The world has come a long way in providing opportunities for economic progress to billions of people. The role played by “free and fair markets” and “competition” in doing this is today well accepted by a whopping majority. The examples are far too many and need not be singled out to demonstrate the infallibility of this statement. The concerns are however in the areas of inequities and asymmetries related to economic progress of people, the duality of opulence and deprivation that plague the same market economy at the same point of time. I have skillfully avoided the question of income growth since as Mr. Amartya Sen points out, “The income going to the poor is only one determining influence among many others in dealing with deprivation”. It is important to delve into these unpleasant questions not from the point of view of moral values and ethics but from the premise that avoiding a debate would only make us lose an opportunity to understand the imperfections in information and knowledge that exists and which in turn forces many enterprises, business or otherwise, in taking decisions that are based on perceptions rather than ‘base’ data of ground realities.
There are far too many treatises on the avoidance of the debate on this ubiquitous malady or the acquiescence to an over-riding belief on the “trickling down” prophesy that after all there is optimism to believe that growth is the most happening thing around us. But at the same time there are economists with far respectable credentials who bring out the essence of the flaws and the fundamental deficiency in the arguments put forward in defense of the above, work done by Mr. Amartya Sen (Nobel Prize winner, 1998) and Stiglitz (Nobel Prize Winner, 2001) are some of the best examples to be sighted in this regard. While the former pointed out that removal of poverty and deprivation required far deeper understanding of the diverse nature of problems that influence the conditions around a specific socio-economic time span and have regional, structural and topographical bias, the later pointed out the unequivocal role played by information imperfections related to economic progress.
The numbers of families across the globe who have struggled out of poverty in the last decade are not hugely different from the ones who have been afflicted by it. The thin line that differentiates people from privileged to poverty-stricken had been crossed over by hordes of families and households back and forth in either directions. Promoting escape and arresting decline follow different sets of rules. While diversification of income sources forms the primary road to escape, there is a mix of factors that govern the arresting of decline, lesser access to micro-credit and failure to deal with insurmountable debt are few of the prime factors out of the many. This may be stunning to many but not to those who deal with the statistics of consumption data in zones of deprivation.
Growth asymmetries in the higher percentiles with low consumption capabilities is the major impediment to aggregate demand growth, an understanding of this fundamental problem would do a world of good to those who run small and large enterprises and often get affected by it; taking a plea that concentration on the smaller percentile with large consumption capability would stand out in the long run due to “trickling effect” is a little far-fetched as there are limits to consumption capacity of any group no matter how bloated the growth rates can be and that of “trickling”.
The real issue is that as free flow of capital, goods and services are made to compete in an open market, the expectations are that it would lower costs and that there would be an equity as far as availability of this benefit is concerned to all the participants in the market; in other words capital at a market rate and prevailing credit would be available to all opportune people who want to enjoy this. This does not happen. And let us understand why it does not happen.
The fundamental problem is with information imperfections related with Capital deployment itself in all forms.
Mr. Amartya Sen points out, “Indeed, many advocates of the market economy don’t seem to take the market sufficiently seriously, because if they did, they would pay more attention to spreading the virtues of market based opportunities to all. In the absence of advancing these enabling conditions for widespread participation in the market economy, the advocacy of the market system end up being mere conservatism, rather than supporting the promotion of market opportunities as widely as possible. Institutional broadening needed for efficient access to the market economy is no less important for the success of the market economy than the removal of barriers of trade.”
Let’s take the example of the organized financial markets and its continuing focus on international trade where returns are supposedly based on primary data related to opportunities, performance factors and sensitivities. The data starts with a presupposition of limits to every element. It delves into risk elements with a certain degree of confidence and more often than not the hypothesis evolves around certainties already experienced in the past. Thus artificial boundaries are created and the market gets limited to supposedly “high return” pockets, or in the banking parlance “the priority sector”, in the process limiting the potential. Past experiences are far too limited in new areas which have not seen the light of day and which have seemingly dormant exposure to investments of all kinds. Another reason for this apparent reluctance is the lack of honest and untiring effort to understand the problems of these untapped markets, which require care and limitless patience.
This finds acceptance by no less than George Soros himself who pointed out that International business concerns often have strong preference for working in orderly and highly organized autocracies than in less regimented democracies which have a regressive influence on equitable development. Credit in its benevolent form as in West, for example gets extended to very limited number in this world, minuscule ten to fifteen percent of the world population, while the need may be actually many fold. Micro credit to farmers and the retail chain is another example of a tremendous opportunity lost in extending the much- needed help to create conditions for growth. Returns from these investments from the sheer size of the numbers to whom these facilities could be extended is by no means minuscule if the institutions that provide them focus on the conditions that would facilitate the right actions needed for success. The problem is that it requires a far bigger framework at the political level, a structure that has a deep -rooted foundation, its inherent economics notwithstanding.
This brings us to the question of channeling capital to areas that do not follow rules of the free market, primary education for example or basic health in a poor village or extending water availability for irrigation. The incentives for such investments cannot be obtained by prior calculations; investment yields would be far from any other. The greater problem would be to move into areas where supply demand balance does not exist (fundamental principle of supply equates demand doesn’t apply), labor markets for example in less developed economies, where supply never matches demand.
