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Asian Development Bank, policy conditionalities and the social democratic
governance: Kerala Model under pressure?
K. Ravi Raman a
a Department of Social Anthropology, The University of Manchester, Manchester, UK
Online Publication Date: 01 May 2009
To cite this Article Raman, K. Ravi(2009)'Asian Development Bank, policy conditionalities and the social democratic governance: Kerala Model under pressure?',Review of International Political Economy,16:2,284 — 308
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Review of International Political Economy 16:2 May 2009: 284–308
Asian Development Bank, policy
conditionalities and the social democratic
governance:
Kerala Model
under pressure?
K. Ravi Raman
Department of Social Anthropology, The University of Manchester, Manchester, UK
A B S T R A C T
This case study of the implications of the Asian Development Bank (ADB) loan on the Indian state of Kerala explores how neoliberal reforms have im-pacted on the state’s much-acclaimed social model of development. Notwith-standing resistance, the state moves towards market-driven reforms wherein external funds are privileged over internal resources, the reasons for which are probed within the context of social structures of accumulation and emer-gent power relations. It is argued that with the diversion of resources towards debt servicing and compliance with policy conditionalities, the collaboration with the ADB is likely to undermine social democracy. What ensues is a dou-ble collapse: a collapse of the Kerala Model of social development and the demise of an iconized Left. This paper thus contributes, first, to the growing literature on the political-economic repercussions of Structural Adjustment Programs in developing regions and second, to the limited scholarship on the adoption of right-wing neoliberal policies by social democratic governments.
K E Y W O R D S
Asian Development Bank; conditionalities; democracy; Kerala; India.
INTRODUCTION
The early 1990s witnessed the launching of the first-generation neoliberal reforms in India, with the right-wing Congress-led government in power opting for an International Monetary Fund (IMF) loan of US$2.3 billion. A compliance with the built-in conditionalities involved two successive devaluations and the opening up of trade barriers. Other critical reforms subsequently followed such as a reduction of fiscal deficit and tax re-forms; however, public sector restructuring was left undisturbed for fear
Review of International Political Economy
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of compromising the state’s own ‘political standing’ (Killicket al., 1998: 97). The millennium, by and large, began with the second-generation reforms, which involved a sweeping liberalization cutting across public utilities such as power and water, these being treated as tradable commodities, fis-cal responsibility and the withdrawal of the state from various public util-ity services. The two important features of these second-generation reforms included, the central position accorded to the state as an agent/medium of change through structural reforms and secondly the role of the Asian Development Bank (ADB) as one of the key sources of external finance.
The ADB project and policy loan, in the first instance, totaled approx-imately US$8 billion and was given for the period 2003–6 – an average annual assistance of about US$2 billion. Most of these loans were to be channeled towards the focal states as identified by the ADB, namely, Chat-tisgarh, Assam and Sikkim in addition to Gujarat, Madhya Pradesh and Kerala. While the ADB-driven program runs largely unhindered in many of these states, in Kerala, it has come up against stiff resistance. The present paper explores the actual and the likely implications of the conditionality-attached ADB loan on the Kerala model of social development and thereby contributes, first, to the growing literature on the political-economic reper-cussions of Structural Adjustment Programs (SAPs) in developing regions and second, to the limited scholarship on the adoption of right-wing neoliberal policies by social democratic governments.
THEORETICAL PREMISES
Studies on SAPs and Structural Adjustment cum Project Loans (SALs) are a natural derivation from the pre-existing debate on ‘aid and development’ which has broadly two opposing themes: aid as a catalyst to development
(see Cassenet al., 1994; Pronket al., 2004) and aid as pillage and extraction
(Magdoff, 1969; Petras and Veltmeyer, 2001). With the shift from project-lending to policy project-lending, the scholarship began to focus on the complex political-economic repercussions of the associated conditionalities, partic-ularly with respect to their impact upon local planning and democratic processes (Beeson, 2000; Stiglitz, 2003). Concerns were expressed regard-ing the actual drivregard-ing-force behind SAPs, whether it was the unilateral pushing of reforms by international financial agencies or whether the do-mestic political-social composition played a role in it as well. While the structural adjustment reforms in themselves have generated a large body of scholarship, the ‘pressing task for the critical literature’ would be to prove that the policies being introduced are based on flawed assump-tions and cannot but have deleterious social consequences (Bello, 2002a;
Bull, 2005; Harriss, 2002; Peet, 2003; Veltmeyeret al., 1997; Zack-Williams
et al., 2000). The paper is thus an empirical political economy analysis of the implications of the ADB loan which is partly an SAL and partly a
project loan, for a sub-national unit, the state of Kerala; it also explores the possible alternatives to external finance and locates the reasons why such alternatives remain unaddressed in the ‘social structures of accumulation’. The analysis further brings out how in the name of structural adjustment, poverty reduction and ‘good governance’, the ADB and its recipient states have intensified privatization programs by a commoditization of social services/institutions, and often through conditionalities that coerce the state into self-discipline (see Abrahamsen, 2000; Larmour, 2002; Mosley et al., 1991: 67–8). The study is further justified as it attempts to light up the following blind spots in existing literature.
While literature on the Bretton Woods institutions (the World Bank and the IMF) is voluminous, that on the ADB is rather less extensive with studies focusing on India being almost non-existent. For this reason, the regional implications of ADB-led reforms with respect to India in gen-eral, and the sub-national level in particular, have remained largely unad-dressed. This is particularly significant considering the fact that the ADB has been flayed in the Asia-Pacific region for a variety of reasons including the lack of transparency (see Guttal, 2000) in its methods and operations. Probably the ADB’s most infamous involvement was with Vietnam, where it initially refused financial aid in keeping with the US embargo; however, when it did retract its decision and extended its policy loan to Vietnam in 1993, it only turned out to be a burden for the country. Many such ‘uncivil engagements’ of the ADB in neighboring countries have come under focus, whether it is with reference to the power sector in the Philippines (Adams, 2000; Bello, 2002b), the transport system of Sri Lanka, Pakistan’s Access to Justice Program (Ercelawn and Nauman, 2002) or the Greater Mekong Sub-regional Economic Reforms, and particularly with regard to its inefficiency in providing long-term social and economic benefits (Oehlers, 2006).
