China and India: Convergence in Economic Growth and Social Tensions?

nirmal@iimcal.ac.in

SPECIAL ARTICLEjanuary 24, 2009 EPW Economic & Political Weekly42Much of what has just been stated is common knowledge and there is no need to substantiate them at length. But there is another side to the saga of development. When a nation is recog-nised by the rest of world as an important player in the global economy, its citizens generally feel proud and appreciative of the State policies. The media in India and China has highlighted the achievements. Yet public opinion polls reveal a cleavage that rarely gets attention. There are many signs of acute, if not increasing, social tension in both countries. This leads to an important question. Do the economic policies or the “business model” adopted by the two countries necessarily aggravate inequalities in income and wealth distribution, and thus exacer-bate social contradictions? This paper does not provide a defini-tive answer, but examines some of the “growth-oriented” measures and speculates on an alternative path. Section 1 highlights the comparative growth rates in the two countries and explores the imperatives behind the reform in each case. India and China not only differed in the “initial” (pre-reform) conditions, but also in the nature of macroeconomic policy con-straints after the reform. Yet both pursued broadly neoliberal policies with a similar, though far from identical, outcome in many spheres. Section 2 provides evidence on the rising concen-tration in income and wealth in the two countries. In the next two sections we take up the trends in poverty, and in employ-ment and unemployment. The nature and extent of social unrest is explored in Section 5. The analytical side of the story, namely how the rich are getting much richer with considerable help from the fiscal authorities is explored in Section 6. Next, I look critically at the logic behind fiscal concessions. Some alternatives are outlined in the final section.1 Growth Rates and Reform Imperatives To comprehend why reforms were undertaken, it is useful to look at the growth story. I use GDP per capita at purchasing power parity (PPP) from 1952 to 2005, all at constant prices of 2000, taken from the widely used Penn World Tables (PWT) version 6.2. As against the official data for China, there are substantial revisions for the years prior to 1980 when the country began to use the UN sys-tem of national accounts; as India followed consistently the UN system, her official statistics were used inPWT with minor changes. However, the base year (1952) estimate inPWT for China indicating a per capita income barely 40% of India’s, was hardly credible. The revision proposed by Maddison and Wu (2006) putting them at par, seems much more plausible. Both series are presented in Table 1. Following Maddison and Wu, China took a small lead over India by 1978, and the gap widened since then; by 2003 China was almost 2.5 times richer. Further, vis-à-vis the US, India’s per capita income stood at 6.3% in 1952, 6.0% in 1978, and 8.6% in 2003, according to PWT. One may draw the following conclusions. (a) China’s growth all through the years, before and after the 1978 reform, was greater than that of India. (b) India managed to grow at almost the same rate as the USA during 1952-78, a period often called the “golden age of capitalism” in the west. Even China failed to “catch up” with the US over this period. (c) Growth accelerated after the reform of 1991 in India, and after 1978 in China.What could be the rationale behind China’s reform? It can be explained by “economic imperatives” to a considerable extent. Her industries had developed along the Soviet lines with new factories coming up with technologies modified only at the margin. The drawback with this “extensive” growth was that a great deal of scarce raw materials and fuel were “wasted” in production, compared to the prevailing standards in the west. Owing to a superabundance of resources the Soviets could ignore the problem for a long time. But China is poorly endowed, and could face an acute shortage of resources if she continued with the old pattern for another couple of decades. It followed that she needed huge imports of western technology and equipment just to maintain the tempo of growth. In the 1970s and 1980s the USSR also felt the same need, took big loans from western banks, and fell into a debt trap from which it could not recover. The Chinese leaders scrupulously stuck to the Mao-era policy of national self-reliance and decided to finance import through additional export.Geopolitical developments offered an unexpected opportunity. By the early 1970s, Sino-Soviet hostility aggravated, reaching a point of no return. At the same time, the Vietnam war stretched US military capability to its limits, heightened by a vigorous do-mestic opposition to the war. President Nixon came to meet Mao in Beijing in 1972, laying the foundation for a de facto Sino-Amer-ican entente against the Soviets. As the experience of post-war “miracle” economies of west Europe, and later of Japan, South Korea and Taiwan show, the key factor in their success was access without reciprocity to the US market for export, and to import of US technology and equipment for the modernisation of industries (Chandra 2004). Just as theUS was earlier eager to foster the economic growth of her strategic allies as a bulwark against the USSR (and China), in the new situation China became the benefi-ciary. It was in this context that Deng’s “open door” policy took shape with its stress on export of Chinese manufactures and im-port for modernisation (Chandra 2005).While the US support was crucial, China never surrendered her political or economic sovereignty. In foreign trade a neutral or positive balance was maintained all through, to pay for a rising volume of import. To facilitate export, central allocation of resources to firms had to be altered drastically to enable the latter to seize opportunities abroad; hence an increasing role for the market forces became unavoidable. Since export prospects were brightest in textiles and light engineering, businessmen from the Chinese diaspora in south-east Asia who had captured large slices of the market in the west during the cold war era, had to be coaxed to operate from China. That explains why the over-whelming bulk of foreign direct investment (FDI) into the country was export-oriented and came from these sources. For FDI cater-ing to the domestic market in high-or medium-tech areas, China welcomed western multinationals, provided they entered (as a minority partner) in a joint venture (JV) with state-owned enter-prises (SOE), and helped the Chinese personnel to assimilate fully the new technologies. Over the years many restrictions were Table 1: India and China: The Ratio of GDP Per Capita at PPP 1952197819902003PWT 2.431.971.130.6Maddison and Wu 1.00 0.91 0.69 0.42Source: Heston (2008).

