ESSAYS IN ECONOMIC POLICY AND ECONOMIC GROWTH

ESSAYS IN ECONOMIC POLICY AND ECONOMIC GROWTH

ESSAYS IN ECONOMIC POLICY AND ECONOMIC GROWTH I. G. Patel Director, London School of Economics and Political Science Palgrave Macmillan

ISBN 978-1-349-18360-9 ISBN 978-1-349-18358-6 (ebook) DOI 10.1007/978-1-349-18358-6 I. G. Patel, 1986 Softcover reprint ofthe hardcover 1 st edition 1986 All rights reserved. For information, write: Scholarly & Reference Division, St. Martin's Press, Inc., 175 Fifth Avenue, New York, NY 10010 First published in the United States of Ameriea in 1986 ISBN 978-0-312-25940-2 Library of Congress Cataloging-in-Publieation Data Patel, I. G. (Indraprasad Gordhanbhai), 1924- Essays in eeonomie poliey and eeonomie growth. Inc1udes index. 1. Eeonomic poliey-addresses, essays, leetures. 2. Eeonomie development-addresses, essays, leetures. 3. India-Eeonomie poliey-1947- -Addresses, essays, leetures. I. TitIe. HD87.P38 1986 338.9 88-1773 ISBN 978-0-312-25940-2

Contents Abbreviations Preface ix xi INTRODUCTION The general setting The Indian scene Individual comments I 4 7 PART I ECONOMIC ANALYSIS AND ECONOMIC POLICY THE LIMITS OF ECONOMIC POLICY Domain of economic policy The rate of growth Strategy of development Relative prices Microeconomics Distribution of income In conclusion 2 SOME REFLECTIONS ON TRADE AND DEVELOPMENT In perspective Trade policy in developing countries Is trade liberalisation vital? 3 THE BALANCE OF PAYMENTS PROBLEM The two-gap theory 17 17 18 19 23 25 29 31 32 35 35 36 38 42 48 48 v

vi Contents Diagnosis of malady Improvement in productivity Financial prudence Exports, imports and invisibles Foreign capital and aid In conclusion 4 ON A POLICY FRAMEWORK FOR INDIAN AGRICULTURE Priority for agriculture Planning for agriculture Policy for agriculture Complacency on food supplies Growth and social justice Summing up 5 INFLATION - SHOULD IT BE CURED OR ENDURED? The meaning and causes of inflation The consequences of inflation Control of inflation Cure and end ure inflation Concluding remarks 6 ECONOMIC THEORY AND ECONOMIC POLICY PART 11 Why economics is difficult Macroeconomic management Economic development Microeconomic management In conclusion ECONOMIC GROWTH AND SOCIAL JUSTICE 7 THE STRATEGY OF INDIAN PLANNING The strategy Rationale in a closed economy An open economy 49 52 53 55 58 60 61 61 61 65 66 73 74 81 83 83 84 87 87 97 99 101 101 102 106 109 113 116 119 119 119 121 122

Contenls VII 8 SOCIAL JUSTICE AND ECONOMIC DEVELOPMENT 128 128 Different meanings of social justice 128 Savings, incentives and social justice 130 Social justice, economies of scale and concentration 133 A final word 137 9 PRODUCTIVITY AND ECONOMIC GROWTH 138 138 Growth without tears? 139 Productivity and social justice 142 Limits of higher productivity 144 Summing up 147 10 EMPLOYMENT, GROWTH AND BASIC NEEDS 149 A new strategy of development 149 Requirements understated 150 Strategy oversimplified 152 An international aspect 154 11 TRE POOREST BILLION 156 Growth only strategy 156 Preconditions for poverty eradication 158 International action and context 162 12 FREE ENTERPRISE IN THE NEHRU ERA 165 In trod ucto ry 165 The emerging pattern 166 The underlying factors 167 Some evidence 173 A caveat 178 Some portents 179 PART III INTERNATIONAL ECONOMIC CO-OPERATION 13 HOW TO GIVE AID - A RECIPIENTS POINT OF VIEW 185 An ideal 185 Internationalisation of aid 188

viii Contents Quantum and terms 190 Performance 193 Concluding remarks 194 14 AID RELATIONSHIP 195 The setting 195 The roots of the crisis 196 The Commission's approach 202 An alternative framework 207 15 THE CURRENT CRISIS IN INTERNATIONAL ECONOMIC CO-OPERATION 212 Past achievements 212 The current crisis 219 Strategy for the future 226 16 NEXT STEPS IN INTERNATIONAL ECONOMIC CO-OPERATION 233 The current scene 233 Background to the current scene 235 Is co-operation feasible? 237 Monetary co-operation 238 International financial system 243 Technical co-operation 244 International trade 244 Index 253

