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Theories of Political Economy

Introduction: Economics of Politics

Political economy relates to application of economic concepts and assumptions in understanding aspects of politics, political behaviour of citizens, decision-makers, interest groups and the states in their interaction with other states.

Political economy approach offers economic explanation for public policy; that decision and policy-makers would choose or formulate such policies that would present an optimal solution, i.e., it would meet or satisfy various objectives and be acceptable in each case.¹

For example, a public policy designed to provide food security for the people below the poverty line (BPL) in India may be required to balance or relate to various other policies and provisions. These may include provisions for food grains at subsidized rates to the BPL people through the Public Distribution System (PDS), Minimum Support Price (MSP) for procurement of food grains and other agricultural produce for PDS, subsidized inputs such as fertilizers, electricity, etc., to the farmers so that cost of agricultural production can be minimized for the farmers producing for self-consumption and livelihood, transparent and accountable delivery system so that the gap between the price of PDS and open market does not result in leakage and benefit to the unintended persons.

Alternatively, however, a public policy may be analysed in terms of influence of interest groups and their pressure to benefit from state-distributed benefits. For example, it may be argued that various types of subsidies given by the governments, for example on fertilizers, benefits rich farmers and commercial crop producers (tea, rubber, tobacco, cotton, fruits) more than the poor farmers. Similarly, subsidized petrol/diesel benefits the urban middle and upper classes more than it reduces the cost of public transportation or cost of transportation of essential commodities.

Political economy approach tells us how allocation of public resource and making of public policies are influenced by economic factors and economic behaviour of the actors. Concepts and assumptions, such as individuals as rational actors, aware of his/her best interests and to be left alone to pursue one's own conception of good and betterment, efficient and optimum outcome and maximization of profit are taken as an explanatory tool for political behaviour and public policy. Assumptions and formal rules of economic analysis are applied to understand the interplay of economics and politics, on the one hand, and behaviour of the political actors, on the other. In brief, a political actor is viewed as economic actor. The political economy approach gives a new dimension to the understanding of politics. Understanding of politics in terms of the ‘state’ or ‘political system’ may present analysis of effect of economics on politics only as a peripheral issue.

Whether conflicting interests in society are reconciled justly or whether settled in favour of a particular section or class through publicly legitimized policies; whether optimal resource allocation is being achieved or whether it is being done in favour of some at the cost of others; or whether resource allocation and public policy are result of pressure of certain groups only. All these aspects require analysis and explanation from the perspectives of political economy; it requires studying politics and economics together. Engaging in economic exchanges, resource allocation, economic development, public policy and welfare redistribution also involves engaging in politics and negotiation.

Another feature of the political economy approach is to understand the concept of power as combining economic and political power. Susan Strange says, ‘it is impossible to make any clear distinction between political power and economic power since there is always an element of each in the other.’² For example, before liberalization and divestment, planned economy in India conferred, and even today confers, power of regulating and directing the economy of not only the public sector but also the general direction of the private sector. Reforms in the land and agrarian relations, planned economy, policy on food security, PDS, resource allocation policies relating to subsidies, priority sector finance and policies on planned development relate to interplay of economics and politics. The political economy approach makes us understand how the interplay between the economic and the political produces economic and resource-based outcomes or results and who benefits from them and how. This interplay between economics and politics can be studied and explained at three levels:

