Will Economic Development Lead To Conflict Resolution? – Analysis

By Kandaswami Subramanian

There is a facile assumption among many that economic development by itself would solve many of our problems and, in particular, resolve conflicts. This indeed was the dream of our college days and the early years of Independence when we were on a socialist path and embarking on Five Year Plans.

We had hoped that the Plan programs would lift us to higher levels of growth and development. Growth, we believed, would lead to higher incomes, wages and reduce poverty. It was also taken as a better way of organizing our society and as the road to harmony and social cohesion. In the last sixty years, especially after we took the so-called path of ‘economic reforms’, we are less optimistic and less sure of these assumptions.

As years pass by, there are signs of increasing violence at local and regional levels. Casteist and communal conflicts are on the rise. There are attempts at capturing public resources for private ends and such attempts are given political colors. Fight for reservation for OBCs, BCs, etc. is one such. Add to these the latter day charges of cronyism, corruption, money laundering et al. Political alliances and coalitions are being hijacked by regional groups owing allegiance to resurgent clans and, in many States, they are a part of the ruling collation.

At another end, terrorism and Naxalism are on the rise. In many parts of India, the writ of the States does not seem to run. Police reports on the rise of this form of terrorism are disturbing. Those who take to AK 47 have their grievances and many of them are genuine. Tribal groups which had been evicted from forest areas where they have been living for centuries and have lost command over living resources are on a war path. These are the compatriots of those who rose against the W.T.O. in Seattle a decade earlier.

An expert Committee constituted by the Planning Commission and headed by D. Bandhopadhyaya, an illustrious civil servant, drew attention to the root causes of Naxalist rise in these areas. Sadly, as reports i suggest, squabbles between the Commission and the Ministry of Home Affairs over the basic objective of the Integrated Action Plan (IAP) for Selected Tribal and Backward Districts have resulted in the dilution of the Plan. This is a clear instance of conflict over remedial strategies between the agencies of the government which should ordinarily be guided by settled policies.

In other parts of the country also there are conflicts caused by the economic policies of the Government of India. These are intended to promote economic growth and exports at a faster rate. The most damaging one has been the policy to establish Special Economic Zones (SEZs) with a thrust on creating facilities in regions to promote exports. Truly, China was a pioneer in promoting export zones in its eastern coastal zone and created record levels of

exports. But there were very special national and global circumstances leading to the success of that policy and was steered in a gradual and determined manner under the leadership of Deng Xiaoping. Deng staked his political future on experimenting with the market opening program. Once the experiment succeeded in some areas, he was able to expand it to cover gradually many other parts of China.

Sadly, in India, our efforts to promote SEZs have been disastrous. The government had approved more than 550 SEZs all over the country giving access to vast areas of arable land. In fact, many of them had become legal ruses to cover existing export operations to gain tax exemptions. Moreover, the attempt was to get access to large areas of land which could be used to promote real estate projects like construction of Malls, luxury apartments in gated communities, etc. These efforts led to what may be described as a Nandigram syndrome. From a larger social perspective, these led to land grabs and forceful acquisition of land at throw away prices. They were also seen as attempts to offer luxurious facilities to the rich at the cost of the poor landholders. These have led to large scale political disturbances marked by violence even in States ruled by Left parties. Another instance of ill-conceived growth programs creating more conflicts than solving any. There are other areas of conflicts at a micro level.

Truly, there are worries over what this “growth” really means for the people of India and what the components of growth are. For many politicians, Growth becomes a magic wand and the components of growth and whom they benefit are often ignored.

It is a fashion to denote growth by annual rates of increases of gross domestic product (GDP). The political leaders in China swore by their performance referring to the increase of their GDP at 10 percent per annum for over twenty years. Of course, historically no country had ever achieved this rate of growth. Deng had set a per capital income level to be achieved by 2005 and he was able to achieve it earlier. However, suddenly China’s leaders had their worries over rising inequalities, mass migration and social unrest, etc. threatening political stability. Well before the crisis of 2008, China was able to turn inwards and shift its priorities from higher GDP to better distribution of income and wages.

There are intense global pressures for rebalancing and the real issue is which country begins to rebalance and in what manner and who starts first. There is no global cooperation as yet. The IMF is supposed to be umpire to what the drama of rebalancing and the Fund lacks legitimacy to perform the role.

Amid all this debate, there is a continuing global competition among emerging economies to show higher rates of growth in GDP. Truly, India has inherited this malaise. All the agencies in the country – RBI, Planning Commission, Finance Ministry, Prime Minister’s Economic Advisory Council, and the Chambers of Commerce – compete with each other in projecting higher rates of GDP. Unfortunately, GDP masks a number of conflicts and is not a short cut to heaven. There are conflicts within the country between stakeholders, especially the rich and poor, and between foreign investors, foreign banks and domestic players both at the policy making level and with the so-called India Inc. Current inflation trends (threats) blowing from other shores spoil the game.

