Macroeconomic Policies, Livelihoods & Sustainability

IUCN Commission on Environmental, Economic and Social Policy

IssueIssue 18,18, NovemberNovember 20112011

18, November 2011

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Design by Ricardo Raziel Romero Ruiz e-mail: [email protected] POLICY MATTERS 18

Special Issue Macroeconomic Policies, Livelihoods and Sustainability

ALEJANDRO NADAL Co-chair, TEMTI Guest Editor POLICY MATTERS 18

Maize Credit: Archive, Prensa Indígena TABLE OF CONTENTS

FOREWORD...... 6 Aroha Mead, Chair, CEESP

OVERVIEW: MACROECONOMIC...... 10 POLICIES FOR SUSTAINABILITY Alejandro Nadal, Co-Chair, TEMTI

ARGENTINA: MACROECONOMICS, RE-PRIMARIZATION AND THE ENVIRONMENT...... 48 Alan Cibils, Universidad Nacional General Sarmiento

THE FINANCIAL AND FISCAL ROOTS OF DEFORESTATION IN THE AMAZON...... 72 Sergio Schlesinger, FASE, Brazil

COSTA RICA: PAYMENT FOR ENVIRONMENTAL SERVICES AND FISCAL POLICY...... 90 Carlos Murillo, Universidad de Costa Rica, San José

MONETARY POLICIES AND ENVIRONMENTAL DEGRADATION IN ECUADOR...... 106 Pablo Samaniego, Consultant, Quito, Ecuador

MEXICO: THE NEOLIBERAL MACROECONOMIC POLICY PACKAGE AND THE ENVIRONMENT...... 130 Marcos Chávez, Consultant, Mexico City

GLOBALIZATION, MACROECONOMICS AND THE ECOLOGICAL CRISIS...... 148 Aseem Shrivastava, Economist, New Delhi, India

MACROECONOMIC POLICIES, DEMOCRACY AND SUSTAINABILITY IN INDIA...... 174 Ashish Kothari, Kalpavriksh, Pune, India

AROUND THE WORLD...... 222

CEESP STEERING COMMITTEE...... 224 MACROECONOMIC POLICIES, LIVELIHOODS AND SUSTAINABILITY

FOREWORD

By Aroha Te Pareake Mead Chair CEESP

Amazon Rainforest Credit: Pahpaha, Creative Commons

18, September 2011 Foreword by Aroha Mead

his special issue of Policy Matters 18 innovates at several levels. It is the first time we are devot- ing an entire issue of our flagship Policy Matters Tjournal to the analysis of economic policies and their impact on sustainability. It is also the first time a CEESP publication explores the highly technical topics of macroeconomic policies in their relation to sustainability. In

F oreword these two respects, the special issue of Policy Matters is a welcome addition to our interdisciplinary work on the economic, social and cultural factors that shape our relation with biodiversity and the natural resource base.

The Commission on Environmental, Economic and Social Policies (CEESP) is inaugurating a new period of productive work organized around the full range of economic policies in order to study their implications for environmental stewardship and for social responsibility. This work is being undertaken by the CEESP Theme on the Environment, Macroeconomics, Trade and Investment (TEMTI). In previous years, the working group that pre-existed TEMTI carried out important analyses on the effects of trade and investment policies, now this analysis has been expanded to the gamut of economic policies to include macroeconomics and, as a result, sector level policies. The studies contained in this special issue of Policy Mat- ters are an important contribution as they inaugurate a key avenue for policy-oriented research.

Everyone knows that macroeconomic policies play a decisive role in our daily lives. But too many people see them as belonging to a mysterious and complex field that complicates or even forbids our having access to the way in which priorities are decided upon. In fact, the whole field of macroeconomics is usually seen as a discipline that only experts in central banks or the treasury department (or professors in academia) are able to understand. In many ways, this explains why the most important decisions in economic policy are left to the experts, while the rest of the population passively acqui- esces and submits to these policy priorities. Even parlia- ments and congresses frequently are unable to monitor and influence these policy decisions.

18, November 2011 MACROECONOMIC POLICIES, LIVELIHOODS AND SUSTAINABILITY

The crucial point is that the priorities that are chosen within the framework of macroeconomic policies affect in a decisive manner the allocation of resources for social and environmental sustainability. These policies affect interest rates, taxation and income distribution, exchange rates, subsidies and the conditions for access to credit in the banking system. By affecting the production strategies of every agent in the economy, whether a giant corporation or a small-scale agricultural producer, these policies also shape resource management practices and therefore, the relation to the environment and the natural resource base. The studies that are published in this special issue show that in many instances, macroeconomic policies can spell the difference between life and death for peoples’ livelihoods.

In addition, macroeconomic policies influence the allocation of resources for environmental stewardship and sustainability at the economy-wide level. This is evident if we consider that priorities in fiscal policy determine the rate and direction of public expenditures. For example, the public monies that are allocated to health, education, housing, sanitation services and natural protected areas, just to mention a few examples, can be significantly reduced when the ministry of finance decides that fiscal spending needs to be curtailed. Thus, in the realm of fiscal policy the linkages between macroeconomics and sustainability are easy to see.

Yet, in spite of these self-evident facts, very few policy- oriented studies have been carried out on the direct and indirect impacts that macroeconomic policies have on sustainability. TEMTI is making here a very important case for redeploying part of our energy and resources to the analysis of this critical problem area. One could say that its underlying message was that it is high time to recover this ground for policy making and really putting it at the service of social and environmental sustainability.

The world is immersed in a dangerous economic and financial crisis that will have multiple ramifications in

10 18, September 2011 Foreword by Aroha Mead

our societies. This global economic and financial crisis is essentially a macroeconomic event of the first order of magnitude. It is not the result of an external shock (i.e., an oil embargo or a war) but rather the consequence of endogenous forces inside the most advanced capitalist economies of the world. It is the consequence of a failed economic model that will not put us in a trajectory of sustainable development. Unfortunately, the policy response to the crisis is now based on the premises of that same failed model. As a result, the crisis will be deeper and last longer, affecting the jobs and livelihoods of millions of people in the world. Yet, for all the evident importance of this, the preparations for next year’s UN Conference on Sustainable Development (Rio+20) are not even considering a meaningful discussion on macroeconomic policies and their relation to long term sustainability. Through the work in TEMTI we hope to send a clear message to the UNCSD that the macroeconomic policies of the failed model that gave us the global crisis are incompatible with an agenda for long- term sustainability.

I wish to acknowledge and thank all the contributors to this edition of Policy Matters, and particularly to the Editor, Dr Alejandro Nadal, Co-Chair of TEMTI. We welcome your feedback on the ideas and analysis expressed in PM18.

Aroha Te Pareake Mead Chair, IUCN CEESP Wellington NZ, 19 September 2011

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Overview: Macroeconomic Policies for Sustainability

Alejandro Nadal

Arid Land Credit: Hannes Grobe, Wikimedia Commons

12 18, September 2011 Overview: Macroeconomic Policies for Sustainability

INTRODUCTION policy-making since the early eight- he world is caught in the ies. The policy package behind this deepest financial and -eco was able to sustain growth only nomic crisis since the Great through the formation of a series of TDepression. The extraordinary expan- bubbles in different classes of assets. sion of the financial sector over the In this process, financial markets past three decades has given way took control over manufacturing

O verview : to a crippled financial system, with corporations, and they sacrificed wealth destruction going into the long term investments for short trillions. Astronomical financial rescue term profitability. Not only were packages (bailouts) will leave an ugly wages put under pressure, but under scar that will mark fiscal policies well the logic of finance, the environ- into the next decade. The fate of the ment simply became another asset. once powerful US dollar is even at It is clear that if we want to advance

for S ustainability stake as a result of this gigantic crisis. towards long term environmental And the frenzy of deregulated mar- sustainability we need to change this kets, so characteristic of neoliberalism state of affairs. and globalization, has put millions of people worldwide in poverty. That this model was also unable to M acroeconomic P olicies promote growth with rational environ- At the same time, the world is trapped mental stewardship is an understate- in a vicious environmental predicament. ment. To put it another way, the We are not only threatened by stag- same macroeconomic policies that nation, deflation, unemployment generated the worst crisis since the and poverty. Our world is also men- 1930’s affect the rate at which we cut aced by climate change, deforesta- trees, catch living marine resources, tion, soil erosion, polluted aquifers, emit greenhouse gasses, deplete over-exploited fisheries and a man- aquifers or exploit open pit mines. made event of mass extinction. The The reason is that activities related to severity of this environmental crisis these phenomena are conditioned by is a threat to the survival of human- interest rates and inflation, exchange kind. rates, credits, securities’ performance, subsidies, taxes, depletion allow- These two crises are intimately re- ances, etc. It is no coincidence that lated to each other. Both point to a some of the speculative bubbles that series of critical flaws in economic mark the latest crises were based on thought and policy-making. The commodities that are, by definition, economic crisis is not the result of close to the natural resource base (for what could be called a rare prob- example, grains and foodstuffs). ability event (“a perfect storm”) but rather the unavoidable outcome of an There is no doubt that inter-capital- economic paradigm that dominated ist competition is the determinant

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force behind the exploitation of the the international financial architecture. natural resource base. But the eco- Because they affect the way in which nomic forces behind environmental economies relate to environmental exploitation (and the current financial change, it’s time to redirect mac- crisis) are shaped by macroeconomic roeconomic policies and to harness policies. The corollary of this is that their potential for sustainability. macroeconomic policies will be a critical frame of reference as we move Macroeconomic policies affect the rate away from a wasteful economy and of economic activity and, therefore, shift course towards sustainability. the usage rates of our natural resource These policies will have to be rede- base. Through their impacts on fined in order to direct investment economy-wide prices, macroeco- flows towards renewable energy nomic policies also condition output sources, energy efficient manufac- composition and technology choice, turing, retrofitting of infrastructure, influencing production and marketing sustainable agriculture, etc. Macro- strategies of every economic agent, John Maynard Keynes economic policies can be a potent from the largest and most powerful (1946), founder of driving force behind our efforts to industrial corporations, to the smallest modern macroeconomics. consolidate good environmental agricultural units. They also affect stewardship, or they can be a mighty asset composition of any investment obstacle in our effort to shift to a sus- portfolio, bringing about important tainable economy. changes in the way in which financial instruments interact with productive Macroeconomic policies are based on activities in the real sectors of the econ- relations between economy-wide omy. In view of the relation between variables.¹ They are powerful engines financial variables and commodities that can be used for stability or change. prices in the world’s mercantile ex- They include monetary and fiscal changes and futures markets, this is a policies. They also cover financial, very important dimension that needs banking and capital account regula- to be taken into account. It may tions, as well as the determination of just be the tip of the iceberg when some key economy-wide prices (prices it comes to the relations between the for energy inputs, basic food com- financial sector and the environment. modities and wages). Finally, because macroeconomic policies cover balance When framed in these terms, the rela- of payments management, they are tion between macroeconomic policies key determinants of the world’s trade and sustainability becomes self-evident. and investment regime, as well as to However, this has not been recognized by

¹ A macroeconomic policy package is made of a set of paramount policy objectives that are pursued in a coherent manner by a group of economy-wide policy instruments. Thus, macroeconomic policy instruments do not act in isolation (although issues of inconsistency frequently arise). The policy objectives are defined in accordance to a particular view of how prices and distribution interact with output determination, employment and inflation.

14 18, September 2011 Overview: Macroeconomic Policies for Sustainability

either the academic and policy-making One final clarification is important. communities. This is a very serious Many years have gone by since Herman omission and may very well be the Daly (1991) called for the develop- most dangerous blunder in interna- ment of an environmental macro- tional policy making. This project economics. Since then very little is a contribution towards filling this progress has been made in this field. gap with rigorous analysis. This report Although many publications do ad- concentrates on how the macroeco- dress this problem, their approach nomic policy package works and tries has systematically avoided dealing to identify its impacts on the envi- explicitly with macroeconomic ronment. Readers should be aware policy. Thus, a substantial amount of the fact that lengthy sections of of work on environmental steward- this report (as well as the country ship and conservation has ignored level studies) are devoted to a de- the importance of monetary and fi- tailed discussion of macroeconomic nancial relations, or of fiscal policy policies. This should not be inter- objectives, or the distributional and preted as the result of an academic employment problems and their role bias for economic discussion and/or in shaping the economic forces that disregard for the other theme in the so deeply affect the real sectors of title of this project. On the contrary, the economy. In a way, Daly’s call is the project concentrates on macro- responsible for this lack of progress. economic policies precisely because His appeal was essentially concerned they carry deep implications for the with the problem of scale and the environment’s health and resilience. reality of finite resources. For him, Conservationists and communities the market took care of the efficient must learn to deal with these themes allocation of resources, but was in- which were until recently the privi- capable of dealing with the problem leged hunting grounds of simple- of scale. This is inaccurate: one key minded economists interested in result of general equilibrium theory how economic aggregates interact (by far the most refined and sophis- with each other. The stakes are in- ticated theory of interdependent deed very high and it is unwise to markets) is that there is no proof that leave this realm of economic policy markets allocate resources efficiently. for the exclusive manipulation of a Thus, Daly’s reference was based discipline that still counts environ- on an erroneous assessment of how mental destruction as “growth”. We markets operate and on the health hope that this report will help estab- of received economic theory. On the lish the foundations for closer coop- other hand, the problem of scale, which eration between communities, the Daly described as the most important constituency of the various IUCN of our time, is something that can- commissions and the world of policy not be addressed without taking into makers. consideration the macroeconomic

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policy framework that shapes the heed to the admonition of Friedman economic forces. It could be argued, (1968) concerning the limited role for instance, that the importance of the of monetary policy, a view that has financial sector, for example, is at least caused great damage and should have as important as the issue of finite re- been totally discredited by now. Ig- sources. However, macroeconomic noring the evolution of macroeco- policy has remained outside of the nomics also leads to overlooking the radar screen, even for the followers contributions of post-keynesians to of Herman Daly.² the debates about demand management and unemployment in today’s Perhaps the disarray in which macro- world. There is no doubt that the economic theory finds itself discour- chasm that separates macroeconomics aged Daly and his followers in en- from environmental concerns con- gaging a meaningful dialogue with tinues to be a deep one. the community of theoretical macroeconomists. The fact remains that Part of our analysis in this special very little work has been published on issue is the result of the project on macroeconomic policy and the en- “The Macroeconomic Connection: vironment. In fact, what has been Monetary and Fiscal Policies for published (see for example the work Sustainability in Latin America”. The of Heyes (2000), Lawn (2003), Tham- last two essays, by Aseem Shrivas- papillai (1995) and Munasinghe (2002) tava and Ashish Kothari, focus on a continues to be based on standard similar analysis for the case of India textbook IS-LM models and sim- and they highlight the similarities ply ignores the evolution of mac- that exist in the relation between roeconomic theory during the past macroeconomic policies and sus- five decades. This ignores the debates tainability even across continents. amongst academics and policymak- The project on Latin America was ers concerning the effectiveness of carried out with the financial sup- monetary and fiscal policies, or the port of the 3IC Fund of the Inter- role that each one of these should national Union for the Conservation have in a world of interdependent of Nature. The project covered case open economies. What little work studies in five Latin American coun- has been published on macroeconomic tries. This project examines the im- policies and the environment pays no pacts of macroeconomic policies on attention to the discussion concerning the environment. It focuses on five disequilibrium, the nature of finan- Latin American countries: Argen- cial crises and the role of regulatory tina, Brazil, Costa Rica, Ecuador and agencies. In fact, these analyses pay no Mexico. The main objectives of the

² Perhaps the disarray in which macroeconomic theory finds itself discouraged Daly and his followers in engaging a meaningful dialogue with the community of theoretical macroeconomists. The fact remains that very.

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project are the following. First, to level studies are Alan Cibils (Argen- identify and analyze the effects of tina), Sergio Schlesinger (Brazil), macroeconomic policies on various Carlos Murillo (Costa Rica), Pablo environmental dimensions such as Samaniego (Ecuador) and Marcos biodiversity, forests, aquifers, soils, Chávez (Brazil). The project was de- genetic resources, atmospheric pol- signed by Alejandro Nadal, Co-chair lution, solid waste and toxic waste of TEMTI, who also monitored the management, etc. The scope of this study and prepared this synthesis re- project covers monetary, fiscal, port. In this introduction, the first, credit, exchange rate policies, as well second and third sections contain as current account liberalization and an overview of the Latin American financial deregulation. A second economy as it evolved in the past objective is to examine how mac- sixty years. The fourth and fifth sec- roeconomic policies constrain or tions focus on how the neoliberal strengthen environmental policies. open economy model works and on This will be done in relation to policies the expansion of the financial sector. that relate to the different environ- The sixth section presents a synthesis mental dimensions mentioned in the and a re-interpretation of the country previous point (particularly important level studies. will be the analysis of effects on policies related to natural protected areas Section I and biosphere reserves). The third The Latin American objective is to contribute to strategy Experience formulation and to identify viable During the 1980’s, most of Latin policy options. America underwent a radical transformation in its policies for economic The individual consultants respon- development. Until then the majority sible for the Latin American country of Latin American economies had

Credit: Miguel B. Sanchez Wikimedia Commons

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followed a development strategy and poverty in most countries. The based on import substitution. But promise of economic growth sug- in the context of the financial and gested the possibility of permanent, economic crisis detonated by the good quality jobs. This would abate violent rise in interest rates and the poverty and inequality. collapse in oil prices in 1981-1982, this strategy was abandoned. By the On the other hand, the equilibrium mid-nineties, most economies in the component had three dimensions. region were implementing an open The first two were related to domestic economy model, complete with fi- economic aggregates. The general price nancial liberalization and a macroeco- level had to be stabilized, while fiscal ac- nomic policy posture aimed at reduc- counts had to be balanced. The third ing State intervention in economic dimension was related to each country’s life.³ With variations in timing and external accounts. The current account in the use of policy instruments, crises of the recent past had to be Latin America adopted the so-called controlled if the region was to attain neo-liberal economic strategy. adequate sustained growth rates.

At the country level, the new macroeco- Twenty years later the promises of nomic model had two critical objectives: the neoliberal policy package remain growth and equilibrium. The growth essentially unfulfilled. Growth rates component was important because in in Latin America were lower for the 1990 the region was emerging from a period 1980-2008 than in the years decade of practically zero growth. After 1945-1978. On the other hand, equi- the performance of the period 1945-1978, librium in domestic macroeconomic with average annual growth rates of variables was not easily established, 6.5%, this was a dismal accomplishment and the region remained prone to and people referred to the eighties as current account crises. In addition, the “lost decade”. This stagnation had ex- the region was affected by a new acerbated unemployment, inequality type of crisis, as the reversal of capital

³ There were differences in timing. Some countries started introducing neo-liberal reforms as part of the stabilization packages negotiated with the IMF, while others took those steps as part of structural reforms. The history of the Chilean economy is different and worth considering. After the coup in 1973, a radical model of an open economy was imposed by the military dictatorship. The tenets of that model were shaped by the doctrine of the New classical macroeconomics school (created under Milton Friedman’s theoretical work). This model combined a very radical approach towards trade liberalization with an uncompromising view on financial deregulation. But the Chilean economy continued to rely on exports of primary goods to survive. By the end of the eighties, the Chilean economy was showing the signs of a looming crisis. A typical current account crisis was detonated in the early eighties and the military authorities were forced to introduce important changes in the policy package. These included controls over capital flows. Ironically, because of the measures introduced by the military dictatorship, especially capital controls and other measures (a return to higher import tariffs), Chile was spared some of the worse consequences of the financial crises that affected Latin America in the nineties. Still, Chile continues to rely heavily on exports of raw materials (copper, agricultural products, forest and wood products, fisheries).

18 18, September 2011 Overview: Macroeconomic Policies for Sustainability

flows hit several countries causing economies embarked in an industrializa- severe damages and bringing about tion process based on an import substitu- negative growth rates. These crises tion strategy. The strategy was accom- left a heavy legacy of public debt in panied by strong leadership from State several countries as bailouts of banks and agencies. This scheme met with some large corporations were implemented. success, until the seventies, when internal and external tensions slowed down The region is also perceived as be- growth rates. The debt crisis that ex- ing generously endowed in natural re- ploded in the early eighties (due to sources. Although it only has 8% of the high interest rates and falling com- world’s population, it possesses 23% of modity prices) spelled the demise of the world’s potentially arable land, 10% the import substitution strategy, and of cultivated land, 17% of pastures, 22% in some cases, of the aspiration to in- of forests (and 52% of tropical forests) and dustrialization. This led to significant 31% of permanently usable water (Chi- changes in the development strategies chilnisky and Gallopin, 2001). Although of the most important Latin Ameri- the region is associated with severe at- can countries. mospheric pollution in its large cities (Sao Paulo, Mexico City or Santiago, for Eventually, the old inward looking example), its environment is also con- model of import substitution gave way to sidered to embrace pristine regions the establishment of an open economy and ecosystems. Eight of the eighteen model along the lines of the Wash- countries classified as mega-diverse by ington Consensus. The economic UNEP are in the Latin American region performance of the Latin American (Bolivia, Brazil, Costa Rica, Colombia, economies under this new strategic Ecuador, Mexico, Peru and Venezuela). approach presents a rather mixed pic- Together, these countries have a very ture, but in general, average growth high percentage of the world’s species rates were slower than in the post-war of reptiles, amphibians, mammals, birds years. In addition, the old contradic- and vascular plants. Endemism is very tions and tensions that marked the high and several of the most important Latin American economies did not biodiversity hotspots are found in the re- cease to exist (in fact, new problems gion, including the Amazon tropical rain appeared). Finally, during the nineties, forest, the Tropical Andes and the Meso- several financial crises struck in most of american corridor. Most of these ecosys- the region and this also caused im- tems are threatened and in some cases, portant changes to be introduced in severely affected by human activities. the policy outlook of countries like Argentina, Brazil and Ecuador. Latin America is also marked by some common patterns in its development Efforts to carry out the economic strategies. During the period follow- integration of the Latin American ing World War II most of the region’s economies have come and gone.

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Probably the most important ones One word of caution is required at were the Latin American Free Trade this stage. To speak of the “Latin Association (ALALC) and at the re- American economy” is a risky ven- gional level, the Andean Pact and the ture. After all, this is a set of highly Central American Free Trade Region. heterogeneous economies in a vast These efforts were not successful continent. It includes very small and when the time came to open the countries in Central America (and economies to international trade and now the Caribbean), as well as the financial flows, most countries went large economies of Brazil, Mexico their own way. Mexico took the lead, and Argentina. The differences be- becoming a member of GATT in 1987 tween the countries in the region and then signing the North American have intensified in the past fifteen Free Trade Agreement (NAFTA), years. Today, discrepancies in eco- which sealed the subordination of its nomic policy (almost at all levels) economy to the U.S. Most of the coun- are quite visible. Clearly, the ag- tries in South America took different gregation of the LAC countries in paths, each trying to gain from its one unit really lacks analytical value individual advantages in its articulation (Urquidi 2005). with the world economy. Section II Throughout these different phases of Import Substitution as economic activity, the environmental a Development Strategy integrity in the region has been en- After World War II, most of the dangered. The degree of deterioration countries in the region embarked in justifies posing the question concerning industrialization strategies based on a the effects of this process on the region’s set of policies to substitute imports.⁴ future prospects for development. It has The new Latin American perspective been continuously affected by the expan- was inspired by the work of a group sion of the agricultural frontier, defores- of economists at ECLAC who main- tation, urban development, irresponsible tained that development and growth activities by extractive industries (by both would not come simply from capital private and public enterprises), as well accumulation and comparative advan- as various forms of pollution sources. tages. The new perspective had ana- Although most countries in the region lyzed trends of in international terms established ministries for the environ- of trade and concluded that they were ment, the fact remains that none of the moving against traditional primary countries in the region has been able to product exports. Thus, domestic pro- establish a policy framework that duly duction would have to substitute for integrates environmental stewardship non-essential imports through a set of with economic development. protectionist policies. This called for a

⁴ In some cases, especially in the smallest countries, the development strategy relied on the old model based on exports of primary products.

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stronger role for the public sector. The international oil markets were severely consequence here was that develop- disturbed by the oil embargo imposed ment would be more the effect of in the aftermath of the Yom Kippur policy, than of market forces. war, and things started to change. The rate of growth of per capita income is a This import-substitution industrializa- good indicator of the evolution of the tion (ISI) strategy met with mixed region’s most important economies. success in the various economies and For a sample of twelve Latin American lasted for over forty years in some countries, annual growth rates in the cases. However, the ISI strategy did period 1950-1973 averaged 2.12%. not proceed according to a well de- During the period 1973-2000, this fined plan or program for industrial average rate dropped to 0.79%. The investments, internal competitive disparities between these countries can structures, technological development be readily seen in Table V.1. or export promotion schemes. This led to several important problems, During a twenty year period, be- starting with high costs and poor results tween 1950 and 1970, the ISI strat- in the trade balance. egy successfully brought about the expansion of the manufacturing sec- In general, the ISI pattern of growth tor and of employment. Between was accompanied by good GDP growth 1960 and 1965, the manufacturing rates in the period 1950-1973. Sus- sector in the region grew at a yearly tained growth rates of the order of 6% rate of 7%, with Argentina, Brazil were not rare in the region. But in 1973 and Mexico leading the way.⁵ In most Table V.1

⁵ According to Fajnzylber (1983: 246) the industrial sector of the Latin American region expanded at an average annual rate of 6.5%.

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cases, the industrialization process took “frivolous protectionism” by Fajn- place without a definite plan or in- zylber (1983). The very high tariffs vestment policy. This is why man- that provided a closed market re- ufacturing industries in all types of gime generated perverse incentives branches were developed almost at that rewarded inefficiencies. In ad- the same time. The central idea be- dition, tariff schedules had no time hind this strategy was that indus- limitations and no performance re- trialization would provide the needed quirements. This provides a very dynamic impulses for economic strong contrast with Japan, Korea growth and development. and Taiwan, where protectionism and finance were subject to technol- The ISI strategy ignored several im- ogy, employment and technology portant aspects of economic change. performance requirements (Amsden First, it neglected the assimilation of 1989). All of this led to high prices technological capabilities. The crucial and lack of competitiveness in the difference with the protectionist poli- international market, which in turn cies of Japan and South East Asian aggravated the deterioration of the countries that were also rapidly in- trade balance. dustrializing is that in Latin America technological development was never These two features reveal that the ISI a part of the equation.⁶ Investing in strategy really took place without a R&D lagged behind in all countries coherent scheme of industrial policy. in the region. The acquisition of disem- There were no priorities and no per- bodied technology was done through formance requirements, and nothing contracts involving licensing agree- to ensure that the acquisition of tech- ments on patents and trademarks, and nological capabilities could lead to fur- these contracts frequently contained ther waves of innovation and efficien- restrictive clauses on exports. Em- cy gains. In a way, the ISI strategy was bodied technology was obtained not what many of its critics say it was: through imports of capital goods and an interventionist, State-dominated intermediate inputs. As an incentive process. for investment by the private sector, tariffs for capital goods were very Third, the distortions of the industrial- low. A short term perspective was ization process in Latin America inten- promoted, with almost no attention sified the vulnerability of the external for the heavy industries that needed accounts of the economies in the a longer time horizon to mature. region. In contrast with the role of the manufacturing sector in highly in- Second, protectionism in the Latin dustrialized countries, where it plays a American experience was uncondi- key role in maintaining a surplus in the tional. This has been aptly described as trade balance, in Latin America it helps

⁶ For a rigorous and insightful analysis of the experience in South Korea, see Amsden (1989).

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explain the chronic external deficit real wages in the manufacturing sec- (and of the currency gap). In fact, the tor increased and were higher than in trade deficit of the industrial sector in other sectors, the absolute size of this most countries in the region was of the purchasing power was not enough same order of magnitude as the trade to allow for investments in more effi- surplus for the rest of the economy. Be- cient scales of production. In addition, tween 1955 and 1975 the trade deficit wages in the agricultural and services the industrial deficit increased from 5 sectors did not increase at a sufficiently to 28 billion dollars. Nevertheless, it is rapid pace. This is related to the issue also important to take into account that of the macroeconomic policy package during the period 1955-1975, indus- that characterized those years. We re- trial exports were growing at a higher turn to this point below. rate than imports. Finally, the highly unequal income Most of the deficit in industrial goods distribution structures in most Latin is due to the high imports of capital American countries also contributed to goods. This is an important feature limit the size of the domestic market. of the entire process because capital The Gini coefficients for most of the goods are critical for the dissemination Latin American countries remained of productivity gains in all branches of at high levels during the ISI strategy industrial activity. The fact that the in- (Ibid.: 486). Most countries had Gini dustrialization process bypassed them coefficients of the order of 0.500 in meant that it could not be the engine the period 1960-1970. The exceptions for growth that most analysts had were Argentina, Costa Rica and Uru- hoped it would become. guay, where the Gini coefficient was 0.400.⁷ These high levels of inequality Fourth, the size of the domestic mar- did not disappear during the next few ket was a serious problem. This is decades. Once again, this is related to intimately related to the issue of pro- the macroeconomic posture, a theme duction scales allowing for low costs. to which we now turn our attention. Because the domestic market for manufactured goods was relatively small Macroeconomic stability played an and limited to the urban centres, an important role during the heyday important question was if the manu- of the import substitution strategy. facturing sector could contribute to Exchange rate volatility was not a increase the size of the internal market crucial problem, although some permanently (Urquidi 2005: 164). The countries did experience balance of truth of the matter is that although payments difficulties that required

⁷ The Gini coefficient measures inequality in the distribution of income. It measures the surface between the line of equal distribution (a 45° diagonal) and the curve of actual observed distribution. If the coefficient is very small, it indicates that actual income distribution is closer to the line of equal distribution. In the largest European countries, the Gini coefficient is typically of the order of 0.300.

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adjustments. On the other hand, fis- sector which has very little linkages cal policy allowed for the building with the rest of the economy. This of infrastructure and social expen- explains why the locomotive of the ditures at adequate levels. Finally, export sector can take off swiftly and monetary policy relied on banking still leave the rest of the economy in regulations that maintained credit the tracks at the station. The engine flows towards productive activities. is disconnected from the economy This placid scenario was to change and this means that Mexico is, in fact, abruptly during the seventies and exporting cheap labour. with the debt crisis in the eighties. Towards the last years of the nineties, Much of the industrial structure in it was thought that Latin America Latin America suffered great losses as could regain some of its competi- a result of the macroeconomic crises tiveness in manufactures. This is that exploded in the eighties. Latin important because it would signal a America’s industrial performance structural transformation that could has declined since the 1980s, and lead to greater efficiency, less de- the region has been constantly losing pendency on the natural resource ground in industrial competitiveness base and better environmental stew- (especially in manufactures) to East ardship. However, a succession of Asia. Argentina, Brazil and Mexico, severe macroeconomic crises (Mex- the most industrialized countries in the ico 1995, Brazil 1997-98, Ecua- region were unable to trigger enough dor 1999 and Argentina 2001) had momentum to transform its productive very negative consequences. The structures and become truly industri- share of manufactures in regional alized economies. In spite of its suc- GDP shrank from 17.2% to 16.6%, cess in several manufacturing branches while manufacturing value added (automobiles, electronics and aircraft) in the region declined from USD and its diversified markets, Brazil’s 316 to USD 285 billion between manufactured exports per capita are 2000 and 2004. In the arena of in- USD 382 (2004), still below Lat- ternational trade, Latin American in America’s average. The share of exports of manufactures expanded manufactures in Brazil’s GDP was by 5% yearly, well below the world only 10.7% in 2004. Mexico, for its average of 8.8%. This explains why part, can boast an impressive share of Latin America’s share in global trade manufactures in its exports of 84%, of manufactures dropped from 4% out of which more than 60% comes to 3.5% during the years 2000-2004. from medium and high-technology Medium and high technology ex- intensive branches. However, this ports also declined during that pe- oft-quoted figure can be misleading riod. To summarize, manufactures’ because almost all of this comes from share in total exports from the region its in bond (maquiladora) industrial dropped from 49.2% to 48.2%, showing

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the signs of a trend to rely more on went into what we now call envi- low-value added and resource-inten- ronmental expenditures. Natural re- sive commodities as Latin American source management practices, clean- moves towards “reprimarization”. ing-up, reforestation, good practices for soil conservation, water manage- Section III ment, urban planning and pollution Macroeconomic Policies, abatement, as well as other aspects ISI and the Environment: of environmental sustainability were the Long Look almost entirely neglected by govern- The import substitution strategy ments in the region during this period. implemented after World War II In fact, in many instances, measures brought about deep changes in the that implied heavy environmental structure of the Latin American degradation were adopted, leading economies. But it did not generate to soil erosion, deforestation, aquifer permanent dynamic impulses and depletion and pervasive pollution. thus, the growth process associated Cumulative damages suffered by the with this strategy came to an end in environment compromises the pros- the 1980s. It also failed to provide the pects for future development and foundations for sound environmen- sustainability. tal stewardship and healthy natural resource management practices. The rate of genuine savings (defined as the rate of savings after due account Data on environmental deterioration in is taken of the depletion of natural Latin America for the period 1950-1980 resources and damages caused by is in short supply. However, during the pollution, but adding investments three decades (1945-1975) that make in so-called human capital) was very up the core years of the ISI strategy, low in the region. This is a clear Latin American economies did not indicator that the natural resource give adequate attention to environ- base and the environment have been mental objectives. In retrospect, this undergoing a continuous process may appear understandable for at of degradation without any visible least two reasons. One is the lack of trend to revert this process. This is a awareness that this was a crucial ele- reference from a World Bank study ment of any development strategy. mentioned in Lopez (2003). The second is that it can be argued that policy-makers and the power Lopez (2003) relies on an analytical elite were too preoccupied with the framework that concentrates on issues of fiscal accounts and the balance market failures and property rights of payments. Nevertheless, the truth inefficiencies. For example, a capital is that during these decades the natu- market failure would prevent the ral resource base was heavily taxed and population from investing in natural very little in the form of investment capital, or inadequate definition of

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property rights would cause distortions growth rates at their historic levels. that inhibit investments in natural The deficit came along from this in- assets. In addition, the lack of robust creased responsibility for the public regulatory regimes allows for pol- sector and the unwillingness to im- luting externalities to further degrade plement a redistributive fiscal reform the environment (Ibid.). Imperfec- that could have generated the re- tions in the credit market imply that quired resources without frightening only the larger corporations (solely away investors. concerned with profitability and accumulation) have access to finance Fiscal policy in the region during for their investments. “Due to credit the heyday of the ISI strategy opted market imperfections, there is no for low tax rates on capital gains flow of savings from the income- and profits. In addition, all types of generating sectors to the household tax credits and rebates were imple- sector to finance investments in human mented to foster private investment. capital and the environment”. Typi- Typically, fiscal revenues came from cally, the smaller agents are left out a regressive tax system and the prices of because they lack collateral or connec- goods and services supplied by public tions to the world of formal financial sector enterprises. In addition, subsidies systems. for the accumulation of physical capital were generously granted whenever But this was not the result of market possible. These resources were insuf- failures, imperfections or negative ficient to keep pace with the grow- externalities. It was the consequence ing demands of health, education, of macroeconomic policies that fa- housing, transportation, infrastruc- voured growth through the accu- ture, and of course, environmental mulation of physical capital. The stewardship. In many instances (ex- most visible aspects of these macro- amples abound) public enterprises economic policies are in the field of were hard pressed to maximize these credit markets and monetary policy, non-tax fiscal revenues and they as well as in fiscal policy (taxation were able to achieve this through ir- and subsidies). In addition, a low wage rational exploitation of the natural rate has contributed to greater inequal- resources at their disposal. ity and the persistence of poverty. Monetary policy in Latin America At the macroeconomic level, two during the same period had the big problems persisted. The first was overarching objective of full em- the fiscal deficit which remained an ployment. This did not mean that intractable problem for most Latin price and exchange rate stability was American countries. This was partly not considered important. In fact, due to the need to increase pub- manipulating exchange rates within lic investment in order to maintain the limits tolerated by the Bretton

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Woods arrangements was common in the sixties led to more inflationary in order to redress trade balances pressures (as imported goods became and to put a brake on inflationary more expensive) rather to a correc- pressures. In fact, all along this pe- tion of the trade balance. riod there were moderate price hikes (things changed in the seventies with Inflationary pressures have been ex- the transmission effects of incre- plained by both monetarist and struc- ments in oil prices). For the ISI strat- turalist perspectives (Cardoso and egy, the accommodating monetary Fishlow 1989). The monetarist view policy focused on its main objective: insists that inflation came about basi- growth and employment genera- cally by large budget deficits financed tion. For this, most countries in the by money creation: thus, inflation is region did not rely on a free mar- the direct result from overspending by ket for credit and instead established the public sector. On the other hand, strong regulatory regimes for credit structuralists maintain that budget allocation. However, these credit deficits are not at the heart of the mat- regulations lacked priorities and ter. The roots of inflation are to be did not incorporate industrial (and found in bottlenecks, supply short- technology) policy criteria. In addi- ages and, in some cases, “inconsistent tion, the vast majority of loans went claims of different groups in society to consumption and some working trying to get a larger share of the pie” capital in industry. Productive in- (Ibid.: 19). The irony here is that this vestments in industry were the object led to stabilization policies in which of self-finance by corporations (up to controls over the wage norm became 60% of financial requirements were one of the central components. This satisfied by the companies them- pattern of wage determination aggra- selves). One reason for this is that vated income mal-distribution and the time horizons contemplated in further constrained the size of the loans from commercial banks were domestic market. simply not long enough to allow for these investments to flourish. In the end, the internal tensions, together with the negative transforma- In addition to these problems, as tions in the international economy commented above, there was a (recession and inflation in the US chronic deficit in the trade balance during the seventies, the high interest of most countries in the region. In rates implemented by Volcker’s Fed the context of an ISI strategy this and the drop in commodity and oil may seem ironical, but the fact is that prices) brought about the demise of import substitution led to overvalued the ISI. exchange rates and this was a strong incentive for increased imports. Crawl- The international debt crisis of the ing peg exchange rates implemented 1980s was detonated in Latin America

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(starting with the Mexican default in known as the Washington Consensus 1982). It led to the effective interrup- (Williamson 1990). The five crucial tion of the import substitution ap- operational components of the policy proach to growth, industrialization package were the following: and development. After that decade, in which per capita growth stagnated a) the main objective of monetary policy (“the lost decade”), none of the Latin is price stability. American countries returned to the b) fiscal policy is to be based on the ISI model. Instead a new approach principle of balanced budgets. was undertaken, based on trade and c) the capital account is to be deregulated. financial liberalization, following in d) international trade liberalization. e) the nineties, the tenets of the Wash- State intervention in economic life ington Consensus. has to be reduced to a minimum. Inflation had remained a negative Section IV feature during the eighties, mostly Neoliberalism in Latin spurred by the abrupt adjustment in America: the Open exchange rates. This adjustment was Economy Model indispensable as the crisis had been By the end of the 1980s most Latin detonated precisely by the collapse American countries were setting the of the region’s external accounts, but foundations for the adoption of a inflation needed to be controlled. In different development strategy. The order to do this, domestic aggregate new approach was very different demand was severely constrained. from the ISI strategy. It was based on The policy instruments to do this the idea that the development process were first, domestic credit became had to be left in the hands of markets scarce and very expensive (high in- operating with as little intervention terest rates played a double role and as possible. Although the notion that helped attract foreign capital). The markets allocate resources efficiently second instrument was found in the lacked any scientific demonstration curtailment of public expenditures so (Box 1), the ideological triumph that fiscal policies acted as a pro-re- of this belief had been consolidated cession instrument. If in the past fis- since the 1970s, especially under the cal deficits had been considered the political hubris of Mrs. Thatcher and source of all evils (monetization, in- Ronald Reagan. debtedness and crowding out), in the new scheme of things, fiscal policy During the 1980s, the main inter- had to be subordinated to the man- national financial organizations, the tra of a balanced budget. Finally, real IMF and the World Bank, had used wages were systematically driven the international debt crisis and the downwards as their determination stabilization plans to further pro- was usually carried out through their mote the policy agenda that became being pegged to expected inflation,

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Box 1 The Theoretical Underpinnings of the Open Economy Model

The structural components of the open economy model applied in many Latin American countries bear a close resem- blance with the Mundell-Fleming model, the widely cited standard for macroeconomic analysis of open economies (Fleming 1962, Mundell 1963). That model was one of the principal accomplishments that led to the award of the Nobel Prize in economics to Robert Mundell in 1999. The Mundell-Fleming model does not have strict microeconomic foundations, but its analytical structure is closely linked to the notions that markets always clear, and that trade liberalization is the best way to organize production and consumption. In fact, the close association between the Mundell-Fleming open economy model and general equilibrium theory was acknowledged by its authors (Mundell 1968), and this close relationship has also been recognized in more recent work (Geanakoplos and Tsomocos 2001). From this perspective, it’s just another member of the family of dynamic stochastic general equilibrium models.

This model is an extension of the IS-LM model which incorporates an equilibrium curve for the balance of payments and can also assimilate different assumptions concerning fixed or floating exchange rates, as well as perfect mobility of capital. With a flexible exchange rate regime, there is no room for an independent monetary policy. In the Mundell-Fleming model the adjustment of the money supply is automatic, and is tied to the surplus or deficit of the balance of payments (when the monetary approach to the balance of payments prevails). A surplus in the balance of payments implies monetary expansion, while a deficit involves an adjustment due to the contraction of the monetary supply.

not to effective or real inflation. This mand.⁸ By the early nineties, infla- led to a loss of purchasing power and tion rates had gone down in most of to a contraction of aggregate de- the economies in the region. ⁸ The critical detonator of the crisis in 1982 had been the unsustainable debt. Efforts to save the international financial system and restructure the debt of the main debtor countries failed. But in 1988 the U.S. Treasury developed a new plan to restructure debt and restore liquidity to the sovereign debt market. This plan was implemented with some success.

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Initially, the new open economy inexorably lead to financial crises. model that was established in most Very soon, other Latin American of the Latin American region led to economies were suffering simi- strong positive expectations about lar crises, with the same pattern of investment and growth. The gener- causation links and the similar af- alized dominance of the Washing- tershocks: Brazil (1997), Ecuador ton Consensus ideology also pro- (1999), Argentina (2000) and other vided a sense of stability, as if a new countries suffered deep contractions prolonged era of policy making and and the destruction of capital as the development was being introduced. crises multiplied. The stabilization Growth rates improved in the early programs that were implemented nineties as inflationary expectations led to painful adjustments, increased diminished and foreign direct in- poverty and inequality and probably vestment started to recover. had deep environmental effects.

