Thomas Piketty’s CAPITAL: Adding the Third World dimension
Posted on January 25th, 2015

By Garvin Karunaratne, Ph.D. Michigan State University

Thomas Piketty’s  Capital, a volume of 700 pages has been hailed as ” a very important book”. Paul Krugman has  stated that the book is a “landmark”.  Economist Branco Milanovic of the World Bank has  dubbed it as “a watershed book in economic thinking.”

Capital is a treatise  on how wealth inequalities have evolved in capitalistic economies and   is an outcome based on statistical studies of income inequality in many Western countries like the USA, France and UK.

 

After an analysis on the distribution of wealth and  the structure of inequality he concludes that there has been enormous inequality through the accumulation of wealth. The book documents that  income inequality has increased since the Seventies

 

As a remedy he advocates a punitive tax on high incomes and wealth. He opines that inequality is not an accident but an essential feature of capitalism.

“To regulate the globalized patrimonial capitalism of the twenty first century rethinking the twentieth century fiscal and social model and adapting it to today’s world  will not be enough. To be sure,  appropriate updating of the last century’s  social democratic and fiscal liberal programme is essential…. But if democracy is to regain control over  the globallized financial capitalism of the century it  must also invent new tools, adapted to today’s challenges. The ideal tool would be  a progressive global tax on  capital, coupled with a very high level of international financial transparency.”

 

Capital is not without its critiques.

Mervyn King, former Governor of the Bank of England, states:

“Thomas Piketty  believes there is a fundamental logical conclusion in capitalism with potentially terrifying consequences for wealth distribution unless we adopt radical policies to tax the rich.”  He adds that  “by promoting efficiency and raising living standards a market economy has proved its worth.”

Bill Gates is of the opinion that “capitalism does not self correct towards greater equality” and  adds that “Governments have to play a constructive role”.

 

To me it seems to be wishful thinking that by merely charging a super tax, inequality and its ills can be arrested.

 

I find that it is necessary to bring in the role of the Third World countries- the colonies of the Superpowers because the accumulation of wealth in the Developed Economies has been possible because of the control over the colonies and the extraction of wealth from them. That was the hallmark of colonial domination.

 

From the Fifteenth Century onwards the powers in Europe have gone to the East and the West in search of riches. It was the Portuguese and the Spanish that were in the forefront and when they fought with each other in plundering the wealth of others, the Pope intervened and declared that Portugal should go to the East and Spain should go to the West- to the Americas. Other European Superpowers like the British, French and Germany who entered the fray later went wherever they could.  Their main aim was the  aggrandizement of wealth and that  included the worth of vast countries like Mexico and  India.  It is even said that vast riches from Mexico lay in the Atlantic Ocean, in ships that floundered on the high seas.

 

The accumulation of wealth from the colonies was vast . When Captain Robert Clive of the East India Company, which had at one time a 60,000 strong army, working on a charter from Britain,, defeated Shiraj Ud Daulah, the ruler of Bengal , GBP 2.750 millions was sent to Britain. Clive also  “acquired GBP 1.2 millions as gifts to officials; in the first  eight years of company rule GBP 5.9 million was extracted out of Bengal, between 1757 and 1815 GBP 100 million went from India to Britain. This was growth for the Superpower and destitution for Bengal. In the 1770 famine  when a third of the Bengal population died, more taxes were collected than in the earlier year.”(How the IMF Ruined Sri Lanka)  Recently the descendants of Robert Clive have auctioned a jeweled jade flask brought by Robert Clive from Bengal; it fetched  GBP 1.1 million.(The Telegraph,11/2/2014)

 

 Histoire de la Iie Internationale,  states that

“The real yearly drain of wealth from India  represents at least GBP 35 million…India is and will probably remain the classic instance of the ruinous effect of unrestrained capitalism in Colonial affairs….”. (Vol.16, Geneva Minkoff Reprint, 1978)

 

The self sufficient and self reliant economic infrastructures of the colonies was altered to a plantation economy where raw materials will be produced as required for the industries established in the Mother Country. If one were to trace the riches of the very wealthy today one could trace it to the accumulation of wealth during  colonial times.

 

The accumulation of wealth and prosperity in the USA was due chiefly to the input of free labour through slavery.

 

In the case of the Third World countries that achieved independence in the twentieth century, they  did muster their resources and commenced development activities in agriculture and industry aimed at self sufficiency mainly through import substitution and fairly succeeded. This  was done by  curtailing imports and manufacturing things locally. The Western Developed Economies felt the pinch of this because they could not sell their manufactured products. The Superpowers had also lost the wealth they got when these countries were colonies.  They came to face stagflation- a mixture of unemployment and inflation. Manufactured products piled up due to the lack of buyers.

