Prabhat Patnaik. Download full Paper at IDEAs Website

The case for ‘planning’, in the sense of a co-ordinated set of policies to realise, at least in some key sectors, certain magnitudes of investment and output-growth, remains as strong today for developing countries wishing to achieve economic and social transformation, as it ever was. There are at least three reasons for this. First, the pace of investment in a spontaneously-operating capitalist economy depends upon the so-called ‘state of business confidence’. The state of business confidence may be such that it leaves the economy demand-constrained for long-stretches of time; what is more, even when the macroeconomy is not demand-constrained, the mix between consumption and investment in aggregate demand may be too much in favour of consumption relative to social requirements. Deliberate intervention by the State is needed not only to overcome demand-constraints, as the Keynesians argue, but, more importantly, to alter the composition of aggregate demand, and to do so in a manner which is socially equitable. The second reason relates to the need for sectoral balance. While the previous argument remains valid even in a one-good world, an additional problem arises the moment we recognise the real life multiplicity of commodities. For a spontaneously-operating capitalist economy, the pattern of supplies adjusts to the pattern of demand through episodes of profit-inflation located in particular sectors. These provide the signals for supply-adjustments to occur over a period of time. In short, the episodes of sectoral profit-inflation are more or less protracted, less protracted, depending upon the speed of adjustment of supplies. But such episodes of profit inflation, if they are severe, protracted and relate to certain essential sectors, are capable of causing extreme social hardships and devastation. The most notable case here relates of course to the supply of wage-goods. A sharp profit inflation in the wage-goods sector can cause, and is known to have caused, severe famines. Deliberate State investment is needed to eliminate supply- adjustment lags in wage-goods and in other key sectors. In sectors like agriculture, it is essential in any case to activate private investment, i.e. for the process of supply adjustment itself. In addition, by anticipating profit inflation and activating supplies before the event, it can in fact eliminate the very need for profit-inflation, and hence the attendant economic hardships. The third reason tums on the distinction between spontaneous and non-spontaneous structural change. Even if a system is not demand- constrained, and even if sectoral imbalances are instantaneously eliminated through the perfect shiftability of capital from one sector to another, the accumulation process is accompanied by a process of spontaneous structural change. The introduction of new processes and products which are perceived to be marketable gives rise to spontaneous structural change. The market in other words responds not only to visible signals, but also to a certain range of invisible signals. What it does not respond to is a range of other kinds of invisible signals, e.g. the social discontent inherent in a situation of unemployment, poverty and sub-human existence. The latter require the deliberate introduction of non-spontaneous structural changes, and this can only be done through deliberate State intervention.

It may be thought that the elimination of poverty is a matter merely of raising the rate of accumulation further, leaving the market to decide where this accumulation goes, so that this case is merely a part of our first reason. This however is not necessarily correct. Raising the rate of accumulation, if it simply accelerates spontaneous structural change and thereby raises the rate of growth of labour-productivity, may have a negligible additional impact by way of absorbing the poor and the dispossessed into higher-paid wage-employment. And if the population is expanding rapidly, then this absorption may require rates of accumulation which are impracticably high if a reasonably meaningful time-horizon is chose. The need arises therefore for introducing non-spontaneous structural change, and curbing to an extent spontaneous structural change. Both this introduction as well as this curbing require State intervention

Taken together, these three reasons for State intervention constitute an argument for more than mere fiscal interventionism, for more than mere public investment policy. They amount to a case for the state shaping broadly the trajectory of growth itself. While this is what I mean by planning it is obviously not synonymous with central planning, with detailed output targets, that was current in the Soviet Union earlier. There would be a range of public investment targets that the State would try to meet. It would seek to realise complementary private investment targets, and hence certain minimal levels of output growth-targets in some key sectors. These would determine the overall trajectory of development, within which there would be sufficient room for the operation of the free market, with the State imaginatively improvising responses to the strains that would inevitably arise from time to time owing to the operation of such a mix between the plan and the market. As is obvious from the above, the operation of such a system is not only not predicated upon universal public or collective ownership of the means of production, but is even compatible with private capitalist (not to mention petty) ownership in several spheres, provided of course the capitalists are responsive to the social need underlying the trajectory of development articulated by the state.

II

I should like to distinguish this vision, which I think has relevance for a democratic South African economy in the current conjuncture, from two other possible visions. The first of these believes in a ‘minimalist’ State. While the need for State intervention for undertaking certain infrastructural investments which the capitalists may be unwilling to do, for providing certain social services, and for weaving a ‘safely-net’ for the poor and the unemployed (the need for which is often seen to be only transitional), is recognised, the basic solution to social and economic problems is seen to lie in rapid economic growth, and the chief means of growth are seen to lie in the provision of freedom of operation to capital, both domestic as well as multinational, in the domestic economy. Allowing markets to function without interference, removing domestic controls of various kinds, and liberalising trade, are visualised as ushering in an internationally competitive, efficient economy which would exhibit rapid and sustained growth. While a certain amount of taxation by the state is accepted as being necessary for meeting its spending obligations, such taxation, it is suggested, should neither result in domestic price-distortions nor destroy capitalists’ incentives by being excessively high (at any rate by international standards).

