A Level Economics 55: Income Inequality

Income Inequality: Income inequality refers to the unequal distribution of income among individuals or households within a particular economy or society. It is typically measured using indicators such as the Gini coefficient, where 0 represents perfect equality, and 1 indicates maximum inequality.

1. Market Failure: Market failure occurs when the free market mechanism fails to allocate resources efficiently, leading to suboptimal outcomes for society. It can result from various factors such as externalities, imperfect information, or the presence of market power.

Market Failure Arising from Income Inequality: Income inequality can lead to significant market failures, affecting various aspects of an economy. Let's explore how income inequality contributes to market failure:

1. Limited Access to Basic Goods and Services: In a highly unequal society, individuals with lower incomes may struggle to afford basic goods and services, such as education, healthcare, and nutritious food. As a result, their overall well-being and economic productivity are compromised.

   Example: In a society with high income inequality, many low-income individuals may not have access to quality healthcare due to unaffordable healthcare costs, leading to adverse health outcomes and reduced workforce productivity.

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3. Reduced Human Capital Formation: Income inequality can hinder human capital formation as individuals from lower-income backgrounds may face limited access to education and skill development opportunities. This affects the labor force's productivity and long-term economic growth.

   Example: In a society with minimal income inequality, all individuals have equal access to quality education and skill training, leading to a more skilled and productive workforce that drives economic growth.

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5. Lack of Economic Mobility: High income inequality can create barriers to economic mobility, making it challenging for individuals to move up the income ladder. This perpetuates intergenerational poverty and reduces opportunities for social and economic advancement.

   Example: In a society with minimal income inequality, individuals have better chances of upward mobility, regardless of their family background, as equal opportunities for education and employment are available to all.

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7. Decreased Aggregate Demand: When income is concentrated in the hands of a few wealthy individuals, aggregate demand may suffer as the majority of consumers have limited purchasing power. This can lead to reduced economic activity and lower overall output.

   Example: In a society with minimal income inequality, a larger share of the population has disposable income, leading to higher aggregate demand and increased consumer spending, stimulating economic growth.

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9. Social Unrest and Political Instability: Extreme income inequality can create social tensions and lead to political instability, as people may perceive the economic system as unfair and favoring the wealthy elite.

   Example: In a society with minimal income inequality, social cohesion is strengthened, and political stability is enhanced as people perceive a fairer distribution of resources and opportunities.

Illustration with Minimal Income Inequality: In a society with minimal income inequality, resources are more equitably distributed, leading to improved social welfare and economic efficiency. In such a scenario:

• All individuals have access to quality education, healthcare, and other essential services, leading to better health outcomes, increased human capital, and higher productivity.

• Economic mobility is enhanced, allowing people to rise out of poverty through education and hard work, leading to greater economic opportunity for all.

• A larger proportion of the population has the means to afford goods and services, leading to higher aggregate demand and increased economic growth.

• Social cohesion and trust in institutions are strengthened, fostering political stability and cooperation.

• In summary, minimal income inequality promotes a fairer and more inclusive society, mitigating market failures and promoting greater overall economic prosperity.

Economics Essay 68: Factors affecting Growth

Discuss whether an increase in investment is likely to be the most important factor in increasing economic growth in economies such as the UK.

While increasing investment is undoubtedly a vital factor in promoting economic growth, it is not the sole determinant of overall economic performance. Several other factors, such as productivity, technological advancements, human capital development, and institutional quality, also play significant roles. Real-world examples can help illustrate the importance of considering these broader factors alongside investment in promoting economic growth in economies like the UK.

1. Productivity and Innovation: Increasing investment alone may not lead to substantial economic growth if it does not result in productivity gains. Productivity improvements, driven by technological advancements, innovation, and efficient resource allocation, are crucial for sustained economic growth. For instance, the UK experienced a period of sluggish productivity growth despite increased investment in the aftermath of the 2008 financial crisis. The focus on enhancing productivity through investments in research and development, technology adoption, and workforce training has become a priority to boost economic growth.

