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/ Economy / General Issues /


1. The Capitalist world economy of today is characterised by a number of features of which the prominent ones are the following:

First, there is a tremendous globalisation of capital in the form of finance, so much so that trade- related financial flows account for just about two percent of total cross-border financial flows.

Secondly, notwithstanding sharp increases in the DFI flows internationally, their total magnitude still remains comparatively small; they still have not broken free from the situation where the North invests largely within the North; and even within the South they tend to come only to those countries which have high levels of domestic savings anyway. In short, a break with the historical pattern of DFI flows to a point where capital-in-production is so mobile that merely removing barriers to its flow would automatically shift it to low- wage countries, is nowhere in sight. To put these first two points sharply what we have witnessed so far is globalisation of capital-as-finance but not globalisation of capital-in-production.

Thirdly, this tremendous financial fluidity has undermined the ability of the nation-State to intervene in the economy to maintain high levels of activity. This explains to my mind not only the high levels of unemployment prevailing in the capitalist world, but also the crisis which afflicts the entire spectrum of theoretical tendencies which invoked an interventionist State, viz. Keynesianism, Social Democracy, Third World Nationalism, and even socialism as traditionally understood.

Fourthly, notwithstanding differences among the advanced capitalist countries on numerous issues, and their rivalries in matters of trade, the present conjuncture is marked on the whole by a far greater degree of unity among them than has been the case over the last hundred years (except the post-war situation when there was a sort of artificial unity imposed by U.S. "superimperialism" upon the vanquished and the rest of the victors of the war alike). This unity in turn owes not a little to the fluidity of finance which has attenuated the scope or the activities of the nation-State.

Fifthly, this fluidity of finance represents globalisation in the double sense, not only in the sense that finance flows everywhere, but also in the sense that it is sucked out of everywhere, not only from Latin America, from India and other third world countries, but even from the Soviet Union in the Gorbachov era. In other words it is not just finance from the advanced capitalist countries flowing everywhere, largely in the form of "hot money", for quick and speculative gains, but finance all over the globe looking for opportunities all over the globe.

And finally, the degree of unity among the advanced capitalist countries vis-à-vis the third world has made it possible for the former to impose on the latter a whole new international trading arrangement (via the WTO) whose objective is to revive (admittedly at some remove) the colonial pattern of international division of labour. The WTO thus becomes a new instrument, in addition to the usual IMF and World Bank conditionalities, for subjugating the third world to the dictates of imperialism. In short, three inter-related phenomena: globalization of finance, a pervasive capitalist crisis (manifested in huge rates of unemployment), and a fresh attempt at recolonising the third world on the basis of a degree of unity among capitalist powers, define the current international conjuncture. 2. The relationship between financial fluidity and production crisis, i.e. between the emergence of globalised finance on the one hand and huge rates of unemployment on the other, is worth exploring a little further. There can be little doubt that the success of post-war capitalism in keeping down the rates of unemployment, compared to historical experience, owed a lot to the application of Keynesian policies of "demand management" . And indeed so successful were these policies that many writers, including Marxist writers, believed that capitalism had at long last learned to manipulate its contradictions. Little did they anticipate that "demand management itself would become difficult once finance capital had reasserted its dominance. The reason why State intervention in "demand management" becomes difficult in a world of financial fluidity is as follows.

2. Whether we talk of Keynesian demand management, or of social democratic welfarism, or of third world State intervention and planning, (or even of socialist planning as conventionally understood) the point of reference in every case is the "national economy". The basic premise of all these different conceptions of interventionism is that the national economy constitutes the "control area" of the State, within which, subject to whatever political economy constraints it may face, the State can act in order to achieve objectives more or less in conformity with its intentions. True, the national economy is linked to the larger international economy, but this link, it is supposed, can be adjusted through instruments such as trade policy or exchange rate policy, leaving the "control area" as amenable to control as before.