However, very soon economic growth These crises typically unfolded through started to weaken and in 1994 a new several stages. First, financial liberaliza- crisis exploded in the region. The tion and other reforms attracted for- detonator was a reversal of capital eign capitals, not only as FDI, but also flows that were going into Mexico, as portfolio (short term) investments. and the shock wave affected all of At a certain stage, investors started to Latin America. This crisis was er- doubt the recipient country’s ability to roneously interpreted as a foreign maintain exchange rate stability, which exchange crisis and described as a is the centrepiece of the model, and financial crisis. lead for the exit. And although there was talk about the fact that perhaps In fact, it demonstrated how the main there were mistakes abd/or negligence contradictions of the model would in the way in which the model was

Credit: George Chernilevsky Wikimedia Commons

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being implemented and/or handled, The open economy model as dic- there is an alternative line of analysis tated by the International Monetary that points in a different direction. Fund and the World Bank has several essential contradictions which In order to understand how macroeco- can be summarized as follows.⁹ The nomic policies affect the environment first and most important contra- and to follow the country level studies, diction is related to the role of the it is essential to analyze how the open exchange rate which is expected to economy model functions. In the rest float freely, maintaining equilibri- of this section we examine its main fea- um in the trade balance. The open tures through what we call the internal economy model rests on the fun- contradictions of the model. Internal damental premise that international contradictions arise when structural trade is so advantageous that any at- elements that are essential to a model tempt at regulating and restricting it simultaneously act as obstacles for the does more harm than good. That’s model’s performance. In other words, why when there is a deficit in the a model contains internal contradic- trade balance it must not be correct- tions if components that are necessary ed with restrictions on the flow of to its inner workings also hinder the goods and services, but by adjusting functioning of the model. The result- relative prices. Thus, within a flex- ing tension leads to a distorted process ible exchange rate framework, the in which the model’s policy mix can- adjustment through variations in the not accomplish the goals that were exchange rate should follow auto- originally established. matically.¹⁰

⁹ The reference here is the Mundell-Fleming macroeconomic model. This model is an extension of the IS-LM model which incorporates an equilibrium curve for the balance of payments and can also assimilate different assumptions concerning fixed or floating exchange rates, as well as perfect mobility of capital. With a flexible exchange rate regime, there is no room for an independent monetary policy. In the Mundell-Fleming model without sterilization the adjustment of the money supply is automatic. It is also tied to the surplus or deficit of the balance of payments (when the monetary approach to the balance of payments prevails). A surplus in the balance of payments implies monetary expansion, while a deficit involves an adjustment due to the contraction of the monetary supply.

¹⁰ The General Agreement on Tariffs and Trade (GATT) prevented signatory parties from sur- rendering to the temptation of routinely resorting to controls on trade flows in order to tackle external deficits. GATT Article XII established the possibility of exceptionally resorting to measures such as quantitative restrictions and tariff surcharges to reestablish equilibrium in the balance of payments. It was thought that it was better to regulate exceptional measures and impose disciplinary measures to avoid abuses, than to leave GATT members at total liberty in this matter. Interestingly, the North American Free Trade Agreement (NAFTA) cancelled the possibility of resorting to exceptional measures. NAFTA Article 2104 establishes that fees, tariff surcharges, import permits, or other similar measures cannot be exceptional measures, and, in effect, it cancels the possibility of applying any such measures. Under these conditions, if there is a deficit in the balance of trade, the adjustment must be made only and exclusively using the relative price system (i.e., the exchange rate). For a detailed account of these provisions in the context of the Mexican 1994 crisis, see Nadal (1996).

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That inflation must necessarily be re- exchange rate stability. In general, duced to the level of a country’s most in the world of deregulated capital important trade partners is another accounts and interdependent finan- key policy objective that prevails in cial markets, countries make efforts the open economy model. The idea to guarantee exchange rate stability; has led to a veritable obsession with this can be done through a literally reaching and maintaining one-digit fixed rate, or through a “dirty” float inflation rates. In terms of growth, the of the exchange rate. Once foreign cost of attaining this objective has capital is invested in a given coun- been significant. One of the main pol- try, investors expect the exchange icy instruments on this front has been rate to remain stable; in the face of the use of the exchange rate as the devaluation risks, a risk premium is nominal anchor of the relative price requested by investors. system. But this approach to controlling inflationary pressures entails a If a country wants to remain attrac- significant rigidity in the exchange tive to these capital flows, it must rate, contradicting the use of a fluctu- try not to betray their confidence by ating exchange rate to adjust the trade maintaining exchange rate stabil- balance. In the end, the exchange rate ity. When capital flows are reversed, ends up being overvalued, further de- the exchange rate is depreciated as teriorating the trade balance. investors flee assets denominated in the local currency, and the inflation There is another force that hampers rate increases rapidly. To prevent the ability of the exchange rate to act as this, the central bank offers a higher the key variable in the adjustment of interest rate as an incentive to keep the trade balance. The open economy assets in the country. The effects on model incorporates perfect capital the interest rates are examined in the mobility as one of its central com- next section. The point here is that ponents. Capital mobility is seen as a a devaluation of the exchange rate is useful instrument to direct produc- deemed unacceptable to economic tive investment to economies with authorities and this further degrades insufficient domestic savings. The competitiveness. Typically, the ad- demand for assets denominated in the justment is postponed; the adjust- currency of the recipient country ment is finally made when it’s too naturally leads to currency apprecia- late and it is implemented in a dis- tion, also contributing to further de- orderly fashion, in an environment teriorate the trade balance. characterized by chaos, volatility, and economic collapse. In addition, because capital that flows into a given economy is invested in Abrupt devaluation makes local as- assets denominated in the local cur- sets cheaper for foreign investors, rency, pressure builds up to maintain stimulating incoming capital flows.

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Once again, these capital flows are exchange rate is finally carried out, this placed in assets denominated in the takes place under conditions of great local currency and tend to raise the volatility and unrest in the financial exchange rate anew. This exchange markets. The adjustment and its effects rate appreciation cancels the effects then become disproportionate. In ad- of the initial devaluation and once dition to the unrest in financial mar- again, contributes to deteriorate the kets, the inflation rate rapidly rises and country’s trade balance. The external past achievements in this area are wiped deficit generates a greater need for out. Although the crisis is said to be an external finance and the process becomes exchange rate crisis, it really is a structural a vicious circle as capital flows seriously crisis of the open economy model. increase external vulnerability. The second contradiction is related to Thus, these three elements (using the the interest rate. The open economy exchange rate to stem inflation, ex- model is based not only on trade liber- change rate appreciation caused by in- alization, but on financial deregulation coming capital flows and maintaining as well. The capital account is deregu- a low exchange rate convertibility risk) lated in order to attract and use foreign bring about an important contradiction savings to increase productive invest- in the model. A central feature of the ments and promote growth. Financial model is the adjustment in foreign ac- deregulation implies eliminating bar- counts via changing relative prices, that riers to the free flow of capital, a pol- is, with a flexible exchange rate regime, icy measure that has profound impli- but other elements in the model im- cations for the role played by several pose a high degree of rigidity on the macroeconomic policy instruments. exchange rate.¹¹ The exchange rate is no longer the key variable that regulates contact How is this contradiction resolved in between two relative price systems practice? The adjustment through ex- (domestic and foreign) in the goods change rate movements is delayed as and services market; instead, as we much as possible, with the resulting have seen, it becomes a variable that deterioration of the country’s foreign is more closely linked to the needs of accounts. When the adjustment in the the short term capital flows.

¹¹ Examples of the above contradiction, where exchange rate adjustment becomes necessary but difficult, abound in recent financial crises. The conflict between the goal of using the exchange rate as an adjustment variable for any external disequilibrium and the need to keep the exchange rate stable in order to benefit short-term foreign investment was clearly manifested in Mexico in 1994. Throughout that year, the overvaluation of the exchange rate had reached exaggerated levels and the deterioration of foreign accounts demanded an important adjustment in the exchange rate. However, even after capital flight had begun, the pressure exerted by foreign investors to keep the exchange rate stable prevailed. This pressure forced economic authorities to adopt the unusual measure of indexing government bonds — held by several foreign pension funds and brokerage firms — to the exchange rate. Effectively this meant that the risk of devaluation fell on the Mexican government. This case is an extreme example of conflicting goals for the same macroeconomic variable in the open economy model.

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In the Mundell Fleming model a cur- restored in the balance of payments. rent account deficit is financed by The drop in the interest rate and the capital inflows. Under fully flexible exchange rate appreciation may or may exchange rate regimes, this variable not lead to a new equilibrium involv- adjusts so that the sum of the current ing a greater level of output, depending and the capital accounts is zero. The on the elasticity of imports and exports adjustment process is automatic. For vis-à-vis exchange rate variations, and example, consider the case of an open of the investment schedule with respect economy with a fixed supply of mon- to changes in the interest rate. ey, flexible exchange rates and fixed prices. In this economy a current ac- The expansion in the money supply count deficit causes capital inflows, resulting from foreign capital inflows which lead to an increase in the sup- can be an important source of infla- ply of real balances and a reduction in tionary pressures, but it can be cur- interest rates. This reduction gener- tailed by sterilizing the effects of the ates capital outflows, which provoke influx of capital. This can be done a depreciation of the exchange rate, through open market operations in making the domestic productive sys- which the central bank sells bonds or tem more competitive and leading to securities and withdraws money from an expansion of demand for exports. circulation in an amount equivalent to Total output now expands until a new the incoming capital flows. In doing equilibrium is reached for the money this, the central bank increases its do- and the goods markets, as well as for mestic indebtedness. To put it in other the balance of payments. terms, sterilization takes place when the central bank trades foreign exchange But now consider the case of an econ- for domestic currency but reverses omy that is the recipient of incoming the expansion of the money supply capital flows for other reasons, per- through open market operations. This haps because its domestic interest rate permits the economy to operate with becomes higher than the prevailing a constant money supply and to keep international rate. In the absence of inflation under control. The problem, any intervention, the domestic money however, is that although limiting the supply expands as demand for assets expansion of the money supply may denominated in the domestic cur- be a worthwhile objective, the central rency increases. This leads to an ex- bank’s intervention with sterilization pansion of the money supply. At this interrupts the adjustment process. The stage, the capital account displays a automatic regulation outlined above surplus, the exchange rate appreciates relies critically on interest rate varia- and the domestic interest rate is forced tions as capital flows take place. But, downwards. The drop in the domestic by maintaining a constant money sup- interest rate gradually reduces the flow ply, sterilization keeps the interest rate of incoming capital and equilibrium is at an artificial level that is higher than

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the international rate. Capital inflows to imports of consumer goods, the continue, reserves grow (but at an trade deficit cannot be financed by additional cost), and domestic invest- capital inflows for a long period of ment continues to be confronted with time. Foreign capital flows may in- a high interest rate.¹² crease the final capacity to import at a faster pace than the build-up of the The contradiction is defined in terms productive capacity to export. of two processes in the model. On one hand, the model requires the in- Incoming capital flows can artifi- terest rate to fall in order to restore cially maintain a country’s capacity equilibrium in the money market in to import goods, without any clear the face of incoming capital flows. relationship to the country’s capac- On the other, a basic tenet of the ity to export (and to generate badly model is that because an expansion needed hard currency flows). From of the money supply leads to increased this point of view, capital flows are inflation, the money supply must re- analogous to foreign aid, which can main constant; this keeps the inter- also artificially support a high level est rate artificially high. In practice, the of imports. Some economists have contradiction is resolved through noted that the use of capital inflows intervention with sterilization, a higher to maintain imports may have a interest rate and an overvalued currency. contractionary effect on the domestic market and the level of aggregate The third contradiction is related to activity (Bhaduri, 1998, and Bhaduri the role of financial liberalization. As and Skarstein, 1996). is well known, a country can access foreign savings to finance its pur- These authors analyze the problem chases of capital goods and interme- in a simplified manner, starting with diate products, and thereby increase the basic formula of national ac- productive investment. But capital counts in an open economy: flows also allow a country to finance a deficit in its trade balance. From I – S = I – sY = (M – X) = A the point of view of the model’s ra- tionale, this is a desirable outcome, where I is investment; S, savings; as imports of capital goods can be Y, income; s, the (constant) fraction used to increase exports. However, of income assigned to savings; M, if the trade deficit is basically due imports; X, exports, and A, foreign ¹² In the case of Mexico, intervention with sterilization has been taking place since the crisis in 1994. This has allowed authorities to maintain an overvalued exchange rate, bringing inflation under control but further reducing competitiveness and deteriorating the trade balance. As international reserves have increased to historical levels, the central bank has continued to pursue a restrictive monetary policy, maintaining interest rates at even higher levels. This limits the economy’s capacity to attain adequate growth rates, while, at the same time, maintaining high rewards for foreign capital. The capital flows that result from this further contribute to the appreciation of the exchange rate and the deterioration of the country’s external accounts.

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capital flow. According to this for- production in successive stages does mula, the level of national income, not imply new or greater substitu- determined by the size of the domes- tion effects directly caused by trade tic market or aggregate demand is liberalization or by the capacity to derived from the following formula: finance imports that capital flows bring about. That is, the induced Y = (1/s)(I – A) impact does not come from the lack of competitiveness of local industry. This second equation indicates that Perfectly healthy domestic industries as capital inflows take place (A in- are weakened and put out of action creases), for any level of investment, by this indirect effect. national income is reduced by the multiplier effect. These imports may These perverse consequences are even lead to a reduction in aggregate in- more intense when capital inflows come through a perverse effect of take place in the framework of rapid the well-known Kahn-Keynes mul- and indiscriminate trade liberalization, tiplier: the initial impulse towards as was the case in Mexico in 1989- contraction is provided by the sub- 95. The contractionary effect is more stitution effect that replaces domestic pronounced when, as in Mexico at that production with imports in certain time, fiscal policy emphasizes generating branches of industry; the multiplier a primary surplus and when restric- process leads to successive rounds tive monetary policy is attempting to of additional induced reductions in control inflation. The primary sur- aggregate demand for domestic pro- plus is determined by the difference duction, in the familiar, converging between tax and non-tax fiscal rev- geometric series. enues and expenditures excluding interests and financial charges. Thus, a At the beginning of the process the measure of the sustainable debt to GDP substitution effect leads to a reduc- ratio is given by a primary surplus tion in profits, wages, and jobs as the that is enough to cover interest pay- some branches affected by increased ments. Formally, in order to maintain a imports are eliminated. But in succes- constant (or declining) ratio of debt to sive phases, this initial reduction of do- GDP ratio, a government is supposed to mestic production creates additional comply with the following condition: cutbacks in aggregate demand. The overall, final reduction in profits, pst =( rt - gt )dt-1 wages, and jobs can be significantly greater than the original drop caused where ps = primary surplus, r = real in- by the direct impact of imports. The terest rate, g = GDP real growth rate contraction of demand and domestic and d = ratio of public debt to GDP.¹³

¹³ This is the expression widely used in models for optimal taxation and debt management. See Croce and Juan-Ramón (2003).

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In a recession, as g falls, sp must in- becomes disconnected from its ability crease in order to meet the terms of this to generate foreign currency through condition. Besides, the primary surplus exports. In this context, higher levels will have to increase even more if r is of investment and capital flow make raised (for example, to attract more for- aggregate demand and income grow. eign capital or to control inflationary But this expansion in aggregate de- pressures). But this view of the relation mand translates into greater imports, between fiscal and monetary policies which have a contractionary effect implies the impossibility of resorting on domestic production. As Bhaduri to countercyclical macroeconomic points out (1989:155), this perverse ef- policies. In the midst of a recession, fect will appear even when a higher fiscal policy will adopt a posture that level of capital flow leads to greater will aggravate the recession, seeking investment and exports, as long as the to increase sp. Typically, sp will be in- marginal propensity to import associat- creased through cuts in public spend- ed with capital flows is larger than the ing, something that affects investment corresponding marginal propensity to in social programs, as well as environ- invest and export. mental programs. We return to this point below. Under a floating exchange rate regime, like the one implemented in In this adverse environment, the com- Mexico since 1995, the above con- bined effect of foreign capital flows clusions are not reversed; in fact, they and government policy amounts to a may even be strengthened. Despite veritable attack on domestic produc- the trade imbalance, the exchange tive capacity. And this scenario be- rate appreciates as a result of capital comes still more complex because of flows; this normally means that the its interaction with the first contra- trade deficit becomes even worse.15 diction: the overvaluation of the ex- Thus, as a result of capital inflows change rate encourages an increase in and increases in imports, domestic imports, while the need to encourage production and demand contract and maintain foreign capital inflows (Ibid.). In a framework of financial requires exchange rate stability and and trade liberalization, capital flows strengthens trends leading to great- that can finance the capacity to im- er overvaluation. Capital inflows do port without generating foreign not necessarily reflect a healthy state currency through exports may lead of the economy. In fact, they turn to a perverse process of cumulative the capacity to import into an exog- causation — using the terminology enous variable. The liberalization of from Hirschmann’s theory of devel- the financial sector and of the capital opment economics. The disequilib- account opens the possibility of in- ria in a country’s foreign accounts can creased private sector indebtedness. As be financed by capital inflows, but a result, a country’s capacity to import these resources only help deepen the

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external imbalance and, through the an economy attempts to increase effects on aggregate domestic demand, domestic savings – in the hopes of contribute to further dismantling of leading to higher rates of productive the domestic productive apparatus. investment – through deregulation of the bank and non-bank financial This contradiction is resolved by main- sector. It is assumed that the deregu- taining financial deregulation, and by lation of the financial and banking hoping that it will somehow lead to sectors can lead to an increase in enough investment to escape from the domestic savings because economic import trap. The problem of artificial agents have greater opportunities for promotion of imports is convention- profitable investments. In addition, it ally ignored; the free flow of capital is was thought that domestic financial simply presented as the ideal manner deregulation provides more power- for a country to access foreign savings, ful risk management instruments. increase productive investment and However, it is difficult to ascertain enter a path of sustained growth. that the rewards to financial savings generally bring about greater produc- These three contradictions act not only tive investment. Because of deregu- as a powerful brake on the entire econ- lation, a growing part of domestic omy, slowing down growth and job savings can be directed instead to- creation. They also entail the ingre- wards financial or speculative invest- dients of instability, as the balance of ments such as the stock market, vari- several critical macroeconomic accounts ous financial instruments, and even are driven farther away from equilib- currency markets. Returns to specu- rium. In addition, all of these contra- lative investments in currency mar- dictions are aggravated by the fact kets, for instance, can be a powerful that financial markets are inherently attractor and shift resources away unstable and that they are driven from new productive investments. by expectations in the context of uncertainty. The combination is truly The process of international financial explosive and leads to various mani- deregulation is usually implement- festations of financial and economic ed at the same time as an almost crises. In Latin America, the stabi- complete deregulation of the do- lization programs that followed in- mestic banking sector. When this volved draconian measures that cut takes place, domestic restrictions public expenditures, restricted mon- on cross-market access for financial etary policy and reduced real wages institutions are eliminated, blurring in order to curtail effective demand the traditional distinctions between and control inflationary pressures. the operations of banks, investment firms, mutual and pension funds, in- The fourth contradiction of the surance companies, and stock exchange open economy model arises when brokerage firms. Also, quantitative

38 18, September 2011 Overview: Macroeconomic Policies for Sustainability

controls on various forms of loan We must also consider that to the extent allocation schemes are scrapped, as that currencies from other econo- well as requirements for the provi- mies become more attractive assets, sion of credit to specific sectors such especially if we consider arbitraging as agriculture or housing. Perhaps opportunities and the possibility of even more important are the elimi- moving from one economic space to nation of preferential interest rates another in response to disparities in for favoured sectors and the slack- exchange and interest rates, agents ening of cash reserve requirements may prefer to speculate on the for- for financial institutions. In theory, eign currency market.¹⁴ As volatil- competition among banks would ity and uncertainty intensify, agents lead to better service, greater options feel increasing pressure to engage in for investors in terms of financial these operations. The need to seek products and credit operations, and, protection from foreign competi- above all, lower interest rates. These tion, which becomes more intense goals were not attained. Domestic as a result of simultaneous trade and savings did not increase significantly financial deregulation, compels in- and the rate of investment remained vestors to prefer short-term rates of stagnant or declined. return. One might guess that this contradiction, i.e., deregulation de- Here the contradiction is expressed signed to stimulate savings and pro- as follows: on the one hand, domestic ductive investment leads to specula- savings must be increased in order to tive investment instead, was linked promote productive investment, but to the size or level of development on the other hand, the deregulation of the national economy. However, of the financial sector opens new exactly the same phenomenon can possibilities of speculative invest- be seen in the U.S., in the mounting ment for the domestic saver. These evidence of speculative and ques- new possibilities can be more attrac- tionably legal investment during the tive than those offered by invest- boom of the 1990s – a time of rapidly ments in the real economy, and thus expanding deregulation of financial the incentives for productive invest- and other markets. The crisis that ment are distorted. In addition, the exploded in the Summer of 2008 is rate of return that comes from plac- the best conformation of this. ing funds in financial instruments, within a framework of deregulated The context in which all of these capital accounts and interdepen- contradictions are deployed is based dent financial markets, connects re- on the idea that State intervention sources from domestic savings with needs to be minimized. This is of the sphere of international financial course related to the notion that speculation. markets allocate resources efficiently

¹⁴ A formal treatment of this is presented in Nadal (2005).

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and any State intervention leads to fact, this has been the path followed price distortions and inefficiencies. by newly industrialized economies The standard open economy model such as Japan, the Republic of Korea also reveals an important contradic- and Taiwan. The style of this public tion between the goal of achieving intervention varies, but in most cases an effective insertion in the global it has involved adequate allocation of economy and that of reducing, as public resources to activities such as much as possible, both the size of research and development, and some the state and the degree to which it level of strategic planning or insti- intervenes in the economy. The lat- tutional support for leading export ter goal is tied to the notion that it sectors. Often this has resulted in a is crucial to maintain healthy pub- very successful pattern of insertion lic finances in order to limit public in the international economy. indebtedness, avoid putting pressure on interest rates and prevent a During the past twenty years, the crowding out of private investment. ideology of reduced state interven- This warning of the dangers of action has been championed by orga- tive fiscal policy is itself the subject nizations such as the IMF and the of longstanding macroeconomic World Bank. It is based on the belief controversy. However, another di- that market forces alone can achieve mension of public policy is of more a more efficient allocation of resourc- immediate relevance to the path of es and that, therefore, no amount of export-led growth that is endorsed industrial or technology policy can by the open economy model: reducing improve on that outcome. While it the role of state intervention can has the apparent support of a narrow hinder the ability of a country’s in- interpretation of conventional eco- dustrial apparatus to overcome the nomic theory, it has no significant barriers to entry that exist in the in- record of historical success to point ternational arena. to. Many studies have shown that “hands-off,” laissez-faire public poli- A country implementing an open cy was not the path followed by suc- economy model ultimately must cessful countries embarking in late rely on a strong export sector capa- industrialization (Chang 2002, Ams- ble of generating enough resourc- den 1989). When state intervention es to finance imports (or at least to is ruled out as a means to generate keep trade deficits under control). In competitive advantages, the possibil- many industrial branches, exporting ity of developing dynamic, success- may require overcoming the barri- ful export-led growth may be lost, ers to entry that exist in the world and an open economy may become market; this has historically been at- heavily dependent on foreign capital tained only through a strategy inflows in order to finance its chronic volving active state intervention In trade deficit.

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This contradiction is “resolved” in the value of actual trade flows in all practice by forgetting one side of types of merchandise. the problem, and hoping for the best: what if all previous histori- This expansion of the world’s finan- cal experience was only prologue, cial sector has left a deep mark on and the true success of laissez-faire the world economy. The financial is only now about to appear on the crisis of 2008-2009 is the best proof world stage? If so, then the IMF and of this, with long term implications the World Bank are right, and the for global development. This coin- less government, the better. Some cides with a multi-dimensional en- readers may prefer, as we do, more vironmental and resource manage- historically grounded hopes. To ment crisis in which massive loss of summarize, one of the main features biodiversity, soil erosion, overex- of the open economy model is that ploitation of aquifers, deforestation, it unleashes the energy of the finan- climate change and pollution from cial sector and sets the stage for its emissions, effluents and solid waste preponderance in the economy. The are leaving a terrible heritage for fu- role of the State and the structure of ture generations. Yet, there are very the economy are organized around few analyses trying to make the con- the requirements of the financial nection between the structure of the sphere and this has important impli- world economy and this combina- cations. tion of environmental catastrophes. One of the main objectives in this Section V project was to start exploring the The Expansion of the linkages between the expansion of Financial Sector: the financial sector and the pattern Implications of environmental deterioration that for Sustainability we are experiencing today. During the past thirty years the world’s economic system has expe- The expansion of the financial sec- rienced the extraordinary expansion tor has been traced back to the years of the financial sector. This can be before the collapse of the Bretton expressed through several indicators, Woods system. This system was set from the growth of currency trans- up after WWII in order to organize actions, to the markets for bonds and international financial and monetary all sorts of financial assets. A signifi- relations. It was based on an array of cant proportion of exchanges in the fixed exchange rates (minimum ad- world’s financial markets are clearly justments were accepted), controls on related to arbitrage operations and transboundary capital flows and the speculation. Today, for example, creation of the International Mone- transactions in currency markets tary Fund to help stabilize currencies are more than one hundred times and assist countries experiencing balance

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of payments difficulties. The matrix of Before the seventies and as a result of fixed exchange rates was organized the so-called Neo-classical synthesis, around the US dollar whose value was it was thought that unemployment set at USD 35 per ounce of gold, as the could be reduced through various United States was the country with demand-management schemes. A the largest gold reserves in the world. consensus was developing around the Phillips curve (identified by The Bretton Woods system was economist A. W. Phillips), a con- marked by several problems. The first struct that identified a trade off be- was the role of gold in the entire system. tween unemployment and inflation. By the late sixties, it was clear that But during the seventies a combi- the mass of dollars in the world was nation of stagnation and inflation greater than the gold reserves of the (“stagflation”) shook macroecono- United States. Countries that were mists as it contradicted the idea that creditors of the US started to worry a trade off existed. Many believed the about the convertibility to gold and stage was set for a new theoretical the value of their reserves in dollar approach: Milton Friedman and Ed- denominated assets. Another big prob- mund Phelps launched the concept lem is the so-called Triffin dilemma of the “natural rate of unemploy- (named after the Belgian economist) ment” which was supposed to corre- that can be described as follows: the spond to a situation in which labour monetary policy requirements of the market rigidities prevented adjust- country issuing the world’s reserve ments and efforts to further reduce currency are in contradiction with unemployment would simply end the liquidity requirements of the rest up accelerating inflation. The NRU of the world. This is exactly what served as a platform to launch an happened in the case of the US dol- all-out attack on the pattern of mac- lar. By 1970 the system was already roeconomic policymaking as it had being buffeted by strong speculative evolved from the adaptation (and movements, especially in the world distortion) of Keynesian analysis in of the euro-dollar. In August 1971 the Neoclassical synthesis. Under then President Nixon unilaterally the new approach to policy making, closed the USD-gold window and the role of automatic adjustment in launched a new era for the world’s markets was once again restored as financial system. the centrepiece of resource allocation.¹⁵ This was followed closely Since then, macroeconomic policy by the rational expectations line making has never been the same. of thought developed by Lucas and

¹⁵ Friedman defined the natural rate of unemployment as “the level that would be ground out by the Walrasian system of general equilibrium equations, provided there is imbedded in them the actual structural characteristics of the labour and commodity markets, including market imperfections, stochastic variability in demands and supplies, the cost of gathering information about job vacancies and labour availabilities, the costs of mobility and so on” (Friedman 1968: 8).

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Sargent.¹⁶ The Dynamic Stochastic the IMF was called to play a critical General Equilibrium Model was to role in stabilization and adjustment rule the field of macroeconomic the- programs in developing countries ory and the age of neoliberalism was that had been badly hit by the inter- about to get going. For policy, the national debt crisis. As a result of this consequence of this was that the only process of deregulation, the volume goal for central banks was to maintain of international capital flows began price stability or, in other words, to to grow at exponential rates. New control inflation. As for fiscal policy, it instruments, such as derivatives and was considered an inefficient tool and structured investment vehicles, were an obstacle for private investment due designed and redesigned to be used to crowding out effects. as tools to take advantage of the new opportunities for arbitraging and The shock of the collapse of the Bret- speculation. ton Woods system, together with the change in the approach to macroeco- Macroeconomic policies could only nomic policy, brought about enor- aspire to perform an accessory role mous pressure for financial deregu- in this new world of interdependent lation. The abandonment of fixed or and deregulated financial markets. stable exchange rates introduced the In most Latin American countries, private sector to exchange rate risks, the central bank was given a sole something that had been previously mission, to maintain price stability, absorbed by the State. This “privati- and fiscal policy became obsessed zation of risk” (Eatwell and Taylor with the objective of generating a 2000) associated with exchange rate primary surplus. Finally, because variations had to be compensated part of the adjustment in the eight- through hedging and this required ies had forced most countries in the free capital mobility. In order to re- region to dismantle their systems for duce these new risks, market partici- industrial and other sector level poli- pants had to diversify their portfolios cies, the path was open for full trade with flexibility, modifying the cur- liberalization. Neoliberalism was the rencies’ combination and of other fi- name given to this combination of nancial assets in accordance with the passive or pro-cyclical macroeco- perceptions of risks. Thus, deregu- nomic policies, full financial deregula- lating the capital account of national tion, a reduced role for the State and the economies became a priority in the notion that efficient markets could take agenda of the rich countries and the care of the development process. international financial institutions. The opportunity to do push forward What was the effect of all of this on this agenda came in the eighties, as the environment? In general terms,

¹⁶ The NRU became for several analysts the Non-Accelerating Inflation Rate of Unemployment or NAIRU.

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the industrialization project was, if These price dynamics in commodity not entirely abandoned, at least push markets during the period 2002-2008 backward in a very decisive manner, was accompanied by the growing pres- as we have seen in previous pages. ence of financial investors on com- The manufacturing sector in Latin modity futures exchanges (UNCTAD America lost importance in its share 2009, ITUC 2009). This phenom- of GDP, as well as in total exports enon has been described as a process of from the region. Commodities that financialization of commodity markets are closer to the natural resource base and it implies that these price dynam- have been called to play a new role ics are caused by the action of financial in the process of economic growth in agents that use primary commodities the region. There are several impor- as simply another class of assets that is tant implications of this process in the included in their portfolio as an invest- realm of social welfare and in the en- ment. In other terms, this disturbing de- vironmental dimension. In the rest of velopment is due to the fact that an as- this paragraph we examine one crucial set intended primarily for use becomes aspect of the relation between the ex- increasingly treated as an investment pansion of the financial sector and the vehicle. The result of this has been a environment: the financial domination series of speculative bubbles that have of markets of primary commodities. deleterious effects on a great - num ber of people, as witnessed by riots The current global financial crisis was and turmoil in countries as diverse as preceded by a few months by a series Egypt, Bangladesh, Mexico and the of abrupt hikes in prices of several Philippines, to mention a few.¹⁷ basic commodities. Starting in 2002, there were significant price increas- Together with the macroeconomic es for several commodities that play package we have been describing (i.e., an important role in international a passive monetary policy, financial and trade. These price increments meant banking deregulation, primary surplus a great deal of stress and, in fact, food as the dominant objective in fiscal policy, crises, in many developing countries etc.) and contract agriculture, this fi- in 2006-2007. As the financial crisis nancialization of certain key commodity started to unfold, these price move- markets is also associated to a deep trans- ments were reversed and there were formation of agricultural production in substantial and equally abrupt reduc- vast territories, with a very high cost tions. This was one of the transmis- when capital flows are reversed. sion mechanisms through which the effects of the crisis were passed on to This process of financial domination developing countries. in the recent evolution of commodity

¹⁷ For a detailed account of the effects of these price changes on hunger and availability of food, see the IUTC report A Recipe for Hunger: How the World is Failing on Food (ITUC 2009).

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prices is the object of intense debate. in commodity markets command a Most mainstream economists have huge amount of resources and their attributed these price movements to operations are susceptible of having fundamental changes in supply and important effects on prices. demand. For example, the change in diet in China as per capita GDP in- Commodity exchange and futures creases has been considered one of markets have existed for a very long the main causes behind these price time and they have been used to iron out dynamics.¹⁸ But one crucial item here the spikes in price variations, provid- that points in a different direction is ing stable market signals to produc- that price reductions took place at a ers and helping them to meet the point in time when fundamentals did uncertainties of agricultural activities. not justify this variation. In addition, Futures markets allow for price dis- trading volumes in commodity ex- covery and therefore reduce price changes experienced sharp increases volatility. These markets allow pro- during the period of price hikes. For ducers to hedge against price fluctua- example, futures and options con- tions that may have negative effects tracts on commodity exchanges rose on production (thus ensuring activity from an average of 13 million con- levels close to capacity utilization). tracts between 200-2005 to more than 35 million contracts on average in In these specialized markets, participants 2006-2008. The peak was reached in have been limited to producers, farm 2007 with 45 million contracts ac- processing agents and traders. Until re- cording to data from the Bank of In- cently, other agents were prevented by ternational Settlements. During that law from entering into these markets period the value of over the counter in order to prevent speculation. In the contracts in commodities increased United States, for example, where the by 1,300 percent, surpassing USD largest mercantile exchanges function, 13 trillion. These and other indica- restrictions to trading in maize, soybean, tors suggest that different factors wheat and other crops prevented specu- are playing a role here. As pointed lation and price manipulation since the out above, one of these factors is the beginning of the XXth century. But increased presence in commodity fu- these restrictions were relaxed as part tures exchanges of financial investors of the drive to financial deregulation. for whom commodities appear as an- In 2000 the US Commodity Futures other class of assets that can be used Trading Commission deepened this to diversify portfolios in profit maxi- deregulation process (with the Com- mization strategies. Some of these modity Futures Modernization Act) financial investors that act as traders and increased the ceiling for trading in

¹⁸ This view has been contradicted by Daryll Ray (Director of the Agricultural Policy Analysis Center of the University of Tennessee). According to Ray’s analysis, China is self sufficient in many of the commodities that experienced the type of price behaviour that we have discussed here.

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maize, oats, wheat and soybeans.¹⁹ The to buy and when to sell. But all of end result was increased trading and this changed with financialization: price hikes. financial investors respond to risks that arise in currency markets, as The issue of how increased activi- well as in other financial assets, and ties in the mercantile commodity they have to diversify their portfolio exchanges affect spot commodity structures continuously in order to prices has been the object of intense search for optimal investment struc- debate. Some observers argue that tures. For these agents, commodi- speculation in futures, options and ties become the physical support of derivative markets cannot affect spot a new investment that is not differ- prices. The reasoning here is that ent (from the viewpoint of portfolio these short run effective prices will structures) from other financial assets. be impacted by speculative trading As futures contracts involving com- only when traders take delivery of modities became more common and commodities and hold physical in- were the object of complex securiti- ventories. Perhaps one of the most zation (Frankfurter and Accomazzo relevant analyses here is Frankfurter 2007), the normal price-inventory and Accomazzo (2007) who identify relationship was altered. The price important shortcomings in models dynamics have been altered because dealing with returns to speculators securitized commodity-linked in- in commodities futures markets. struments are now considered an investment rather than a risk-man- In the past there was some specula- agement tool. This may lead to self- tion in commodity exchanges and fulfilling prophecies that can engen- futures markets, but it was based on der higher prices until markets break how agents perceive the evolution down. of supply and demand. In this sense, speculation in futures and mercan- Commodities have certain properties tile exchange markets was simply that make them attractive as assets the action of taking advantage of a in an investment portfolio: their re- system of relative prices. Carrying turns are negatively correlated with costs, delivery dates and inventories those of other assets over the busi- were critical in deciding how much ness cycle and they are less volatile.

¹⁹ The CFTC controls potential market manipulation and excessive speculation through the Commit- ment of Traders (COT) report. But this was severely downgraded and rendered useless by the Commodity Futures Modernization Act enacted under the Clinton administration in 2000. In addition, the regulatory and monitoring capacity of the CFTC was further eroded when it allowed the Intercontinental Exchange (ICE) to use its trading terminals in the United States for trading of U.S. commodity futures contracts on the ICE futures exchange in London. Later, ICE Futures allowed traders in the United States to use ICE terminals in the United States to trade its synthetic futures contracts on the ICE Futures London exchange. This not only allowed unregistered funds to effectively bypass registration, it also contributed to distribute the effects of these operations worldwide.

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Besides, because many commodities market and start pushing price up- are an important component of the wards, financial operators may pull basket of goods that is used to mea- agricultural production chains into sure price changes, these commodi- the space of financial transactions, ties are a good protection against risk management and speculation. inflation because their returns are Because of the size of the resources positively correlated with price in- at their disposal, their transactions creases. Investment returns become in futures markets have direct effects the objective function and replace on market (spot) prices.²⁰ But more hedging against price fulctuations. than that, these effects are relayed through the workings of contracts Financialization of commodity ex- that link agribusiness (with their own changes is not a problem confined credit and marketing facilities) to di- to price dynamics and financial risk rect producers in the field. Banking management. It goes well beyond deregulation, tight monetary poli- the walls of the mercantile exchange cies (with scarce and costly credit), and has direct impacts in the field, recessive fiscal policies and the within output mix, technology choice drawal of support for small scale ag- and resource management practices. riculture, all combine to leave this When they enter into a commodity space for large agri-business.

Sao Paulo Stock Exchange. Credit R Matsunaga, Creative Commons ²⁰ Futures markets involve contracts in which traders pledge to buy or sell a commodity in the future at a pre-set price. The contract can be traded so that the agent does not have to actually take delivery of the commodity when the date expires. In the case of option, traders have the right but not the obligation to purchase or sell a commodity at a pre-set price in a future date and they pay a premium to the agents who make the opposite pledge.

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REFERENCES Amsden, Alice (1989) Asia’s Next Giant. South Korea and Late Industrialization. Oxford University Press. Banco Central de Costa Rica (2007) Deuda y los efectos de la política fiscal. Evaluación de vulnerabilidades para la economía costarricense. Departamento de Investigaciones Económicas. Documento de Investigación, DIE-01-2007-DI. Bhaduri, Amit (1998) “Implications of Globalization for Macroeconomic Theory and Policy in Developing Countries”, in Globalization and Progressive Economic Policy, (Dean Baker, Gerald Epstein and Robert Pollin, eds.). Cambridge University Press. Chang, Ha-Joon (2002) Kicking Away the Ladder. Development Strategy in Historical Perspectiva. London: Anthem Press. Chichilniski, Graciela and Gilberto Gallopín (2001) “The Environmental Impact of Globalization on Latin America”, Managing Human-Dominated Ecosystems, [271-303]. CONABIO (2007) Sistema Nacional sobre la Biodiversidad en México, http://www.conabio.gob. mx/institucion/snib/doctos/acerca.html Croce, Enzo and V. Hugo Juan-Ramóm (2003) “Assessing Fiscal Sustainability: a crosscountry comparison”. International Monetary Fund. Working Paper. WP/03/145. Daly, Herman (1991) “Elements of environmental macroeconomics”, in R. Costanza (Ed.), Ecological economics: The science and management of sustainability [32-46]. New York: Columbia University Press. Eatwell, John and Lance Taylor (2000) Global Finance at Risk. The Case for International Regulation. New York: The New Press. Engel, Stefanie, Tobias Wünscher and Sven Wunder (2009) “Increasing the Efficiency of Forest Conservation. The Case of Payments for Environmental Services in Costa Rica”, in Palmer and Engel (2009). Falconi Benitez, Fander (2005) “La construcción de una economía con cimientos ecológicos”, Asedios a lo imposible: propuestas económicas en construcción (Alberto Acosta y Fander Falconi, editores) ILDIS y Flacso, Ecuador, 2005. Fajnzylber, Fernando (1983) La industrialización trunca de América Latina. Mexico: Editorial Nueva Imagen. Fleming, M. (1962) ‘Domestic Financial Policies under Fixed and under Floating Exchange Rates’, International Monetary Fund Staff Papers, 9. Friedman, Milton (1968) “The Role of Monetary Policy”, American Economic Review, 58 (March) [1-17].

48 18, September 2011 Overview: Macroeconomic Policies for Sustainability

Frankfurter, Michael Mack and Davide Accomazzo (2007) “Is Managed Futures an Asset Class? The Search for the Beta of Commodity Futures”, Social Science Research Network, (December 31 20007). Available at SSRN: http://ssrn.com/abstract=1029243. Heyes, A. (2000) “A Proposal for the Greening of Textbook Macro: ‘IS-LM-EE.’.” Ecological Economics, 32(1), 1-7 ITUC (2009) A Recipe for Hunger: How the World is Failing on Food. International Trade Union Confederation, Brussels. Lawn, P. A. (2003) “On Heyes’ IS-LM-EE proposal to establish an environmental macroeconomics”. Environment and Development Economics, 8(1), 31-56.

Nadal, Alejandro (1996) “Balance of Payments Provisiones in the GATT and NAFTA”, Journal of World Trade. Vol. 30 (4). [5 – 24]

--- (2000) The Environmental and Social Impacts of Economic Liberalization on Corn Production in Mexico. WWWF and Oxfam.

--- (2005) “Estabilidad y flujos de capital en el modelo de economía abierta”, in (Nadal, A. and F. Aguayo, editors) Experiencias de crisis y estrategias de desarrollo. Autonomía y globalización. México: El Colegio de México.

Munasinghe, Mohan Ed. (2002) Macroeconomics and the Environment. Cheltenham, U.K.: Edward Elgar.

Moreno-Brid, Juan Carlos and Carlos Rozo (2xxx) “Dolarización: conveniencias y disconveniencias para México”, in (Guadalupe Mantey and Noemi Levy, editors) De la desregulación financiera a la crisis cambiaria: experiencias en América Latina y el Sudeste Asiático, Mexico: UNAM (Check).

Palmer, Charles and Stephanie Engel (editors) (2009) Avoided Deforestation. Prospects for Mitigating Climate Change. London: Routledge.

Mundell, R. (1963) “Capital Mobility and Stabilization Policy under Fixed and Flexible Exchange Rates”, Canadian Journal of Economics and Political Science, 29.

Oilwatch (2007) “Conservar el crudo en el subsuelo, por el país, por el Yasuní, por su gente”, available in http://www.amazoniaporlavida.org/es/files/guardar_el_crudo_ en_el_subsuelo.pdf/.

Thampapillai, D. J. (1995). “Environmental macroeconomics: Towards filling an empty box”. Indian Economic Journal, 42(4), 43-58.

Urquídi, Víctor L. (2005) Otro siglo perdido. Las políticas de desarrollo en América Latina (1930- 2005). México: Fondo de Cultura Económica.

18, November 2011 49 MACROECONOMIC POLICIES, LIVELIHOODS AND SUSTAINABILITY

Macroeconomic policy and environmental sustainability: the case of transgenic soybean production in Argentina

Alan Cibils²¹ Universidad Nacional General Sarmiento Buenos Aires, Argentina

Soy Credit: Archives Infosur Hoy ²¹ Senior Researcher and Professor at the Universidad Nacional de General Sarmiento (www.ungs.edu.ar). This report was produced as part of a five-country study on the environmental impact of macroeconomic policies, funded by IUCN. Besides Argentina, reports were produced for Brazil, Costa Rica, Ecuador and Mexico. The author wishes to thank Eduardo Gudynas and participants at the IV Jornadas de Economía Ecológica of the Asociación Argentino Uruguaya de Economía Ecológica for helpful comments.

50 18, September 2011 Argentina

Abstract Since the mid-1970s, Argentina has embarked on a process of neoliberal economic transformation which has resulted in widespread de-industrialisation and a re-primarisation of the economy, accumulation of a large and periodically unsustainable public debt, and widespread privatisations and deregulation. Deregulation of agricultural activity, coupled with an official approval for the introduction of genetically modified seeds, resulted in an unprecedented expansion of the surface cultivated with soybean, displacing other traditional crops and activities. The rapid expansion of soybean and the technological package that accompanies it (no-till sowing, glyphosate herbicide), has had substantial social, economic and environmental impacts. This report concludes that given the importance of soybean as an export commodity, and the weight of export taxes in the government’s revenue structure, make it unlikely that there will be any policy initiatives in the short-to medium-run that will try to alter this scenario.