2. Human Capital Development: Investment in human capital, such as education and skills development, is essential for long-term economic growth. While physical capital investment is important, a skilled and adaptable workforce is crucial for innovation, productivity, and competitiveness. For example, countries like South Korea and Singapore have prioritized investment in education and skills training, contributing to their economic success. In the UK, initiatives promoting vocational training, apprenticeships, and lifelong learning are critical to complement investment and drive economic growth.

3. Institutional Quality and Business Environment: A conducive institutional framework and business environment are fundamental for attracting investment and promoting economic growth. Transparent and efficient governance, rule of law, protection of property rights, and low levels of corruption are essential components. For instance, countries like New Zealand and Denmark consistently rank highly in ease of doing business and governance indicators, attracting significant investment and fostering economic growth. The UK's commitment to maintaining a business-friendly environment, reducing bureaucracy, and promoting good governance can contribute to its economic growth potential.

4. Macroeconomic Stability: Stable macroeconomic conditions, including low inflation, sound fiscal policies, and exchange rate stability, are vital for sustaining economic growth. Without macroeconomic stability, investment may be deterred, and the potential benefits of increased investment may be eroded. Countries like Germany and Switzerland have maintained stable macroeconomic environments, attracting both domestic and foreign investment and supporting long-term growth.

5. Global Economic Environment: The global economic context can significantly influence the impact of investment on economic growth. Factors such as international trade, foreign direct investment, and global demand patterns can shape an economy's growth trajectory. For instance, the openness to trade and the ability to access global markets are critical for countries like Singapore and the Netherlands, which have successfully leveraged global networks to drive economic growth.

In conclusion, while investment is an important driver of economic growth, it is not the sole determining factor. A comprehensive approach that considers productivity, human capital development, institutional quality, macroeconomic stability, and the global economic environment is crucial. Real-world examples demonstrate that successful economies focus on a combination of these factors to maximize their growth potential. For the UK, increasing investment must be complemented by policies that enhance productivity, foster innovation, invest in human capital, improve institutional quality, and adapt to the evolving global economic landscape.

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There is a global debt crisis coming – and it won’t stop at Sri Lanka

Foreign capital flees poorer countries at the first sign of instability. The pandemic and Ukraine war ensure there is plenty of that around writes Jayati Ghosh in The Guardian





This January, even before Sanjana Mudalige’s salary as a sales worker in a shopping mall in Colombo, Sri Lanka, was slashed in half, she had pawned her gold jewellery to try to make ends meet. Ultimately, she quit her job, because the travel costs alone exceeded the pay. Since then, she has shifted from using gas for cooking to chopping firewood, and eats just a quarter of what she did before. Her story, reported in the Washington Post, is one of many in Sri Lanka, where people are watching their children go hungry and their elderly relations suffer for lack of medicines.

The human costs of the crisis only really captured international attention when the massive popular upsurge earlier this month, known as Aragalaya (Sinhalese for “struggle”), led to the peaceful overthrow of President Gotabaya Rajapaksa. His family had ruled Sri Lanka with an iron fist, albeit with electoral legitimacy, for more than 15 years, and is now being blamed by both national and international media for the desperate economic mess the country is in.

But blaming the Rajapaksas alone is too simple. Certainly, the aggressive majoritarianism that they unleashed, along with the alleged corruption and major economic policy disasters of recent years (such as drastic tax cuts and bans on fertiliser imports), were crucial elements of the economic debacle. But this is only part of the story. The deeper and underlying causes of the crisis in Sri Lanka are barely mentioned by most mainstream commentators, perhaps because they reveal uncomfortable truths about the way the global economy works.

This is not a crisis created by a few recent external and internal factors, it has been decades in the making. Ever since its “open economic policy” was adopted in the late 1970s, Sri Lanka has been Asia’s poster boy for neoliberal reform, much like Chile in Latin America. The strategy was the now-familiar one of making exports the basis for economic growth, supported by foreign capital inflows. This led to a significant increase in foreign currency debt, something the IMF and the Davos crowd actively encouraged. 