Abbreviations ASEAN CPI DAC EEC EMS FAO FERA GATT GDP GNP IBRD IDA ILO IMF ODA OECD OPEC SDR TCDC UN UNDP UNESCO UNIDO WHO Association of South-East Asian Nations Communist Party of India Development Advisory Committee European Economic Community European Monetary System Food and Agriculture Organization Foreign Exchange Regulation Act General Agreement on TaritIs and Trade Gross Domestic Product Gross National Product International Bank for Reconstruction and Development International Development Association International Labour Organisation International Monetary Fund Official Development Assistance Organization for Economic Co-operation and Development Organization of Petroleum Exporting Countries Special Drawing Rights Technical Co-operation among Developing Countries Uni ted Nations Uni ted Nations Development Programme United Nations Educational, Scientific and Cultural Organization United Nations Industrial Development Organization. World Health Organization IX

Preface The 16 essays included in this volume represent a selection from a large number of conference papers and speciallectures given over aperiod of nearly 25 years. Seminars and public lectures are generally occasions for a 'command performance'. But they have also given me an opportunity to sit back and reflect from time to time on what has been my major professional concern, name1y, the concern for economic growth with stability and socialjustice in an environment, hopefully, of international economic co-operation. In selecting these particular essays, I have been guided by the desire to produce a manageable volume which could be of some interest to a broad spectrum of students, commentators and practitioners of the art of making economic policy. All material of strictly transient interest, or ofinterest to Indian readers only, has been excluded. At the same time, much of what I have to say is based on Indian experience; and I can only hope that it is of some general significance. Apart from minor textual changes, the original arguments as weil as the form of presentation have been left untouched. Nothing has been included here wh ich was not intended inilially for the general public. Somewhat re1uctantly, I have also exc1uded all writings before 1961, partly because many of them are readily available, but more importantly, because they do not share with the essays inc1uded here the characteristic of experience recollected in tranquillity. For the sake of convenience, the present volume has been divided into three parts. Part I contains six essays which deal primarily with shorter-term management of the economy without eschewing comment on supply-side considerations of efficiency and priority in investment which are at the heart of economic development. The emphasis in the six essays inc1uded in Part 11 is on longer-term aspects of growth and economic policies as they impinge upon, and are influenced by, considerations of equity or social justice. Four articles dealing with international co-operation in matters of trade, aid, money and finance have been brought together in Part BI. xi

Xll Preface In each part the articles appear in the order in which they were written. All the parts, and indeed all the essays, are self-contained, so that it should be possible to read them individually or at random without losing the thread ofthe argument. However, in view ofthe fact that they were written over an extended period and cover a rather large canvas, I have provided an introduction to set the different essays in their proper perspective. The credit or the blame for encouraging me to overcome my inertia in getting this volume published belongs largely to Mr V. B. Kadam of the Reserve Bank of India, and to Dr Deena Khatk,hate of the International Monetary Fund. On the occasion of my leaving the Reserve Bank in the autumn of 1982, Mr Kadam presented me with several volumes containing the typescript ofmost ofmy writings. There was more than a hint that I should get on with the job of getting a selection published. Dr Khatkhate carried the plea a decisive step forward by supplying material which was more readily available in Washington, De, than in Bombay, and by arranging for a publisher. Mr T. M. Farmiloe could not have been more patient and helpful in seeing a rat her long manuscript expeditiously through to the final stage of publication. My secretaries at the London School of Economics and Political Science, Mrs Anne de Sayrah and Mrs Margaret Little, have been most diligent in preparing a neat typescript for the publishers. Over the years, Professor M. R. Shroff and Mrs Alaknanda Patel have exercised the right of most careful and strict censorship, and editing, of all I have written, to spare me from lapses in logic, style and taste. During my years at the Reserve Bank Mr Kadamjoined this team to make a formidable trio with wh ich to contend. To all these persons I owe a special debt of gratitude; and I am glad to have this opportunity of acknowledging it. London I. G. PATEL