1. Introduction 2008 with the consequent impact on 008 was not a good year for the government’s revenues. A wide- Argentina. March through spread and lasting drought, affecting June saw the government in Argentina’s main agricultural pro- 2an intense dispute with agricultural duction areas, added to an already S oybean P roduction I n A r g entina producers over agricultural export tax difficult situation. To top it all off, for levels. The government’s intransi- the first time since Argentina’s 2001 gence resulted in the four main rural sovereign default and due primar-

S ustainability : T he C ase O f rans g enic sector organisations presenting a united ily to the effects of the international front for the first time ever against economic crisis, Argentina’s ability a government²². Once the dispute to meet its debt service payments was settled, at a high cost to both became a growing concern. M acroeconomic P olicy A nd E nvironmental sides, the international price of Ar- gentina’s main export commodities The link between the events just de- (soybean, wheat, oil) had dropped to scribed may not be immediately appar- almost half their peak values of mid ent, in the same way that the relationship

²² The four organisations were the Sociedad Rural Argentina (SRA, the large landholder association, historically opposed to populist governments), CONINGAGRO (an association of rural cooperatives), Confederaciones Rurales de la Argentina (CRA, an association of cattle ranchers) and the Federación Agraria de la Argentina (FAA, an association of small producers, historically opposed to the large landholders).

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between these events, macroeconomic This report presents the transformations policy, and environmental sustainability that have occurred in Argentina on are not directly obvious. However, the macroeconomic level and how they there is an integral relationship between relate to changes in the agricultural them all, and that is the subject of this sector. The following section deals report. Indeed, the unifying factors are with the economic transforma- Argentina’s agro-export-based eco- tions since 1976 and the important nomic model and the country’s macro- role that Argentina’s public debt has economic fiscal balance, in which a heavy played in this process. The section debt-service burden plays a key part. after that examines the evolution of Argentina’s agricultural production in the In the mid-1970s, Argentina em- last few decades. This is followed by barked on a process of neoliberal a presentation of the broad impact economic transformation which re- that transgenic soybean has had on sulted in widespread de-industriali- society, the economy and the envi- sation and a re-primarisation of the ronment and the important role this economy, accumulation of a large crop plays in Argentina’s macroeco- and periodically unsustainable public nomic balance. The report concludes debt, and widespread deregulation with a brief summary. and privatisation of utilities and state enterprises. Deregulation of agricultural activity, coupled with an official 2. The macroeconomic approval of the introduction of ge- context: from military netically modified seeds, resulted in neoliberalism to an unprecedented expansion of the default and back surface cultivated with transgenic The Argentine military dictatorship soybean, displacing other traditional of 1976-1983 produced profound crops and activities. transformations in Argentina’s political, social, cultural and economic The rapid expansion of soybean and the spheres. The “National Reorgani- technological package that accompa- sation Process,” as they named it, nies it (no-till sowing, glyphosate sought to do away with the Welfare herbicide), has had substantial social, State and the entire set of industrial economic and environmental im- policies known as import substitu- pacts. Furthermore, the importance tion industrialisation (ISI) which had of soybean production as an export prevailed since the 1930s. The disap- commodity, and the weight of export pearance of 30,000 labour and social taxes in the government’s revenue movement activists, a tight control structure, make it unlikely that there over the media, and a generalized will be any policy initiatives in the climate of terror effectively reduced short- to medium-run that will try the ability of the opposition to fight to alter this scenario. against such reforms.

52 18, September 2011 Argentina

The policy framework introduced by development”²⁵ and massive public the military consisted of trade and debt accumulation which resulted in finance liberalisation and the begin- repeated financial crises.²⁶ ning of a generalized reduction of State participation in the economy and The dictatorship ended in economic, society through privatisation and de- social, and military disaster (defeated regulation.²³ Without a doubt, finan- in the Falklands/Malvinas war). The cial liberalisation²⁴ was the hallmark country’s industrial capacity had of the dictatorship’s policy reforms, shrunk by 30%, capital flight dra- issuing in an era of “speculation-led matically increased foreign debt, and

Figure 1. Re-primarisation: Argentine Sectoral GDP 1935-2004

Source: Author’s calculations based on Ferreres (2005) ²³ The military’s policy package, based on orthodox economic theory, later became known as neoliberalism or Washington Consensus policies (Williamson 1990). The policy prescriptions based on this theory emphasize trade and financial liberalisation, privatisation of state enterprises, deregulation, and a general withdrawal from participation of the State in the economy.

²⁴ Financial liberalisation is the deregulation of the domestic financial system and the elimination of barriers to inflows and outflows of capital.

²⁵ Ilene Grabel (1995) coined this term to characterize the effects of financial liberalisation in developing countries.

²⁶ The first crisis was in 1982 when Argentina, together with Mexico and Brazil, defaulted on its debt. In 1989-1990 there were repeated episodes of hyperinflation and in 2001-2002 Argentina’s spectacular crash garnered world attention and resulted in a world-record setting default (Cibils et al. 2002)

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the distribution of income —which a requirement that all pesos in cir- had reached its point of greatest culation be backed by dollars in the equality in 1975— began a trend of Central Bank’s reserves. The peso peg, increasing inequality that continues coupled with a prohibition to the to the present. government to finance its deficit with monetary emission, meant that The return to democratic rule in 1983 Argentina’s monetary policy was es- with President Raúl Alfonsín did not sentially on automatic pilot, leaving result in any lasting changes to the eco- the government very little space for nomic framework introduced by the independent policy-making. military. Despite initial attempts to roll back some of the military’s reforms, Menem’s ten years in office resulted rising inflation towards theend of the in a radical deepening of the restructur- decade resulted in a series of hyperinfla- ing process of Argentina’s economy tionary bouts. As a result, Alfonsín and society begun by the military called for elections and turned over dictatorship. Abrupt trade liberalisation the presidency six months ahead of bankrupted much domestic indus- schedule, in July of 1989. try and manufacturing, turning Ar- gentina into a primary product and Carlos Menem, the candidate of the service economy. As a result, the historically pro-labour Peronist party, process of “re-primarisation” which succeeded Alfonsín. While he had cam- had begun under the military took paigned on traditional populist themes, on new momentum (Figure 1). This once in power he made a 180° turn to- process resulted in a net loss of the wards economic neoliberalism. Macro- weight of manufacturing in GDP, economic instability and two bouts of while the primary sector’s secular hyperinflation during his first year in decline stabilized and then was reversed power resulted in Menem appointing towards the end of the period. The Domingo Cavallo, a Harvard-trained service sector’s strong increase is economist, as finance minister. due, among other factors, to the rise of financial intermediation. As we Cavallo implemented the most far- shall see later, these transformations reaching neoliberal economic program were to have a profound impact on in Argentine history. It included Argentina’s macroeconomic balance. trade and finance liberalisation and set in motion the process of privati- Large capital inflows, lured by better sation of all state enterprises, utilities investment returns than those of- and the Social Security system. The fered by weak Northern economies of cornerstone of Cavallo’s package was the early 1990s fuelled a boom in con- a currency board system that pegged sumer credit, which resulted in a large the Argentine peso to the U.S. dollar increase in consumer demand and on a one to one exchange rate and positive growth rates from 1991 to

54 18, September 2011 Argentina

1994. However, that capital quick- presidential candidate of the Alianza ly exited after the December 1994 coalition, won the 1999 election, his Mexican peso crisis, driving the Ar- strategy was to maintain the IMF aus- gentine economy into a deep recession terity guidelines of his predecessor. in 1995, with unemployment going According to the IMF, Argentina’s over 18%. The tequila effect, as it problem was runaway fiscal spending came to be known, underscored an which needed to be reigned in to important structural flaw of Argentina’s generate the fiscal surplus needed to neoliberal experiment: the econo- meet rapidly growing debt service my’s dependence on foreign capital, payments. which could leave the country at ver- tiginous speeds. The Asian, Russian, However, actual data tell a different Brazilian and Turkish financial crises story. As Table 1 clearly shows, the of the late-1990s all had substantial IMF —and Argentine officials— se- repercussions in Argentina. Growth verely misdiagnosed the problem. The was erratic after 1994, and unem- issue was not runaway public spending ployment never dropped below 13%. —which remained fairly constant Furthermore, poverty and inequality as a percent of GDP throughout increased steadily reaching unprece- the 1990s. The issue was debt ser- dented levels at the end of the century. vice payments which spiralled out of control for two reasons. The main In the third quarter of 1998, as a result reason was the substantial fiscal revenue of the Brazilian crisis, the Argentine gap left by the 1994 privatisation of economy entered a recession. When social security which was covered by Fernando De la Rúa, the conservative borrowing.²⁷ The second reason was

Table 1. National Government Spending and Revenue (1993-2001) (millions of current pesos, 1 peso = 1 US dollar)

Source: Authors’ calculations based on Ministry of Economy, Argentina ²⁷ Social security privatisation in 1994 led to a fiscal revenue gap equivalent to 1% of GDP each year between 1994-2001 (Baker and Weisbrot 2002). For more information on the crisis and its causes, see and Cibils et al. (2002).

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a series of interest rate shocks that of strong economic growth until resulted in mounting debt service. 2008. By the end of 2008, domestic economic problems and the global As the recession deepened, Argenti- financial crisis were taking its toll on na’s IMF-mandated fiscal spending the Argentine economy and fiscal cuts acted procyclically, worsen- accounts, causing many to question ing the recession. The country was the sustainability of its debt service thus caught in a downward spiral schedule. of falling growth and government income, larger deficits, more fiscal 2.1. The centrality austerity, and so on. When in 2001 of public debt in it became obvious that the economic the macroeconomy strategy was not viable, capital flight Argentina’s public debt issues can be took on alarming proportions and traced back to the 1976-1983 military the government was no longer able dictatorship.²⁸ When the military to borrow to cover its fiscal gap. In took power in 1976, Argentina’s December 2001, Argentina defaulted public debt totalled approximately on roughly $80 billion of its privately $9 billion. By the time the military held debt, making it the largest sov- left in 1983, the public debt had more ereign default in history. One month than quintupled to $45 billion. How- later the fixed exchange rate regime, ever, the latest chapter in Argentina’s which had been the hallmark of the debt-accumulation process began in 1990s policy framework, was aban- 1991 with the Menem-Cavallo Con- doned resulting in a substantial cur- vertibility regime described above. rency devaluation. The success of Menem’s radical The recession, which had begun in neoliberal economic program (the the last quarter of 1998, turned into a Convertibility Plan) hinged upon depression and lasted until the first attracting foreign capital inflows. quarter of 2002 and resulted in a GDP The hope was that foreign capital contraction of approximately 20%. flows would set off a “virtuous cycle” However, mainly due to the devaluation, of economic growth and general the economy began to turn around welfare improvements for the popu- in the second quarter of 2002. Initially lation (through “trickle down” ef- spurred by some degree of import fects), which would then lead to further substitution and export increases, investment flows and so on. In or- the economy began to grow. As the der to achieve this, Menem officials economy grew, so did consumption believed that normalizing public and investment, leading to six years debt payments—which had been in

²⁸ Argentina had had public debt problems for much of its early history (see, for example, Galasso 2002). However, Argentina’s most recent debt issues start with the military dictatorship. See Cibils and Lo Vuolo (2007), and the works there cited, for a detailed account.

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a virtual state of default during the 30-year Brady bonds with lower 1980s—was key. Therefore, a “perma- interest rates and an average capital nent” solution to the debt problem was reduction of 35 percent. The main devised, consisting of two main parts. result of this swap was the atomisa- tion of Argentina’s creditors from a The first component consisted of allow- few Northern commercial banks to ing state enterprises to be privatized hundreds of thousands or millions of to be purchased partly with Argentine bondholders around the world. public debt bonds.²⁹ This operation greatly favoured holders of Argen- Official faith in this strategy was such tine debt, since they were given full that Minister Cavallo stated in 1993 credit for bonds that were trading that “the public debt will be insig- at 15–20 percent of their nominal nificant by the end of the century.”³⁰ value on the open market. The sec- Despite such optimism, Argentina’s ond component of the solution to public debt continued to grow at Argentina’s debt problem was the an exponential rate throughout the 1992 Brady Agreement, by which 1990s, reaching explosive levels to- Argentina would swap its $21 bil- ward the end of the decade and re- lion debt to commercial banks, plus sulting in the largest sovereign de- $8.3 billion in late payments, for fault in history (Figure 2).

Figure 2. Argentina’s public debt 1990-2001 (millions of pesos, 1 peso = 1 US dollar)

Source: Ministry of Economy, Argentina. ²⁹ This was the case for the national telephone company, Entel, and the national airline, Aerolíneas Argentinas.

³⁰ Cited in Kulfas and Schorr (2003).

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What were the reasons behind this gap was covered with both public explosive debt accumulation? Ac- and private debt.³³ When in 2001 it cording to the IMF, Argentina’s spi- became clear that Argentine public ralling debt was caused by runaway finances looked increasingly like a fiscal spending. However, fiscal data ponzi scheme, capital flows reversed analysis reveals that the IMF con- causing the convertibility regime to tention that is grossly incorrect. crash and the default on most of the Rather, three main causes emerge for country’s public debt. Argentina’s 1990s public debt build- up. First was the growth in debt ser- The default provided badly needed vice due to external shocks. Second breathing room for Argentina’s fiscal was the privatisation of social secu- accounts. However, when in 2003, rity (Argentina’s “pay-as-you-go” it became clear that Argentina was retirement system). Indeed, the lost emerging from its political and eco- revenue, plus accumulated interest nomic crisis, the IMF and defaulted costs, amounted to nearly the entire creditors increased pressure for a solu- government budget deficit in 2001.³¹ tion to its $80 billion default debt. After A third cause for Argentina’s debt intense negotiations, including two build-up was a growing demand different Argentine official debt-re- for foreign exchange from both the structuring proposals, a debt swap was public and private sectors.³² implemented in early 2005, with a 76.15 percent acceptance rate.³⁴ The only way to sustain this situation was through sustained capital account The swap’s financial results included surpluses. While foreign direct in- an effective capital reduction of ap- vestment partially satisfied this need, proximately 50%, substantially lon- overall it proved insufficient to meet ger maturity dates and lower interest the demand for foreign exchange. rates. The debt-to-GDP ratio went As a result, the foreign exchange from 113 percent at the time of default

³¹ See Baker and Weisbrot (2002).

³² Public sector demand for foreign exchange was based on the need to keep Central Bank reserves equivalent to pesos in circulation (as per the Convertibility Law), and the need to make debt-service payments that were primarily in foreign exchange. Private sector demand for foreign exchange resulted from a need to finance imports, which, given the overvalued peso, resulted in a growing trade imbalance. The private sector also showed a growing preference for the dollar over the peso, as witnessed by increasing dollar-denominated bank deposits and the dollarisation of economic transactions. Business and household demand for hard currency as store of value is a common problem in many developing countries and a source of financial instability. See Aguiar de Medeiros (2008) for an in-depth discussion of this issue.

³³ See Cibils and Lo Vuolo (2007) for an analysis of each of these factors.

³⁴ Roughly 24% of defaulted debt did not accept the Argentine swap conditions and are still awaiting a settlement at the time of this writing.

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in December 2001, to 87 percent colonial days. Abundant and fertile after the restructuring (taking into lands made Argentina’s range-fed account the 24% of defaulted debt that beef famous and abundant wheat chose not to enter the swap). De- and maize production resulted in spite this reduction, Argentina was Argentina being food self-sufficient left with a very heavy debt service while producing a large exportable burden for decades to come, which surplus. This resulted in Argentina will require a substantial fiscal pri- being dubbed the “world’s granary”. mary surplus in order to not default again. Obtaining a large primary Until the mid 1960s, most of Argentina’s surplus depends significantly on ex- agricultural output was produced by port growth since 15%-20% of fiscal small and medium farmers. Tech- revenues depend on export taxes. As nical change in agricultural sectors we shall see in section 4.2. below, an took place primarily through the important contributor to Argentina’s large-scale introduction of tractors export tax revenue is the soybean and other agricultural machinery crop and its derivatives (oil, flower, such as harvesters. This had a large oilseed cakes, etc.). Therefore, soy- impact as it displaced many agricul- bean exports are a key component of tural workers, greatly reducing pro- Argentina’s debt service sustainability. ducer costs.³⁵

As we shall see below, soybean culti- Two important transformations took vation has significant impacts on the place in the 1970s. First, new seed environment and on long term sustain- varieties allowed for year-round ability. While soybean exports can be agricultural production or “double seen as a typical “trade and environ- cropping.” Secondly, soybean was ment” issue, our analysis shows that introduced and spread rapidly and deeper questions concerning the ori- widely. In this way the rotation between gins of this issue are to be found in stra- crops and cattle breeding was displaced tegic macroeconomic policy decisions in favour of an intensifiedagricultural related to monetary and exchange production (or “agriculturisation” as it rate policies, as well as fiscal policy. is sometimes called). The introduction of soybean also meant wide- 3. The explosion of spread and growing use of herbicides transgenic soybean and plaguicides, which quadrupled production and between 1970 and 1985.³⁶ its multiple impacts Agriculture and cattle breeding have In the case of Argentina, glyphosate been mainstays of the Argentine (a herbicide used extensively with many economy since the country’s early transgenic crops) consumption went ³⁵ See Teubal et al. (2005), Teubal and Rodríguez (2002) and Barsky and Dávila (2008).

³⁶ Barsky and Dávila (2008: 18).

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from one million litre equivalent in the mid 1990s.³⁸ This is also a good 1990/1991 to almost 60 million by example of how macroeconomic the end of the decade.³⁷ It has been policies affect the environment. argued that transgenic soybean requires less agro-chemical products, Figure 3 shows the production in tons which is true, since it only requires of soybean, maize and wheat between glyphosate. However, the increasing 1997 and 2007, while Figure 4 shows amount of pesticide used makes this the hectares sowed with soybean, a crop that has a very high environ- maize and wheat for the same period. mental impact. There are several remarkable features which emerge from the figures. First, With the deepening of the Argen- soybean production has increased tine neoliberal economic policy dramatically both in tons produced framework in the 1990s, the “indus- and in hectares sowed. Tonnage and trial agriculture” model experienced hectares sowed have more than dou- substantial and far-reaching trans- bled for the period under question, formations. The best example of making soybean Argentina’s most this transformation is the expansion important crop. A second feature of transgenic soybean production of the data presented is that wheat which took place in Argentina since production has a declining tendency

Figure 3. Selected agricultural production (tons)

Source: Secretaría de Agricultura, Ganadería, Pesca y Alimentos.

³⁷ Lapitz et al. (2004), p.125.

³⁸ Teubal (2008).

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both in tonnage and in hectares sowed. sector.⁴⁰ Furthermore, since 95% of Thirdly, maize production has expe- Argentina’s soybean production is rienced a decline in surface sowed but exported, this results in substantial an rising trend in tons produced.³⁹ foreign exchange inflows and fiscal revenues through export taxes. Soybean Since 1996, almost 100% of soybean production is therefore viewed by planted in Argentina is transgenic many as a key crop, bringing mod- “roundup ready” (RR) soybean, a ernisation to Argentina’s rural sectors technological package developed and contributing to macroeconomic by the Monsanto Corporation. The balance. package includes a soybean variety resistant to glyphosate, a powerful 3.1. The multiple impacts herbicide originally produced by of transgenic soybean Monsanto and now available by other However, the introduction and rapid manufacturers, and the no-tillage expansion of transgenic seeds, especially sowing method. The introduction of transgenic soybean, has had multiple and transgenic soy in 1996 was hailed by profound impacts in Argentina. Im- many as a technological innovation, pacts include soil and environmental greatly increasing the productive degradation, deforestation, land-use capacity of Argentina’s agricultural concentration, contamination from

Figure 4. Surface planted (hectares)

Source: Secretaría de Agricultura, Ganadería, Pesca y Alimentos.

³⁹ Transgenic maize was introduced in 2004, so it is too soon tell whether yields have changed substantially.

⁴⁰ Such a view can be found in Barsky and Dávila (2008), although it is a widespread view.

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excessive use of agrochemicals, mono- fertile grounds which are far more culture and loss of food security, susceptible to erosion. Also, intensive displacement of small and medium agriculture practices mentioned above producers and increased dependence and the elimination of rotation have on transnational agribusiness corpo- contributed to soil erosion as well. rations⁴¹. We will deal briefly with Soil loss could reach 19 to 30 tons these issues in what follows. per hectare in Argentina and Brazil, according to some estimates.⁴² Addi- 3.1.1. Soil degradation tionally, nutrients in the soil have be- The introduction double cropping in come increasingly depleted requiring the 1970s followed by the introduction ever increasing amounts of fertilisers of transgenic seed varieties in the and herbicides to maintain yields.⁴³ 1990s has resulted in an intensification of agriculture in two ways. Firstly, Additionally, since crops are no longer production has become more capital rotated with cattle, soil phosphorous intensive, requiring substantial invest- content has been seriously depleted and ment in machinery and agrochemicals. soil once considered to be well supplied is Secondly, year-round agriculture has now phosphorous deficient.⁴⁴ Nutrient become the norm, with two soybean depletion also includes nitrogen and production cycles or alternating soy- potassium. bean with maize or wheat. This intensification of agriculture has resulted in If this depletion were to be compen- a decline in soil fertility and increased sated by the application of fertilizers, soil erosion. it is estimated that it would have required 1.1 million metric tons of Originally, it was believed that the phosphorous fertilizers in 2005.⁴⁵ no-tillage system would protect the soil Soybean accounts for 50% of nutri- from erosion, since it wasn’t being ent depletion according to the cited turned over every sowing season. study. Empirical studies, however, cast substantial doubt on this assumption. The 3.1.2. Ecological impact reason is that with herbicide-resis- In addition to soil erosion, the dramatic tant soybean varieties (e.g. Monsan- growth of transgenic soybean produc- to’s Roundup ready), soybean pro- tion has had substantial environmental ducers have been expanding into less impacts. Widespread use of glyphosate ⁴¹ Teubal (2008).

⁴² Pengue (2006:16).

⁴³ Laptitz et all (2004:113). See also references cited in chapter 6.

⁴⁴ Pengue (2005, 2006).

⁴⁵ Pengue (2005:317).

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has eliminated innumerable plant spe- Deforestation is another substantial en- cies from Argentine “pampas”. This has vironmental by-product of the expan- had a substantial impact on insect and sion of the agricultural frontier. The other bird and mammal species. In vast rapid expansion of soybean in Argen- regions of Argentina’s most fertile soils, tina’s most fertile agricultural areas has they now speak of “la primavera silenci- resulted in a displacement of other ag- osa” (the silent spring) due to the disap- ricultural activities, such as cattle ranch- pearance of birds, butterflies and other ing, into areas that were not previously insects that used to typical of spring.⁴⁶ used for agriculture.

Intensive use of herbicides such as Additionally, new soybean varieties have glyphosate has resulted in herbicide- resulted in expansion into areas that were resistant strains of plants and weeds, not previously deemed fit for agricul- which then require additional or stron- ture. As a result, of displacement of cattle ger herbicides, deepening the cycle of ranching and the expansion of the agri- biodiversity depletion. Additionally, cultural frontier, the rate of deforestation intensified herbicide use has substantial has increased substantially in Argentina’s impacts on the soil, water sources, and northern provinces (Figure 5). human beings living in the proximity of sprayed fields.⁴⁷ In Chaco province, 118,000 hectares have been deforested for soybean pro- Defenders of the industrial agriculture duction between 1998 and 2002. In model and herbicide manufacturers Santiago del Estero, 223,000 hectares argue that if herbicides are correctly have been deforested for the same rea- applied, negative effects on humans son and in the same period⁴⁹. This has and the environment are minimal. resulted in the expansion of the indus- However, large scale production of trial agriculture model into areas where transgenic crops make extensive use small producers and indigenous com- of aerial spraying making it very munities have lived, with the resulting difficult to control pesticide applica- displacement and marginalisation of tion and impact. Empirical studies these populations. of the negative impact of glyphosate on soil, plants, water, insects, arach- 3.1.3. Economic and nids and amphibians at this point are social vulnerability compelling and troubling.⁴⁸ Economic and social impacts of the

⁴⁶ This is a reference to Rachel Carson’s 1962 book, Silent Spring, one of the first alerting one the effects of widespread use of pesticides. See Lapitz et al. chapter 6 and the references there cited for greater detail.

⁴⁷ Pengue (2006), Teubal (2008).

⁴⁸ See Pengue (2005:319-320, 2006:18).

⁴⁹ Pengue (2006:15).

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Figure 5. Deforestation rates for selected Argentine provinces

Source: Greenpeace Argentina (2007) based on official data. industrial agriculture intensification available data (the National Agrarian process have had considerable im- Census of 2002 with the previous pacts on rural populations and the census of 1988). Between 1988 and national economy. 2002, there are 24,5% less farming enterprises, whereas the average sur- Intensification of agriculture and land face of these enterprises increased by use, combined with the technological 28%. These changes are a clear indica- package of which transgenic seeds are a tion of the disappearance of small and part, has resulted in a displacement of medium producers.⁵⁰ The result of this small and medium producers from the process is the implantation of a model countryside. This has led to a sustained labelled “agricultura sin agricultores” process of concentration in land use, as (agriculture without farmers), since the larger producers rent the land from industrial agriculture extensive use of producers who, due the smaller scale machinery results in lower rural em- of their productive capacity, cannot ployment ratios.⁵¹ afford the machinery required. According to Teubal (2003) and The process of land-use concentration Pengue (2006), the displacement of is confirmed comparing the latest beef and other traditional crops by ⁵⁰ Giarracca and Teubal (2006), Teubal et al. (2005), Teubal (2003)

⁵¹ Pengue (2005, 2006), Giarracca and Teubal (2006), Teubal (2008), Teubal and Rodríguez (2002), Cloquell et al (2007).

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soybean production is a clear indica- has to do with specific legislative re- tion that soybean is on the way to forms introduced since 1976. A sec- becoming a monoculture. This pro- ond area has to do with the current cess not only has environmental and macroeconomic balance and the social implications, but it could also important role that soybean exports severely damage Argentina’s food play in that. We shall tackle each in self-sufficiency since Argentines, for turn. the most part, don’t consume soybean. 4.1. Legislation links: The expansion of the soybean indus- deregulation trial agriculture model has also in- There were key changes in Ar- creased Argentina’s dependence on gentine legislation since 1976 that imported inputs. For example, only greatly aided the expansion of soy- 16.6% of pesticides are produced lo- bean production. The first key legis- cally. Of the remaining, 43.6% are lative reform was introduced by the imported and 39.8% are produced military dictatorship and it consisted locally with imported basic chemi- of a “flexibilisation” of the land rent cals.⁵² Furthermore, over the last de- laws. Agricultural land rent had been cades the international commerce of heavily regulated during the first seeds, agrochemicals, and crops has Peronist government (1946-1955) become highly concentrated, in- in order to provide protection for creasing Argentina’s dependence.⁵³ small and medium producers.⁵⁵

4. The links between This led to a widespread prevalence soybean production and of rent contracts “for one sowing government policy season” (contratos por una cosecha) What are the reasons behind Argen- and a rapid expansion of short-term tina’s dramatic soybean expansion? contract agriculture. Deregulation While there are both economic and and technological change promoted policy reasons, we will focus in this a new form of industrial agriculture section on government policies that had in which small and medium farmers, a direct impact on soybean expansion.⁵⁴ while retaining ownership of the land, lost control of its use transfer- Argentine government policy links ring everyday management to a third to soybean production can be divid- party.⁵⁶ This has led to a rapid expansion ed into two broad areas. A first area of what became known as “sowing pools”

⁵² Pengue (2005:318, 2004:5).

⁵³ Pengue (2004), Teubal (2003).

⁵⁴ For a list of economic reasons, see Pengue (2004, 2005).

⁵⁵ Teubal (2008:3).

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and the financialisation of agriculture, since the 1930s, such as the Jun- i.e., intensive agriculture with short-term ta Nacional de Granos (National profit objectives.⁵⁷ The rise in commod- Grain Board), the Junta Nacional de ity prices, and particularly the rise in Carnes (National Meat Board) and soybean prices (Figure 6) during the the Dirección Nacional de Azúcar early 2000s, intensified this process, a (National Sugar Board). These insti- local expression of what Wray (2008) tutions played a key role in regulat- calls “money manager capitalism”. ing agrarian sector economic activity and in setting base prices (precio The second, and perhaps the most sostén) for different crops in support important, legislative change came of small and medium producers. As during the Menem government a result of this decree, the Argentine through the Deregulation Decree agricultural sector became one of the (Decreto de desregulación).⁵⁸ This most deregulated in the world.⁵⁹ decree eliminated national institutions which had been in existence The final regulatory change was the

Figure 6. Argentine soybean export prices (monthly, FOB, US dollars)

Source: Secretaría de Agricultura, Ganadería, Pesca y Alimentos.

⁵⁶ Gudynas (2008).

⁵⁷ This the same process which occurred two decades earlier in non-financial corporations. See Crotty (2003) for an insightful account of this process.

⁵⁸ Giarracca and Teubal (2006), Teubal (2003).

⁵⁹ Teubal (2003), Teubal and Rodríguez (2002).

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official permission in 1996 for the use primary surplus has averaged 2-3% of transgenic varieties in Argentine of GDP in recent years, a debt ser- agriculture. This led to a massive ex- vice schedule of this magnitude means pansion of genetically modified soybean that Argentina will have to borrow (“RoundUp Ready”) and later, maize. heavily or restructure its debt. Be- tween 2011-2016, assuming a modest 4.2. Macroeconomic balance links growth rate each year, the country As described in section 2.1. above, will also have to make a considerable Argentina’s restructured debt-service fiscal effort to meet payments. schedule, augmented by new debt issues since 2005, implies that the Obtaining a large primary surplus on country will have to maintain a large a sustained basis depends on several primary surplus and positive growth factors in the Argentine case. First, rates for many years in order to meet it depends on high rates of growth debt-service payments.⁶⁰ since Argentina’s tax structure is highly dependent on economic ac- Table 2 contains Argentina’s debt ser- tivity.⁶² Second, obtaining the pri- vice schedule for the period 2010-2016. mary surplus depends significantly Debt service payments in 2010 amount on export growth since 15%-20% to 8.2% of GDP. Since Argentina’s of fiscal revenues depend on export Table 2. Argentina’s debt service schedule 2010-2016 (millions of US dollars)⁶¹

Source: Author’s calculations based on Ministerio de Economía data. ⁶⁰ Obtaining such results would require a break from Argentina’s two hundred-year history, since the country was never able to achieve such macroeconomic performance on a sustained basis.

⁶¹ GDP projections are based on 2008’s nominal GDP in US dollars, and a growth rate of zero was assumed for 2009. Unfortunately, since 2007 Argentina has no reliable official statistics, so it is very difficult to have a clear idea of what is happening in the economy. Private growth estimates for 2009 vary, most are negative. A zero growth assumption is, therefore, a very conservative assumption. For the rest of the period a steady 3% yearly growth rate is assumed.

⁶² High growth rates also impact debt service since many of the restructured bonds have “GDP-linked” coupons.

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taxes. An important contributor to Figure 7 shows the evolution of soy- Argentina’s export tax revenue is the bean exports since the early 1990s. soybean crop and its derivatives (oil, It is clear from the chart that soy- flower, oilseed cakes, etc.). bean exports have grown considerably to the point where they repre- Since the 2001-2002 Argentine crisis and sent between 20% and one quarter peso devaluation, soybean produc- of Argentina’s total exports. Figure tion and exports have become a key 8 shows the evolution of export tax component of Argentina’s fiscal rev- revenue as a percentage of total fiscal enue structure and macroeconomic revenue. It is clear from the graph that balance. In order to reduce the im- export taxes play an important role pact of the devaluation on domestic in the government’s accounts. The food prices, the Argentine government weight of export taxes as a percent- introduced export taxes on most of the age of total revenue has increased as country’s agricultural exports, in- a result of the increase in commodity cluding soybean and its by-products.⁶³ prices between 2006 and 2008.

Figure 7. Soy and soy product exports as a percentage of total exports

Source: Author’s calculations based FAO and Mninisterio de Economía data

⁶³ Many of Argentina’s food exports are also consumed locally. After the devaluation, to prevent producers from charging world prices domestically, the government implemented export taxes to bring world and domestic prices closer together.

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Also showing in Figure 8 is export and given the importance of export tax revenue as a percentage of GDP. taxes for Argentina’s fiscal account As the Figure clearly shows, export balance, and given the fiscal require- tax revenue has been between 1.6 ments of Argentina’s hefty debt-service and 3 per cent of GDP since it was schedule, it is clear that soybean implemented. This is roughly equiv- production and exports are of critical alent to half of Argentina’s public importance, at least in the short-to debt service load. medium-run. It is highly unlikely that any government policy will be In other words, given the weight of soy- implemented that will curtail soybean products in Argentina’s exports, bean production. Figure 8. Export tax revenue as a percentage of total fiscal revenue and GDP

Source: Author’s calculations based on data from Dirección Nacional de Investigaciones y Análisis Fiscal

left Credit: Archives Instituto de Ecología Regional Argentina

right Credit: Archive BCBA

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5. Concluding remarks producers, dependence on agroin- Starting with the military dictator- dustrial imports, tendency towards ship of 1976, Argentina has undergone monoculture, soil depletion, wide- a profound series of economic trans- spread contamination, loss of biodi- formations aimed at eliminating versity and deforestation. state intervention in the economy through deregulation and liberalisation Given this picture, a national agri- economic policies. cultural policy that gave priority to small and medium producers, food Deregulation policies had a substantial self-sufficiency and environmental economy-wide impact, including in sustainability has become not only the agricultural sectors. One of these desirable, but a necessity. However, impacts was the introduction on a given the importance of export tax massive scale of genetically modi- revenues to Argentina’s fiscal balance, fied soybean. Soybean production and given the weight of soybean has had, and continues to have, very export in Argentina’s total exports, substantial social, economic and it is unlikely that such a policy will environmental impacts, including be implemented in the short term. displacement of small and medium Contrary to what is desirable, the

Mount Olivia, Arg. Credit Miguel Monjas, Creative Commons

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current world economic crisis is likely for a strong State to promote envi- to reinforce Argentina’s dependence ronmental sustainability will also on transgenic soybean production, at materialize. least in the short-to medium-term. top It should be clear from the above Archive presentation that the State has played BCBA and continues to play a key role in directly or indirectly promoting or hindering environmental sustainability. Generalized environmental degradation over the past decades, coupled with the present crisis and its social and economic aspects, have brought the role of the State back to the forefront. There appears to be a growing consensus on the need for a State that is capable and willing to act to promote economic stability. Hopefully the realisation of the need

bottom Hudoht dreamstime.com

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6. Bibliography Aguiar de Medeiros, Carlos (2008). “Financial dependency and growth cycles in Latin American countries”. Journal of Post Keynesian Economics, 31(1).

Baker, Dean and Mark Weisbrot (2002). “The Role of Social Security Privatisation in Argentina’s Economic Crisis.” Washington, D.C.: Center for Economic and Policy Research.

Barsky, Osvaldo and Dávila, Mabel (2008). La rebelión del campo: Historia del conflicto agrario argentino. Buenos Aires: Editorial Sudamericana.

Cibils, Alan, Mark Weisbrot, and Debayani Kar (2002). “Argentina Since Default: The IMF and the Depression”, Center for Economic and Policy Research, Briefing Paper, September.

Cibils, Alan and Lo Vuolo, Rubén (2007). “At Debt’s Door: What Can We Learn from Argentina’s Recent Debt Crisis and Restructuring?” Seattle Journal for Social Justice, 5(2).

Cloquell, Silvia, ed. (2007). Familias rurales: El fin de una historia en el inicio de una nueva agricultura. Buenos Aires: Homo Sapiens.

Crotty, James (2003). “The Neoliberal Paradox: The impact of destructive product market competition and impatient finance on nonfinancial corporations in the neoliberal era”. Review of Radical Political Economics, 35(3).

Ferreres, Orlando (2005). Dos siglos de economía argentina. Buenos Aires: Fundación Norte y Sur.

Galasso, Norberto (2002). De la Banca Baring al FMI: Historia de la Deuda Externa Argentina. Buenos Aires: Colihue.

Giarracca, Norma and Teubal, Miguel (2006). “Democracia y neoliberalismo en el campo argentino: Una convivencia difícil” in Hubert, Gramont, ed., La construcción de la democracia en el campo latinoamericano, Buenos Aires: CLACSO.

Grabel, Ilene (1995). “Speculation-led economic development: A post-Keynesian interpretation of financial liberalisation programmes in the Third World.” In- ternational Review of Applied Economics 9(2).

Greenpeace Argentina (2007). “Información sobre deforestación en las provincias (actualizado)”. Junio. http://www.greenpeace.org/raw/content/argentina/ bosques/informaci-n-sobre-deforestaci.pdf

Gudynas, Eduardo (2008). “The New Bonfire of Vanities: Soybean cultivation and globalization in South America.” Development 51(4).

Kulfas, Matías and Marín Schorr (2003). La Deuda Externa Argentina: diagnóstico y lineamientos propositivos para su reestructuración. Buenos Aires: Centro In- terdisciplinario Para El Estudio De Politicas Publicas (CIEPP) and Fundación OSDE.

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Lapitz, Rocío; Gerardo Evia and Eduardo Gudynas (2004). Soja y carne en el Mercosur: Comercio, ambiente y desarrollo agropecuario. Montevideo, Uruguay: Coscoroba Ediciones.

Pengue, Walter (2004). “La ingeniería genética y la intensificación de la agricultura argentina: algunos comentarios críticos”, in Alicia Bársena et al., Los transgénicos en América Latina y el Caribe: un debate abierto. Santiago, Chile: CEPAL.

Pengue, Walter (2004). “Transgenic crops in Argentina and its hidden costs” in Ortega, E. and Ugliati, S., eds., Proceedings from the Biennial International Workshop Advances in Energy Studies, Unicamp, Campinas, São Paulo, Brazil, June 16-19.

Pengue, Walter (2005). “Transgenic crops in Argentina: The Ecological and Social Debt”. Bulletin of Science, Technology and Society, 25(4).

Pengue, Walter (2006). “La soja transgénica en América Latina”. Biodiversidad n.47.

Rodríguez, Javier (2008). Consecuencias económicas de la soja transgénica: Argentina 1996-2006. Buenos Aires: CLACSO-Ediciones Cooperativas.

Teubal, Miguel (2001). “Globalización y nueva ruralidad en América Latina” in Norma Giarraca ed., ¿Una nueva ruralidad en América Latina? Buenos Aires: Clacso.

Teubal, Miguel (2006). “Soja transgénica y la crisis del modelo agroalimentario argentino.” Realidad Económica, n.196.

Teubal, Miguel (2008). “Expansión de la soja transgénica en la Argentina”, Global Development and the Environment Institute, Working Group on De- velopment and the Environment in the Americas Discussion Paper N.22.

Teubal, Miguel and Javier Rodríguez (2002). Agro y alimentos en la globalización: Una perspectiva crítica. Buenos Aires: Editorial La Colmena.

Teubal, Miguel; Domínguez, Diego and Sabatino, Pablo (2005). “Transformaciones agrarias en la Argentina: Agricultura industrial y sistema agroalimentario” in Giarracca, Norma and Teubal, Miguel, eds., El campo argentino en la encrucijada: Estrategias y resistencias sociales, ecos en la ciudad. Buenos Aires: Alianza Editorial.

Williamson, John (1990). “What Washington means by policy reform.” In John Williamson, ed., Latin American Adjustment: How Much has Happened? Washington, DC: Institute for International Economics.

Wray, L. Randall (2008). “The Commodities Market Bubble: Money Manager Capitalism and the Financialisation of Commodities”. Public Policy Brief No. 96. Annandale-on-Hudson, NY: The Levy Economics Institute.

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THE FINANCIAL AND FISCAL ROOTS OF DEFORESTATION IN THE AMAZON

Sergio Schlesinger FASE member Rio de Janeiro, Brazil

Amazon deforestation Credit: Alexander Lees www.dicyt.com

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tarting in the decade of the in debt service and very high infla- 1930s Brazil started on a path tion rates. to industrialization through Simport substitution. In the Latin As a result, macroeconomic policies American region, Brazil was perhaps were no longer oriented towards the B razil : the country that had a good industrial needs of the ISI strategy. The main and technology policy articulated priorities after the eighties responded with import substitution. This was to the need to ensure debt service, to perhaps due to efforts to develop a reduce indebtedness and to curtail strong military industry during some inflationary pressures (Delgado 2008). of the darkest periods of Brazil’s re- After 1983, Brazil accepted the super- cent history. This led to the definition vision of the International Monetary of priorities for backward linkages Fund over its main macroeconomic and technological development, as policy components. Brazil’s policy expressed in the National Develop- makers were captured by the IMF ment Plan which explicitly defined recipes of constrained adjustment. the need for import substitution in There were four main principles the capital goods sector. The policy that would determine macroeco- objectives at that time were not only nomic policy from then on. The first industrial self-sufficiency, but also principle was to cut government ex- to attain scientific and technological penditures in order to reduce infla- autonomy in order to rid the country tionary pressures and to increase the of its dependency in key areas such participation of the private sector in as chemicals and electronics. the economy. The second principle was to contain monetary supply and F inancial L iberalization , iscal The industrialization strategy led to to keep high interest rates, again to the establishment and consolidation control inflation, but also to attract of a strong industrial base. Brazil foreign capital. The third principle became the only Latin American was to control the exchange rate so as country that was able to advance in to maintain it as an effective instru-

P olicy and D eforestation in A mazonia the domestic production of capital ment to fight inflation and to use it goods such as machine tools. But the to promote exports. This meant that conditions that allowed for the con- the exchange rate would have to be tinuity in the industrialization strategy manipulated in order to have periods and the country’s growth pattern of overvaluation and undervaluation, were definitely broken in the eight- according to the needs of the econo- ies as a result of the debt crisis. Some my. The fourth principle was related of the most important consequences of to financial and trade liberalization, the crisis were the loss of access to something that was thought would the international capital markets, to- be an effective tool to attract foreign gether with the significant hikes in investments and further reduce public interest rates and the increased cost expenditure. Trade liberalization in

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itself was seen as subordinate to the of aggregate demand was enforced macroeconomic objectives of price through monetary and fiscal poli- stabilization, rather than respond- cies, as well as the contraction of real ing to the notion of comparative wages. The implementation of these advantages and efficient resource al- policies took place through a drastic location.⁶⁴ Financial and trade liber- contraction of public expenditures, alization were also seen as a way to high interest rates, a tightening of deliver a clear message for all coun- money supply, as well as restrictions tries and international financial in- on credit. In spite of this package of stitutions that Brazil was seriously contractionary policies, stabilization committed to maintaining an open remained an elusive goal. Some tem- economy model. This message was porary successes were attained, but critical to assuage the concerns of the spectre of hyperinflation haunted foreign investors and increase cred- the Brazilian economy since 1987. ibility on Brazil’s intentions. In the early nineties, inflationary pressures really went out of control: Another key objective of macroeco- in 1993-1994 the year to year infla- nomic policy in this period was to tion rate surpassed the 5,000% mark. eliminate the current account deficit It was clear that Brazil had been through significant surpluses in the ensnared in a policy dilemma. The trade balance. For this, the under- trade surplus objective had been at- valuation of the exchange rate was tained in a very adverse internation- used. Thus, the drop in commodi- al context, but the undervaluation of ties’ prices of the eighties was com- the exchange rate had strengthened pensated by a devalued exchange inflationary pressures, in spite of the rate. Thus, a recessive macroeco- recessive fiscal and monetary policy nomic policy was adopted, together postures. with a shift in favour of the sector of tradable goods. In the future, export To meet the challenges of this new led growth would replace the old predicament a new macroeconomic import substitution strategy.⁶⁵ policy package was implemented: the Plano Real was born in 1994. Its In the context of the strategic transfor- most important component was the mation, a highly recessive reduction introduction of a new currency, the

⁶⁴ This is another interesting example of how macroeconomic policy priorities dominate trade liberalization. The same can be said of Mexico’s decision to proceed with trade liberalization. In 1987, when authorities decided the country should become a member of the GATT, the main objective was the need to control inflation through cheaper imports.