But the "control area" ceases to be amenable to control by the State if it gets caught in the vortex of international capital, especially of "hot money" flows. State intervention can hardly achieve its objectives if the capital account of the balance of payments behaves in a manner not anticipated by it, and since expectations play a crucial role in this behaviour, exchange rate policy (trade policy disappears with "trade liberalisation") can not insulate the economy from speculation-engendered balance of payments crises

Precisely for this reason, however, State policy gets directed towards keeping the international rentiers happy so that they do not precipitate payments crises. For this the interest rates have to be kept high, the fiscal deficit has to be kept in check and tax rates have to be kept low, all of which contribute to deflation and stagnation. Moreover, workers'rights have to be restricted to ensure their acquiescence in this deflation. And if perchance a capital flight does occur despite all this, domestic resources and assets have to be offered for sale "for a song" to entice such capital not to leave the shores. In short, the policies of the nation- State, instead of having the autonomy that any form of "demand management" presupposes, are dictated by the caprices of a bunch of international rentiers.

This was brought home most vividly when Mitterand was first elected the President of France. Reflating the French economy to bring down unemployment was a part of his election promise . But the moment reflation was attempted there was a speculative run on the French Franc and Mitterand had to abandon, for the rest of his entire tenure, any attempt to reduce unemployment through "demand management" in France.

3. The question naturally arises: how did this ascendancy of finance capital come about? The entire thrust of post-war "demand management" and "Welfare State" was in fact a retreat on the part of finance capital. True this so-called "Welfare State" represented above all a redistribution from the employed to the unemployed in so far as the governments' social expenditures in the form of unemployment and other benefits were matched by social security taxes levied on the workers by the State, but even this would not have been acceptable to finance capital but for its tremendous weakening because of the war. The tact that Keynesianism despite its anti-rentier thrust and its advocacy of State activism triumphed for such a long lime in the advanced capitalist countries, is testimony as much to the severity of the crisis of capitalism between 1913 and 1951, which made a degree of restructuring, no matter how unpalatable to finance capital, essential, as to the success of capitalism between 1951 and 1968 in keeping inflation in check, through an adverse movement of terms of trade for primary producers despite the fact of decolonisation. But the onset of inflation from 1968 onwards as a lagged consequence of the Vietnam War provided the first rumblings of discontent against Keynesian "demand management" policies. Capitalism, as Marx had pointed out long ago cannot do without a substantial reserve army of labour. The depletion of this reserve army not only weakens the coercive power of capital over labour ("workes get out of hand" in the language of the capitalists), but produces "unmanageable" conflicts over distribution, which, in conditions of monopoly price-fixing by capitalists, manifest themselves in accelerating inflation. When this happens then all sections of capital, not just the rentiers who in any case oppose every instance of inflation, become panicky and join in the demand of finance capital for deflation and unemployment as an antidote to inflation. This is precisely what happened in the advanced capitalist world after 1968.

Meanwhile of course there had been a progressive strengthening of finance capital, initially owing to the continuous U.S. budget deficits (which produced a flood of Eurodollars) and subsequently owing to the oil-price-hikes (which produced a flood of petrodollars) And with this strengthening the fluidity of finance had increased, as mentioned at the beginning of this paper. All these factors contributed to a climate where the policies and the ideology of "liberalisation" gained ascendancy. Reaganomics and Thatcherism represented this ascendancy.

4. As a matter of fact, however, the real victims of Reaganomics and Thatcherism were the third world economies. As far as the advanced capitalist countries were concerned, Reaganomics and Thatcherism did not lead to such a great transformation in economic policy as they had promised. Reagan did cut taxes but the U.S. fiscal deficit widened to record levels and stimulated a rather Keynesian boom. Like- wise, Thatcher did not succeed in carrying out much of privatisation, did not succeed in slashing the National Health Service, and did not succeed in having a persistently lower budget deficit. In short, the constellation of social, or class, forces in the advanced Capitalist economies was such that the ascendancy of finance capital did not succeed in enforcing the adoption of an economic policy-package of its choice.

In the third world however this policy package could be enforced with apparent impunity. The IMF acted as the agency through which the interests of metropolitan finance capital could be served. And the rentiers of the third world itself tended to make common cause with metropolitan finance capital since the gains from privatisation and financial liberalisation, from their point of view, promised to be large enough to outweigh the possible financial losses from deflation.

Putting the matter differently, the IMF, more than ever before, acts today as the guardian of the interests of metropolitan finance capital. The IMF had always been a conservative organisation, prescribing "stabilisation" policies to countries whose balance of payments problems forced them to take recourse to borrowing from it. These stabilisation policies were always of the kind that deflated the economy, cut welfare expenditures, and hit the working people hard through both greater unemployment as well as lower social wages. But, now a change has taken place both in the position of the IMF as well as in the policy- package it prescribes.