 

To face this situation the Developed Countries came up with the neoliberal economic policies, ably propounded by Professor Miltion Friedman where they developed the Structural Adjustment Programme by which the countries were opened up  for the manufactured products of the Developed Countries..  In addition people were to obtain foreign exchange very freely for travel etc. This was done by lifting import controls and allowing foreign exchange  freely for them to use. The deficits were met with loans from the IMF.  The loans at first came on generous low interest and the receipient leaders were not that concerned because loans came with grace periods of no payment where for years no interest or repayments had to be made.  Further the policies included a high interest rate policy to locals where entrepreneurs had to get loans from the banks at high interest as much as 24% per year. This made the entrepreneurs give up manufacturing, leading to  increased imports from the Developed Economies.. The money was used for luxury living and the debts piled up and governments found that with increasing debt they had to raise more loans to service the debt. The local currencies were taken out of the control of the countries and free floated. This meant that the Markets and banks(mostly foreign) controlled the exchange rate and there was manipulation to devalue the currencies. By Devaluation the Developed Countries emassed great riches because with devaluation all exports from the countries were at the devalued rate.  For instance the Ghana Cedi which was 1.04 Cedi to the GBP in 1965 is in 2014, 51,000 Cedi(5.1 GHC) to the GBP. Ghana exports gold, cocoa, bauxite and this is their source of foreign earnings. One can imagine the discounted rate at which these raw materials get to the manufacturers in the Developed  Countries. Many countries have suffered from devaluation- The Turkish Lira has dropped in value from 336 Lira to the GBP in 1983 to Lira 3,610,000 in 2014 marking a devaluation of 1,074,000%.

 

This was the Structural Adjustment Programme of the IMF in action and most countries have fallen a prey. Today these countries have been brought under the control of the IMF.   Instead of helping the Third World Countries the IMF has actually structured their economies to contribute to the Developed Countries and with this capital flows from the Third World to the wealthy in Developed Countries. In my words:

“The IMF’s Structural Adjustment program is actually a financial missile  that kills. It kills people by taking over the foreign exchange earnings of a country and channeling it to get back to the Donors- the Developed Countries through imports and other methods like foreign travel etc.(“Financial Missiles of the IMF that made sovereign countries indebted”: Lanka Web:30/8/2014)

 

John Perkins in his Confessions of an Economic Hitman, has provided details of how multinationals have been used by the USA to draft loans on  projects that were  designed to send back the loaned funds to the Donors while leaving the country saddled with the debt.  This too led to the accumulation of wealth in the Developed Countries.

 

As a consequence  the countries became indebted  and came under the control of the Developed Countries and their financial institution, the IMF. As Anup Shah says:” Debt is an efficient tool. It ensues access to other people’s raw materials and infrastructure on the cheapest possible terms”.(Global Issues 24/3/2013)

 

Currently all Third World Countries in their attempt to pay up their debt are advised to open up their economies further and to entice foreign investors to come in to  use their resources. At the initial stages these foreign investors bring in some foreign funds and invest. They then take away their profits and do not pay taxes as they work on tax havens. This process too leads to the flow of wealth from the Third World to the Developed Economies.

 

Thus was born the foreign debts of countries. Countries that had no foreign debt or had a negligible foreign debt in the Sixties and Seventies have built up huge debts by acting on the IMF advice.

 

In the meantime the advice of the IMF was to reduce taxes on the rich and countries charged less taxes than countries like the USA and UK. This led to the accumulation of wealth among the wealthy. The wealthy lived in luxury and their luxury living requisites being imported led to increasing debt.

 

 

The way out of this morass of financial failure, marked by the unequal accumulation of wealth by a few,  does not lie in imposing a tax on wealth as suggested by Thomas Piketty

 

In my words:  “The IMF should allow  every sovereign country the right to handle their own economies and should not impose conditions  that lead to recessions. The current method  of forcing the countries  to liberalize the use of foreign exchange and even get into debt to enable this liberty and extravagance to continue, is non developmental. .. It has been repeatedly shown  that the current flow of investment and Aid  to the Third World  is designed in a manner  that the money flows back with interest and profits to the donor countries.”(How the IMF Ruined Sri Lanka: Godages, 2006)

 

It requires  the abolition of the Structural Adjustment Policies of the IMF  and the development of an algorithm of policies that can enable all sovereign countries to manage their own financial matters,  create production, and also thereby create employment avenues, avoiding poverty and deprivation. The exploitation of the resources in other countries to accumulate wealth in the Developed Countries which is the order today should cease.

 

It would behove  the newly formed Bank BRICKS to address this major task.

 

References

 

Bill Gates, “Bill Gates takes on Thomas Piketty’s: Here’s whats wreong with the billionaire’s critique” in Salon, 14/10/2014

Histoire de la IieInternationale, Vol.16, Geneva, Minkoff Reprint, 1978,1907.

Garvin Karunaratne, How the IMF Ruined Sri Lanka and Alternate Programs of Success, Godages, 2006

Garvin Karunaratne, “The Financial Missiles of the IMF that made sovereign countries indebted”: Lanka Web, 30/4/2014

Mervyn King, “Capital in the Twenty First Century by Thomas Piketty” in The Telegraph, 7/1/2015,

John Perkins, Confessions of an Economic Hitman, Berett Koehler, 2004

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