1. At the level of individual actor: Market condition is considered the basis for individuals pursuing their self-chosen conception of good life, un-interfered by external authority, the state. Laissez-faire doctrine and theories of the classical economists, such as Adam Smith, Robert Malthus, David Ricardo and others are considered part of classical political economy. In the classical political economy approach, the individual actor is considered as a rational actor and if s/he is un-interfered, one would achieve what is her/his best interest. The State is not allowed any role for regulation and resource allocation. Instead, the market forces, what Adam Smith says, the ‘invisible hand’ is considered the sole regulator and distributor. Resource allocation and outcomes are considered a result of market forces and not of political authority.
2. At the level of civil society: Friedrich Wilhelm H. Hegel, the idealist philosopher, analysed the civil society, as the realm of the market relations and competition. Karl Marx, influenced by the classical political economy, felt that the latter ‘incorporated the presumptions of bourgeois society’.³ In classical political economy as well as in Marxian analysis, political behaviour, or for that matter, human activity is treated as reflection of the economic activity. In this, economic activity and economic relations are assigned a fundamental place than any other activity. However, though starting on the same platform of political economy (economic activity as the primary realm of human activity), classical political economists and Marx reached different conclusions. While the former set up arguments for a market society and individual actor, Marx did exactly the opposite and treated it as a class phenomenon. We can discuss theory of political economy in terms of classical economists and the Marxian framework.
3. At the level of interest groups: Rational-choice or public-choice theory or political economy approach deals with the analysis of strategic choice by decision-makers in a situation of competition or conflict in order to maximize gains and minimize losses. Primarily, it is an analytical tool for accounting for the behaviour of rational actors or players. As such, it is the rational actor who always seeks maximization of his/her interest. The political economy approach seeks to find out the correlation between the interest groups and state and governmental policies. Do policy and programme formulations of governments reflect preferences of interest groups within the economy? This explains why and how interest groups emerge and express their objectives and preference, so far as resource allocation and preferential distribution of benefits in society is concerned. It also focuses on how interest groups enter into coalitions, tacitly or openly, with similar groups and how they interact with other institutions in society, primarily the institutions of the state and resource distribution. A mathematical model of this approach is called the Game theoretic model or game theory, which explains actions of individuals as rational actors by applying the mathematical model of calculation of maximum, minimum and optimum benefits and payoffs.

Application of the political economy approach in studying and explaining the Indian political situation is present in studies by Francine R. Frankel's India’s Political Economy, 1947–1977: The Gradual Revolution, Pranab Bardhan's The Political Economy of Development in India and Lloyd Rudolph and Susanne Rudolph's In Pursuit of Lakshmi: The Political Economy of the Indian State, amongst others. We have the following approaches that broadly constitute political economy approach:

1. Classical political economy approach: This includes the lasses-faire thesis of individual actors being left un-interfered as economic actors and the utilitarian thesis of utility maximization as the basis of political action by individual actors. These are integrated with the assumptions of the classical liberalism. When applied to international politics, classical political economy or the laissez–faire approach becomes a liberal theory of International Political Economy (IPE). This approach supports free market world economy and includes support for free trade and free movement of capital and investments. Another approach in IPE relates to ‘mercantilist tradition’ that treats world economy as an ‘arena of competition among states’ where states seek maximization of their strength, self-reliance and power through economic means including ‘trade protectionism’.⁴
2. Marxian approach to political economy: This treats economic activity as the primary activity and political activities as result of economic relations. In bourgeois society, i.e., society dominated by the interest of the capitalists, the Marxian approach deals with class relations defined in terms of ownership of means of production. Application of Marxian class perspective and political economy in the international arena has been in terms of ‘World System’, ‘Dependency Theory’ and ‘Theory of Underdevelopment’. Immanuel Wallerstein, Samir Amin and André Gunder Frank, amongst others, have discussed and analysed the phenomenon of world capitalist system and relationship between the core-periphery (industrialized countries versus developing countries) and unequal economic exchange between the two sets of countries.
3. Political economy/public-choice/rational-choice approach: This approach seeks to explain political behaviour of human actors by drawing economic concepts such as incentive, rational choice, maximum outcome and payoff in decision-making. This approach can be applied to explain behaviour of individual decision-makers, interest groups, sectors of economy, bureaucracy, and states in their interaction with other states. It is also called ‘neo-utilitarianism’.⁵

Theories of Political Economy

Classical Political Economy Approach

Classical political economy approach is said to have started with the Physiocrats (a school of economic thought in France led by Quesnay and Mirabeau) who advocated liberty of production and non-interference of state in the economic activity (primarily agricultural), a policy of laissez-faire. However, Adam Smith, Robert Malthus and David Ricardo advocated the policy of laissez–faire as a firm political economic doctrine of free market. Smith holds an individual as a self-interested, rational actor with propensity to trade and do business. This view has been termed as a view of ‘economic man’ by his critics. The concept of economic man assumes that everyone acts only in self-interest and in a capitalist system only selfish consideration prevails. How would then any welfare be possible? Smith would answer that self-regulating demand and supply would provide general stability and prosperity. It follows that in an environment of self-interested individuals, competition becomes a self-regulating mechanism in the market. Competition along with resultant demand and supply becomes an ‘invisible hand’, which regulates the market. With this assurance, Smith and supporters of the classical political economy approach argue for non-interference by the state or external agency in the affairs of the market. They advocate a condition of laissez–faire.

