Why Bhagwati and Co are wrong on reforms

Illustration: Sudeep Chaudhuri
Illustration: Sudeep Chaudhuri

Some years back, just before the WTO Ministerial Conference was held at Hong Kong in 2005, economist Jagdish Bhagwati commented in the Far Eastern Economic Review (and quoted by the Economist, 23 March 2005): “Agricultural subsidies are certainly undesirable. But the claim that removing them will help the poorest countries is dangerous nonsense and a pernicious fallacy.”

I thought this was outrageous. How could Bhagwati make an economic prescription that would keep the poor countries perpetually standing with a begging bowl? Doesn’t he know that importing food is like importing unemployment, destroying livelihoods? Cheap and heavily subsidised food makes agriculture in developing countries uneconomical, forcing migration to cities.

It was almost at the same time that I did an exhaustive study on the first 10 years of the wto Agreement on Agriculture, which was also circulated widely at the Hong Kong wto Ministerial Conference. The conclusion was crystal clear. The rich industrialised countries had managed to protect their monumental agricultural subsidies. As a result, of the 149-odd developing countries clubbed in the category of Third World, 105 had become food importing.

Nearly 70 percent of all developing countries are now net food importing. The two major gainers were the two giants on either side of the Atlantic — the United States and the European Union. This was the outcome of the policies perpetuated first through Structural Adjustment Programme and carried through more aggressively under the wto. All aimed at further dividing the world into food factories of the rich industrialised countries; and the other hungry half, always prostrating with a begging bowl in hand. What Bhagwati perceived as “dangerous nonsense” was, and still remains, the biggest threat to mankind.

At stake is not only food security of the importing countries, but also national sovereignty. That is why India’s first Prime Minister Jawaharlal Nehru, while addressing the nation on 15 August 1955, had said: “It is very humiliating for any country to import food. So everything else can wait, but not agriculture.”

Food is the biggest weapon, and those who control food will control the global politics, as well as the economy. That is why the US and the EU have refused to open up their own borders to agricultural imports from the developing countries, but lose no opportunity to arm-twist and force the developing countries to fall in line by providing more market access.

The US has even questioned India’s Food Security Bill, and is threatening to take India to the dispute panel. In turn it wants India to ratify the agreement on trade facilitation, which will ensure developing countries to lay appropriate infrastructure and bring in policy changes that help trading consignments of multinational companies to get a quick entry — nothing more than that.

That is why I have always called wto the Wrong Trade Organisation.

Take the case of cotton subsidies. Before the Cancun wto Ministerial Conference in 2003, presidents of four western African countries wrote a signed article in the New York Times saying how US cotton subsidies killed their farmers. In 2004-05, the US provided its 20,000 cotton farmers with $4.7 billion in subsidies to produce a crop of $3.9 billion. Such massive subsidisation insulated US cotton farmers from the volatilities of the global markets, resulting in a drastic fall in international prices — as a result of which cotton farmers in western Africa and India were priced out.

Brazil later took the US to the dispute panel on cotton subsidies. The US lost, and to ensure that Brazil didn’t impose countervailing duties, started providing Brazilian farmers with $147 million in subsidies. This is the only case I know where a major economic power is actually bribing another nation.

If US can protect its farmers, why can’t India do the same? Why are we ashamed to acknowledge that India can’t sacrifice millions of its farmers at the altar of trade and development?

No one is against trade. But trade has to happen on equal terms and has to be judicious. If it is not, I expect the distinguished economists to stand up and be counted. But it never happened. Both Bhagwati and Arvind Panagariya actually supported the flawed trading regime.

Soon after Independence, public investment in industry, agriculture, infrastructure, defence and administration left little revenues for education and health. So unless you followed the growth-friendly Track-I policies as the writers suggest, there wouldn’t have been a rapid expansion in incomes and revenues.

Recall the time when Lal Bahadur Shastri was the prime minister. That was also the period when India was a major recipient of food aid under the US government’s overseas food assistance programme. India was living under what is called a ‘ship-to-mouth’ existence. Food used to come directly from the foodcarrying ships into the hungry mouths. At that time, an American journalist had asked the prime minister as to what he thought of the war in Vietnam. Shastri replied: “It is an act of aggression”. This small sentence had annoyed the then US President Lyndon Johnson who ordered food aid to be stopped under what is called ‘stop-go’ policy.

Shastri had asked the nation to fast for a day to ensure that food goes to those who need it most. Subsequently, the Green Revolution that followed was the result of a combination of right kind of policies, technology and approaches. The rest is history. Had India followed Bhagwati’s prescription instead, we would have continued living in misery.

But 45 years after the Green Revolution was ushered in by Indira Gandhi, Finance Minister P Chidambaram is doing exactly that by asking for State agencies to withdraw from grain procurement. The food ministry is toying with the idea of capping grain procurement and letting the Food Corporation of India (fci) use the grain stocks in future trading. Instead, fdi in multi-brand retail and commodity trading is being pushed as a panacea for all the ills plaguing Indian agriculture.

If this is true, then why is that farmers in the US and the EU have to be given massive doles of direct income support year after year? The US -EU have big box retail giants like Walmart, Tesco, Sainsbury and Metro operating for several decades now. If the big retail (and also commodity trading) had helped in price realisation for farmers, then how come the oecd (Organisation for Economic Cooperation and Development) countries end up providing close to $370 billion every year for farm support?