www.bcg.com (www.cia.gov).

(www.hurun.net) for China are

In China, it is not only that the number of millionaires is rising at a fast pace, but their average wealth is increasing faster. (For India comparable information are lacking.) According to t Hurun Reports, the assets of the 50th rank-holder went up steeply from $6 million in 1999 to $145 million in 2002 and $525 million in 2006, while the richest person in the last year was worth $3.4 billion.

Hurun Report further revealed

made their own estimate of the “food poverty line”; on non-food expenditure, they allowed for two values and thus came up with two poverty thresholds. Their estimates for rural China

Nevertheless, a seasoned critic of post-reform China and correspondent of The Observer, Watts (2006B) on a remarkable 5,000 km journey across China, found that, after years of deprivation, even the poorest provinces are sharing in a new-found prosperity, and that for the majority of people he met their living environments had improved. There is no doubt, in my view, that

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SPECIAL ARTICLEjanuary 24, 2009 EPW Economic & Political Weekly46Over the same period labour productivity at current prices increased annually by 22.9%, while nominal wages rose by 12.7%.In a study for the US Bureau of Labour, Banister (2007) looked at Chinese official data from different sources; total manufacturing employment, urban and rural, declined from 123.01 million in 1995 to 104.60 million in 2004. For large enterprises (“at and above designated size”) the fall was quite sharp from 71.9 to 56.7 million or by 20% over these years, and somewhat less for other enter-prises. The average real wage in large enterprises increased 2.66 times over the nine years, but the rise was much slower elsewhere. Thus in 2004, the average monthly wage (in yuan) at large enter-prises was 18,043, as against 9,079 in other establishments, and a mere 6,343 in self-employed and household manufacturing units.The sharp rise in nominal wages and complaints about labour shortage by numerous employers led many observers, inside and outside China, to believe that the era of “surplus labour” is over. Though reliable statistics over a period are absent, The Economist (4 September 2008) wrote: “the real wages of low-skilled work-ers barely rose during the 1980s and 1990s, despite big producti-vity gains; only recently have they increased rapidly”. Further, “to attract migrant workers, urban employers have to pay more than rural income, which has increased in recent years, thanks to government policies and higher food prices”. It concluded that labour surplus “may eventually dry up, but it still seems some years away”.The employment situation in India is just as grave as, if not worse than, in China, though for somewhat different reasons. There has been no massive retrenchment of workers comparable to that in China’s state-owned and collectively-owned enter-prises. However, the workforce in India’s “organised” sector (covering administration, the public sector enterprises, registered factories, mines, plantations, construction companies and incor-porated private enterprises in the tertiary industries) has been remarkably static at between 26 and 28 million from 1990 onwards; in manufacturing the total number actually fell from 6.5 to 5.6 million during 1981-2004 (ES 2006-07, Tables 3.1-3.3). In any case, the organised sector is a small island comprising less than 10% of the nation’s workforce.According to the censuses, “main workers” (“gainfully occu-pied” for more than one-half of the usual working year) as a per-centage of the total population stood at 33.5 in 1981, rose margin-ally to 34.1 in 1991, and fell sharply to 30.5 in 2001. By contrast, the percentage of “marginal” workers in the population increased from 3.2 to 3.4 and 8.7 over the same period (EPWRF 2003). If one counts a marginal worker as one-half of a main worker, the adjusted participation rate seems to have fallen marginally over the past two decades.The quinquennial reports on employment and unemployment by the National Sample Survey (NSS) tell a broadly similar story. The