Smith explained and argued for freedom of an economic man and liberty for commerce and industry. His conclusions that laissez faire capitalism has the capacity to generate enormous productive forces; is self-regulating because of the presence of competition and demand–supply factor; and market should be left to the ‘invisible hand’, and provide an important theoretical ground for operation of capitalist economy along with limited government. The free market, in which voluntary exchanges between rationally self-interested individuals are considered desirable, is considered the basis of optimal and efficient resource allocation in the society. Further, it is also treated as morally or ethically desirable, as it allows every individual to follow his or her own conception of good without external intervention for redistribution or allocation of resources. In the twentieth century, F. A. Hayek (The Road to Serfdom) and Milton Friedman (Capitalism and Freedom) have argued for economic freedom and against any planned or state regulated redistribution of resources as inimical to individual liberty.

Classical political economy approach considers rational individuals in the free market condition with minimal state interference as the basis of efficient and morally desirable resource-allocation. By implication, it rejects any intervention of the state for reallocation or redistribution of resources, which need to be achieved through market operation. The classical political economy approach is not in favour of welfare and planned economic intervention of the state.

Marxian Approach to Political Economy

Marx adopted the conception of ‘economic determinism’ as part of his materialistic explanation of history. It implies that economic and material conditions of human life are basic and primary factors for understanding all the other activities. Economic relations, as they prevail in the context of ownership of the means of production, are the determining factors for other aspects of life, including the political aspect. For Marx, society in a capitalist mode of production is a class society and its politics, a class politics, because there is an irreconcilable class struggle between the bourgeoisie and the proletariat. Emphasis on the economic factor as determinant of political activity (and also ideological, intellectual, legal, cultural, religious and social) is a significant element of Marxian approach to political economy.

Andrew Vincent is of the view that the Marxian theory tends towards political economy and treats the economic activity as the primary concern. The rest of the human activity, including the political, is taken as a result of this primary activity.⁶ Marxian theory gives primacy to the economic structure of society and considers it as the base or the infrastructure. This consists of forces and relations of production. ‘Infrastructure’ or the ‘base’ determines all other aspects of society, which are termed ‘superstructure’. Political arena, being part of the superstructure and determined by the base or infrastructure, is also an arena of class struggle. For Marx, and for Engels and Lenin, political economy is class economy and distribution of material conditions of life is determined according to the ownership of the means of production. There is antagonist class struggle and political economy is characterized by exploitation of one class by another class. This condition of oppression and exploitation of one class by another is the main element of capitalist political economy.

While classical political economy treated market economy and capitalist society as the mainstay of a new society and free individual, Marx showed the inhuman and exploitative face of the same political economy. Marx felt that no freedom, no moral or intellectual development of the individual was possible in the capitalist economy. It is a class economy, a class politics and it is exploitative, alienating and inhuman.

The framework of exploitative and oppressive relations between those who are dominant and owners of means of production and those who are not has been used by a set of writers to explain the political economy of relations between states. The world economy is understood as arena of capitalist competition and imperialist regime as reflection of the capitalist requirements of market for goods and profitable investment of capital. Lenin's Imperialism: the Highest Stage of Capitalism captured the essence of this argument. Writers, such as Immanuel Wallerstein and Samir Amin, suggested that nation-states were not separate societies but an integrated part of a ‘world-system’. World-system perspective suggests that capitalism provides the basic logic of integration of all nations-states into a single capitalist world-system. This is an approach based on the capitalist world economy concept, which treats all countries as part of one single interdependent system. Understanding of internal social, political and economic aspects of a country are to be done within the context of world-system. How world division of labour is organized, how surplus in one part of the world is being extracted and transferred to other parts within the capitalist world-system and how unequal exchange takes place between different nations. The conclusion is that there are countries that constitute ‘core’ and there are others, which constitute ‘periphery’. While the industrialized countries, with mostly erstwhile colonial record, are associated with ‘core’, the developing and underdeveloped countries, most of them erstwhile colonies, constitute the ‘periphery’.