In the period after the 2008 global financial crisis, as low interest rates in advanced economies led to the availability of cheap credit, the Sri Lankan government relied on international sovereign bonds to finance its own spending. Between 2012 and 2020, the debt to GDP ratio doubled to around 80%, with a growing share of this in bonds. The payments due on these debts kept rising in relation to what Sri Lanka could earn from exports and the money sent back home by Sri Lankans working abroad. The disruptions caused by the pandemic and the war in Ukraine made matters much worse, by causing export earnings to fall and sharply increasing the price of essential imports including food and fuel. Foreign exchange reserves plummeted – but the government had to keep paying interest even when it could not import essential fuel.

Looked at in this light, it is clear that Sri Lanka is not alone; if anything, it’s just a harbinger of a coming storm of debt distress in what economists call the “emerging markets”. The past period of incredibly low interest rates in the advanced economies meant that more funds flowed to “emerging” and “frontier” markets from the richer world. While this found cheerleaders in the international financial institutions (IFIs), it was always a problematic process. This is because, unlike in places such as the EU and US, capital leaves low- and middle-income countries (LMICs) at the first sign of any problem.

And these countries were much more battered economically by the pandemic. Advanced economies were able to provide massive countercyclical measures – think of the UK’s furlough programme – because financial markets effectively allowed and even encouraged them to do so. By contrast, LMICs were prevented from increasing fiscal spending by much – because of those same financial markets, which threatened the possibility of credit downgrades and capital flight as government deficits grew larger. Plus they faced significant declines in export and tourism revenues and tighter balance of payments constraints. As a result, their economic recovery has been much more muted and economic conditions remain mostly dire.

The half-hearted attempts at debt relief, such as the moratorium on debt servicing in the first part of the pandemic, only postponed the problem. There has been no meaningful debt restructuring at all. The IMF bewails the situation and does almost nothing, and both it and World Bank add to the problem through their own rigid insistence on repayments and the appalling system of surcharges imposed by the IMF. The G7 and “international community” have been missing in action, which is deeply irresponsible given the scale of the problem and their role in creating it.

The sad truth is that “investor sentiment” moves against poorer economies regardless of the real economic conditions in specific countries. Private credit rating agencies amplify the problem. This means that contagion is all too likely, and it will affect not just economies that are already experiencing difficulties, but a much wider range of LMICs that will face real difficulties in servicing their debts. Lebanon, Suriname and Zambia are already in formal default; Belarus is on the brink; and Egypt, Ghana and Tunisia are in severe debt distress.

Many countries with lower per-capita income and significant absolute poverty are facing stagflation. Billions of people are increasingly unable to afford a basic nutritious diet, and cannot meet basic health expenses. Material insecurity and social tensions are inevitable.

The situation can still be resolved, but it requires urgent action, especially on the part of the IFIs and G7. Speedy and systematic debt resolution actions to bring in private creditors and other creditors, such as China, are needed, as is IFIs doing their own bit to provide debt relief and ending punitive measures such as surcharges. In addition, policies to limit speculation in commodity markets and profiteering by big food and fuel companies must be put in place. Finally, the recycling of special drawing rights (SDRs) – essentially “IMF coupons” – by countries that will not use them to countries that desperately need them is vital, as is another release of SDRs equating to about $650bn to provide immediate relief.

Without these minimal measures, the post-Covid, post-Ukraine global economy is likely to be engulfed in a dystopia of debt defaults, increasing poverty and sociopolitical instability.

The Great Replacement Theory

 

Can we fix Capitalism?

 

Trashing the planet and hiding the money isn’t a perversion of capitalism. It is capitalism

George Monbiot in The Guardian


‘A few decades after the Portuguese colonised Madeira, in 1420, they developed a system that differed from anything that had gone before.’ Photograph: Thomas Pollin/Getty Images
Wed 6 Oct 2021 13.00 BST


Whenever there’s a leak of documents from the remote islands and obscure jurisdictions where rich people hide their money, such as this week’s release of the Pandora papers, we ask ourselves how such things could happen. How did we end up with a global system that enables great wealth to be transferred offshore, untaxed and hidden from public view? Politicians condemn it as “the unacceptable face of capitalism”. But it’s not. It is the face of capitalism.