The current level of inflation which is very different from what we had witnessed in the recent decade has thrown up the conflicts in a grim manner. The Third Quarter Monetary Policy Review of the RBI released on 25th January has brought up these issues in the open. Many analysts feel that the RBI’s response has been rather weak and half-hearted. The RBI is seen to have been caught in the trap: inflation versus growth. If it showed a heavy hand to control inflation by raising interest rates or taking other tough measures, it would dampen growth. Therefore the RBI seems to have decided to play safe and ‘calibrate’ its steps, as the cliché now goes.

Most analysts are convinced that the ‘baby steps’ taken by the RBI may not help. One reporter of the Wall Street Journal ii said, “But food prices have been rising at a double-digit rate for more than two years, reflecting that this is driven by growing demand, as incomes rise faster than crop yields can be increased or new farm infrastructure built. Growth in demand, a product of India’s economic rise, is something the RBI can slow with more-aggressive increases.”

Most economists predict at least another 50 basis points to be added to the repo rate by the end of the year to cool stubbornly high prices. However, India Inc. seems unhappy over the RBI’s stance. The Secretary General of the FICCI “urged the central bank to be prepared to reverse interest rates if a slackening of industrial production persisted.” iii

Study this against the predicament of the poorer sections of the iv population who are facing a dire situation in the wake of rising food prices. There have been global warnings of the coming shortage and price increase and the need for structural adjustments. As Jacques Diouf, Director General of the FAO, explained, there has been a global failure to deliver on commitments. “If current trends persisted, the goals set by the world leaders of reducing by half the number of hungry people on the planet by 2015 would only be achieved by 2150.”

Of course, monetary policy by itself cannot increase food production or food security. Surely, it can help by curbing credit for speculative purposes. The idea in highlighting this issue is to illustrate that there are several stages and circumstances when growth comes into conflicts – between industrialists and the weaker sections of the population. While entrepreneurs clamour for lower interest rates, the poorer sections will fight for lower food prices and higher food security. If their expectations are not met with, there will be food riots. This was observed in 2008 when food prices rose abnormally. There are also reports of such riots in Algeria, Tunisia and Egypt. India with its vast segment of people below poverty line is highly combustible. v Unlike in advanced countries, inflation in India is identical with higher food prices. What emerges from this brief discussion is that there is no unique or single model of growth and a lot depends on the nature and components of growth. The larger issues are: What is the model of growth which can be inclusive and encompass the concerns of all sections of the people? Who decides the model? And who changes the model to suit changing national and global conditions? These questions are easier raised than answered.

Unfortunately, until recently, the agenda was hijacked by the advanced countries and was promoted through the International Monetary Fund (IMF) and the World Bank – the so-called Washington Twins. In the post second world war years, there was a profound debate on the nature of economic development, especially in developing countries, and the model suited for poorer countries. For some years, the policy mix was to adopt direct state intervention as in socialist countries, private enterprise as in some capitalist countries and a mixture of both, as in India. Over the years, even as aid flows from developed countries and the Washington Twins were increasing, the conditionalities attached to aid programs took hold and displaced all other modes or models. These were subsumed in what is called the “Washington Consensus.”

I do not wish to dwell more on this consensus as its history and current status are known to most of you. Under this consensus the endeavor was to give the primacy of place to the “MARKET” and relegate the role of the STATE or Government to that of a night watchman. Successive World Bank reports pressed for opening up the markets, creating better conditions for the market and for privatizing erstwhile state- owned enterprises.

These policy packages were rammed through the gullets of emerging economies. In fact, as was displayed in the wake of the Asian crisis of 1997, these packages were one-size-fit-all strait jackets and Loan Officers began to innovate and add their own conditions to loans. Neo-liberalism as a model reigned supreme. Airport economists, as Fund experts came to be denigrated, would descend on state capitals and threaten Finance Ministries with direct consequences if they didn’t follow their prescriptions. The unrealism of these policies and the adverse impact they had on many countries came be realized soon.

With improvement in their economies and their building reserves to insure against future financial crisis, developing countries began to desert the Washington Twins and created a budgetary crisis for them. Since then the Washington Consensus has been declared dead though, unfortunately, it continues to lurk in the minds of many economists working in Washington.

