Themes > Current Issues
06.01.2009
The Economic Geography of Recession
Jayati
Ghosh
Now
that the economic slowdown is truly upon us, and the government is no
longer in complete denial about the vulnerability of the economy, the
discussion is dominated by the possible effectiveness of the policy
measures that have been announced to deal with it. But this depends
upon two different features: first, what has caused the recession in
the first place; and second, how it will affect different economic agents.
By both counts, the measures announced so far appear to be lacking. On the first count, there is an official presumption that this is simply an imported crisis. And there is an associated blindness to important lessons about the regulation of finance that are coming from the developed world. Unlike possibly any other government in the world today, the Indian government is going in for more financial liberalisation, even when the results of such deregulation in terms of creating unsustainable bubbles and spawning major crises are there for all to see. While this may provide some immediate relief by propping up the rupee and stopping the bleeding of foreign exchange reserves, it will create the conditions for a much worse country-specific financial crisis in the near future.
On the second count, the policy response thus far is deficient because it seems to have ignored most of the people who are likely to be badly affected, in favour of a few who happen to be more well-connected. This particular economic crisis, because it has both financial and real economic aspects, is going to affect different people very differently. The financial sector is clearly hit. Stock market investors have lost (at least nominally) huge amounts, and the credit crunch is adversely affecting both large corporates and smaller businesses.
This inevitably has knock-on effects on the real sector, adding reduced domestic demand to the problem of depressed export markets. And so real economic activity, in both tradeables and non-tradeables, is affected and this directly translates into employment losses.
Most of the government’s measures are designed to ease the credit crunch and revive the stock market and investor confidence: by lowering interest rates, by propping up the banking system through promises of fresh capitalisation, by injecting new liquidity through relaxed credit norms. Clearly all this will not be enough in the current liquidity trap conditions, but at least it will directly benefit some large banks, corporate houses, builders and export units. The idea is that this will in turn benefit those who are employed by such agents, and therefore prevent job losses that would otherwise occur.
Yet in all this the government is ignoring two major groups of workers who are already directly hit, and who together account for the majority of the workers in the country: farmers and migrant labourers. Cultivators in India have already been through more than a decade of agrarian crisis, which persisted even through the period of rising international crop prices. They have then been on a complete roller coaster in price terms in the past year, as world trade prices of most crops doubled and then collapsed within a few months, and by the end of the year came to settle at levels below those of two years ago.
Many cash crop cultivators, who had begun their sowing operations on the basis of crop prices determined by the relative prices of just a few months ago, now find that their cultivation will simply be financially unviable at prevailing input and output prices. With particular regions of the country, including some of the fragile dry land areas, increasingly dominated by such cash crop cultivation (such as cotton, groundnuts, soya beans) it is not difficult to imagine what will happen to livelihoods in such cases.
This is a major economic catastrophe that is not just waiting to happen - it is already unfolding. So a series of monetary and fiscal packages that does not even mention, let alone address, the inevitable problems of cash crop cultivation, is bizarre to say the least.
The other major group that is already negatively affected is of those workers who are employed on casual contracts, who now find that even their fragile jobs no longer exist. Many of these are migrant workers, often short-term migrants whose very existence tends to be ignored by our official statistics. The economic boom of the past decade relied heavily on such workers. This was very obviously true in the construction industry. But it was also the case in some labour-intensive services, such as cleaning, maintenance, private security, driving and related services, that catered to the requirements of the expanding corporate sector, and in effect subsidised it by providing a cheap and flexible external labour force. A lot of manufacturing, especially in those sectors such as garments, leather goods, gems and jewellery and metal products where exports have been seriously hit by the world recession, have also increasingly relied on informal contract workers, who could be hired and fired at will.
Many of these workers have already been laid off and many more will now indeed be fired, or at any rate lose their jobs at least temporarily. And so they will be forced either to stay in precarious conditions in the urban areas, or go back to their places of origin - villages or smaller towns. They will change from becoming providers of remittance incomes to their households, to becoming dependents of these households, even as these households face more fragile material circumstances than before. And so the negative multiplier effects will permeate geographically.
The potential for social and political upheaval caused by such economic changes should not be underestimated. The heat will be felt by state governments, who (despite the paltry provision of more borrowing facility announced most recently) will also be reeling under the pressure of coping with reduced tax revenues and increase salary expenditure because of the recent Pay Commission award. So state governments will not be in a position to deal with the consequences, unless explicit provision is made by the Centre for them to cope with these new and adverse circumstances.
This has significant implications, because many of these migrant workers, for obvious reasons, come from the most depressed and backward regions of the country, where there is currently little potential for productive income generation. These are often also the regions of dry land agriculture, where remittance incomes play a vital role in sheer survival. They are also - no surprise! - the regions where extremist Maoist activity is widely prevalent, because of the anger bred by persistent backwardness and rising inequalities.
So the economic geography of this unfolding crisis is likely to have huge political fallout. Because we live in an electoral democracy, it might be expected that the government - or at least the political parties involved who know they have to face the people in a general election in just a few months - would take note of these negative effects on the majority of voters. It is both extraordinary and alarming to realise that thus far nothing in the policy pronouncements suggests that the welfare of such people - cultivators and migrant workers - is at all a consideration for the central government. Their future is being sacrificed because our rulers seem unable to stop paying homage to a different type of mobility at the altars of international finance capital, however discredited this might be in the present global scenario.