The Change was most clearly visible between the first and the second oil-shocks. Most of the recycling of petrodollars that took place during the second oil-shock was under the aegis of private banks; the IMF itself had very little funds. And this has been the case ever since. Private banks need the IMF to provide them with a "security cover". They loan to countries which are under IMF-conditionalities, because only such countries are considered "creditworthy".

This is hardly surprising. Within a country, when a creditor gives a loan to a debtor, he or she is "protected" by the paraphernalia of laws of the country which are ultimately defended by the State. But in the international arena there is neither a world-State nor political control of the colonial kind. The IMF acts as a watchdog body on behalf of metropolitan finance capital to ensure that no debtor flouts the rules of the game. In other words, as metropolitan finance capital became stronger, the IMF progressively became less and less a mediator of financial flows to the third world, and more and more a watchdog on behalf of metropolitan finance capital which now determined the financial flows.

5. This fluidity of finance explains both the drive towards "liberalisation" that is being imposed upon the third world as well as why this drive has serious adverse implications for it. "Liberalisation" serves among other things to open up the economy institutionally to the unrestricted flow of capital-as- finance .

This to be sure is not the only reason why the imperialist countries and their institutions like the IMF and the World Bank are forcing "liberalisation" upon the third world. One can discern at least two additional reasons: first, given the current high levels of unemployment in the advanced capitalist world and the difficulties of persisting with Keynesian "demand- management" policies in a situation of fluidity of finance, opening up third world markets, not just for goods but also for services, can help them to "export unemployment", i.e. precipitate "deindustrialisation" here while creating some jobs there to keep domestic working class anger in check. This after all is capitalism's conventional response to a crisis: it can alleviate the sufferings of one section of the workers i.e. the domestic working class, only by shifting the burden to another section of the workers, i.e. those located in third world countries.

The second additional reason for forcing "liberalisation" upon the third world is to break the latter's self-sufficiency in producing food and other essential commodities and to make them hooked to the international market as agricultural, and more generally primary commodity, exporters, and to become food importers. This would help the imperialist countries both to obtain essential primary commodities cheap, and to get rid of their surplus food stocks (produced with huge subsidies) while exercising crucial leverage through food exports.

But while these factors are important, nonetheless the biggest push for "opening up" the third world is provided at present by capital-as-finance.

6. To say that metropolitan financial interests, whose cause the IMF has increasingly been championing, supported in this instance by metropolitan producers as well, constitute the main entity behind the structural adjustment package being imposed upon the third world, does not by any means imply that there are no domestic supporters of such measures within the third world itself. We have already seen that domestic rentiers have a vested interest in measures of privatisation and liberalisation. What is more, within the third world where the bourgeoisie itself is of recent origin the distinction between the rentier and the "entrepreneur' elements cannot be too strongly maintained. Even sections of the "industrial" bourgeoisie in other words, who would be normally expected to oppose measures of deflation and trade liberalisation, may nonetheless support structural adjustment in so far as the new dispensation allows them to put on their "rentier" hats (or become junior partners of multinational corporations) and make substantial gains.

7. But the fact that some sections of the domestic bourgeoisie in the third world countries do well out of "liberalisation" does not mean that the economies of the third world do well too. On the contrary, "liberalisation" spells stagnation and retrogression for the third world economies. This is not only because Of the reduction in wages via inflation that export agriculture entails, in a situation where public investments in agriculture and infrastructure (the main source of growth in the agrarian economy) are curtailed in pursuit of "sound" financial policies. This is not only because the fear of capital flight, as mentioned above makes the pursuit of contractionary policies imperative. This also happens when vast amounts of finance capital are moving into the country. This last may appear odd at first sight. If foreign exchange even in the form of hot money keeps coming in, why can it not be converted to productive capital through the intermediation of the State? In other words can't the mobility of finance capital itself be made use of through judicious macroeconomic policy to push up the investment ratio in the economy?