Secondly, SAL literature furnishes persuasive evidence of the inherently right-wing character of the policy reforms; however, the general assump-tion that they are likely to be introduced only by right-wing governments is now being strongly refuted. Studies suggest that social democrats are just as anxious and eager as authoritarian regimes to secure SALs and they appear to be willing to introduce reforms which are quite at variance with their own historical background. The economic reforms passed by the governments of Australia, New Zealand, Spain (under Gonzalez), and Costa Rica provide no reason to associate economic reforms solely with the political Right (Williamson, 1994: 570; Wilson, 1994, 1998). In fact, it is ar-gued that the center-Left governments are more likely to enjoy the trust of labor, in part because they are thought to be more sensitive to ameliorating the costs of adjustment. They may therefore be able to introduce reforms that would have been stiffly opposed had they been imposed by the polit-ical Right (Williamson, 1994: 570–71). Considering the fact that the rate of non-compliance with conditionalities is quite high, that they are not rigidly
adhered to on most occasions (Haggard, 1986; Kanbur, 2000; Killicket al., 1998; Mosley, 1987; Mosse and Lewis, 2005) and that punishments for failure to comply with these obligations are rare (Polak, 1994) one could assume that the reasons why these countries undertake neoliberal reforms are not the conditionalities alone. It could equally be attributed to domestic politics and the class character of the coalitions, power relations inherent to the internal social structures and the associated political-ideological stances of the recipient nations, particularly those of social democratic regimes (Wilson, 1994). The state of Kerala, with a social democratic gov-ernment often alternating in power with the right-wing coalition once every five years provides an interesting case study in this respect.
Thirdly, there is hardly any literature exploring the resistance against the reforms heralded by the left-wing social democratic forces, pointing to a general faith in their ideological fidelity. However, Kerala provides a unique picture of resistance to SAL as implemented by the left-wing government, and particularly the ADB-driven reforms, in contrast to other regions/states in India, where reforms are taking place at a fast pace. The fact that the Left in Kerala – led by the Communist Party of India Marxist (CPIM) – was not only responsible for inviting the ADB to the state during its previous regime, but has also been instrumental in the implementation of these neoliberal reforms, being currently in power, makes the case study all the more relevant. It is argued that in the emerging global political economy, policy loans aim at scuttling social democratic ideas in preference for market-driven reforms and thus generate their own resistance whether they meet with success or failure.
The Kerala Modelof social development
Kerala is a state known for its communist legacy and its consistently high
level of social development, the latter being often referred to as theKerala
Modelof social development. It is unique among the Indian states in that it has achieved a high quality of life on a comparatively low income level, and in this respect it has performed well in comparison with the West. It has a low infant mortality rate (14 per 1000 live births in 2000 showing a 90% decline from 1950) and high life expectancy – 73 years in males and 75 in females which compares well with the figures in South Korea, Malaysia, China and Indonesia. Kerala’s sex ratio – female-to-male ratio – is 1.058 which is almost identical to that of advanced Europe and North America and much higher in comparison with the rest of India (0.93). The state also has a near universal level of literacy (94% for males and 88% for females) and high levels of health and nutrition in the women and children. Most of these factors, independently and jointly, contribute to the composite human development index which gives the state an edge over the remaining Indian states and in fact many other countries in the
world. Kerala has been continuously ranked first in the country in terms
of human development with an index of 0.773 in 2001.1
The state has thus been hailed as a model state worth emulating, cer-tainly for the rest of the third world, and partly, even for the advanced West. The Kerala model was the outcome of what has been referred to as ‘public action’/‘public politics’ (Dreze and Sen, 1989, 1995; Franke and Chasin, 1991, 1994; Heller, 1995; Herring, 1983; Jeffrey, 1992, 1993; Kannan, 1995; Parayil, 2000; Ramachandran, 1997). Kerala has been designated progres-sive and democratic with social justice being its developmental agenda, the latter being attributed to the late nineteenth century subaltern move-ments, trade union formations, peasant struggles and the social policy regime of the communist/social democratic government, which first came to power in 1957, a year after state formation, on the strength of these movements. The emergent welfare state with its policy of redistribution of wealth and income through progressive land reforms and particular
em-phasis on health and education laid the foundation of the Kerala Model.2
It is this model state built through decades of conscious interventions on the part of the state as well as the public that now stands threatened by neoliberal reforms, the responsibility for which lies equally with the Left government as with the right-wing coalitions.
POLITICAL ECONOMIC BACKGROUND OF THE LOAN
The true import of the acceptance of the ADB loan by the state of Kerala could only be realized against the background of the Center–State federal relations, the present public debt situation in the state, and the subservient nature of a sub-national state like Kerala to the federal government. Both tax devolution and total grants have shown declining trends within the current federal transfers; this is despite the fact that the federal govern-ment continues to control the major sources of revenue such as income tax, customs, excise and the newly emerging economy of services. The politics of public/federal finance in India have had the immediate effect of an erosion of the financial status of the various states in India, includ-ing Kerala, since the mid-1980s (George, 2002; Kannan and Mohan, 2003; Rao and Chakraborty, 2006) which worsened from the mid-1990s. The rev-enue deficit and fiscal deficit as a percentage of State Domestic Product (SDP) continued to increase from a meager 1.0 and 3.4 in 1995–6 to 4.4 and 6.1 respectively in 2006–7; the primary deficit more than doubled during the same period rendering the fiscal health of the state more vul-nerable. Successive Finance Commissions – particularly the eleventh and the twelfth – too, played their part, encouraging structural adjustment reforms, chiefly in the critical social sectors, even before the states were considered for resource transfers and grants, and despite their being con-stitutionally eligible for financial assistance. The states were thus forced
to accept neoliberal reforms. Bearing the onus of economic development, while the Center enjoyed the power to dip into state-owned resources, the states are often under duress to adopt anti-poor fiscal reforms such as expenditure cuts in social sectors, the raising of utility charges such as those of power and water, and the withdrawal of subsidies on basic needs. Meanwhile, interests on loans from the Center, which again the states were maneuvered into accepting, climbed from an average annual rate of 8.32% in 1990–1 to 12.96% in 2003–4, which in turn had the effect of forcing the state to pay a huge amount in terms of debt servicing thus
leading to a ‘negative flow of resources’,3 synonymous with reverse aid,
but within the country and from the sub-national state to the federal ex-chequer. Moreover, having accepted the recommendations of the twelfth Finance Commission, the federal government scaled down its role as in-termediary between the domestic market and the states; instead, the states are now expected to raise loans themselves on the market for their plan expenditures. While domestic borrowing could be a viable option, this too is regulated by the federal government, leaving open the remaining options, which would either be a reduction in social sector expenditure or a dependence on external international financial institutions. In both these situations, the ill-effects would be borne by the common people, with the state’s domestic policies being increasingly tailored to suit the international financial agencies and the associated neoliberal reforms as this study on Kerala would reveal.