proportion of “principal and subsidiary” workers in the population over the years 1973-2004 fluctuated in a narrow band; it fell from a high of 42% in 1977-78 to a low 40% in 1999-2000, but recovered to 42% in 2004-05. It follows that there was no clear long-term trend.TheNSS provides some insights into unemployment that are rarely available elsewhere. The employment status of each person in the survey is determined not just annually (as in the census), but also on a weekly and a daily basis. Indeed, the number of workers (unemployed persons) decreases (increases) as the ref-erence period is shortened. In 2004-05, for instance, the unem-ployment rate for rural men jumped from 1.6% on the annual basis to 8.7% on the daily basis. This is an indicator of under-employment among those who are employed on an annual basis. Over the past three decades the daily unemployment rates showed an irregular pattern within a narrow range. For 2004-05, NSS collected information on three aspects for the first time. Though there are data separately for each gender in both rural and urban areas, I focus on rural men, aged 15 years or more, who are employed on an annual basis: (i) 11% of themdid not work regularly throughout the year; (ii) 10.7% of them sought or were available for additional work; and (iii) 9.2% of them sought or were available for alternative work. One should not add up these percentages and claim that nearly 31% of the “employed”were “underemployed”. The figures just cited merely corroborate the general impression that underemployment is a very significant issue.Far more important is the fact that India has a very low work participation rate compared to many other countries. A very high proportion of the working age women remain out of the labour force in eachNSS survey. Thus, in 2004-05 the ratio of women to men workers (annual basis) was only 44% in rural and 24% in urban areas. It is misleading to attribute the low rate for women to “tradition”, “culture”, “attachment to children in the family” and so on. For, among agricultural workers at one end, and urban professionals and business families at the other, women are often economically as active as their men, although many of them are very traditional and religious. It is more likely that the low parti-cipation rate for women is primarily due to the absence of appro-priate job opportunities, keeping in mind their domestic and other compulsions. In that case, the number of “potential” work-ers, not actually employed, is several times greater than the number of unemployed, as currently defined.Unemployment in a more “inclusive” sense is far more wide-spread in India than in China where the overall work participa-tion rate is much higher. Subjectively, however, the Indians always faced it and adjusted themselves. But in China memories of full employment, though at a rather low level of remuneration, in pre-reform years are still vivid, leading to strong resentment about the current scene.In India one observes the same phenomenon as in China of an increasing proportion of workers in lowly paid jobs. It is worth quoting Unni and Raveendran (2007) in this context: Overall, while there has been a growth of employment particularly in urban areas, the nature of this growth and the quality of employment generated needs probing. There has been a substantial growth in self-employment in the recent period, 1993-94 to 2004-05. However, much of this work is poorly remunerated. The sharp growth of regular sala-ried work among women particularly in urban areas also appears to be in poor quality work. In fact, for the first time in decades, there has been a decline in the real wage rates of regular salaried workers and urban casual workers. The growth of employment in the unconven-tional places of work and of home-based work among women is one more indicator of the informalisation of work, which has implications for the levels of incomes and security of the workers.

According to Watts (2006A), the director of law enforcement in the land ministry, Zhang Xinbao, admitted that there were “more than a million cases of illegal land use in the past six years.”

