Ecuador must be one of the most exciting places on Earth right now, in terms of working towards a new development paradigm. It shows how much can be achieved with political will, even in uncertain economic times.

Just 10 years ago, Ecuador was more or less a basket case, a quintessential “banana republic” (it happens to be the world’s largest exporter of bananas), characterised by political instability, inequality, a poorly-performing economy, and the ever-looming impact of the US on its domestic politics.

In 2000, in response to hyperinflation and balance of payments problems, the government dollarised the economy, replacing the sucre with the US currency as legal tender. This subdued inflation, but it did nothing to address the core economic problems, and further constrained the domestic policy space.

A major turning point came with the election of the economist Rafael Correa as president. After taking over in January 2007, his government ushered in a series of changes, based on a new constitution (the country’s 20th, approved in 2008) that was itself mandated by a popular referendum. A hallmark of the changes that have occurred since then is that major policies have first been put through the referendum process. This has given the government the political ability to take on major vested interests and powerful lobbies.

The government is now the most stable in recent times and will soon become the longest serving in Ecuador’s tumultuous history. The president’s approval ratings are well over 70%. All this is due to the reorientation of the government’s approach, made possible by a constitution remarkable for its recognition of human rights and the rights of nature, and its acceptance of plurality and cultural diversity.

Consider just some economic changes brought about in the past four years, beginning with the renegotiation of oil contracts with multinational companies. Ecuador is an oil exporter, but had benefited relatively little from this because of the high shares of oil sales that went to foreign oil companies. A new law in July 2010 dramatically changed the terms, increasing the government’s share from 13% to 87% of gross oil revenues.

Seven of the 16 foreign oil companies decided to pull out, and their fields were taken over by state-run companies. But the others stayed on and, as a result, state revenues increased by $870m (£563m) in 2011.

Second, and possibly even more impressively, the government managed a dramatic increase in direct tax receipts. In fact, this has been even more important in revenue terms than oil receipts. Direct taxes (mainly corporation taxes) increased from around 35% of total taxes in 2006 to more than 40% in 2011. This was largely because of better enforcement, since the nexus between big business and the public tax administration was broken.

Third, these increased government revenues were put to good use in infrastructure investment and social spending. Ecuador now has the highest proportion of public investment to GDP (10%) in Latin America and the Caribbean. In addition, social spending has doubled since 2006. This has enabled real progress towards the constitutional goals of free education at all levels, and access to free healthcare for all citizens. Significant increases in public housing have followed the constitution’s affirmation of the right of all citizens to dignified housing with proper amenities.

There are numerous other measures: expanding direct public employment; increasing minimum wages and legally enforcing social security provision for all workers; diversifying the economy to reduce dependence on oil exports, and diversifying trading partners to reduce dependence on the US; enlarging public banking operations to reach more small and medium entrepreneurs; auditing external debt to reduce debt service payments; and abandoning unfair bilateral investment agreements. Other efforts include reform of the justice system.

One exciting recent initiative is the Yasuní-ITT biosphere reserve, perhaps the world’s first attempt to avoid greenhouse emissions by leaving oil underground. This not only protects the extraordinary biodiversity of the area but also the habitats of its indigenous peoples. The scheme proposes to use ecotourism to make human activity compatible with nature.

All this may sound too good to be true, and certainly the process of transformation has only just begun. There are bound to be conflicts with those whose profits and power are threatened, as well as other hurdles along the way. But for those who believe that we are not condemned to the gloomy status quo, and that societies can do things differently, what is happening in Ecuador provides inspiration and even guidance. The rest of the world has much to learn from this ongoing radical experiment.

This piece was originally published by The Guardian.

The Indian government’s sudden decision to allow hitherto prohibited foreign direct investment in multi-brand retail as well as full ownership in single-brand retail generated huge public outcry, to the extent that the government was forced to pause. One important ally of the government, fearing for her own popularity in the state of West Bengal where she is currently Chief Minister, declared that the policy is temporarily “on hold”, to be greeted only awkward silence from the government. Finally the government was forced to announce that the policy is to be kept on hold until “consensus” is achieved, which certainly seems unlikely at present.

What this episode does show clearly is that this is a highly contentious and potentially very unpopular policy, and that politicians are now getting more aware of this. So despite the raucous support from corporatised media and more subtle but possibly more influential lobbying by big multinational business, this policy could not be easily forced down in the face of massive public outcry.

The Indian debate provides an opportunity to consider the actual impact of large corporate retail, and especially multinational retail chains, in developing countries in general. Proponents of such corporate retailing make several claims: that they “modernize” distribution by bringing in more efficient techniques that also reduce wastage and costs of storage and distribution; that they provide more choice to consumers; that they lower distribution margins and provide goods more cheaply; that they are better for direct producers, such as farmers, because they reduce the number of intermediaries in the distribution chain; that they provide more employment opportunities.

In fact, all of these claims are suspect, and several are completely false. This is particularly so in the case of employment generation: experience across the world makes it incontrovertible that large retail companies displace many more jobs of petty traders, than they create in the form of employees. This has been true of all countries that have opened up to such companies, from Turkey in the 1990s to South Africa. Large retail chains typically use much more capital intensive techniques, and have much more floor space, goods and sales turnover per worker.