⁶⁵ The macroeconomic policy used in the midst of the crisis in the eighties used to main types of approaches: the reduction of aggregate demand (through monetary and fiscal policies) and the shifting of aggregate expenditure (through trade and exchange rate policies). In countries such as Brazil, this latter approach was to modify the composition of domestic aggregate demand and, through this, have some bearing on the trade balance.

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real, which was pegged to the U.S. and growth rates. Unemployment dollar.⁶⁶ This was designed to sta- rates increased from 4.3% in 1994 bilize inflationary expectations and to 7.9% in 1998. Many firms had to thus bring about higher investment close down as they could not com- rates, spurring growth, fiscal reve- plete with the foreign imports that nues and employment. On the fiscal were being buttressed by the over- policy front, the new plan included a valued real. mandatory balanced budget approach which included generalized indexation The contradictions of the open of wages, performance of several economy model that we have exam- key financial assets, taxes and a wide ined above started to play a role in variety of contracts. The objective the Brazilian economy. The capital here was to put a brake on inflation- inflows provided an artificial sup- ary expectations associated to the fiscal port to Brazil’s capacity to continue profligacy of the past decades. It was importing, but they also contributed thought that indexation would bring to appreciate the exchange rate. Of about stabilization and would be critical course, the appreciation of the new for the monetary reform component. currency due to capital inflows was aggravated by the commitment to The Plano Real succeeded in bring- maintain its value pegged to the U.S. ing stability and putting a lid on in- dollar. On top of this, as the dollar flationary pressures. However, the strengthened in the mid-1990s, the reduction of inflation was not instan- real appreciated against other cur- taneous and this led to a significant rencies. In the end, the ability of overvaluation of the new currency. Brazil to sustain large current ac- This deteriorated the trade balance count deficits through a surplus in and the current account deficit con- its capital account was called into tinued to weigh heavily and the cur- question. After the Mexican crisis rency gap had to be covered through in 1994, brought about by a sudden movements in the capital account. reversal of capital flows, it became Thus, the commitments to maintain clear that the Brazilian economy had a strict monetary posture, with high become highly vulnerable to a simi- interest rates and exchange rate sta- lar danger. The Asian crisis in 1997 bility seemed credible enough to the and the Russian bond default in 1998 international financial community increased the perception that risk in for a short period of time. the so-called emerging markets was simply too big. The probability of However, the high interest rates had Brazil suffering a speculative attack very serious implications for investment on its currency was increasing every

⁶⁶ The real’s value was set using a predetermined rate against the dollar. The system included a scheme for daily mini-fluctuations around the target value. This did not prevent the appreciation of the currency.

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year and fund managers that were the drastic fiscal adjustment lead to a taking advantage of arbitraging oppor- better performance in debt service. tunities in Brazil started to doubt the country’s capacity to sustain the real. The historical balance of the Plano Real is a mixed bag of results on Early in 1999 Brazil’s central bank several fronts. Although hyperinfla- decided to widen the mini-band sys- tion was avoided, and stability was tem, a move that amounted to a de fac- restored, the price for that was in- to devaluation. The result was a stam- deed very high. Not only was Brazil pede in capital flight and a much more rendered more fragile and vulner- severe adjustment in the real’s value: able, its economy was slowed down, the exchange rate dropped dramati- with several very negative implica- cally and by February the real was tions. Figure V.7 shows how the pe- trading at 1.80 to the dollar. The deci- riod was marked by very slow rates sion to abandon the mini-band sys- of growth and even drops in income tem was taken and short term interest per capita as the high interest rates rates were increased to 39%. Longer that accompanied the Plan Real took term rates continued to show very their toll. high levels, as shown in Figure V.6, with negative implications for invest- In the end, the Plano Real had left 2.6 ment and growth. This contributed million newly unemployed persons to temporarily stabilize things, and between 1995 and 2002. In spite of

Figure V.6 Real Short Term Rates in Selected Countries (Average, 1996-2002)

Source: Sergio Schlesinger, Brazil Country Study.

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Figure V.7 GDP and GDP Per Capita Growth Rates (1990-2007)

Source: Sergio Schlesinger, Brazil Country Study.

the reduction in inflation rates, in- the US dollar, caused the real to lose come distribution was only margin- in its value. The rapid expansion of ally altered, with the Gini coefficient the Chinese economy contributed evolving from 0.574 to 0.563 with to increase the price of several key GDP increasing 2.3% per year dur- commodities of agricultural and in- ing that period. dustrial origin in the international markets. And a renewed impetus of The most dramatic indicator of fis- capital flows brought helped estab- cal policy was that between 2000 lish a new pattern of stable external and 2007, federal investment, as well accounts. Although imports expand- as expenditures in education and ed by 156% in 2002-2007, exports health represented only 43% of the grew by 166% during the same pe- total amount allocated to interest on riod. Brazil was able to keep more the public debt. than 200 billion USD in reserves by 2008. However, the current account In 2003 the new government of started to deteriorate once again in Lula took office in Brasilia. Several 2008, with a deficit of 10.7 billion in indicators contributed to gener- the first quarter. In addition, the exter- ate an optimistic perspective for the nal debt (public and private) increased future of the Brazilian economy. from 215 in 2007 to 254 billion US Several factors at the international dollars a year later. Servicing this level, including the depreciation of debt continues to weigh heavily on

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the country’s economy. Table V.8 surplus (income over expenditures, below shows how the external debt without considering debt service) of has evolved over the last three decades. 55 billion dollars, a sum that represented 6% of GDP and allowed the To summarize, Brazil’s macroeco- government to surpass the annual nomic policies have been shaped by goal of 3.8% of GDP. But during its debt burden. While monetary that first semester, interest payments policy is obsessed with price stabil- on the Brazilian debt amounted to ity, fiscal policy is dominated by the 56 billion, and this left a total public short term objective of generating deficit of 0.14% of GDP. a primary surplus.⁶⁷ This process constitutes a deviation of resources Financial Liberalization from the real sectors of the economy and Fiscal Policy: (and from the real needs in educa- Changing the Rural tion, health, housing, transporta- Landscape tion, infrastructure and science and Controls over capital flows and invest- technology) to the financial sector ments were part of the macroeconom- of the economy. Consider the fol- ic policy package that accompanied lowing: during the first semester of the ISI strategy. These controls were 2008, Brazil generated a primary established in Brazil as a part of the

Figure V.8 Brazil’s External Debt (1980 – 2007) (USD billions)

Source: Sergio Schlesinger, Brazil Country Study

⁶⁷ This has been a more or less constant in Brazil’s fiscal stance. In 2009, as a result of the international financial crisis, Brazil’s economy weakened and fiscal revenues dropped. Also, the implementation of countercyclical measures (such as tax breaks and increased public spending) will prevent Brazil from reaching the goal of a primary surplus of 2.5% of GDP.

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Bretton Woods regime and they had tablished a degree of financial liber- also served as a buffer from the vola- alization that was unique in Brazil’s tility in the international economy history. Portfolio investments could in the seventies. When the Bret- now benefit from its arbitraging op- ton Woods system was abandoned erations, taking advantage of Brazil’s by the developed economies in the high interest rates and exchange rate world, Brazil kept the old system stability. of controls in place, but gradually started to feel the pressure to relax In the 1990s a second wave of mea- some of these restrictions. It would sures to secure this financial liberal- take several years to dismantle this ization. Foreign financial institutions system and attain full financial lib- were allowed to settle, expand and eralization. consolidate their presence in Brazil. Banks were allowed to obtain exter- As we have seen, in the eighties and nal resources and to carry out swap nineties, Brazil needed to attract foreign operations with foreign entities. And capital in order to close its currency it is precisely in the year 2000 that the gap. In 1988 a currency market with Cargill Bank, as well as other banks floating exchange rates was estab- belonging to foreign multinational lished, access to foreign currency corporations, initiated its operations became easier and greater flexibility in Brazil. Their role was to be the in financial operations was intro- financial and credit arm of their op- duced for all agents. But by far the erations, pushing for deeper market most important measure was taken penetration of their products and in 1992, when free flows of capital strengthening their commercial and and profit remittances by foreigners industrial presence in the country. were authorized. But perhaps more important, these banks were the main instrument to This was the definitive measure for get control over primary production financial liberalization and estab- and thus the source of its main raw lished, for the first time in Brazil, the material. This was seen by corpora- possibility to transfer resources to a tions such as Cargill, Archer Daniels foreign country without the need Midland and Bunge as the way in to show that they had an incoming which they could strengthen their registry or counterpart in the capital industrial, commercial and financial account. Institutional investors were operations. allowed to take part in the privatization program. These and other measures (tax Contract agriculture was a by-prod- exemptions and rebates, allowance uct of the financial predominance of of royalty payments for technology these firms in the regions where rapid and technical assistance between expansion of soybean took place. A subsidiary and head firms, etc.) es- typical contract involves the promise

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to deliver a certain amount of soy- operations severely curtailed. As fis- bean is exchanged with the supply cal policy became dominated by the of inputs even before sowing. Many need to generate a primary surplus, of these operations are coordinated the subsidies that had been chan- by cooperatives, trading companies neled to the agricultural sector via and input producers. In other cases, soft loans and credit by the develop- especially when harvest is going to ment banks almost disappeared. take place, other forms of credit with working capital are more common. If agricultural production received More than 80% of total output of soy- significant public resources in the bean is acquired by five or six large form of credit and subsidies during trading companies (Cargill, Bunge, the seventies and even the eighties, in ADM, Dreyfus and Maggi are the the 1990s those resources were dras- largest of these. tically cut by fiscal policy makers. The most important comparison is The proliferation of these con- the following: in 1985, central gov- tracts is not so much related to the ernment agencies were covering 92% virtues of the crops or technology of credit, but this dropped to 40% and depends more on the lack of in 1988 and 29% in 1989. In value credit and support which was pro- terms, this reduction was even more vided by public agencies in the past. dramatic, with a drop of more than In all cases, farmers lose control of 83% in 1980 - 1990. As the provi- the production process. This was to sion of credit through public agencies become a powerful instrument for collapsed (due to the fiscal crisis), the these companies due to the high cost trading companies and the larger of credit. We have already seen that MNCs with their banks occupied Brazil was maintaining some of the the space that had once been the re- highest interest rates in the world, sponsibility of State agencies.⁶⁸ and because price stabilization was paramount in the agenda of mone- The resources that were used by tary policy, credit was scarce and the these banks were basically chan- banks of the large corporations were neled to rural producers and coop- to play a key role in filling the gap erative firms to cover investments in between demand and supply for com- modernization of productive infra- mercial credit. In addition, in the case structure, as well as for the purchase of agriculture, the withdrawal of State of agricultural inputs. Mostly, these support had already left a huge vacu- loans lead to various forms of com- um as development banks saw their mercial agriculture in which the key

⁶⁸ The subsidies and support that still subsist in Brazil are concentrated in the larger commercial producers and firms, especially those related to exporting agri-business. In the 2004/2005 cycle, for example, big landowners and their firms obtained R$ 39 billion, while the smaller farmers had access to only R$ 7 billion. These smaller farms represent 57% of total farming units, while the medium and large farms represent 13% and 30%.

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decisions on output and the technology corporations took advantage of the mix were taken away from produc- new favorable context in order to ers. The international context made gain access to alternative sources Brazil a country especially attractive of raw materials and land. This last for activities in sectors closer to the resource is of course critical for the natural resource base. Other policy large MNCs in agri-business. The measures reinforced this trend. First, older MNCs (Cargill, Bunge, Drey- there was a lax environmental legis- fus) that had been operating in the lation and a very weak enforcement Brazilian economy since the days of infrastructure. Second, imports for the import substitution strategy react- goods that are important for agri- ed to the evolving context and the business underwent very significant challenge of the newest competitors deregulation. Third, and perhaps (Archer Daniels Midland) by rapidly more important, was the authori- expanding their operations in order zation to harvest genetically modi- to protect their control over the supply fied crops. This was of course related of the commodities that were the to Brazil’s acceptance of the TRIPs most profitable (soybean). agreement in the context of the World Trade Organization. One aspect of this strategy was to take advantage of the deregulation of This combination of factors made the FDI regime and a wave of mergers foreign direct investment the main and acquisitions (M&A) took place. driver for the expansion of a new ag- Many of the local firms, small and ricultural model in various key regions medium producers, were already in in Brazil. Several large multinational bad shape due to the series of crises

Harbor Credit: Marc Ryckaert Wikimedia Commons

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and adjustment measures, lack of credit, global financial crisis, they have very etc. Their underpriced assets offered little resources to act as a buffer between advantages to the expanding MNCs their enterprises and market volatil- as they still had important networks ity. For example, the crisis is expected of suppliers in strategic regions. As the to take a heavy toll on the operations entire sector was being restructured, of the big trading companies and the M&A multiplied: between 1994 and supply of credit is already being drasti- 2003, 312 separate operations were cally reduced. In 2009, it is expected that registered in the food, beverages and a larger part of credit will be supplied tobacco sectors, making it the number directly by producers. Obviously, this one sector in this field. And 80% of means that output will have to fall these operations corresponded to and this will lead to a larger amount MNC’s. The largest four corpora- of defaults on previous loans. In the tions (Cargill, Bunge, Dreyfus and case of agricultural machinery, already ADM) have bought small and medi- the pace of foreclosures has intensified. um firms in all stages of the production process in Brazil. This explains This process has left behind a series of why the share of FDI in the food deep changes in the rural sector and and beverages sectors increased from the environment. Family farms, which 0.6% in 1998 to 11.3% in 2002. are less capital intensive and provide up to 70% of rural jobs, have been one Other branches of the manufacturing of the first casualties. Between 1985 sector were also targets of this expan- and 2005, the number of family farms sion and vertical integration process. dropped significantly and, with this, Many manufacturers and suppliers rural employment also suffered a severe of agricultural machinery and tools, fall. Most of soybean production takes fertilizers and pesticides, as well as in place in large scale commercial op- the field of agro-biotechnology, were erations that are capital intensive bought by the expanding MNCs.⁶⁹ and employment generation is low: Finally, several chains of marketing roughly ten full-time jobs for every firms were also acquired and this sealed thousand hectares, with six of them the vertical integration process, from temporary jobs. Land concentration is primary production (through contract also well documented, with the conse- agriculture) all the way to marketing. quent generation of landless labourers.

By losing control of production de- As a direct consequence of the evolu- cisions, farmers’ vulnerability has in- tion we have analyzed here, soybean creased. In the context of the 2008/2009 production underwent a dramatic

⁶⁹ The agricultural manufacturing sector shows a similar pattern with banks such as New Holland and John Deere acting as suppliers of credit to rural producers and, once again, filling the vacuum left by the withdrawal of State agencies. Brazil’s agri-biotech sector is 100% controlled by MNCs. Monsanto, through its fully owned subsidiary Monsoy, is responsible for 60% of production. Pioneer (controlled by Dupont) controls 14%, and Dow, Zeneca and Agr-Evo control the remaining 10%.

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expansion. In the period 1991-2005, course, is that if these expectations the surface devoted to soybean tripled are not confirmed by market trends and by 2006 this crop was occupy- and prices go down, producers will ing more than 22 million hectares, a likely get stuck in a very difficult situ- surface that was roughly equivalent ation. The experience of these boom to the one devoted to the other four and bust cycles in agriculture is well main staple foods grown in Brazil known, but when liquidity abounds (rice, wheat, beans and millet). Total in international markets, the specula- output of soybean reached 58 million tive tendency actually worsens. The tons, approximately 25% of world social and environmental impact of production. The West Central re- these attacks on entire agro-ecosys- gion in Brazil experienced the most tems parallel the effects of financial rapid rates of growth, advancing on crises as capital flows are reverted. the vegetation of the cerrado biome where 40% of Brazilian soybean Environmental production is taking place. Effects Financial deregulation, combined with It is important to underline that these a restrictive monetary policy that macroeconomic policies combined curtailed credit and a contraction- have also favoured the expansion of ary fiscal policy responding solely to speculative capital in Brazil’s agri- the generation of a primary surplus business. Crops such as sugar, for ex- have led to this extraordinary expan- ample, have expanded at even faster sion of agri-business. There are sev- rates than soybean in some regions eral important environmental impacts due to expectations of ethanol price from this process. The first is the loss in the near future. The problem, of of agro-biodiversity, as the expansion

Amazon Rainforest Credit: Mart St Amant, Creative Commons

18, November 2011 85 MACROECONOMIC POLICIES, LIVELIHOODS AND SUSTAINABILITY

of monoculture takes place. This has of the riches savannas in the world, brought about widespread pollution of with 12,000 plant species and 2,000 soils and aquifers because these crops animal species, many of which are are heavy users of chemical inputs. endemic to the cerrado. This vast region does not have a system capable of Table V.3 shows the ranking of land monitoring environmental degradation use practices in Brazil. By far, live- and resource management practices. stock continues to be the most important activity, but several commer- According to official data, in 2007 cial crops are growing in importance. 39% of the cerrado’s surface has al- The second type of damages comes ready been converted for livestock from the destruction of the cerrado, production (26%) or agriculture a sprawling savanna in central Bra- (10%).⁷⁰ In the states of Mato Grosso do zil that has more than two million Sul Goias, Sao Paulo and the southern square kilometers in Central Brazil part of Minas Gerais, the Cerrado has (about 24% of its territory). The re- already disappeared. gion hosts forty ethnic groups (with 45,000 indigenous people), several of In addition, rates of destruction of the cer- which face the threat of extinction. rado remain at very high levels. In 2004 In terms of biodiversity, this is one Conservation International estimated

Table V.3

Source: Sergio Schlesinger, Brazil Country Study

⁷⁰ The data comes from the Conservation and Sustainable Utilization Project of Brazilian Biological Diversity that was carried out by the Minister of the Environment. A study by Conservation International claims that 55% of the cerrado had been already transformed in 2002. Another WWF study is even more pessimistic, considering that only 19% of the original cerrado vegetation remains untouched.

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that 1.5% of the total surface of the comes from the reallocation of pre- biome was being destroyed every viously deforested areas to soybean year. Another study by the University production. This land was former- of Goiás, The Nature Conservancy ly used for ranching, and the cattle and Conservation International es- raising activities have been displaced timated that rate at a lower level, into regions in the Amazon basin. 0.25% per year, but warned that this Brazil already is the largest producer could accelerate with the expansion of commercial livestock (with two of crops for biofuels. Finally, a study hundred cattle). And because this is by the Cerrado-Pantanal Program done through extensive methods, (it of Conservation International states is estimated that one head of cattle that the region may have already lost requires one hectare) cattle production 13% of its biodiversity. occupies the first place in land usage.

Finally, the third problem is related But the pressure from monoculture to the deforestation of the Amazon crops (soybean and sugarcane) is rain forest. Direct destruction of the having a critical impact in displacing rainforest through the expansion of cattle production from the states in soybean has already been identified Central-West, South and Southeast by Greenpeace and other NGOs. Brazil into the regions of Legal Am- But perhaps the most powerful effect azonia. This is confirmed by official

Deforestation Credit: A. Lees www.dicyt.com

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data which shows that the number fragile regions, with all of its envi- of cattle in the North and Central- ronmental impacts. West of Brazil, precisely where the Amazon rainforest is located. Table This appears to be “logical” step be- V.4 reveals that the fastest growth cause the land in the Amazon basin is rates of cattle are precisely in these not suitable for harvesting commercial

Table V.4 Brazil: Cattle by Region, 1995-2005

Source: Sergio Schlesinger, Brazil Country Study

Wind Farm Cedit: O Tétard, Creative Commons

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monoculture crops such as soybean threatening not only the Amazon and sugarcane. Ranching is expanding rainforest itself, but the last remains in areas where land is cheaper and of the unique biome of the cerrado. competition with commercial crops can be evaded. Ranching is and will continue to be the main driver for deforestation in Amazonia, representing 80% of total deforested land, and this is being intensified by its displacement from land reallocated to soybean and sugarcane production.

Macroeconomic policies, in the monetary and fiscal front, as well as financial deregulation, have set the stage for this tragedy. In the context of intense inflationary pressures, high indebtedness, a restrictive monetary policy that curtails credit, financial liberalization and a fiscal policy preoccupied solely by generating a primary surplus, the vacuum left by the withdrawal of support for small scale agricultural activities, has been occupied by large consortia. These have brought about a radical trans- Top formation of the rural landscape Archive in Brazil, with deep and long last- financialred.com ing environmental consequences,

bottom Industry Credit: N Bildhauer, Creative Commons

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REFERENCES Rangel, A. Diagnóstico de C&T no Brasil. MCT, 1995.

Mark Delgado, N. (2008) Liberalização Comercial e Agricultura Familiar no Brasil. A Experiência das Décadas de 1980 e 1990. Grupo de Trabalho sobre Desenvolvimento e Meio Ambiente nas Américas. Documento de Discussão nº 25, 2008. Available at http://ase.tufts.edu/gdae/Pubs/rp/DP25DelgadoJuly08.pdf.

Delgado, N. A questão agrária no Brasil, 1950-2003. In: JACCOUD, L. (org.). Questão Social e Políticas Sociais no Brasil Contemporâneo. Brasília: IPEA, 2005, p. 51-90.

Jesus, A. Uma Análise da Balança Comercial no Brasil a partir do Plano Real. Centro Universitário de Desenvolvimento do Centro-Oeste, Luziânia, Goiás, 2007.

Veríssimo, M. e Brito, M. Liberalização da conta de capital e fluxos de portfólio para o Brasil no período recente. Universidade Federal de Uberlândia, 2004.

Ipea: País gasta mais com juro do que com saúde e educação. Invertia, 12/11/08.

Ministério do Desenvolvimento, Indústria e Comércio Exterior. Balança Comercial Brasileira, janeiro-dezembro de 2007.

CARVALHO, F. e SICSÚ, J. Controvérsias recentes sobre controles de capitais. Revista de Economia Política, São Paulo, v. 24, n. 94, p. 163-184, abr./jun. 2004.

Laan, C. Liberalização da conta de capitais: evolução e evidências para o caso brasileiro recente. Rio de Janeiro, BNDES, 2007.

Schlesinger, S. O grão que cresceu demais. A soja e seus impactos sobre a sociedade e o meio ambiente. . Rio de Janeiro. FASE, 2006.

Bruch, K. et. al. Barreiras à entrada no mercado brasileiro de sementes trans- gênicas. Ribirão Preto, SP. Sociedade Brasileira de Economia e Sociologia Ru- ral, 2005.

FONTE: CEPAL. La inversión extranjera en América Latina y el Caribe. Santiago do Chile: A Comissão, 2002. p. 33.

Complexos. Biotecnologia e agronegócio. MDIC. Disponível em www2.desenvolvimento.gov.br/.../51biotecnologiaAgronegocios.pdf, acesso em 05/05/09.

GASQUES, J. e VERDE, C. Gastos públicos na agricultura: evolução e mu- danças. Bahia Análise & Dados Salvador, v. 12, n. 4, p. 133-154, março 2003.

CASTRO, A. Estudo da competitividade da indústria brasileira. Competi- tividade na indústria de óleos vegetais. Nota Técnica Setorial do Complexo Agroindustrial. MCT, Campinas, 1993.

BELIK, W. e PAULILLO, L. Mudanças no Financiamento da Produção Agrícola Brasileira. Campinas. Unicamp, 2003.

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LAZZARINI, S e NUNES, R.. Competitividade do sistema agroindustrial da soja. PENSA/USP, 1998. Disponível em www.fundacaofia.com.br/pensa/ pdf/.../Vol_V_Soja.PDF

Rosemeire Cristina dos Santos, assessora técnica da CNA. Sojicultor banca fatia maior da produção. Gustavo Hennemann. Folha de São Paulo 22/4/2009.

Alda do Amaral Rocha. Sojicultor de Mato Grosso esvazia o bolso para financiar safra 2008/09. Valor Econômico, 16/03/2009.

Falta de crédito assusta produtores de soja do Mato Grosso. Agência Reuters, 16/03/09.

Cargill pretende expandir financiamento a produtor. Valor Econômico, 26/05/09.

CAMPOS, A. et. al. Integração nas Américas: uma abordagem a partir do rural, in Comércio internacional, segurança alimentar e agricultura familiar. Rio de Janeiro. Action Aid Brasil, 2001.

Agência Carta Maior. Movimentos sociais reagem ao “tratoraço” do agronegócio. Junho de 2005.

CONAB. Acompanhamento da safra brasileira de grãos. Safra 2007/2008. Oitavo Levantamento. Maio de 2008.

FAPRI. U.S. and World Agricultural Outlook. Food and Agricultural Policy Research Institute. Disponível em www.fapri.org/outlook2007.

WHITE, C. et al. Soy Expansion in the Brazilian Amazon Region: a local and global social and environmental dilemma. http://www.ambafrance.org.br/refeb/projets.

Ricardo Castillo, por Luiz Sugimoto em Soja, perigo nos novos fronts, Jornal da Unicamp, n° 249, maio de2004.

Schlesinger, S. e Noronha, S. O Brasil está Nu! O avanço da monocultura da soja, o grão que cresceu demais. Rio de Janeiro. FASE, 2006.

FERNÁNDEZ, A. Estudo de caso sobre a soja no município de Sorriso. FASE, mimeo, 2005.

Enio Rodrigo. No coração do gigante. Disponível em http://www.comciencia. br/comciencia/?section=8&edicao=42&id=508, acesso em 16/07/096

Cristina Caldas. A busca por números da devastação. Disponível em http://www. comciencia.br/comciencia/?section=8&edicao=42&id=515, acesso em 16/07/09.

Germana Barata. Megadiversidade corroída em ritmo acelerado. Disponível em http://www.comciencia.br/comciencia/?section=8&edicao=42&id=506, acesso em 16/07/09.

Greenpeace. A farra do boi na Amazônia, junho de 2009. Disponível em http:// www.greenpeace.org.br/gado/FARRAweb-alterada.pdf, acesso em 05/06/09.

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Costa Rica: Fiscal Policy and Payment for Environmental Services

Carlos Murillo Universidad de Costa Rica

Bridge Credit: Kady www.kadilea.es.tl

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his small Central American small fraction of what used to be its republic has maintained a treasure. From being 100% covered democratic and non-military by lush forests, Costa Rica has been Ttradition. It is also perceived as one of deforested and its soils degraded: only the most environmentally conscious 15% of the original forest remains and countries in the region. Although most of its soils have been seriously this country has a tiny fraction of to- affected by agricultural practices. tal landmass, it has 5% of the world’s Fortunately, national protected areas

C osta R ica : biodiversity. Its varied terrain, situated have multiplied and government in an isthmus, and its tropical and appears to be seriously committed to subtropical climate regimes make it preserving what’s left. However, these ideal for biodiversity. Costa Rica has remaining riches are seriously threat- also seen a succession of egalitarian ened by new patterns of growth and regimes and has a unique social wel- several economic forces. fare system providing health and education services. Although poverty Evolution has remained at a constant level over In the years after WWII, food-suffi- the past decade (20% of population is ciency was emphasized in the midst considered to live in poverty, accord- of the import substitution strategy. ing to data from the Inter-American GDP growth maintained satisfactory

F iscal P olicy and ayment Development Bank, IDB) and in- rates and per capita income improved equality in income distribution has steadily, while income distribution for E nvironmental S ervices increased. remained at equitable levels. But the structure of exports was skewed Although free trade zones are pro- in favour of coffee and when these viding a significant part of the coun- prices collapsed in the seventies, to- try’s hard currency needs, exports gether with the hike in oil prices, the continue to be based in commercial external deficit became unsustain- agricultural crops. Costa Rica con- able. In the early eighties Costa Rica tinues to be the region’s most impor- had already entered a pattern of high tant beef exporter to the US. Indus- indebtedness and 60% of its export trialization policies helped develop earnings were being devoted to debt some light industries (food process- service. As the debt crisis was deto- ing, chemical inputs, textiles, some nated, Costa Rica declared a mora- electronic components). Tourism torium, a measure that cut its access has now become the second larg- to new loans. This is when Costa est source of foreign exchange. The Rica turned to the World Bank and renewed emphasis on eco-tourism the IMF. may help make Costa Rica a show- case of development strategies that Costa Rica was the first country in are sustainable. But the beauty and Central America to undergo a process ecological variety of this country is a of structural adjustment under the

18, November 2011 93 MACROECONOMIC POLICIES, LIVELIHOODS AND SUSTAINABILITY

direction of the International Mon- dismantlement of the support system etary Fund (IMF) and the World for agriculture and industrial activi- Bank. The Costa Rican economy ties; promotion of exports. was presented as a success by both the IMF and WB, but the reality of The introduction of these changes its main indicators shows that this is was done not through a wave of not an accurate assessment. There are privatizations, the reduction of so- severe imbalances, both in the country’s cial investments or the withdrawal external accounts and internal ac- of the State from economic life. The counts. The trade deficit continues reform of State intervention took to expand, while the fiscal balance place through the gradual reduction continues in a fragile position. The in the fiscal appropriations to agen- traditional primary deficit has been cies that had intervened in economic reduced, but this may not be sustain- life. On the other hand, State mo- able, as recent trends show. Inflation nopolies were maintained in tele- continues to be a problem, although communications, insurance, energy there is some improvement in terms and alcohol. But in the case of the of variability of the price index. financial monopoly that had characterized the previous regime, Costa On the social front, real wages have Rica simply opened the market to maintained a disquieting downward external investors and this explain trend. Income inequality has wors- why State banks continue to be im- ened recently. In rural areas, many portant actors today. And during the small scale producers have been left 1990s, although social expenditures out of the official support programs oscillated, they maintained certain that promote exports rather than stability (especially in education and food security. Because some of the health), in contradiction with the crops that are export-oriented require view that fiscal balance had to be the large scale investments, this has also main priority. The sector that really led to some land concentration and suffered by fiscal austerity is related greater inequality in rural areas. to infrastructure, where roads, ports, bridges and other components have Today Costa Rica is one of the most seriously deteriorated. open economies in the region. This is the result of adjustment programs and The Costa Rican economy has main- IMF-sponsored structural reforms of tained an erratic performance since the 1980s. These reforms were inspired the 1980s crisis. Although the coun- in the principles of the Washington try has been able to avoid acute crises, Consensus examined above. The the main macroeconomic aggregates main features in these reform pack- have suffered of chronic instabil- ages were the following: financial ity. Figure V.9 shows GDP growth liberalization; the almost complete rates for the period 1991-2008 and

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reveals an inconsistent stop and go example) the concentration of pro- pattern. This is the consequence of duction in big foreign-owned firms structural problems that remain un- also implies high profit remittances. solved under the new strategic ap- In any event, the economy appears proach: concentration of exports in to be incapable of sustaining ade- a few number of agricultural prob- quate growth rates and good years lems, lack of adequate productive are inevitably succeeded by periods linkages between sectors, etc. of mediocre performance, with a growing deterioration of the trade In the new strategy, exports were balance. supposed to be the main growth engine. The two components that Costa Rica’s exports have been based made the strongest contribution to on its natural resources and labour. growth in 1992-2008 were the in- Under the new strategy with an open dustrial and the services sectors (22% economy and export promotion, it and 23% respectively). And the con- has been trying to diversify markets tribution of the free trade zones to as well as products. However, these the growth of the manufacturing efforts have not yet crystallized in a sector has increased from 11% in comprehensive structural transforma- 1992-1996 to 73% in 2002-2006. tion and the export base continues to The concentration of exports to the rely heavily on the natural resource US market remains a serious prob- base and low cost labour. In the six- lem. Finally, in several commercial ties, 60% of exports earnings came crops (macadamia or pineapple, for from commercial crops (coffee and

Figure V.9

Source: Carlos Murillo, Costa Rica Country Study.

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banana). In 2008, 52% of exports came from free trade zones where in-bond industries are based, but commercial crops such as pineapple and melons continue to play an important role in exports. These crops have their own environmental costs (and human health costs) due to their use of agrochemical inputs.

The in-bond industries do require better trained labour inputs. How- ever, it is rather misleading to think of these exports as high technology for several reasons.⁷¹ First, the definition of R&D intensive industries is a product-based definition. This means that the R&D component is related to the final product, not to Terrace Field, the segment of the production pro- Yunnan China. Credit: J Gao, cess that is carried out in the free Creative Commons Figure V.10

Source: Carlos Murillo, Costa Rica Country Study

⁷¹ This applies to the Mexican experience, as we shall see below.

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trade zones. Second, typically in external accounts (current account maquiladoras or in-bond industries deficit, deteriorating terms of trade, the assembly operations are not re- high indebtedness, exchange rate lated to any meaningful technologi- volatility). The new strategy based cal development process in the host on exports and economic open- country. Costa Rica is no exception. ness required a different approach to There are some spill over effects monetary policy. from in-bond industries that may lead to some technology dissemina- The external imbalances were at- tion, and even some innovation, but tacked through a crawling peg re- the general experience here is that if gime of mini-devaluations that this is not linked to a well designed helped maintain a real exchange val- industrial policy, in-bond industries ue that would help exporters without will not lead to industrialization and unduly contributing to inflationary technological development. pressures. Simultaneously, measures were adopted to prevent speculative Monetary Policy exchange operations against the co- After the crisis in 1980-1982 Costa lon, the local currency. The central Rica was marked by severe macro- bank’s intervention led to a policy economic disequilibria, both on the of accumulation of foreign currency domestic front (high inflation, un- reserves that generated a high cost. employment, high and unsustainable The struggle against inflation had fiscal deficits) as well as the country’s mixed results in the 1980s, mostly

Figure V.11

Source: Carlos Murillo, Costa Rica Country Study

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due to the devaluations of the ex- to note that although the contribu- change rate. It showed better marks tion of in-bond industries to the in the 1990s, with less volatility, al- trade balance is, by definition, posi- though it still remained close to the tive, it is not enough to compensate two-digit level. the large deficit generated by all the other sectors of the economy. The new policy approach included the deregulation of the capital ac- In 2006 Costa Rica adopted a new count and the modernization of the approach to monetary policy. The financial sector was pursued as a high sole objective of the central bank’s priority objective. It was thought that posture is to maintain price stability and greater competition would bring reduce inflation to one digit levels. A about better services and a wider system of bands within which the ex- gamut of assets that would be avail- change rate could vary was established, able for the public. Also, this would allowing the central bank to inter- attract greater flows of foreign direct vene within that range to maintain investments. But the central bank stability and order in the currency had to maintain a delicate balance in market. As a result, the exchange order to prevent creating perverse rate appreciated by 10.7%. Inter- incentives to short term speculative est rates dropped as the bank chose portfolio capital flows. not to create incentives for speculative capital inflows (this was also due During this period, the trade bal- to less demand for funds to cover ance maintained a growing deficit the fiscal deficit as revenues had -in that attained alarming levels (18% in creased). As a result, credit availability 2007). In this context, it is important for the private sector increased (by Figure V.12

Source: Carlos Murillo, Costa Rica Country Study

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39%), maintaining investment and Fiscal Policy consumption at high levels. The country has maintained a chronic primary deficit that has been basically But the global crisis of 2008 slowed covered through new public debt down the economy and inflation that increases servicing costs. This reached 13.4%, significantly above puts pressure on interest rates and the 8% target. According to the this has generated distortions that central bank, there are two main act as incentives for speculative in- causes for this. First, as interest rates vestment. The primary deficit in dropped in the developed countries, Costa Rica has been the result of a capital inflows increased and this af- weak tax collecting system as well as fected money supply. Second, in the a skewed tax system. first two quarters of 2008 prices of certain basic inputs (food stuffs and The open economy model has failed fuel) rose significantly more than to provide adequate fiscal revenues. most forecasts had predicted. To this Perhaps this is a reflection of some we must add the fact that bottle- of the measures introduced in the necks in several markets may have structural adjustment programs in given firms and traders the power to the eighties, when tax concessions set and manipulate prices. and subsidies were allocated to private

Credit: Miguel B. Sánchez Wikimedia Commons

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enterprise linked to tourism or ag- The structural adjustment programs ricultural exports. The fiscal deficit implemented in Costa Rica under has prevented Costa Rica from car- supervision of the IMF and World rying out badly needed investments Bank were supposed to lead to lower in infrastructure. debt levels. The debt burden actually increased, even in spite of the Recently, tax reform has focused on fact that Costa Rica was an active changes in income taxes and in the participant in the Brady Plan. In the transformation of the sales tax into a nineties new debt reductions were value added tax. Improved tax col- conditioned to the implementation lection systems have increased fiscal of adjustment measures and adher- revenues significantly (24% and 27% ence to an open economy model growth in 2006 and 2007 respectively). that intensifies the dependence on This had favourable repercussions, export markets and loans. but the international crisis in 2008 brought about slower growth and After the 1982 crisis, one of the most a fiscal revenues dropped by 28% in important challenges for Costa Ri- 12 months while expenditures in- ca’s economy has been the manage- creased by 4%. The small primary ment of its large public debt. This surplus observed in 2007 was rapidly has weighed heavily on the stability wiped out. of macroeconomic policy, growth

Chicago Mercantile Exchange. Credit: L Noise, Creative Commons

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and social welfare. As a result of the due to its social welfare programs. renegotiation of external debt, the The structural adjustment programs ratio of consolidated public debt to of the eighties brought about a re- GDP dropped from 95% to 51% duction of 17% in real wages (1980- in 2006 (external rate to GDP was 1990) and increased economic po- 16.3% in 2005). Most of the finan- larization in the Costa Rican society. cial resources to service this debt And although employment started were found in the domestic market. to improve, it is also true that the The central bank has maintained a jobs that were created at the time debt/GDP ratio close to 11% during were poor quality jobs, with greater this period, mostly due to the ster- instability and few benefits. Clearly, ilization of incoming capital flows the burden of the adjustment process which has been perceived as in- fell unduly on the poorest segments dispensable to keep money supply of Costa Rica’s society. within the targets established by the central bank every year. Also as a result of SAPs many small scale farmers were reluctant to give Poverty and up their traditional crops which pro- Inequality vided food security and lost access to Until the 1980s Costa Rica’s history government support for export crops. was one of an egalitarian system and The non-traditional (i.e., commer- real wages had been constantly on cial) crops that were favoured at the the rise. The country had also been time required infrastructure invest- able to maintain a good pattern of ments many farmers were caught in income distribution during decades a difficult situation and either sought

Figure V.13

Source: Carlos Murillo, Costa Rica Country Study

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off-farm income generating activi- to the development of new ones. ties or even sold their plots. This has several beneficial effects, in terms of better soils and water man- Poverty has remained at a constant agement, air quality, and enhanced 20% level and recently inequality started biodiversity. This instrument is also to increase. Although the Gini coef- an important tool in attaining the ficient maintained a low level during Carbon Neutral position that Costa most of the 1990s, it started to de- Rica has defined as a national goal by teriorate after 1997 and peaked in 2021. Finally, the program is being 2001. Some progress was made after dovetailed with country level efforts that but things went wrong again to coordinate policies in the context in 2005 and it is likely that austerity of REDD, the set of mechanisms for measures to counter the effects of reducing emissions from deforesta- the 2008 global financial crisis will tion and degradation that have been lead to further deterioration in this the object of the Kyoto Protocol’s indicator. COP 13 (Bali), COP 14 (Poznan) and that will be taken up in COP 15 The environmental implications of (Copenhagen, December 2009). poverty cannot escape policy makers. Rural poverty will undoubtedly The program is based on the envi- undermine the long term viabil- ronmental services supplied by for- ity of all national protected areas. ested areas (including plantations) A sustainable conservation policy instead of a direct subsidy to invest- based on the creation of biodiver- ments in this sector. The Program sity islands in a sea of rural poverty is aimed at pre-defined priority ar- is doomed. Compatibility between eas which cover more than 29,800 agricultural policies and long term square kilometres, a surface equiva- environmental goals has to be a core lent to 80% of Costa Rica’s territory component of the national develop- (51,000 square kilometres). ment strategy. Payments are made by the imple- Payments for menting agency FONAFIFO (Fon- Environmental Services do Nacional de Financiamiento and Macroeconomic Forestal) to land owners who adopt Policy healthy forest resource management In 1997 Costa Rica launched an in- practices, including agro-forestry novative program designed for the and sustainable forest management. long term conservation of its forested The program covers four types of en- areas. The Program for Payment of vironmental services: carbon emis- Environmental Services is directed sions’ mitigation, hydrological ser- to the improvement and protection vices, biodiversity conservation and of existing forested areas, as well as scenic values. A parallel objective is

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poverty alleviation. Priority is given patterns, choosing cattle produc- to projects that are located in natural tion which had the highest profit- protected areas, biodiversity corri- ability level at the average cost of dors, land belonging to indigenous renting one hectare for grazing. In groups and areas with low social de- more recent years, payments vary velopment indicators. Also, small and depending on the type of contract. medium producers have precedence In the case of conservation projects, over other projects and the surface payments amount to $816 USD per per project cannot exceed 300 hect- hectare, with a schedule of payments ares. Plots with less than 50 hectares (first payment is 50% of total amount, receive 50% of the payments in ad- with 20% in the second year and vance while protection projects re- 10% during each of three years). ceive 20% in advance. Approximately 90% of total resources are concentrated in projects of this This Program for Payment of Environ- type, as can be observed in Figure mental Services (PPES) has allowed for V.14. Second, projects for protec- the reforestation of 400,000 hectares tion purposes involve payments are in more than 8,300 projects in 1997- $320 USD per hectare for five years, 2008. The government has already and owners cannot modify the use allocated 90 million USD to this proof their land. Only 9% of payments gram. In the beginning, payments in the PPES are allocated to these in the program oscillated around projects. Finally, projects for natu- $22 USD - $42 USD per hectare a ral regeneration in former grasslands year. This amount was determined involve payments of $205 USD per in accordance to alternative land use hectare.