Capitalism was arguably born on a remote island. A few decades after the Portuguese colonised Madeira in 1420, they developed a system that differed in some respects from anything that had gone before. By felling the forests after which they named the island (madeira is Portuguese for wood), they created, in this uninhabited sphere, a blank slate – a terra nullius – in which a new economy could be built. Financed by bankers in Genoa and Flanders, they transported enslaved people from Africa to plant and process sugar. They developed an economy in which land, labour and money lost their previous social meaning and became tradable commodities. 

As the geographer Jason Moore points out in the journal Review, a small amount of capital could be used, in these circumstances, to grab a vast amount of natural wealth. On Madeira’s rich soil, using the abundant wood as fuel, slave labour achieved a previously unimaginable productivity. In the 1470s, this tiny island became the world’s biggest producer of sugar.

Madeira’s economy also had another characteristic that distinguished it from what had gone before: the astonishing speed at which it worked through the island’s natural wealth. Sugar production peaked in 1506. By 1525 it had fallen by almost 80%. The major reason, Moore believes, was the exhaustion of accessible supplies of wood: Madeira ran out of madeira.

It took 60kg of wood to refine 1kg of sugar. As wood had to be cut from ever steeper and more remote parts of the island, more slave labour was needed to produce the same amount of sugar. In other words, the productivity of labour collapsed, falling roughly fourfold in 20 years. At about the same time, the forest clearing drove several endemic species to extinction.

In what was to become the classic boom-bust-quit cycle of capitalism, the Portuguese shifted their capital to new frontiers, establishing sugar plantations first on São Tomé, then in Brazil, then in the Caribbean, in each case depleting resources before moving on. As Moore says, the seizure, exhaustion and partial abandonment of new geographical frontiers is central to the model of accumulation that we call capitalism. Ecological and productivity crises like Madeira’s are not perverse outcomes of the system. They are the system.

Madeira soon moved on to other commodities, principally wine. It should come as no surprise that the island is now accused of functioning as a tax haven, and was mentioned in this week’s reporting of the Pandora papers. What else is an ecologically exhausted island, whose economy depended on looting, to do?

In Jane Eyre, published in 1847, Charlotte Brontë attempts to decontaminate Jane’s unexpected fortune. She inherited the money from her uncle, “Mr Eyre of Madeira”; but, St John Rivers informs her, it is now vested in “English funds”. This also has the effect of distancing her capital from Edward Rochester’s, tainted by its association with another depleted sugar island, Jamaica.

But what were, and are, English funds? England, in 1847, was at the centre of an empire whose capitalist endeavours had long eclipsed those of the Portuguese. For three centuries, it had systematically looted other nations: seizing people from Africa and forcing them to work in the Caribbean and North America, draining astonishing wealth from India, and extracting the materials it needed to power its Industrial Revolution through an indentured labour system often scarcely distinguishable from outright slavery. When Jane Eyre was published, Britain had recently concluded its first opium war against China.

Financing this system of world theft required new banking networks. These laid the foundations for the offshore financial system whose gruesome realities were again exposed this week. “English funds” were simply a destination for money made by the world-consuming colonial economy called capitalism.

In the onshoring of Jane’s money, we see the gulf between the reality of the system and the way it presents itself. Almost from the beginning of capitalism, attempts were made to sanitise it. Madeira’s early colonists created an origin myth, which claimed that the island was consumed by a wild fire, lasting for seven years, that cleared much of the forest. But there was no such natural disaster. The fires were set by people. The fire front we call capitalism burned across Madeira before the sparks jumped and set light to other parts of the world.

Capitalism’s fake history was formalised in 1689 by John Locke, in his Second Treatise of Government. “In the beginning all the world was America,” he tells us, a blank slate without people whose wealth was just sitting there, ready to be taken. But unlike Madeira, America was inhabited, and the indigenous people had to be killed or enslaved to create his terra nullius. The right to the world, he claimed, was established through hard work: when a man has “mixed his labour” with natural wealth, he “thereby makes it his property”. But those who laid claim to large amounts of natural wealth did not mix their own labour with it, but that of their slaves. The justifying fairytale capitalism tells about itself – you become rich through hard work and enterprise, adding value to natural wealth – is the greatest propaganda coup in human history.