SPECIAL ARTICLEjanuary 24, 2009 EPW Economic & Political Weekly48agricultural land for the benefit of private investors, domestic and foreign. One may recall that the set of economic reforms launched in 1991 had no popular mandate whatsoever; all subse-quent governments lost in parliamentary polls, and yet they all pursued policies scripted in Washington. The National Election Study (Suri 2004) conducted after the 2004 parliamentary elec-tions, and covering over 20,000 respondents, revealed for the first time public perception on a wide spectrum of issues. (i) As many as 43% of the respondents felt that the reforms benefited only the rich, while for 28% the whole country gained. (ii) Over-all economic conditions were better in the post-1991 years in the view of 27%, became worse for 19%, and remained unchanged for 51%. (iii) For 41%, the employment situation worsened over the same period, while 17% thought that it had improved. Re-garding policy questions: (iv) Sixty-nine per cent as against 17% were in favour of a ceiling on the ownership of land and prop-erty; (v) Fifty-two per cent did not support a reduction in govern-ment staff, but 45% did; (vi) Forty-seven per cent rejected the policy of privatisation of PSUs, with only 24% in its favour; and (vii) Forty per cent as against 31% expressed a desire for some restrictions on multinationals.The recent spate of land acquisition is fuelled by the scheme of “Special Economic Zones” to be probed further in a later section. Everyone will agree that “economic development” in an agricul-tural country cannot take place with its land-use pattern frozen forever. After independence, millions of acres of land were taken over for new projects in various sectors, but the major part of it was for “public purposes” like building dams, roads, factories and so on. “Fairness” requires that in all such cases, the losers must be “adequately compensated” – with cash or assets that can help them maintain, if not improve, their living standards. Actually, as Fernandes (2007) pointed out, a whole series of studies found that 60 million persons were displaced, of whom a vast majority was not properly rehabilitated over the period, 1947-2000; among those displaced, 40% were tribals, and 20% each of dalits and OBC.In the current phase of land acquisition, several factors have combined to rouse popular anger. (i) Owing to the job deficit (see Section 4), and scarcity of cultivable land, farmers are most reluctant to part with land. (ii) As in China, compensation is given for “agricultural” land, although its market value hits the roof the moment it is reclassified by the state as “non-agricultural”. (iii) The State as the acquirer and the eventual private buyer of the land make huge profit. (iv) In addition, the private buyers are showered with enormous subsidies for the development of industries (with a lean workforce), commercial real estate for the use of the affluent who in turn benefit from numerous hidden subsidies (see below). In short, the state seems to promote “primitive accumulation” similar to the “land enclosure” Acts of 18th century England. Resistance in contem-porary India has been so strong in Orissa, West Bengal (Singur and Nandigram) and elsewhere that the governments at the centre and the states find themselves in a quandary, slowing down the reform process.At the moment an uneasy truce prevails. The “reformers” havenot abandoned their goals. The opponents are equally determined to thwart every new move in that direction, but are not strong enough to impose their agenda on the state.6 How the Rich Are Getting Richer with Fiscal SopsIndia’s Budget 2006-07, presented for the first time tentative esti-mates of “tax expenditure”, or tax revenue foregone as a result of various “exemption” dur-ing 2004-05 as follows.As against the GDP, the actual revenue was only 7.3%, while exemptions amounted to 70% of the revenue. Further, owing to business lobbies, lower tax rates are fixed for similar activities or prod-ucts that are hardly justified. Thus corporate profits on the con-struction of “small” houses (up to 1,000 sq feet in area) are fully exempt from tax, but most such apartments can be easily turned into luxury apartments just by demolishing the partition walls. Again, the excise duty on small cars was only 16% or one-third less than on other cars, though not even 5% of the population can own or maintain a small car. These and many other loopholes are not counted as “exemptions”.Moreover, the tax rules are extremely liberal on “perquisites” for the owners and senior managers of business firms. Thus, when a house is owned or rented by a company and is allotted to an employee, the latter is deemed to pay not more than 20% of the salary, irrespective of the market rent of the premises. For the personal use of a company car with chauffeur, an employee’s per-quisite is valued at a fixed sum amounting to a small fraction of the cost incurred by the company. The list of perquisites is quite long. The upshot is that much of the personal consumption of company executives is financed by the firms as “business ex-penses”, thereby reducing the taxable incomes of all concerned. Internationally, the classic case is that of Jack Welch, the legen-daryCEO of GE, US, whose employment contract stipulated a tax-free post-retirement benefit of $4.5 million a year. While no such case has been reported in India, our exchequer loses 40% of the value of perquisites; the total is yet to be estimated. The sudden burst in conspicuous consumption over the past decade in various forms like five-star hotels, deluxe apartments, golf courses, and so on, are closely linked to the barely noticed fiscal rules in small print. In 2002 the central government announced for manufacturing firms undertaking new investments or substantial expansion in hilly states of the north like Uttarakhand, Himachal Pradesh and so on, full relief from excise duty for 10 years, and from income tax for five years; income tax relief at 50% would continue for the next five years. Through substantial expansion, the investors can enjoy similar benefits for an indefinite period. As many leading firms headed for these states, other state governments began to offer equivalent relief in respect of state-level taxes such asVAT, stamp duty, and so on, while giving away land at a low cost.The budget for 2006-07 added another major tax relief for the rich. Earlier, short-term capital gains from transactions in shares, TaxTax ExpenditureRevenue (Rs Billion) (Rs Billion)Corporate income tax 576 819Personal income tax 119 477Cooperative sector 15 naExcise duty 305 788Customs duty 926 405Less export-credit related -354 naTotal 1,5872,258

