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THE THEORETICAL PREMISES OF STRUCTURAL ADJUSTMENT :
[Lecture delivered at the Academic Staff College, JNU, in September 1998. The copyright rests with Prof Prabhat Patnaik. This may be downloaded and copied only for personal, non-commercial and academic purposes. Scanned and proofread at the Academic Staff College, JNU.]
Orthodox economic theory operates in terms of a concept of equilibrium, traceable to Walras, which is characterised by the property that if all transactions occurred at equilibrium configurations then all markets would clear. This equilibrium has well-known properties of optimality. But even on the assumption that all transactions occur at equilibrium configurations, the uniqueness and stability of this equilibrium require the satisfaction of certain very stringent conditions (Mukherji 1990). And of course when transactions occur at prices other than the equilibrium prices, there is no reason to expect stability.
There is however an alternative conception of equilibrium which has been used by the different genres of heterodox economic theory, whether Keynesian or Classical or Marxian, and which, though palpably different from the Walrasian conception, needs explicit characterisation. Before doing so however some preliminary remarks are in order.
The problems with the Walrasian conception have been much discussed, but, for our purposes, two in particular need to be noted. First, the flexibility of prices, whether in terms of the numeraire money or in terms of some other particular commodity, may in fact be subject to bounds, in which case the Walrasian equilibrium as a stylisation of the functioning of a market economy would lose its rationale even if we close our eyes to all its other problems. Malinvaud (1977) has talked about a rationing equilibrium at fixed prices, but of course prices need not be fixed in all markets. In Classical and Marxian economics, in the short-run, all markets clear to eliminate excess demand, except the labour market where the `real wage', i.e. the price of labour-power relative to the price of some basket of wage goods has a lower bound which may even change from one period to the next (Goodwin 1967). (Over time- (logical or historical), these 'market prices' would tend to `gravitate' towards `prices of production' but that is a separate matter). In Keynes all markets clear except the labour market where the money wage rate is given.
It does not follow of course that if these prices were perfectly flexible then unemployment would have disappeared in the Classical or Keynesian systems. But the fact of this insufficient flexibility undermines the relevance of the Walrasian stylisation. This insufficient flexibility in turn can be for any number of reasons: institutions like monopoly or trade unions characterising the economic landscape, political compulsions, 'efficiency wages', 'subsistence wages' etc.
The second problem with the Walrasian conception of equilibrium arises because of the historicity of time, the fact that the present is sandwiched between an irrevocable past and an unknown future. The past leaves a legacy, not only of endowments as commonly recognised, but also of commitments in the form of payments obligations; the future on the other hand is something about which only expectations can be held which provide the basis for action today. To be sure one can think of a set of particular expectations on the basis of which a Walrasian `temporary equilibrium' can be defined. But once we accept that these expectations change as the variables relating to the current period change, the conception of equilibrium faces serious problems. Owing to the existence of commitments from the past and expectations about the future, it becomes perfectly conceivable that no amount of price movement in a world of perfect price flexibility can eliminate excess demand (positive or negative) in particular markets (Keynes 1936, Ch.19; Kalecki 1967). The fact that such a world nonetheless experiences a state of rest somewhere would then have to be attributed not to any tendency towards a Walrasian equilibrium but to the fact that there actually are bounds to price movements.
Thus, one interpretation of Keynes would hold, not that rigid money wages are a cause of unemployment equilibrium, but that there is no spontaneous tendency towards a removal of excess supply in the labour market through money wage movements, and that the sluggishness of money wage movements is what prevents a free fall of money wages by providing a perch where it rests. If anything, inelasticity of price expectations in asset markets which is necessary for ensuring that excess demand moves inversely with current price can arise from the fact that certain prices do have limited flexibility(1). In other words limited price flexibility acts to stabilise the system around some state of rest even if this is not the Walrasian equilibrium; but if such limits did not exist then there would be no anchorage for price expectations whose elasticity may be too large to permit the usual shape of the excess demand curve that underlies a Walrasian equilibrium.
If the first point mentioned above argues that limited price flexibility undermines the relevance of a Walrasian equilibrium, the second point argues that unlimited price flexibility, such as is assumed for a Walrasian equilibrium, can also undermine it for a different reason, namely by removing the basis for inelastic price expectations in particular asset markets.