Developing countries like India continue to suffer from the collateral damage inflicted on them by the Fund/Bank policies. This has been documented in a scholarly study on the role of the World Bank in India. vi As the Editor explained in the introductory chapter, “The struggle is therefore with development policy and with historical capitalism as a form of social organization. It is a battle against a ‘development terrorism’ that is corporate- driven and based on the voting power of the rich in the market as opposed to democratic principles.”

There is deep seated opposition to the reform policies as they have been steered heretofore. This is based on the conviction and ground reality that the poorer sections have lost their countervailing power and the agenda is set by and for the corporate class. High rates of GDP proclaimed from roof tops do not gel with data on rural poverty, distressing rates of farmers’ suicide, and high rates of child mortality, lower life expectancy even when compared with very poor African countries, immiserisation of the weaker section by rising health costs, etc.

Globalisation has been the mantra of the Washington Twins, especially the World Bank. The Bank’s research group acquired global celebratory status and his was in great part the result of the support lent by multinational corporations and the U.S. government which was keen to promote their global outreach. Reports of the Bank, in particular the pretentious annual World Development Reports acquired episcopal status and conditioned the thinking of policymakers and many intellectuals. An evaluation of the World Bank research was undertaken in 2006 by a team of economists. vii The study was critical about the quality of the research undertaken by the Bank economists and how they oversold the globalization agenda. The endeavor of the Bank was to push all countries, especially the indebted developing countries, into the global market regardless of their endowments and the state of their development. This was very acute in the financial sector where the attempt was to drive them to adopt capital convertibility and open up their financial markets to foreign banks and institutions.

These policies created partial globalization for countries like India. However, they also led to dependence on foreign capital resources and created a fragile situation. These efforts could continue for some years until the financial crisis struck in 2008. When the collapse of Lehman Brothers took place, it nearly brought down the entire financial universe and many countries are yet to get back to the pre-crisis situation. This includes the U.S. also. Trillions of dollars of tax payers’ money is being pumped to revive bankrupt banks and there are no signs of success. I have dealt with this issue with reference to India in a paper published in the Political and Economic Weekly. viii The ongoing financial crisis exemplifies the conflicts between developed and developing economies. There are differences over the policies to be adopted to stimulate the economies and also the strategies for their withdrawal. High rates of growth of GDP in one country whether China or India or one region say Asia is no guarantee of stability across the globe. In fact, as is seen in recent months, there is growing tension between the US and EU and within EU between Germany and France and other members weakened by the burden of unsustainable sovereign debt. It is ironical that in the meantime the IMF keeps on issuing revisions in its estimates of GDP growth to douse the fears of its members! The IMF itself is clueless and waits for messages from its masters.

Globalisation as a policy is in retreat. Currently, there is a backlash against foreign trade within the U.S. and there is greater worry about failing exports and loss of competitiveness and employment than over other issues. It was with tremendous diplomatic pressure that the U.S. President could get the Free Trade Agreement with South Korea cleared by the Korean parliament. There are doubts whether this agreement will be approve by the U.S. Senate. Market opening is also in retreat and there are worries over competitive protectionism.

Currency wars are getting converted into trade wars and there is no atmosphere of goodwill to harmonise relations. Incidentally, the E.U. which portrays itself as a harbinger of free trade is the worst offender in defending its interests. The EU’s Sustainability Impact Assessment (SIA) done at a cost of 10 million Euros is an eye opener. In a recent book ix Clive George shows how the impact of trade opening on various sectors such as manufacturing, agriculture and services is insignificant and uneven. However, “developed countries which had climbed the ladder were shielded behind protectionist walls for over a century or more.” And they are attempting to remove them from developing countries when they need them badly. Add to these the damage caused to the ecology and environment of emerging economies.

The current global scenario has created a tragi-comic situation for India in terms of conflict resolution. There are reports that global investors have suddenly become bearish on India. As a report put it in Financial Times x, “Few would have guessed a year ago that a rise in the price of onion would put a brake on the stellar growth of India’s stock market and force investors to rethink exposure to Asia’s third-largest economy.” Data suggest that foreign direct investment (FDI) fell by more than a third last year. The RBI records a decline of 36 percent and it is estimated at $24 billion. The decline is sharpest in the construction, mining and business service sectors. As reported in the Wall Street Journal xi, the major charge was laid at the doors of “environment sensitive policies pursued, as manifested in the recent episodes in the mining sector, integrated township projects and construction of ports” and these appear to have affected investors’ sentiments. We have the tragic choice here:

Should the country opt for high growth with unfettered entry of foreign capital regardless of environmental damage or should we have greater concern about our longer term sustainable goals with lower growth rates?

