The strategy response to the global economic crisis seems to be to sustain the financial system and wait for the next ‘bubble' to appear rather than to revive the real economy directly through fiscal stimuli, frets Prabhat Patnaik in the opening essay of ‘ Progressive Fiscal Policy in India ,' edited by Praveen Jha ( ).

Cautioning that the consequence of this strategy will be a prolonged period of recession and unemployment with much human suffering, Patnaik observes this only underscores the power of the financial interests in contemporary capitalism, where even a crisis of epic magnitude engendered by their functioning leaves this power undiminished.

Taking on ‘the mythology propagated by capitalism,' that the unfettered functioning of the system gives rise to a state of full employment where the resources are efficiently allocated, the author calls for government expenditure aimed at achieving full employment, financed by an appropriate mix of taxes and borrowing. It is better for recovery if the increase in government expenditure is coordinated across the major countries rather than being sequentially undertaken, he adds.

Recommended reference.

Two instruments for redistribution

It is possible that imposition of a high tax burden on the formal sector may create more informality in the system, reads a note of caution in ‘ The Outsiders: Economic reform and informal labour in a developing economy ' by Sugata Marjit and Saibal Kar ( ). The tax burden intended for redistribution may be so high that those in the formal sector get dissuaded from working, the authors reason. “They may choose to become net recipients by switching sides, drying up the tax base in the process.”

An insightful section in the book discusses two instruments in the hands of the government for redistribution – tax and governance. The essay goes on to discuss how there is a reasonable case for strong governance and high tax for those societies experiencing lower incidence of poverty and lower income inequality, whereas in societies with high incidence of poverty and income inequality, the level of governance is chosen to be weak, and the income tax rate is lower.

Instructive study.

US aid to Pakistan

In the backdrop of the operation against Osama, a topical read can be ‘ Deadly Embrace: Pakistan, America, and the future of the global jihad ' by Bruce Riedel ( Harper ).

For instance, a chapter titled ‘Helping Pakistan' traces how, on the economic side, the Kerry-Lugar Bill of the US tripled assistance to Pakistan, with a potential to provide a significant boost to key sectors including education, water, and energy. It would be even more useful if supplemented with an automatic democracy bonus, an idea Congress had been toying with earlier, suggests Riedel.

“This would commit the US to adding another billion dollars a year in aid every year the president could certify that Pakistan was a democracy. This, in turn, would provide an incentive to keep the army out of politics.”

Interestingly, the book cites the view of economists that Washington could do much more for Pakistan by modifying its trade policy to allow more Pakistani-made textiles to be sold in the US.

A related reference is to a recent report published by Pakistan experts at the Council on Foreign Relations, recommending that Mr Obama and Congress aggressively pursue a free trade deal with Pakistan.

“This, it concludes, would have the largest impact on job creation, especially among women, and would help revitalise economic growth.”

Informative material.

High inequality is explosive

Dhananjaya Rao Gadgil, a major contributor to the development of economics in India, wanted austerity in public expenditure, primarily, through a relatively lower level of salaries and wages for individual servants, reminisces P. R. Brahmananda in an introductory essay included by Sulabha Brahme in ‘ The Indian Economy: Problems and prospects ' ( ). “He believed that the wages and salaries in the public sector had a powerful influence in fixing wages and salaries in industry, business, trade, and finance.

He wanted the disparity ratio to be kept as low as possible.”Another point that Brahmananda mentions is that D. R. Gadgil did not want primarily an anti-poverty programme in terms of distribution.

“He wanted a large number of productive and related measures with activities focused in rural and agricultural areas, supported and, if necessary, subsidised by the state.”

Among the ‘selected writings of D. R. Gadgil' compiled in the book is one on ‘public interest and big business,' where there is an ominous statement that high inequality is explosive, not creative. “Severe restraint on wasteful consumption through an overall ceiling on incomes, channelling all savings in the modern sector through public agencies, overhauling the structure of administrative services, and the operation of administrative machinery, are among the many reforms that have to be undertaken to achieve rapid and peaceful progress,” reads a nugget of Gadgil's wisdom, delivered through a convocation address at the Nagpur University on January 20, 1962.

Educative collection.