It follows then that an alternative conception of equilibrium is called for which would provide a more adequate stylisaion of the eonomic universe. Such an alternative conception defines equilibrium merely as a state of rest for the economy where all markets do not clear and recognises the existence of limited price flexibility in many markets as well as the possible destabilising role of expectations. In other words if we do not burden the concept of equilibrium with the clearance of all markets and in the process deprive ourselves of the ability to cognise several real-life phenomena, then we could define the equilibrim merely as a state of rest for the economy and make our theory more open-ended. This is what Keynes did; and this also characterises Classical economics in its short-period version (which is the version comparable to Walras). Such a conception of equilibrium represents a better stylisation of reality, and we shall use the term henceforth only in this sense.
The purpose of this preliminary disquisition is the following: the theory underlying structural adjustment is derived from the Walrasian conception and its claim to validity is necessarily based on the presumption that the Walrasian stylisation is an adequate representation of the real world(2).
This may appear strange at first sight, since much of the argument in support of structural adjustment rarely invokes any high theory and is generally confined to swapping anecdotes about government "inefficiency" from which the need for greater reliance on the market mechanism is supposed to follow as a self- evident proposition. But this impression is erroneous. Structural adjustment refers not to some minor administrative reorganisation but to a systematic shift towards greater reliance on the market on the grounds that "it works". Any statement that the "market works" must be backed by some theory, and in particular some notion of equilibrium; and no theoretical statement about the successful working of the market can be made unless it is believed that the market achieves full employment of all resources, i.e. that under the functioning of the market mechanism all individual markets clear as envisaged by the Walrasian equilibrium. Even propositions about the advisability of "more use of the market" being better, i.e. propositions comparing two "suboptimal situations" (in Walrasian terms), if they are presented as being unambiguously valid, must logically entail an acceptance of the Walrasian stylisation. In short, like Moliere's Monsieur Jourdain who talked prose without knowing it the advocates of structural adjustment have been talking Walrasian equilibrium without always knowing it(3), in which case it follows from the inadequacy of the Walrasian equilibrium as a stylisation of reality that the theory underlying structural adjustment is misleading.
To establish my point that structural adjustment does indeed rely on a Walrasian equilibrium, and is for that reason flawed, I shall give two illustrations. The first relates to the much-used concept of "efficiency"(4).
In any period, and we shall confine attention here only to the single period, "efficiency" can be unambiguously and unexceptionably defined as follows. If on the basis of the same endowment of resources which are made available for use, one activity bundle gives a larger vector of final goods than another activity bundle then the first is more "efficient" than the second.
This definition which is in terms of production outcome is supposed to be achieved through a certain instrumentality which itself is therefore sometimes used as a second definition of "efficiency". This second definition can be seen as follows. Consider any actual position of production characterised by an activity-set. One can think of marginal rates of transformation / substitution of inputs into outputs, of outputs into outputs and of inputs into inputs associated with this activity-set. Now, if there exists some activity outside of this set whose inclusion at the expense of some activity inside the set "improves" these rates of transformation/substitution, in the sense that one more unit of any input either gives more extra output in the alternative set than currently or saves more of some other input than currently, or that one more unit of any output necessitates a lower fall in some other output than currently, then the use of this alternative set instead of the current one entails an improvement in efficiency.
This second proposition can be stated in a different way: associated with any activity set is a set of implicit prices (whose ratios are nothing else but these rates of transformation/ substitution we have been talking about). If at these prices some other activity-set, formed by replacing a current activity by an activity outside the set, yields a profit, then a move to this set represents an improvement of efficiency.
Now, these two definitions of "efficiency" which are usually taken to be identical are not identical. The view that the market promotes "efficiency" , or that "trade is efficient production", is based on the belief that the two definitions are identical: the market of course palpably promotes efficiency in the second sense, but this second sense is meaningful only as an instumentality for achieving efficiency in the first, real sense. Thus if the two are not identical, then that makes the "efficiency" argument in favour of the market untenable. And the lack of identity between the two arises because of the fact that greater recourse to trade does not leave the level of employment, i.e. the level of resource use, unaffected. In other words if the market while trying to promote, supposedly, the efficiency of resource use, actually makes resources unemployed, then by any objective criterion, such as our first, unexceptionable, definition of efficiency, it reduces, not promotes, efficiency.
Those who believe in the proposition that the market promotes efficiency must ipso facto believe that unemployment, whether of the Keynesian or of the Classical (Marxian) variety, does not occur, i.e. the operation of the market ensures full employment exactly as in a Walrasian equilibrium. It follows that the proponents of structural adjustment who argue that the market would improve the efficiency of resource use must believe in the reality of the Walrasian equilibrium.
