Factoring Globalization into the virtuous spiral – Partho’s comment on Dipankar’s article

April 4, 2007

By Partho Sarathi Ray

I started following this interesting discussion rather late but would like to make a few layman’s observations. A crucial point which seems to have not been considered in detail in this discussion on the “neo-liberal” economic reforms in India is globalization. What Dipankar has stated about Adam Smith’s observation that “division of labour” being the cause of prosperity of an economic system (by “economic system” I refer to anything from an enterprise to a society or a national economy, better word), is true, because in division of labour lies the efficiency of extracting profit, and for generating the so-called virtuous spiral. Although Adam Smith describes this division of labour as “parts of a complex production process can be separated into different points of production, which may be located in different firms, or even different geographic regions”, he considers this division to still work in a sort of unified economic system, as in a corporation or a national economy.

But I think that globalization, and particularly the globalization of the “division of labour”, adds a new dimension to this, which we must appreciate to understand the nature of neo-liberal “reforms”.

I’ll try to clarify the point which I have so clumsily put. By globalization of the division of labour I mean that the process of social production, which today includes both manufacturing and services, is no more restricted to a single unified economic system such as a national economy, but is spread out around the world. This is old hat, but the crucial point is that a dominant capitalist economy, like the economies of the North, is based on a world-wide division of labour, where, because of the greater efficiency that it gives to the process of extraction of profits, the costs of production have been externalized.

This is epitomized by the economy of the USA, the most developed capitalist economy, where manufacturing has been greatly externalized (to countries like China) and services have been externalized (to countries like India). I think the reason why this has been done is basically to go out of the “virtuous spiral”, because with increased efficiency of production and rise of “social needs” of workers, the rise in wages (or the rise in the expectation of wages) has been such as to make the extraction of profit inefficient. On the other hand, removal of the processes of production from the national economy would result in a stop in the rise of incomes, unemployment, reduction in purchasing power, contraction of the market and social upheaval, all of which is detrimental to the capitalist system. So, cost of commodities and services have to be kept low enough, such that the majority of people, regardless of the fact of decreasing or stagnant incomes, still have the purchasing power to meet their social needs and to sustain and expand the market.

Today, the USA has the most unequal economy in the industrialized world, with I think 10% of the population owning 60% of the nation’s wealth, but this rising inequality seems not to have significantly affected the purchasing power of 90% of the population. So, the solution to this dual problem, of maintaining the efficiency of the process of profit extraction and of sustaining the market, was globalization. Globalization would externalize not only the costs of production, but also the forces of production, and would also maintain the supply of cheap goods and services, that would keep the economy running. I think we have to consider the nature of economic reforms in India against this backdrop, because therein lies their fallacy.
So, let me consider that the economic “reforms” in India leads to the process of capitalist industrialization which, although at immense short term costs, would lead to general prosperity in a space of 20-25 years. That might be acceptable to many people, of course you cannot have long term benefit without some short term costs.

But what type of an economy are the policies building up in the meantime? Therein lies the crux of the matter. We are building up what I call a “service economy”, an economy designed to serve the “dominant economy” based upon a globalized division of labour. The economy will serve the purposes of globalization which I have enumerated earlier, to externalize the processes of production (in the case of India it will be mostly the service sector) of the dominant economy and to act as a source of supply of cheap commodity (again, in the form of cheap white collar labour in the case of India). Moreover, any social unrest tied to this process will become a problem of the state running the service economy, as we have seen in Nandigram and everywhere else in the world. This service economy, servicing the global capitalist system and superimposed on the national economy, will increasingly have resources allocated to itself from the traditional economy…in the form of land, power, subsidies, tax breaks etc., because of its apparently high returns (leaving aside the fact that the class which will profit from this economy is also the ruling class).

The proposed Tata small cars factory in Singur is a beautiful case in point. I was talking to a friend of mine in Kolkata about a month back who has three car dealerships in the city. According to him, the largest purchaser of passenger cars in the city now are not individuals, but companies which maintain fleets of cars to transport employees of software/BPO firms to Salt Lake. The small cars rolling out of Tata’s assembly line will supply the needs of these people. So what is the bottomline…Singur represents the removal of a resource (land) from the real economy (agriculture) to service transporters who will service ITES firms who will service the dominant economy in the USA. The short term costs are apparent, 10000 people will lose their means of livelihood.

But will there be long term benefits, will it lead to an overall rise in prosperity, will it lead to the “virtuous spiral”? I don’t think so, and therein lies the fallacy of these economic policies. To keep the system profitable for global capital, the reason why in the first place the division of labour was globalized, the service economy has to remain relatively underdeveloped, to remain as a source of cheap goods and services. For real incomes to rise up in the, wages have to increase, but that will replicate the process that already happened in the dominant economy, so that cannot happen. To keep the wages low, there has to be a constant pool of the unemployed, so that people are always ready to come into the service economy at low wages. To keep the production process profitable, there has to be a continous reallocation of resources, in the forms that we have seen…land, subsidies, electricity etc. as a result of which state expenditure on the social sector has to reduce. And the superimposed service economy, employing a small number of people, will drive up the prices of commodities, which we have seen happen in everything from education to real estate, further impoverishing people.