One estimate suggests that for every job Walmart (the largest global retail chain) creates in India, it would displace 17 to 18 local small traders and their employees. In a country like India, this is of major significance, since around 44 million people are now involved in retail trade (26 million in urban areas) and they are overwhelmingly in small shops or self-employed. Since other organized activities in India create hardly any additional net employment, and overall there has been a severe slowdown in job growth in the past five years, this is obviously a matter that simply cannot be ignored.

The argument that such large retail benefits direct producers like farmers is also very problematic. Greater market power of these large intermediaries has been associated in many other countries with higher marketing margins and exploitation of small producers. This is even true of the developed world, with more organized and vocal farmers protesting against giant retailers squeezing the prices paid to the farmers for their products, in some instances forcing them to sell at below cost prices. The European Parliament in 2008 actually adopted a declaration in February 2008 stating: “throughout the EU, retailing is increasingly dominated by a small number of supermarket chains…evidence from across the EU suggests large supermarkets are abusing their buying power to force down prices paid to suppliers (based both within and outside the EU) to unsustainable levels and impose unfair conditions upon them”. In the United States, marketing margins for major food items increased rapidly in the 1990s, a period when there was significant concentration of food retail.

The idea that cold storage and other facilities can only be developed by large private corporates involved in retail food distribution is foolish: proactive public intervention can (and has, in several countries) ensured better cold storage and other facilities through various incentives and promotion of more farmers’ co-operatives. The argument is also made that corporate retail will encourage more corporate production, which in turn supposedly involves more efficient and less ‘wasteful” use of the production.  But calculations of efficiency based only on marketed output really miss the mark, because they do not include the varied uses of by-products by farmers. Biomass is used extensively and very scrupulously by most small cultivators, but industrial style farming tends to negate it and does not even measure it. Biodiversity, use of biomass and interdependence that create resilient and adaptive farming systems are all threatened by the shift to more corporate control of agriculture.

There is another crucial implication that is all too often ignored in discussions of corporate retail. Corporate involvement in the process of food distribution causes changes in eating habits and farming patterns, which create not just unsustainable forms of production that are ecologically devastating, but also unhealthy consumption choices. In the developed world, this has been effectively documented by books like Eric Schlosser’s “Fast Food Nation” and Michael Pollan’s “The Omnivore’s Dilemma”.

In the Baltic countries, this has led to a striking breakdown of any real link between local production and the supply of food. The global supply chain has become the source of most food and the European market has become the destination of food production: all mediated by large chains that deal in buying from farmers (often in contract farming arrangements that specify inputs and crops beforehand) and in food distribution down to retail outlets. Anecdotal evidence suggests that farmers have not gained from this even in a period of rising food prices, as they are powerless relative to the large traders who now control the market. And consumers complain about the rising prices of food, which the supposedly more “efficient” supermarkets have not prevented at all.

As affluent western markets reach saturation point, global food and drink firms have been seeking entry into developing country markets, often targeting poor families ad changing food consumption habits. Such highly processed food and drink is also a major cause of increased incidence of lifestyle diseases like such as obesity, diabetes, heart disease and alcoholism, all of which have been rising rapidly in the developing world. The recent experience of South Africa is especially telling: around one-fourth of schoolchildren are now obese or overweight, as are 60% of women and 31% of men. Diabetes rates are soaring. Yet, nearly 20% of children aged one to nine have stunted growth, having suffered the kind of long-term malnutrition that leaves irreversible damage. And it has been found that obesity and malnutrition often occur in the same household.

These considerations – which are at least being noticed in the fierce debate now raging in India around this issue – surely deserve greater public attention across the world.

The social and economic system that has powered global economic relations in the past two decades is clearly in crisis. We now know only too well that periods of “rapid growth” have been based on unsustainable bubbles; that such growth has contributed little in terms of generating more decent work and has significantly increased inequality; and that people will no longer accept these unfair outcomes, as shown by the waves of protest in many countries.

We need a completely different approach to economic policy making, one that will provide for a more just and equitable society and be more compatible with the aspirations and expectations of citizens. This means that decent employment and better living conditions cannot be seen only as potential byproducts of income growth – or even as ends in themselves – but as a means to sustainable growth.

In this context, an important new report, Social protection floor: for a fair and inclusive globalisation (pdf), from the Social Protection Advisory Group, chaired by Michelle Bachelet for the International Labour Organisation (ILO) and World Health Organisation, (WHO) has just been released. The report provides a key element of the economic blueprint for forward-looking economic policy, by emphasising the role of social protection measures in cushioning the impact of the crisis among vulnerable populations, serving as a macroeconomic stabiliser fuelling demand and enabling people to better overcome poverty and social exclusion in both developing and developed countries.