The second illustration relates to the effect of the so-called `rent-seeking' activities (Krueger 1974) , and, more generally, of the 'directly unproductive expenditures' that Professor Bhagwati talks about. These, which, it is taken for granted, constitute an unmitigated evil, may well play the role of keeping the level of employment higher than it would otherwise have been, if the system is demand-constrained (Ghosh 1995). To be sure, it is better to have the same injection of demand through other, more `productive', means than through unproductive expenditures; e.g if the resources devoted to 'unproductive expenditures' could be used for investment, the economy would be much better off. But this is not the same as saying that the elimination of 'directly unproductive expenditures' is per se an unmixed blessing. In fact if the system is demand-constrained, then, since a reduction in unproductive expenditures would not automatically lead to an increase in investment or in other wortbwhile expenditure, there would be a reduction in the level of activity and employment through the multiplier. This may even have the effect of lowering the level of investment subsequently through the accelerator, so that, far from stimulating growth, the reduction in unproductive expenditures could have the precisely opposite effect. (Indeed Baran and Sweezy (1966) had argued how 'wasteful expenditure' of various kinds had played the role of boosting the level of employment, activity and investment in post-war American capitalism)
Those who argue that 'unproductive expenditures' are unambiguously harmful for the economy under all circumstances therefore must believe that the removal of dirigisme and the introduction of more or less free markets would eliminate these unproductive expenditures without there being any drop in employment and activity. They must in other words believe in he spontaneous ability of the market to eliminate deficiency of aggregate demand. This is tantamount to a belief in the Walrasian equilibrium.
So far I have argued that the theory underlying structural adjustment, which assumes the spontaneous tendency of the market to eliminate involuntary unemployment, whether of the Keynesian or of the Classical (Marxian) kind, is necessarily based on the belief that the Walrasian equilibrium is an adequate representation of the world. Since, for reasons already discussed, it is not, the programme of structural adjustment lacks theoretical validly. I shall now try to show that its introduction in a third world economy can even be pernicious. I shall do so through a simple model which in my view gives a better stylisation of the reality of third world economies than the Walrasian one. The equilibrium we shall be talking about is a heterodox one which recognises involuntary unemployment.
Consider an economy with just two sectors "food" and "manufacturing "where" food" output is given in the short - run (one of the specificities of agriculture which yields the bulk of food) but "manufacturing" output is a function of labour alone with diminishing marginal productivity, since the equipment stock is given. (One can think in terms of a vintage model to make the story more credible, but the purpose of using the production function approach is precisely to remain as far as possible within the neo-classical paradigm)
The workers spend their entire wages on the consumption of "food" while the "manufacturing" output is used for capitalists' consumption, government consumption and investment. The real wage rate of the workers is given, i.e. their money wage rate is such as to give them some "subsistence" amount of "food" at the prevailing food price. We can express what has just been said through the following equations:
where O denotes output, L employment, p price, the l.h.s. of (3) the (fixed) real wage, and subscripts f and m the corresponding sectors. The equations are self-explanatory.
Food is the export commodity (the general case of primary commodity exports will be discussed later), the magnitude of exports being given by the excess of production over domestic absorption. The manufactured good is imported, again the magnitude of imports being given by the excess of domestic absorption over production. The world prices of the two commodities are given and unaffected by the country's actions ("price-taker" assumption) . The domestic prices (at the given price of foreign exchange) are different from these world prices, higher for the manufacturing sector and lower for the food sector.
The difference between the world price of food and its domestic price is sustained through quantitative restrictions on food exports (with only the unabsorbed output at the prevailing domestic price being exported) , and the difference between the world manufactured good price and the domestic price is mopped up by an import tariff. We thus have
where Dm, denotes the quantity of the manufactured good demanded (and actually absorbed), e the price of foreign exchange, and t the tariff rate; all other symbols are self-explanatory.
Now Dm, the magnitude of the manufactured good domestically absorbed depends on the demand of the government and of the capitalists operating domestically. We assume that the government's total demand is its current and investment expenditure which are given in the short period (we ignore here the complications arising from the fact that private propensity to spend out of government transfers such as interest payments may be less than unity). The government's fiscal deficit is simply the difference between this total expenditure and its revenue. This revenue consists of import tariff revenue and other (tax and non-tax) revenue which is some fixed proportion of the total surplus of the manufacturing sector (we avoid in this way, for the sake of simplicity, the need to draw any distinction between public and private sector enterprises). The investment by the capitalists of both sectors is given; the consumption of the "manufacturing" capitalists is a fixed proportion of the manufacturing sector's surplus left over after the government has taken its share, and of the "food" capitalists the same fixed proportion of their surplus (which is not taxed). On this basis we have:
Dm = G +Ig +Ip + c.P(1 - t)/pm + c.(Of- w.Lf))pf/pm...(8)
pm(G + Ig) = t.P +tpm.M.e + D...(9)
P=pm.Om- w.pf.Lm ...(l0)
F=X.pf-M.pm ... (11)
where P denotes the manufacturing sector's surplus, t the proportion of it taken by the government, c the capitalists' propensity to consume, Ip their "real" investment, Ig "real" government investment, G "real" government expenditure, D the fiscal deficit, and F the trade deficit in foreign exchange terms.