As Laleh Khalili explains in the London Review of Books, the extractive colonial economy never ended. It continues through commodity traders working with kleptocrats and oligarchs, grabbing poor nations’ resources without payment with the help of clever instruments such as “transfer pricing”. It persists through the use of offshore tax havens and secrecy regimes by corrupt elites, who drain their nation’s wealth then channel it into “English funds”, whose true ownership is hidden by shell companies.

The fire front still rages across the world, burning through people and ecologies. Though the money that ignites it may be hidden, you can see it incinerating every territory that still possesses unexploited natural wealth: the Amazon, west Africa, West Papua. As capital runs out of planet to burn, it turns its attention to the deep ocean floor and starts speculating about shifting into space.

The local ecological disasters that began in Madeira are coalescing into a global one. We are recruited as both consumers and consumed, burning through our life support systems on behalf of oligarchs who keep their money and morality offshore.

When we see the same things happening in places thousands of miles apart, we should stop treating them as isolated phenomena, and recognise the pattern. All the talk of “taming” capitalism and “reforming” capitalism hinges on a mistaken idea of what it is. Capitalism is what we see in the Pandora papers.

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Time spent in the pub is a wise investment

Sarah O'Connor in The FT

When I joined the Financial Times as a trainee in 2007, I spent a lot of time learning about credit default swaps and a similar amount of time in the pub. The CDS knowledge proved useful in the ensuing financial crisis, but 13 years later, I am glad of the hours spent in the pub too. 

It was how I got to know my colleagues, who taught me the FT’s folklore, its funny anecdotes and its subtle power dynamics. I just thought I was having fun, but an economist would have said I was building “social capital”, defined by the UK’s statistical office as “the extent and nature of our connections with others and the collective attitudes and behaviours between people that support a well-functioning, close-knit society”. 

Social capital is a fuzzy concept and hard to measure. But Covid-19 has made us think about who has it, who doesn’t, how we build it and how we lose it. 

I was near the end of my maternity leave when the pandemic started, so it has now been almost 18 months since I last worked in the office. I’m grateful every day for my store of social capital, which has helped me to stay connected, though I do get a twinge of anxiety with every new byline I don’t recognise. 

It has been much tougher for people starting out this year. If it is hard to maintain relationships via video calls, it is harder still to build them from scratch. I spoke recently to some senior accountants about their new crop of trainees. They were learning their trade, but there was no opportunity for general chit-chat before and after virtual meetings, and the trainees seemed to find it harder to ask “daft questions” in video calls than when “sitting round a table with a packet of biscuits”. 

Next year, employers will have to think creatively about how to help new employees “catch up” on forming social capital, especially in a world of “hybrid” work where people stay at home for several days a week. 

Inadequate social capital is a problem for organisations as well as individuals. Research suggests that social capital boosts efficiency by reducing transaction and monitoring costs. In other words, “society wastes resources when people distrust and are dishonest with each other”, according to Dimitri Zenghelis, leader of the Wealth Economy project at Cambridge university, which explores social and natural capital.  

I am often struck by the inefficiencies of distrustful workplaces. Companies using screenshot and mouse-tracking software can end up in a cat-and-mouse game with resentful workers using tech workarounds of their own. Employers who doubt the honesty and motivation of their staff compel line managers to hold “return to work” meetings with employees after every sickness absence, even of only a day. Factories and warehouses often have long queues at shift changes as staff go through scanners to prove they are not stealing. Covid-19 might push some employers further in this direction, particularly if they decide to use more offshore workers with whom they have no prior relationship. 

On the other hand, this year’s forced experiment with homeworking has made some employers realise their staff can be trusted to work productively without oversight. The key will be to hold on to that trust, and the efficiencies it brings, rather than slip back into old habits of micromanagement. 

Social capital matters for economies, too. For his book Extreme Economies, economist Richard Davies travelled to nine unusual places, from a refugee camp in Jordan to an Indonesian town destroyed by the 2004 tsunami. He was struck by how societies with higher social capital were more resilient when disaster struck. In Glasgow, by contrast, he argued that the replacement of tenement homes with tower blocks had dismantled the social capital of the people who lived there, making it harder for them to cope with economic decline. 