Countries of the periphery are treated as integrally linked to the economic framework of the core and no possibility of independent economic development is seen in the periphery. The economic agenda of the periphery is decided by the requirements of surplus of the core or countries of the centre. It creates a relationship of dependency between the core/centre and the periphery. Gunder Frank suggests that this relationship results in ‘development and underdevelopment simultaneously’.

Frank's The Sociology of Development and the Underdevelopment of Sociology and On Capitalist Underdevelopment focused on the integration of the world into a single world wide capitalist system. Expansion and growth of the mercantilism in the sixteenth century and subsequently industrial and financial expansion coupled with colonialism–imperialism in the eighteenth to the twentieth century created, what Frank says ‘metropole’ and the ‘periphery’. By ‘metropole’ is meant industrial and financially rich countries, which also became imperialist and colonizers and ‘periphery’ refers to developing, colonized and underdeveloped countries. Frank argues that metropole/core– periphery relationship is characterized by development and underdevelopment at the same time. As all the countries are treated as part of one world capitalist system, countries of the core exploit the countries of the periphery. And while in core it is development, in periphery it is underdevelopment. Franks says, ‘Capitalist development everywhere has been a fundamentally contradictory development based on exploitation and resulting simultaneously in development and underdevelopment.’⁷ Frank suggests that both development and underdevelopment happen as part of the same process. He concludes that so long as developing countries are linked with the capitalist system they are subject to capitalist–imperialist–colonial exploitation. He finds solution in substitution of capitalism by socialism to escape from underdevelopment. This is known as dependency theory.

Immanuel Wallerstein's The Capitalist World Economy presented the ‘world system’ or ‘Capitalist World Economy’ model with a structure of Core, Semi periphery and periphery.⁸ Samir Amin (Unequal Development) also supported the world system model.

The basic idea behind the dependency and world system model of political economy of the developing countries is that there is unequal exchange between the developed, industrial and capitalist countries and the developing and erstwhile colonial countries. This is global capitalist structure and is analogous to the capitalist relations within a nation-state. This capitalist linkage has been maintained forcefully by imperialist–colonial structure. It is also argued that even after the independence, the decolonized and developing countries remain within the world capitalist system and have no means for independent development. Neo-colonial linkage has been referred to define the emerging relationship between the developed and underdeveloped countries. Particularly, when there are international financial and trade organizations that further enforce the capitalist system.

It may be mentioned that Dadabhai Naoroji in his Poverty and Un-British Rule in India and R. C. Dutt in his Economic History of India had analysed and explained the drain of wealth from India to England and had suggested that development of the English cloth industry was partially funded by drain from India. It is not uncommon that in the contemporary global world relationship of the developing countries vis-à-vis, the developed countries is not of equality, be it trade, finance or investment and technical cooperation.

Contemporary Theories of Political Economy

One of the contemporary theories to politics that uses economic assumptions in explaining and understanding politics is known as ‘political economy’, or ‘public-choice’ or ‘rational-choice’ theory. It is also called ‘formal political theory’.⁹ It applies rules and assumptions of the economic theory to analyse the behaviour of human beings in a situation of decision-making. It involves decision-making by actors in a situation when various options are available and one option or a combination of them will give maximum return or payoff. This implies rational decision-making or making of a rational choice. Individuals are considered rational actors capable of making economically maximizing or profitable decisions. As such, this approach is based on the rationally self-interested behaviour of actors. Due to its focus on return or payoff or profit maximization, it is also called ‘neo-utilitarianism’.¹⁰

The political economy or rational-choice approach does not concentrate on ideas or history that lies behind political institutions and policies, as has been the case with conventional political studies. It focuses on the incentive that the decision-makers have while deciding. This means how actors will promote their interests when certain choices are available. Rational choice means a choice based not on its apparent rightness or wrongness but whether it is rational and has the effect of giving maximum result. This approach is of particular use in explaining and understanding the behaviours and actions of voters, lobbyists, bureaucrats, politicians, individual decision-makers and interest groups. It is also applied to actions and conduct of the states in international politics where national interests of the states are considered as prime and not other values and ideas.

