A game of shifting stands
V. Krishna Murty
The Observer
May 29, 1999
Title: A game of shifting stands
Author: V. Krishna Murty
Publication: The Observer
Date: May 29, 1999
With the launching of the liberalised economic policy regime during
the 90s, the traditional reservations as to the blessings of private
foreign investment inflows have largely given way to tremendous
enthusiasm for them. With a view to facilitate smooth flow of
investment into the country, the government has embarked upon the task
of dismantling various laws which constricted their flow into the
country over the years.
But is this change in policy from regulation to liberalisation
beneficial? Opinions can differ for several reasons. There are
different types of flows with differential impact on different
economic variables. While this is matter of positive economics where
research should help to unravel the truth, in practice, it is not
really so. Consciously or unconsciously, the ideological preferences
vitiate the research findings.
Of course, nobody can abide by the Spartan principles of positive
economics. However, one can largely remedy the state of affairs by
explicitly spelling out one's ideological preferences. But the
researchers usually shy away from this path in view of their desire to
get approval from the profession by pretending they have been
objective.
Moreover, the research methods adopted are not always above board.
According to Karl Popper, the scientific method requires the
researchers setting up refutable hypotheses. Admittedly, most of the
re-searchers find this condition onerous and accordingly, they shy
away from the standards prescribed by him. Consequently, most of the
researchers dole out anecdotal evidence in support of their
proposition. This is further reinforced by selective statistics. While
there can be some doubt about their utility in establishing
theoretical propositions, there can be none about their efficacy in
raising doubts regarding the widely-held perceptions.
For example, foreign private investment is sought by the developing
economies in the hope that these flows will help not only to
strengthen the balance of payments but also to bridge the gap between
savings and investments. While the portfolio investments are perceived
to lift the stock market, foreign direct investment is desired for its
contribution in upgrading technology and management.
These issues were sought to be thrashed out at a recent workshop
jointly organised by the Institute for Studies in Industrial
Development (ISID) of New Delhi and Economic and Social Institute'
(ESI) of Netherlands early this month. The papers presented at this
workshop by Prof K.S. Chalapati Rao and Dr M R Murty of ISID contain a
mine of data generated by their research. As explained by Prof S K
Goyal (director, ISID) these papers represent a progress report on the
on-going work on the research project on the same subject.
The choice of topic for research on global capital flows is timely as
India has been actively wooing foreign capital flows. Further, this
topic assumes importance, particularly in the backdrop of the Asian
currency experience. The impact was not merely on stock exchanges, as
the crisis happened to wreck these economies by its influence on the
exchange rate, interest rate as well as on the banking system.
While the authors were somewhat cautious in view of the fact that
their research work is in progress, most of the participants, in the
workshop were not so. They seemed to be convinced that the foreign
capital flows, irrespective of their nature, are no good to India.
A serious researcher may come to the conclusion that some of the
capital flows are desirable in realising certain policy objectives
even if they happen to be deleterious in some other respects. It is
not so with the gentlemen with Marxist leanings as they do not require
any further assistance from research.
Of course, Marxists were not alone in recognising the havoc played by
capital outflows on the Asian economies now and on Latin American
economies earlier. In certain contexts, the rescue packages of IMF
helped to revive confidence in these economies. But the prescription
of same old restrictive monetary policies for a large group of
economies at the same time has, in fact, hampered the growth process
across the globe.
But the important thing is that IMF, though, was not designed to meet
the global debt crisis sought to offer some succour within its
budgetary constraints. In the absence of an institutional mechanism to
meet such crises, they continue to recur.
Commenting on this, one learned former bureaucrat-economist wondered
why IMF should try to intervene at all in the debt crisis. He averred
that the logic of free enterprise required the IMF to keep off.
Probably he couldn't assume to be unaware of the stance of modern
liberals about the monetary interventions to maintain stability in
free enterprise economy. Domestic financial and banking crises are
avoided by the presence of the central bank as a lender of the last
resort.
While Soros may advocate such agencies to prevent global debt crises,
our Marxist veteran would like the world to experience the financial
collapse so that Marxian predictions of doomsday can come true.
It is immaterial whether Marx in fact envisaged such a failure. In
fact, several predictions of Marx have failed to materialise. That is
unimportant. What is important is the failure of capitalist economies.
Alas! What we witness is the collapse of several communist economies,
including USSR. And China has been wooing foreign capital more
successfully than any other developing economy. Our Marxist friends
would prefer to blink at these experiences.
It is not clear whether Marxist economists are worried about the entry
of MNCs into India, or their lack of enthusiasm, or exit from India.
They are prone to take potshots at MNCs.
Picking some data from ISID paper, one professor noted that actual FDI
inflows were much lower than the approvals. This led him to
hypothesise that these MNCs were trying to preempt the entry of others
in the field. Obviously, he was drawing upon the finding of Prof R K
Hazari regarding the practice of Birla companies of preempting the
licensing capacity in the good old days. It didn't occur to our
learned professor why MNCs should slavishly follow the example of
Birlas in this licence-free regime.
The right hypothesis is that MNCs perceive both visible and invisible
barriers on their way. These can be state or municipal regulations or
any other.
When this writer pointed out that Heritage Foundation placed India
very low in ranking in the matter of liberalisation, another communist
intervened to say that the body was a conservative one. But why should
India be placed at the bottom when there are several other countries?
The inevitable conclusion is that they are prisoners of their own
ideology.
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