Now let us turn to the Track-II reforms that Bhagwati and Panagariya propose for India. Let us first begin with America, where they are based. We all know that the American dream has collapsed. What happened? Wasn’t US the Mecca of economic liberalisation? Just a few days back, an Associated Press report (28 July) in its opening paragraph said: “Four out of five US adults struggle with joblessness, near-poverty or reliance on welfare schemes for at least part of their lives, a sign of deteriorating economic security and an elusive American dream.”

At present, 46.2 million Americans — 15 per cent of the population — are living in poverty. Estimates show that by 2030, going by the prevailing rate of inequality, at least 85 per cent of the working population will experience economic disparity.

Hunger has broken all records. Since 2006, hunger or call it ‘food insecurity’, has risen by 30 percent. The US Department of Agriculture estimates 17.4 million families to be ‘food insecure’. One in every four children doesn’t know where the next meal is going to come from. A record number of post-graduates are now using food coupons for subsistence.

While Panagariya wants India to adopt cash transfers and education vouchers, a California-based organisation ‘Eat, Drink Politics’ has come out with startling revelations providing insight into how the hunger programme adds to the profits of some of the big corporations and banks.

Several corporations like Coca-Cola, General Mills, Walmart and banks like JP Morgan Chase have reaped windfalls from the food programme. Accordingly, Walmart received $33 million for nine supermarket centres in the State of Massachusetts, which is four times the money spent on farmer markets across the country under the same programme. JP Morgan Chase has a five-year contract worth $83 million in Florida alone.

Another argument is that revenues must be redistributed to the beneficiaries through cash, school vouchers and health insurance, allowing them to decide whether they want to buy food, education and health from private or public providers.

Well, let’s take the case of US again as far as privatisation of health services is concerned. According to a report by the US-based Institute of Medicine (iom), the US is the sickest country in the developed world. “This disadvantage has been getting worse for three decades, especially among women.”

In any case, the economic disparity is so glaring that the private wealth of 300 individuals across the world equals the wealth of three billion poor people. And this disparity is worsening with every passing year. If this is the situation, why do we need to import a flawed economic model?

Not only the US, Europe too faces hardship. At a time when millions of workers in Europe have taken to streets time again to protest against spending cuts that have aggravated recession and led to mass unemployment, how can any sensible person, least of all an economist or policymaker, defend this paradox — millions go jobless while private companies sit over massive cash reserves. Says a 2012 cnbc report: “Amid a lacklustre earning season that has featured many companies missing sales expectations, cash balances have swelled 14 percent and are on track towards $1.5 trillion for the Standard and Poor’s 500.” Apple alone sat on a cash reserve of $117 billion.

In Europe, Ernst & Young estimates that corporates hold over €2 trillion. US corporates alone hold more than $2 trillion in the UK. In India too, at a time when the current account deficit situation has become more pronounced, India Inc in 2012 was sitting comfortably over Rs 9.3 lakh crores or $166 billion, and is refusing to invest it within the country.

In India too, even between 2004-05 and 2008-09 when the economy grew at a record 8-9 percent, a Planning Commission report shows that 14 million people were driven out of agriculture, and another 5.3 million suffered job loss in the manufacturing sector. High growth, therefore, has not translated into increased employment.

Regarding the vanishing poverty trick, economist Utsa Patnaik has in her analysis ‘The dishonesty in counting the poor’ (The Hindu, 30 July) ripped apart the spurious claims. In fact, the tendency to hide poverty and hunger is not only confined to India. Economists all over the world are bending backwards to show how poverty is coming down in an era of market reforms.

The illusion of growth has not spelled happiness. Since 2004-05, India Inc has received nearly Rs 32,00,000 crore by way of tax exemptions. If such heavy subsidisation has not resulted in increased employment, pushed up industry and manufacturing output, or helped increase exports, isn’t it a waste of resources? Don’t these subsidies add to fiscal deficit? And yet, despite these subsidies, explicit as well as implicit, industrial growth remains sluggish.

The subsidisation of the industry does not end here. Privatisation of health and education through the public-private partnership (ppp) mode is essentially a subsidy. Acquiring land at throwaway prices for Special Economic Zones (sezs), industrial estates, malls and real estate is a huge subsidy. Providing interest-free loans and tax holidays is also a subsidy. In fact, the industry thrives on subsidies. The difference being, these subsidies are called ‘incentives for growth’. But, strangely, it is always subsidies for the poor that come under the scanner.

Often I am asked if I am questioning economic liberalisation and whether I want the country to go back to the old days of the Hindu rate of growth. If I point to the glaring inequalities and injustices being pushed down the throat of developing countries, it does not mean that I am against trade.

The near collapse of the economic growth model after the 2008 economic meltdown should make us rethink. The economic pathway to happiness can be a combination of the good from the neoliberal era as well as the so-called socialist era. It is time to move ahead by redrawing a new economic pathway.



  1. there are reasons why you favour “trickle down” kind of economics. oligarchy at work, but do the countrymen really deserve alms or legitimate right, it’s better to uproot “owner/ his highness” kind or government.


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