Two variants of the rational-choice theory have been applied to explain behaviour of different actors and decision-makers. They include: (i) Game Theory and (ii) Political Economy or Public-Choice Theory.

Game theory

It applies mathematical assumptions to analyse individual behaviour in the context of choices and options or what is called the ‘prisoners’ dilemma. The game theory has been discussed in detail in Chapter 2, relating to approaches to the study of politics. The focus of this approach is on analysis of strategic choice by decision-makers in a situation of competition or conflict in order to maximize gains and minimize losses. Primarily, it was developed as an analytical tool for accounting for the behaviour of rational actors or players. As such, it is the economic man/woman as a rational actor who always seeks maximization of his/her interest. John Neumann, a mathematician, is associated with this model though it owes its popularity to Oskar Morgenstern, an economist, who applied it to economic analysis. Subsequently, R. Duncan, Anatole Rapoport, Morton Kaplan and William Riker came to apply this in political studies.¹¹ Riker used it to explain numerical and mathematical conditions of stability and instability of coalition governments. J. Aumann and Thomas Schelling, two leading economists and exponents of game theory were awarded the Nobel Prize in 2005 for their contribution to the theory of games.¹²

Public-choice theory

Application of rational-choice assumptions in understanding political process and for carrying out political analysis has resulted in public-choice theory. How government's policies and decisions regarding resource allocation are made? How public and social policies are decided? Do preferences and policies of government reflect the actions of specific interest groups within the economy? Answers to these questions relate to the field of rational-choice theory. Anthony Downs, An Economic Theory of Democracy, Mancur Olson, The Logic of Collective Action: Public Goods and the Theory of Groups, William A. Niskanen, Bureaucracy and Representative Government in the area of party competition, interest group behaviour and policy influence of bureaucrats and James Buchanan on social choice theory have applied the rational choice theory or political economy theory for political analysis. It focuses on the behaviour of interest groups and their effect on the state's policies and applies the assumptions and techniques of rational-choice in public policies, public goods and political issues.

Anthony Downs in his An Economic Theory of Democracy extended the arguments of the elitist democratic theory of Schumpeter and others and developed it into an economic theory of democracy. According to this, as it is in the elitist democratic theory, politics and electoral arena is political market analogous to economic market. Politicians behave like entrepreneurs, voters like consumers and political parties as businesses. He says, ‘Parties in democratic politics are analogous to entrepreneurs in profit-seeking economy. So as to attain their profit ends, they formulate whatever politics they believe will gain the most votes, just as entrepreneurs produce whatever products they believe will gain the most profits for the same reasons.’¹³ Politics becomes an economic game played by the elite to maximize political gains. Implication of Downs's argument is that voters behaving as consumers select their representatives as self-interested consumers will select goods or services for purchase. This has two implications: (i) voters remain the final wielder of power fulfilling the basic presumption of democracy that power rests with the people, and (ii) the majority party can claim that its policies reflect or the interests of the majority of the voters fulfilling the criteria of representation.

However, contrary to the assumption of Downs, we are aware that voters are not always the most informed and most rational decision-makers. Various irrational elements and ideological inclinations such as liberal versus welfare values, national pride, religious affiliations, personality factor, immigration issues, etc. go into a voter's decision. In countries such as India and other developing countries, rational decision can at best be part of a relatively smaller group of voters, the rest are charged with voting as per sectional, caste, religious and local considerations. However, their decisions may be considered as rational only if all these criteria are included as part of rational choices. Further, Downs's approach does not consider the factor of ‘factionalism’ within political parties, which work as internal check of elite consolidation.

Mancur Olson in his The Logic of Collective Action: Public Goods and the Theory of Groups argued against the corporatist tendency in liberal democracy. As we have discussed in Chapter 13 on power, dominance and hegemony, corporatism relates to organized interests and their participation in the decision-making process, especially organized capital and labour and how the industrial relations between employer and trade union are mediated by the intervention of the state. This means corporatist model of power distribution deals with incorporation of certain organized interest, mainly employer and labour, into the process of decision-making and government. Olson argues against this tendency and suggests that corporatism results in government's policies being shaped by the preferences and sectional interests of these groups rather than by consideration of broader public good.¹⁴ Olson feels that one joins groups to secure public goods but it can also be secured by even being a ‘free rider’. For example, even if a few groups and employees associations or a small group of officials fight for government's decision on salary hike to government employees, its benefits also go to those employees who never participated or agitated. In a way, this becomes a public good and creates the problem of free riders. This is more relevant in big membership organizations where a few take chances. According to Heywood, it becomes apparent that ‘there is no guarantee that existence of a common interest will lead to the formation of an organisation to advance or defend that interests.’ This is because to some the purpose may always be served by being ‘free riders’.