What exactly is the social protection floor? Basically, it can be seen as integrated set of social policies designed to guarantee income security and access to essential social services for all, paying particular attention to vulnerable groups. It includes guarantees of: basic income security, in the form of social transfers (in cash or in kind), such as pensions for the elderly and persons with disabilities, child benefits, income support benefits and/or employment guarantees and services for the unemployed and working poor; universal access to essential affordable social services in the areas of health, water and sanitation, education, food security, housing, and others defined according to national priorities.

This approach is quite different from the old “social safety net” approach beloved of the Bretton Woods institutions, whereby social protection was supposed to provide relief to poor and vulnerable groups during structural reform or austerity measures. These measures were generally temporary, fragmented and targeted at the “poor”. In the past decade, there has been growing awareness that this kind of needs-based strategy is unproductive, and so in many countries there is a shift to a rights-based approach of social protection, with guaranteed basic social rights as a precondition for citizenship.

The point is to universalise access to benefits in health, pensions, unemployment, childcare and primary education. Instead of a residual and temporary approach, the social protection floor becomes a full and permanent component of the development strategy for inclusive growth. It is easy to see how a universal rights-based approach, instead of a selective needs-based one, will contribute more towards reducing poverty, containing inequality, sustaining equitable economic growth and encouraging greater empowerment and autonomy for women.

The most common argument against such floors is that most governments simply cannot afford them, especially governments caught in the throes of fiscal crisis or those in poor countries. But the report shows that social protection measures at a basic level – of the kind comprising the floor – can be kept within a relatively modest percentage of national income even in severely resource-constrained countries. In countries like Benin, El Salvador, Mozambique and Vietnam, major social protection floor programmes would only cost between 1 and 2% of GDP.

This is tiny compared with the tax revenues often lost by not effectively collecting revenue from the wealthy and by not tackling inefficiencies in many spending programmes. The important point is that effective country-specific social protection floors, which can gradually expand, are not only affordable but can – in the long run – pay for themselves, by enhancing the productiveness of the labour force, the resilience of society and the stability of the polity.

What is especially significant now is that, apart from reducing human insecurity and gender gaps in living conditions, this strategy has great macroeconomic significance. It increases the presence of counter-cyclical buffers that reduce the negative effects of periods of economic downswing.

Because of its positive multiplier effects, this strategy actually provides a positive way out of the downward cycle of fiscal austerity and social unrest that now seems to be a common curse in so many countries.

This piece was originally published by The Guardian.

On October 10, the Chinese government announced that it will increase its stakes in the four largest commercial banks, which are already largely public-owned. The move is designed to “support the healthy operations and development of key state-owned financial institutions and stabilise the share prices of state-owned commercial banks”.

But why was this move considered necessary at all? Recently, investors have been dumping Chinese bank shares, anticipating a slowing down not just of the economy as a whole, but in particular the property market, which had experienced a bubble of massive proportions. But the underlying concern about the health of Chinese banks reflects a deeper concern, about the extent of entanglement of these commercial banks with the growing “shadow banking sector”.

What exactly is shadow banking? Basically, this refers to non-depository banks and other financial entities like investment banks, mutual funds, hedge funds, money market funds and insurers, who typically do not fall under banking regulation. The growth of this sector has been explosive in the last decade: in the United States, in the run-up to the financial crisis, its size was estimated to be significantly bigger than that of the formal banking sector. In the aftermath of the crisis, many of these institutions, and banks that were exposed to them, had to be rescued.

UNCTAD’s Trade and Development Report 2011 noted that “The shadow banking system depends on wholesale funding, which is extremely unstable and renders the system very fragile, as evidenced by the crisis” (page 94). It argued strongly in favour of bringing shadow banking under regulation, not just money market mutual funds, but also the asset-backed securities market financed with repos.

Even at the IMF, a recent meeting of regulators held during the Autumn meetings called for greater regulatory focus on shadow banking. Participants noted that shadow banking operations – firms doing these bank-like activities outside the banking system – can pose systemic threats, and to have some effect regulators need more and different data to understand this fast-changing sector.

But China was known to have a much more regulated banking sector. Indeed, the ability of the Chinese authorities to control the four important commercial banks (Bank of China, Agricultural Bank of China, China Construction Bank and Industrial and Commercial Bank of China, which together were earlier estimated to control more than three quarters of total domestic credit) was seen as an important macroeconomic tool in the hands of the state as well as an instrument of ensuring directed credit, both of which have been crucial to China’s economic success.

But this situation has been changing. The changes have accelerated after 2008, when the urge to provide more stimulus meant that the government allowed or encouraged more “informal” credit flows that went through new shadow banking intermediaries. As a result, the government’s control over actual flows of domestic liquidity is now weaker than it has been for more than half a century.  In addition to trust companies and private banks, which are not regulated but at least are registered businesses with established offices, there has been a proliferation of underground operators, usually no better than loan sharks operating in a world of largely unsecured loans. Such has been the profitability of these operations that even large local state-owned firms whose main business was not finance are now expanding into operating guarantee companies, pawnshops and trusts, arbitraging their own access to cheap loans to lend out at many multiples of the official interest rates.

