provision of welfare in recent times, there are now far greater protections in place for ordinary people than in the 1930s.
Perhaps as a result, there are also no indications that the current economic crisis is tearing at the social fabric of the US in the same way as the Great Depression. Demonstrations by unemployed and homeless people shook many cities during the 1930s. Fears grew that a fascist demagogue could use grassroots unrest as a means to seize power in Washington, a scenario enacted in Sinclair Lewis' satirical novel It Can't Happen Here. While the US is not about to become a fascist dictatorship, there is a possibility of more serious social unrest should the crisis deepen further.
The stakes are high. Bush's handling of the economy may prove decisive to this year's presidential election, as was true in 1932. The dour President Hoover appeared to many Americans uncaring and unable to appreciate the scale of the problem that beset the country.
In 1930, Hoover introduced higher trade tariffs to protect American manufacturers from foreign competition. The Smoot-Hawley Act led to a protectionist war between the US and other countries. American exports and imports fell sharply, crippling businesses, which laid off workers in ever higher numbers. The president became so unpopular that the shantytowns erected by homeless people became known as "Hoovervilles" and an empty pocket turned inside out a "Hoover flag".
The public perception that Hoover had failed either to avert or remedy the economic crisis led to his resounding defeat to Democratic challenger Franklin Roosevelt in the presidential election of 1932. Roosevelt won a landslide victory with 22.8m votes to Hoover's 15.7m. How the US government acts now is very important, but while Bush is unlikely to repeat Hoover's mistakes, so far he has lacked the vision of Roosevelt.
One of the most striking contrasts between the past and present economic crises concerns presidential rhetoric. "The only thing we have to fear," proclaimed Roosevelt in his inaugural address of January 1932, "is fear itself." The Great Depression had a profound psychological as well as material impact on Americans, shattering their individual and collective self-confidence. In times of unprecedented trouble, Roosevelt sought to restore public optimism through his regular radio broadcasts, the "fireside chats" in which he presented himself as not only a politician but a personal friend to ordinary Americans.
In sharp contrast, the address that Bush delivered to rally support for the bail-out plan exploited public fears. "Our entire economy is in danger," the president warned. "Without immediate action by Congress, America could slip into a financial panic and a distressing scenario would unfold." If the strategy was to scare Congress into endorsing the plan with little or no amendments, it clearly failed. Although the Senate approval of an amended plan places members of the House of Representatives under increasing pressure to support the administration, the outcome of a further vote is still not certain.
With his poll rating already disastrously low because of his mishandling of the Iraq war, Bush has suffered a further blow to his credibility as a result of the economic collapse. According to a poll conducted by the American Research Group last month, only 19% of Americans approve of how the president is handling the economy, while 76% disapprove.
Unlike Hoover, Bush is not seeking re-election. The crisis in the financial market has nonetheless similarly undermined popular trust in the Republicans while providing political capital for the Democrats. John McCain, who concedes his limited expertise in economic matters, has attempted to reinvent himself as a populist champion against Wall Street. His efforts to dissociate himself from the pro-business policies of the Bush administration appear, however, to be in vain.
With the economy now the central issue in the election, Americans are increasingly placing their faith in Barack Obama to deliver the country from its current crisis. In what has been a tightly contested race, that advantage could prove decisive when Americans go to the polls on November 4.
A fundamental weakness of the American economy in the 1920s was the unequal distribution of wealth. Although the average wage of workers increased during that decade, the economic elite benefited far more from cuts in personal and corporate income taxes. Rather than borrow more, ordinary Americans cut back on consumer purchases, creating chronic deflation. The situation is strikingly similar today. Millions of debt-ridden Americans cannot afford to repay mortgages, triggering a collapse in the housing market.
During the presidential campaign of 1932, Roosevelt gave a speech in which he spoke of the failure of the federal government to address the needs of the Forgotten Man. Washington, he asserted, had "sought temporary relief from the top down rather than permanent relief from the bottom up". This is precisely the criticism that many Americans are now making about the plan to bail out the banking industry.
There is one further lesson from history that the federal government will need to consider should economic conditions deteriorate further. Although much of the blame for the current crisis is attributable to the recklessness of Wall Street, bailing out the economic elites will not address the problems that afflict Main Street. The New Deal programmes of the Roosevelt administration represented an unprecedented expansion of government intervention in the economy. Yet they failed to work. Although Washington provided relief and opportunities to millions of Americans, the country remained in a perilous state. On the eve of US intervention in the second world war, nine million Americans were still out of work.
Perhaps the most frightening lesson of history is that the mobilisation for war and the factory-employment opportunities it created accomplished what government economic reform programmes could not. By contrast, the current military conflict in which the US is embroiled only compounds its economic problems. The expenditure of billions of dollars on the war on terror drains resources that could be spent on the domestic economy, imposing a tax burden on ordinary people that restricts their disposable income. Nothing less than a radical restructuring of the economy, from the grassroots up, will fix today's mess.

Thursday, October 2, 2008

SEZ and Rural Development.........