Figure V.14

Source: Carlos Murillo, Costa Rica Country Study

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This program is financed through a facility. A new phase of this is be- special tax of 3.5% on all sales of hy- ing implemented today with another drocarbon fuels. This is, in fact, an special non-recoverable loan of $30 environmental tax explicitly directed million USD and a special contribu- towards the improvement of forests. tion from the World Bank of $10 Average annual revenues generated million USD. This loan had some con- by this tax amount to $13.8 million ditions related to the participation of USD. These resources are insufficient the private sector in order to ensure to ensure an adequate to the demand the financial sustainability of the pro- received from the owners of forested gram. As of today, revenues from the lands. An estimated 38,000 applica- private sector do not represent more tions have remained unattended. In than 1% of total revenues. 2004 more than 800,000 hectares of applications were pending (Engel, There are several problems with the Wünscher and Wunder 2009). resource management aspects of PPES. One is related to the resource The program was also strengthened in management aspect of the program. 2001-2005 by a special non-recoverable PPES is focused on conservation, loan from the Global Environmental not on sustainable production. This

Nursery Credit: Archive Centro de Comunicación y Prensa MAG

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is why although the program makes it is to become a core element in the a positive contribution to the expan- long term strategy for sustainable de- sion of forests, the forest-products velopment, it has to step up its activities sector is suffering from an acute deficit. and increase its coverage. Resources Another problem is related to tar- from international agencies and the geting and efficiency issues (recent- private sector do not appear to be able ly addressed by the work of Engel, to cover the costs of expanding this Wünscher and Wunder 2009). The program. main conclusion from their study is that the amount of environmental During the past decade, Costa Rica’s services achieved with a given con- government has been expanding its servation budget can be substantially expenditures in environmental policies. enhanced through improved tar- However, current trends indicate that geting. But unless resources for the in the short term fiscal policy will con- PPES are increased significantly, the tinue to face a significant deficit. This long term perspective is rather bleak. means that expanding resources for the No matter how much efficiency is forest sector and for the PPES will extracted from limited resources, the remain an elusive goal. In fact, as a re- scale of the problem will defeat ef- sponse to the downturn of the econo- forts to ensure long term conserva- my (which reduces tax and non-tax fis- tion of Costa Rica’s forests. cal revenues), the Ministry of Finance is cutting spending. It remains to be seen The other problem is related to lack if appropriations for the PPES remain of resources and thus, to macro- untouched or if they can increase. economic policies. Clearly, given the number of applications and the The combination of fiscal constraints surface that is eligible for support and the contraction of credit may through this program, the amount prove dangerous for the program of resources is too small. Consider and for Costa Rica’s forests. Today, the the following. The total eligible sur- competition between alternative land face (priority areas) is 28,000 square uses is clearly disadvantageous for kilometres. Until 2004, total surface forests. A comparison of cost structures under contract in this program was and profits associated to diverse land 2,300 square kilometres, or less than uses reveals that commercial crops 8.5% of the total eligible surface. and cattle are substantially more These calculations reveal that the profitable than forested land. - Fore program is still a marginal component gone benefits also are skewed against of Costa Rica’s policies. Evidently, if conserving forested land.⁷²

⁷² The RATIOS values of land devoted to pineapple, banana and ranching are 5.2, 3.5 and 2, respectively, while the value of forested land is 1.5. All values are in millions of colones per hectare per year. Foregone benefits are 274,000, 108,000 and 34,000 colones per hectare every year if forested land is conserved instead of shifting to pineapple, banana or ranching, respectively.

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THE CONFLICT BETWEEN Formally, a government is supposed to MACROECONOMIC POLICY comply with the following condition: OBJECTIVES AND ENVIRONMENTAL pst =( rt - gt )dt-1 (1) POLICY OBJECTIVES The relationship between debt sus- where tainability and fiscal policy is at the ps = primary surplus/GDP heart of the future of the PPES. If the r = real interest rate private sector and the international g = GDP real growth rate community are unable to ensure d = public debt/GDP that enough resources are allocated to the PPES, then fiscal expenditure The dynamics of this relation between will have to continue providing the primary surplus and debt service can be bulk of the resources needed here. analyzed through the following relation: The restrictions are significant. The following formal analysis used by dt =( pst - st ) + (r - g)dt-1 (2) the Central bank of Costa Rica can help explore how this may play out where s is equivalent to the seigniorage (BCCR 2007). (defined here as the rate of change of

Credit: Archive financialred.com

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Strip Mining in Burial Grounds, India. Credit: US NARA Creative Commons the monetary base to GDP). Equa- tion 1.2 shows that the ratio of public debt to GDP will tend to increase (decrease) when the real interest rate paid by the public sector for its debt is greater (less) than the real rate of growth of GDP and/or when the relative levels of the primary surplus in terms of GDP are inferior or greater. According to the analysis of Costa Rica’s central bank, these indicators help reveal the vulnerability of the public debt position in case of external shocks in interest rates or downturn in growth rates. Accord- ingly, the central bank insists on the need to intensify efforts to maintain an adequate primary surplus. And this Soweto Township. Credit: Matt, will be achieved by cutting or stabi- Creative Commons lizing current fiscal expenditures.

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Ecuador: Environmental Deterioration and Monetary Policy

Pablo Samaniego Independent Consultant Quito, Ecuador

Hypsiboas Calcaratus (Yasuni). Credit: G Gallice, Creative Commons

108 18, September 2011 Ecuador

cuador is a megadiverse country 1.7% in 2000-2005. The World Re- with more than 20,000 species sources Institute estimates defores- of plants, 840 species of reptiles tation rates in 1980-1990 at 0.4%. Eand amphibians, 341 species of mam- This means that deforestation rates mals and more than 1,500 species of have intensified in the past decade. birds. Its landscape is varied, forming a It is estimated that logging and oil rich tapestry of ecosystems, from tropical exploration have contributed to this E cuador : rainforests and inter-mountain valleys loss of forested land: only 15% of to the famed marine ecosystems of Ecuador’s primary rainforests. The the Galápagos Islands. The range of the coastal lowlands in the West have Andes is both a majestic and beautiful been thoroughly deforested as a re- scenery, and it is also an important sult of illegal logging. source of freshwater. During the last three decades of the But environmental problems abound XXth Century, Ecuador followed in this beautiful country. Ecuador two different growth and develop-

and M onetary P olicy has the highest deforestation rates in ment strategies. The first one started decades, with a tremendous impact in 1970 and relied heavily on crude oil on biodiversity. According to the exports as a source of fiscal revenues. United Nations Millenium Indica- This period was also marked by the tors the deforestation in 1990-2000 continuation of a process of industrial- was 1.5% per year, and this rose to ization via import substitution. The E nvironmental D eterioration

Credit: Crusier Wikimedia Commons

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second strategy starts with the in- strategy via import substitution. The ternational debt crisis of 1982 and “Dutch disease” syndrome didn’t marks the beginning of neoliberal take long to hit Ecuador’s economy: policies in the country. Figure V.15 the exchange rate remained overvalued shows that this period is marked by by an average of 40% between 1970 crises, two wars with neighbouring and 1987. But this was mitigated by Peru (1981 and 1995), as well as several the strict implementation of tariff and natural disasters. It culminates in the non-tariff measures that increased deepest and most severe crisis in the effective protection in activities such country’s history. as agro-industries, textiles, metal and chemical industries. Although The economic boom of the seventies imports of capital goods increased redefined consumption and production rapidly and the country embarked in patterns in Ecuador. The extraction an unprecedented industrialization of crude oil was a critical event for effort, the backward linkages of the this small economy as it was under- industrial system remained weak. going the decline of one of its main exports, bananas. Oil represented the op- The State played a decisive role in portunity to launch an industrialization guiding this process and public

Figure V.15 Ecuador: GDP Growth and GDP Per Capita (Constant USD 2000)

Source: Pablo Samaniego, Ecuador Country Study

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spending represented 19% of GDP The end of the oil boom also exacerbat- by 1977. However, severe economic ed the struggles that had been taking and political problems subsisted, place for control of oil revenues. In with the State relying on a system of 1983, as a result of these struggles, clienteles and fiscal structure marked the State approved a program for the by inefficiencies. As the mismatch restructuring of a significant portion between revenues and expenditures of the private sector’s external debt. intensified, Ecuador’s debt increased The program converted liabilities in at a very fast rate (more than 80% foreign currencies into sucres, the in 1977) and international loans rose domestic currency, with the Central from USD 300 million in 1971 to Bank becoming the external debtor USD 8,000 million in 1985. and the internal creditor. Of course there are several very serious prob- Monetary and exchange rate policy lems with this, but one heavy irony had been passive until 1980. Subsi- here is that as fiscal expenditures were dized interest rates for productive suffering drastic cuts, the Central Bank investments remained in place until was subsidizing the private sector. the mid-1980s. But because of the Figure V.15 shows that growth in appreciation of the exchange rate that period was mediocre and GDP and high domestic spending (by per capita stagnated. Inflation -ac both the public and private sectors) celerated and the various external inflation accelerated during this pe- shocks led to the first transforma- riod: in 1971 is had been limited to tions of the development strategy. 3.5%, but ten years later it was already reaching 18%. In the period 1982-2000, when the Ecuador’s economy adopted the USD Debt Crisis, External as its currency, a common pattern Shocks and Instability persisted: the exchange rate remained As the international context dete- the most important instrument of riorated in the seventies, prompting macroeconomic policy. But this re- steep hikes in interest rates accom- sponded to conflicting objectives: the panied by the collapse in the price of control of inflation and the competi- oil and other commodities, Ecuador tiveness of exporters. In the end, it was was forced to undergo a dramatic the lobby of exporters that prevailed adjustment. The main component and the exchange rate remained un- of this adjustment was a sharp cur- dervalued for much of this period. tailment of public expenditures, and This increased the cost of servicing this would lead to the dissolution of the external debt and stimulated in- the role of the State as the driver and flationary pressures. But it became regulator of the development strat- clear that the exporters’ lobby had egy. Its capacity to provide basic so- won the battle over how to distribute cial services also started to crumble. the costs of adjustment.

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In 1986 the sector level policies for the macroeconomic policy objective industrial development started to of price stabilization. In that period be dismantled and a growth model some progress was made with respect fundamentally based on extractive to the Ecuadorean version of the “twin practices. Because the industrializa- deficits”: the external accounts and tion effort was still in its infancy, the public finance. However, inflation pressure of increased exports fell di- remained at very high levels (50%). rectly on products that are close to the natural resource base. The envi- With respect to the exchange rate, ronment started to suffer the impact a system of so-called dirty flotation of this intensification of usage and was established to replace the old extraction rates in the old commer- mini-devaluations scheme. The ob- cial crops (coffee, bananas, cocoa) jective was to stabilize inflationary and in new sectors such as shrimp, expectations and implement a policy fisheries, flowers, African palm tree, of real exchange value that would etc. These crops expanded the agri- promote exports. Although this ob- cultural frontier. Particularly dam- jective was partially attained, it was aging was the expansion of shrimp based on a narrow definition of the aquaculture projects which destroyed notion of comparative advantages. mangrove forests at alarming rates.⁷³ In the end this meant that indus- All industrial activities declined dur- trial exports declined, and biomass ing this period. The reprimarization exports sustained this effort during of the economy was clear: if we ab- the period (Figure V.16). Directly stract from oil extraction and related related to this is the expansion of the activities, the economic structure of agricultural frontier due to low gains Ecuador in 1995 resembled the one in yields. Agriculture’s share in GDP it had in 1970. increased, another example of the reprimarization of the economy. At the end of the eighties and beginning of the nineties, the new con- Ecuador’s economy not only shift- servative strategy was being con- ed towards greater pressure on the solidated. Privatizations proceeded natural resource base, it also benefit- forward, banking activities were ted the financial sector more than deregulated and, most important, any other sector of the economy. the capital account, the most impor- Speculative activities found new tant component in the Washington and powerful incentives in the new Consensus set of principles, was lib- style of monetary policy. Interest eralized between 1992 and 1996. rates remained at high levels and Trade liberalization was driven by thus, financial charges could only be

⁷³ Between 1984 and 1987 shrimp farms grow at an average rate of 9.6% and hectares of mangrove forests declined rapidly. In 1969 Ecuador had 203,000 hectares of mangrove forests. By 1987 this had dropped to 175,000 hectares.

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Figure V.16 Ecuador: Material Flows of Exports

Source: Pablo Samaniego, Ecuador Country Study.

covered in activities with very high financial transactions. This led to a profitability levels. All of this led to further decrease in bank deposits a greater weakening of the real sec- and weakened the banks’ position. tors of the economy, especially those In the last quarter of 1998 Ecuador’s related to manufacturing industries. largest bank had to be intervened and Financial firms were the big benefi- the deposit insurance was activated. ciaries in these years, until the col- This was not enough and in a few lapse of the economy. months, a full blown bank crisis developed: a bank holiday was imposed, In 1997 a strong El Niño event took freezing all withdrawals of deposits. In place, affecting crops in the coast- the end, the banks themselves pressed lands and severely damaging the hard for the depreciation of the sucre country’s physical infrastructure. because they had already transferred Traditional exports dropped and the their resources into dollar denomi- non-performing loans to agricultural nated assets. The long debated mea- firms increased significantly, affect- sure to adopt the USD as Ecuador’s ing the financial position of banks. currency was adopted. IN this mo- Because new and extraordinary ex- mentous decision the advice of the penditures had to take place to repair entrepreneurial groups in Guayaquil the country’s damaged infrastructure, weighed more than technical rea- a new 1% tax was established on all sons or even the advice of the IMF.

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The sad irony here was that the efforts would threaten the country’s abil- that had been deployed to stabilize ity to future economic growth. The the economy, sometimes through the comparison of the monetary and contraction of real wages and/or the physical trade balance shows how drastic reduction of public spending the external sector responded to in health, education or infrastruc- these years of crisis (Figure V.17). ture, were simply brushed aside as the The measure in physical terms is an country experienced its worse crisis indicator of how monetary flows are in a century. GDP dropped by 6.3%, supported and provides an idea of the exchange rate suffered a devalu- the effort deployed in an economy’s ation of 196% and inflation reached natural resource base to maintain a 78% in 1999. In terms of per capita given level of exports. income, the country moved back at least ten years. Because the industrial The “Dollarization” of sector had been seriously weakened Ecuador’s Economy and and could not respond in this crisis, the Its Effects on the economy had to rely more than ever Natural Resource Base on its sectors that were close to the In January 2000 Ecuador adopted natural resource base. The environ- the US dollar as its national currency, mental deterioration that followed its domestic medium of exchange

Figure V.17 Ecuador: Trade Balance in Monetary and Physical Terms

NOTE: The physical balance is measured in metric tons (exports minus imports) Source: Pablo Samaniego, Ecuador Country Study.

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and its official unit of account. This This problem becomes more severe measure was the response to the deep if imports are inelastic, for example, crisis in which the economy had when the productive apparatus is fallen, with hyperinflation, a severe heavily dependent on imported raw contraction of the real economy, a materials, intermediate inputs and large fiscal deficit, the meltdown of capital goods. the sucre, the banking system under government intervention and the In the years following the dollar- country in arrears with respect to ization inflation showed a slow but private creditors and bondholders. constant downward trend. This was The dollarization of the economy due to the effect of international was supposed to bring about the sta- prices because Ecuador is a small bilization of these elements, but it open economy and the elimination did not take place without a serious of the domestic currency forced do- political crisis. The president was mestic prices downward. However, deposed a few days later and a new interest rates remained at a very high president was sworn into office - af level for a longer period of time (in ter a very intense period of political 2008 it was still common to find ac- haggling and negotiations. tive rates of 80%, of course, in USD). In spite of the reduction in infla- The immediate effect of dollarization (for example to 1.46% in 2005), tion was that Ecuador lost its control interest rates for productive loans over monetary policy. Once this maintained their high levels in real measure is adopted, the money sup- terms. These real interest rates have ply depends on what happens in the extremely negative effects on pro- current account balance. A deficit ductive investments because very few means that endogenous money sup- of them have the profitability required ply will have to decrease, while the to cover these financial charges. only way in which the expansion of the money supply can take place is Dollarization has another effect on the through a current account surplus. structure of the economy: it favours In this context, the price level and the trend towards greater pressure on interest rates depend crucially on the the natural resource base. The data in net balance of the current account. this study shows that land use pat- What this means is that Ecuador lost terns changed, intensifying agricul- the capacity to use monetary policy tural practices that increase pressure in a counter cyclical manner. For on soils and biodiversity. One of the example, if the economy goes into critical problems of dollarization in a recession and its export sector is Ecuador is that under this special ex- negatively affected, it is impossible to change rate regime stagnant or de- provide with adequate credit and the clining productivity is compensated situation moves into a vicious circle. by putting extra pressure on natural

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resources and the environment.⁷⁴ may not be even enough to cover Data shows that the dollarization led the amount of domestic transactions. to a greater reprimarization of the As Figure V.18 shows, this is a risk economy and of exports (Falconi that needs to be taken into account, Benítez 2005). The crucial point here considering the performance of the is not the intensification of the usage non-oil trade balance. rates of natural resources in order to obtain hard currency for the trade The private sector is not playing a balance, but that this is related to the positive role here, as can be observed need to increase the monetary base. in Figure V.18: the performance of This is not a problem that can be the non-oil sectors of the economy is understood through the narrow lens not making a positive contribution of another “trade and environment” to the trade balance. The economy study, but needs to be understood as has faced a favourable international part of one of the main components context because of the high oil prices of macroeconomic policy. that prevailed before the 2008 crisis. In addition, migrant workers’ remit- The sustainability of the dollarization tances have been a major contribu- strategy is called into question if we tion to the external accounts (they observe that in an extreme case, the tripled since 2000). Clearly these flow of cash into Ecuador’s economy factors cannot be the pillars of a long

Figure V.18 Oil and Non-oil Trade Balance as Percentage of GDP

Source: Pablo Samaniego, Ecuador Country Study.

⁷⁴ The flows of foreign direct investment have followed and strengthened this pattern. More than one third of FDI flows go to the primary sector, without counting investments in agri-business.

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term development strategy. In fact, standpoint, and the economy could the dollarization of the economy has spiral into a depression. increased its vulnerability because imports of durable and non-durable The decision to adopt the USD as consumer goods have been growing the domestic currency was accom- at faster rates since 2000. panied by legislation that imposed maximum ceilings on the growth of The global financial crisis of 2008 public expenditures and a reduction poses new challenges. The current of the public sector’s external debt. account deficit will be directly trans- In this manner, fiscal policy became mitted into the economy through “legally” pro-cyclical and together monetary channels. This means that with dollarization became one of two bank deposits may suffer a contrac- constraints on using macroeconom- tion, and with this, credit will also ic policy in a counter-cyclical way. suffer a setback. Thus, if the external And although in recent years, Ecua- deficit is such that the money supply dor’s external and fiscal accounts had starts to contract, Ecuador’s econo- positive signs, there were four im- my may enter into a period of defla- portant factors behind these results: tion until a new balance is attained. the price of oil in the international This would of course be disastrous market, the remittances by migrant because employment would fall, workers, a depreciation of the USD many activities would become non- vis-à-vis other currencies (in the pe- viable from the purely cost/benefit riod May 2006 and September 20008)

Tungurahua Volcano Credit: D T Costales, Creative Commons

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and, finally, the flows of foreign direct investment. These four factors contributed to the elimination of the country’s twin deficits, but this was a temporary achievement and there are signs that this is simply not sustainable, especially in the context of the global financial crisis.

Foreign direct investment has flowed traditionally to oil production, but more recently they have been associated to the expansion of production capabilities that have important en- Credit: Archive vironmental implications. In 2004, www.energiasrenovadas.com the new pipeline for heavy crude oil (OCP is the acronym in Spanish) This project is the culmination of was completed with a record invest- a process that started in the nine- ment of more than 700 million USD ties seeking to give stronger guar- in one year. The new feature here is antees to private investments in this that the OCP is owned and operated sector. As a result, the share of the by private sector firms that extract State-owned oil company, Petroec- crude oil in Ecuador’s northeast region. uador, in total production dropped

Figure V.19 Ecuador: Profitability remittances by FDI in Oil Sector

Source: Pablo Samaniego, Ecuador Country Study.

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to 47.6%, while private sector firms In 2008 these remittances show a down- accounted for 52.4%. The public ward trend. This is the consequence sector’s stance in oil production was of several government measures ad- weakened through a reduction of its opted since 2007. In that year, the investments while private foreign government of President Rafael Cor- firms were allowed to gain a stron- rea started the renegotiation of several ger foothold in Ecuador’s oil sector. important contracts with oil firms and Although the public sector gained as a result, fiscal revenues increased less from oil production, the external significantly. This process was consoli- accounts improved, albeit temporar- dated by the National Constitutional ily, and this allowed the economy to Assembly (charged with drafting a new maintain the dollarization format. Constitution for Ecuador) established But in fact, this has led to setting several special funds for oil revenues up a scheme in which a greater per- with direct implications for the cen- centage of a key non-renewable re- tral government’s budget. Because of source: profitability remittances for these measures, the government was FDI in this sector increased by an able to obtain significant increments astonishing 97% in 2003 and 62% in its resources: in 2008 its resources in 2004, moving from 1.2% to 3% of increased by 56.8% (their share of GDP in 2004. The counterpart of this GDP rose from 29.4% to 40%). This has been the increased flow of mate- boom in non-tax revenues is only rials and energy in what can be aptly comparable to the years in which described as extreme extractivism. Ecuador started its oil exports.

Figure V. 20 Ecuador: Revenues and Expenditures of Public Non-Financial Sector (Millions of USD)

Source: Pablo Samaniego, Ecuador Country Study.

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To summarize, Ecuador’s economy 21% to more than 36% between 2002 was able to expand its monetary base and 2008. During the same period, because of the positive results in external remittances from migrant workers accounts. This was mainly due to the averaged 6.6% of GDP, a level that extraordinary growth of exports which surpassed the surplus in the trade as a percentage of GDP increased from balance (1.4%) and FDI (2.1%).

Figure V. 21

Source: Pablo Samaniego, Ecuador Country Study.

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Physical Flows in terms is found in the evolution of oil Ecuador’s Economy prices. But the prices of other com- The methodology based on physical modities and raw materials (bio- or materials’ flows is used here to ex- mass) also experienced substantial amine trends and assess the long term increases. Especially interesting is sustainability of the current econom- the fact that raw materials exports ic model. Data from Ecuador’s Cen- increased at the annual average rate tral Bank covering the period 2000- of 5.1% per year. This is mostly ex- 2008 is analyzed.⁷⁵ These exchanges plained by the expansion of crude are measured for four categories of oil exports, but also by biomass ex- goods: raw materials (fossil fuels, min- ports, especially from fisheries and erals and biomass), semi-manufactured forest products. Ecuador’s economy products, finished products and other transferred energy, nutrients, water non-classified goods.⁷⁶ and biomass to its trade partners in order to obtain the currency needed In general terms, the data for 2000- to keep functioning. But in value 2008 shows that, in physical terms, terms, their contribution is only 79% the vast majority of exports is con- (and this will go down due to the stituted by fossil fuels and biomass. drop in oil prices). All of this means The structure of exports by weight in that Ecuador’s dollarization policy is 2000-2008 shows that 86% if these based on the continuous flow of in- exports are primary raw materials and creasing doses of raw materials and only 9.4% by semi-manufactured primary products, with their severe products. Raw materials gained 1.6 ecological footprint, in order to sus- percentage points during this period, tain current levels of money supply. while finished products increased by The contrast between the physical 0.4 percentage points. Other products, and monetary balances reveals the mostly biotic in origin, increased absolute supremacy of raw materials their share. During this period, the and provides additional information share of semi-manufactured goods on the requirements of the economy to was diminished. subsist in the context of dollarization and fiscal stringency. Raw materials One of the key factors behind the provide a favorable balance (surplus) dramatic rise in exports in value and this compensates the monetary

⁷⁵ The analysis carried out in this study is similar in all respects to the assessment of Eurostat measuring the exchange of physical flows between economies. Data comes from the Central Bank and is processed with the methodology of the European Union (European Commission 2001, Economy-wide material flow accounts and derived indicators: A methodological guide, Office for Official Publications of the European Communities.

⁷⁶ One obvious limitation of this methodology is that it does not differentiate between one ton of wood and one ton of crude oil. But if economic values are used to solve the problem of additivity, the problem of distinguishing between the different environmental features of goods remains unsolved.

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deficit that is generated by the oth- economy will also come from the er products. It must be emphasized side of a restrictive fiscal policy. Now, also that this result in the past few in an economy with a weak and years is due to the evolution of the non-competitive manufacturing sec- price of oil and other products (Af- tor, exports will be provided by the rican palm), so this vulnerable situ- natural resource base and usage rates ation could be reversed in the con- will intensify in a syndrome of an text of the global financial crisis. In extractive economy. Also, because addition, the enormous deficit of interest rates are not determined in a the raw materials’ physical balance market of savings and investments, the (Figure V.22) is just the most ap- surplus in the external accounts does parent sign of the predicament of not automatically mean that inter- Ecuador’s natural resource base: the est rates will go down, that credit ecological footprint of these exports will flow and that consumption and is something that needs a careful as- investments will increase, generat- sessment. ing employment and growth. The dependency on raw materials is also In a dollarized economy the need to observed through extraction rates. If expand exports is not only an issue of we compare the decade of the nineties trade policy. It is foremost a question with the years of the period 2000-2007 of monetary policy. And because we observe an increment in extraction the money supply will depend not levels in all of the categories we have only on the balance of the current been considering here. In fact, these account but also on the size of the greater extraction rates are required to primary surplus, the pressure on the generate the expansion of the money

Figure V.22 Ecuador: Physical and Monetary Balance of Commercial Transactions (Millions USD and tons)

Source: Pablo Samaniego, Ecuador Country Study.

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supply. Finally, all of this will affect both Together, these materials and those the private and public sector, espe- for construction industry and industry cially if the latter relies on such items explain 84% of the annual variation as crude oil exports to increase its fiscal of GDP.⁷⁷ revenues. One of the most important conclu- In order to evaluate the dependency sions from this exercise is that GDP of the economy on the natural re- variations always react favorably to source base, a model was estimated the increments in extraction rates to assess the role of variation rates of of natural resources, whether they are the extraction of biomass, fossil fuels, renewable or not. Assuming that the metallic minerals and minerals for the transmission channels that have been construction industry. The model is analyzed here through public expendi- expressed in terms of constant USD tures and the balance of the country’s for 2000. The equation described in external accounts are valid, this equation the following table shows that bio- shows that materials’ extraction is cru- mass has the highest influence in the cial for growth. And this in turn, means rate of growth of GDP, followed that Ecuador has fallen into the trap by metallic minerals and fossil fuels. of low productivity and comparative

Lake Sibinacocha, Peru. Credit: Villemin, Creative Commons ⁷⁷ Because the equation is expressed in terms of variation rates, the adjustment observed in R2 is rather high.

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advantages, a trap that may lead to growth may play out differently if irrevocable environmental degrada- instead of fossil fuels, for example, the tion. In the future, this weakening process relies more on biomass. Af- of the physical environment may ter all, fossil fuels are non-renewable even put a brake on the economy’s and biomass is a renewable resource. growth. Of course, this is a delicate But even here there needs to be cau- subject and over-dependence on raw tion: certain biomass resources, such materials’ extractive practices for as fisheries or forests, can be abused

Table V.5 Materials’ Extraction and GDP Growth

Notes: DGDP Variation rate of GDP DBIO Variation rate of biomass extraction DFOS Variation rate of extraction of fossil fuels DMIN Variation rate of metallic minerals DMINM Variation rate of minerals for construction and industry DDOL Dummy variable (equals 1 since dollarization and 0 for the rest of the period, expresses structural change)

Numbers in parentheses express lags for independent variables to have their effect.

Source: Pablo Samaniego, Ecuador Country Study.

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and over-exploited, sometimes to the amount of years before their benefits point of collapse and recovery may materialize. take a long time. Also, high biomass extraction rates can also have nega- An innovative project that offers a tive effects on biodiversity and on way out from this dilemma is the Ish- the long term survivability of natural pingo-Tambococha-Tiputini project protected areas. which pursues simultaneously the dual objectives of economic development The Ishpingo/ and environmental sustainability. Tambococha/Tiputini This project consists of a scheme to Project leave a significant amount of Ecua- Today, Ecuador is at a crossroads. dor’s oil reserves underground. These In order to assess alternative trajec- reserves are located in a mega-di- tories, we can consider two pos- verse region that is covered by pris- sible scenarios, each with its own tine tropical rain forest and is home disadvantages. In the first one, the to several indigenous peoples. By dollarization scheme is abandoned leaving these reserves underground, altogether and a new domestic mon- Ecuador would contribute simulta- etary unit is adopted. This is not an neously to three critical objectives. easy path and there are many politi- First, it would contribute to the con- cal and economic costs that would servation of biodiversity. Second, it be incurred. In the second, Ecuador would be a factor in the reduction of maintains the dollar as its domestic CO2 emissions, both from defores- currency, but in order to solve the tation and from the burning of fossil external constraints, it aggressively fuels. Third, it would contribute to intensifies exports of the agricultural the conservation of cultural diver- products that have shown to have sity. The counterpart of this would the strongest demand in the interna- be a flow of income that would be tional market and promotes exports disbursed by international donors, from the extractive industries.⁷⁸ In governments and anyone willing to this case, heavy environmental costs support the project.⁷⁹ The scheme are incurred and, in fact, the future would allow Ecuador to reduce the viability of the economy may be seri- physical deficit of its economy, reap the ously impaired. In addition, here we benefits of its endowment of natural have to take into account that these resources as a reward for this contribu- policies will probably require a certain tion to environmental sustainability.

⁷⁸ The external sector also faces a problem with declining revenues due to the fall in oil prices in 2009. It is expected that a gap of the order of USD 1500 million needs to be bridged, most probably with the assistance of multilateral financial institutions so as to prevent draining the domestic money supply.

⁷⁹ This project may also be articulated with the scheme of emissions reductions due to avoided deforestation and other schemes that may emerge from the Copenhagen conference in December 2009.

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Figure V.23 Location of the Yasuní National Park

Source: Pablo Samaniego, Ecuador Country Study.

The area covered by this project is in been forcibly displaced by oil explo- the Yasuní National Park located in rations in the Yasuní National Park. Ecuador’s Amazon region. This area is the homeland of the Waoram⁸⁰ This area is a hotspot of biodiversity, and Tagaeri-Taromenane people. with one of the richest concentra- The latter live in voluntary isolation tions of insects (more than 100,000 from the rest of the world. These species per hectare), amphibians people are nomad and have defended (105 species), reptiles (83 species) their territory for centuries. They have and freshwater fish (382 species).

⁸⁰ This Word means “True Humans”.

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Yasuni National Park www.natura-medioam- biental.com In one hectare of Yasuní forest 644 the resource management plan has different species of trees have been not been designed and never was found, a number larger than the to- implemented. tal number of tree species in all of North America.⁸¹ The Ishpingo-Tambococha-Tiputini (ITT) oil exploration block involves The Yasuní National Park was declared 412 million barrels of proven reserves a biosphere reserve by UNESCO in of (heavy) crude oil (14.7° American 1989. It has a core zone that is free Petroleum Institute) and, taking from any human activity, a buffer into account probable reserves, the zone and a transition zone in which hu- total amount could reach 920 million man productive activities take place barrels.⁸² Total proven reserves in under a resource management plan. Ecuador amount to 4,500 million However, due to lack of resources, barrels, which means that the ITT

⁸¹ See Oilwatch (2007), Project ITT in http://www.amazoniaporlavida.org/es/La-propuesta/). Original document: “Scientists Concerned for Yasuní National Park. 2004. Technical advisory report on: the biodiversity of Yasuní national park, its conservation significance, the impacts of roads and our position statement.”

⁸² Heavy crude like the one in ITT need to be combined with other lighter crudes or their transformation into synthetic crude oil in order to be transported. This would require additional investments in a converter and a thermoelectric plant.

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fields would account for 9%-22% of top the country’s reserves. The econom- Archive ic importance of the fields located energiasrenovadas.com within the ITT block is undeniable, both from the viewpoint of the external sector (and monetary policy) and from the perspective of fiscal revenues. Petroecuador and Sino- pec (China Petroleum and Chemical Corporation) are two firms currently developing plans for ITT. The first would initiate operations with 130 wells and the second with 214 wells and an investment of approximately USD 5,000 (Oilwatch 2007). If this output were to be exported it would increase Ecuador’s crude oil exports by 31% with respect to 2008.

Initially, the Yasuní project was based on a payment for environmental

bottom Deepwater Horizon Burns Credit: US Coast Guard, Creative Commons

128 18, September 2011 Ecuador

left services scheme. The following pa- Rufous Bellied Euphonia rameters were estimated: net pres- Credit: G. Gallice Wikimedia Commons ent value of income from exploitation of the oil fields, value of lost forest products and biodiversity loss, losses from reduced ecotourism, costs of CO2 associated to deforestation, tons of CO2 generated by the use of this crude oil, etc. The scheme of payment for environmental services was abandoned because it was considered to be impractical.

The new project has a different - fi nancial architecture and is contained in the National Development Plan is not based on the damages but on the benefits that the project would generate. Among these are the following:

. Effective conservation of 40 natural 1protected areas (4.8 million hectares) and adequate resource management plans for 5 million hectares in natural zones property of indigenous and Afro-Ecuadorian peoples. This is equivalent to 38% of Ecuador’s territory. The conservation of Yasuní

right H. Zell Wikimedia Commons

18, November 2011 129 MACROECONOMIC POLICIES, LIVELIHOODS AND SUSTAINABILITY

would also allow the Tagaeri and . Social development in the influ- Taromenane people to continue in 4ence zones of the areas covered by voluntary isolation if they so desire. the project through education, train- ing, technical assistance, generation of . Reforestation, natural regenera- productive employment in sustain- 2tion and adequate management able activities such as eco-tourism and of one million hectares of forests agro-forestry. belonging to small landowners in soils currently threatened by erosive The central ideas of the Yasuní project processes (all of this would involve a would go a long way in transforming substantial reduction of the defores- the economic logic of production and tation rate). conservation. First, as oil would be kept underground, CO2 emissions would be . Improved energy efficiency and reduced by a significant amount: it is es- 3energy savings in Ecuador. timated that the emissions from proven

Mackerel Credit: Archive www.edibleblog.com

130 18, September 2011 Ecuador

reserves in Yasuní would equal the same discount rate. The income emissions of Brazil (332 million MT would accrue to a special fund that of CO2 equivalent), France (373 mil- would emit Yasuni Guarantee Cer- lion MT) and equivalent to Ecuador’s tificates which would not be added emissions for thirteen years. Second, to current allowed emissions’ quotas. funds would be obtained from CO2 If Ecuador would decide to exploit avoided emissions’ certificates (already the ITT fields, it would have to re- the German Parliament has agreed imburse these funds (but in that case to allocate USD 50 million to these Ecuador must give notice five years certificates). Third, the funds would before proceeding to exploitation). be allocated to conservation, prevent The Yasuní initiative is a bold proj- deforestation in other protected areas ect designed to initiate a structural and develop energy efficiency proj- transformation for Ecuador’s econo- ects, helping to start the transforma- my. Much depends on the reaction tion of Ecuador into a sustainable of the international community to fossil free economy in which activi- ensure its success. ties such as ecotourism and agro- right forestry would gain in importance. Archive quevedo.olx.com.ec The fund of the project would be basically integrated by the market value of the avoided CO2 emissions. Taking as a reference the quotation of USD 17.66 per MT for certified emissions reductions (CERs) in the European market, a net present value of USD $5,195 million (using a 6% discount rate). This is less than the net present value of USD $6,979 million that would correspond to the output from these fields at a price of USD 61.21 (WTI) and using the

left Deepwater Horizon on Fire. Credit: USCG, Creative Commons

18, November 2011 131 MACROECONOMIC POLICIES, LIVELIHOODS AND SUSTAINABILITY

Mexico: The Neoliberal Macroeconomic Policy Package, Stagnation and Environmental Degradation

Marcos Chávez Independent Consultant Mexico City, Mexico

Mexican Farmers Credit: Archive Jornada Política

132 18, September 2011 Mexico

exico is a megadiverse coun- Deforestation proceeds at a very fast try that has a wide variety of rate, with an estimate one million ecosystems in its territory. hectares being lost every year to ille- MFrom the coastal plains on the west- gal logging and the expansion of the ern and eastern coasts, to the central agricultural frontier. The loss of bio- highlands, a rich tapestry of varied diversity that is associated with this ecosystems covers its landscapes. process of loss of habitat is incalcu- The ecosystems include tropical lable and its real costs will probably rainforests, temperate forested areas, never be properly accounted for. In cloud forests, semi-arid and arid en- addition, soil erosion, loss of topsoil vironments. Mexico’s coastline ex- and the reduction of soil fertility tends some 11,000 kilometres and continue to haunt the rural land- its exclusive economic zone covers scape. Over exploitation of aquifers reef barriers and well endowed mais another very serious problem, rine fisheries. This combination of with more than 35% of the country’s ecosystems allows Mexico to be the underground aquifers being exploit- home of more than 200,000 different ed at rates that are higher than the species or approximately 10%-12% pace of their natural replenishment. of total biodiversity. According to Commercial fisheries have also been the National Biodiversity Commis- taxed with very intense catch levels sion, Mexico ranks first in biodiver- and some of them are on the verge sity of reptiles (707 species), second of total population collapse. Pollu- P olicy ac k a g e , S ta nation in mammals (438 species), fourth in tion of soils and water bodies pro- amphibians (290 species) and fourth ceeds rapidly with no end in sight in flora (26,000 species). to the accumulation of toxic waste. Greenhouse gas emissions per unit

and E nvironmental D e g radation One of the most important strategic of GDP were slightly reduced in the objectives of Mexico’s environmen- past decade, but that is due more to tal policy is the conservation and the collapse of the petrochemical in- management of this endowment dustry than to genuine progress in in biodiversity. The most impor- productivity and energy efficiency. M e x ico : T he N eoliberal acroeconomic tant policy instrument to attain this In summary, almost every environ- objective is the National System of mental dimension is imperilled. Natural Protected Areas (NSNPA). Already more than 170,000 square Macroeconomic Policy kilometres are NPAs, with 34 bio- and Mexico’s Economic sphere reserves, 64 national parks, 26 Performance areas of protected flora and fauna and During the period 1950-1970, Mexi- 17 sanctuaries (CONABIO 2007). co’s economy maintained an average yearly rate of growth above 6.3%. This wealth of environmental di- This allowed for a substantial incre- versity is at risk in Mexico today. ment of per capita income and was

18, November 2011 133 MACROECONOMIC POLICIES, LIVELIHOODS AND SUSTAINABILITY

associated (as in the case of the rest international financial obligations. of Latin America) with an industri- In turn, this detonated the world’s alization strategy based on import debt crisis that wrought havoc in the substitution. However, the protec- world economy and caused the so- tionist strategy was implemented in called lost decade of the 1980s. a very inefficient and careless manner, without any consideration for ac- In the aftermath of this critical period, countability, strategic objectives in the Mexico implemented a deep change area of exports and technological de- in its development strategy. As the velopment. This led to high market first stabilization plans of the 1980s concentration coefficients in many gave way to deeper structural reforms, key industries and to sub-optimal the country adopted a strategic production scales and a persistent course based on two crucial premis- anti-export bias. es. The first was that the State would no longer provide the signals that The difficult international economic would guide the development pro- context of the 1970s, combined with cess. From now on, its role would several problems linked to the man- be to allow markets to fulfil this mis- ner in which protectionist policies sion. The second premise was that were implemented, led to drops in exports would become the engine capital formation rates, inflationary for growth, and Mexico would have pressures, unsustainable fiscal defi- to unleash its export potential based cits and growing indebtedness. All on its comparative advantages. of this translated into stagnant GDP Growth rates. But in the second half The corollary from these two prem- of the 1970s new oil discoveries al- ises was that a large scale privatiza- lowed the government to maintain tion process would have to take the illusion that its financial situa- place, the complete deregulation of tion was robust and healthy. In fact, markets was to be implemented and a process of “Dutch disease” led to macroeconomic policy would have higher debt levels and a significant to be organized around these strate- and quite detrimental appreciation of gic premises. Accordingly, the main the exchange rate. The internation- objectives of fiscal policy would have al recession of the final years in the to be redefined in order to ensure decade, together with unacceptable the sustainable management of pub- inflation rates in the United States, lic debt (both internal and external) brought about a very steep hike in and to maintain an open space for interest rates and a sudden collapse private investment (i.e. to prevent of international commodity prices, any so-called crowding out effect especially oil. This combination on the private sector). This meant that of events led to Mexico’s unilateral the primary balance would have to declaration of a moratorium in its generate a permanent surplus in order

134 18, September 2011 Mexico

to guarantee a flow of resources that scale agricultural production (which would allow for sustainable debt has important environmental stew- management. This redefinition cul- ardship implications) to natural pro- minated with a federal law that es- tected areas (which are lacking ad- tablished the obligation to maintain equate support for the development a balanced budget. As a result, pub- and implementation of their resource lic expenditures were systematically management plans). One important reduced and only a modest growth point here is that this approach to rate marked the evolution of this key fiscal policy transformed it into a policy tool. As a percentage of GDP, pro-cyclical instrument with serious public expenditure stagnated and re- effects on Mexico’s economy. mained at a very low level after 1990, as can be seen in Figure V.24. This Monetary policy was also redefined affected all the real sectors of the along two lines of action. The first economy which are related to envi- one was to provide complete auton- ronmental sustainability, from small omy for Mexico’s central bank. The

Figure V.24

Source: Marcos Chávez, Mexico Country Study.