The growing but opaque interlinkages between the formal credit system and the world of shadow banking are the real cause for concern. This is because the formal banks are also more attracted to indirect lending that generates at least double or triple the official 6.5 per cent one-year lending rate, and can even go up to 30-70 per cent in underground banks. In the first half of 2011, the most profitable activity of state-owned banks was not lending to businesses but funding trusts and underground banks.

Much of that went into the overheated housing market, associated not just with a construction boom but with urban real estate prices that are now the highest in the world for cities like Shanghai and Beijing. Since official curbs on lending to this sector were tightened, this market has expanded even further. But recently the market has wobbled and real estate prices have finally started falling.

The bursting of this bubble could be painful. In an attempt to provide some protection, the government has encouraged the growth of credit guarantee companies – but many of these are also highly leveraged and themselves far from creditworthy.

Societe Generale has pointed out that China’s shadow banking sector could amount to as much as RMB 14 to 15 trillion.  This has also increased the correlation between lending curbs on formal banks, corporate bankruptcies and the occurrence of macroeconomic difficulties in China.

For a very long time, China’s ability to control finance was an important (some would say essential) ingredient of its macroeconomic success. Now that this control looks more tenuous, the future of the overall growth strategy also looks that much less rosy.

The stupidity of the current macroeconomic stance in the UK is surprising in itself; but when combined with similar voices in Europe and the US, it is downright astonishing. Three years after the collapse of Lehman Brothers, the global economy is not going through a recovery from financial crisis, but simply entering act two after a brief intermission. On current form this play is a farce that will end in tragedy.

Policy discussion on both sides of the Atlantic is dominated by extreme fiscal hawks, who wrongly see public spending as the problem rather than at least part of the solution. The emphasis on fiscal rectitude is accompanied by the inability to rein in finance. All this condemns economies to financial instability, depressed and even contracting GDP and worsening conditions for ordinary citizens.

Consider: the UK government’s focus is still on cutting the budget deficit, though the economy is not just tottering but into the downswing already. The Vickers report on controlling the financial sector is well-intentioned but so modest as to tend to irrelevance. It misses essential points about the financial system, and the lengthy grace period it awards to banks (more than seven years before they have to ringfence their operations) risks being completely overtaken by the likely future volatility in banking.

Part of the problem is that the bulk of the mainstream economics profession has forgotten basic Keynesian macroeconomics, and so is unable to offer even the most obvious advice. But the other aspect of the problem is deeper, reflecting the class configurations that create and intensify the mess. The choice between increasingly futile and counterproductive monetary easing and dithering about policies oriented to more austerity to satisfy bond markets is ultimately a political one, reflecting the continued power of finance.

There are some voices of sanity. The 2011 UNCTAD trade and development report makes the point that fiscal tightening, especially in the advanced economies, is likely to be self-defeating. It will reduce GDP growth and revenues – not just bad news for a sustained recovery but counterproductive for fiscal consolidation.

What is happening in Greece confirms this analysis. After aggressive cutbacks in public spending forced by the EU-IMF bailout, the economy shrank at an annual rate of 7.3% in the second quarter of 2011. This far exceeds the most pessimistic projections of the IMF or the EU. Since tax revenues can hardly improve now, even with the most sweeping attempts at better collection, fiscal balances will improve only with further public spending cuts. Even so, public-debt-to-GDP ratios will deteriorate.

The point is that fiscal space is not a static variable. Expansionary policies increase demand and revenues and therefore generate more tax revenues. It makes much more sense to grow out of debt than to plunge into a downward spiral worsened by public austerity.

Of course, how this is done matters. Tax cuts (especially on the rich) are less effective than spending on infrastructure, social transfers and subsidies. Multiplier effects are higher when public spending is directed to lower-income groups that have higher propensity to spend their incomes. How could any government, including in the UK, ignore this obvious point?

Arguments that cuts are necessary to appease financial markets are specious. Fiscal imbalances were a result of the financial crisis, not a cause of it: public bailouts accounted for a large part of Ireland and Spain’s deficit.

Meanwhile, attempts to rein in banks have been limited – and strong re-regulation is required, not the namby-pamby approach of the Vickers report. The UNCTAD report points the way. Controls have to be tighter on the “too-big-to-fail” institutions. But re-regulation alone will not orient credit to real investment or make it accessible to small and medium-sized firms.

So there must be restructuring of the financial system: giant institutions must be downsized; the activities of commercial and investment banking should be clearly separated; and the aim should be more diverse financial systems, with a bigger role for public and co-operative institutions. Commodity markets, which have been subject to wild price swings related to speculative and herd behaviour, need to be made more transparent, with more controls on financial activity and direct intervention when required to curb price bubbles and prevent sharp declines.

Why are such obvious and sensible actions completely off the radar for most policymakers? Governments have been spooked and even paralysed by the very financial markets that they have just saved. They seem impervious to public protests from left and right – not only are workers, students and other citizens out on the streets, but even some of the very rich have asked for higher taxation on their wealth and income. This will have massive repercussions, not just in social and political tensions, but also in possibly prolonged economic depression.