Given G, Ig, Ip, t, e, t, and pf which is "administered", (and parameters such as the world prices, the subsistence wage and the capitalists' propensity to consume) these 11 equations determine the 11 variables: Of, Om, Lm, Lf, pm, Dm, X, M, P, D and F.
The essential point of the above model is the following: the domestic price ratio between "food" and "manufacturing" is more unfavourable for "food" than the international price ratio in equilibrium. In other words, more manufactured goods can be obtained per unit of food through trade than through domestic production. But if the country does export food and import manufacturing, then there would be a net contraction of total domestic output and employment, a net reduction of per capita food availability and an unambiguous increase in poverty, for both these reasons, in the short-run.
Of course, we have to consider what happens over time and shall do so, but before that let us establish the above propositions, which we do via looking at the effects of "stabilisation" in such an economy,
Suppose in the above model, which can be seen as a simple representation of a dirigiste economy, there are insufficient capital inflows (including possible running down of reserves) to finance F. The economy can pursue "stabilisation" through alternative routes. One would be to reduce its fiscal deficit through larger taxation of the surplus P or by widening the tax net to cover the agricultural capitalists, supplemented by some reduction in non-investment, non-welfare expenditures. The reduction in aggregate demand here would show itself in terms of a reduction in the fiscal deficit which occurs via a reduction in the current deficit of the government.
On the other hand if the government is unwilling to raise larger tax revenue, it might simply reduce government expenditure, and such a reduction, if it is to carry the entire burden of "stabilisation", is likely to affect expenditure of all descriptions including investment and welfare expenditure. In this case the fiscal deficit would have been cut but not necessarily through a cut in the current deficit alone.
Both these routes are through a reduction in aggregate demand. But "stabilisation" associated with structural adjustment not only frowns on larger tax rates on the capitalists but insists on bringing the domestic prices into closer alignment with world prices, through a removal of export restrictions on "food" and through a reduction in the tariff rate. If the ratio between the world price of "food" in terms of the local currency and the domestic price (we ignore freight charges for simplicity) is denoted by n which is greater than 1, and the ratio between the world prices of manufactures and food by r, then
pm /pf = n.r (1 + t) = T (say)
where r is given from ouside and n and t are fixed by policy.
"Stabilisation" associated with structural adjustment, apart from curtailing government expenditure, necessarily also entails a reduction in T via a removal of export restrictions on "food" which lowers n, or a reduction in the tariff rate t. Since from equation (3) it follows that in equilibrium
w/T=g' ... (12)
a lowering of T raises g', i.e. reduces employment and output in "manufacturing". Since output and employment in the "food" sector are given in this period, the overall output and employment are reduced by following this route of "stabilisation"(5)
It may be thought that even if this is true for the short period, matters would get rectified over time since investment would flow into the "food" sector. Or, looking at it differently, as the domestic terms of trade are narrowed to come closer to the international terms of trade, while the "manufacturing" sector would shrink in the face of competition from imports, the "food" sector would expand to take advantage of the world market. This may not happen immediately in the single period in question but would certainly happen over time, as comparative advantage theory predicts.
What this argument misses is again the specificity of the act of investment. What governs investment differs from sector to sector. And food production has its own sui generis determinant of private investment. Here, while a certain minimum profitability constitutes a condition for investment, once this is ensured, raising profitability further does not have any positive effect on private investment (Mitra 1977). What private investment depends on (once the minimum profitability is ensured) is the availability of complementary public investment in the form of infrastructure, irrigation, extension etc (6). To say this is not to assert some unique relationship between public and private investment (since how much of private investment is stimulated would depend on a host of additional factors including land relations and the available technology). Nor can one deny the very significant time-lags that may elapse before a certain provision of public investment calls forth any response in the form of larger private investment. All that is being argued is that a mere increase in profitability, beyond the threshold level, does not per se lead to larger private investment.