William A. Niskanen in his Bureaucracy and Representative Government argues that irrespective of their image as public servants, bureaucrats are mainly motivated by their career self-interests and expansion of agencies they work with. This leads to an increase in budget as government agencies and senior bureaucrats largely shape budget-making. The implication is that a self-interested bureaucracy invariably indulges in their enlargement and this, in turn, leads to a state that becomes interfering because of bureaucratic expansion. Thus, rational self-interests make the bureaucrats expand the activities of the government. However, in a welfare democracy, this may not always be possible. More so, when citizens are vigilant, have right to information about the activities of the government and bureaucrats and have a legislative financial control process that is accountable.

Another explanation related to rational-choice is in terms of social choice theory. Its hypothesis, says Stieglitz, is ‘that government action can be explained as the outcome of individuals acting rationally in their own self-interest, in response to the political “rule of the game’’’.¹⁵ James Buchanan, a Nobel Laureate (1986) has worked on the aspects of the ‘rule of game’, i.e., constitution. This involves putting constraints on the government so that the redistribution of resources should not go in favour of a section or a few. For example, if governments do not put a constraint on it fiscal deficit targets or borrowing options, it may act under the influence of powerful interests to distribute subsidies, transfer payments, spend more on current expenses than on asset creations.

Rational choice theory with its application in public choice and social choice formulations gives inputs for understanding the interplay of economics and politics. The basic criterion of this interplay is the economic incentive or motive of resource reallocation by the governments. In the Indian context, two studies (Bardhan and Rudolphs) have focused on this aspect and have analysed the policy of the state in terms of political economy of interest groups.

Political Economy of the Indian State

The Constitution of India has envisioned a liberal-democratic-welfare state with socialist goals. Sounds a bit torn between different directions but the goals of welfare democracy with equitable redistribution of resources are considered important. A result of this goal has been the importance given to the planning process for long-term development. This goal is also reflected in the policies related to progressive taxation (tax slabs as per size of income), transfer payments, social and developmental programmes and a regime of resource redistribution through subsidies, exemptions and concessions to various groups of people. Economic role of the state in terms of ownership of the public sector enterprises is also part of the state policy. Planning process, combined with public sector economic role of the Indian state, has prompted observers and writers to call Indian political economy as ‘state capitalism’ (André Bettelheim), ‘command economy’ (Lloyd and Susanne Rudolphs), ‘permit-license-quota’ Raj (C. Rajagopalachari) etc. The state-directed planned economic development with focus on capital-intensive heavy industrialization under the Nehru-Mahalanobis¹⁶ model was meant to achieve the goal of a socialist state with complementary role for the private sector. However, the advantage for the private sector was to operate within the overall protected arm of the state with its self-reliant and import-substitution policy. Various public financial institutions for credit financing to the enterprises were available. A policy of priority sector lending was also adopted. Such a policy ensures credit finance facility to certain areas such as agriculture and agro-industry, small-scale industry, export-oriented enterprises etc. It ensures flow of a fixed percentage of the total credit from the public sector banks to these areas.

While the policy of heavy industrialization continued as part of building a self-reliant, import-substitution economy, in mid-1960, the Government of India adopted the New Agricultural Policy (NAP) as the central component of the Fourth Five Year Plan (FYP) (1969–74).¹⁷ The NAP with its emphasis on high yielding seed varieties (HYVs) was meant to revolutionize the agricultural production. HYVs became the mantra of ‘green revolution’ and ‘capitalist farming’ that have characterized the agrarian scene especially of Haryana, Punjab and western Uttar Pradesh in northern India after the 1970s. In the Fourth FYP, rural development and poverty alleviation was given importance.

