The global crisis that struck the world in 2008 is the latest symptom of the failure of the western economic systems. For about twenty years after the collapse of Soviet Russia, it was argued that market-centric economic theories of the west, led by the US, remained the best and the only solution for the development of economies of all the countries in the world, irrespective of their histories and backgrounds. Hence “one size fits for all” approach was advocated, in spite of the vast differences in culture, resources and life styles of people living in various parts of the world. Countries were compelled to accept the beliefs and ideas of the west through the multilateral agencies and the establishments. But from the 1980s, the market- based approaches have been proving to be failures in different parts of world, from South America to ASEAN countries and other parts of the world.
When we look at the developments in India against this background, we get useful insights. At the time of Independence, India was a poor, underdeveloped and illiterate country. More than three fourth of the population was dependent on agriculture for livelihood. Figures show that in 1950-51, about 45% of the population was living below poverty line and the literacy rate was around 17%. The average age of life was just 32.1 years. India was a condemned nation, struggling to survive without much respect in the global arena. But after sixty two years now, the whole world is turning its attention to look at India and the functioning of her economic, business and management systems. In recent years, Indian economy has been growing at the second fastest speed in the world. It remains as one of the least affected economies due to the global crisis. India has around 85 million entrepreneurs engaged in various economic activities.
The history of the macroeconomic management of the past six decades shows that our policy makers remain looking at the west trying to learn their approaches and adopt them to the maximum extent possible. Sincere efforts have not been attempted to develop policy frame works suited to the Indian conditions and implement them. As a result the country has been facing serious difficulties in many areas, including agriculture which remains the most important constituent of our economy for it is responsible for food security, apart from providing employment and livelihood to large sections of the society. But amidst all these problems, India is growing. The growth has been continuing in spite of the confusions and contradictions at the policy making levels. It is this growth that is making the world to turn its attention towards India.
It is time we studied the Indian economic, business and management systems from realistic perspectives and understand the ‘functioning models’ in the light of changes in the global economic scene. Then only the global crisis and its impact on the Indian systems would be clearly understandable to us.
Global economic crisis
What erupted as the financial crisis beginning from September 2008 with the collapse of the mega investment firms in the US, affected in turn the insurance companies and banks resulting in the exposure of the fragility of their entire financial system. The impact spread to the other sectors as well, affecting giant automobile corporations such as General Motors. Simultaneously the crisis affected other major western economies and moved to the other regions of the world. So what started off as an American financial crisis became a global economic crisis within a few weeks. The US Government had to announce bailout packages worth over $ 700 billion and support programmes to help stop the crisis devastating their companies and lives of citizens who lost their jobs and savings. The other countries affected by the crisis also offered various types of incentives and packages to protect their economies from further troubles. But the crisis is far from over. Even after one year the woes of the crisis continue to daunt many of the western economies, particularly the US. About 120 banks have collapsed in 2009 alone. The rate of unemployment has crossed ten percent.
More than six decades of post-war growth has not solved their problems; rather it is leading to more difficulties. With all their scientific advancements, health care costs have skyrocketed. They find it difficult to provide even the basic minimum medical facilities to all sections of the society. In spite of many years of economic progress, the gap between the rich and poor has been widening. Surveys note that the satisfaction levels of the average American have been going down. Growth has slowed in the richer countries as a whole. Saving rates are either low or negative. Families are breaking down at higher rates. Child poverty ratio remains high among many OECD countries. Social security expenditures are going up. As a result the burdens to the governments have been increasing.
Failure of western theories
The impact of the market fundamentalist approach has been troubling the rest of the world as well. The poorer and developing countries remain the victims of the rich countries and powerful multinational corporations. Human Development Report 2005 mentions that the payments made by the US government to their cotton farmers had resulted in the fall of cotton prices in the poor countries, leading to the poverty rate increasing from 37 to 59% in Benin alone. Nobel laureate Joseph Stiglitz, who was with the World Bank earlier, notes: “Globalization today is not working for many of the world’s poor. It is not working for much of the environment. It is not working for the stability of the global economy.” The market approach has affected India also. Unemployment is on the rise. Social sectors are not being cared adequately. The most crucial sector namely, agriculture is in serious difficulties. Hence there is an all round dissatisfaction against globalization and the market ideology across the world. Paul Krugman, winner of the 2008 Nobel economics prize, observed recently that “much of the past 30 years of macroeconomics was “spectacularly useless at best and positively harmful at worst.” So the root cause of the latest financial crisis, and the resultant economic crisis, is clearly the western theories and their approaches.