For both individuals and economies, social capital is an important buffer against unexpected hardships. Yet in the UK, where the Office for National Statistics has been trying to track various indicators of social capital over time, the trend has not been good. We exchanged favours or stopped to talk with our neighbours less often in 2017/18 than we did in 2011/12. Our sense of belonging to our neighbourhoods also fell. Parents became less likely to regularly give help to, and receive help from, their adult children. 

The pandemic has strained our ability to maintain the bonds between us, but it has also reminded us just how important they are. Any plan to “build back better” when the crisis ends should include plenty of time in the pub.

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India’s heartless capitalists deserve the labour shortages they are about to be hit with

The migrant labour crisis has arisen out of the refusal of businessmen to pay wages during lockdown. This is Indian capitalism’s hour of disgrace writes SHIVAM VIJ  in The Print

File photo | Migrant labourers wave from a train as they leave for Barauni in UP from Amritsar, during the nationwide lockdown, 10 May | PTI

The Indian public discourse around migrant labour largely ignores the main reason why the labourers have been so desperate to go back home: their employers stopped paying them wages.

One survey in May found that almost 8 out of 10 migrant labourers had not been paid at all during the lockdown.

No wonder they’ve come to hate the cities and factories because of the way they’ve been treated by their employers. Migrant labourers across India have told reporters they won’t return to see such humiliation again. “We’ll live on salt,” they say.

In the prosperous western and southern states, labour contractors, factories and small companies washed their hands off migrant labour the moment India went into lockdown.

On 29 March, the home ministry made it legally compulsory for salaries and wages to be paid even during the lockdown period. Yet, many of our disgraceful capitalists didn’t even pay wages or the month of March, not even for the days the labourers had worked. In Tamil Nadu, for instance, a survey found 63 per cent labourers hadn’t been paid wages they were owed from before the lockdown. In Gujarat, the diamond industry hasn’t been paying workers despite repeated government orders.

Governments, NGOs, middle-class volunteers, political parties and even the police have been busy feeding migrant workers meals. Yet this charity, this munificence, would not have been needed if employers hadn’t abdicated their responsibility.

These employers are mostly small businessmen and they also seem to be rather small-minded. They are your ‘micro, small and medium enterprises’ or MSMEs. These capitalists have refused to bear the cost of paying even a month’s wages to migrant labourers who are the engine of their economic enterprises. 

The wages of sin

No doubt these same entrepreneurs have had it rough thanks to Modinomics since 8 November 2016. But a month’s wages?

What did these capitalists do when they suffered a setback when Modi sent the economy into a tailspin with demonetisation? The sucked it up, bore the losses, called the BJP names in private and hailed Modi in public. Then, what did they do when a confusing GST stalled the economy? They whined about it over their single malts at night and probably bought electoral bonds to donate to the BJP in the morning.

Migrant labour? They don’t fear workers like they fear Modi. Migrant labourers don’t affect the morning mood at 7, Lok Kalyan Marg. Migrant labourers have nothing to do with tax terrorism. It’s not as if any government is going to identify and penalise the employers who fired lakhs of daily wage labourers across India.

News reports tell you how these migrants haven’t had money to recharge their phones and talk to family back home, or money even to buy tickets once the government started special trains. If this is how you treat people, what do you expect in return?

What our heartless capitalists will get in return is an acute labour shortage when they try to finish those half-built buildings, or switch on the machines in the factories. The clock on these walls is going to be stuck on 22 March for a while even after all restrictions have been lifted.

Surely, you ask, this anger will subside and migrant labour will return because they’ve got to feed themselves? Sheer economics will make sure they will swallow their pride, pack themselves like sardines into the general compartments and travel back from Saran to Satara?

At some point, yes, but not anytime soon. The fear and uncertainty of the coronavirus pandemic along with the humiliation of the sub-human treatment is not going to make workers want to take those trains again for a few months. They’re going to make our small and small-minded capitalists beg for their sweat and blood.

We have already seen a trailer of this when Karnataka chief minister B.S. Yeddyurappa wanted trains for migrant labour to be scrapped. “The builders said that the labourers were given all essential facilities,” said Yeddyurappa. All ‘facilities’ except for a small thing called wages. One Karnataka company even went to the Supreme Court to request that the home ministry notice asking for paying full wages to be quashed.

