Revive farm subsidy, end FDI


1991’s process of economic reforms is coming to an end with its rejection by the United Nations Conference and Development (UNCTAD). It has not...

Notably, for world trade and business to grow it calls for reintroduction of subsidies for the farm sector. Self-reliance has to be the motto of growth for the Third World economies is the undercurrent of the UNCTAD

Shivaji Sarkar

1991’s process of economic reforms is coming to an end with its rejection by the United Nations Conference and Development (UNCTAD). It has not only severely criticized the present economic model but has called for enunciation of a new world order by taming the financial sector, reducing dependence on foreign direct investment (FDI), shunning the model of export-oriented development and bringing labour, public sector and agriculture back into focus.

Notably, for world trade and business to grow it calls for reintroduction of subsidies for the farm sector. Self-reliance has to be the motto of growth for the Third World economies is the undercurrent of the UNCTAD. In fact, the UN body foresees the economic crisis deepening with further contraction of world economy as activity in most developed countries is still reeling under the impact of 2008 crisis, including insufficient job creation, wage compression and the still incomplete process of balance-sheet consolidation. It notes the major reason for the crisis “has been the dominance of the financial sector over the real sector”. Indeed, business cannot go on as it has, for it can no longer deliver growth.

Importantly, the UNCTAD, in its flagship Trade & Development Report (TDR) 2013, has come down severely on the Breton Woods institution-supported economic model without naming it. According to it, the present crisis is the result of ignoring labour in the name of “greater flexibility” of labour market and “wage flexibility”. It has led to wage suppression, worsened income distribution and posed a threat to social cohesion. Wages have lagged behind productivity growth in the past two decades. It not only suppressed domestic demands but has led emerging economies into deep financial and currency volatility.

In the first place, greater inequality of income distribution led to the economic crisis. The solution is being seen in an “incomes policy” aimed at accelerative consumption growth which could contribute decisively to restoring national economies (like that of India) and the global economy to a stronger and more balanced growth path.

The UNCTAD calls for a change from the “overall expansionary, though unsustainable, nature of global growth so far”. Export-oriented strategies are no longer viable, as this growth model has led to many problems of reduced wages, and activated lobbies that competitively campaigned for currency devaluation in emerging economies.

It also warns against easy credit policy for boosting consumer demand. This could pose danger to the emerging economies as it would lead to excessive debt and household insolvency. A number of developed countries have witnessed this in recent times; that is UNCTAD’s justification.

Therefore, the panacea is in boosting domestic demand through public sector investment and growth in employment in this sector. There is also a need to change (lower) the tax structure and reorientation of public expenditure to increase purchasing power. This would increase aggregate demand from household demand. The activities could be sharpened with the public sector providing an incentive to entrepreneurs in increasing real productive capacity.

In short, UNCTAD calls for a shift from corporate profit-oriented development to large base of medium and small scale entrepreneurs. This would widen income distribution as against concentration of incomes in some pockets. Ultimately, it would bring down social disparity. It states: “If many developing and transition economies simultaneously give domestic demand a greater role, their economies could become markets for each other, fostering regional and South-South trade and thus further growth for all”.

The study clearly avers that the US’ stimulus to industry has not helped. This is more or less what new RBI governor Raghuram Rajan states. The slowdown in the economy, he says, was paradoxically the effect of substantial fiscal and monetary stimulus that its policymakers had injected into its economy in the aftermath of the 2008 financial crisis. The resulting growth spurt led to inflation, he has stated.

Much of the slowdown is contributed by the dominance of financial institutions in the post-Lehman crisis, the TDR says. It led to lopsided demand and convoluted economic order. Therefore, developing and transition economies have now been asked to adopt “a cautious and selective approach towards foreign capital flows”. Such foreign fund flows through conduit of powerful political lobbies have tended to create macroeconomic instability, currency appreciation and recurrent “boom and bust financial episodes” – something reminiscent of the series of scams rocking the Indian economy since 2008 Commonwealth Games to the latest Coalgate scandal to the rupee being on a roll.

Indeed, such foreign flows are expensive. Besides, it leads to large repatriation in terms of profits, technical fees and other outgo. Instead, these economies are now being told to rely more on domestic sources of finance, the most important being retained profits and bank credit. This will lead to productive economic activities, job creation and less vulnerability to global economic shifts.

In subdued words it has asked emerging economies to be apprehensive of the US quantitative easing (QE). (The QE in reality means printing currency notes. Since 2008, the US has printed trillions of currency notes. It is devastating developing economies by large flow of short-term investments and withdrawals creating bubbles across the world. This has enormously reduced the US’ current account deficit – in other words the US is trying to prosper at the cost of economies of poor countries).

This has happened as the financial system remains unregulated, creating both monetary and financial instability. Through regulation and strong government controls the financial system, especially banking, has to be restructured. This would require a larger role for central banks (RBI), development banks and specialised credit institutions.

The UNCTAD also calls for larger role for agriculture for overall productivity growth. This would increase activity in countries with large rural sector, as in India, that has many small producers.


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