This is an unusual moment in the history of global capitalism: the system’s famed capacity for surviving and re-inventing itself seems, for the moment, to have disappeared.

This article was originally published in The Guardian on September 13, 2011.

An extraordinary new process has been at work in the past few years: the aggressive entry of Indian corporations into the markets for agricultural land in Africa. At one level, this process is simply following the hoary old tradition in global capitalism, of firms (often supported by the governments of the originating countries) entering new areas in search of access to natural resources on preferential terms.

Several centuries ago, the growth of plantation agriculture in large parts of the western hemisphere was essentially the product of such a process. This was further facilitated by cross-border movements of labour (in the extreme case of African labour through slavery, then through indentured labour contracts largely from South Asia, then through supposedly more ”free” movements driven by lack of adequate income opportunities in the home countries). Together these flows generated production and trade patterns that were critical in shaping the international division of labour by the mid-twentieth century.

In more recent cases, multinational agribusiness companies from Europe and the United States have been active for more than a decade now, acquiring prime agricultural land in developing countries to grow cash crops and biofuels that benefited from substantial subsidies provided by developed country governments. But recently, this global land rush has become even more competitive, with companies from developing Asia, and particularly China and India, joining the scramble for acquiring land.
A new research study by Rick Rowden (”India’s role in the new global farmland grab”, GRAIN and ERF) provides some often startling insights into this process, particularly with respect to Indian companies and the explicit and implicit encouragement provided by the Government of India. Most of the Indian companies involved in such land purchase and lease arrangements have thus far been focussed on Africa, but South America is also seen as a promising new destination. And integrated Indian oilseeds firms have already invested in South East Asia, in operations ranging from plantation cultivation to the processing of edible oils for export.

Looking at the East African region alone, based on data provided by governments in the region, Rowden finds that more than 80 Indian companies have already invested about $2.4 billion in buying or leasing huge plantations in countries like Ethiopia, Kenya, Madagascar, Senegal and Mozambique. The land will be used to grow food grains and other cash crops for the global market, and in some cases specifically for the Indian market.

It is not just the allure for Indian foreign investors of much cheaper land and the promise of more abundant water sources in these locations that have driven these investments. It is interesting to note that many governments in the African region have actively courted Indian and other agricultural investors. They have typically offered incentives, ranging from the permission to lease massive tracts of arable land at very generous terms and providing access to water, to promising the firms that they will be allowed to export all output and have the ability to repatriate all profits.

The Indian government, for its part, has both facilitated and encouraged such investment, seeing it as a way out of land availability issues and increasing problems of water shortage facing Indian agriculture. In addition to leading trade missions and supporting various initiatives to facilitate Indian agricultural companies in their overseas investments in Africa and elsewhere, it has progressively liberalised the rules on outward FDI by India companies. The Eximbank has provided lines of credit and soft loans not only to African governments, but also to Indian companies engaged in such transactions.

Ironically, many of these Indian companies operating in Africa are engaging in activities that involve huge displacement of farmers and changing patterns of production and consumption that would either be difficult or impossible for them to do in India. They would either be illegal or get embroiled in very significant political controversies because of the negative impact on local people.

Take, for instance, one of the most high profile of recent deals, the acquisition of around 300,000 hectares of land on long lease in the Gambela region of Ethiopia by the Indian firm Karuturi Global Ltd. The claim is that this was all surplus, or unutilized land that will now be used for more efficient and productive cultivation. But this is fiercely contested by several local analysts, who point out that there is no such thing as ”idle land” in Ethiopia, or indeed anywhere else in Africa.

It is well known that competition for grazing land and access to water bodies are the two most important sources of conflict between different pastoral communities in Ethiopia, and in all such cases of land lease involving foreign enterprises, there have been complaints by locals of loss of access to grazing land and water. There have been many cases of loss of cultivated land as well as homestead land in the process, leading to simmering discontent that has not yet been able to find political voice.

Further, since the new cultivation practices will be highly mechanized, there will necessarily be quite substantial displacement of labour from the traditional smaller-sized farms that will have lost land. And cultivation of the traditional staple food crop teff has already been affected, leading to significant increases in local prices of this basic food crop which forms part of the subsistence diet of most Ethiopians. Meanwhile, there are also growing environmental concerns about the pattern of cultivation that has been promoted through these new arrangements. The large scale and heavily mechanised monocropping farms that are being created typically depend upon high levels of water usage and involve heavy doses of pesticides and herbicides that can pollute nearby groundwater, all of which can rapidly deplete soil quality.

What is even worse is that the contracts signed provide a high degree of protection for the companies with low responsibility for any adverse effects, and scant respect for the rights of those affected by the contracts. Rowden’s study provides detailed analysis of several contracts, including that of Karuturi Global Ltd. with the government of Ethiopia.