A variant of this argument in the South African context would state that since tax-rates here are already very high by international standards, the State should meet its expenditure obligations, especially for the uplift of the oppressed in a democratic South Africa, by privatising State owned assets. This particular argument is palpably wrong. In a supply-constrained system, an increase in State expenditure on the upliftment of the blacks would not cause any additional macro-imbalances only if there is a simultaneous reduction in aggregate demand elsewhere i.e. in other avenues of public expenditure or in private consumption or investment (apart from foreign capital inflow). Now, unless the sale of State-owned assets to the private sector results in a reduction of private consumption or investment in order to finance their purchase, privatisation financed State expenditure would cause serious macro-imbalances by generating excess aggregate demand. Putting it differently, if private purchases of State-owned assets are financed by credit-creation, then using the proceeds from privatisation to expand State expenditure is no different in its macro-impact from a straight-forward credit-financed expansion of State expenditure; while causing exactly the same macro-imbalance as the latter, it amounts to a gratuitous transfer of State-owned assets to private hands. The fallacy of this argument incidentally is a replication of a fallacy which one finds in IMF-stabilisation policy packages. For stabilisation, the Fund argues, fiscal deficits should be cut; suggesting targets for fiscal deficits is a part of the Fund’s usual ‘conditionalities’. But in calculating the fiscal deficit, the Fund takes the proceeds from the sale of State-owned assets as an item of receipt, which in general is analytically illegitimate. The Fund may have ideological reasons for treating the sale proceeds of State-owned assets as if they constituted flow-receipts, but to accept this argument amounts to subscribing to a fallacy.

Let us however get back to the vision of a ‘minimalist State’. In a ‘liberal trade’ regime, assuming a given exchange rate, assuming a given import propensity, assuming that there is no deficiency of aggregate demand arising on the domestic side, i.e. that the State and the private sector taken together spend what they get, and ignoring all capital flows and debt-servicing, the rate of growth of output would be tethered to the rate of growth of exports. Those who argue for a ‘minimalist State’, therefore, pin their hopes for rapid growth on the ability of a ‘liberal’ regime, because of its acquired international competitiveness, to achieve high export growth-rates as well as a progressive lowering of the import propensity. The argument in other words is that such an economy would hold on to, or even improve upon, its share of the world market in a period when this market itself is believed, on the whole, to be a rapidly expanding one, and to witness no further increases in restrictive trade practices.

Even if we concede for a moment the last two beliefs, the argument is an invalid one for the following reasons. First of all a ‘liberal trade’ regime is a weapon that cuts both ways. While it is a truism that, if the world market is expanding rapidly, a country that retains or improves its share of it would witness rapid growth, a ‘liberal trade’ regime is as likely to allow others to encroach upon the country’s own home market as it is to allow the country to encroach upon the markets of others. In a typical third world context in fact, it is the encroachment by others upon the country’s own home market which is the fall-out of ‘trade liberalisation’. What is more, whatever prospects might have existed for the country’s eventually encroaching upon others’ markets get sabotaged in the very process of transition to a ‘liberal’ regime; in other words, the very nature of the traverse from a dirigiste to a ‘liberal’ regime determines the eventual position the country finds itself in, no matter what potential a ‘liberal’ regime held for it in the abstract.

Trade liberalisation brings immediately in its train a process of domestic de-industrialisation (together often with a lowering of the domestic savings-ratio), which is financed by borrowings from the Fund, the Bank, and, through their courtesy, from multinational banks. The beneficial effects which are supposed to accrue to the export profile from trade liberalisation, can after all manifest themselves, if at all, only after a considerable length of time. Meanwhile, the debt incurred at the initial stage of the traverse has to be serviced, and for this a further deflation of the economy is undertaken. The unemployment initially engendered by de- industrialisation is added to by the subsequent deflation. The running down of infrastructure because of the deflation subverts to an extent the prospects of export growth. And even if perchance exports do eventually pick up, the additional exchange earnings go largely into debt-service payments, somewhat easing perhaps the magnitude of domestic deflation, but by no means lifting the economy to the promised higher growth-profile. This picture of the traverse is made only grimmer to the extent that the exchange rate is depreciated as an accompaniment to the deflationary policy. This accentuates inflation, lowers the real wages especially of the unorganised workers and gives rise to speculative capital flight. In other words, the deflation-cum- devaluation package succeeds in ensuring that the burden of domestic adjustment during the traverse falls precisely on those sections of the population which are least able to bear it.

But this is not all. The argument for a ‘liberal’ economic regime is flawed for a second, even more important, reason. If it entails freedom for capital flows, then it makes the growth-process of the domestic economy dependent entirely upon the caprices of domestic and international investors. In any case, a theoretical flaw in any conception of a free global economy, where each country accepts the world prices of commodities and adjusts its production structure to these prices, lies in the fact that, even assuming that there are no problems of global aggregate demand, the locations where capital accumulates remain indeterminate; the fact that underdeveloped countries have lower wages does not by any means ensure that capital would flow towards them, rather than away from them as has historically happened. But when we superimpose freedom of capital flows upon a situation of traverse as discussed above, the problem becomes acute. Domestic deflation, growing unemployment, accelerating inflation accompanied by repeated depreciations of the exchange rate, declining real wages of unorganised workers, and the growing discontent that all this gives rise to, together with the increasing criminalisation of the society, provide the setting for capital flight; and this only exacerbates the problem ensuring that the promised turnaround in the economy is postponed still further.