An objective analysis of the western economic history shows that their models rest on weak foundations. Earlier it was feudalism in which lands were owned by a few, with most of the population toiling for their masters. Then it was mercantilism which aimed for huge stocks of gold and silver for the royal treasuries, without any benefit for the citizens of their countries. Colonialism, that resulted in the huge exploitation of men, material and resources by a few European countries, was the major and most visible scheme of the mercantilist ideology. Backlash against mercantilist approach witnessed capitalism being propounded by Adam Smith in the eighteenth century. Poor working environment, suffering at the hands of the factory owners and the overall population not getting benefited led to the birth of the communist ideology put forth by Marx and Engels in the nineteenth century. The failure of communism in Soviet Russia in the late 1980s and the subsequent disintegration of the state into smaller countries left the US driven market model as the ‘only alternative’ to the rest of the world, as claimed by the supporters of the neo-liberal framework. But now, as the recent developments make it clear, the market model is also failing them, and all of us in the rest of the world.
Western models are not universal
It is informative to note that after the latest crisis, when it was pointed out that the western models have failed, one or two major European countries specifically mentioned that it was the US model that failed. Hence it is clear that even the European countries are not ready to accept the US- driven market ideology. A study of economic history would make us understand that that no one western model dominated the world, especially after the ascendancy of the west. The noted economic historian Andre Gunder Frank asserts that the world economy was Asia based even during 1400-1800. To quote Frank: “….. all available estimates of world and regional population, production, and income, as well as the discussion ….. on world trade, confirm that Asia and various of its regional economies were far more productive and competitive and had far and away more weight and influence in the global economy than any or all of the “West” put together until at least 1800.” But as the modern history was written by the west as they saw it, Asia’s rightful place was denied. To quote Frank: “Asia’s rightful and historically documented place has been denied by the dominance of excessively Eurocentric perspectives on early modern and recent world economic history - and social science.”
The developments during the recent periods show that the countries which did not follow the policy prescriptions of the west have escaped the crisis. In this connection it would be useful to see what Stiglitz had noted on the capital control policies of India and China. To quote: “It is no accident that the two large developing countries spared the ravages of the global economic crisis—India and China—both had capital controls.” But the countries that implemented the prescriptions of the US dominated west had to face serious difficulties. Hence it is clear that the western models are not the ‘only best models.’ So they cannot be universally advocated to all the countries in the world.
In fact in any economic matter, there are many non-economic factors. Family, society, culture, lifestyles and preferences are some of the major factors that play a dominant role in economic decisions. History, backgrounds and resources also have their role. But unfortunately, modern economics does not take all these into consideration, as the western paradigms are different from that of the rest of the world. Individualism dominates their lives. States and markets are the only two major external entities to them. Hence all their theories revolve around these beliefs and their lifestyles. This is the reason why Alan Greenspan, the Governor of the US Federal Reserve Bank for more than fifteen years, has been arguing till recently that saving was a waste and people should spend as much as possible.
Now the crisis should help them – and all of us - to recognize that there are other methods of managing economies and there are many non-economic factors that play a role in taking economic decisions. So as a first step we should avoid looking at the economies of different countries of the world only through the western theories. This is all the more true for an ancient economy such as India. Kanagasabapathi notes: “It is very unfortunate that we try to understand the economic models of different countries, particularly an ancient nation such as India, through the two popular “isms”, born very much later in the west. Even the study of the world economic systems begins only from the last few centuries. It is as if no economic system had existed earlier, even in prosperous civilizations such as India and China.”
Indian economy – During the earlier centuries
India is an ancient civilization. India is known for her economic prosperity and all round achievements since the earliest times. Indus- Saraswathy civilization proves the existence of well planned urban systems about 4500 years ago. Business historian Agarwal notes that imports and exports were at their peak in India even during those times. The first economics book of the world namely Arthasashtra was written in India about 2300 years back. Even when we take the last two millennia for which comparative figures are available, India stands out as the most productive and sustainable economic power in the world. Maddison shows that India was contributing 32.9% to the global GDP, the highest in the world, during the beginning of the Common Era, with China following us with 26%. India remained as the most powerful economy in the world for more than 80% of the time during the last two thousand years. It was the British domination that destroyed the Indian systems and made India lose her superior status. Even in 1750, India’s contribution to the global GDP was almost 25%. India was made as a poor nation by the British.