According to Karuturi’s signed lease agreement for the first 100,000 hectares, it has been given the land for 50 years at a cost of total cost of only 100,000,000 birr (equivalent to $59.28 per hectare) for full use of prime agricultural land, with yearly rent of only $1.18 per hectare! The five contracts analysed all mention that that the companies have the right to build dams, water boreholes and irrigation systems as they see fit. But there is no mention of paying for this water, how much water would used or over what period of time, how the usage would be monitored, or what the environmental impacts would be on surrounding areas regarding the water that would diverted for use by the companies. With fixed term leases, the implications for over-exploitation of this critical resource are obvious.

As a sign of how attractive the Ethiopian government is seeking to make such investments, the contracts all provide for ”Special investment privileges such as exemptions from taxation and import duties on capital goods and repatriation of capital and profits granted under the investment laws of Ethiopia.” None of these five contracts for the Indian companies mention labour laws or specify any wages or working conditions for their local employees. There is no obligation to dedicate any portion of the produced crops to the domestic market for local consumption.

In all the contracts analysed, the Indian companies have the ”right” to provide power health clinics, schools, etc., but these are not listed under ”obligations” of the investors. Nor do the contracts specify for whom these services might be provided – the local population or for those of company workers. Since this is merely a non-enforceable right, the companies may choose to not act on it.

One of the most disturbing features of the contracts relates to the displacement, the very aspect that is currently the cause of so many intense disputes in India. Rowden points out that ”the contract for Karuturi suggests the Government of Ethiopia will evict any local people who are in the way of the commercial project, by force if necessary. Although this land has been or still is home to thousands of Ethiopian citizens, Article 6.1 of the contract states: ”The lessor [Government of Ethiopia] shall be obliged to deliver and hand over the vacant possession of leased land free of impediments.” Arguably local people who are unwilling to leave their land could be construed as ”impediments” and the lessor is now contractually obligated to ensure they are not a problem for the company. Article 6.6 seems to suggest the Government will provide police or military action against any resistance: ”The lessor [Government] shall ensure during the period of lease, the lessee [Karuturi] shall enjoy peaceful and trouble free possession of the premises and it shall be provided adequate security, free of cost, for carrying out its entire activities in the said premises, against any riot, disturbance or any other turbulent time other than force majeure, as and when requested by the Lessee.”

All these features point to a frightening new tendency with respect to land acquisition by Indian companies. As democratic processes in India force both Indian corporations and the Government to take into account the rights of local citizens, issues of compensation and rehabilitation of those displaced, environmental concerns, the conditions of workers, and other related aspects, there is an attempt to export the problem by encouraging these companies to undertake land grabs elsewhere in the developing world.

Surely all those who would fight such irresponsible and exploitative corporate behaviour in India must raise their voices against this tendency as well. At the very least, we have to express solidarity with those like Obang Metho, Director of the Solidarity Movement for a New Ethiopia (SMNE), who in an ”Open Letter to the People of India” asked for the citizens of India to take steps to stop the harmful land grabbing by Indian companies in Ethiopia:

”I come to you first and foremost as a fellow human as I call you to join our effort to stop the plundering of Ethiopia and Africa by African dictators, their cronies and their foreign partners-some of whom are Indian-who are hungry for our resources but care little for our people. …Will you help work within India to bring greater transparency and compliance with whatever protective laws and safeguards are in place in India?”

This is important for Indian democracy not only because of the broader humanist considerations outlined by Metho, but also because without this solidarity, the struggle for greater economic justice within India will also be undermined.

This article was originally published in Frontline, Vol. 28: No. 19 Sep 10 – 23, 2011, and was re-posted from the IDEAs Network.

The world economy has clearly started on Act II of the possibly prolonged drama that began with the Great Recession of 2008-09. But if the Government of India is to be believed, the Indian economy is not likely to be very adversely affected by the current round of global financial volatility. Finance Ministry sources argue that the Indian economic growth story is so robust that the current uncertainty will cause no more than a minor blip in its confident trajectory.

But this is definitely an over-optimistic prediction, which makes one hope that the policy makers are actually more aware of the possible downsides, whatever their public pronouncements may be. One important downside is the likely diminished role of the US as a net importer. This is no longer a future possibility – it is already a process that is well under way and is likely to get even more accentuated in the near future. And it means that the rest of the world – including India – can no longer rely on exporting to the US as the means of generating growth in their own domestic economies.

It is true that the US current account deficit increased slightly in 2010 compared to 2009, and has been increasing slightly in the first half of 2011. Even so, in 2010 the deficit was 30 per cent lower than it was in 2008, amounting to $2 trillion less.

More significant for countries like India, which have put so many eggs into the service exports basket, is the pattern of US imports of services. They fell quite sharply in 2009 compared to 2008, recovered in the following year but were still below the 2008 level. In the first six months of 2011, US service imports were only 5 per cent higher than they were in the first six months of 2008, which implies a fall in real terms because of the depreciation of the US dollar in the intervening period.

All this occurred while the stimulus packages still included some amount of fiscal expansion in the US. Unfortunately, the political charade around the debt ceiling that just played out in Washington has almost completely ruled out the possibility of more government expenditure to combat the current fragility – instead, the current watchword is austerity and budget cuts. Quite apart from the implications for employment, welfare and inequality in the US, this is a further constraint on import expansion in the US economy. And the growing resentment among the people that is bound to be associated with these cuts will generate further protectionist pressures that will rebound on outsourcing and related tendencies.