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main objective here was to prevent completion of the North American runaway fiscal deficits from being Free Trade Agreement (NAFTA) “monetized”. The second line was to between Mexico, the United States define by law the main objective of and Canada. Mexico was sending a monetary policy: the control of in- clear signal to the rest of the world flationary pressures. Together with about its commitment to the new set these new definitions, monetary of policies. policy was charged with the task of maintaining a stable exchange rate In the first few years of the 1990s in order to generate a favourable cli- there were some signs that this mate for foreign direct investment policy package might lead to a suc- and international capital flows. cessful exit strategy from the crisis of the 1980s. A very rapid growth Accordingly, after 1989 Mexico un- of exports from the manufacturing derwent an intense process of priva- sector created the impression that tization, deregulation of markets and Mexico could get away from over the shrinking of State intervention reliance on oil exports and continue in the economy. This was accompa- with its industrialization strategy as nied by the complete deregulation it established a solid platform for ex- of the capital account, creating the port-led growth. However, the ma- conditions that would lead to inter- quiladora sector that was behind this national capital flows. This process rapid expansion of industrial exports culminated with the negotiation and was disconnected from the rest of

left Maquiladora Credit: Guldhammer, Creative Commons

right Credit: Archive www.energiasrenovadas.com

136 18, September 2011 Mexico

right Credit: Archive Wikimedia Commons

left Credit: Jebulon Wikimedia Commons the economy. Although it was able was the role of the exchange rate of spectacular double-digit growth which was chronically overvalued as rates in exports, the economy re- a result of the inflow of capital. The mained stubbornly fixed with very appreciation of the exchange rate slow growth rates, incapable of gen- was used as an anchor for the sys- erating sufficient employment to tem of relative prices and was a key meet the demands in the job market. instrument to control inflation. But this led, in turn, to a deterioration of This was only the first sign of the the external accounts as it punished fragility of the new macroeconomic Mexico’s exporting sector. The model. In fact other variables were country had to rely increasingly on being artificially kept in what ap- capital inflows to sustain its growing peared to be a healthy position. For trade deficit. example, inflationary pressures had subsided due to the restrictions im- Capital inflows not only brought posed on aggregate demand through about the appreciation of the ex- a restrictive monetary policy and the change rate, but they also imposed imposition of a norm for minimum a framework that created strong in- wage that persistently led to a drop ertias to maintain the overvaluation. of real wages. This of course implied The reason for this is that as a surplus putting a brake on the role of the do- in the capital account was required mestic demand as a source of GDP to cover the current account deficit, growth. But even more important attempts to correct the trade balance

18, November 2011 137 MACROECONOMIC POLICIES, LIVELIHOODS AND SUSTAINABILITY

via devaluations were resisted by the balance sheets of the banks, allowing financial community. The govern- foreign investors to purchase most of ment and monetary authorities con- the banking industry in Mexico.⁸³In sidered the cost of this adjustment too addition, in order to prevent the high. Typically, the adjustment was exchange rate from becoming seri- postponed indefinitely until expec- ously maladjusted, a modified float- tations in the financial world led to ing exchange rate system was ad- the conviction that the host country opted (with “dirty” intervention by was unable to fulfil its commitment the central bank), but otherwise, the and would have to devalue sooner macroeconomic model remained es- or later. In December 1994 a stam- sentially the same. pede for the nearest exit exacerbated the reversal of capital flows that had The economy’s performance under been going on since March of that the neoliberal policy package has year. This was followed by a macro- been disappointing. Not a single devaluation, a decision that was im- strategic objective has been attained. plemented in complete disarray. All Growth remains mediocre (with an the temporary gains in the struggle average 2.2% per year) and is insuf- against inflation were wiped out (see ficient to meet the requirements of Figure V.25). As 1995 advanced, the the labour market. The country’s economy went into a tailspin, with a external accounts remain fragile, drop of 6.5% in GDP. The severity with an extreme concentration of of the crisis can be gauged by its im- trade in a single market (the United pacts in the world’s financial markets. States). There is a large surplus in the country’s trade balance with the In the aftermath of the 1995 crisis, United States, but this is the result of the entire banking system was se- oil and maquiladora exports, so that verely affected as the non-performing in the final analysis, Mexico’s trade portfolio increased. The govern- structure is relying on cheap labour ment implemented a rescue program and its natural resource base. This is consisting in the (illegal) purchase problematic for several reasons. One of these non-performing loans, re- is that the maquiladora sector is not placing these liabilities in the banks’ a good engine for growth. Maqui- books with government backed ladora plants are disconnected from IOUs that had handsome interest the rest of the economy and this is payments. Because the new IOUs are why we can observe spectacular assets, this changed dramatically the growth rates in maquiladora exports,

⁸³ Ironically, the banking sector had been one of the most heavily protected sectors in the NAFTA. Foreign investment in this sector was heavily regulated and was to remain as a virtually forbidden sector for ten years. In the aftermath of the 1995 crisis, authorities realized that banks had to be recapital- ized and they reached the conclusion that only foreign investors were up to the task but NAFTA was an obstacle. At first, between 1995-1997 the law for the banking sector was clearly violated, but afterwards this was reformed. Today, 95% of the banking industry is foreign owned.

138 18, September 2011 Mexico

without any significant effects on the slow growth rates, a fact that is sel- rest of the economy. In addition, oil dom included in official analyses exports in volume terms will likely of the macroeconomic landscape. start diminishing because of Mexi- When the Mexican economy grows co’s dwindling reserves. Finally, the at rates above the average of the past important surplus observed with the twenty years, the current account United States is not enough to com- deficit also increases significantly. pensate for the deficit in Mexico’s Thus, slow growth rates also help trade with Europe and Asia (espe- maintain a fragile balance in the ex- cially China). Clearly, trade liberal- ternal accounts. Finally, the balance ization simply did not allow Mexico of payments is also improved by to establish a robust foundation for the remittances of migratory work- export-led growth. ers that have crossed the border in search for stable employment op- As a result of high oil prices and the portunities. Mexico has expelled an important surplus with the United average of 400,000 migrant workers States, Mexico’s current account to the United States every year since deficit has been stabilized in the past 1994. Their remittances have been a few years. This is also the result of positive contribution to the balance

Figure V.25

Source: Marcos Chávez, Mexico Country Study.

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of payments, but their personal expe- but this is just an exercise that shows rience is a testimony of the failure of how important oil and cheap labour the Mexican economy to provide ad- is for Mexico’s exports. equate job opportunities for its people. In so far as the strategic objectives of The key problem of Mexico’s trade maintaining equilibrium in the coun- balance is that it relies on exports of try’s internal macroeconomic aggre- maquiladoras and oil (the official nar- gates, the picture is not very bright. rative about the lack of importance Inflation has been subdued, but this is of oil in total exports notwithstand- achieved at a very high cost. Figure ing). The following exercise gives V.25 shows how the restrictive pos- a better idea of the structure of the ture in monetary policy has contributed trade balance. In 2008 the total trade deficit amounted to USD $17 billion, left or 1.5% of GDP. However, if we ex- Maize clude maquiladora exports, the defi- Credit: Marco Guzmán Wikimedia Commons cit reaches USD $ 42 billion, or 4.4% of GDP. And if we abstract from oil exports, the deficit reaches USD $ 67 billion, or 6.2% of GDP. This would of course be the worst performance of Mexico’s trade balance in decades,

right Mexican Stock Exchange Credit: Keith Weller Wikimedia Commons

140 18, September 2011 Mexico

to the control of inflationary pres- In addition, another anti-inflation sures. The main component of the instrument has been the overvalued anti-inflation strategy has been a currency with detrimental effects restrictive monetary policy. This is on the country’s external accounts. translated into a contraction orient- Because imports are an important ed approach to the monetary base. component of aggregate supply, an Interest rates have remained very overvalued exchange rate is an im- high throughout the period and this portant instrument to put a lid on has affected capital formation rates. inflationary pressures. Figure V.24 This has acted as a powerful brake also shows how the exchange rate for productive investment and has has been successfully utilized as an- slowed down economic activity. chor for the price system. The peak

Gulf Offshore Platform Credit: Coquitlam Wikimedia Commons

18, November 2011 141 MACROECONOMIC POLICIES, LIVELIHOODS AND SUSTAINABILITY

in 1995 shows how a macro-devalu- disorderly process, with extreme cap- top ation can as a long period of over- ital flight. As pointed out above, the Harbor Credit: Miguel B. Sanchez valuation helps subdue inflation but positive achievements of the anti- Wikimedia Commons leads to a severe adjustment as expec- inflation struggle are destroyed and tations deteriorate and capital flight a very unstable situation emerges. takes place. Figure V.24 shows that High interest rates are used to attract when tension builds up and finally foreign capital, but this affects the bottom the exchange rate is adjusted, a mac- cost of credit and leads to high non- Field Credit: Archive ro-devaluation takes place in a very performing portfolios. www.ecoalimenta.com

142 18, September 2011 Of course, the use of the exchange in practice this adjustment process is rate as an anchor for the price system impeded by financial liberalization. presents its own problems because it impedes using the exchange rate as an Finally, minimum wages, which is a adjustment instrument for the trade key reference for contractual wag- balance. This is a major problem in es, have been indexed with the ex- the open economy model: as capi- pected inflation rates established by tal inflows take place, the exchange the central bank. Throughout the rate is appreciated, with negative ef- period, real inflation rates have ex- fects on the external sector. In ad- ceeded expected inflation, leading to dition, because these capital inflows a systematic drop in real wages. Al- are crucial for the country’s inter- though this helps contain aggregate national balance of payments, mon- demand (and thus less inflation), it etary authorities are trapped into also leads to greater inequality and a commitment to maintain the ex- poverty. change rate stable. So, even though the open economy model is based Mexico’s fiscal accounts appear as a on the premise that the exchange good basis for sustainable debt man- rate must adjust with great flexibility ageable. However, there are serious to the results of the current account, problems with this conclusion. In the

Peso Archive

18, November 2011 143 MACROECONOMIC POLICIES, LIVELIHOODS AND SUSTAINABILITY

first place, as we have noted several finance in Mexico. The notion of the times in this report, fiscal policy has so-called Financial Requirements of been dominated by the central objec- the Public Sector (FRPS) was used to tive of generating a primary surplus. provide a more accurate idea of the This has been achieved through the health of public finance. reduction of expenditure rather than through increased revenues. So the As a result of several bailout operations, impact of this on the allocation of first for the sugarcane industry (which resources for environmental stew- went bankrupt ion the 1980s), then ardship has been rather intense. Of for the failed system of privatized toll course, social expenditures (health, roads (early 1990s) and finally for education, housing, municipal ser- the rescue package of the country’s vices) have also been drastically af- banking system (1995-1997), the fected by this approach to fiscal pol- FRPS represented more than double icy. But even this approach has not the normal public balance deficit. In been enough to solve the problem of addition, if we add the government’s increased indebtedness. In 1998 the commitments associated with the re- Federal government disclosed infor- form of the pension system, the real mation about the true state of public deficit becomes significantly higher.

Irrigate Credit: Alupus Wikimedia Commons

144 18, September 2011 Mexico

Today, this deficit is more than twice critical reasons behind this dramatic the size of the deficit authorized by outcome for Mexico. The first is that the Mexican Congress. Servicing approximately 88% of Mexico’s to- this deficit is a problem that remains tal international trade is carried out unsolved and leads to a heavy mort- with the United States. As the crisis gage of public resources. unfolded and the US economy started to slow down, the ripple effects The global financial crisis of 2008 is extended into almost every corner of having a severe impact on Mexico’s Mexico’s economy. The second rea- economy. The contraction for 2009 son is that oil prices have collapsed is currently being estimated to be of and this brought about a fiscal crisis, the order of 6.8% by Mexico’s mon- with a gaping hole of more than 300 etary authorities, but the Interna- billion Mexican pesos. The response of tional Monetary Fund is forecasting the government was a pro-cyclical fis- a drop of 7.3%, while several private cal package that will exacerbate the sector rating firms, such as Moody’s, effects of this crisis: taxes are being are forecasting even steeper falls in increased, while expenditures con- aggregate output. There are two tinue to be curtailed. The combined

Figure V.26

Source: Marcos Chávez, Mexico Country Study.

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effects of this will have a long lasting with the sluggish rate of growth of impact on Mexico’s ability to allo- GDP. This almost assumes a linear cate adequate resources for environ- relationship between GDP and en- mental stewardship. vironmental costs, something that is not justified by what we know about Stagnation and growth and stagnation. In a stagnant Environmental economy, productivity and techni- Degradation cal change remain more or less con- Mexico’s recent economic history stant. In any event, the total costs of is a picture of stagnation combined depletion and environmental dete- with environmental deterioration. rioration are of the order of 22% of One possible explanation for this GDP. This amount is probably un- may be found in the misallocation derestimated (due to the coverage of resources that takes place through of the environmental accounts), but macroeconomic policies. In particu- it still is quite significant and may lar, fiscal policy has not been able to be an indicator that if this pattern remedy the serious problems associ- of events is not reversed, the coun- ated with environmental degradation try may well enter into a dangerous through the allocation of an adequate phase of environmental degradation level of financial resources. The evo- that may be capable of threatening lution of public expenditure may be the future potential for sustainable in line with a strict ideological view development. about the need to reduce stet intervention in economic life in order to Figure V.27 shows that in spite of attain economic development. But it years of “responsible” budget man- is not in accordance with historical agement (i.e., generating a primary experience (see Chang 2002), nor is surplus and containing expenditures), it in agreement with the need to in- the financial requirements of the vest in environmental stewardship. public sector continue to grow. In fact, they have almost doubled since An examination of Figure V.27 re- 1998 when data started to be disclosed. veals that net environmental costs Clearly, there is something wrong are significant. The graph shows with this approach to fiscal policy. how net domestic product (GDP The distraction of resources from ar- minus fixed capital depreciation and eas related to environmental steward- amortization) and total net ecologi- ship is not only substantial, but it is also cal domestic product (which takes useless when it comes to reducing into the costs of account depletion the financial burden of the State. and environmental deterioration) evolve as time unfolds. The eco- It is difficult to conclude that techni- logical accounts show that these cal progress has taken place and that environmental costs have kept pace this maintains environmental costs

146 18, September 2011 Mexico

Figure V.26

Note: All figures are in constant 2002 Mexican pesos. NDP = Net domestic product. NEDP = Net Ecological Domestic Product. DET = Environmental Deterioration Costs. GDP, NDP and NEDP are measured against the left hand axis. Depletion Costs, Deterioration Costs and Total Environmental Costs are measured in the right hand vertical axis.

Source: Marcos Chávez, Mexico Country Study.

more or less in line with the slow slope that reflects the growth of en- growth of GDP. But in fact, Fig- vironmental deterioration costs. But ure V.27 shows a strange behaviour after 2000 the curve adopts a negative in the case of the curve describing slope, indicating that these costs are the evolution of environmental de- being reduced. This could only be the terioration costs. Until 1999-2000, result of greater efficiency, increased the curve continues with a positive productivity or a change in the output

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mix that would be accompanied by as a percentage of GDP (oscillating inferior environmental deterioration around the 16% level). costs. In fact, all indicators and the output mix of the Mexican econo- In absolute terms, the resources al- my contribute to cast serious doubts located to the Federal budget items on this conclusion. that can be considered as close to environmental stewardship have re- Could it be that Mexico is investing mained at very low levels. The curve more in remediation and control of that includes regional development, environmental deterioration? The municipal and housing services, study of how public spending in en- also includes social expenditures vironmental sustainability has evolved related to the war on poverty cam- contradicts this viewpoint. Figure paigns. Even this amount remains at V.28 shows that total public expendi- the level of 150 billion pesos, and is ture (programmable appropriations, even showing a downward trend in without debt service) has increased 2007-2008. This means that the en- modestly in real terms in the period vironmental costs that are associated 1987-2008. In these two decades, total with the evolution of the Mexican expenditures have remained constant economy (which, as we have seen, has

Figure V.28

Source: Marcos Chávez, Mexico Country Study.

148 18, September 2011 Mexico

maintained a modest growth rate) are As commented above, Mexico’s en- met with a more or less constant and vironmental accounts reveal that the modest level of resources. total cost of depletion and deterioration is equivalent to approximately 22% of The country study for Mexico shows GDP. The amount of resources allo- that the long period of economic stag- cated to environmental stewardship is nation that has taken place in the last not more than 4% or 5% of GDP. thirty years is accompanied by a process And even this amount is overestimated of constant deterioration in almost ev- because it includes expenditures that are ery environmental dimension. The not strictly directed towards environ- level of public spending allocated mental conservation and remedial ac- to environmental damage remedia- tions. Clearly, if fiscal policy continues tion and prevention is not enough to to generate a primary surplus, this neg- compensate the total cost of depletion ative trend in the amount of resources and environmental deterioration used allocated for environmental sustain- to calculate the Net Ecological Do- ability will continue with negative mestic Product (see Figure V.27). consequences into the future.⁸⁴

Botswana Sunset Credit: Matt80, Creative Commons

⁸⁴ This conclusion is quite independent of any assumption on weak or strong sustainability

18, November 2011 149 MACROECONOMIC POLICIES, LIVELIHOODS AND SUSTAINABILITY

The challenge of socio-economic and ecological sustainability in India under neo-liberal macroeconomic policies⁸⁵

Aseem Shrivastava Independent Consultant New Delhi, India. Contact: [email protected]

Credit: Archive www.natura-medioam- biental.com

⁸⁵ While the term neo-liberalism has been adopted in this paper, the policies associated with it are neither too new, nor very liberal, as far as the majorities in a country like India, who are impacted adversely by it, are concerned. Given the co-option of the state by powerful, globally mobile private players from both India and abroad, the term ‘corporate totalitarianism’ is perhaps no exaggeration, even if corporations are occasionally ‘defeated’ by mass movements (for instance, when the Indian government stopped Vedanta’s plunder of the ‘bauxite mountain’ Niyamgiri in the state of Orissa; though it remains to be seen if the order stands for good). Corporate hubris is of such proportions today that a transnational giant like IBM, as per its popular commercial, has no shame in boasting that it is helping “build a smarter planet” (as though it’s the planet that is not smart enough for us!). In fact, even the Chief Economist of the IMF has pointed out recently the “privatization by stealth of the state in India.” (The Times of India, July 31, 2010, http://timesofindia.indiatimes.com/business/india-business/Many-of- Indias-billionaires-have-made-money-by-their-proximity-to-govt-/articleshow/6239385.cms)

150 18, September 2011 The challenge of socio-economic and ecological sustainability in India

n this paper I outline the chang- and the implications for macroeco- ing character and structure of nomic policies and policy sovereignty, the Indian economy and analyse and the imbalanced, jobless growth Isome of the key socio-economic and and stagnant real wages. The sec- ecological consequences this is lead- ond section centres on the social and ing to. The central hypothesis is that environmental collateral damages the formal advent of neo-liberal eco- brought about by this macroeconomic policies since 1991 has had a nomic policy package. dramatic impact both on the country’s environment, as well as on the PART I livelihoods of hundreds of millions Increasing external of people and their prospects for the orientation of policies future. In the process, not only have and its consequences hunger, malnutrition and poverty remained about as serious as they A. Financialization of were in proportionate terms two de- the Indian economy cades ago, we are seeing new ways The externally oriented growth strat- in which people are becoming poor egy crafted for India in the 1980s and or poorer. We show how neoliberal 1990s took a dim view of purchasing ‘economic reforms’ have contribut- power in the domestic market. It was ed to a most socially divisive process argued that India was too poor to grow that has, at once, also compounded by itself. Given its limited capacity to ecological difficulties. save, it needed not only capital from abroad, it was felt that it also needed The first section of this chapter focuses the markets of the Western world to on the increasing external orientation sell its exports. Success stories from of policies and its key consequences: East Asia were cited to open up the financialization of the Indian economy Indian economy to transnational neo - liberal macroeconomic policies T he challen g e of socio - economic and ecolo g ical sustainability in I ndia under

Credit: Archive Wikimedia Commons

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business. The Indian growth process rate was 35.7% of GDP, the rate since the reforms began is externally of investment was only marginally stimulated –both by service sector higher, at 36.9%, suggesting that exports and by capital inflows. foreign capital inflows are performing some altogether different role in It is factually incorrect to argue that the economy.⁸⁷ the Indian savings rate and the limited size of the domestic market were Indian export performance has been impediments to growth. India was inadequate for making policy-for- growing at 5-6% between 1974 and mulation relatively autonomous of 1990. The only post-reform period global financial interests. The slow in which it has exceeded this signifi- growth of export revenues and the cantly was during 2003-08, when persistence of the external trade def- the economy grew at 6-9% and the icit are serious problems and show stock market went delirious.⁸⁶ that the net contribution of foreign trade to the Indian economy has As far as savings and capital for in- been negative all along, and is, in vestment are concerned, it is note- fact, deteriorating. worthy that domestic savings and investment are even today not too The last time that India enjoyed a far apart, suggesting the redundancy trade surplus was in 1976-77. Af- of foreign capital for growth. In ter the reforms began, India’s mer- many years, savings have exceeded in- chandise trade deficit has expanded vestment. India had already achieved (at constant prices) rapidly from $6 a savings rate of about 23% of GDP billion in 1990-91 to $57 billion when the reforms started in 1991. in 2007-08 (over 5% of our GDP). This was high for a poor country, The surplus from trade in services, and certainly much higher than including IT ($37.6 billion, 3.5% of rates of saving in the West, especial- GDP) was not adequate to make up ly the US (which has typically had a for this in 2007-08. Import liberal- negative savings rate till the crash of ization has allowed much demand to 2008). In fact the savings rate, even “leak away” from the Indian econ- after the reforms, hovered around 23% omy. The trade deficit worsened all the way till 2002-03, before cross- from 2.3% to 7.8% of the GDP in ing 30% for the first time in 2004-05. the 5 years preceding the crash. If In 2006-07, while the national savings India spent Rs. 8 out of every Rs.100

⁸⁶ Economic Survey 2007-08, Government of India, New Delhi, p. 248, http://indiabudget.nic.in/

⁸⁷ Economic Survey 2007-08, Government of India, New Delhi, p. A-10, http://indiabudget. nic.in/; RBI Annual Report 2008-09, p.80 http://rbidocs.rbi.org.in/rdocs/AnnualReport/PDFs/ IRAR200809_Full.pdf. To say that the national savings rate has kept pace with investment is not to negate the Keynesian logic that investment can sometimes spur growth of incomes, and hence, savings. It is only to discern the role of foreign capital inflows to India.

152 18, September 2011 The challenge of socio-economic and ecological sustainability in India

of its GDP on imports in 1991, by reserves are based entirely on in- 2000 the proportion had increased flows of speculative capital owned to Rs.14 and in 2008 it was Rs.30. by foreigners and Non-Resident We can see from these figures who Indians, who see India as a desirable has benefited most from the reforms destination for their investment. In under globalization.⁸⁸ ⁸⁹ one three-month period in 2007, Indian markets gave a flattering re- India’s foreign exchange reserves turn of over 33% to investors at a have hovered between $200-300 time when the “mature” markets of billion during the first decade of the West were often yielding nega- the century. Apart from yielding tive returns.⁹⁰ high returns to investors, they have served to finance India’s persistent For the government, there is always and growing trade deficit with the the lurking fear that speculative port- rest of the world. This fact is of some folio investments (also referred to as significance for the dilution -of au foreign institutional investments, tonomy over policy-making for the FIIs) would be withdrawn if policies Indian State. It means that the latter needs to sustain the attractiveness of the economy to investor elites abroad, by keeping interest rates high and exchange rates stable, the latter in order to reduce the risk for foreign investors who decide to invest in rupee-denominated assets.

When it comes to foreign exchange reserves, the difference between India and China is huge. Unlike China, whose enormous reserves are based on an export surplus, giving their Selling Flowers policy-makers remarkable room for Credit: E Sandler, Creative Commons manoeuvre, Indian foreign exchange ⁸⁸ Economic Survey 2007-08, Government of India, New Delhi, p. A-81, http://indiabudget.nic.in/

⁸⁹ Economic Survey 2008-09, Government of India, p.129, p.148, http://indiabudget.nic.in/, World Bank Country Data: India, http://ddp-ext.worldbank.org/ext/ddpreports/ViewSharedRe port?&CF=1&REPORT_ID=9147&REQUEST_TYPE=VIEWADVANCED&HF=N&WSP=N; Sunanda Sen, “State, society and the market: Indian Economy under Economic Reforms”, Paper presented at the Italian Institute of Political Economy, Rome, 2008.

⁹⁰ “India is world’s best performing stock market”, Economic Times, November 21, 2007, http:// economictimes.indiatimes.com/Markets/Analysis/India-is-worlds-best-performing-stock-market/ articleshow/2559788.cms

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are seen to be anything but entirely needed sectors of badly needed friendly towards overseas and NRI funds, by attracting them instead to investor elites. Countries compet- the financial sector. Moreover, un- ing for global finance could drain der the liberalized tax regimes that such capital away from India. If such have been created as “incentives” for a thing were to happen, India will financial investment, neither capital once again confront the situation it gains (when assets are sold) nor divi- faced in 1991, when it only had hard dends on financial assets are taxable. currency reserves left at one stage This adds fuel to the fire as second- for two weeks of imports. ary market transactions grow in volume relative to primary transactions. The net result is that global finance Greed in this case, as in so many profoundly influences the real do- others, actually undercuts industrial mestic economy (producing actual capitalism. goods and services), whose activities are relegated to lower priority. This While foreign capital inflows may mirrors a world-wide trend in which not have brought much benefit for the centre of gravity of the economy the bulk of the Indian population, as a whole has moved away from real their sudden outflow can certainly production towards finance. bring much harm. The experiences of Latin America in the 1980s and What is crucial to understand from 1990s, those of East and South-East the point of view of those with a Asia in 1997-98, of Russia in 1998 genuine concern for the economic and of Argentina in 2001 suggest betterment of people in India is that that the sudden departure of foreign purely financial transactions result in capital easily leads to a quick devalu- a mere change of ownership. They ation of the currency, inflation and contribute little or nothing to the unemployment. Given India’s pre- productive or job-generating ca- cariously poised external accounts, pacity of an economy. When shares this remains a serious worry for In- change hands in the secondary mar- dian policy-makers.⁹¹ ket, the transaction does not reflect the creation of any real assets. Policy space is taken up not just by measures which open the economy Thus, a finance-led boom of the to foreign goods, services, and capi- sort that India has witnessed since tal. The conditionalities imposed by the beginning of this century brings the IFIs ensure that fiscal and mon- windfall gains to global and Indian etary policies are also put in place investor elites, but deprives many which suits the interests of financial ⁹¹ The literature on these crises is vast. For a specialist’s overview, see Charles P. Kindleberger and Robert Aliber, Manias, Panics, and Crashes: A History of Financial Crises, 5th ed. Wiley; For a journalistic overview, see John Lee, “Dollar’s fate written in history”, Asia Times June 4, 2009, http://www.atimes.com/atimes/Global_Economy/KF04Dj03.html

154 18, September 2011 The challenge of socio-economic and ecological sustainability in India

markets. This is why, for instance, if we add to the primary deficit the Indian governments have had to ac- large interest payments made by the cept the Fiscal Responsibility and government since the 1990s, the fis- Budgetary Management (FRBM) cal deficit balloons to 3-6% of GDP Act (2003) which enforces balanced every year. Arguably, this (together budgets and thus restricts deficit with the growing trade deficit, 1-4% spending, thereby capping public of GDP) constitutes the flip side of expenditure on health, education, the institutional capital inflows into public housing, environmental pro- India (1-3% of GDP).⁹² tection (which has suffered a -pro portionate decline in State spending Likewise, no policy which slows during the last decade) and social down financial transactions, such as a services (though the 2008 collapse turnover tax, or a capital-gains tax, on forced the government to make an transactions in securities is allowed exception – to boost business ac- on the agenda. These steps, it is ar- tivity, not for generating employ- gued, will upset “investor sentiment” ment specifically). Under pressure and drive away foreign capital inflows. from international creditors, work- But measures like easing the convert- ing through the IMF and the World ibility of the Rupee (on the capital Bank, India’s policy-makers have account, thereby easing large capi- consistently had to focus on maxi- tal outflows), it is pointed out, will mising the primary surplus (or mi- vastly improve such sentiment.⁹³ nimising the primary deficit, to be more precise) on the government A key lesson from the ongoing budget. This hovered around zero, global crisis is that an externally ori- till the global crisis hit in 2008. But ented growth strategy for countries

Rupees Credit: Archive apudecadiz.blogspot.com ⁹² Economic Survey 2009-10, Government of India, New Delhi, http://indiabudget.nic.in/es2009-10/ chapt2010/chapter06.pdf

⁹³ “Tax-GDP ratio slated to drop to 10.94% in 2008-09” http://www.livemint.com/2009/07/07002528/ TaxGDP-ratio-slated-to-drop-t.html; “Low tax-GDP ratio daunts India’s quest to join the developed world”, http://www.thehindubusinessline.com/2005/10/13/stories/2005101301531200.htm

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as large as India or China is flawed resulting growth in output was expect- at the root. First of all, the markets ed to be pro-poor as well. In other of the affluent nations are saturated, words, growth in employment was while the unemployed labour force expected too. Has it actually hap- in a country like India is huge. Sec- pened as hoped for? ondly, exports to the rich nations are usually capital-intensive (unless one Between 1983 and 1994, when eco- thinks of super-exploitative sweat- nomic growth was 4-5% every year, shops), and so cannot support too employment in the organized sec- much employment. Thirdly, there tor grew at 1.2%.⁹⁴ Between 1994 is stiff competition from other poor and 2005, when growth increased countries also trying to sell in the to 5-6% (sometimes crossing 7%), same markets of the wealthy nations. employment growth turned negative China and East Asia have already (-0.3%). It turned imperceptibly conquered the largest share of West- positive by 2006 (0.12%). But once ern markets. Fourthly, when India the data is in for all the hundreds of attracts big inflows of foreign capital, thousands of workers laid off during it raises the value of the rupee, thereby the current recession, the employ- making Indian exports less competi- ment growth will once again probably tive in global markets. To compen- turn negative. Importantly, in the sate for this, suppliers often suppress pre-reform period, rate of growth of wages, or even retrench workers. employment was well above the rate Finally, too much portfolio invest- of growth of population. During the ment (FII) generates exchange rate post-reform period the opposite is instability in a developing country, the case.⁹⁵ causing problems for exporters and importers, again adversely affecting In 1991, when reforms began, the wages and/or employment. mainstream economy (the organized sector) employed 26.7 million people, B. Imbalanced, jobless growth of whom 7.7 million worked in the and stagnant real wages private corporate sector. In 2006, When Indian economic policies the numbers had remained virtually were re-directed towards a more unchanged (total employment was 27 open economy in the early 1990s, the million with 8.8 million in the private

⁹⁴ I use the term mainstream economy to refer to the dominant formal (or organized) sector of the Indian economy. In this sector, at least ten people are employed in a registered production unit which uses power. It also pays taxes, and employs only about 7% of India’s work-force. Contrasting with this are many subsistence or default economies in the country, which include most of agriculture and al- lied activities and the enormous unorganised, or informal sector of industry and services, on which most people in the country are dependent (and in this sense should actually be called the mainstream!)

⁹⁵ Various issues of Economic Survey 2002-09, Government of India, New Delhi, http://indiabudget. nic.in/.

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Making labour markets more flexible, as per the neo-liberal prescription, is unlikely to generate more employment: “Empirical findings suggest that the so-called labour market inflexibility had hardly been a factor in determining either the growth of employment or labour intensity in organized manufacturing.”

The primary explanation for the stagnation in organized sector employment lies in the very nature of the capital-intensive technology used in modern industry and services. Mechanization and automation account for this. India today produces more than three times the industrial output it made in 1990 with the same number of workers in the organized Potter at work, sector that it employed then. The Credit: Yann, above numbers are confirmed by Creative Commons evidence from the shop-floor. Here are some of the many examples that corporate sector, including the big can be cited. spurt in the IT sector). Almost all the net increase in employment in Redundancy, even more than exploi- the organized sector has been of the tation, is increasingly the condition of casual variety, without job or social labour around the globe. It seems that security. Following the neo-liberal the economist Joan Robinson’s char- prescription of flexible labour mar- acterisation of the modern worker’s kets, there is a clear trend towards situation, articulated decades ago, is the informalisation of the work now only too real today: “The only force. Meanwhile, between 1991 thing worse than being exploited by and 2006, India’s labour force grew a capitalist is to be exploited by no from about 325 to 440 million.⁹⁶ one at all.”⁹⁷

⁹⁶ Economic Survey 2008-09, Government of India, New Delhi, http://indiabudget.nic.in/es2008- 09/chapt2009/tab31.pdf;, The Challenge of Employment: An Informal Economy Perspective, Na- tional Commission for Enterprises in the Unorganised Sector (NCEUS), GoI, New Delhi, 2009, p.14, http://nceus.gov.in/The_Challenge_of_Employment_in_India.pdf

⁹⁷ Quoted in Samuel Bowles and Herbert Gintis, “The Revenge of Homo Economicus”, Journal of Economic Perspectives, Vol.7#1, Winter 1993.

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So, if India’s labour force has expand- officially– unemployed.⁹⁸ What sorts ed by well over 100 million since of wages are being earned by in- the early 1990s, where have people formal workers? The tables below found work? The answer lies in the (computed from NSS data) tell their dramatic growth of “self-employ- own story: ment” and employment in unorganised services. They appear to SOURCE: J. Unni and G.Raveendran, have absorbed over 60 million new “Growth of Employment (1993-94 to workers since 1993, most of them 2004-05): Illusion of Inclusiveness?”, severely under-employed and un- EPW, January 20, 2007. Data in- derpaid. The remainder are –even cludes agricultural workers.

TABLE 1

Average Real Daily Wages of Regular Workers, All India, 15-59 years, in Rs./day at 1993-94 prices

TABLE 2

Average Real Daily Wages of Regular Workers, All India, 15-59 years, in Rs./day at 1993-94 prices

⁹⁸ RUPE (2008).

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Real wages declined or stagnated for most categories of workers over the period from 1999-2000 to 2004-05. If we take five members and two wage-earners per family (one male, one female) we can see that for casual workers –the majority– in urban areas, daily per capita income in 2004-05 (at 1993-94 prices) was under Rs.12 a day. In rural areas, it was just over Rs.10 a day. Both are below the official poverty line. And this is only for the days of the year that both working members in a family found work. It is to be noted that these are averages. In other words, there are many not even earning this much. Small wonder that the high economic growth of recent years top Credit: Bernard Gagnon has made no impact on the living Wikimedia Commons standards of the poor.

bottom Farmer Credit: Redaloes, Creative Commons

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PART II The ‘collateral damage’ of macroeconomic and other policies for growth and ‘development’ under globalization In sum, the state’s approach to agriculture and small farmers is a har- binger of times to come. By giving obvious preference to a few corporations over millions of indigenous top small farmers, it is failing to perform Flower Seller its duty under the nation’s Consti- Credit: Ekabhishel, tution. If domestic companies and Creative Commons TNCs ultimately win this battle the small farmer of old will be decimat- ed over the next few decades. Tens, if not hundreds, of millions of dispossessed and displaced peasants will join the ranks of footloose labour which is lucky to find work for even half the year. Perhaps the numerical growth rate in agriculture will become impressive after this massive destruction of traditional livelihoods. The chosen few among the globally agile TNCs will come to control center Credit: Archive and dominate the Indian food chain Vanguardia –from the seed and input supplies and the grain fields all the way up to the wholesale and retail of processed foods in city supermarkets.

However, given the size of the population under consideration –over 700 million– this scenario is somewhat unlikely to actually transpire. The pressure of population on the land is growing, not diminishing, especially since jobs in others sectors of bottom the economy are not forthcoming at Assorting Eggplants anywhere close to the desired rate. Credit: Arne Hückelheim Creative Commons

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People are not going to quietly ac- have been forgotten. They can be cept the rapid worsening of their lot. briefly outlined here. The more likely eventuality is that traditional Indian agriculture will If government invests in agriculture become a zone of perpetual con- (at least in proportion to its signifi- flict and violence as powerful global cance in national income, if not to its players challenge the age-old foun- significance in employment), especial- dations of Indian agrarian life with ly in land and water regeneration, the sometimes open, sometimes tacit decentralised irrigation and dryland backing of state policy. agriculture, and the RBI ensures af- fordable credit for farmers, land pro- The neglect of agriculture since the ductivity and food production will dawn of the reform era is working grow (unless land continues to be seized against the broader economic interests from agriculture at a high rate). If not just of the rural population, but of decent prices are offered to farmers the country as a whole. Agriculture for the sale of their crop (which is is germane to the well-being of a poor to some extent happening with or- country. It is the very foundation of ganic produce already), farmer’s in- a strong developing economy. This comes would grow as well. As farm- much is obvious –now even to the ers become better off they would World Bank and the IMF, normally spend a larger fraction of their income not quick to grasp such insights. on non-agricultural goods, generat- What is less obvious is that the well- ing demand for the products of in- being of agriculture has a profound dustry and services. Many of these impact on industry and other sectors things would be produced in rural of the economy, especially in the areas themselves. Consumer goods countryside. The linkages have long and small retail would be obvious been understood by Development beneficiaries of such an approach. As economists. It’s a surprise that in the non-agricultural demand in the coun- excitement around globalization and tryside increases one can reasonably the reforms these elementary lessons expect rural non-farm employment

Credit: Bernard Gagnon Wikimedia Commons

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(RNFE) to grow as well. This would assistance…we don’t want to be de- be especially so because consumer pendent on the WTO, the IMF and goods, small retail and other sectors the World Bank.” What these latter likely to benefit from such policies institutions and their client corpora- are more labour-intensive than oth- tions are most afraid of is precisely er (more modern) sectors of industry such independence.⁹⁹ and services. One of the fundamental commitments The growth of RNFE will give a fur- made at the dawn of independent ther impetus to local food produc- India –and dating to the concerns of tion as the effective demand for food the freedom struggle during the early increases. This will further boost decades of the 20th century– was for other sectors of the local rural econ- the state to ensure the availability of omy. And so on. A ‘virtuous cycle’ land to the rural poor and marginal can be set in motion. In conjunction peasantry, by carrying out extensive with potentially successful govern- land reform. This was seen as basic ment programmes like NREGS it to the goal of distributive justice. can change the socio-economic face To this end, for instance, zamindari of the countryside. (absentee landlordism) was legally abolished after independence. In There is only one problem with such fact, the promise of “land to the til- an approach to agriculture. It leaves ler” informed many of the electoral virtually no opportunity for the gi- campaigns of various parties in the ant food companies (both domestic decades after independence. Avail- and foreign) and seed companies to ability of fertile land to the peasantry make growing profits by controlling was seen as a necessary pre-requisite India’s food-chain. Nor do corrupt to food security and the removal of politicians and bureaucrats have op- rural poverty. Land reforms were portunities they are used to. On the not particularly successful in most contrary, as local rural economies parts of India. Nonetheless, the in- pick up a dynamism of their own, tention was significant, and progress they will render the Indian peasant- was made in some states. ry relatively autonomous of happen- ings in the world outside. Leaders This intention has been summarily of farmers’ movements in India are dethroned in policy circles after the not interested in continuing their reform era began. The hypocrisy is dependence on external help of any blatant when you compare the rhet- sort. As a Karnataka farmer says “we oric of political parties with their ac- the farmers need to stand on our own tual performance. The UPA govern- two legs. We don’t want financial ment, for instance, in their Common

⁹⁹ A Karnataka Rajya Raitha Sangha (KRRS) farmer, quoted in Raj Patel, Stuffed and Starved, Portobello Books, London, 2007, p.42.

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Minimum Program announced be- cultures, euphemistically character- fore the 2004 elections that “landless ised as ‘development-induced displace- families will be endowed with land ment’. The way that development is through implementation of land assumed to happen by the book is ceiling and land redistribution leg- something like this: Most people in a islation. No reversal of ceiling will developing country are found living be permitted.” Meanwhile, land leg- in a ‘tabula rasa’ world – in a condi- islation across the country is being tion of utter destitution, barely sur- radically changed, to remove all land viving under an open sky, with no ceilings and make agricultural land access to the means of subsistence. available for industry, infrastructure, The government of the country then mining, Special Economic Zones opens up its markets to ‘the world’. (SEZs), or quite simply ‘land bank- As competition arrives, investment ing’. “There is real danger of reversal pours in, productive jobs are gen- of the land reform agenda”, admits a erated, incomes rise and ultimately report of the Ministry of Rural De- prosperity prevails everywhere. The velopment.¹⁰⁰ process takes a while, and causes pain to some along the way, but is said to Textbooks of development eco- unfold roughly like this.¹⁰¹ nomics hardly ever acknowledge the routine phenomenon of the up- We know full well –if our cognition rooting of human communities and is not tinted– that there is no such

Credit: Rajesh Kumar Singh Wikimedia Commons ¹⁰⁰ Quotations from Committee on State Agrarian Relations and Unfinished Tasks of Land Reform, Ministry of Rural Development, GoI, New Delhi, 2009, p.i, ii, available at http://www.rd.ap.gov. in/IKPLand/MRD_Committee_Report_V_01_Mar_09.pdf

¹⁰¹ While this may be seen by some as a rude caricature of the complexity of developmental processes, the popular meaning, if not the essence, of the latter is certainly captured by this description. This popular meaning has such persuasive force today that even as sophisticated a writer as Amartya Sen for instance, omits any discussion of the loss of land and livelihood, human community and culture invariably involved in the displacement induced by development. See his much lauded book Development as Freedom, Oxford, New Delhi, 2000.

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thing as a ‘tabula rasa’ in the Devel- financial firms to have easily trans- oping world. Each poor family tries ferable portfolios of assets which to survive by living off land, water, can be auctioned to highest bidders forests, pastures, rivers or coastlines at great profit.) What the vast ma- which provide it with the basic jority of people in the country suf- means of subsistence. In a country fer is the ‘collateral damage’ of such like India, every little thing –from imbalanced economic growth: they fallen twigs and wild grasses to cow- live in the shadow of forces and de- dung– finds its place in the everyday cisions taken far away from them, economic life of the people. Before very often outside the country, and the arrival of development, they do for considerations that do not con- have access to natural resources, of- cern them whatsoever. The scale of ten in the form of the commons, and displacement that has resulted from should not even count amongst the the acceleration of economic growth ‘poor’ if this access provides them all in recent times is large. their basic needs and more. (Unfor- tunately, that’s not how poverty or It bears emphasis that the mining prosperity is measured nowadays!) and mega-projects intended for the The government recognises land as greater good of the nation, on ac- privately owned if an individual has count of which so much of displace- an authorised patta or title. In all oth- ment has happened over the past six er cases (except major parts of north- decades have virtually nothing to do east India) the land is considered with the people who are forced to State property. However, in practice move. The latter do not usually par- such land may be common property. take of the benefits that accrue from It may be a common grazing area, a the projects (whether it is power, wa- village forest or a coastal belt shared ter or something else). Nor do they traditionally by fishermen. These are typically find employment in these often areas used by communities for projects. Increasingly, such modern- generations without the State pro- izing projects need highly qualified viding titles or rights. and skilled personnel who usually come from outside the region where The requirements of the mainstream the project is located. economy are today enormously demanding. Integration with a glo- Also important to remember is that balizing world economy on terms all too often land requirements are favourable to it (and the national overstated and much more land is elite) involves creating a domestic acquired than is needed for an indus- economy with, among many other trial project. In places where privatiza- things, smoothly functioning land tion and enclosure ends up depriving and property markets. (This is urgent- village communities of access to the ly demanded by globally powerful commons, it is the more marginalised

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groups –women and landless classes in particular– who suffer the most. As a collective form of economic life is lost, rural society is transformed into a set of individuals competing against each other for the crumbs of development. Many of the poor, marginalised classes lose out in the race and village society gets further stratified as the well-off classes are able to corner the few local gains of the development process –perhaps a few contracts or high levels of compensation with which they could start a new business. Rich landlords around Delhi, for instance, are often the new owners of cab services that have proliferated in recent times, even as Dalits who served as agricultural labour in the past go jobless, or Pakistan Street Vendor have to spend money on transport to Credit: S. Evans, Creative Commons travel every day for work.