Since structural adjustment entails a reduction in the role of the State as an investor, and, since, even where such a role is "allowed", e.g. in infrastructure, the resource crisis facing the State in such a regime on account of the predilection for lower taxes, higher interest rates, and reduced fiscal deficits (all dictated by the need to maintain "investors' confidence") results willy-nilly in a curtailment of its investment, overall growth in food production remains constrained. In other words, even over time, our "food" sector does not necessarily grow at a rate which is any higher than what the economy would have experienced if it had been stabilised in a different way, as suggested above, without being drawn into structural adjustment. Hence, if structural adjustment entails in the short-run an output and employment loss and, in the long run does not necessarily give any higher growth than would have happened on an alternative non-structural adjustment path, then clearly structural adjustment should be shunned in favour of an alternative path (7)
Even when "food" exports as such are insignificant, the relevance of the above argument remains. This is because as long as "food" and non-food export crops compete for land, a shift of land use towards the latter associated with larger exports reduces ceteris paribus the "food" availability in the economy exactly as the above model has presented. In other words, instead of " food" being directly exported, structural adjustment which entails a reduction in T may have the effect of pushing up the exports of commodities that, from the production point of view, are substitutes of "food", through a diversion of land use away from "food"; it would simultaneously however cause a reduction in "manufacturing" output ("deindustrialisation") which makes this shift away from "food" production at the prevailing real wages possible.
It was mentioned above that the short-run decline in per capita food availability owing to structural adjustment is not necessarily followed by a higher investment profile in food production which would entail in the long-run a higher employment profile than could have been sustained otherwise, because of the complementarity between public and private investment in food production. Once we consider non-food export crops, then taking agricultural production as a whole, this complementarity may become less pronounced (as many have noticed in the Indian context of late), but that still makes no difference to the argument presented above unless it can be shown that higher private investment in non-food production can somehow raise the profile of food availability, which is far-fetched.
On the other hand the spectre of an economy engaged in the export of non- food crops witnessing, as a consequence of the growth of such crops, a shift of acreage from food production of an order which entails a substantial absolute decline in per capita food availability, is by no means a far-fetched one. It is what characterised colonial India during the first five decades of this century. Between 1897 and 1947 as is well-known (Blyn 1966), cash crop production grew at an annual average rate of 1.31 percent in "British India" while food crop production grew at O.11 percent. Per capita food production declined by about 25 percent between the turn of the century and 1947 and by over 28 percent between the peak reached around the First World War and independence. For "Greater Bengal" this latter figure was 38 percent. Likewise in the nineties there are unmistakable signs of acreage shift in India from foodgrains to export crop production, which, together with declining government capital formation in agriculture, underlies the slowdown in the growth of foodgrain production, which even official publications have shown concern over (GOI 1997). These are some of the stylised facts underlying the above models (8).
There is a second major problem with structural adjustment, which arises from the capital account of the balance of payments. From equation (12) it is clear that the effect of the exchange rate on the overall level of activity of the economy is exercised through changes either in T or in "subsistence wage". If T is kept constant, and in any case there is a fixed T equal to r which the economy would attain if it is fully "opened up", then the only way that the exchange rate would make any difference to the real economy is via depressing real wages below the "subsistence" level. And if it cannot do so, which is our assumption here, then, it cannot have any real effect. It follows that balance of payments problems would be handled essentially by varying the domestic level of activity.
Now, so far we have assumed that the only reason for adjustment is an unsustainable trade deficit. But structural adjustment opens the economy up for capital inflows, including especially movements of speculative finance. These movements have an asymmetric effect in the following way.
When such short-term funds come in, they add to the country's reserves which cannot however be used for productive purposes for at least two reasons: first, if capital formation is stepped up on the basis of short-term capital inflow, then the country is "borrowing short to invest long" which exposes it to extreme illiquidity risks. Secondly, even for doing this there has to be an agency. Since private investment is not undertaken simply because there are larger reserves (unless it was credit-rationed to start with, which is unrealistic, or unless the interest rate is lowered, which however the government would be loath to do for fear of triggering off capital flight), the only agency capable of responding to accumulated reserves through stepping up investment is the government. But structural adjustment discourages the role of the government as an investor (and in any case the larger fiscal deficit through which government investment is to be financed if it is to deplete reserves would frighten speculators and be opposed by the IMF). The upshot is that accumulating reserves on the basis of short- term capital inflows are of no help in stepping up productive investment.
