Economist’s Column Can economics of swadeshi and economic liberalization go together - a theoretical search

Economist Column Can economics of swadeshi and liberalisation go together?

The protagonists of the theory of Economic Liberalization often cite Ricardian theory of comparative advantage as their guiding principle. David Ricardo is considered to be the founders’ theoretician of the market economic regime. The essence of the Comparative cost theory is well known. In Ricardian example if the England and Portugal are the two countries with comparative advantage in production of cloth and wine respectively then both countries may be benefited from trade. This would follow an international division of labour where England would specialize with cloth while Portugal would specialize with wine. However the Ricardian comparative cost theory had an implicit support for colonialism which can be understood from the example of England and Portugal by Ricardo. Production of clothes augmented the level of industrialization in England while the production of wine did not make any structural change in Portugal. In other words the suggestion that came out from the Comparative Cost Theory of Ricardo was that the less developed countries should not go ahead with industrialization but should be dependent on advanced capitalist countries for imported industrial goods. On the other hand they should specialize in production of agricultural commodities that they would export to the advanced capitalist world to support the demand for raw materials and food. There was an obscurity in the term ‘intensive factor endowment’ of Ricardo. Ricardo made us believe that England had natural abundance in industrial inputs while the less developed countries had abundance in agricultural commodities. The fact is that England or most of the advanced capitalist countries in northern globe have no natural climate to grow the agricultural goods. But the industry can be set up any where in the world with the sufficient investable resources. The industrial development is not related with the climate or natural intensity of production. England along with today’s advanced capitalist countries in the globe industrialized directly at the cost of de-industialization and underdevelopment of the nonwhite countries in the south (Bagchi 1982, Frank 1967, 1975). Ricardian comparative cost had the necessary assumption that each country has to produce two goods. This must be the necessary condition in autarky without that the trade is not possible on the basis of comparative advantage. But in the original example of Ricardo, England had no endowment for production of wine. Thus, the comparative cost of textile remains undefined in England. The same thing is true when we consider the trade between agricultural good of any tropical country and industrial good of the advanced capitalist country (Patnaik 1996). This was the logical fallacy of argument that Ricardian theory could not overcome.

However the proponents of the fund bank theorists tried to resurrect the comparative cost theory from the museum of colonial history and gave it a new name ‘globalization’. However, in comparison with the Ricardian Comparative Cost theory the new version of free trade theory (?) has more adverse implications on the process of development in the LDCs. According to Ricardian theory, the comparative advantage is derived from the abundant factor of production and the latter remains the motivating force behind the specialization in a particular good for a country. In other words in Ricardian points of view, intensive application of abundant factor entails a country to reduce its unit cost of production and to avail of economies of scale. However, the Fund-Bank theorists have little to do either with the comparative cost or abundantly available resources for any country. The Fund-Bank theory of globalization proposes that any country would specialize in that particular commodity that have high demand in the international market. It is indeed immaterial whether any country has abundant availability of a factor of production to produce that particular commodity or have comparative advantage in that commodity. The so-called scholars of IMF-World Bank suggest that a hitherto underdeveloped country cannot only survive in the competition with the advanced countries to capture the international market but they can also gain ‘competitive efficiency’. However since the competition in the world market is predominantly a competition of price and technological superiority, the country who can supply technologically superior cheap products is treated as a successful competitor. The demand for goods in the international market is framed according to the domestic demand of the advanced capitalist countries who have a higher share in world trade. (It might be noted that India’s percentage in world trade is only 0.4 per cent). As we know that marginal cost or average prime cost in Kaleckian sense is a main determinant of the price of a commodity. Now given the demand for commodities in the international market that is compatible with the production condition of the advanced capitalist countries, if a less developed country would try to specialize in those commodities where they don’t have any comparative advantage at all, the cost of production (and therefore marginal and prime cost) to produce that commodity must increase. Now the question that arises naturally, when the big investors of the world market supply their far superior technological product at a lower cost (permitted by technological application), how does, a less developed country would be able to survive in competition? The answer is obvious. The less developed countries have the key factor of production in abundance - labour. The LDCs must curtail the wage rate of the labourer to a great extent in order to reduce cost of production. Due to the acute unemployment problem, the labour force in Asia, Africa and Latin America have compelled to sell their labour power at the lowest possible wage rate. Even child labour is used relentlessly in order to curb the cost of production. The control of labour process is sooner or later captured by the multinational corporations. The main attraction of the latter is the cheap labour of LDCs. They create a pressure from above (through IMF-World Bank) as well as through different lobbies within the domestic economy of the LDCs who act on a behalf of them to privatise the industry. The continuous pressure from Fund - Bank to curb the fiscal deficit is designed to cut plan and non-plan development expenditure and subsidy for the poor, rather than to tax rich or to cut military expenditure. In this way a less developed country has to pay a high price for its desperation to survive in the international market. In the short run, he might be getting `successful’ certificate from Fund-Bank, but in the long run that will call for dooms day of poverty, illiteracy, malnutrition and environmental disorder.