Functioning Indian Models
Now within sixty two years of Independence, India has already emerged as a global power – economic power, business power and management power. She is the fourth powerful economy. Indians are setting up businesses in different parts of the world. Many Indian companies have become important players at the international level. Several clusters such as Surat, Tirupur and Karur have become household names in foreign countries. Indians dominate international businesses such as diamonds in Antwerp. An increasing number of Indian professionals are occupying senior and responsible positions in different fields abroad.
What is the reason for India emerging as a global power, in spite of difficulties and disturbances at various levels? What was the reason for India contributing one third of global GDP 2009 years back and maintaining the number one position for more than eighteen centuries? The answer is the unique Indian models. They are functioning even today, against all confusions and predicaments among the elite and ruling sections of the country.
For all economic activities, funds are important. It is better when the funds are mobilized through savings. But people need to save. They cannot be mandated to save. The main problem with the western economies is the lack of savings and the consequent lack of own funds. So there is shortage. But in India saving is part and parcel of one’s life. It takes place naturally without getting noticed. In 1950-51, when about half of the population was starving, the saving rate was 8.6%. One has to remember here that the current saving rates in the richer countries such as the US and the UK are in negative figures. It means they are spending more than what they earn. But in India even when people do not earn adequate amounts, they save. Saving rates have continued to increase over all these years and as a result the official saving rate for 2008-09 was 38.1%. It is one of the high rates in the world. We have to remember here that there are other popular avenues of investments such as gold and a variety of indigenous methods that are not taken into account for the calculation of official saving rates. India buys about 20 to 25% of global gold output annually. If we take all the different methods of saving into account, our saving rates would be more.
Why do people save money, even when they are in difficulties? Why don’t they spend whatever they have and enjoy their lives? In Indian culture it is the duty of the householders to look after their children, elders and dependents. So everyone thinks it is his/her duty to save as much money as possible so that they would be able to contribute to the wellbeing of the family. Parents sacrifice their needs to provide comforts to their children. As a result huge funds are saved in different avenues.
Due to high levels of saving, capital formation becomes easy. Since India is a family and community oriented society, there is a pool of huge social capital. As a result promotion of business is facilitated. Net works of relationships are used for establishing and running businesses. World Development Report 2001 notes that Tirupur is able to successfully compete in the international textile market due to the prevalence of high social capital. The report mentions that Tirupur businessmen are able to borrow loans without much transaction costs, as people ‘rotate credit’ due to their close relationships. This practice has been helping them to sell the products at lower prices, as their cost of capital is low when compared to their competitors from western countries. In a study conducted among the diamond exporters from Surat and Ahmedabad, it was reported that about 80% of them were financially supported by their relatives when they set up their ventures.
Family bondages and community orientation encourage and help Indians to enter into businesses. As a result people venture into different economic activities in huge numbers. Economic Census 2005 notes that there were around 42 million businesses in the unorganized sector, comprising of small businesses. Reserve Bank of India mentions that there were about 13 million units in the SSI sector. An all India survey published by the Government of India noted that there were 2042 clusters across the country during 2001-02, with each cluster housing hundreds of business and industrial establishments. As for the corporate sector, there were 7, 43,678 companies at work at the end of March 2007. (Govt. of India, Ministry of Corporate Affairs)
It is important to note that most of the businesses, especially among the small and medium category, were established by the promoters themselves through their savings and support from families and close circles comprising of relatives and friends. The contribution of the state and state mechanisms remain very low. In the unorganized segment for example, more than 95% of contributions have come from the promoters, their families and close circles. A study of major clusters in the states of Gujarat and Tamil Nadu showed that in most of the cases initial funds for businesses had been mobilized by the promoters through own funds, family support and informal sources. ( Kanagasabapthi) The share of banks funds even in working capital remained very low in centres such as Sankagiri, the transport cluster with the second largest lorry traffic in the country. It is necessary to know that the contribution of the women folk to the functioning of the economy and the success of businesses is enormous. Many businessmen attribute their success to the dedication and support of their mothers, wives, grandmothers and sisters.
