october 8, 2011

Sound Finance Imperilling Democracy

inance capitals imposition of fiscal austerity on both sides of the Atlantic and this at a time when private consumption and investment are stagnating is pushing the developed capitalist world into double-dip recession. As it is, the short-lived recovery has been a jobless one. The top dogs at the annual gatherings of the World Bank and the International Monetary Fund (IMF) in Washington at the end of September, and a meeting of the central bankers and finance ministers of the G-20 countries on the sidelines of the Fund-Bank conclaves, stared into this abyss, expressed concern, and (the G-20) promised strong action to ensure financial stability and go on with fiscal consolidation. Banks and other financial institutions in Europe that are heavily exposed to Greek, Italian, Portuguese and Spanish government debt are tottering as the interbank credit market is beginning to freeze as it did when Lehman Brothers collapsed three years ago. Predictably, an expansion of the European Financial Stability Facility (EFSF) the stabilisation fund for the Eurozones government bond markets set up in May last year is in the pipeline. But it will not come without greater fiscal austerity and privatisation imposed by the so-called Troika the European Commission, the European Central Bank, and the IMF in Greece, where the crisis is full-blown. But is Greeces excessive fiscal deficit really the problem? Or is it the Eurozones institutional design that makes the financial markets the arbiters of the public debt? Where is all this leading to? Debt deflation? Democracy imperilled? The main player here is Germany. The euro had enabled German capital with its innovative capital goods sector and an entente with the trade unions that allowed productivity to rise much faster than the average wage to prosper via net exports. Weaker neomercantilist powers like Italy, hitherto dependent upon real currency devaluation, were now sidelined. France, even if it did have neo-mercantilist ambitions, could not contemplate competitive devaluations because of the dominance of financial capital over its industrial counterpart in the French economy, and so it pitched for the euro, hoping that it would thereby gain some control over Germanys monetary policy. In the wake of the US financial crisis, German net exports to the US and investments in the US financial markets suffered, and post-2008, Germany has had to harden its neo-mercantilist stance and enforce the rules of the game in the Eurozone. Moreover, Berlin is also focusing on its eastern periphery Estonia, Latvia, and Lithuania, as also Hungary and Slovakia.
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This is where German finance capital would like to allocate more of its portfolio; it is also where the foreign direct investment of German transnational corporations is presently focused in their bid to restructure and sustain their competitive advantage. Nevertheless, with Paris and Washington together demanding a huge expansion of the EFSF, we think that Germany will pledge the required monies for the EFSF. But will this infusion placate the financial markets? The expansion of the EFSF has to be seen against the background of a deepening of the fiscal austerity imposed on countries like Greece, Portugal, Spain and Italy, with the French too moving towards a balanced budget. It also has to be viewed in the context of the integration of financial markets in the Eurozone where French, German and Dutch banks hold Greek, Portuguese, Spanish and Italian government bonds. These transnational banks exert pressure on their respective home governments to ensure that this public debt is refinanced. The Greek, Spanish, Portuguese and Italian governments are, of course, subject to the imposition of strict conditions regarding fiscal austerity and forced sale of public assets (privatisation) by the Troika against the will of the majority of their citizens. Huge layoffs and reduced wages and pensions of Greek public sector employees have provoked mass protests which are increasingly being suppressed with a heavy hand. Democracy is fast becoming a casualty in Greece. And, with sound finance being imposed on both sides of the Atlantic leading to recession and a consequent further deterioration of the fisc, state authoritarianism backed by finance capital may assume endemic proportions. The root of the Eurozones problems is its institutional framework countries that persistently violate the 3% ceiling on the fiscal deficit to GDP ratio and/or the 60% limit on the public debt to GDP ratio have no other alternative but to borrow short-term on the financial markets because their own central banks are not permitted to refinance the debts by purchasing their governments treasury bonds. Monetary and fiscal policies are thereby completely divorced from one another. The financial markets become the arbiters of public debt. The big question now is: What will happen if Italys public debt goes out of hand due to the persistence of economic stagnation? After all, the Italian public debt is bigger than the sum of the Spanish, Portuguese and Greek public debts. The fiscal austerity imposed on the country will only lead to further economic deterioration and consequently, a further exacerbation of the public debt crisis. What then?

october 8, 2011

vol xlvI no 41

EDITORIALS

We still think that an Italian government default may not be permitted by the Eurozones power elite. But there seems to be little or no concern about the deteriorating condition of the real economy in the Eurozone and how this can affect the financial superstructure. The downswing, if not dealt with in time, could lead to an avalanche of bankruptcies and a disastrous further fall in aggregate demand, leading to debt deflation, understood as a general decline in prices associated with a massive slump in aggregate demand leading to ever-increasing real values of debts. In such an eventuality, with the high levels of debt among households and business the real cost of borrowing will rise even at low nominal

rates of interest, dampening spending (including investment expenditure) and, in turn, worsening the economic downturn. But, more ominously, even if households and businesses already in debt are able to refinance their obligations at the lower nominal rates of interest, with deflation they will carry a debt burden that is larger in real terms. And their financial distress or bankruptcy will worsen the fragility of the already tenuous financial superstructure because the share of loans that are delinquent or in default will go up even further, leading to more failures of banks and other financial institutions. One can only imagine the consequences if governments too continue to cut their expenditures in such a situation!