A line of argument that is often given enlarge or shrink their livelihood in favour of land acquisition is that a options. The experience with dis- change in land-use from agriculture placement hitherto tends to suggest or forestry to industry raises the val- that people’s options typically shrink ue of the land dramatically, especially once they lose their access to land, if the land is close to an urban area. water or forests. With this greater monetary value of the land the losers can be more than The way that land is typically acquired adequately compensated. This argu- for industrial or other purposes in India ment has been used to defend land reflects the underlying historically acquisition for SEZs, industry, infra- given inequalities of power. Those structure and mining. who must move for the nation’s progress and development are typically The fundamental question that has poor and powerless. (Delhi’s pow- to be asked of any change from the erful politicians and bureaucrats are status quo is whether people get to after all not going to move if high- have the access to resources they grade iron ore was suddenly discov- have at present, or to viable alter- ered under the city). An anachronistic natives, whether the change will piece of legislation from colonial

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India (the Land Acquisition Act of It is as important to notice the break- 1894), meant for the extractive goals down of rural society under the pres- of the British Empire, is invoked to sure of rapid commercialization, and enable this. In the name of “public the advent of huge sums of money purpose”, using the power of “emi- in the hands of the few who are able nent domain” (the state’s prerogative to auction out large areas of land to to acquire in the ‘public interest’), the state or to industrialists. As the the land of the powerless is seized availability of guns grows (gun cul- from them by the state to promote ture is not new to the villages), new “development” projects which es- forms of violence are emerging in sentially enrich a powerful lobby the countryside and the urban centres of contractors, developers, indus- in their vicinity, in addition to older, trialists, bureaucrats and politicians, feudal modes of violence, especially along with urban middle classes and in North India.¹⁰⁴ the rural elite.¹⁰² What we are witnessing across the Following an enduring colonial-era country today is perhaps an acceler- practice, the Indian State arrogates ated, Indian version of the Enclosure to itself a discretionary power which movement which engulfed the Brit- profoundly distorts land markets, ish countryside over a period of 3-4 raising asset prices for speculative centuries stretching right across the ends. It is perhaps the single biggest period of the industrial revolution source of corruption in the country, in the 18th century. This long and enabling the formation of vast for- complex process entailed the forced tunes. If Indian capitalism is often eviction of millions of peasants from accused of being “crony” in nature, their traditional fields, commons and the land market and its sponsors have homesteads. The peasants of early to shoulder the most blame.¹⁰³ modern Britain resisted this process,

¹⁰² For detailed critical scrutinies of the Act, see Usha Ramanathan, “Displacement and the law”, EPW, Vol. XXXI, #24; June 15, 1996 and Colin Gonsalves, “Judicial failure on land acquisition for corporations”, EPW, Vol.XLV #32, August 7, 2010

¹⁰³ For detailed critical scrutinies of the Land Acquisition Act, see Usha Ramanathan, “Displace- ment and the law”, EPW, Vol. XXXI, #24; June 15, 1996 and Colin Gonsalves, “Judicial failure on land acquisition for corporations”, EPW, Vol.XLV #32, August 7, 2010

¹⁰⁴ “Indian school shooting sparks US gun crime fears”, The Telegraph, Dec.12, 2007, http://www. telegraph.co.uk/news/worldnews/1572359/Indian-school-shooting-sparks-US-gun-crime-fears.html; “Vedic Village land-grab goon nabbed”, The Times of India, September 9, 2009, http://timesofindia. indiatimes.com/city/kolkata-/Vedic-Village-land-grab-goon-nabbed/articleshow/4988654.cms; Shoma Chaudhury, “Weapons of mass desperation”, Tehelka, Vol.6 #39, Oct.3, 2009, http://www.tehelka. com/story_main42.asp?filename=Ne031009coverstory.asp; For an extended critique of the growth of organized, so-called “Far Left” rural violence, see Sailendra Nath Ghosh, “Lalgarh and Junglemahal: Where are we heading”, Mainstream Weekly, Vol.XLVII, #50, November 28, 2009, http://www. mainstreamweekly.net/article1801.html.

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Green Revolution Credit: Lokilech Wikimedia Commons as was witnessed in numerous insur- Bank and the Asia Development rections repeatedly over the early Bank. The high user charges effec- centuries of industrialization. In fact, tively exclude poor consumers, who resistance continued all the way till constitute a majority. the middle of the 19th century.¹⁰⁵ Financial liberalization also has devas- A house on fire: tating consequences for the environ- Economic growth ment. The consequences are all too causes ecological havoc real for the environment and for the The current phase of globalization has people living closest to those ecosys- had a severe impact on the country’s tems which are impacted by mining. natural environment, and conse- Enormous transfers of the control quently on those communities who over real ecological and economic depend directly on nature for their wealth is now taking place through subsistence and livelihood. Privati- financial mechanisms. These can only zation in various sectors is encouraging be stopped through state intervention. the violation or dilution of environ- Even a routine thing like the print- mental standards, and the neglect of ing of money to balance the govern- social services/goods for the poor. ment’s budget is a way of redistrib- Crucial public benefits or functions uting control over resources from like water have been privatized in those with fixed incomes to those some parts of the country under ad- with upwardly variable incomes, since vice from institutions like the World it relies on inflation. When banks

¹⁰⁵ Eric Hobsbawm, The Age of Revolution, Abacus Books, London, 1980, p.65.

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create money to finance mining projects, to take a different example, they too are again abetting the redistribution of resources away from the poor – who do not have access to credit that the rich do. If we understand money and credit as claims on resources, and also notice the structural financial exclusion faced by the poor in a climate when the rich have been borrowing and buying at will, we can appreciate the transfers of wealth that have been taking place over the past few decades in a deregulated world. Things are made doubly worse by governments only too willing to treat public and common land as though it owned them, often top Charity auctioning them to private corpora- Credit: Archive tions for a song. apudecadiz.blogspot.com

down Traffic Credit: Archive www.cepolina.com

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Changes in macroeconomic policies to environmental constraints and con- –such as in interest rates, tax rates siderations, but also to those of equi- and social spending– have profound ty and fairness when it comes to the consequences for the environment distributions of power and material and people’s livelihoods, howsoever and institutional resources. indirect. These go unnoticed since we do not even have a conceptual However, as we have just seen, the framework, let alone systems of na- impositions made by the mainstream tional accounts, which incorporate economy and the IFIs on the subsis- such connections. Even so, some ob- tence, default economies of vulnerable servations can be made. For instance, majorities, are of an order that can only cuts in social spending on account exacerbate environmental problems. of pressure from the IFIs have led to Even the limited environmental lack of funds for environmental protection. Currency devaluations lead to greater pressure on the environment, as an exporting Developing country necessarily gives up more of its resources in order to obtain a given amount of hard currency through international trade.

A sustainable form of socio-economic life cannot emerge in a land of In- dia’s size, diversity and complexity top without the adoption of a radical Bombay Stock Exchange Credit: A. Tallam, version of ecological democracy, Creative Commons which would be sensitive not merely

bottom Credit: Coyau Wikimedia Commons

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promises that have been made have economic growth is meant to be the not come close to being met. The decisive salve for poverty, the latter macroeconomic policy imperatives is still too high for a country that of a large, indebted, industrializing has been growing impressively at 8 economy such as India’s, under a or 9% in recent times. More recent neo-liberal regime, are such as to official estimates than the ones we completely colonize the policy space considered earlier have been done available and short-change any pos- by the Planning Commission. The sibility of a genuine transformation latest one puts the proportion of the which could terminate both poverty poor population across the country and hunger on the one hand, and at 38%. The Sengupta Committee stem the ecological crisis on the other. figure of 77% of Indians spending Rs.20 a day or less is corroborated Conclusion by a number of other figures, as Almost everyone in the educated we have seen. Malnutrition in the classes has come to believe that poverty country has been consistently high in India has been declining steadily and in fact rising in some parts of since the inception of the reforms the country. The incidence of anae- and has reached manageable pro- mia among children and women of portions of around a quarter of the child-bearing age has grown percep- overall population. The rising tide of tibly during this period. We would economic growth has lifted all boats. hardly expect to see such trends had This has been the dominant view. the poor been benefiting from In- The 2007-08 Economic Survey of dia’s growth run during the past few the government, for instance, claims decades. ¹⁰⁶ ¹⁰⁷ that the proportion of the poor in the total population has declined from How does one conceptualise the 36% in 1993-94 to 27.5% in 2004-05, nature of the growth process in the a view supported (as we saw earlier) Indian economy over the past few till very recently by the World Bank, decades? What is the primary mech- using an international poverty line anism at work? of $1 a day (in PPP terms). High growth, it appears, is feed- Poverty –even if perhaps on the de- ing on inequalities. The growth has cline– has not been falling quite as been demand-deepening (within swiftly as everyone has been led to the wealthy and the rich classes), believe, or as compared to the rate rather than demand-widening (cut- at which it may have decreased in ting across classes). Different income some other Developing countries. If groups meet their needs in markets

¹⁰⁶ http://www.expressindia.com/latest-news/Poverty-line-fluctuates-with-conflicting-data/504141/

¹⁰⁷ NFHS, 2005-06, GoI, http://www.nfhsindia.org/pdf/IN.pdf

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Credit: Yann Wikimedia Commons quite distinct from each other. The rich and poor and between cities and well-to-do buy their provisions in villages. It also generates pressures malls and super-markets. The not so for further migration to urban areas. well off go to Kirana stores. The poor end up in ration shops or outlets in The well-known economist Amit the informal economy. As inequali- Bhaduri proposes a simple way to ties have grown, purchasing power understand what has been going on: has come to be concentrated among “The combination of accelerating growth the elites and the middle classes, and rising inequality begins to work in mostly in urban areas and metros. unison. The corporations are needed to produce goods for the rich, and in the The growing demand for luxury process they make their high profits and goods and services thus feeds a par- provide well-paid employment for the ticular pattern of consumption de- rich in a poor country who provide a mand and corporate industrialization part of the growing market. It becomes a which renders increasingly redun- process of destructive creation of corpo- dant the skills and talents of village rate wealth, with a new coalition cutting artisans and small producers, no less across Right and Left political division than the modest output of small informed in the course of this road to high dustries. What’s more, land is taken growth. The signboard of this road is away from agriculture and farmers ‘progress through industrialisation’. The in order to facilitate industrialization middle class opinion-makers and me- (via things like SEZs), infrastructure dia-persons unite, and occasionally of- and mining, thereby exacerbating fer palliatives of ‘fair compensation’ to inequalities in society, both between the dispossessed. Yet, they are at a loss

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as to how to create alternative dignified to direct investments towards the most livelihood caused by large-scale dis- productive and profitable sectors for ‘the placement and destruction in the name efficient allocation of resources’. The of industrialisation.” price mechanism sends signals to guide this allocation, but the prices that rule Bhaduri adds: are largely a consequence of the grow- “Over time an increasingly irreversible ing unequal distribution of income in production structure in favour of the the society. The market becomes a bad rich begins to consolidate itself. Because master when the distribution of income the investments embodied in the specific is bad.”¹⁰⁸ capital goods created to produce luxu- ries cannot easily be converted to pro- Such a process of industrialization, ducing basic necessities (the luxury ho- driven by the growing demand for tel or spa cannot be converted easily to luxury items from a small fraction of the a primary health centre in a village etc.) people relies on unsustainable levels And yet, it is the logic of the market of exploitation of the environment,

Chiang Mai Credit: Takeaway, Creative Commons ¹⁰⁸ http://www.expressindia.com/latest-news/Poverty-line-fluctuates-with-conflicting-data/504141/

¹⁰⁸ NFHS, 2005-06, GoI, http://www.nfhsindia.org/pdf/IN.pdf

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given its appetite for water, energy been experiencing over most of the and non-renewable resources. Rural past decade can never trickle down India gets a raw deal in this trans- to the mass of the people. fer of resources from the hinterland to urban India. In effect, the metros Why? For growth to be inclusive in thrive on the ecological subsidies an increasingly privatised, capitalist routinely extracted from the coun- society, it must, minimally, ensure tryside. that the poor find growing purchasing power in their hands. One or more This growth can never trickle down. of the following conditions must be met: (1). New employment must be Even if a lot of well-meaning business- generated in the organized sector at a men and policy-makers in powerful pace somewhat comparable with the decision-making positions wish it rate of growth of the working popu- to, the benefits of the unprecedent- lation. (2). The indirect employment ed economic growth that India has effects (in the informal economy)

Lacquerware Factory Workers Credit: Hybernator, Creative Commons

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of growth in the organized sector overall benefits can always be split in must be substantial and make up an egalitarian fashion after they have for the failure of the organized sec- accrued (to the rich), through taxation. tor to create adequate employment. Moreover, such informal jobs have The evidence presented earlier leaves to be minimally rewarding. Super- us in serious doubt as to the viabil- exploitation only deepens structural ity of either (1) or (2). We have seen poverty. (3). If the gains of growth that growth has been largely jobless accrue largely to the rich, the gov- as far as the organized sector of the ernment must be able and willing to mainstream economy is concerned. redistribute a significant fraction of We have also seen that the linkages them to the poor, through appro- between the organized sector and priate fiscal policy. This possibil- the rest of the economy (where they ity is the last surviving hope of the exist) are typically too exploitative to growth economist –who has tradi- bring any significant lasting benefit tionally defended inequality- gener- to the poor majorities who work in Credit: Archive ating growth on the grounds that its agriculture and the informal economy. www.cepolina.com

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Credit: Yann Wikimedia Commons This also implies that population The truth is that the way the pie gets growth is not the real cause of the created determines in good measure global ecological crisis. If there was how it gets divided. If high growth is no economic growth during 1981- based on an exorbitant financial sec- 2001, but the aforesaid redistribu- tor and increasingly capital-intention was carried out, the rich would sive industrial technologies which be imperceptibly less rich than be- structurally exclude large numbers fore and the poor would be a shade of working people, it is a formida- less poor. However, nature and our bly uphill task for the government progeny would be far better off. It to correct the inequalities that result shows that redistribution is, at least with the help of taxes and spending ecologically speaking, the far more programmes. There are demands af- effective way to reduce poverty than ter all from the mainstream econo- is economic growth.¹⁰⁹ my on the tax collections –for things like infrastructure, defence, security, It would be worthwhile for young higher education etc. – which usually researchers, keen on working with take priority over social spending. If data, to estimate, in the manner of growth was to be employment-led, the NEF has done for the world as ecologically and culturally sensitive, a whole, what fraction of the gains resulting as a by-product of an ex- from growth in India since 1991 pansion of people’s creative partici- have actually reached the intended pation in a sustainable economy, it population of, say, the poorest 20-40%. would take care of both demand as One should be pleasantly surprised if well as inequalities. The removal of the fraction is significantly above what poverty could truly become a fea- it is for the world as a whole. sible goal.

¹⁰⁹ Growth isn’t Working, New Economics Foundation, London, 2006 http://www.neweconomics.org/sites/neweconomics.org/files/Growth_Isnt_Working_1.pdf

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Globalisation and its Alternatives: A View from India¹¹⁰

Ashish Kothari Author contact: Kalpavriksh, Apt 5 Shree Datta Krupa, 908 Deccan Gymkhana, Pune 411004, India [email protected]

Nandi Hillside Credit: Shyamal, Creative Commons ¹¹⁰ This essay is a shorter, modified version of chapters from a forthcoming book by the author and a colleague, Aseem Shrivastava, provisionally titled ‘Reclaiming India: Escaping the Globalisation Trap’.

176 18, September 2011 Globalisation and its alternatives: a view from India

PART I of the sheer numbers of people in- Globalisation volved, or the global importance of and its impacts India’s biodiversity and natural re- n 1992, soon after heralding in sources, but also because increasingly the new economic policies con- the Indian economy is playing an stituting globalization, the then international role. IFinance Minister of India (now its Prime Minister) Manmohan Singh Economic globalisation policies intro- delivered a lecture on environmen- duced in 1991, include: a shift away tal aspects of the reforms in Delhi from an inward-focused model of (Singh 1992). His main argument self-reliance towards a stress on ex- Globalisation was that environmental protection ports and imports, the opening up of requires resources, which would be various economic sectors to foreign created by the new policies. How- investment, liberalization of regulatory A V iew from I ndia ever, as we shall see below, things regimes, and a move from public have not played out as Singh argued. sector investments to privatization.

and its A lternatives : Economic globalization in India has The impacts of these, include the had a severe ecological impact, with following, each of which will be ex- adverse effects on several hundred amined in more detail in this essay. million people who depend directly on nature for their subsistence and i. Rapid growth of the economy has livelihood. It is important to examine required a major expansion of in- this as a global issue, not only because frastructure and resource extraction,

Credit: Archive www.justomedio.com

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and encouragement to wasteful in companies with notorious track consumption by the rich. The records on environment (and/or economy has tended to predominant- social issues), with demands to ly demand-led, with no thought further relax environmental and given to how much demand (and social equity measures. Domes- for what purpose) is to be consid- tic corporations, partnering with ered legitimate and desirable. The foreign ones or on their own, result is a significant increase in have also grown considerably in projects and processes with nega- size and power, and now make tive ecological and social costs. the same demands. ii. Liberalization of trade (exports and v. Privatisation of various sectors, imports) has had two conse- while bringing in certain effi- quences: rapid increase in exploi- ciencies, is encouraging the viola- tation of natural resources to earn tion or dilution of environmental foreign exchange, and a massive standards, and the neglect of so- inflow of consumer goods and cial services/goods for the poor. waste into India (adding to a rapidly rising domestic production). This Had Manmohan Singh’s assertion has created serious disposal and worked, by now we should have seen health problems, and impacted a spate of measures and programmes traditional livelihoods in forestry, to protect India’s environment. But fisheries, pastoralism, agriculture, the ecological crisis has only intensi- health, and handicrafts. fied. This chapter attempts to show that this is an inherent and inevi- iii. Environmental standards and reg- table outcome of the globalization ulations have been relaxed, or al- process. Just as the ‘trickle-down’ lowed to be ignored, in the bid theory does not work for the poor, to make the investment climate so too the ‘having the resources to ‘friendlier’ to both domestic and invest’ assertion does not work for foreign corporations. Governments the environment. are sacrificing more and more natural habitats and prime food- Two caveats growing land to make way for Two clarifications are necessary at commercial enterprises. In sync the outset. First, criticism of a number with this, goals of equity are being of sectors and activities below, does given up, for instance in the move not mean I am per se against them. to relax land ceiling laws to allow I am not saying there should be no industrial expansion. mining, no floriculture, no fishing, no exports and imports, and so on. iv. The opening up of the economy What is crucial is to ask not only to foreign investment is bringing whether we need these, but to what

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extent, for what purpose, and under and coasts, or farms and pastures. what conditions. These questions are simply shoved under the carpet in The example of minerals is strikingly il- the current model of ‘development’ lustrative. Between 1993-94 and 2008- under globalization. 09 mineral production in India has risen by 75%. India is now amongst the Second, many of the trends described world’s biggest producers of barites, below, are not necessarily a product of chromite, talc/steatite/pyrophillite, current globalization. Indeed many coal/lignite, bauxite, iron ore, kya- of them have roots in the model of nite/sillimanite, manganese ore, and ‘development’ we have adopted in crude steel (Ministry of Mines An- the last five-odd decades, and/or in nual Report 2008-09). This would underlying problems of governance, be a source of pride, were it not for socio-economic inequities, and oth- the inconvenient fact that most of ers. However, the phase of global- the minerals being demanded are un- ization has not only greatly intensi- der forested or poor rural areas, rich fied these trends, it has also brought in biodiversity, where communities in new elements that considerably are heavily dependent on the area’s enhance the dangers of this model to resources. Of the approximately India’s environment and people. 113,000 ha. of forest land that has been diverted for mining since 1980 Infrastructure and materials: (when it became mandatory for non- demand is the god forest use of forest land to be cleared With a single-minded pursuit of a by the central government), over double-digit economic growth rate, 70% has been in the period 1997- demand achieves the status of a god 2007, a clear indication that globaliza- that cannot be questioned. The need tion has dramatically raised demand for infrastructure or raw materials or for minerals. (Data from Ministry of commercial energy is determined Environment and Forests, obtained not by the imperatives of human by Kalpavriksh using applications un- welfare and equity, but by economic der the Right to Information Act). growth rate targets, even where, growth rates may have no necessary The ecological and social impacts co-relation with human welfare. have been horrifying. The blasted limestone and marble hills of the The last couple of decades have Aravalli and Shivalik Ranges, the therefore seen a massive increase in cratered iron ore or bauxite plateaux new infrastructure creation (highways, of Goa, Madhya Pradesh, and Orissa, ports and airports, urban infrastruc- the charred coal landscapes of eastern ture, and power stations). This has India, and the radioactive uranium meant increasing diversion of land, belt of Jharkhand, are all witness to the mostly natural ecosystems like forests worst that economic ‘development’

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can do. Tens of thousands of hect- easier for mining companies, start- ares of land have been rendered ing with the 1993 National Mineral completely barren and unproductive, Policy. In 1996, the government with only a small percentage restored approved guidelines allowing pri- (mostly a euphemism for reclamation vate companies to get prospecting by a handful of mostly exotic species licences to areas upto 5000 sq. km, of trees, nowhere near the original as against the then limit of 25 sq.km. vegetation). (Vagholikar and Moghe In 2001, Foreign Direct Invesment 2003; Bhushan et al 2008; see also (FDI) upto 100% became possible. http://www.mmpindia.org/). In the period 2000 to 2009, permits for mineral reconnaissance went up Since 1991, some of the world’s larg- from 53,000 sq.km to 466,556 sq est mining companies are investing km. In 2006 a high-level committee in India. This includes Rio Tinto set up by the Planning Commission Zinc (UK), BHP (Australia), Alcan recommended a “seamless” transi- (Canada), Norsk Hydro (Norway) tion from reconnaissance permits Meridian (Canada), De Beers (South to prospecting licences and onto Africa, Raytheon (USA), and Phelps mining licences. Then in 2008, a Dodge (USA). Many of these have as new National Mineral Policy was bad or worse environmental and social brought in with the objective to records as India’s own mining com- make the regulatory environment panies. http://www.mmpindia.org/ “more conducive to investment and Multinationals.htm. technology flow”. The new policy encourages the move towards great- The direction of policy change has er mechanization, privatisation, and been towards making life much foreign investment, suggests that

Agni Missile Credit: A. Milena, Ceative Commons

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environmental regulations become www.thehindu.com/2009/12/10/ voluntary, and assures companies the stories/2009121058660800.htm) seamless transfer mentioned above. (Ministry of Mines and Minerals, An- Exports: Selling our future nual Reports, 1999-2000 to 2008-09; Globalizing India’s economy has Planning Commission 2006; Saha- meant opening up natural resources to Sinha 2009; Ministry of Mines 2010; both domestic and foreign demand, Vagholikar and Moghe 2003). justified by the positive effect this will have on domestic economic growth. The lack of regulation in the mining In line with this, exports grew at an sector, an inevitable consequence of annual rate of over 25% from 2003- a demand-driven economy that is 04 to 2007-08, jumping to US$163 trying to meet the greed of India and billion, representing 1.4% of global the world, is clearly indicated in the trade. (Singh undated; http://com- spate of exposes regarding illegal. In merce.nic.in/publications/annualre- Karnataka alone, 11,896 cases of il- port_chapter4-2008-09.asp, accessed legal mining were detected between 30 November 2009; http://pib.nic.in/ 2006 and 2009; in Andhra, 35,411 cas- archieve/eximpol/eximpolicy2002/ es. The central government has had to eximpolicy2002_rel.html, accessed ask the Central Bureau of Investiga- 20 February 2010). tion (CBI) to go into the matter. Some states, shamed into action, have halted Whether an economic development operations in many illegal mines, and model that depends heavily on ex- arrested concerned officials. (Ministry ports is itself desirable, is a question of Mines and Minerals, Annual Re- for a separate essay. For the moment, ports 2005-06 and 2007-08; http:// assuming that some level of exports is

Mine Credit: Archive energiasrenovadas.com

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desirable or necessary, a responsible India previously did not export, and policy would have at least the fol- the introduction of new technolo- lowing key principles: gies, has fueled a steady growth in extraction and export. From a hand- • Access of the country’s citizens to ful of products being sent to about the products being considered for a dozen countries, we now export export is not jeopardized by reduced about 475 items to 90 countries physical availability or increased (www.mpeda.com/inner_home. costs; asp?pg=publications/exportreview/ trends.htm).¹¹¹ • Extraction or manufacture of these products is ecologically sustainable; But at what cost? India is now the 2nd largest aquaculture producer (in • Rights of local communities from quantity and value) in the world, at whose areas the resources are being the cost of serious ecological dam- extracted are respected; and age, and disruption of the livelihoods of traditional fisherfolk and farm- • These communities are the primary ers. One study showed that in the beneficiaries. states of Andhra Pradesh and Tamil Nadu, the social and environmental Unfortunately, exports under glo- costs of shrimp aquaculture were 3.5 balization have violated each of these times the earnings (annual losses: Rs. principles, not surprising when tar- 67280 million; annual earnings: Rs. gets are set in terms of monetary fig- 17780 million). (NEERI 1995a&b; ures of growth rather than the quality Kurien 1999). As more and more of the impacts of such growth. The areas get converted to shrimp farm- rapid increase in mining (a signifi- ing, local fish that are the staple food cant portion of which is for export) of local communities, like mullets has already been discussed above. (Mugilidae) and pearl spot (Etroplus Another instance is marine fisheries. suratensis), are eliminated (Bhatta 2002). Exports of marine products have risen from 139,419 tonnes in 1990- As marine capture fisheries have also 91, to 602,835 tonnes in 2008-09. grown to about 3 million tonnes in While the rise was extremely steep 2008, there is evidence of over-fish- in the pre-1991 period also (from ing in the territorial waters (though a small volume of 15,732 tonnes in not in the deeper seas), and overhar- 1961-62), the globalization phase is vesting of several species. (James and significant in many ways. A grow- Kitto 2008). This, according to the ing demand from countries to which Report of the Working Group on

¹¹¹ All pages in the MPEDA site open with the same URL; readers would need to search for the relevant data by accessing the links on the home page.

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Fisheries for the 10th 5-Year Plan, is now import over 100 broad kinds mainly due to the use of the seas as of wastes, of which a few dozen are ‘open access’ with no tenurial rights hazardous. Import of metal wastes is given to traditional fishing communi- now in several millions of tonnes an- ties (Mathew 2003). Technologies nually. Import of waste parings and have also changed, with bottom PCV scrap shot up from about 33 trawling becoming very common, tonnes in 1996-97 to 12,224 tonnes and the traditional diversity of gear in 2008-09. Plastic wastes as a whole as also the traditional knowledge more than quadrupled from 101,312 that maintained sustainability, rapidly tonnes in 2003-04 to 465,921 tonnes eroding. in 2008-09 (Department of Com- mercial Intelligence and Statistics, The government claims that big op- Ministry of Commerce and Industry, erators under the new policies will be data supplied on Right to Informa- allowed to fish only in deep waters, tion application by Kalpavriksh, Feb- where traditional fisherfolk do not ruary 2010). Corporate giants are go. But past experience has shown often the culprits: Pepsico has been that trawler owners find it conve- exposed sending PET bottles (very nient and cheaper to fish closer to difficult to recycle) to India; Hindu- shore (Kurien 1995). Also, trawlers stan Lever Ltd (subsidiary of Unile- continue to be illegally used in the ver) has been implicated in a case of fish-breeding season. Physical clash- dumping wastes containing mer- es between trawler owners and local cury, behind a settlement in Tamil fisherfolk remain common. Nadu. Protests by the community led the Tamil Nadu Pollution Con- Import liberalization: trol Board to take action, including or- India as dumping ground dering the scrap (416 tonnes) to be Accompanying the liberalization of sent back. (http://www.thesoutha- exports has been the opening up of the sian.org/archives/2004/mercury_ Indian economy to an increasing in_our_backyard.html, December amount and variety of imports. Poli- 10, 2004; http://www.thesouthasian. cies or programmes that gave priority org/archives/2005/waste_dumping_ to domestic agriculture and produc- grounds_of_the_w.html, June 28, tion, and to environmental and con- 2005). sumer safety, have given way to a virtual free-for-all. A growing proportion of the imported waste is from the computer and elec- The last decade or so has also seen In- tronic industry. According to an india emerging as a major importer of vestigation by Toxics Link, an NGO hazardous and toxic wastes from the working on waste issues, about 70% industrial countries, like many other of e-wastes found in recycling units of tropical countries in the past. We Delhi were those dumped by industrial

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countries into India. Toxics Link the 1990s, and has also fueled a huge found that the company Attero had domestic luxury product sector. received permission to import 8000 tonnes of e-waste in 2009. (Minis- The rapid rise in production of luxury try of Environment and Forests, Of- goods has major ecological conse- fice Memorandum, No.23-9/2009- quences from resource extraction HSMD, 2nd July 2009). (mining, tree-felling, etc.) to production (pollution, working hazards, Consumerism and waste etc.). The links between such con- India’s current wave of ostenta- sumerism and the environment are tious consumerism has its roots in a not well-studied, but there are some thirst for foreign consumer products indications. Based on surveys by the amongst a tiny elite minority, which CSO and NCAER over the 1980s was before the 1980s possible to sati- and 1990s, The Energy Research In- ate only by purchasing them abroad stitute (TERI) has documented the rapid and paying substantial customs du- rise in the use of non-renewable ma- ties to bring them home (or smug- terials (like minerals), manufactured gling them in). In the 1980s the then consumer goods (including those Prime Minister Rajiv Gandhi began with direct environmental impact like opening up the import sector. How- refrigerators and air-conditioners us- ever, the biggest thrust to consum- ing CFCs), transport vehicles, and so erism has come after the economic on. This is not just a result of rising ‘reforms’ begain in right earnest in populations, but perhaps more due

Credit: Aisart Wikimedia Commons

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to changing lifestyles. For instance, 1991, production capacity of various consumer preferences are changing forms of plastics in the country has shot from non-packaged goods to pack- up from less than 1 million tonnes, aged ones – TERI estimates that con- to well over 5 million. Average sumption of packaged paper will rise consumption of virgin plastics per from 2.7 kg per person per year in capita reached 3.2 kg in 2000/2001 1997 to 13.5 kg per person per year (5 kg if recycled material is included), by 2047. This would mean a total from only 0.8 kg in 1990/1991. By paper use of 23.1 million tonnes for 2000-01, India was producing 5400 packaging alone, and the consequent tonnes of plastics waste per day, rise in solid wastes. Hazardous waste about 2 million tonnes per annum generation is now mind-boggling, (more recent figures not available). at about 4.4 million tonnes in 2006. (Kandhari 2009; MoEF 2009; http:// Electronic waste, a phenomenon en.wikipedia.org/wiki/Plastics_ma- purely of the last couple of decades, terials_in_India, accessed 27 Febru- was estimated at 146,180 tonnes in ary 2010). 2005, and likely to go up to 800,000 tonnes by 2012. (Pachauri and Srid- Consumption Inequities haran 1998; MoEF 2009). In 2007, Greenpeace India produced a report on climate change issues in Plastics have penetrated the life of In- India, showing that a tiny percentage dians in ways no-one would have pre- of India’s population was responsible dicted even two decades back. Since for an inordinate amount of carbon

right Credit: Archive Cepolina Photo

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emissions, but this was hidden by and the wastes they throw out, it is the fact that a huge number of low- very likely that their overall ecologi- emission Indians reduced the per cal impact is even more skewed vis- capita figures (www.greenpeace.org/ à-vis the poorest classes. india/press/reports/hiding-behind- the-poor). It found that the richest Internal liberalization: (those with income above Rs. 30,000 towards a free-for-all? a month) emit 4.5 times (per person) All industrial countries of the world more than the poorest (income behave gone through a process of low Rs. 3000 a month, well over half tightening environmental standards of India’s population). All 150 million and controls over industrial and de- Indians who earn above Rs. 8000 per velopment projects, for the simple month are already above the global reason that project authorities and limit of 2.5 tonnes per capita that corporate houses on their own have scientists consider is necessary if we not shown environmental and social want to restrict the temperature rise responsibility. In India, there is a re- to below 2°C. (Greenpeace India verse process going on. 2007; Bidwai 2009). In 1994 a notification was brought in, What explains this gross difference under the Environment Protection in emissions? Greenpeace found that Act 1986, making it compulsory for the biggest difference was in the environmental impact assessments extent of household appliances us- (EIAs) to be conducted for specified ing electricity. While general light- projects. While this notification was ing, fans, and TVs are common to weak, and subject to various kinds of all classes (though much more in use implementational failures, it neverthe- by the rich), several appliances were less injected some degree of environ- found only or predominantly in mental sensitivity in development rich households… air conditioners, planning. However, it continued to electric geysers, washing machines, be seen as a nuisance by industrialists, electric or electronic kitchen appli- politicians, and many development ances, DVD players, computers, and economists. A committee set up the like. Secondly, much greater use by the Indian government pointed of transportation using fossil fuels, to the need to reduce the environ- including gas-guzzling cars and air- mental hurdle, and a World Bank- planes, characterised the consump- funded process to assess environ- tion of the rich. mental governance, also suggested ‘reforms’ (read: ‘weakening’) of this Carbon emissions are only one in- and other regulatory measures. Thus dicator of consumption inequities. If in 2006, despite considerable civil one adds all the products and servic- society opposition, the government es that the richest classes consume, changed the notification, making it

186 18, September 2011 Globalisation and its alternatives: a view from India

much easier for industries and devel- (Data supplied by Ministry of En- opment projects to obtain permis- vironment and Forests, in response sion, and weakening the provisions to Right to Information applications for compulsory public hearings. The filed by Kalpavriksh, 2008). notification also took tourism off the list of projects needing environmen- Even areas designated for the specific tal clearance, despite evidence that protection of wildlife and biodiver- in many places this was a sector out sity have not been spared. The last of control. (Kohli and Menon 2005; couple of decades have seen a spate Saldanha et al. 2007; Menon and of proposed and actual diversions of Kohli, 2008: 14-17) land within national parks and sanctuaries, including outright denotifi- The net result of these changes (and cations (or degazetting). Very soon others outlined in this chapter) has after the reforms process started, been a sharp increase in the num- for instance, several hundred sq.km ber of projects that are seeking and of Darlaghat Sanctuary (Himachal getting environmental clearance, Pradesh), Narayan Sarovar Sanctu- making it impossible for the central ary (Gujarat) and Great Himalayan Ministry of Environment and For- National Park (Himachal) were de- ests (MoEF) to properly scrutinize reserved to make way for mining, their implications, or monitor their industries, and dams. This has con- impacts. As of early 2009, MoEF tinued with several dozen other pro- had over 6000 projects to monitor, tected areas being affected. with about 20 personnel; projects granted environmental clearance are In 1991, the Coastal Regulation monitored only once in 3 to 4 years. Zone (CRZ) notification was pro- (Kohli and Menon 2009). mulgated under the Environment Protection Act 1986, as a means to The impact of globalization on en- regulate activities that could be det- vironmental regulations is nowhere rimental to ecological and livelihood clearer than when examining how interests. Though by no means per- the Forest Conservation Act 1980 fect, and despite indifferent imple- (under which all proposals for non- mentation by most states, the noti- forest use of forest land have to get fication helped protect many coastal central government permission), has areas and the fishing communities become a Forest Clearance Act. Out living in them. But for the same rea- of the total forest land diversion that son it became a thorn in the flesh of has taken place since 1980-81, about industrial and commercial interests, 55% has been after 2001; as already and their pressure on the govern- mentioned, about 70% of the forest ment resulted in about 20 relaxations land diverted for mining since 1980- to the original notification. Then in 81, came between 1997 and 2007 2005-6 the government initiated

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a move to change the notification the figure almost quadrupled to 527 altogether, proposing a system in million in 2007; in the same period, which state governments can deter- foreign visitors increased from 2.29 mine what should and should not be million to 5.08 million. Several allowed in various zones along the parts of India previously restricted coast. Civil society organizations and to visitation, have been opened up fisher communities (through net- for tourism in the last few years. This works like the National Fishwork- includes ecologically, culturally and ers’ Forum) have severely criticized strategically sensitive areas like La- the proposal for being a sell-out to dakh, Andaman and Nicobar Islands, commercial and industrial interests. Lakshadweep, and many parts of Responding to this, MoEF has al- north-eastern India. Other areas, allowed the CMZ draft notification to ready open before globalization, are lapse, and as of the time of writing, groaning under mass, unregulated promised widespread consultations tourism activity. Hundreds of cases of before coming up with a new noti- violations of the law, e.g. of the CRZ fication. (Menon et al 2007; Kasturi notification by tourist resorts on the 2008; http://www.coastalcampaign. coast, have been reported in the last few page.tl/Home.htm). years (over 1500 cases from Kovalam beach area in Kerala alone). Tiger Tourism has received a major boost reserves and other protected areas in the globalization era. From about like Kanha, Bandhavgarh, Corbett, 140 million domestic tourists in 1996, Periyar, Ranthambhor, Bandipur, and

left Indian Rhinoceros Credit: Gnozef, Creative Commons

right Herding goats Credit: Priit Kallas, Creative Commons

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Nagarahole, are ringed by resorts that the treatment of environmental sus- put enormous pressure on the staff and tainability of ‘development’ projects facilities of the reserves, repeatedly and processes is not being changed. violate both the letter and spirit of (Lele et 2010; Menon and Kohli regulations meant to minimize tour- 2009; TAI-India 2010). ism impact, and contribute virtually nothing to the upkeep of the re- Along with the attack on environ- serves. (MOT 2009; EQUATIONS mental governance, has come an 2008; 2009). increasing propensity to dilute or sidestep the social guarantees given Though well aware of the situation, to some of the most vulnerable sec- there is little action by the govern- tions of Indian society. The Land ment to regulate tourism. On the Acquisition Act 1894, one of colo- contrary, it is actively considering nial era’s most pernicious laws that the declaration of Special Tourism allows the government to take over Zones (STZ). These zones would virtually any land it wants for an have several facilities, e.g. single arbitrarily defined ‘public purpose’, window clearance and 100% tax ex- has been strengthened in a recent emption for 10 years, and would be amendment (1984), and a proposed quite large as they should be able to new Bill (2007) to enable faster or provide 2000 to 3000 hotel rooms. easier take-over of land by state and (EQUATIONS 2007). private entities. (Parker and Vanka 2008; Asher 2009). There have been some welcome moves towards stronger environ- Massive chunks of land in the heart mental oversight, by the Minister of of tribal India, home to some of State for Environment and Forests who country’s most sensitive communi- came in with the new Indian Govern- ties and some of its best forests, have ment in 2009. But a new institution in been (or propose to be) leased to the form of a National Environment industrial houses for mining, steel Tribunal, aimed at providing faster plants, and other industries. Finding legal recourse to litigants, and a pro- however that both Adivasi resistance posed National Environment Pro- and the hold of the so-called ‘Naxal’ tection Authority, aimed at creating or ‘Maoist’ groups¹¹² is not allow- an independent regulatory body, are ing any of these plans to materialize, very inadequate attempts, given that the state government in the name of the overall context of fundamentally fighting ‘Naxalism’, has armed some flawed legislation and approach to Adivasis to turn against their own

¹¹² ‘Naxalism’ or ‘Maoism’ are loose labels to a range of strongly leftist groups in parts of eastern and central- southern India (especially in areas of tribal concentration), that have been waging armed struggles for land rights and other issues for many years. The Government of India terms them the country’s biggest internal security threat, a perspective not shared by several independent observers.

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kind. Termed ‘Salwa Judum’ (‘peace- bridges and railroads. To stoke Indi- ful hunt’), this has created a civil war an manufacturing and satisfy consumers, like situation, in which hundreds of the country needs cement, steel, and villages have been forcibly evicted or electric power in record amounts…. forced to flee. A high-level committee There is a need for a suitable social and set up by the Union Ministry of Rural economic environment to meet this na- Development (http://www.rd.ap.gov. tional challenge. Yet there’s a collision in/IKPLand/MRD_Committee_Re- with the Naxalites….Chhattisgarh, a port_V_01_Mar_09.pdf), in its draft hotbed of Naxalite activity, has 23 report had indicted corporate houses per cent of India’s iron ore deposits and like Essar and Tata, in what it called abundant coal. It has signed memo- “the biggest grab of tribal lands after randa of understanding and other Columbus”; but both this phrase and agreements worth billions with Tata references to specific corporate houses Steel and Arcelor Mittal (MT), De were removed from its final report Beers Consolidated Mines, BHP Bil- (http://www.dolr.nic.in/). Meanwhile, liton (BHP), and Rio Tinto (RTP). a report on “national security and Other states also have similar deals. terrorism’ by the Federation of Indian And US companies such as Caterpil- Chambers of Commerce and Industry lar (CAT) want to sell equipment to (FICCI), released in November 2009, the mining companies now digging is a thinly veiled argument to open in eastern India”. up central India for exploitation by corporations. (FICCI 2009). It argues Headlong into unsustainability? that “the growing Maoist insurgency Given the way India has treated its over large swathes of mineral-rich environment in the last few decades, countryside could soon hurt some environmentalists and social activists industrial investment plans”…… “just have been warning that we are on an when India needs to ramp up its in- unsustainable path of ‘development’. dustrial machine to lock in growth This conclusion, born out of observa- and just when foreign companies tion and experience, was confirmed are joining the party, the Naxalites in a report produced by the Global are clashing with the mining and Footprint Network (GFN) and the steel companies essential for India’s Confederation of Indian Industries long-term success.” …… “The other (CII) (GFN 2008). Released in 2008, reason for sounding the alarm stems this document said that: from the increasingly close proximity between the corporate world and the • India has the world’s 3rd largest eco- forest domain of the Naxalites…..In- logical footprint, after the USA and dia’s affluent urban consumers have China; started buying autos, appliances, and homes, and they’re demanding im- • Indians are using almost two times provements in the country’s roads, what the natural resources within

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the country can sustain (or twice Indian economy exhibits some robust its ‘biocapacity’); features of low carbon growth that makes its overall energy and CO2 • The capacity of nature to sustain intensity lower than that of China and Indians has declined sharply by comparable to that of the US.” Never- almost half, in the last four de- theless, the Report concludes that: cades or so. “Notwithstanding these signs of optimism, India is by no means on an TERI in a study in the late 1990s, optimal path towards sustainable de- concluded that environmental costs in velopment.” This is because growth India exceed 10% of the GDP as a has been very uneven, leaving behind result of loss in agricultural produc- a huge section of the population; and tivity, loss in timber value due to because carbon intensity of the energy degradation of forests, health costs due sector, relying as it does on inefficient to polluted water and air and costs coal technologies and distribution due to depleted water resources. systems, is still one of the highest in Further, the economic loss due to soil the world. (Rao et al 2009: 40-41). degradation resulted in an annual loss of 11-26% of the agricultural output. Multiple crises: (Pachauri and Shridharan 1998). food, water, livelihoods A very large section of India’s popu- A report on energy scenarios for India lation is going through severe and has a somewhat positive analysis: “The multiple crises: food insecurity, water

left Credit: Angélica Barón angelicabaron.blogspot.com

right Credit: Archive apudecadiz.blogspot.com

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Box 1 The Climate Change Impact and Response

The period since the 1980s, when economic globalisation started being imposed on countries of the South, has seen the greatest rise in climate change emissions. Carbon dioxide emissions have nearly doubled since 1985, as a result of substantial jumps in global trade (requiring transportation of goods and people), the rise of some key Southern economies (South-east Asia, China, India) riding on the backbone of fossil fuel energy, growth and trade related natural resource destruction (especially deforestation).

There are several scenarios of the impacts India will face. A rise of one metre in sea levels, which could occur by the early 22nd century, could inundate about 5764 sq.km, displacing over 7 million people. Changes in rainfall patterns, with overall amount increasing, but a decrease in both amount and number of rainy days in many areas, will cause worse droughts and floods than so far experienced. This and increased temperatures could, according to most assessments, reduce foodgrains production (by upto 20% for some crops), though some say it may increase. The receding and faster melting of the Himalayan glaciers (the rate of which is a topic of serious scientific disputes, but very few challenge the fact that this is happening) will threaten river-based livelihoods across northern In- dia. Changes in marine water temperatures will affect the productivity of the seas, cause rich coral systems to start dying, and change fish movement patterns in ways that fisherfolk will find difficult to cope with.