The labourers will give in one day and return, but that day may not come before October, according to Chinmay Tumbe, economist and author of India Moving: A History of Migration. The next few months will see labour shortages in the prosperous industrial hubs and urban growth centres. This is bound to raise the cost of labour. That’s when our capitalist class will realise how they’ve shot themselves in the foot. If demand-supply and economic value is the only language they understand, that’s the language labour will and must reply to them in. 

Saving the bribe money

Meanwhile, labour exporting states will have a massive crisis at hand. Already reeling with high unemployment, they will have many more mouths to feed. From Rajasthan in the west to West Bengal in the east, we will see a huge labour surplus.

Seeing the anxiety of state governments over a looming unemployment time bomb, India’s capitalists are pushing for abolition of labour laws. The skulduggery is to be admired. Some people should be in jail for not paying migrant workers. Instead, they are using this opportunity to be allowed greater exploitation of labour.

Yet, it’s not the labour laws that created this crisis. This crisis has taken place because labour laws are not implemented. Had the Migrant Workmen Act of 1979 even been barely implemented, governments would have been in a better position to help the stranded labourers.

The central government, for instance, asked state governments to spend Rs 31,000 crore lying with them for the welfare of construction labourers. State governments don’t even have a database of migrant workers they can reach out to.

Surveys show migrant workers don’t even know the name of their employers, letting the shady labour contractors disappear with the money. For example, Chennai Metro workers say they haven’t been paid but the Metro authorities say they’ve been paying the labour contractors on time. Who will catch these labour contractors and bring them to justice?

It is a myth that labour laws have held back the Indian industry. They’ve, at best, held back formalisation. Some in our business class have managed to do well despite labour laws by simply bribing labour inspectors. If our labour laws worked, we wouldn’t have had this crisis. Let’s see how many millions of jobs are created now that the much-maligned and un-implemented labour laws are put aside. 

PM Garib Vinash Package

This is not to put all the blame on the business community and give the Narendra Modi government a clean chit. Yet, the Modi government’s biggest failure is not the refusal to let migrant workers go home, or to be cruel enough to make them pay for tickets when they don’t have money to buy food.

Narendra Modi and Nirmala Sitharaman failed in their duty to work with MSMEs to make sure wages are paid. When activist Harsh Mander asked the Supreme Court to order the government to pay minimum wages, the SC said it didn’t want to interfere. The government told the Supreme Court it was taking good care of migrant labourers, of course.

Many countries are shelling out money for workers. Some have been directly giving money or rebates to companies, unemployment allowance or direct benefit transfers. And not just rich Western countries. Even a developing country like Brazil is giving informal workers $120 a month. Narendra Modi is putting a princely sum of Rs 500 in Jan Dhan accounts — a baksheesh of $6.6. Meanwhile, he is unwilling to suspend the government’s plan to spend thousands of crores to rebuild the Central Vista.

This also exposes the fraud called the ‘PM Garib Kalyan package’. So wonderful has been this plan to do ‘kalyan’ (welfare) of the ‘gareeb’ (poor) that they’re dying walking on the highways after having been paid zilch by employers. The truth about this so-called Rs 1.7 lakh crore package is that most of it was existing schemes, throwing not even peanuts into the pockets of migrant labour.

Between the government and our small companies, no one has been willing to pay lakhs of migrant labourers. They’re just happy to pass the buck on to each other. The government is being called out for this, but our business community must also be called out. This is Indian capitalism’s hour of disgrace.

The great labour crisis of 2020 will not leave politics untouched. Remember that it was migrant labourers in Gujarat who went back home to their villages and spread the word about heaven-like Gujarat for the Modi campaign in 2014. These are the crores of rural poor whom the BJP will have to assuage now.

The result will be more socialism and greater populism. We have already seen how the pro-poor rhetoric helped Modi despite the failure of demonetisation. In the years to come, we will likely see a lot more of it, and our Seth-jis could thus suffer even greater apathy from the government. Modinomics is exactly what they deserve.

