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Fiscal stimulus package is half-baked: Patnaik

— Photo: S.R. Raghunathan

Dr. Prabhat Patnaik at a function in Chennai on Tuesday.

CHENNAI: Economist Prabhat Patnaik, now a member of the United Nations task force to recommend reform of the global financial system, is convinced that the coordinated fiscal stimulus package that the world’s economies are planning as a response to the global economic crisis is “half-baked” for two reasons: the lack of controls on capital flows and the failure to direct the stimulus package towards the agricultural sector and primary food producers.

In a public lecture here on Tuesday, organised by the Media Development Foundation and the Indian School of Social Sciences, Prof. Patnaik said the current crisis was not an aberration due to poor regulation, but was inevitable under free market capitalism.

The cycle of market bubbles leading to a boom followed by the bursting of the bubble leading to a depression were “not related to the mistakes of the system, but are part of the modus operandi of the system itself. Bubbles are how the system grows,” he said.

Economist John Maynard Keynes, writing during the Great Depression, suggested that such a system where the livelihoods of millions were dependent on the whims of speculators driving the bubbles was “irrational.” He proposed to curb the power of speculators through the socialisation of investment and state control on the movement of capital. The Keynesian policy of controls on capital flows was in place during the “golden age of capitalism” in the 1950s to 1970s, which did not see any major financial crisis, said Prof. Patnaik.

However, the globalisation and liberalisation of the financial system have eroded those controls, leading to a repeat of the cycle of bubbles that caused the Great Depression, complicated by the systematic undervaluation of risk through the derivatives markets and the huge bubble in consumer credit. Now, with their coordinated stimulus package, the world’s leading capitalist nations wanted a return to the Keynesian model of public investment and an injection of demand through increased public expenditure, but they were refusing to consider the key element of controls on capital flows, said Prof. Patnaik. “No one is willing to talk of the very thing needed to make this stimulus successful,” he said.

Worse still, no one was taking into account what would happen if the stimulus was successful, and returned the world to the economic output levels seen before the recession began earlier this year. Just before the recession began, there were strong inflationary pressures on these sectors. Over the two decades till 2005, a squeeze of the purchasing power of the rural peasantry meant that a decline in per capita food grain output occurred without any inflation in food prices, said Prof. Patnaik.

Now, even if the economic stimulus worked, it would result in huge inflation unless the package was directed towards promoting and sustaining peasant agriculture and increasing the purchasing power of rural farmers, he said.

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