Heavy emphasis for reallocating public investment towards the agricultural and rural sectors has been supported by certain studies that pointed out the need for investment in agriculture and rural development as part of policy towards poverty alleviation and agricultural self-sufficiency. The famous study ‘Poverty in India: Dimensions and Trends’ by V. M. Dandekar and N. Rath published in the two issues of the Economic and Political Weekly, (2 and 9 January 1971), gave ‘precise estimates of the numbers, consumption expenditures, and calorie intake of the poor’.¹⁸ Dandekar and Rath's study pointed out that those who lived on 50 paise per day in rural areas and 75 paise per day in urban areas were poor. This study suggested that so far the planned intervention had not much affected the poor. It suggested that unless specific programmes and policies in a targeted manner were adopted for the poor, their lot would not improve.

Michael Lipton's Why Poor People Stay Poor: A Study of Urban Bias in World Development insisted that there was an inbuilt bias in industrialization strategy towards the urban centre. It pointed out the neglect of rural and agricultural sector in public investment. This is known as the theory of ‘Urban Bias’. It argues for reallocation of public investment towards the agricultural and rural sectors. Lipton compares the flow of public and private investment allocations in cities, city connecting roads, five-star hotels and sport stadia with allocation for rural poor, agricultural implements, research, drinking water and land upgradation etc. Lipton provides a critique of Indian political economy from the perspective of ‘urban bias. This critique has been supported by many politicians and observers particularly echoed in the ‘India versus Bharat’ slogan.

For long after independence, it was held that land reforms, community and block extension programmes, price control, food security, rationing etc., could deal with the problem of poverty. It was felt that in the long term growth and development would ‘trickle down’ to the poor and remove the perennial problem of poverty.¹⁹ From the Fourth FYP, direct attack on poverty was made a strategy through poverty alleviation programmes. The study of Dandekar and Rath, incidentally, coincided with Indira Gandhi's garibi hatao campaign in early 1970s. Various poverty alleviation and rural development programmes emerged out of the political agenda of garibi hatao and the economic requirement of reallocating public investment in agricultural and rural sectors. The BPL people became the target for upliftment. The struggle between the poverty line and the Indian state continues even today and given the pace it promises to continue for some more time to come.

Until late 1980s, political economy of the Indian state has been characterized by a mixed three-dimensional policy. This included heavy industrialization with public sector ownership, agricultural development and poverty alleviation. Without doubt, bureaucracy in post–Independent India was supposed to play a welfarist–developmental role and not merely a monitor of permit, licenses and quota. However, by the late 1980s, it had already dawned upon the Indian state that neither the poverty line had vanished, nor bureaucracy had dissociated itself from the licence-permit-quota raj, nor import-substitution could be sustained in the fast changing world of globalization. Come 1990s and we have the era of liberalization, divestment and privatiztion. The policy of liberalization meant replacing the policy of import substitution and opening the domestic market for external players. Divestment or disinvestments and privatization aimed at diluting the economic role of the state by ceding financial and regulatory control over the public sector and government owned enterprises by reducing stake.

Political economy of privatization and disinvestments are supposed to remove licence-permit-quota raj, make the domestic industry competitive, and reduce the role of the state in those areas which are not core government functions or which are commercial in nature. It is argued that government should withdraw from areas which do not pertain to core government functions and should concentrate on its core areas of social sector, education, health and public goods. It is also argued that proceed of disinvestments should be appropriately reallocated for catering to the requirements of health, education especially primary education and social security. It may also be noted that earlier public sector enterprises were also considered as a means of employment generation. Now, private sector initiatives are supposed to provide employment generation while the state initiative would complement it.

To what extent the goals of poverty alleviation, universal education, employment generation, food security with a view to be available to all in times of need, basic health, water and electricity facilities and balanced regional development have been achieved is a matter of debate and there would be differing views on this. The fact, however, remains that there is poverty, unemployment, illiteracy, drought related food scarcity, regions where even electricity, primary health centres, primary schools, portable water, connecting roads and other basic amenities still challenge the dreams of the people and dare them to think of them in their live times. Some sensitive observers have commented on the issues of poverty and basic human necessities and have shown the need for a more proactive role of the state in these areas. P. Sainath's Everybody Loves A Good Drought and Jean Drézé and Amartya Sen's India: Economic Development and Social Opportunity have raised the issues of drought and poverty and fulfilment of basic human necessities. Drézé and Sen argue that expansion of human capabilities through meeting basic human needs of education, health care, water, sanitation, housing etc. would be useful not only for better human lives but also for economic development. Educated and skilled human resources would contribute to economic development.