The presence of all these factors combined with the native entrepreneurship systems makes India one of the unique economic models. Sivakasi in Tamil Nadu was a little known place with only salt water about 90 years ago. Two youngsters decide to enter into business, go to Calcutta, work in the match factory run by foreigners, learn the business and return to their native. With great difficulties, they set up their first match unit in 1923. Today Sivakasi is a household name in the country for it manufactures 90% of the national cracker requirements and supplies 80% of the match boxes, besides having a share of more than 45% in offset printing. Cheque books of European banks, air tickets of foreign companies and the highest prized diaries of the world are printed there. The ordinary people of Sivakasi, many of them with little or less education but enormous business sense and vision, have made the town a ‘ little Japan’ as the first prime minister of India called it. Whether it is Namakkal with the largest lorry traffic in the country or Surat with a turnover of more than 50000 crore rupees, almost all the business and industrial centres in the country have similar histories behind them. No business is difficult for these people, for they have the enterprise and native intelligence in abundance. They compete with the western multinationals run by the highly qualified technical/business school graduates and emerge successful even in the foreign soils, making the country proud and richer.
Hence it is the functioning models with unique features that are responsible for taking India to greater heights. But unfortunately they are not recognized, as we still continue to look at the country from western perspectives. In the earlier centuries before the arrival of the British, native systems thrived and prospered with the support of the society and the state. Hence they produced better results. In the changed circumstances, after two hundred years of destruction and more than sixty years of confusion, the native systems had to undergo many changes. But with the strong foundations provided by the age-old culture, the overall spirit remains. It is this spirit, rooted in the dust and soil of this country, which is making India functional and productive, irrespective of the strong negative influences from within and outside.
The global economic crisis is a symptom of the failure of the US driven market approach. The crisis seems to indicate the beginning of the end of the contemporary western models. India escaped the crisis and continues to move forward with all the problems, as the functioning Indian models help the country from the onslaught of the narrow market ideology. Studies by the author indicate that the Indian economic and business models are unique and stand on stronger foundations. It is unfortunate that they are not understood and recognized properly and our policy makers continue to ape the west. Hence the critical issues remain unsolved. There is a long way to go to provide facilities to all the sections of the society by making one and all participate in the development process. It is time we studied the Indian systems and devise policies based on the ground realties, so that our strengths are fully utilized for getting maximum possible benefits.
1. Stiglitz, Joseph E., Globalization and its Discontents, Penguin Books, New Delhi, 2002
2. Human Development Report 2005 , Oxford University Press, New Delhi, 2005
3. Krugman Paul quoted in The Economist, July 16, 2009
4. Frank, Andre Gunder, ReOrient: Global Economy in the Asian Age, Vistaar Publications, New Delhi, 1998
5. Kanagasabapathi, P., Indian Models of Economy, Business and Management, Second Edition, Prentice Hall of India , New Delhi, 2009
6. Agarwala, P.N., A Comprehensive History of Business in India – from 3000 BC to 2000 AD, Tata McGraw- Hill Publishing Company Limited, New Delhi, 2001
7. Maddison, Angus., The World Economy- A Millennial Perspective, First Indian Edition, Overseas Press (India) Private Limited., New Delhi by arrangement with Organisation for Economic Cooperation and Development, 2003
8. World Development Report 2001, World Bank, Washington, 2001
9. Patel, Sharad and Kanagasabapathi, P., ‘A Study on Gujarat Diamond Export Industry’, Unpublished report, P.S.G. Institute of Management, Coimbatore, April 2005
10. Handbook of Statistics on Indian Economy, Reserve Bank of India, 2008
11. Statistical Review of the Corporate Sector, Annual Report 2007-08, Ministry of Corporate Affairs, New Delhi
12. Final results: Third All India Census of Small Scale Industries 2001-
2002, Ministry of Small Scale Industries, Government of India, New Delhi, 2004
(Published in Perspectives in Social Science, Vol.2 No.1, C.Achutha Menon Foundation, Thiruvananthapuram, pp.18-29, Jan-Mar.2010)