Having profited from putting the states under financial pressure, the Federal Government of India now finds itself in a position to start pre-paying its loans. It should also to be noted that India has now become a lender-member of the Financial Transaction Plan (FTP) of the IMF to meet the Balance of Payment needs of other countries; it has already contributed US$291 million to the FTP in 2003. Caught in this maze of fiscal politics, largely the making of international financial agencies and the domestic social structures and institutions, the states are forced to opt for high-cost project and structural adjustment loans, which carry the twin drawbacks of deflecting fiscal liability away from the federal government and ensuring that the states find themselves persuaded to fall in with the structural ad-justment reforms. However, quite apart from such unfavorable federal re-lations, it is the state augmented/patronized liquidity crisis, coupled with the adverse effects of globalization and regional trade agreements, that ap-pear to have wrought greater damage to the regional economy and society. Like many other states in India, the outstanding debt of Kerala, too, had been rising during the 1990s: debt indicators such as the debt-state domestic product ratio and the debt-servicing ratio show the vulnerability of the state to the extreme. The ratio of outstanding state debt to the Gross Domestic Product (GDP) is more than 40% – one among the highest in India – as against the 30% norm fixed by the Reserve Bank of India. In absolute
terms, Kerala’s debt stock has been steadily rising, from Rs.114.2 billion in 1996–7 to Rs.269.5 billion in 2001–2 and a staggering Rs.571.38 billion in 2007–8; the per capita debt stands at Rs.12,681 in 2005, up from Rs.7,414 in 2001, the highest among the four southern Indian states. As the state’s own tax revenue as a percentage of SDP showed no improvement but instead declined since the early 1990s, the ‘turn around’ in its growth did not give the economy the necessary tax buoyancy to service the increasing debt. Debt servicing accounts for more than one quarter of the total revenue receipts in the state which is higher than the middle income states in India. As against this, the repayment capacity of the state in terms of tax revenue has not been keeping pace with the growth of the cost of debt servicing. Given the fact that the growth rate of debt servicing in Kerala has been greater than its own net state product, its own revenue, social sector expenditure and the development expenditure, the possibility of debt sustainability in Kerala was foreclosed by the mid-90s pulling the
state into what is called a high-cost debt overhang;4with the acceptance
of the ADB loan, an internal debt trap appears to be a certainty.
LOANS, CONDITIONALITIES AND DERAILMENT OF DEMOCRACY
The US$1000-odd million loan from the ADB to the state of Kerala, routed through the Government of India based on the London Inter Bank Offer Rate (LIBOR) with a repayment period of 25 years, was meant to launch
three sets of reforms: (1) the Modernizing Government Program and Fiscal
Reforms (MGP) with co-finance by the Netherlands; (2) thePower Sector Reforms; and (3) theKerala Sustainable Urban Development, Environmental Improvement and Poverty Reduction Program (broadly the Kerala
Sustain-able Urban Development Project).5 In addition to this, the ADB’s role in
centrally sponsored projects such as the Jawaharlal Nehru National Urban Renewal Mission is not insignificant, particularly in terms of Technical Assistance and the promotion of public–private partnerships (PPPs), the latter being a major agenda on the Country Strategy and Program Update 2006–8, which again is in keeping with the neoliberal reforms of the Gov-ernment of India. The ADB-designed PPP cells are being set up in various urban centers in India including the two cities of Thiruvananthapuram and Cochin in Kerala.
While the first two sets of reforms are being taken up directly by the state
Government through the concerned boards and institutions, the Urban
Development Projectis largely routed through the self governing bodies such as municipal governments and city corporations in the state. The loans are provided by the ADB out of its Ordinary Capital Resources at a floating interest rate which varies in accordance with the prevailing US dollar LIBOR plus 0.6% per annum. While the policy loan has been accepted for
a term of 15 years with a grace period of 3 years, the project/investment loan is repayable in 20 years with a grace period of 5 years; the foreign exchange risk of the loan to be borne by the federal government.
It would be interesting to trace the history of the ADB’s entry into Kerala, with both the Left and the Right governments playing an equal role in the chain of events that led to it. Ironically enough, it was the ruling CPIM in Kerala, which first initiated a dialogue with the ADB in 1996 and later in 1998. The matter was discussed neither with the coalition partners of the Left Democratic Front (LDF) nor within the State Party
Secretariat. A Concept Paperwas submitted to the Government of India
on the basis of discussions held with the ADB mission in 1998 accepting in spirit the neoliberal agenda of a restructuring of public utilities based on market principles and private participation. The ADB on its part, was keen to enter into an agreement with the Left government seeking as it did a certain legitimacy to the implementation of neoliberal reforms; it had insisted on a political consensus on the future course of action as a pre-requisite for its selection of Kerala as a focal state, just as it had selected Gujarat and Madhya Pradesh in 1996 and 1997 respectively. As per the assertions made by the ADB and the Left government, the two problems that posed a challenge to growth in Kerala were the breakdown of the finances of the state and low economic growth which, in the absence of domestic resources, could be mobilized through external loans. However, it must be noted that such a portrayal of the state economy could only be termed partial and incomplete, the obvious agenda behind it being the institutionalization of neoliberal reforms.