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SPECIAL ARTICLEjanuary 24, 2009 EPW Economic & Political Weekly50up. Not only has GDP growth been superlative, China has modernised many of her industries as noted earlier, though a fairly large chunk remains backward. Now, Allaire (2006) has estimated that energy-intensity has come down sharply per unit of industrial production from an index of 100 in 1980 to 45 in 1990 and 20 in 1998. The fall was due partly to greater effi-ciency and partly to a change in industrial structure from heavy to light industries. China continues to make progress (Xinhua, 15 July 2008), but even now in many factories energy use is sig-nificantly higher than in rich countries. With domestic savings well above 40% of the GDP and in excess of the investment rate, and a huge and barely productive foreign exchange reserve of over $1,800 billion, or about 40% of the GDP, there is no dearth of capital. Since up to 50% of FDI in recent years is actually “round-tripping” by Chinese firms to avail of the tax benefits for foreign firms (Geng Xiao 2004), it shows again that capital has not really been scarce for quite some time. Most disturbing is the sharp fall in the percentage of private consumption in the GDP from 47 in the early 1990s to just 36 in 2006. In parallel, the share of wage income in the GDP nosedived over the past decade from 53% in 1998 to 41% in 2005. These percentages are probably the lowest in the world. It is ironical that the neolib-eral weekly,The Economist (11 October 2007) captioned a piece, “A Workers’ Manifesto for China: How Workers in China Are Losing Out and Why It Matters for the Rest of the World”. The resultant inequality in income and wealth (see Section2) is not what worried the weekly. The sustainability of China’s growth momentum is implicitly questioned. Moreover, a slowing down in China could have serious repercussions, not only in east Asia but also in the global economy.Actually, over the past decade, the Chinese government, the IMF, the World Bank and independent scholars have underlined the need to expand domestic consumption as the engine of GDP growth. But the state policies worked in the opposite direction, as Kuijis (2006) pointed out. The household savings rate used to be around 5% of the income around 1978 before the reform, but rose to 30% in the mid-1990s for a variety of reasons, including the withdrawal of the state from social services like education and health. The proportion fell to 20% in 2000 and stayed there. The high saving rate is basically “precautionary”, and not an indicator of affluence. The savings are put into bank deposits with a low (negative, adjusted for inflation) rate of return, while the SOEs and privileged private firms borrow from banks at a low, often negative, rate of interest. In addition, the SOEs benefit from a massive capital transfer to the extent of 4-5% of the GDP from the state. As a result, production becomes highly capital-intensive across the sectors from manufacturing to infrastructure, and employment stagnates.The Chinese leaders may be apprehensive that any attempt to change the present policy regime may lead to a sharp fall inGDP growth, and destabilise the “socialist market economy with Chinese characteristics”. The famous Lieberman agenda of economic reform in theUSSR in the mid-1960s was abandoned for the same reason; as Lewin (1974) predicted, the maintenance of status quo contributed in no small measure to the collapse of the Soviet economy. India has evolved somewhat differently. The new industries since 1950 were set up with Soviet as well as western technology. Two World Bank (1975 and 1984) studies had shown that the capital goods industries were internationally competitive; as the conclusion ran counter to the theology of the Bank and its con-sultants, both reports were suppressed. The abrupt liberalisation of imports and foreign investments in 1991 did cause hiccups ini-tially, but most domestic firms, public and private, weathered competition from the transnational corporations (TNCs), and quite a few emerged as world-class companies. As in all countries, Indian exporters of manufactured goods have always been exempted from paying indirect taxes on goods procured domestically or tariffs on imported inputs. A new incen-tive was added in the mid-1980s when profits earned from ex-ports became tax-free to encourage domestic investment and ex-ports in non-traditional areas. However, even today the latter constitute a quarter of total export, though the absolute value of “engineering goods” rose from $1.2 billion to $21.5 billion during 1987-88 to 2005-06. Currently, 40% of these exports come from labour-intensive small and medium enterprises that do not have access to foreign customers. Hence this incentive enriches the intermediaries in the export business that hardly invest in fixed assets. The overall incentives are so high that many Indian firms overstate export earnings!India’s success inIT andIT enabled services (ITes) is now an acknowledged fact. Whether for call centres or more complex software engineering, low cost (in comparison with the west) of skilled labour is the driving force, and the industry exports 75% of its output. Some of the leading Fortune 500 companies like TCS, Infosys, and Wipro pay a corporate tax of no more than 12% on their net income. Do they need the tax sops? Narayanamurthy, the iconic founder of Infosys, called for its abolition that would add Rs 16,000 crore to tax revenue (The Hindustan Times, Kolkata, 20 January 2007).Consider next the special schemes for Uttarakhand, etc, and for the SEZs: (a) Concessions on central taxes (direct and indirect) are likely to exceed the value of investments. If one adds the state-level exemptions, and the existing income tax provisions on depre-ciation allowance for fixed assets, the investors would have a free lunch twice over. (b) As the Reserve Bank of India (2006, Box I.1) and Rajan (2006) of the IMF pointed out, both schemes willen-courage investors to divert new projects and relocate old facto-ries and business centres from other areas into the favoured regions and the SEZs. Indeed, Bajaj Auto closed down its thriving plant near Pune for two million two-wheelers, the biggest in the country, retrenched over 20,000 workers, and shifted to Pantnagar, Uttarakhand to avail of the tax bounties. (c) The estimate of “new” jobs to be created is illusory, partly because of the diversion or relocation. Also, “modern” manufacturing with its stress on a “lean” workforce is unlikely to create many new jobs. Indeed, Ra-hul Bajaj, an industrialist in the Fortune list of billionaires, opened an auto factory without any unskilled labourer.Too many exemptions for the corporate sector have greatly reduced the effective income tax rate. For the corporate sector as a whole, it was estimated by the official Task Force on Direct Taxes (2003) at around 20%, while the statutory rate stood at 40%.