We have two kinds of rural development: One, the traditional variety; it targets the very poor. Two, the latest fad, the special economic zone (SEZ); it takes very rich investors to poor villages. The former has failed again and again but its sponsors will not concede defeat. The latter is evoking bitter conflicts. Even so, the powers that be will not concede that the scheme is flawed.It must be admitted that both schemes have their uses. Unfortunately, their flaws outweigh their good points. That is why, in the previous article, I argued “Existing rural development schemes are so badly riddled with corruption and inefficiency that they will not remedy the ills of even our well-off villages, let alone those of Naxal infested ones.”Vocal and socially powerful groups have emerged in recent years that strongly oppose development of almost every type. Often, the government is no match for these activists. The activists succeed and governments lose because of the different natures of politics and development.
Politics is about “Who?” and development is about “What?” Politics concentrates on the miseries and travails of the poor; development concentrates on the hopes and aspirations of the poor. The two, politics and development, should complement each other but in practice they are often in conflict.For activists, modern development (implying increasing incomes) is a threat to existing order. In 1974, Easterlin demonstrated that “higher income was not systematically accompanied by greater happiness.” He found that people in Japan became no happier after a fivefold jump in incomes.A recent study by Justin Wolfers at the Wharton School modifies this finding: It reports that growing incomes do increase happiness but mainly in poor countries. That is not unreasonable: For the poor, even a small improvement in income can lead to big jumps in welfare; for the rich, even a big jump in income fetches little extra of real value. Therefore, development is more important for India than for the US or Japan.
Development need not necessarily be expensive. How little an increase in investment is enough to make a large difference was brought out in a recent seminar in Ahmedabad. Dr Amarjit Singh, a medical doctor-turned IAS officer of Gujarat, explained that in his State, the total number of gynaecologists in all of its health centres in 25,000 villages is seven — that is right, the number seven that you can count on your fingers.He described how he roped in over 800 private partnerships in a Public-Private Partnership. Last year, the scheme, Chiranjeevi, supported private doctors to attend 1,31,329 child births of poor (mainly tribal) mothers. Dr Singh claimed that, as a result, both maternal mortality and infant mortality came down by over 90 per cent, producing results better than even Sri Lanka. In this scheme, as against the usual expenditure of about Rs 4,000 per delivery, poor families spent Rs 727 on an average — not for medical treatment but on medicines and transport. The scheme has been implemented mainly in four of the most backward districts of the State and cost Rs 11 crore last year. If extended to the whole country, it will cost no more than Rs 1,000 crore.
In a similar low-cost effort, the CAP Foundation in Hyderabad is providing accelerated training in lifestyle skills (spoken English, computer literacy and work skill) to school dropouts. It has a success rate of better than 90 per cent in placing its students in skilled jobs.
The cost is between Rs 3,500 and Rs 6,000 per candidate. If this technique is extended to train school dropouts who seek non-farm employment, the cost for the entire country will be no more than Rs 1,200-2,000 crore a year.
Instead of treating Naxals as incurable criminals, we should concede their reasonable demands. Of these, two stand out: healthcare and life skills. That is where the Chiranjeevi Scheme of Gujarat and the CAP Foundation programme in Hyderabad can be useful.
Both have done well because they are paid by results instead of for inputs, the way state schemes do. Admittedly, Gujarat has a culture of both entrepreneurship and social service. Hyderabad too is advantageously situated. Such favourable conditions are not easy to find elsewhere. Hence, these two examples may not be replicable everywhere. Yet, their success shows that powerful programmes can be devised at very low cost through Public-Private Partnership. In contrast, state-managed schemes or the latest SEZs are expensive. They do not make people happy; they spawn Naxals.
In recent years, India has been growing economically faster than most other countries. Yet, its Human Development Index has not improved because its social development is lagging behind. Till the 1990s, we invested in social development at the expense of economic growth. Nowadays, we concentrate on economic growth at the expense of social development. Either way, it has been unbalanced development. The Centre has sanctioned over 600 SEZs. At the same time, the Government of Goa has cancelled all of its own SEZs. The Centre has argued that the State government has no powers to do so. That is legally correct but politically untenable: In ignoring local opposition to SEZs, the Centre is taking the State down a slippery, violent path.
Businessmen too should rethink; stop thinking of quick bucks and start thinking of peaceful, long lasting development. Suppose they offer to adopt one village (population 1,500-2,000) for each acre of land they acquire. That is, fund one class room and one trainer in life skills as well as one hospital bed plus one doctor/nurse per acre of SEZ. That will cost them a fraction of what they are paying out now if they follow the CAP Foundation, Chiranjeevi example. Will not that social development inspire confidence among local people and halt their violent opposition to SEZs?
Actually,introducing one teacher or one doctor in any village does not work in practice. Social development will be viable only when a number of teachers or medical specialists are concentrated in one place. Hence, it is necessary to provide public transport to help villagers reach relatively large, well-located training schools and hospitals. Then, each SEZ should also provide one bus per acre, not a big one, a small one will do.In brief, I propose that promoters of SEZs donate one class room, one hospital bed and one small bus for each acre of land they acquire, that they also support one trainer of life skills, one doctor or nurse and one bus driver. The government should chip in by subsidising social service providers by results: for each maternal/infant death prevented, for each job filled, for each km travelled by the buses.
SEZ developers have three options: One, lean on government patronage. Two, buy off rich landlords ignoring their poor neighbours. Three, include all neighbours by contributing to local social development. If developers are not penny wise and pound foolish, they will choose option three: Invest Rs 30 lakh per acre in social development and contribute a fraction of that amount annually. The expense will be worth the trouble: Human capital will accumulate; Naxalism will stop spreading. Above all, that will fetch goodwill, invaluable goodwill.