Contrary to the trend in the early 1980s, the Kerala economy had
regis-tered a revival from the late 1980s, marking a major ‘turn around’ (Human
Development Report, 2005) – and had remained ahead of the all-India av-erage until the mid-nineties. Though it could not maintain this tempo, the economy has still been performing well (Subramanian and Azeez, 2000; Ra-man, 2004b) despite the aberrations created in the cash crop sectors owing to trade agreements such as the World Trade Organization and the India– Sri Lanka free trade pact with the historically evolved unfavorable terms of
trade and surplus drain.6The economic necessity for an externally driven
financial and policy agenda as embodied in the ADB statutes and the political position of the Left thus seems hardly justifiable. The opposition led by the right-wing United Democratic Front (UDF) had been in no way averse to the ADB package, assuring the ADB mission that it recognized the need for ‘pragmatism’. Subsequently, the actual execution of the con-tract and the first tranche of the loan had come into the hands of the UDF, which had by then returned to power in keeping with the set political cycle in Kerala. The leftist forces which were now on the opposition benches were quick to deride the UDF government for its hasty acceptance of the loan; in fact, this formed a major electoral strategy for the Left. However,
with the state governance back with the Left in 2006, and despite the misgivings expressed by some of its factions as well as public protests, it accepted structural adjustment as part of the ADB-package. Neither the LDF nor the UDF thought it a necessity to seek a peoples’ mandate before opting for such a huge loan. Further, as part of an effort to legitimize these structural adjustment policies pushed by the ADB, the state has granted permission to self-government institutions like the city corporations to borrow finance from international agencies – a new way of decentralizing global finance (see Germain, 2004) – which, it must be pointed out, is associated with neoliberal reforms such as the privatization of public utilities, largely in line with the structural adjustment lending of the IMF. In general, the neoliberal conditionalities that accompanied the SAL ‘went far beyond what was required to address the concerns of the crisis’ (Stiglitz, 2002: 25); Kerala was no exception to this rule. The ADB put forth specific policy conditionalities as part of its shift from ‘project lending’ to ‘program lending’ which also co-ordinated well with the SAP of the World Bank and the IMF; for more than a decade now, the IMF has insisted on privatization as a standard condition of its structural adjustment lending
(Bruneet al., 2006). The Government of Kerala acquiesced in this respect
too. A few of the stipulations are worth the mention. In future, all contracts or agreements or even negotiations with other financial agencies/donors were to be discussed with the ADB, which practically reserved the right to insist on a cross-conditionality with respect to other foreign contracts. In clearer terms, the Government stood to lose its right to freedom of decision making in matters of finance; the state even forfeited its freedom to enter into bilateral negotiations with other financial agencies/countries. The other specifications were equally repressive: as part of the restructuring of State Level Public Enterprises (SLPEs), the state would have to assure a minimum annual ‘net attrition rate of one per cent’, the approval and extension of the Voluntary Retirement Scheme and Employee Separation Scheme to all categories of workers, and the successful implementation of the recommendations of the Enterprise Reforms Committee to the effect of accepting ‘alternative systems of management including privatization, disinvestment, merger, management contracts and leasing’. Most of these pro-liberal reforms had already been undertaken by the Rao-led federal government in the early 1990s as part of its first-generation reforms (Killick et al., 1998: 97).
As for the projects launched by the state governments before the coming of the ADB, those over 5 years old would stand terminated, if so deemed by the ADB, no matter how far they had progressed or how extensively their benefits accrued. The state was expected to submit reports to the ADB on its production and trade statistics from time to time; this, when seen in counterpoint to the total lack of transparency in the ADB-Government of Kerala discussions lucidly illustrates the unequal terms of information
exchange being foisted on the state. Further, public utilities were to be run on market principles with cost recovery and efficiency in delivery being pivotal points. Needless to say, this has led to the levy of increased taxes on education, health and water and a tariff hike in the power sector; ‘uneconomic’ schools are now in danger of being closed and the Public Distribution System (PDS), the pride of Kerala (Mooij, 1998), down to a bare minimum.
The major components of the ADB-sponsoredUrban Sustainable
Devel-opmentprojects include the modernization of the drinking water system, the public transportation system and urban waste disposal measures. More than a dozen conditionalities are being imposed with each of these projects, all of which is in keeping with the larger World Bank–ADB scheme of charging user fees for basic public utilities and privatization of loss-making public projects. It amounts to a virtual takeover of the state’s domestic poli-cies as it involves the constitution of regulatory authorities and the passing of legislative measures aimed at market-driven reforms; the World Bank has major stakes in the water and irrigation sectors in Maharashtra and Karnataka. It was in the mid-1980s, at a time when the state and its lower level administrative units held responsibility for the management of pub-lic utilities such as water distribution, that the World Bank made its first foray into Kerala on the strength of the argument that such administration should be disengaged from the state and instead entrusted to an inde-pendent authority; the immediate outcome of this change in policy was the introduction and subsequent prevalence of market-driven policies in water distribution. And when the rural water system was in jeopardy ow-ing to the failure of the local administrative bodies, World Bank projects likejalanidhi(treasure trove of water) were launched which, in their turn, proved themselves to be utter failures. In Kerala, the ADB has also suc-ceeded in persuading the municipalities/city corporations, and thereby the local self-government institutions, to levy user charges on drinking water based on market principles.
Until recently, drinking water in Kerala had been distributed to the public free of charge, but it eventually came to be a priced commodity and the entire management of the system was handed over to the local self-government institutions like the corporations and municipalities. And now with the acceptance of the ADB loan by the city corporations, attempts are being made to phase out public taps and to levy user charges; moreover, water drawn from public taps is to be metered, obviously with a view to its pricing, though the move for an outright abolition of public taps in the state has been successfully resisted. The constraints placed by the ADB agreement on state autonomy are manifest in its statement, to quote:
the state shall ensure that all the Municipal Corporations pass a resolution by March 2008 to introduce service tax and/or revenue
mobilization measures in each MC to meet shortfall of rev-enues . . . (ADB, 2007a)
which implies that the ADB directly argues for an increase in the prices of water or other such public utilities; both the state/city corporations and the ADB agree with the suggestions regarding the degree to which prices could be raised, the sectors wherein new taxes could be imposed and the extent to which municipalities/city corporations should increase their income every year. The distribution of water through public taps is in danger of being restricted at any time and the consequences are particularly alarming in Kerala, wherein, unlike many other states, the incidence of poverty is much higher in the urban than in the rural areas – an outcome of the state’s own skewed developmental trajectories.