Mining Illegality
Illegal mining in Goa calls for urgent steps to expose the extent of the violations as well as a stronger law.

ven as giant earthmovers gouge out the red iron ore from mines in Goa, another scandal in Indias mining sector has been unearthed. The latest scam concerns dozens of illegal iron ore mines in Goa that have successfully evaded the state machinery and exported several million tonnes of the ore without paying royalty. The loss to the state exchequer is still being calculated. As with the Bellary scandal exposed earlier this year in Karnataka, once again we see the hand of the states top politicians working closely with those breaking laws to maximise profit. Goas Chief Minister Digambar Kamat is in the eye of the storm. He was in the Bharatiya Janata Party (BJP) before he switched sides to join the Congress. He has also headed the department of mines for 12 years. Whether he pulls through this crisis or is forced to step down like his Karnataka counterpart B S Yeddyurappa is only a small part of the story. In fact, the mining scandals in Goa and Karnataka illustrate how greed is not the exclusive property of one party; it happily crosses party lines. Unlike Karnataka, where the problem was rooted in one extended family, in Goa the share of the loot has been spread over many individuals. In a state that covers 3,702 sq km, Goa has 89 working legal iron ore mines, all of them privately owned. For mine owners and those providing ancillary services such as transport, revenues grew hugely with the growing demand for iron ore especially from China in the run-up to the 2008 Beijing Olympics. All iron ore mined in Goa is exported and the last decade has seen a threefold growth in volume, peaking at 53 million tonnes in 2009. This growth in demand has also fuelled overextraction and the operation of illegal mines that export close to 11 million tonnes of ore a year. The loss to the exchequer is estimated to be anywhere between Rs 3,000 crore and Rs 10,000 crore. But apart from the revenue loss, Goas environment has been irreparably damaged by the extent and the very nature of iron ore mining. The red scars on Goas verdant landscape left by the mines cannot be obliterated easily, and certainly not for many years to come. Despite environmental laws that forbid mines in forests, near protected areas, rivers and water bodies, the states mining industry has operated with callous disregard for these concerns. The illegal mines, which consist of mines operated without

clearances, make no pretence of abiding by any norms. Meantime, communities living in the vicinity of these mines pay the price in their health as the red dust from the open cut mines envelops everything. Waste from the mines for every tonne of ore that is extracted, there is at least three times as much waste floods agricultural fields, ruins freshwater wells and destroys rivers. Goas roads are jammed with the 1,500 trucks a day that go up and down with ore and waste. Since the issue came into focus, the state forest department has issued notices to 19 mines for being too close to national parks and sanctuaries and 40 mines have received notices from the Goa State Pollution Control Board (GSPCB) for failing to obtain official consent to operate. How did these mines get the initial clearance to operate? And if they did not, why did these authorities not act earlier? These are only some of the questions, in addition to the loss of revenue, that have to be addressed. It is no ones case that iron ore should not be mined. The issue in Goa as elsewhere is how this should be done, how much should be extracted, how can existing laws be implemented and how we ensure that the communities living in the vicinity of these mines get their share of the profit instead of having their lives and livelihoods disrupted and destroyed. The amended Mines and Minerals (Regulation and Development) Bill 2011, which has received union cabinet approval and will be placed in Parliament, is an important step towards tighter regulation of the mining sector. The new law, for instance, recognises the rights of communities affected by mining and gives them a share. Unfortunately, the earlier proposal of granting them 26% direct ownership has been diluted to a fund managed and disbursed by district authorities, thereby taking away direct power from the communities. Yet a new law alone will not suffice. It is essential that the full extent of illegality is exposed and punitive measures are taken. Only then can one hope that in future such flagrant violations will not occur. For this, the investigations of the nine-member commission headed by the retired Supreme Court judge M B Shah are crucial. The commissions report on Karnataka has already led to the stoppage of mining in Bellary. One hopes that the Shah Commission report on Goa, expected next month, is equally strong and forthright and that the centre takes its recommendations seriously.
october 8, 2011 vol xlvI no 41
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