By both counts, the measures announced so far appear to be lacking. On the first count, there is an official presumption that this is simply an imported crisis. And there is an associated blindness to important lessons about the regulation of finance that are coming from the developed world. Unlike possibly any other government in the world today, the Indian government is going in for more financial liberalisation, even when the results of such deregulation in terms of creating unsustainable bubbles and spawning major crises are there for all to see. While this may provide some immediate relief by propping up the rupee and stopping the bleeding of foreign exchange reserves, it will create the conditions for a much worse country-specific financial crisis in the near future.
On the second count, the policy response thus far is deficient because it seems to have ignored most of the people who are likely to be badly affected, in favour of a few who happen to be more well-connected. This particular economic crisis, because it has both financial and real economic aspects, is going to affect different people very differently. The financial sector is clearly hit. Stock market investors have lost (at least nominally) huge amounts, and the credit crunch is adversely affecting both large corporates and smaller businesses.
This inevitably has knock-on effects on the real sector, adding reduced domestic demand to the problem of depressed export markets. And so real economic activity, in both tradeables and non-tradeables, is affected and this directly translates into employment losses.
Most of the government’s measures are designed to ease the credit crunch and revive the stock market and investor confidence: by lowering interest rates, by propping up the banking system through promises of fresh capitalisation, by injecting new liquidity through relaxed credit norms. Clearly all this will not be enough in the current liquidity trap conditions, but at least it will directly benefit some large banks, corporate houses, builders and export units. The idea is that this will in turn benefit those who are employed by such agents, and therefore prevent job losses that would otherwise occur.
Yet in all this the government is ignoring two major groups of workers who are already directly hit, and who together account for the majority of the workers in the country: farmers and migrant labourers. Cultivators in India have already been through more than a decade of agrarian crisis, which persisted even through the period of rising international crop prices. They have then been on a complete roller coaster in price terms in the past year, as world trade prices of most crops doubled and then collapsed within a few months, and by the end of the year came to settle at levels below those of two years ago.
Many cash crop cultivators, who had begun their sowing operations on the basis of crop prices determined by the relative prices of just a few months ago, now find that their cultivation will simply be financially unviable at prevailing input and output prices. With particular regions of the country, including some of the fragile dry land areas, increasingly dominated by such cash crop cultivation (such as cotton, groundnuts, soya beans) it is not difficult to imagine what will happen to livelihoods in such cases.
This is a major economic catastrophe that is not just waiting to happen - it is already unfolding. So a series of monetary and fiscal packages that does not even mention, let alone address, the inevitable problems of cash crop cultivation, is bizarre to say the least.
The other major group that is already negatively affected is of those workers who are employed on casual contracts, who now find that even their fragile jobs no longer exist. Many of these are migrant workers, often short-term migrants whose very existence tends to be ignored by our official statistics. The economic boom of the past decade relied heavily on such workers. This was very obviously true in the construction industry. But it was also the case in some labour-intensive services, such as cleaning, maintenance, private security, driving and related services, that catered to the requirements of the expanding corporate sector, and in effect subsidised it by providing a cheap and flexible external labour force. A lot of manufacturing, especially in those sectors such as garments, leather goods, gems and jewellery and metal products where exports have been seriously hit by the world recession, have also increasingly relied on informal contract workers, who could be hired and fired at will.
Many of these workers have already been laid off and many more will now indeed be fired, or at any rate lose their jobs at least temporarily. And so they will be forced either to stay in precarious conditions in the urban areas, or go back to their places of origin - villages or smaller towns. They will change from becoming providers of remittance incomes to their households, to becoming dependents of these households, even as these households face more fragile material circumstances than before. And so the negative multiplier effects will permeate geographically.
The potential for social and political upheaval caused by such economic changes should not be underestimated. The heat will be felt by state governments, who (despite the paltry provision of more borrowing facility announced most recently) will also be reeling under the pressure of coping with reduced tax revenues and increase salary expenditure because of the recent Pay Commission award. So state governments will not be in a position to deal with the consequences, unless explicit provision is made by the Centre for them to cope with these new and adverse circumstances.
This has significant implications, because many of these migrant workers, for obvious reasons, come from the most depressed and backward regions of the country, where there is currently little potential for productive income generation. These are often also the regions of dry land agriculture, where remittance incomes play a vital role in sheer survival. They are also - no surprise! - the regions where extremist Maoist activity is widely prevalent, because of the anger bred by persistent backwardness and rising inequalities.
So the economic geography of this unfolding crisis is likely to have huge political fallout. Because we live in an electoral democracy, it might be expected that the government - or at least the political parties involved who know they have to face the people in a general election in just a few months - would take note of these negative effects on the majority of voters. It is both extraordinary and alarming to realise that thus far nothing in the policy pronouncements suggests that the welfare of such people - cultivators and migrant workers - is at all a consideration for the central government. Their future is being sacrificed because our rulers seem unable to stop paying homage to a different type of mobility at the altars of international finance capital, however discredited this might be in the present global scenario.
© MACROSCAN 2009