An important lesson to be learnt here is that given the responsibility of meeting the expenditures on public utilities, and the authority to mobilize funds, the local governments negotiate with external financial agencies to raise funds against the background of a falling transfer of resources from the center to the state (and thence to the local bodies). This devolution of responsibilities and the power to raise funds by the lower levels of government is further encouraged by the larger process of
decentraliza-tion in the state,7 which closely parallels the World Bank conception of
decentralization despite Kerala’s assertions to the contrary. The inevitable consequence, therefore, is an increased pressure from the external agen-cies on domestic poliagen-cies, the poliagen-cies themselves being framed to fit the funding conditionalities and the World Bank agenda of decentralization leading to a minimalist (welfare) state.
DEBT-DRIVEN ‘DISEMBEDDING’?
It is more than 5 years since the state began to collaborate with the ADB with the aim of fiscal correction through structural reforms. However, by the ADB’s own admission, Kerala’s fiscal deficit increased significantly during 2006–7 and there was only ‘lacklustre revenue growth’ even af-ter the SAP even afaf-ter complying with the conditionalities (ADB, 2007b). More importantly, the debt–GSDP ratio in the state was expected to rise to more than 43% in 2006–7 revealing that post-ADB, Kerala’s fiscal health had only worsened. Yet, the state government continues to adhere to the remaining ADB-conditionalities such as direct intervention in policy mat-ters including the extension of the Voluntary Retirement Scheme and the Employee Separation Scheme to all categories of employees – a Govern-ment that ought to be providing jobs for its educated unemployed masses has actually agreed to downsize employment opportunities to an ‘efficient minimum’, having already done away with many of the service benefits of the employees. This is highly objectionable on many counts. First of
all, the true crisis in the state is one of rank unemployment and in such a context, it is quite unacceptable that the state agrees to further cuts in employment opportunities instead of negotiating for more job-oriented ventures. Meanwhile, the state creates illusions about the possible genera-tion of employment through export processing zones, which is again part of the agenda of global integration, despite the fact that the people in West Bengal had to resist forced evacuation for the setting up of such zones in favor of corporate colonization (Bhaduri, 2007; Sarkar, 2007). Secondly, it overlooks the fact that, despite its good performance in terms of health and education indices, Kerala faces a shortage of specialty skills, and with the structural adjustment policy favoring the closure of uneconomic pub-lic institutions, it is the very essence of the Kerala model that has fallen victim to these reforms. But as neoliberal reforms take root in Kerala, the share of expenditure on health and education has already begun to decline reaching a level far below the UNDP standard. The UNDP (1991: 44; also see Dev and Mooij, 2002), for instance, considers it desirable for a country to have a social allocation ratio of more than 40% and Kerala had touched this target on one occasion; however, it later declined to around 30%. Tak-ing education alone, the percentage declined steadily over the decades from 29.8% in the early 1980s to 23.17% in the early 1990s and further to around 18% in 2005–6. The health and family welfare sector too has seen sharp cuts in expenditure from 11.67% of SDP in 1983–84 to 9.94% in 1989–90 and again to 6.36% in the post-reform phase; social security benefits too were sliced during the neoliberal phase and together with the increasing commercialization of education and health pose a grave threat to the equity base of the Kerala model with the subalterns being ever more marginalized (Oommen, 2008; Raman, 2004a). Typified as a post-Keynesian reinforcing of the market and an assault on democratic rights through a re-definition of one of the ‘core functions’ of the state as policing, the new governance thus comes to represent a process of ‘disembedding’ (Polanyi, 1944).
Knowing full well that ‘the biggest risk comes from public action against reform’, the ADB has pressed ahead with its ‘good governance’ agenda. The state was persuaded to institute a massive hike in power tariff, which was to earn for it the first tranche of the ADB loan. The prophesied ‘public action’ came in the form of a massive mobilization of various social sec-tions; this included the mainstream Left parties, who had been responsible for inviting the ADB to the state in the first place. In spite of these protests, the state hiked up the withdrawn tariff once again, but at a lesser rate. The agenda for the power sector reforms further encapsulates unbundling and corporatization – the setting up of separate companies for the gener-ation, transmission and distribution of electricity and the formation of an autonomous Tariff Regulatory Commission at a time when de-regulation in the power sector in most of the countries has presented a dismal picture
with price gouging and hoarding being the new norm. In-house alterna-tives (Kannan and Pillai, 2002) have also been ignored in preference to the privatization strategies propounded by the ADB. This is explicit in the experience of the Andhra Pradesh State Electricity Board, which was subjected to World Bank-driven reforms in spite of its satisfactory perfor-mance indicators. The global agencies are also driven by the knowledge that once the critical social sectors like water supply and power, particu-larly in the cities, are brought under their jurisdiction, entire regions would be theirs to govern.
The state has been at great pains to create an impression that the ADB bound modernization program would be implemented with a ‘human face’, the latest pretension of neoliberal proponents the world over. How-ever, the very fact that hardly 4% of the adjustment cost of the MGP is earmarked for poverty eradication – the Kerala model of the twenty-first century – has brought such efforts to naught. This is particularly evident from urban development projects wherein severe restrictions are to be imposed on a large number of urban dependants on public utilities like public tap water which are required to be phased out eventually as part of the ADB-conditionalities. The neighboring state of Karnataka had earlier attracted much criticism with the implementation of its urban develop-ment project, which was quite evidently anti-urban poor besides lacking transparency in operations. As things stand now, the public sector re-structuring envisaged would only serve to aggravate the problems of the working class particularly those in the lower and middle-income groups. The ADB-supported Poverty Impact Assessment (PIA) of the loan seeks
cover behind its poverty alleviation schemes, and, in particular,
Kudum-basree8and other such micro credit enterprise programs in the state, quite
ignoring the fact that women’s self-help groups are well on their way to extinction in this globalized country.
When the PIA maintains that the SLPE reforms ‘do not have any funda-mental conflict with the goal of poverty alleviation’, it grossly disregards the experiences of other countries, particularly those of the African conti-nent, wherein state withdrawal had led to a loss of access to food, health, education and sanitation facilities. Further, it fails to learn from the social chaos faced by the sacked public sector workers in those countries that have undergone public sector restructuring – Brazil, Peru, and Bolivia, to name a few (George, 1992); it also overlooks the fact that public sector reforms were initially met with stiff resistance in borrower nations such
as India, Kenya, Madagascar and Zambia (Killicket al., 1998: 112). And
this is precisely why the public sector employees of the state have rejected the recommendations of the Enterprises Reform Committee constituted by the Government of Kerala, for whom restructuring of SLPEs reads privatization – damaging its ecology and draining away its wealth –
dis-investment and closure.9
WHO STANDS TO GAIN: THE NEW POWER BLOCK?