There is a dark side of globalization. In the past many western economists used to criticize emerging economies, especially the resource rich countries in Africa, over their failure to utilize precious extractive resources to raise revenue and use them for developmental goals. They criticized them over corruption, lack of governance, internecine wars and similar other ills. In much of their analysis, these economists did not provide the nefarious roles played by multinational corporations to hire private military corporations and support tribes or groups which would ensure supply of raw material for their global operations. Congo is one of best examples of the negative consequences of world market integration or globalization in the world. The U.N. has come out with reports on the adversarial roles played by big corporations in that country. The Democratic Republic of Congo is described as a ‘failed’ state. Nigeria is also another country riddled with the corruption and corporate warfare. In a brilliant study xii two authors have linked this phenomenon to the early days of colonial entry into Africa. It is neither the result of post-colonial nor pre-colonial heritage. It dates back to the very beginning of the integration of Congo into the global economy. “Since the first contact with Europeans, it has experienced a vicious cycle of exploitation that promotes violence and is driven by internal power relations but even more so by world market demands. While the objects of these demands (slaves, ivory, rubber, copper, diamonds, coltan) changed over the centuries and decades, the structures of dependence and the pat terns of exploitation did not change fundamentally.” Congo offers an extreme case of resource abundance leading to corporate dominance. But the recent pattern of globalization which has taken place in manufactures, electronics, textiles, leather, etc. are paler versions of the same story. It leads to islands of sweat shops enriching corporate pockets. There may be high rates of growth through multinational corporations. But who really are the ultimate beneficiaries?

Recently the U.N. has come out with a pioneering and scintillating study on “The dark side of globalization.” xiii The two authors have given wide publicity to their findings and articles have appeared in most papers. xiv Not all globalization is garden party. There are unequal relations between developed and developing countries. Globalisation has also let loose the forces of ‘uncivil society” and accelerated the transnational flows of terrorism, human and drug trafficking, organized crime, piracy and pandemic diseases. There is need to maintain the right balance between openness and regulation. Growth in financial flows is not matched by an equivalent growth in global governance mechanisms to regulate them. On date, the advanced countries, especially the U.S., have not shown any willingness to engage in coordination exercises. Meetings in G20 end up empty statements and vague promises. Hence any hope of engaging in global integration in expectation of securing higher rate of growth may be misplaced.

As we see it, there are limits to growth. These are set by natural resources, infrastructure and human resources. There are competing claims and any arrangement which is exclusive or results in unequal or unfair distribution of gains to stakeholders will be unsustainable. Higher rate of growth does not necessarily resolve conflicts. The growth process itself may create conflicts and these will have to be resolved through state intervention including adequate welfare provisions. Growth may be conditioned or contained by external developments. From a longer term perspective, it is desirable to live with lower and steady rates of growth then at higher rates which are fragile.

(This paper was presented on 1-2 February, 2011 at the ” National Seminar on Conflict Resolution in South East Asia” organised by the Centre for Gandhian Studies of Alphonso College, Pala. The writer is a Former Joint Secretary, Ministry of Finance, Government of India)

i Planning Commission to delink tribal welfare from security, The Hindu, January 24, 2011.
ii India Needs Tough Love From Its Central Bank, The Wall Street Journal, January 25, 2011.
iii Indian industrialists fear rate rise too far, Financial Times, January 25, 2011.
iv Price volatility & food crises, The Hindu, January 26, 2011.
v Fiddling in Davos While Arab World is Burning, B. Raman, South Asia Analysis Group, Paper No.4298 dated 27 Jan. 2011 See http://www.southasiaanalysis.org/papers 43/paper 4298.html.
vi The World Bank in India, Undermining Sovereignty, Distorting Development. Independent People’s Tribunal on The World Bank India, Edited by Michele Kelly & Deepika D’Souza, Orient Blackswan, 2010.
vii An Evaluation of World Bank Research, 1998-2005, Abhijit Banerjee, Angust Deaton, Nora Lustig AND Ken Rogoff, September 24, 2006, World Bank.
viii Ghosts in the corridor, Economic & Political Weekly, 2008, 43(45).
ix The Truth About Trade: The real impact of liberalization, Clive George, Zed Books, 2010.
x India’s inflation deters foreign investors, James Fontanella-Khan, Financial Times, January 25, 2011.
xi Foreign Investment in India Slows, The Wall Street Journal, January 25, 2011.
xii The Dark Side of Globalization, Andreas Exenberger and Simon Hartmonn, Working Paper 2007-31, University of Innsbruck, 2007.
xiii The Dark Side of Globalization, Jorge Heine & Ramesh Thakur, UNU Press, 2011.
xiv See The Hind, January 10, 2011.