On the other hand when short-term funds flow out for whatever reason, the outflow cannot be met merely by running down reserves; the real economy inevitably gets affected. There are two reasons for this: first, if reserve depletion has been undertaken earlier for stimulating domestic luxury consumption, by credit financing of liberalised consumer goods imports (and consumption is more likely to have been credit-rationed than investment) then the sheer amount left over for meeting capital flight would be less. And secondly, expectations regarding exchange rate are likely to turn elastic in such a situation, with an initial outflow giving rise to a torrent until some palpable measures for "boosting confidence" are undertaken, And these typically take the form of a deflation of the economy, affecting its real peformance.
In short while the inflow of short-term funds does not stimulate output, employment and investment in the economy, the outflow of short-term funds does lead to a contraction in these. What is more, the very fear of outflow in an economy that is open to the movement of short-term funds encourages a tendency towards the pursuit of contractionary policies with regard to the real sectors as a means of retaining the confidence of speculators in the domestic economy. Openness to movements of finance capital therefore has a dampening effect on growth even though such openness is advocated as being growth-stimulating via enhanced DFI inflows. While DFI inflows for locating production domestically and meeting the international market (9) tend to be niggardly, the economy gets caught in the vortex of speculative finance to its detriment.
Once we abandon the Walrasian stylisation of the economic universe and reckon with the facts of rigid prices, of unemp1oyment, of elastic expectations, of the structural constraints on resource movements from one sector to another which show themselves as specificities of investment behaviour, we have to work in terms of a heterodox concept of equilibrium. Both Classical (and Marxian) economics as well as Keynesian economics operated in terms of such concepts. The point is not simply to take over one such concept but to set up a sui generis stylisation of a heterodox kind which is more appropriate. And if we do so, then the detrimental consequences of structural adjustment emerge in bolder relief.
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1. According to Grandmont (1982) something akin to inelasticity of price expectations in commodity markets is necessary even for ensuring that there is a non-zero value of money as a form of holding wealth.
2 Frank Hahn (1984) has pointed out that monetarism, which incidentally is a component part of the theory of structural adjustment, is based on the belief that the real world corresponds to a Walrasian equilibrium.
3 Professor Jagdish Bhagwati in a recent interview to a popular Indian magazine has accused the early Indian planners of committing the fallacy of believing that because the market is not perfect it does not work. Since the proof that the market can work is given only for the case where it is perfect (and that too under exceedingly stringent assumptions), it would appear that the planners were right and Professor Bhagwati's argument is a non-sequitur. In fact to argue from the proposition that the market works when it is perfect the conclusion that it also works (more or less) even when it is not perfect, is rather like arguing from Voltaire's famous remark that "you can always kill a person through incantations- plus a little poison" the conclusion that "you can at least maim a person through incantations alone"
4. The discussion which follows is based on Patnaik (1997)
5. Some have attempted an alternative neo-classical story, set in the context of an underdeveloped economy, which would nonetheless demonstrate the benefits of trade liberalisation. Imagine two sectors A and B, characterised by fixed and flexible wages respectively. They produce different goods, each has a production function, and both capital and labour are shiftable across sectors. The relative price of A in terms of numeraire B is given: it is the relative world price supplemented by a tariff on A. Trade serves to remove discrepancies between demand and output vectors. Equilibrium is characterised by full employment and equal rates of profit. Liberalisation in the form of a lower tariff is beneficial because it raises the wage rate in B.
This model however is not logically tenable. Equilibrium may require importing B and exporting A. Since this is not possible, as A's domestic price is higher than its world price, the economy perforce would be saddled with unemployment. This would be a case of disproportionality with A as the constraining sector. Thus, Kaldor's proposition (1978) that in a fix-price world some multiplier determines the overall output, remains valid.
6. The connection between irrigation and agricultural growth across regions in the pre-independence period in India is discussed in Bagchi (1976). For the post-independence period a similar argument is made by Rao (1971).
7. It may of course be argued that in a liberalised economy exports of "manufactures" would pick up and could even be the engine of growth. The counter-arguments to this are well-known and need not be repeated here. We would however have made some progress if it is at least conceded that exports of "food", and, by implication primary commodities (see next section), cannot be the engine of growth.
8. For evidence on this question relating to Africa and India see U.Patnaik (1996)
9. This is the DFI that is clearly beneficial for the economy, since "displacement" of already-occurring exports is extremely unlikely. By contrast DFI oriented towards the home market is likely to displace already-existing home producers with lower import content of production which has a contractionary effect on the domestic economy.
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