While the options for internal resource mobilization are wide-ranging, the question why the state, both the Left and the Right, chose neoliberal op-tions to the exclusion of all else, is to be answered not simply in terms of international pressures or pressure from the federal government, but equally in terms of domestic politics, the class constituents of the state, and more specifically, as this section would show, the local social struc-tures of accumulation and its links with the state. The swelling middle- and upper-class income brackets in the state signal a vibrant consumer market in the state, which is most reflected in the elevation of Kerala to the status of a state with the highest per capita consumer expenditure in India. Yet,
commodity taxes have not yet been tapped to their full potential.10Sales tax
evasion is as high as 35% (Rakhe, 2003) and it is obvious that the richer sec-tions of the society stand to benefit from this. Kerala is probably the biggest market for gold in the country, yet, the sales tax revenue realized from this sector is quite low; it should have been five to six times the present mo-bilization, had it been under stringent tax vigilance (Raman, 2004b). Most importantly, there is an ever-increasing revenue loss in various revenue generating sectors of the economy owing to under-assessment of tax, in-correct computation of agricultural income tax, exclusion of income from assessment, including those of luxury hotels and bars, non-realization of potential value in forest produce and due to non-implementation of revised lease rents in the plantation belts, which are still controlled by pan-Indian capital. Many such firms continue to make profits through management strategies such as intensification and flexibilization of labor, in spite of the globalization-induced crash in crop prices. A quick estimate of such locked-up funds in the state comes up to an amount equivalent to or even in excess of the ADB loan. Yet, the class bias of the state blinds it to such encrypted sources of funds, which in Kerala help foster social structures
of accumulation11constituted by groups of large business traders, owners
of luxury hotels, planter capitalists, gold merchants, liquor barons, forest contractors and so on, who alternately collude with and dissociate from national and international capital.
They form multiple nodes in the power chain which ultimately winds its way to the state apparatus and it is this ‘power elite’, which further depresses the buoyancy of the tax revenue in Kerala which has already been on a decline: the average value of the state’s own tax buoyancy co-efficient during 1980–90 was 1.20, which fell to 0.89 in 1991–2002 (Rao and Chakraborty, 2006: 346). On the contrary, a high tax–GDP ratio, as in the Scandinavian welfare states such as Denmark and Sweden – well over 50% – would have secured equally high levels of social security and fostered strong social welfare systems. In fact, the stagnant/depressed tax–GDP ratio in the state reflects the presence of a huge shadow economy
characterized by large-scale evasion, unaccounted money and corruption, which in turn leads to a dwindling contribution of the value added to the state exchequer. The source of disparity and inequality in the Kerala econ-omy as well as many of the other ‘developed’ states in the post-reform phase could be traced along the chain of power relations in which the parliamentary Left in Kerala is just as involved as the conservative Right. The situation that results is one in which the dominant sections in both the mainstream political parties are often implicated in the nurturing of the marketization of the economy and the local social structures of accumu-lation. Rather than an attempt at self-reformation through the adoption of viable alternatives to Western-inspired neoliberalism such as those be-ing put into motion in Latin American countries, the emergent neoliberal party coalitions in Kerala appear to have chosen the Russian/east
Euro-pean path of ‘post-Communist managerialism’ (Eyalet al., 1997; Hankiss,
1990; Staniszkis, 1991) with the proliferation of mafia gangs, consolidation of property relations and widespread corruption; the political elite in the state has thus become fully embedded within the new power bloc in the
state,12one which is only likely to be further fortified by the market-driven
reforms of the ADB–state coalition. Evidence from various countries that have opted for SAPs shows that it is in fact the political regimes composed of such varying interest groups that not only facilitate, but also justify neoliberal reforms (Haggard and Kaufman, 1992). The comprador bour-geoisie – the big business people, big and medium traders, the salaried upper-class bureaucrats, who all play their part in the accumulation of arrears and in evasion – have themselves grown at the expense of pub-lic resources and are the creatures of state patronage, as in many other
third-world countries.13 The formation of a rent-seeking class was the
very outcome of the way in which the state patronized these accumulating structures, or as Poulantzas (1969: 67–78) would argue, it was the effect more than the cause of the capitalist state.
Other possibilities of resource mobilization which, however, lie outside the purview of the state, and are ruled by extraneous forces, include the newly introduced services tax, Central transfers and market borrowings. With its economic performance being primarily driven by the services sector, Kerala could bargain with the Federal Government for the right to levy taxes on more and more services. The state could also have found ways to attract a significant portion of foreign exchange from its Gulf migrants
to the tune of Rs.200 billion a year,14 had it politically negotiated with
the Center and the financial authorities such as the Reserve Bank of India and the Finance Commission, and offered an interest rate nearly as much as it is bound to give to the Central Government. The state should also have negotiated for a higher share of foreign direct investment in India, as against the meager 0.3% of the US$21 billion, and also to reverse the falling trend of Central investment in the state. It must be pointed out that in the
absence of concrete state-run production-oriented projects which could
put such funds to good use, themalayali diasporaprefers to invest its
hard-earned money not in directly productive activities such as industries or agro-processing sectors, but rather in real estate transactions, speculation
and stock exchange markets.15 Owing specifically to this reason, Kerala
has, of late, become home to a real estate/speculative economy with all its associated political-cultural implications such as high-level corruption and rent-seeking. The state also fails to mobilize resources from its own domestic savings, and instead, allows a draining of its surplus with its low credit–deposit ratio: a pointer to the route of surplus drain from the state. A state/region thus denied its own surplus for reinvestment can never hope to prosper. But the ADB and the World Bank have out-maneuvered the Center, and have secured permission to raise up to $250 million in rupees from the Indian debt market.
Moreover, there being a continuing emphasis on large-scale infrastruc-ture projects and modernizing government, the ADB is very particular that all its contracts be awarded through internationally advertised competitive bidding with the caveat that bidding would be confined to the powerful donor countries of the ADB. The past records of ADB-tied procurements reveal that most of it goes to the world’s biggest corporate capital in the donor countries such as Mitsui and Co, Mitsubishi of Japan, Cooper Rolls and Raytheon Company Electronic Systems and Cargill Fertilizer of the US, Siemens of Germany and Balfour Beatty of the UK (Adams, 2000: 20– 31); it implies a net gain for the multinationals, with the cost to be borne by the developing countries, in a situation which Petras and Veltmeyer (2001: 283) rightly label ‘reverse aid’. With respect to Kerala, this translates into yet another drain on state finances apart from the negative flow of resources to the federal exchequer.