SPECIAL ARTICLEEconomic & Political Weekly EPW january 24, 200951In industrial policy, the scheme of reservation of product lines for small industries has been whittled down after 1991. At the same time, there was a reduction in bank credit to small firms, withdrawal of preference in government purchases, and so on. All this led to the “unorganised” (or non-corporate) sector losing its percentage share in the GDP from 63.8 in 1990-91, to 56.7 in 2002-03, while its share in the national workforce remained steady at around 92-93 (NCEUS 2007, Table 1.1). In manufacturing output, the unorganised lost its share from 41% in the 1970s to an average of 32% during 1999-2005.Balasubramanyan and Sapsford (2007) have made a telling comparison between India and China. Measuring output inUS dollars at the purchasing power parity of the national currencies in 2002-03, and utilisingUNIDO’sIndustrial Statistics Database 2006, they found that per million labour units, aggregate manu-facturing output was 0.919 in China and 0.589 in India; the cor-responding averages were 0.762 and 0.453 for hi-tech products, and 1.261 and 1.011 for low-tech products. Similarly, China utilised $39,406 worth of assets per unit of labour in “all manufacturing” as against $72,051 for India; the gap was particularly large for hi-tech industries – $68,542 in China and $290,272 in India. In my view, the comparison in respect of hi-tech industries may be misleading, as China assembles these goods from imported components to a far greater extent than India. However, the two authors’ argument that a labour surplus country like India has adopted more capital-intensive technologies than China remains valid. The fiscal incentives in India should have contributed to this anomaly.Returning to the perquisites, there is no reason why personal consumption of business executives should be considered as necessary for the success of business ventures. Whether one takes a prospective client to a neighbourhood restaurant or a five-star hotel is a matter of “convention” jointly determined by the business communities and the tax authorities. One may refer to the analogous debate on the pay of high-level executives in Anglo-Saxon countries. When a relatively small and closed group of executives in different firms fix one another’s remuner-ation, there is no role of the “market”; the “norms” are set to mutual satisfaction, irrespective of the performance of the firms concerned.Most of the post-1980 tax cuts and tax sops for individuals and corporations across the world, including India and China, follow from two interrelated neoliberal premises. First, the lower the tax rate, it is argued, the greater is the incentive for tax compliance, and hence the tax yield goes up. It is doubtful if this proposition has been empirically proved for any major country. Indeed, in all countries designated as “miracle” economies after 1945, namely, West Germany, Japan, South Korea and Taiwan, the marginal tax rates for the top earners until the end of the 1970s were 80% or more. On the other hand, there is growing evidence that in recent years millionaires everywhere have been seeking offshore tax shelters to avoid paying any tax at all.The second premise is that a firm’s investment depends on its post-tax income. This has never been true. In the years of high-speed growth, the typical profit rate of firms in the same miracle economies was quite low, but that did not impede a high rate of investment through easily available loans at a low interest. Currently, in mergers and acquisition across the world, the acquirers rely heavily on borrowed funds rather than their own accumulated funds. Thus a large stock of undistributed profits is neither necessary nor sufficient for corporate investment.8 Alternative of Development with EquityIn defence of the current economic policies in China or India, one may argue that inequalities may have risen but this is essentially transient in nature. If the GDP growth is maintained, the market forces will automatically redress the imbalances, as the “trickle-down theory”, consistently promoted by the Washington institu-tions, posits.There is an apparent support for it in the works of Kuznets. He showed for the US that the inequality increased from around 1880 till the 1920s, and the “levelling” process started during the second world war, gaining momentum after 1945. Broadly similar was the story in Britain or France. What is missing in the conventional narrative is the political factor. The introduction of welfare capitalism in western Europe was, to a great extent, a response to the ideological threat from the Soviet Union that won the hearts and minds of the working classes and large sec-tions of intellectuals after the second world war; in Italy and France, the communist parties came close to winning parlia-mentary elections. Even before the war, a parallel development was taking place in the US under the impetus of President Roosevelt’s New Deal policy; many of the leading Marshall Aid administrators and economists from the US, as agents of the donor state, took an active part in the creation of the welfare state in Europe. The US, too, took several strides in the same direction (Chandra 2004).If the welfare state was the logical outcome of capitalism at an advanced stage of development, how does one explain the retreat from welfare policies and the sharp increase in inequality since 1980 in all industrial countries? The proponents of trickle-down theory have no answer. My own hypothesis is again political. The “oil shock” of 1973 emanating from the third world (backed by theUSSR) seemed to threaten the average living standards in rich countries; the somewhat excessive militancy of the trade unions alienated the middle classes in these countries; and the economic stagnation in the USSR combined with wide-spread political disenchantment with Soviet socialism, created a fertile ground for the emergence of the radical right in the Anglo-Saxon countries.As Stalin (1952) stated long ago, the market as such is “neutral” insofar as it coexisted with both feudalism and capitalism; he believed it could also play a useful role under the Soviet system. Byextension, one can argue that market can function under a variety of capitalisms. Much depends on the character of those who control it. The notion of “free market capitalism” is a utopia, obfuscating the invisible hand of the political masters. In short, itis not the market but the alignment of political forces and their relative strength that determine the degree of inequality in a country.