The answer to this question, which is central to an understanding of what a "liberalised" economy entails, consists of two parts: first it is risky in any case to use hot-money as the basis of an investment- drive. A country which does so is in effect "borrowing short to investment long" i.e. getting into a more and more risky portfolio-mix. But important though this consideration is, it is not over-riding. The State could always choose a pattern of investment, e.g. in quick- yielding projects which have the effect of raising supplies of potentially-exportable commodities (raising agricultural output would be a good example), which minimise the risks of an investment drive.

The more serious constraint arises from the fact that under the logic of liberalisation the State begins to withdraw from the role of a principal player in the arena of production itself. As a result "liberalisation" leaves the economy without any agency capable of transforming potentially investible resources into actual productive investment, i.e. capable of using the "slack" in the economy to step up its rate of growth. Direct foreign investment does not flow in, to any significant extent, to take advantage of global markets; domestic private investment dwindles owing to low inducement to invest (which removal of protection entails) and the greater profitability of speculation; and the State progressively reduces its role as an investor. Not surprisingly economic atrophy ensues even as speculation thrives and foreign exchange reserves accumulate.

Using financial inflows for stimulating productive investment therefore becomes almost impossible in a "liberal" regime. As a consequence not only does investment and growth suffer, but macroeconomic policy itself runs into a dead-end, like India's macroeconomic policy has done, where, even under the best of circumstances, i.e. even assuming that large foreign exchange inflows on the capital account continue to take place, the economy experiences a combination of stagnation, stock-market speculation, accumulating exchange reserves, and government impotence. And it, because of accumulating exchange reserves, the State is compelled to "liberalise" trade further, especially of consumer goods imports, then this precipitates a domestic deindustrialisation financed by depleting reserves built up on the basis of "hot money" inflows, i.e. the country not only borrows short to indulge in luxury consumption but deindustrialises its economy in the process! The argument advanced for "liberalisation" therefore is based on a gigantic fraud. This argument claims that owing to "liberalisation" lots of capital-in- production would flow in which would stimulate investment and growth. As a matter of fact, because of "liberalisation", capital-as-finance flows in which strengthens speculation, and retards investment and growth.

8. It fluidity of finance causes unemployment, stagnation and even retrogression everywhere, not just in the third world but even in the first word, then are we justified in talking at all of imperialism? Are we rather not seeing a situation where all productive systems no matter whether they are located in France or in India have to be victims of deflation, have to witness wage-cuts etc., in which case there is nothing special about the plight of the third world?

This however is an erroneous view. As mentioned above the flow of finance, when it occurs towards the third world, is used for expanding the local markets for metropolitan products. And even otherwise the third world markets are opened up for metropolitan goods and services, often at the expense of domestic deindustrialisation, financed by capital inflows of various kinds. But if hot money flows out or debt payments fall due, the third world economy offers its natural resources, land, natural wealth, or produced assets in lieu of such capital or in order to entice such capital to stay. In other words the impact of financial fluidity cannot possibly be symmetric between the developed and the underdeveloped economies. Any such symmetry would always be vitiated by the fact that the former would capture the latter's markets, at the expense even of the latter's own production, and get paid for their sales by the latter's assets and resources.

In other words the fluidity of finance and the universal production crisis engendered by it necessary has an uneven impact on the world economy because it is accompanied by and hastens the process of centralisation of capital on a global scale.

9. To sum up, the current phase of capitalism is marked by the rise to dominance of financial or rentier interests, and the fluidity of finance across national boundaries. This has the effect of undermining the "control area" of nation-States, of making all agendas of State intervention for improving the living conditions of the people appear vacuous, of precipitating stagnation and unemployment even in the metropolitan countries, and of prising open the third world economies for penetration not only of metropolitan goods, but even more importantly of metropolitan finance. This economic milieu however has the effect of producing greater unity in the advanced capitalist world (where there is talk even of supra-national States, as in Europe), but as a dialectical counterpart of this, greater disunity in the third world, with tendencies towards separatism, divisiveness and disintegration acquiring prominence. The question which naturally arises is: are we now doomed to this fate forever? Or, can we overcome this fate?

The possibility of the "joint exploitation of the world by internationally united finance capital" had been envisaged by Karl Kautsky the eminent German theoretician of the Second International. Kautsky's position however had been attacked by Lenin who had argued that the pervasiveness of uneven development under capitalism made any agreement among the capitalist powers temporary, to be followed by intensified inter-imperialist rivalry as the terms of the old "truce" are rendered obsolete by new configurations of strength.