And with respect to grant/loan-tied Technical Assistance, the beneficia-ries are again a handful of donor countbeneficia-ries particularly the US, UK, Canada and Australia; it was to PDP Australia (P) Ltd that the consultancy on fiscal reforms in Kerala went. The Australian Treasurer’s report to Parliament on the ADB for 1998–9 states that:
ADB-financed contracts provide sizeable commercial opportunities for Australian firms and can be stepping stones to further work in developing countries in Asia and the Pacific. (cited in Adams, 2000)
Not surprisingly, the genesis of many such corporate capitals which have won ADB Technical Assistance contracts may be traced back to policy-based lending with huge investments in infrastructure; and concomitantly, a new genre of bureaucrats, consultants and academic compradors have emerged in recipient countries/states like Kerala, as elsewhere in the world
(Reuschemeyeret al., 1992: 212). While a few democratic sections and the
left-wing radical groups did launch a massiveADB-Quit Kerala Campaign,
it should, however, be admitted that theCampaignfailed to articulate the
possibilities of state-based alternative processes of development;16 it also
failed to expose the ‘Trojan Horse’17 strategy engineered by the state, the
ADB and the federal government.
BREWING PROTESTS/DEATH OF PROTESTS?
The linking-up of the state finances and governance in Kerala with the ADB has been challenged by various sections of the society such as trade unions, socially concerned scholars, activists, students, indigenous people, women’s groups and environmentalists. On 1 May 2002, a few democratic
groups together launched theADB-Quit Kerala Campaign. With the state
already steeped in debts, any further loan, they said, would only put the economic position of the state in greater jeopardy. Moreover, once the ADB were to gain a foothold in the state through its ‘common policy matrix’, it was feared that the financial, social and, to a certain extent, political structure of Kerala would change, altogether reversing the social development model the state had thus far been proud of. More importantly, it was pointed out that the entry of multilateral financial institutions like the ADB into traditionally grown democratic institutions in the state would ultimately erode the political self-respect of the majority of the people of Kerala, to the effect of further marginalizing the poor; the MGP and the reforms that it entailed would prove to be too great a burden for
them to shoulder. A day before the democratically organized ADB-Quit
Kerala Campaignwas launched, a few radical youths, calling themselves ‘Porattam’ (the Fight, a Maoist outfit) ransacked the ADB state office in the capital city of Thiruvananthapuram, damaging office files and equipment. TheCampaign, joined by fresh groups of feminists, environmentalists, and scholars chose novel ways to register its protest such as the
‘sathya-graha chain’. Though the Campaign drew to a halt for a few days, the
individuals involved kept up their protests in unprecedented ways: a dalit activist bound himself in chains in front of the secretariat, with his little son to help him. But the most novel protest probably came from the fem-inist groups of Kerala. They exposed the ADB as an agent of democratic violation and the ADB contract as more than a simple economic contract.
Breaking all norms, they claimed thenight for their own, painting and
danc-ing all night long to express their anger and discontent. A ‘democratic
hartal’ was also called for by theCampaignon 1 November – the day of
state formation – only those individuals who felt themselves compelled
to join were expected to participate. In the initial phase of theCampaign,
the Left opposition too had come out in public against the ADB loan. For instance, as the resistance to the ADB package mounted the LDF leader declared that the LDF would not repay the loan were they to come to power: though a distinct political option, the statement failed to have the
desired effect on the public of Kerala, but it did help heighten awareness of the ‘other side’ of the ADB package. But when the Left did come to power as recently as in May 2006, not only did it go back on its earlier stance, but it actually catalysed the full implementation of the ADB package as we have explored above. When the two dominant factions of the Kerala CPIM traded claims and counterclaims regarding certain ‘anti-people clauses’ including the question of the metering of public taps in the conditional-ities, the ADB officials themselves made it clear in January 2007 that no change has been made in the loan agreement it had signed with the Kerala
government in December 2006, nor was any such change possible.18
Though there was a revival of resistance against municipal govern-ments/city corporations accepting the ADB loan, again from outside the institutionalized Left domains, it did not gain much ground due to the divi-sions in the opposition parties in the state. The recent mass demonstration by thousands of farmers, students and non-governmental organizations (Tadem, 2003) against the ADB, which took place in Chiang Mai, Thailand in May 2000 during the ADB’s thirty-third annual conference firmly un-derscores the unpopularity enjoyed by the bank in various south Asian countries. This cannot be seen as anything but a continuation of similar protests against the World Bank and the IMF in other parts of the world (Bello, 2002a; Routledge, 2003). Though the ADB Annual Governors’ Meet-ing was held in Hyderabad, India, in May 2006 amid much protest, the overall functioning of the ADB continues unhindered.
CONCLUDING OBSERVATIONS
World-wide, the operations of the International Financial Institutions (IFIs) undermine national and local planning processes, and domestic potential for resource mobilization as well as genuine sustainable development; more importantly, they also undermine domestic democratic processes. In the name of poverty reduction and ‘good governance’, the ADB too, as informed by this study on the Indian state of Kerala, has intensified priva-tization programs, particularly with respect to essential services, in effect marking the end of a widely recognized social model of development. This in turn serves the interests of transnational elites, their local bureaucratic-authoritarian classes, broadly, the social structures of accumulation, all of which co-ordinate themselves into a new power block. Given the fact that post-ADB, the fiscal health of the state has only worsened – a fact that is partly admitted by the ADB itself but not by the Left government – a per-sistence with the structural adjustment measures only strengthens these new power relations.
Even a casual observer of the Indian economy can see the apparent con-tradictions in driving the state to foreign loans, particularly when the coun-try has actually begun to prepay certain high-cost loans from multilateral
agencies as part of its effort to reduce the burden of interest and to rein in the fiscal deficit, and has also now become a lender-member of the Finan-cial Transaction Plan of the IMF to meet the Balance of Payment needs of other countries. Perhaps a developing country like India should have put its forex reserves to more judicious use as part of good public policy – to plough it back into its domestic economy, to increase the steadily declining public investment, correct the fiscal deficits, plug the surplus drain and to strengthen state-level finances. This is particularly true with respect to Kerala, which on the one hand makes the single largest contribution to the federal forex in terms of migrant-remittances, while entering into a state of high-cost debt overhang on the other, being subject to multiple channels of surplus drain.