Deliveroo was the poster child for venture capitalism. It's not looking so good now

The food delivery company is a case study in the destructive nature of its own ‘disruptive’ business model writes James Ball in The Guardian

 

‘Earlier this week, Deliveroo was reported to be cutting 367 jobs (and furloughing 50 more) from its workforce of 2,500.’ Photograph: Alex Pantling/Getty Images


If any company can weather coronavirus well, it should be Deliveroo. The early days of lockdown saw demand surge for the service delivering food from restaurants and takeaways. The decision by several major restaurant and fast-food chains to shut for weeks during the early stages of lockdown might have dented demand, but as they begin to reopen for delivery – with most other activities still curtailed – prospects would seem bright for the tech company.

The reality looks quite different. Earlier this week, Deliveroo was reported to be cutting 367 jobs (and furloughing 50 more) from its workforce of 2,500. Others seem to be in similarly bleak positions – Uber is said to be discussing plans to let go around 20% of its workforce, some 5,400 roles. The broader UK start-up scene has asked for – and secured – government bailout funds.

Why Deliveroo is struggling during a crisis that should benefit its business model tells us about much more than just one start-up. The company’s nominal reasoning for needing cuts is that coronavirus will be followed by an economic downturn, which could hit orders. That’s plausible, but far from a given.

The financial crash of 2008 – which led to the most severe recession since the Great Depression – saw “cheap luxuries” perform quite well. People would swap a restaurant meal for, say, a £10 Marks & Spencer meal deal. Deliveroo is far cheaper than a restaurant meal for many people – there’s no need to pay for a childminder, or travel, and there’s no need to purchase alcohol at restaurant prices. Why would Deliveroo be so certain a downturn would be bad news?

The answer lies in the fact that Deliveroo’s real business model has almost nothing to do with making money from delivering food. Like pretty much every other start-up of its sort, once you take all of the costs into account, Deliveroo loses money on every single delivery it makes, even after taking a big cut from the restaurant and a delivery fee from the customer. Uber, now more than a decade old, still loses money for every ride its service offers and every meal its couriers deliver.

When every customer loses you money, it’s not good news for your business if customer numbers stay solid or even increase, unless there’s someone else who believes that’s a good thing. What these companies rely on is telling a story – largely to people who will invest in them. Their narrative is they’re “disrupting” existing industries, will build huge market share and customer bases, and thus can’t help but eventually become hugely profitable – just not yet.

This is the entire venture capital model – the financial model for Silicon Valley and the whole technology sector beyond it. Don’t worry about growing slowly and sustainably, don’t worry about profit, don’t worry about consequences. Just go flat out, hell for leather, and get as big as you can as fast as you can. It doesn’t matter than most companies will try and fail, provided a few succeed. Valuations will soar, the company will become publicly listed (a procedure known as an IPO) and then the company will either actually work out how to make profit – in which case, great – or by the time it’s clear it won’t, the venture capital funds have sold most of their stake at vast profits, and left regular investors holding the stock when the music stops.

This is a whole business model based on optimism. Without that optimism, and the accompanying free-flowing money to power through astronomical losses, the entire system breaks down. That’s the real struggle facing this type of company. It’s also why the very idea of bailing out this sector should be a joke: venture capital chases returns of at 10 times their investment, on the basis that it’s high risk and high reward. If we take out the element of “risk”, we’re basically just funnelling public money to make ultra-rich investors richer.

What pushes this beyond a tale that many of us might be happy to write down to karma, though, is the effects it has well beyond the rest of the world.

Tech giants move in on existing sectors that previously supported millions of jobs and helped people make their livelihoods – cabs and private hire, the restaurant business, to name just a few. They offer a new, subsidised alternative, that makes customers believe a service can be delivered much more cheaply, or that lets them cherry-pick from the restaurant experience – many restaurants relied on those alcohol sales with a meal to cover their margins, for example.

These start-ups come in to existing sectors essentially offering customers free money: £10 worth of stuff for a fiver. It turns out that’s easy to sell. But in the process, they rip the core out of existing businesses and reshape whole sectors of the economy in their image. And now, in the face of a pandemic, they are starting to struggle just like everyone else. It’s not hard to see how this sorry story ends. Having disrupted their industries to the point of leaving business after business on the verge of collapse, the start-ups could be tumbling down after them.