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While India’s global position has justifiably been one of demanding accountability and action from the Northern countries, its domestic policy remains weak and vas- cillating. In 2009 a National Action Plan on Climate Change (NAPCC) was released. There are some good elements, such as a significant focus on solar power and energy efficiency through dedicated missions. But even these have conceptual and implementational problems (e.g. a focus only on solar and none on other renewables, little emphasis on decentralised energy generation, and several missing sectors in energy efficiency). Many of the other elements (e.g. missions on sustainable agriculture, and water) remain stuck in tired, outmoded strategies with little bold, out-of-the-box thinking. The water mission includes a continuing dependence on big dams, completely ignoring their immense ecological and social costs. In agriculture a major chance to shift away from chemical fertilizers (responsible for about 6% of climate emissions in India) to organic inputs, has so far been missed (the Mission is still under development). There is little or no mention of inequities in how much ‘climate space’ is occupied by different sections of In- dia’s population, and the obscene consumerism of the ultra-rich. The NAPCC has been drafted, and continues to be worked on through its individual missions, with minimal public input and transparency. Overall, it does very little to challenge the fundamental flaws of the ‘development’ and growth model that brought about the climate change crisis in the first place.

Sources: GOI 2009a; MoEF 2009; Bidwai 2009; Thakkar 2009a; Greenpeace India 2009

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shortages, inadequate fuel availability, Crucial sources of nutrition such as and dislocation of livelihoods with traditional cereals (e.g millets) and limited alternative options. These pulses, or wild and semi-wild foods have all existed prior to the cur- from forests and wetlands, have de- rent phase of globalisation, and even clined both in availability and af- prior to modern forms of ‘develop- fordability (e.g. a 26% decline in ment’. But they are precisely what per capita availability of pulses since ‘development’ and globalisation is the early 1990s). (FAO 2009; MoEF meant to have alleviated; on the con- 2009; GOI 2009b; TPCG and Kal- trary, they have been exacerbated, pavriksh 2005; MoEF 2009). or stayed as severe, for many people and regions. Water insecurity is as serious. For several million people in both rural Take food insecurity. The percent- and urban areas, access to adequate age of the population going hungry potable water even for drinking is a has declined from 24 at the start of struggle. Proximate causes include the 1990s to 22 in 2004-06, a mar- mismanagement of surface wetlands ginal decrease. More tellingly, In- and subsurface aquifers, degradation of dia has the world’s largest number catchment areas that trap rainwater, of undernourished people: the Food repeated droughts, excessive con- and Agriculture Organisation (FAO) centration of population (in cities), estimate for the period 2004-06 is pollution of surface and groundwa- 251 million, a little less than a fourth ter sources. At the root of these lie of the country’s population. There policy failures (relating to wetland is still plenty of food available, with and groundwater conservation and foodgrain stocks of the Food Cor- management, pollution, and pricing of poration of India (FCI) remaining water), and appropriation by powerful consistently high, and yet a fourth corporations and elites (for instance, of Indians go to bed hungry. These Coca Cola’s bottling plants in many are people who simply can’t afford parts of India have deprived local to buy the grains, and who are not communities of safe groundwater, being reached by the government’s see http://www.indiaresource.org/ welfare schemes; a situation made issues/water/index.html, accessed 27 much worse by the alarming infla- February 2010; http://www.teriin. tion in food prices India has seen at org/cocacola.php). the end of the first of the third mil- lennium. As millions of people get Of particular concern is groundwater. pushed out of ecosytem and small- Its exploitation for agricultural, indus- agriculture based subsistence liveli- trial and urban purposes, has in many hoods, into the market economy, parts of India reached levels where food can only be obtained with cash, aquifers are dropping alarmingly. which is a scarce resource for them. Over half the groundwater blocks in

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rural India are not recharging as fast turning away under myriad influ- as withdrawal. In a reply to a ques- ences. The Anthropological Survey tion in parliament, the government of India estimated that there were has stated that in one-third of the at least 276 non-pastoral nomadic country’s districts, groundwater is not occupations (hunter-gatherers and fit for drinking, due to high levels trappers, fishers, craftspersons, en- of iron, fluoride, arsenic, and salinity. tertainers and story-tellers, healers, (MoEF 2009; Bidwai 2009; TOI 2010). spiritual and religious performers or practitioners, traders, and so on). Total use of water in India (at about Most of these are threatened, some 750 billion cubic metres) is still well already extinct or dying, and the within the water available (about people displaced from these liveli- 1869 bcm), but it is projected to level hoods are either getting absorbed off soon after 2025 and then overshoot into insecure, undignified, low- by 2050. This, of course, is if we only paid, and exploitative sector of un- consider human use; if we need to ac- organized labour, or left simply un- count for all other functions of water employed. The same holds for many for natural ecosystems and for other of the 40-million pastoral nomads of species, we realize we are already in the country. (Misra and Prabhakar a crisis situation. (MoEF 2009). 2002; Vivekanandan undated; Shar- ma et al undated). And finally, there is the crisis of livelihoods, or employment. As ecosytem Has environment been disruption and land/water degrada- mainstreamed into tion intensifies, or as access to natural national planning? resources and traditional consumers As mentioned at the beginning of declines, communities who have this chapter, at the start of the glo- been traditionally self-employed (as balization reforms in 1991, the then farmers, hunter-gatherers, fishers, Finance Minister Manmohan Singh pastoralists, craftspersons, etc), are had stated that India needed to in- increasingly impacted. There is no crease its rate of economic growth to comprehensive estimate of the loss of raise the resources needed to protect livelihoods and employment that has the environment. Quite apart from taken place so far, itself an indication of the fundamental issue of whether how neglected this issue is. (Raju 2003; one can bring back what has already TPCG and Kalpavriksh 2005). been destroyed (e.g. the several hundred thousand hectares of natural Particularly badly hit are nomadic forest that have been submerged under groups, their migratory routes disrupted, dams or mined out or chopped for their lifestyles and cultures marginal- industry), one can ask: has funding ized, misunderstood or denigrated, for environmental protection sub- and their own younger generations stantially increased in proportion to

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the problems that globalised ‘devel- non-conventional energy sources. opment’ has caused? And has environ- These were given about 0.8% of the ment become a central part of the total energy budget in 1992-93, and planning process? have crept up to a still-mere 1.28% in 2008-09. Most of the rest of the While the central government allo- budget went into thermal power, cation to the MoEF has steadily gone acknowledged to be highly pollut- up since the early 1990s (from about ing and the biggest source of climate Rs. 3700 million in 1995-96 to 15000 change gases; a substantial portion million in 2009-10¹¹³), its share of the also went into hydro-power, much total budget has remained dismally of it into ecologically and socially low. MoEF’s allocation has never, destructive big dams. (GOI 2009). ever, gone even near the mark of 1% of the total budget. Indeed, it has Another way to assess the central- steadily declined as a share of the to- ity given to ecological issues in the tal budget, since 2004-05., reaching macro-planning process, is to ex- an all-time low of 0.36% in 2009- amine the annual Economic Sur- 10. While the total budget has risen vey produced by the Government over 5 times in this period (1995-96 to of India, reviewing major trends in 2009-10), the MoEF budget has risen the economy and providing an out- only 4 times. It is therefore clear that look for the coming year. Since the even where the government has more early 1990s, the Survey has included overall money, it is not putting a pro- a section on environment, previously portionally higher amount into envi- absent. However, the section has re- ronment. mained an insignificant aside, getting one or two pages out of around 200. What about other sectors of the bud- And while this has often painted a get that may be related? One clear dismal situation regarding forests, indication could be the funding for land and water, and pollution, this

Jazmine Vendor Credit PlaneMad, Ceative Commons ¹¹³ Figures not adjusted to a baseline; it is therefore more relevant to look at the trend of the share of the budget that MoEF is allocated, over this period.

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has never been linked to the years’s issues’ have to be looked into, in rela- major economic developments. tion to climate change and the need They do not, for instance, analyse for ‘ecological sustainability of India’s whether the impact of these devel- development path’. This could be opments was ecologically detrimen- one wedge for the much fuller en- tal or corrective, nor the implica- try of environment into economic tions of environmental degradation assessments in future, but for the for future economic development. moment, those who are in charge of India’s economy, do not appear to Despite repeated pronouncements be particularly interested. of the goal of ‘sustainable development’, there are no criteria and in- Has globalization dicators in use to assess whether we not benefited the are heading towards such a goal. environment at all? There are undoubtedly a number of For perhaps the first time, the2008-09 environmental benefits that global- Survey mentions that ‘consumption ization brings. Several technologies

Credit: Luca Galuzzi Wikimedia Commons

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relating to renewable energy, pollution that economic globalization has un- control, efficiency, and so on, have leashed are not going to be quelled been part of the overall inflow that simply by deploying environmentally globalization enables. The electronics appropriate technologies or spreading and communications boom too has rapid-fire information. At best, these facilitated much faster and greater will delay the ecological collapse exchange of information and ideas, and social disruption that economic including the possibility of campaign globalization is leading us towards, alerts that people around the globe helping us to gain time, and provid- can respond to virtually immediately. ing some steps in the transition to, a It can also be argued that many mul- radically different society. But what tinational corporations, and India’s could such a society look like; what is own megacorporations, have greater the alternative to economic globalisa- resources to research into and develop tion? ecologically superior technologies for many processes. PART II TOWARDS ALTERNATIVES: Yet, there is no indication that these RADICAL ECOLOGICAL benefits of globalization are any- DEMOCRACY where commensurate with the losses it entails, as outlined in this chapter. Radical Ecological Whatever indications are available, Democracy: An introduction quantitative or qualitative, point to If the real aim of human society is growing ecological unsustainability of happiness, freedom, and prosperity, the country as a whole, and increasing there are indeed many alternative environmental insecurity for hun- ways to achieve this without endan- dreds of millions of its citizens. At gering the earth and ourselves, and least partly this is because the forces without leaving behind half or more of

Credit: Bernard Gagnon Wikimedia Commons

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Credit: Yann Wikimedia Commons humanity. This applies to India as to decision-making, based on the twin any other country, though the specifics principles of ecological sustainability of the alternatives will vary greatly and human equity.¹¹⁴ depending on ecological, cultural, economic, and political conditions. Ecological sustainability, is the This essay presents, all too briefly, an continuing integrity of the eco- outline of some key ingredients of a systems and ecological functions on more sustainable, equitable, and just which all life depends (including India, and glimpses of initiatives that all hydrological, chemical, and are already achieving one or more physical processes that give us the elements of such a framework. air, water, and soil we cannot live without). This encompasses the I call this framework Radical Eco- continuation of biological diversity logical Democracy (RED): a social, as the fulcrum of life, ensuring the political and economic arrangement security of species from human- in which all citizens have the right caused extinction. and full opportunity to participate in

¹¹⁴ For elaborate expositions of more participatory forms of democracy, see: the concept of ‘radical democracy’ in Markovic 1994: 131-145; ‘inclusive democracy’ by Fotopoulos, http://en.wikipedia. org/wiki/TakisFotopoulos#Inclusive_Democracy, ‘associative democracy’ in Hirst 1994. For glimpses into ancient Indian democratic or republic-like practices, see Muhlberger 1998; on clan assemblies, village assemblies, and gana-sanghas, see Thapar 2002. The environmental angle to radical democracy has been brought out by many, including Morrison (1995) and Mitchell (2006). An earlier and shorter exposition of RED occurs in Kothari 2009.

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Human equity, is a mix of equal- where individuals and collectives are ity of opportunity, full access to responsive to each other’s needs and decision-making forums for all rights, and to the needs and rights of (which would include the principles non-human nature. of decentralization and participation), equity in the distribution . Dignity of labour: equity be- and enjoyment of the benefits of 4tween intellectual work and human endeavour (across class, physical labour, as opposed to the caste, age, gender, race and other premium given to the former. divisions), and cultural security. . Subsistence lifestyles: ways of Linked to these is a set of the following 5living that are not predominantly basic values (amongst others) that profit-oriented, with low ecologi- need to be respected: cal footprints and greater control by communities and citizens. . Diversity and pluralism: the 1great plurality of ways of living . Simple living and the qualitative (cultures, livelihoods, political and 6pursuit of happiness: the pursuit governance systems, all of these re- of knowledge, happiness, and satis- lating to diverse ecological condi- faction through cultural and social tions), that have characterized the interaction, in which simple (not ages, many of which continue even necessarily austere) lifestyles become in 21st century India, with none a norm, replacing the endless accu- having the predominant status of be- mulation of material goods as central ing the ‘mainstream’, moving away human goals. from the homogenizing tendency of globalisation. . Customs and social norms: reli- 7ance on customs and norms (not . Cooperation and the ‘commons’: necessarily written) as much as on 2the conduct of life predominantly coded policies and statutory laws, through forms of collective cooper- to regulate all forms of human be- ation, treating resources for survival haviour; but freed of the class, caste, as the commons, as opposed to the gender and other inequities they are cutthroat competition and privatiza- sometimes characterized by. tion that globalisation thrives on. . Non-violence: not doing harm . Rights with responsibilities: the 8to fellow human beings (including 3full range of community and in- those of future generations), and to dividual human rights, including non-human species; this includes the right to a healthy and fulfilling moving away from the violence in- environment, but with the full re- herent in the current model of ‘de- sponsibility of ethical citizenship, velopment’ and globalisation.

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. Participation: access to forums right-wing Hindu chauvinists talk 9and avenues of participation in all about; traditions need to be rescued matters impacting one’s life, local to from those who use them in a big- global. oted way (on which, see an incisive essay by Sharma, 2009). Taking the above principles together (and undoubtedly others that can be Localisation added), RED is a continuous and mutu- Localisation, a trend diametrically ally respectful dialogue amongst hu- opposed to globalization, is based man beings, and between humanity on the belief that those living closest and the rest of nature. It is also not to the resource to be managed (the one solution or blueprint, but a great forest, the sea, the coast, the farm, variety of them. One of the first mis- the urban facility, etc), would have takes we must immediately correct, the greatest stake, and often the best is the imposition of one economic knowledge, to manage it. Of course model, or indeed one model of gov- this is not always the case, and in ernance, education, health, and en- India many communities have lost vironmental management, on the the ability because of two centuries enormous diversity of ecological and of government-dominated policies, cultural situations that defines India. which have effectively crippled their own institutional structures, customary These would include systems once rules, and other capacities. Neverthe- considered valuable but now con- less a move towards localization of sidered outdated and ‘primitive’: essential production, consumption, subsistence economies, barter, local and trade, and of health, education, haat-based trade, oral knowledge, and other services, is eminently pos- work-leisure combines, the ma- sible if communities are sensitively chine as a tool and not a master, local assisted by civil society organizations health traditions, handicrafts, learn- and the government. The few exam- ing through doing with parents and ples given in this essay are amongst other elders, frowning upon prof- thousands of Indian initiatives at de- ligacy and waste, and so on. This centralized water harvesting, bio- does not mean an unconditional ac- diversity conservation, education, ceptance of traditions -indeed there governance, food and materials pro- is much in traditional India that duction, energy generation, waste needs to be left behind- but rather a management, and others (in both re-considered engagement with the villages and cities) (Agarwal and past, the rediscovery of many valu- Narain 1997; CEE 2002; Satheesh, able practices which seem to have 2002; Pathak 2009; for several dozen been forgotten and building on the case studies, see http://planningcom- best of what traditions offer. This is mission.nic.in/reports/sereport/ser/ not the kind of revivalism that India’s seeds/stdy_seed.htm; see also Down

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to Earth Special issue ‘Good News’, to rural and urban communities), taken at http://www.downtoearth.org. to their logical conclusion, are es- in/default20090115.htm). Nor are sentially about localisation.¹¹⁵ ‘Com- these only initiated by civil society munitization’ (providing greater groups. Indeed the 73rd and 74th local control) of education, health Amendments to the Indian Consti- and other aspects has been success- tution (mandating decentralization fully tried by the governament of

Box 2 Agricultural Transformations

In the low-rainfall region of Zaheerabad, Andhra Pradesh, Dalit women have brought about an agricultural revolution in 75 villages. Mobilised under the banner of the Deccan Development Society, women’s sanghas (assemblies) have used a mix of organic farming and pastoralism, traditional seed diversity, economical water use, community grain reserves, links with consumers including through the Public Distribution System and an organic restaurant, celebration of biodiversity as part of cultural events and festivals, outreach through locally generated media, and a host of other measures. This has helped transform a situation of chronic food shortage, unemployment, and dependence on government, particularly amongst Dalit women and other disprivileged sections, into one of self-sufficiency, dignity, and control over their own lives. (www.ddsindia.com).

Other such initiatives have been facilitated by the NGO Green Foundation in Karnataka (http://www.greencon- serve.com/), and the Jaiv Panchayat network of Navdanya (http://www.navdanya.org/campaigns/jaiv-panchayat).

¹¹⁵ Decentralisation has so far had very mixed impacts in India; widespread bureaucratic resistance, local power-play, and lack of capacity amongst communities to handle decentralized functions, have undermined implementation across much of India, but in many states organized communities and civil society groups, and sensitive officials, have also managed to utilize it for people’s benefit. For a detailed review, see various essays in Jayal, 2006.

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the north-east Indian state of Naga- castes interacting with much greater land (http://www.nenanews.com/ equality in Kuthambakkam village ANE%20June%201-15,%2007/ of Tamil Nadu, and adivasi chil- special%20report1.htm, accessed 1 dren being empowered through June 2009). the Narmada Bachao Andolan’s jeevan shalas (all described elsewhere For localization to succeed, it is crucial in this chapter). In any case, there to deal with the socio-economic ex- is little evidence that globalisation ploitation that is embedded in India’s has in any significant way reduced caste system, inter-religious dynamics, caste, religious, and gender exploita- and gender relations. Such inequities tion, and indeed not brought in new can indeed be tackled, as witnessed forms of inequality. in the case of dalit women gaining dignity and pride through the ac- Working at the landscape level tivities of Deccan Development So- The local and the small-scale are not by ciety in Andhra, dalits and ‘higher’ themselves adequate. For many of the

Box 3 Conservation Democracy

Across the country there are literally thousands of community-led efforts at protecting and regenerating forests, wetlands, grasslands, and coastal/marine areas, as also wildlife populations and species (several case studies and state/national analyses are presented in Pathak 2009). Such ‘community conserved areas’ (CCAs) are a crucial reason for the continued presence of natural ecosystems and wildlife even amidst dense human population. An important component of these initiatives is the enormous diversity of rules and institutions that communities have developed, for governance and management. Institutions for management range from a small youth committee to the full gram sabha (village assembly), and the rules can be oral or written, traditional or new, usually accompanied by varied sanctions and penalties for violation.

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problems we now face are at much and cultural boundaries. In a detailed larger scales, emanating from and af- exercise conducted as part of the Na- fecting entire landscapes (and seascapes), tional Biodiversity Strategy and Action countries, regions, and indeed the Plan process (TPCG and Kalpavriksh, earth. Climate change, the spread of 2005), such planning was envisaged toxics, and desertification, are exam- for 10 such landscapes across India. ples. Landscape and trans-boundary These pointed to the need to: planning and governance (also called ‘bioregionalism’, or ‘ecoregionalism’, . Delineate appropriate ecologi- amongst other names), are exciting 1cal boundaries, e.g. those defined new approaches being tried out in by mountain ranges, rivers and river several countries and regions. These basins, coasts, etc. are as yet fledgling in India, but some are worth learning from. The Arvari . Understand the dynamics of Sansad (Parliament) in Rajasthan 2various ecological factors within brings 72 villages in the state of Ra- these boundaries. jasthan together, to manage a 400 sq.km river basin through inter-village . Overlay these boundaries and coordination, making integrated 3interactions with socio-cultural plans and programmes for land, ag- and political ones, highlighting the riculture, water, wildlife, and de- possible convergences, e.g. when dis- velopment (Hasnat 2005: 16-17; trict or state boundaries match those http://www.tarunbharatsangh.org/ of watersheds or mountain ranges. programs/water/arvariparliament. htm, accessed 1 June 2009). This . Consider planning and manage- is part of an effort to create water 4ment mechanisms for the eco-re- self-sufficiency in an arid zone, over gions thus defined, including, building several hundred villages, through from the grassroots as described below, decentralised harvesting and strict one or more institutions that can be self-regulation of use, initiated by charged with these tasks. the community NGO Tarun Bharat Sangh (www.tarunbharatsangh). In Building on decentralized and land- Maharashtra, a federation of Water scape level governance and manage- User Associations has been hand- ment, and in turn providing it a solid ed over the management of the backing, would be a rational land use Waghad Irrigation Project, the first plan for each bioregion, state and the time a government project has been country as a whole. This plan would completely devolved to local people permanently put the country’s eco- (Paranjape and Joy undated). logically and socially most fragile or important lands into some form of Working at the landscape necessarily conservation status (fully participa- envisages thinking across political tory and mindful of local rights and

204 18, September 2011 Globalisation and its alternatives: a view from India Box 4 Sustainable and Democratic Cities

Moving away from the classic model of a city parasitical- ly dependent on the countryside for all its needs, is precisely what Bhuj, the district headquarters of Kachchh (Gujarat), is aiming for. Civil society and consultancy groups like Hunnarshala, Sahjeevan, Kutch Mahila Vi- kas Sangathan, and ACT, have teamed up to mobilize slumdwellers, women’s groups, and other citizens into reviving watersheds and creating a decentralized water storage and management system, manage solid wastes, generate livelihood for poor women, create adequate sanitation, and provide dignified housing for all. The process is also re-establishing common spaces for all to use, and informed citizens’ involvement in the full planning process to realize the vision of the 74th Amend- ment of the Indian Constitution (providing for urban decentralization). Deeper democratic processes in the context of a city are also the aim of processes in Banga- lore, initiated by the network Janaagraha. Its approach is characterized by taking a regional perspective of the city (looking at linkages with Bangalore’s surrounds), empowering citizens (including children and the youth) with information regarding their rights and roles in urban processes, enabling citizens and officials with the skills necessary for improved urban planning, and facilitating direct responsibility, accountability and transparency of agencies towards citizens. In Delhi, the NGO Parivar- tan has facilitated greater citizens’ access to government offices, helped people in lower income class colonies obtain better services including by challenging the massive fraud in ration (fair price) shops, and forced the government to abandon a proposed World Bank funded project that would have hiked up water costs with the poor bearing the brunt (www.hunnar.org; www.janaagraha.org; www.st-award.org; Baviskar 2010).

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tenure). Such a plan would also enjoin Dewas district of Madhya Pradesh upon towns and cities to provide as where Samaj Pragati Sahayog is much of their resources from within active, and those in Alwar district their boundaries as possible, through of Rajasthan where Tarun Bharat water harvesting, rooftop and vacant Sangh works (Pangare and Pangare plot farming, decentralized energy 1992; Sakhuja 2008; http://www. generation, and so on; and to build fao.org/docrep/x5669e/x5669e06. mutually beneficial rather than para- htm, accessed 1 June 2009; Anand sitic relations with rural areas from undated; www.tarunbharatsangh. where they will still need to take org; www.samprag.org). resources. The greater the say of rural communities in deciding what Governance, local to national happens to their resources, and the Central to the notion of RED, is greater the awareness of city-dwellers the practice of democratic gover- on the impacts of their lifestyles, the nance that starts from the smallest, more this will happen. most local unit, to ever-expanding spatial units. A number of theo- Ultimately as villages get re-vitalized ries of democracy or governance through locally appropriate develop- have expounded on this, across the ment initiatives, rural-urban migration broad spectrum of political ideolo- which today seems inexorable, would gies (Markovic 1994; Gandhi 2008; also slow down and may even get re- Morrison 1995). In each of these, versed… as has happened with villages and crucial to the concept of RED, Industrial Park, Mumbai like Ralegan Siddhi and Hivare Bazaar is the combination of rights and re- Credit: A. Sarda in the state of Maharashtra, those in sponsibilities posited above. Wikimedia Commons

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Box 5 Local Self-Governance and Planning

The Gond adivasi village of Mendha-Lekha, in the state of Maharasthtra, with a history of involvement in mass movements against big dams and industrial deforestation, takes decisions involving all its adults. For these decisions it uses information generated by abhyas gats (study circles involving villagers and where necessary, external experts). Decisions are taken only by consensus, creating a high stake in their implementation. All government depart- ments have to seek consent of the gram sabha for their activities. In the last three decades the village has moved towards fulfillment of all basic requirements of food, water, energy and local livelihoods, as also conserved 1800 hectares of forest. There is now the challenge of transferring the values of collective decision-making, and conservation, to new generations. (Pathak and Gour-Broome 2001; Pathak and Taraporewala 2008; http://www.indianex- press.com/news/gadchiroli-villages-get-rights-to-forests/554714/)

An attempt at bringing citizens at the urban ward level into the planning process, is the participatory budgeting exercise in a number of cities in India (and many other countries). The idea is for citizens to submit their priorities for spending, which are then converted into project proposals by official agencies or people’s representa- tives; these then go back for citizen voting and then get incorporated into budgets and implementation plans. Amongst the first to initiate this process was Bangalore, followed by Hubli-Dharwad and Pune. This process is still only one step in the direction of deeper democratic urban planning, but a significant one, since funds allocation and use is often the main stronghold of a minority in power. (Menon 2009).

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In India, the Constitution mandates hamlet or village or urban colony are governance by panchayats at the vil- conveniently able to participate in lage and village cluster level, and by decision-making. All critical decisions ward committees at the urban ward relating to local natural resources or level. However, these are represen- environmental issues should be taken tative bodies, subject to the same at this level, with special provision to pitfalls that plague representative de- facilitate the equal participation of mocracy at higher levels. It is crucial women and other underprivileged to empower the gram sabha (village sections. assembly) in rural areas, and the area sabha (smaller units within wards) Larger level governance structures in cities, or other equivalent body need to essentially emanate from these where all the adults of the individual basic units. These would include

Box 6 The Role of Knowledge

The most relevant knowledge for RED will also be that which disregards the artificial boundaries that western forms of education and learning have created, between the ‘physical’, ‘natural’, and ‘social’ sciences, and between these sciences and the ‘arts’. Ecological and human systems are not constituted by such neat boxes, landscapes are not amenable to easy boundaries between the ‘wild’ and the ‘domesticated’, the ‘natural’ and the ‘human’. The more we can learn and teach and trasmit knowledge in holistic ways, giving respect not only to specialists but also to generalists, the more we can understand nature and our own place in it. In a number of countries, universities (ide- ally to be renamed ‘multiversities’) are already experiment- ing with such inter-disciliplinary and trans-disciplinary studies, encouraging students to cut across previously impenetrable boundaries. An even bigger challenge is to integrate modern and traditional knowledges in the institutions of learning, providing respectful places to experts from the latter, sending students out to learn from

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Kerala, Fishing Credit: H. Rosbach, Ceative Commons

‘ordinary’ folks through new forms of the ancient system of apprenticeship, bringing back oral traditions, and so on. A number of alternative education and learning initiatives attempt to do this: schools like pachasaale of the Deccan Development Society, in Andhra Pradesh, and the jeevan shalas (‘life schools’) of the Narmada Bachao Andolan, struggling to save the Narmada valley and its inhabitants from a series of mega-dams; colleges like the Adivasi Academy at Tejgadh, Gujarat; open learning institutions like the Bija Vidyapeeth in Dehradun, Ut- tarakhand (refs), and others.

http://www.ddsindia.com/www/psaale.htm; Suresh Kumar Challa, DDS, pers. comm, Dec. 2009; http://www.ddsindia. com/www/Education.htm; http://www.narmada.org/AL- TERNATIVES/jeevanshalas.html http://www.narmada. org/nba-press-releases/february-2009/17Feb.html; http:// www.adivasiacademy.org.in; http://www.navdanya.org/ earth-university

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clusters or federations of villages with livelihoods. The National Rural Em- common ecological features, larger ployment Guarantee Act (NREGA), landscape level institutions, and others one of the current government’s that in some way also relate to the flagship programmes, as also other existing administrative and political schemes such as the Jawaharlal Nehru units of districts and states. Governance National Urban Renewal Mission across states, and across countries, of (JNNURM), could well be oriented course presents special challenges; towards such environment-employ- there are a number of lessons to be ment combinations. Also important learnt from failed or only partially in the new ‘green job’ deal would successful initiatives such as river ba- be a renewed emphasis on labour- sin authorities (Thakkar 2009b). intensive rural industries and infrastructure, including handlooms and Employment and livelihood handicrafts, local energy projects, The combination of localization and rural roads, and others that people landscape approaches also provides can be in control of, building on massive opportunities for livelihood their own traditional knowledge or generation, thus tackling one of India’s with easily acquired new skills. biggest ongoing problems: unemployment. Land and water regen- The United Nations Environment eration, and the resulting increase in Programme and the International productivity, could provide a huge Labour Organisation estimate that source of employment, and cre- there is considerable employment ate permanent assets for sustainable opportunity in ‘green jobs’, defined

Farmer, Credit: WRI Staff, Creative Commons

210 18, September 2011 Globalisation and its alternatives: a view from India

right Credit: Quartl Wikimedia Commons

must be truly astounding. Yet no comprehensive study on this potential has ever been carried out.

Economic democracy RED requires not only a fundamental change in political governance, but also in economic relations of production and consumption. Globalized left economies tend to emphasise the de- Farmer, DRC. Credit: N. Palmer, mocratization of consumption (the Creative Commons consumer as ‘king’…though even this hides the fact that in many cases there is only a mirage of choice), but not as “decent work”¹¹⁶ that helps to the democratization of production tackle the ecological crises we face. (Shrivastava 2009). This can only For instance, organic, small-scale change with a fundamental reversal, farming can employ more people than towards decentralized production conventional chemical-based agri- which is in the control of the pro- culture. Renewable energy genera- ducer, linked to predominantly local tion, and energy efficiency, as yet in consumption which is in the control its infancy, could provide jobs to tens of the consumer. of millions. (UNEP et al 2008). For both farming and energy (generation Village-based or ‘cottage’ industry, and efficiency), as also several other small-scale and decentralized, has been a sectors, such as transportation, en- Gandhian proposal for decades. Such ergy-efficient building, decentralized industry would be oriented to meet- manufacture, recycling, forestry, ing, first and foremost, local needs, and others, the potential in India and then national or international

¹¹⁶ Decent work is defined by the International Labour Organisation as opportunities for women and men to obtain dignified and productive work in conditions of freedom, equity, security and human dignity http://www.ilo.org/global/About_the_ILO/Mainpillars/WhatisDecentWork/index.htm

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needs. Since this would be a part of a cluster of 7-8 villages to form a a localized economy in which pro- ‘free trade zone’, in which they will ducer-consumer links are primarily trade goods and services with each (though not only) local, the crucial other (on mutually beneficial terms) difference between such production to reduce dependence on the outside and current capitalist production is market and government. This way, that it is for self and others, primarily the money stays back in the area for as a service and not for profits (Ku- reinvestment in local development, marappa 1962). and relations amongst villages get stronger. In Gujarat, the NGO Bha- Groups of villages, or villages and sha is promoting the idea of Green towns, could form units to fur- Economic Zones to encompass doz- ther such economic democracy. In ens of tribal villages, based on the Tamil Nadu, the dalit panchayat “concepts of sustainability, ecologi- head of Kuthambakkam village, cal sensitivity, and an ingrained un- Ramaswamy Elango, is organizing derstanding of the cultural roots of a

top Credit: Hansueli Krapf, Creative Commons

bottom Gram Sabha Credit: Yann Wikimedia Commons

212 18, September 2011 Globalisation and its alternatives: a view from India

people”. The Nowgong Agriculture tioned above, are just two examples Producer Company Ltd (NAPCL) of what locally democratic trade rein Madhya Pradesh and the Aharam lations could look like). Traditional Crop Producer Com- pany (ATCPC) in Tamil Nadu are Financial management itself needs examples of farmer-run companies to be radically decentralized, away that enable producers directly reach from the mega-concentrations that their markets. (www.goodnewsin- today’s banks and financial institu- dia.com/index.php/Magazine/story/ tions represent. These globalized elango-kuthambakkam/; Siganporia institutions and the free rein given 2009; http://www.bhasharesearch. to their speculative tendencies, have org.in/Site.html#id=GEZ; personal been at the heart of the latest financial observations, November 2009; Avani crisis. But simultaneously, across the Mohan Singh, NAPCL Board, pers. world a host of localized, commu- comm., 2009; Ghate 2009). nity-based banking and financing systems have also cropped up over Money may remain an important the last couple of decades (Morrison medium of exchange, but would 1995: 195-97). be much more locally controlled and managed rather than controlled Will big industry still have a place? anonymously by international fi- Perhaps, though this will depend nancial institutions and the abstract on what future societies, far more forces of global capital operating conscious of the ecological and so- through globally networked financial impacts of production and con- cial markets. Considerable local sumption, will want to produce. trade could revert to locally designed Moreover, the choice of technolo- currencies or barter, and prices of gies will be a matter of open pub- products and services even when lic discussion and argument, rather expressed in money terms could be than being unilaterally decided by decided between givers and receiv- powerful corporations. But even if ers rather than by an impersonal, big industrial units are necessary, non-controllable distant ‘market’. they will only be the last resort for A huge diversity of local currencies products that small-scale industry and non-monetary ways of trading simply cannot make. and providing/obtaining services are already being used around the The role of the state world, (Cohen-Mitchell 2005; see Though communities (rural and ur- also International Journal of Comple- ban) will be the fulcrum of the alter- mentary Currency Systems, at http:// native futures, the state will need to www.uea.ac.uk/env/ijccr/index. retain, or rather strengthen, its wel- html The ‘free trade zone’ and the fare role for the weak (human and adivasi ‘green economic zone’ men- non-human). It will assist commu-

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nities in situations where local ca- there are currently intense conflicts pacity is weak, such as in generating (e.g. the Siachen glacier between resources, providing entitlements, India and Pakistan). More globally, and ensuring tenurial security. It will strengthening various treaties on rein in business elements or others peace, rights, and the environment, who behave irresponsibly towards the are a key agenda. environment or people. It will have to be held accountable to its role as Much more needs to be said about guarantor of the various fundamen- this, but this essay is not focusing on tal rights that each citizen is supposed the international dimension as such. to enjoy under the Constitution of India, including through appropri- Is such a transformation possible? ate policy measures such as the Right RED entails huge shifts in gover- to Information Act the government nance, and will be resisted by today’s brought in in 2005. Finally, it will political and corporate power-cen- retain a role in larger global relations tres. But in India, there are many between peoples and nations. signs that a transformation is possible over the next few decades, in- International relations cluding: The reversal of economic globalization does not entail the end of global . Growing civil society mobili- relations! Indeed there has always 1zation to resist elements of the been a flow of ideas, persons, services dominant economic growth model. and materials across the world, and There has been a marked growth in this has often enriched human soci- mass movements against destruc- eties. RED, with its focus on local- tive development projects, espe- ized economies and ethical lifestyles, cially amongst communities most learning from each other, would ac- impacted by displacement or the tually make the meaningful flow of degradation of their environment, ideas and innovations at global levels supported by civil society groups in much more possible than a situation urban areas (Shiva et al, 1991; Agar- where everything is dominated by wal et al, 1994; Humanscape, special finance and capital. issue on movements, October 2000; Kothari et al, 2003; Oommen, 2008; India needs to build much better ICR 2010). relations with neighbouring countries, based on our common ecolog- . Civil society facilitating basic ical, cultural, and historical contexts. 2needs: The repeated failure of Transboundary landscape and sea- the state to deliver on many counts, scape management would be an ex- has prompted civil society organiza- ample, including ‘peace zones’ ori- tions (community-based, or NGOs) ented towards conservation where to take on the role of provision of

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basic facilities and amenities, and of 2006, and the Scheduled Tribes and facilitating local empowerment, as Other Traditional Forest Dwell- illustrated in examples in this chap- ers (Recognition of Forest Rights) ter. But care is needed that they do Act 2006. Each of these has a base not exempt the state from its roles as in people’s initiatives; e.g. the RTI described above. emerged from grassroots struggles in Rajasthan, Delhi and elsewhere, . Policy shifts and reforms: Civil led by groups like the Mazdoor 3society advocacy and initiatives Kisan Shakti Sangathan (MKSS) de- by progressive individuals from manding access to official records on within the state itself, has led to some employment and funding (Kidam- policy shifts and reforms that are bi undated; Baviskar 2010; http:// against the general trend of economic www.mkssindia.org/node/41). globalisation. Three recent legislative measures are examples: the Right to . Technological shifts: Many tech- Information Act 2005, the National 4nological innovations are mak- Rural Employment Guarantee Act ing human life not only less dreary

Credit: Paulrudd Wikimedia Commons

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but also more ecologically sensitive, move towards greater sustainability. in industrial and agricultural pro- Shifting subsidies from ecologically duction, energy, housing and con- destructive practices such as chemi- struction, transportation, household cal-heavy agriculture, to truly sus- equipment. There is also growing tainable ones like organic farming, appreciation of the continued rel- are one powerful set of changes that evance of many traditional tech- a number of civil society groups have nologies, e.g. in agriculture, textiles demanded in India. Taxes that reflect and other manufacturing, and other something of the true value of natural fields. Countries in a ‘developing’ resources being used by urban and stage, have the unprecedented op- industrial-scale consumers, discour- portunity to leapfrog directly from age ecologically destructive practices some of the most wasteful industrial, including consumerism, and reduce left energy, and transportation tech- income disparities, would also con- Thar Desert nologies, into super-efficient ones, tribute substantially. Credit: Flicka, provided they are given the oppor- Creative Commons tunity and support to do so by the . Awareness, education, capacity: industrialized world. 6Ecological and social awareness and the capacity to deal with associated right . Financial measures: A range of problems has risen exponentially in Islamabad Stock reforms in macro-economic and the last 2-3 decades. Yet amongst Exchange 5 Credit: Danish47, fiscal policies have been suggested to decision-makers, and business elites, Creative Commons

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it remains particularly poor. A tran- lifestyles and worldviews including sition to RED will require a massive of ecosystem people who still tread campaign to spread awareness about the most lightly on earth, the pow- the multiple crises we face and their erful legacy of Buddha, Gandhi, and root causes, and build capacity to other progressive thinkers, the adop- spread meaningful solutions. tion of revolutionary thinking from others like Marx, zealously guarded India is perhaps uniquely placed to practices of democracy and civil so- achieve the transformation to RED. ciety activism, and the very many This is for a variety of reasons: its peoples’ movements of resistance thousands of years of history and ad- and reconstruction. But of course aptation (including ancient democratic it cannot do this alone, it will need practices that perhaps pre-date even to convince, teach, and learn from, the famed Greek republics), its eco- other countries and peoples….which logical and cultural diversity, its re- too it has done for many centuries, silience in the face of multiple crises, but now in an entirely new and far the continued existence of myriad more challenging context.

Students Credit: Archive www.voyagesphotos- manu.com

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18, November 2011 223 around the world

Greek protests. May 2010. Credit: J. GaRcia, CReative Commons

Indignados in Madrid. May 2010. Credit: Madrid Acampada, Creative Commons

Day 31 Occupy Wall Street. Credit: Shankbone Creative Commons IUCN has members from some 170 countries including nearly 90 States, over 200 government agencies, and some 1000 NGOs. Over 10 000 inter- nationally-recognized scientists and experts from more than 180 countries volunteer their services to its six global Commissions, which are principal sources of guidance on conservation knowledge, policy, and technical advice. The vision of IUCN is “A just world that values and conserves nature”.

CEESP, the IUCN Commission on Environmental, Economic and Social Policy, is an interdisciplinary network of professionals whose mission is to act as a source of advice on the environmental, economic, social, and cultural factors that affect natural resources and biocultural diversity and to provide guidance and support towards effective policies and practices in environmental conservation and sustainable development. Following the mandate approved by the 3rd World Conservation Congress in Bangkok in November, 2004, CEESP contributes to the IUCN Programme and Mission with particular reference to seven thematic areas: •Theme on Governance, Equity and Rights (TGER) •Theme on Sustainable Livelihoods (TSL) •Theme on Conflict, Environment and Security (TCES) •Theme on the Environment, Macroeconomics, Trade and Investment (TEMTI) •Theme on Culture and Conservation (TCC) •Theme on the Social and Environmental Accountability of the Private Sector (SEAPRISE) •Theme/Strategic Direction on Indigenous Peoples, Local Communities, Equity and Livelihood Rights in Relation to Protected Areas (TILCEPA, joint between CEESP and the IUCN World Commission on Protected Areas).

Policy Matters is the journal of CEESP, edited by one or more of our members. Typically published annually, often concurrent with major global events, it is distributed to CEESP members and IUCN Secretariat offices and at relevant conferences and meetings around the world. Recent issues include “Climate Change, Energy Change and Conservation”, “Conservation and Human Rights”, “Poverty, Wealth and Conservation”, and “Community Empowerment for Conservation”.

For more information about CEESP or to download past issues of Policy Matters, please visit our website: http://www.iucn.org/about/union/commissions/ceesp. Please send comments or queries to [email protected]. We look forward to hearing from you! CEESP STEERING COMMITTEE CEESP EXECUTIVE Chair Aroha Te Pareake Mead [email protected] Aotearoa/New Zealand Deputy Chair Michel Pimbert [email protected] United Kingdom Finance Officer Richard Cellarius [email protected] USA Executive Officer Elizabeth Erasito [email protected] Fiji

CEESP REGIONAL VICE-CHAIRS NORTH AMERICA Iain Davidson-Hunt [email protected] Canada Peggy Smith [email protected] Canada

OCEANIA Lea Scherl [email protected] Australia/Brazil

MESOAMERICA Vivienne Solis Rivera [email protected] Costa Rica

SOUTH AMERICA Gonzalo Zambrana [email protected] Bolivia

SOUTHERN AFRICA Masego Madzwamuse [email protected] South Africa

EUROPE Grazia Borrini-Feyerabend [email protected] Switzerland

WEST ASIA Mohammad Shabaz [email protected] Jordan

CEESP THEME CO-CHAIRS THEME ON THE SOCIAL AND ENVIRONMENTAL ACCOUNTABILITY OF THE PRIVATE SECTOR (SEAPRISE) Emannuel Obot [email protected] Nigeria

THEME ON CULTURE AND CONSERVATION (TCC) Ken MacDonald [email protected] Canada Elise Huffer [email protected] France/USA

THEME ON THE ENVIRONMENT, MACROECONOMICS, TRADE AND INVESTMENT (TEMTI) Jayati Gosh [email protected] India Alejandro Nadal [email protected] Mexico

THEME ON CONFLICT, ENVIRONMENT AND SECURITY (TCES) Arzu Rana Deuba [email protected] Nepal

THEME ON GOVERNANCE, EQUITY AND RIGHTS (TGER) Janis Bristol Alcorn [email protected] USA Juanita Cabrera-López [email protected] Guatemala

THEME ON INDIGENOUS PEOPLES, LOCAL COMUNITIES AND PROTECTED AREAS (TILCEPA) Nigel Crawhall [email protected] South Africa

THEME ON SUSTAINABLE LIVELIHOODS (TSL) Lucy Mulenkei [email protected] Kenya

YOUTH ENGAGEMENT AND INTERGENERATIONAL PARTNERSHIP Catie Burlando [email protected] Canada

The essays in this issue of Policy Matters analyze how monetary, financial and fiscal policies play a critical role in driving environmental degradation and affecting peoples’ livelihoods. They also examine alternative macroeconomic policy options that will blend environmental stewardship and social justice with long-term sustainability. These essays underline the importance of macroeconomic policies as we shift course towards social and environmental sustainability.

CEESP, the IUCN Commission on Environmental, Economic and Social Policy, is an inter-disciplinary network of professionals whose mission is to act as a source of advice on the environmental, economic, social and cultural factors that affect natural resources and biological diversity and to provide guidance and support towards effective policies and practices in environmental conservation and sustainable development.