In one sense the present debate is reminiscent of the Kautsky-Lenin controversy but in another very important sense it is not. Both Kautsky and Lenin derived their concept of finance capital from the German context, and Lenin expressed this as representing a coalescence of banking and industrial capital. In other words the concept encompassed nationally-based, bank-controlled, industrially- operated gigantic blocs of capital which were either in truce or in conflict. The finance whose fluidity was being talked of above, however, simply consists of enormous sums of money being pushed here and there by rentiers and speculators, big and small. This finance therefore is a somewhat different animal from the finance capital that both Lenin and Kautsky had in mind. About this finance hilferding's dictum that the nationalisation of half a dozen banks would be the end of finance capital is even less appropriate than it was to the finance capital of his time. On the other hand, notwithstanding this difference, the two general perspectives articulated by Kautsky and Lenin continue to be of abiding interest.

The question raised above can be decomposed into two separate questions: first, can we think in terms of some agency transcending the nation-State that can be invoked as the agency for intervention in this new era? Secondly, if we can not, and the nation- State still remains the only possible agency for intervention on behalf of the people, then how can it ever revive, since by our own argument its capacity for intervention has got undermined?

The answers to these questions are difficult because they still remain hazy. They will emerge with clarity only in the course of time. Nonetheless one can advance some hypotheses. I believe that in the context of the third world at any rate the possibility of the emergence of an agency beyond the nation-State as an agency for intervention in the interests of the people remain remote. What is more, if the nation- State is incapable of intervention then any such agency too would be equally incapable of intervention. Enlarging merely the size of the agency would in no way contribute to the solution of the basic problem. On the other hand I do believe that the nation-State can and will revive as an agency for intervention.

It is impossible to imagine that the levels of unemployment prevailing in the advanced capitalist world would become a perennial feature of metropolitan life without causing serious social disruptions. And any attempt, no matter what its nature, to reduce the levels of unemployment would necessitate a revival of the nation-State, and controls over financial fluidity. True, such attempts in the context of the advanced capitalist world could well come from the Right, rather than from any radical quarters, in which case such a revival would have a very different complexion, entailing chauvinism and jingoism, from the welfarist and social democratic conceptions of the post-war era: and the tremendous spread of racialism and neo- Fascism all over Europe may be a pointer in this direction. But, no mater what the nature of the revival of the nation-State in the advanced capitalist countries, any such revival would once again create the space required for a similar revival of the nation-State in the third world. This is not to say that one should welcome Right-wing nationalism in the advanced capitalist world, or be indifferent between a radical revival of the nation-State and a chauvinistic revival; this is only to underscore the fact that it is impossible to visualise such a revival not occurring if the world looks somewhat Kautskyite at the moment, that does not by any means signal the victory of the Kautskyite perspective in the debate between Lenin and Kautsky.

Besides, for us in the third world, it is not even the case that we have to sit quietly until the nation-State has been revived in the West. True, the scope for State intervention has been greatly reduced, but it has not disappeared altogether. What is required is that the State has to take the constraints of living in a world with financial fluidity into account in planning its intervention. While I consider any emulation of the East Asian model in the rest of the third world neither desirable (since this entails a neo-mercantilist development strategy that is necessarily accompanied by a degree of authoritarianism which is unwelcome), nor feasible (since it is the product of a very specific domestic class configuration as well as international correlation of forces), East Asia does demonstrate in a way the possibility of successful State intervention in a contemporary world marked by financial fluidity.

In contexts such as ours if the nation is to remain united then the resuscitation of an agenda of development that entails conscious intervention by the nation-State in the interests of the people, as opposed to leaving economic development to be determined as a mere fall-out of the caprices of international speculators are absolutely essential. This requires however an alternative class-alliance underlying the State, one that would both enforce accountability on the State, as well as provide it with sufficient sinews to face up to the challenge of a international finance which is out to undermine its capacity for intervention. The forging of such a class alliance, which would necessarily be centred around a worker-peasant alliance, however is a matter for political praxis.

(This address was delivered at a Seminar on Globalisation of Economy)

Source: The Working Class, Monthly journal of the CITU Vol.27 No.9 May-June, 1997 pages 75-80