Since fiscal measures are being ruled out by the politics, the only means left for the US to come out of this current stagnation is through monetary policy, though the effects of this are unlikely to be very positive. The real problem with the expansionary and low interest monetary policy being followed by the US Fed in the wake of the crisis is that it has contained no measures to make sure that banks actually lend out in ways that improve economic activity, employment and the financial condition of the mass of consumers.

But still no such actions are planned. Instead, Federal Reserve Chairman Ben Bernanke has just announced that interest rates will remain at their very low levels (close to zero) for the next two years at least. This may be fun for banks, but is not likely to stimulate domestic output or demand in the US directly, especially because thus far the banks have shown little appetite for lending to small producers or distressed householders who are being forced to cut consumption. But this policy will surely contribute to a weakening of the US dollar, which indeed may be part of the intention.

And it will lead to yet another problem for emerging markets like India: the increased tendencies for inflow of mobile capital, in the form of carry trade to take advantage of interest rate differentials and because of perceptions of greater growth potential in these countries. In Brazil this is already seen as a major economic concern, as inflows of hot money push up the currency despite some attempts at capital controls. But policy makers in India are not necessarily as wise, and they may rather interpret the renewed inflows of footloose capital as a sign of the continued economic strength of India.

That would be a mistake, because financial inflows in the current context will push up the exchange rate and further increase the trade deficit, which is already of significant proportions. It will further shift incentives in the economy away from tradable goods to non-tradable activities including real estate, construction, stock markets and debt-based personal consumption.

These are classic signs of a bubble economy. As long as the bubble is in progress, it feels like a boom, but all bubbles do burst eventually. In the Indian case the bursting is likely to be even more painful, because even in the boom the growth process is simply not generating enough productive employment. So a quick ”recovery” from the current volatility need not be something to celebrate in India if it is because of renewed capital inflows, with their attendant unfortunate consequences.

Meanwhile, in Europe (the other major market for Asian exports), political tensions continue to simmer over the extent to which economic and monetary integration necessarily require fiscal federalism and greater protection of the ”weaker” segments of the European Union by the stronger countries. At present, the countries with deficits (whether these deficits are public or private) are being forced into massive internal deflations based on swingeing fiscal cutbacks and falling real wages, but thus far these are not contributing to rapidly reducing deficits. Instead, some imbalances are getting worse simply because GDP continues to fall. Meanwhile the stronger surplus countries are also intent on domestic austerity and continue to look to external markets as the source of growth.

Obviously this is not a sustainable situation, and something must give fairly soon. But in any case this means that this region also cannot provide the impetus required if global output is to be on a genuine track of recovery, and indeed the pressure is more likely to be downward.

There are those who argue that the US and EU are no longer the significant sources of global demand anyway, and that the future growth for the world economy will come from the BRIC countries (Brazil, Russia, India and China). Jim O’Neill of Goldman Sachs, who coined the term ”Brics” has pointed out (”Panic measures will ruin the Bric recovery”, Financial Times August 9, 2011) that ”In the decade that finished in 2010, the Brics added around $8,000bn to global gross domestic product, equivalent to about 80 per cent of that of the Group of Seven leading economies. The Brics will probably add around $12,000bn more over the next decade, double the US and the eurozone combined.” He believes that if domestic growth in these economies is not thwarted by inflationary pressures, the world economy can treat these economies as the engine of future growth.

But this misses the point that despite some moves towards greater stimulation of the domestic market especially in China, these economies are also dominantly export-driven. Manufacturing exports from China, oil exports from Russia, agricultural exports from Brazil and service exports from India are all crucial in driving domestic growth in these economies, even in the countries that are currently running trade deficits. Any slowdown or reduction in exports to the US and EU is bound to have some depressing effect on both output and employment in these and other neighbouring countries. If it also affects investor expectations, then this can turn into a cascading effect.

The other potentially dangerous effect of the fact that loose monetary policy in the United States has unleashed lots of cheap liquidity on global markets has to do with primary commodity prices. At this moment oil prices have fallen globally, but this may be just temporary respite, and for other important commodities there is no clear decline. Gold prices are rising because of a flight to safety, but investing in other commodities may also keep increasing simply because investors do not know where else to go with their money, and because interest rates are so low that there is little to lose.

This means that further increases in global commodity prices are possible and even likely. The dramatic increase in global food prices has already created havoc and adversely affected consumption of the poor across the developing world. The pressure on food prices in India is already so intense that the country really cannot afford another trigger in the form of renewed global price increases. And this is compounded by other pressures on domestic prices, so much so that when the dust created by the anti-corruption agitation settles, it is likely to become evident that inflation in food and other basic goods is the single most important problem in the perception of most Indians.

Despite macho claims to the contrary, the Indian growth process is a potentially very fragile one. It has been heavily based on global integration, both in terms of new markets for goods and services and the effects of inflows of mobile finance capital that have enabled disproportionate expansion of some sectors, especially finance, real estate and construction.