Therefore not in 20-25 or a 100 years, but possibly never, will these policies result in an increase of general prosperity, because they are enmeshed in a global system predicated on maintaining the service economy “underdeveloped”. It is something which I compare to thermodynamics. Energy flows from a source to a sink, but only along a gradient. Wealth can also flow only along a gradient, from the producers to the accumulators, and global flow of wealth from the service economies to the dominant economies, can only be maintained if the gradient of inequality is maintained.

To draw an imperfect analogy, something that has already been referred to in this discussion, we can look at the relationship between the colonies and the imperialist countries. That relationship was also based on a sort of division of labour, although not to the extent that globalization has done today, but that never resulted in the prosperity of the colonies vis-a-vis the colonizing economy. It resulted in a net drain of wealth, although it gave rise to a small prosperous class of landlords etc. whose economic functions were centered around servicing the dominant economy again, mostly in the form of providing raw materials. The analogy is imperfect, but I think is the indicator of the fallacy underlying the process of capitalist development which the neo-liberal policies have ushered in in India.


3 Responses to “Factoring Globalization into the virtuous spiral – Partho’s comment on Dipankar’s article”

  1. Sayam Says:
    April 3rd, 2007 at 08:05

    I agree with your general argument; there is just one point I would like you to elaborate on: the possibility of countries like India of outgrowing the phase of service economy. Do you think that India has a chance of becoming if not a fully functional dominant economy then at least one which functions as an intermediate between the two? I am talking about India’s capability of capturing external markets and external labour. Or do you think that unless a dramatic change in the global balance of power takes place, the existing dominant economies will continue grabbing new markets (for example in Africa) and more cheap labour leaving nothing for countries like India and China?

  2. Partho Sarothi Ray Says:
    April 5th, 2007 at 00:55

    This is an important question, which we don’t have a clear answer to at this moment . There are tendencies towards what you have referred to, i.e the capability of Indian corporations to capture external markets and external labour with companies like the Tatas selling steel to Africa and both Indian and Chinese companies investing outside. However, leaving aside the undesirability of the Indian economy becoming a cogwheel in the global engine of wealth flow from the producers to the accumulators, I think it is highly unlikely that India will ever become a dominant economy in the way the economies of the North, like the US economy, are today. I think there are various reasons for this. A major reason is that the economic policies, which make India a service economy, benefit only a small section of the Indian population whereas a vast majority, maybe 70-80%, remains outside their ambit or are directly disadvantaged by them. In many cases, for example. by loss of resources or loss of means of livelihood, they have been impoverished by them. As a result, the benefit of capturing external markets or using external labour is unlikely to reach this huge section of the population. On the other hand, the size of the population linked to the service economy, which maybe 100 to 200 million strong, and increasing in purchasing power, is big enough to sustain a robust demand in the economy and mainatin a high rate of profit extraction for both Indian and global capital. Therefore, with 800 million disadvantaged people, India cannot become a dominant economy. I’ll use an analogy, again from the colonial times, although as I said it is not an ideal one because of the differences in certain historical and economic circumstances. The opium trade was a source of great profit for the British colonialists, where opium was produced in India and exported to China, where the people had been addicted to it by the British. In return, the British obtained Chinese gold. In this case, the British capitalists were the dominant economy, India was the intermediary economy with a handful of landlords and contractors, including Jamsedji Tata, reaping huge profits from the growing and trade of opium, and China was the captured external market with its population addicted to and devastated by the narcotic. But India didn’t benefit from it, precisely because the benefit was restricted to a small set of capitalists/landlords and a much larger segment of the population, whose agricultural land was put to cultivation of opium, actually suffered from it. This is analogous to the possible scenario which will arise in India. However, we should keep thinking about these issues, and maybe discuss the situations of post-war Japan and South Korea, which became somewhat like dominant economies even though they were subsidiary to the US. However, I should mention that in both these cases, because of the small size of the populations, comprehensive land reforms were pushed through under US guidance to increase the purchasing power of the entire population and bring them inside the market.

  3. kuver Says:
    April 5th, 2007 at 22:41


    Some people may claim that the IT services economy isn’t all that bad, precisely because it gives young urban Indians exposure to technology that they might be fashioning themselves a generation from now. In other words – service now, learn from exposure, and invent in the future. If you bracket yourself out of servicing, you essentially lose out on the computer/internet revolution.


    1. Is/was it possible for India not to miss the technology revolution if it didn’t go into servicing (in other words make do with what is dished out)? Was it at all necessary for India to be exposed to the internet/IT revolution? By India, I mean the relevant part of the population.

    2. Is there any real scope of future non-service based industries? Who will be their market?

    3. What will be the impact of such non-service IT industries on the real economy, and disadvantaged people? Will there be any effect at all? Is it something that one might even wish for?

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