But avoidance of these markets for free capital to flow is a bigger problem hardly realized by many, not only does it limit the flow of economic activities but also it creates conditions for imbalance and instability in any economy. The slightest of downturn in the adjoining markets creates conditions of an overwhelming depression which has a multiplicative effect all round.
Debt and its iniquitous treatment pose a far saddening picture of morbidity. On one hand we have a mountain of debt created by unfettered relaxation of capital controls in the developed West and on the other a moderate one in the less developed which has a compelling need for a kind treatment and compassion. Per capita debt in the under-developed world is very minuscule but gets treated with conditions far more austere and less suited to the needs of the debtors. These deprivations are more influenced by information imperfections than by economic sense of markets. The prescriptions given to tide over the debt problems in the Developed West are far different from the ones given in the less developed. For example interest rate hike had been abandoned as an idea long time back in the West, but found it coming as an only solution in the East Asian crisis; one can imagine the gravity of the problems in smaller micro-economies within such economies, in villages and towns where debt instruments are left to the vagaries of all kind.
Making micro credit available to a large majority and helping to come out of the debt burden are the two most important elements of any sound economic instrument to fight deprivation. The examples already exist, where this has been possible, in smaller pockets but have never been attempted as a general approach to development, the biggest remiss in our times.
Let me take the Indian example in the post reform period to illustrate how antithetical have been the performance of the banking sector in terms of spurring growth, although prime lending rates have fallen progressively. While the deposit rates have fallen sharply the lending rates on a weighted average basis have not. For example while the banks on an average offer 5.5% for deposits up to 3 years, which is less than the inflation, the weighted average lending rate is still fairly high at 12%, thus making the real interest rate still very high in the region of 7% to 8% thus making many businesses still uneconomical. The “priority sector” corporate bodies however continue to enjoy credit at well below 6%-7% due to the strength of their balance sheet. This asymmetry, no matter how much justifiable by economic theory, is antithetical to growth.
Let me then come to the issue of the credit to deposit ratios of banks. This is a major driver for growth. While the incremental credit-deposit ratio has been 55% for the year 2003, the increase in non-food advances has been 15% compared to 16.8% for the earlier year. Apart from the credit expansion, its distribution amongst the sectors has been disappointing. Till the 1990s there was a 60% credit-deposit ratio prescribed for the rural and semi-urban branches of banks. There has been a steady decline in this and today they hover around 40-45% in the rural areas and 34-35% in the semi-urban. Yes, there may have been a decline in the number of viable bankable projects, but the importance of “supply-lending role” of the banks cannot be disputed. The worst however has been the share of agriculture in the total bank credit, which had touched 18% in 1980s have now come down to 9.8% and the same for small scale industry segment has dwindled from 13.4% to 5.1%.
These are examples of policy decisions that do not go hand in hand to spur growth. On the contrary it would aid growth asymmetry in a nation like India.
Let me then move to other examples of the world.
Imagine an aggregate debt of $30 Trillion sitting at United States, which is exactly equal to the World Economic Output. And on the other you have minuscule debt, with no sympathy, distributed over a range of economies, which have a compelling need to come out of the shackles of deprivation of all kinds. There is no economic sense in this wide difference and it looks as if the rest of the world has taken the onus of saving money and deferring their lives’ enjoyment so that a single privileged economy enjoys the fruit of all their misery. India for example is in the top six nations that hold the U.S. Treasury Bills, largely coming from the savings of common man.
This has to do with imperfections in the decision making process by the World Institutions and the International Financial market institutions in particular. The results of such gross folly orchestrated over years and aggravated further by wrong promises not vetted by fundamental strengths of economic entities transacting over short and long periods have trickled down to this overwhelming chaos that engulfs the economic environs of the world. On one hand there is an economic engine that gets fueled by the savings of the entire world and that does not have the fundamental strengths to move at the targeted speed and on the other there are a whopping number waiting for the opportunity to be fueled. The return on investment curve we all know follows the same principles of growth, maturity and death unless fundamental changes are brought about with painstaking corrections.
The international financial markets cannot be held solely responsible for this finance capital over drive into one single economy. The World Institutions like IMF have failed miserably to act; the World Bank has tried to respond but yielded no great result.
Let me single out the funding of mergers and acquisitions in U.S. alone that took place in the period 1994-1998. It is a whopping $ 3 Trillion, one third the GDP of U.S. How many of these mergers and acquisitions created value in terms of generating wealth, improving the top-line growth, creating opportunities for employment? The number wouldn’t even be 20%. Surely the funding did not come from printing Greenbacks at the back yards of U.S. households. It came from the savings of millions of people the world over, including the U.S. of course.
Financial market imperfections stemming from altogether wrong assumptions of growth and sustenance is one of the biggest regressive factors; alleviation from the morbid shackles of depravity the world over cannot happen if such imperfections are allowed to continue.