Within the larger agenda of the ADB-driven reforms, what is being en-visaged is a uni-dimensional pushing of neoliberal regulations and what has been swept under the carpet is the fact that, as a system of governance, democracy easily betters the rest; mis-governance in democracy asks for correction rather than rejection, particularly when the global political sys-tem redefines aid and credit with its goal of more effectively integrating national economies into the global capitalist system. If the Kerala govern-ment were to adhere fully to ADB-driven governance, it would culminate in social divestment, commodification of critical sectors such as education and health and, thereby, a reversion of whatever remains of the Kerala model of social development: what Polanyi would have called ‘disembed-ding’ from social bonds and civic engagements. Kerala and other ADB-focal states in India on their part would do well to re-examine their stand on the ADB and on Center–State relations and to, first, stop further bor-rowing from the ADB and not to pursue with the ADB policy package and, second, renounce the path of externally driven neoliberal reforms. Other-wise, the state would find itself ‘mortgaged’ for generations to come; the Kerala Model of Social Developmentwould gradually disintegrate, in effect wiping out one of the welfare state models which has often been quoted as an example for the rest of the world. While the recent resurgence of the Left in Latin America offers fresh hopes of social development, the Left in Kerala, and in India as well, follows the destiny of the socialist system in eastern Europe. What is likely to ensue is a double collapse: the collapse of a reasonably successful model of social development and the demise of an iconized Left.
ACKNOWLEDGMENTS
An earlier version of this paper was presented at the Department of Inter-national Studies, Queen Elizabeth House, University of Oxford (2007) and
also at thePoverty and Capital Seminar and the Annual Workshop of the
International Political Economy Group, both at the University of Manchester
(2007). I am grateful to Barbara Harriss-White, Nandini Gooptu, Paul Cam-mack, Ben Fine, John Gledhill, Paul Langley and Andreas Antoniades for their comments on varying occasions. I am also grateful to David Hulme and K.P. Kannan who have made extensive comments on an earlier draft. I have also benefited from discussions with K.K. Subramanian, M.A. Oom-men, K.T. Rajagopalan, P.B. Rakhe, Ajit Dayanandan, T.G. Arun, R. Mohan and Pinaki Chakraborty. The detailed comments made by the anonymous reviewers have proved invaluable in shaping the paper into its final form.
NOTES
1 TheHuman Development Indexis a composite index derived from per capita consumption expenditure, incidence of poverty, access to safe drinking water, proportion of pucca houses, literacy rate, intensity of formal education, life expectancy and infant mortality rate, seeHuman Development Report(2005). 2 This does not mean that theKerala Modelis without its own drawbacks,
partic-ularly from the perspective of its outliers whose poverty and marginality have been further accentuated in the neoliberal phase, see Kurien (2000); also see Rammohan (1991), Omvedt (1998), Bijoy and Raman (2003), Raman (2004a). 3 For details, seeAspects of India’s Economy(2004).
4 For a brief survey of debt overhang in developing countries, see Sachs (1989: 80–102).
5 For details, see, Government of Kerala (2002a). ADB documents, 1– 8, MGP: A Strategy Document, General Administration (Modernising Government Programme) Department, Government of Kerala, Secretariat, Thiruvananthapuram; ADB: Validation Report, Number: PCV: IND, 2007– 27, Project Number 31328, India: Modernising Government and Fis-cal Reform in Kerala Program; ADB (2000); Loan 2226-INDIA: Ker-ala Sustainable Urban Development Project, Local Self Government (Ur-ban) Department, Government of Kerala, Secretariat, Thiruvananthapuram. All the documents are available at <http://www.keralamgp.org>; <http://adb.org/projects/project.asp?id=31328>.
6 For the impact of the Indo–Sri Lankan trade agreement on the Indian economy, see Harilal and Joseph (1999: 750–53); the question of surplus drain from Kerala was dealt in Rammohan and Raman (1990).
7 Decentralization through local-self government institutions implies the devo-lution of powers to lower levels of governance such that elected bodies may function independently in terms of the use of authority and resources which was made effective by the seventy-third and seventy-fourth amendment acts of the Indian Constitution. While it is argued that fiscal centralization is bet-ter suited to provide macrostablization (see Garrett and Rodden, 2003 and Sambanis, 2006), decentralization may equally assist the penetration of global finance to the lower structures of governance.
8 Women’s self-help programs such as micro-enterprises supported by the state. 9 GoK,Approach Paper for State Level Public Enterprise Reforms in Kerala, Enterprise
Reforms Committee (2002), Thiruvananthapuram.
10 Various aspects of commodity taxation in Kerala have been explored by Jose (2000).
11 For a theoretical understanding of the ‘social structures of accumulation’, see Gordonet al.(1982) and Kotzet al.(1994); also see Harriss-White (2003).
12 Of late, political discourse in the state which even had to pass theGoonda Act 2005, has centered around the rampant corruption, high crime rate and a general erosion of values which pose a challenge to the political governance in the state.
13 For an early study exploring such state patronage with respect to Bangladesh, see Sobhan (1982).
14 Various estimates of foreign remittances have been made; for an early estimate, see Zachariahet al.(2002).
15 For the argument that Kerala in no way suffers from a lack of capital but is the victim of surplus drain through various routes, see Rammohan and Raman (1990: 17–19).
16 Alternatives to the existing pattern of development are often articulated through social movements, and it is particularly true with respect to Kerala, see Raman (2007a, 2007b); for state-led developmental possibilities, see Evans et al.(1985) and Escobar (1995).
17 For an early usage of the term, situating the World Bank, see Weissman Stephen (1974); also see Salil, C. S. and Raman, K. R. (2006) ‘ADB: Who Will Shackle the Trojan Horse?’, report in Samakalika Malayalam[Contemporary Malayalam], weekly in Malayalam, the regional language, 24 February: 8–17.
18 See Financial Express,< http://www.financialexpress.com/news/adb-no-to-change-in-kerala-loan-agreement>.
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