The threats to this growth process are usually seen as internal, in the form of social and political unrest driven by the greatly increased asset and income inequalities and the growing gap between material aspirations and reality especially among the youth. But the extent to which even these social variables can be affected by signs of external vulnerability should not be underestimated.

Employment in exporting sectors in India has still not fully recovered from the falls during the global recession, though output barely dipped. And the large numbers of young people who have invested heavily in expensive private higher education in the hope of a better future are increasingly entering the labour market only to find that there are simply not enough jobs being created for them, especially in the formal sector. The pressure cooker in India is clearly simmering, and even small signs of external vulnerability and economic fragility can cause it to explode.

This article was posted on the website of IDEAs Network.

A new report from the FAO blows the myth about increased grain consumption from developing countries leads to higher global demand and higher prices.

Ever since the global food crisis of 2007-08, a perception has persisted in many parts of the world that one of the main underlying reasons for the price spikes in major food items – especially food grain – is the increased demand from countries such as China and India. If anything, this perception has become even more widespread since prices started rising again, especially since early 2010.

On the face of it, such a perception seems quite reasonable. After all, China and India both have huge populations, accounting for nearly 40% of the total world population between them. Their economies have both been expanding very rapidly, much faster than most of the rest of the world, so per capita incomes have been rising from relatively low bases. It is well known that as incomes rise from low levels, people tend to consume more food grain – not necessarily directly, but indirectly through the consumption of livestock products that require more grain in the form of food.

So it is only to be expected that the increased incomes in China and India would translate into more demand for food grain, and this could certainly affect the global supply demand balance in ways that would cause food prices to rise. Expected, yes: but did this actually happen?

It turns out that there has been barely any change, and if anything a slowdown, in the rate of grain consumption in these two large countries. And the global consumption of grain for all food purposes has actually decelerated in recent years compared with previous periods.

This is very evident from an important new report from the high level panel of experts set up by the FAO to study commodity price volatility and its relationship to food security. The report contains a careful assessment of both the actual trends and the various attempts to explain the price changes. In the process, it blows the myth about increased consumption from developing countries leading to higher global demand and, therefore, higher grain prices.

Consider the evidence it provides on rates of change of global cereal consumption, as shown in the chart. The growth rate of total cereal consumption was considerably slower in the period since 2000 than it was in the 1960s and 1970s, and only around the same as it was in the 1980s. It did increase relative to the 1990s, but not by very much. And, contrary to the general feeling, feed consumption for livestock actually increased more slowly than direct (or non-feed) consumption.

In fact, the report notes that even the apparent acceleration of feed use in the last decade was essentially because of the recovery of feed use in the former Soviet Union after the 1990s. So, despite all the booming demand for meat in fast-growing Asia, the growth of feed consumption in the rest of the world outside the former Soviet Union was not accelerating. Rather, it has actually been slowing down.

As it happens, FAO food balance sheets show that both direct and indirect demand for grain in China and India barely increased between 2000 and 2007, and cereal imports were actually lower. Why this has been happening, and why the economic growth has not translated into more aggregate demand for grain, is obviously a fascinating question on its own and one that deserves more study. It is likely that the worsening income distribution in both countries may have had something to do with it, so that increased demand from high-income groups is counterbalanced by reduced demand from poorer sections. But this needs to be explored further.

The relevant point is that it is not increased demand from China and India that is driving up grain prices. This does not mean that there are no other demand forces at work, however. Financial speculation in commodity markets is clearly significant, but it is also true that even such speculation must be based on some assessments of changing global balances. What could that be based on?

The report from the FAO has a convincing response to that as well: it notes that the biofuel boom has had a major impact on the evolution of world food demand for cereals and vegetable oils. According to page 32 of the report “there is a real acceleration of non-feed uses boosted by biofuel development. Excluding use for biofuel, the growth rate for non-feed use is stable compared with the 1990s and markedly inferior to its historical performance. Without biofuel, the growth rate of world cereal consumption is equal to 1.3% compared with 1.8% for biofuel”.

This massively increased demand from biofuel is largely determined by the very large subsidies provided in many western countries, which have, ironically, been increasing their subsidisation of biofuel at the same time that they have reduced subsidies on food cultivation. Aside from a few producers, such as Brazil and Cuba, biofuel production in most locations would be completely unviable without these large subsidies.

The impact of these on diverting production and affecting price has been even more significant in the case of edible oils. The report shows that “the use of vegetable oils for food slowed down between the 1990s and the 2000s (from 4.4% a year to 3.3%), but industrial use of vegetable oil soared, pushed by the booming European biofuel industry. As a result, the share of industrial use in world consumption of vegetable oils jumped from 11% to 24% between 2000 and 2010″.

The surprising conclusion from all this is that, leaving out the impact of the biofuel boom of the 2000s, global consumption of both cereals and edible oils is actually slowing down. All the more tragic, then, that speculative forces are still allowed to run amok in global commodity markets and global food prices are kept so high as to increase the deprivation of the millions of hungry people in the world.