While per capita GDP over the period increased dramatically from $11,672 to $36,595 per capita GPI has stagnated in the $14,000$15,000 range since the late 1970s. “This implies that since the late 1970s, the benefits of economic growth have been entirely offset by rising inequality, deteriorating environmental conditions, and a decline in the quality of our lives”. For 2004, the positive contribution to GPI comes from personal consumption (adjusted downward for greater inequality since the best year of 1968), services of consumer durables, services of streets and highways, net capital investment, and also the “imputed values” of housework, higher education, and voluntary work, totalling $11,603 bn. From the total are deducted various social and private costs like those of crime, unemployment, commuting, auto accidents, and pollution of different types; loss of wetlands and farmlands; net foreign borrowing; and so on. Deductions amounted to $6,45 One may not agree with the fine details of the GPI. Still, if billion. Thus GPI came to $4,419 bn as against the GDP of $11,734 some corrections are made along these broad lines in the GDP bn. Most notably, $600 billion spent on wars are not counted time series for China or India, much of the shine is likely to either as a positive or a negative contribution to GPI. evaporate, strengthening the case for development with equity.

Annual Survey of Industries 1973-74 to 2003-04 (Vol. II) A Data Base on the Industrial Sector in India Second Edition

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raga.madhu@gmail.com).

Watts, J (2006A): “The Big Steal”, The Guardian, 27 May.

– (2006B): “Concrete Paves Peasants’ Long Road from Poverty”, The Observer, 27 August.

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Review, Vol 15/3, pp 145-63.