Political Economy of the Indian State: Bardhan and Rudolph's Analysis

Could objectives of the Nehru-Mahalanobis model and the planned economic development in terms of industrialization, asset and infrastructure creation, poverty alleviation and employment generation be achieved? If not, then what are the factors that have influenced the state policies and their operation? Are there interest groups that have influenced the resource distribution away from the state decided policies towards their own benefit? Which are the powerful interests that interfere in the state policy formulations and their operation? Pranab Bardhan's The Political Economy of Development in India and Lloyd Rudolph and Susanne Rudolph's In Pursuit of Lakshmi: The Political Economy of the Indian State are of particular interest in this regard. These writers have analysed the dynamics of planned approach and policy of controlled economic development and the role of various groups in society in influencing the state policies towards economic development.

Pranab Bardhan has argued that political economy of the Indian state is characterized by the presence of ‘dominant proprietary classes’. They include ‘industrial capitalists, rich farmers, and white-collar workers and professionals’. Applying the public choice theory, he argues that these classes influence the state policy on resource allocation in their favour. Bardhan finds a correlation between the political support that the state seeks from these classes and the share of public resources exchanged. The political process in Indian democracy is characterized by providing patronage and seeking support from a variety of groups. Due to diverse interests of these groups—regional, economic and professional, there are conflicting demands from them on the state. For example, the industrial capitalists, rich and commercial farmers and white-collar workers have different interests and their support to the government would require accommodating and balancing their conflicting interests. This has economic cost to the state. Bardhan points out that ‘massive doses of public investment in basic industries and infrastructural facilities, such as coal, transport, power, and irrigation, are crucial at the early stages of industrial and agricultural transformation’.²⁰ However, he ruefully observes that ‘the bulk of public resources are being frittered away in non-development expenditures and political and administrative mismanagement of public capital’. Why and how does this take place? Bardhan suggests that this happens due to the pressure and pulls from the coalition of the dominant proprietary classes. The industrial capitalists, rich farmers and the white-collar and professionals seek to influence resource allocation in their favour but they are not strong enough to dominate individually. Each pulls the loose coalition of the dominant proprietary classes in different directions. To keep them from pulling apart and placated, the state policy formulation is influenced and results in ‘proliferation of subsidies and grants … with the consequent reduction in available surplus for public capital formation’.²¹

It means due to a plethora of subsidies and grants to interest groups like rich farmers, industrialists and professionals, there is little or no investable capital left with the state for capital investment and asset and infrastructure creation. Subsidies to farm products in the form of support prices (Minimum Support Price), fertilizers, electricity, fuel, gas, exports etc. serve the interests of the rich farmers, industrial capitalists directly and indirectly, professions and white-collar urban middle classes. Various claims such as, subsidized credit by public sector lending agencies, non-payment of loans by rich farmers and their organized agitation for influencing resource allocation in their favour, concessional financing to the industrial sector, nursing sick private industries, eat upon the public resources. Bardhan concludes that ‘The Indian public economy has thus become an elaborate network of patronage and subsidies’. This also raises a question about whether the Indian state is relatively autonomous from interests of the various groups and to what extent its policy formulations would be free from the pulls and pressures of these interests.

Bardhan's study points to the influence of the dominant proprietary classes on the state policy formulation and public policy choices. Lloyd and Susanne Rudolphs have analysed the characteristics of the political economy of the Indian state from the perspective of planned economy on the one hand, and pressure of the demand groups, on the other. Their main thesis is that the Indian political economy has swung between command and demand economy. According to Rudolphs, the dynamics of planning and control of the economy gives birth to command economy and pressure from the rising ‘demand’ groups makes it a demand economy. This duality signifies that the political economy of the Indian state shifts between being a strong commanding economy to a soft patronage-distributing economy. Because of the green revolution, middle peasants have emerged as powerful demand group. Similarly, a number of intermediate castes, also referred to as ‘Backwards’, have become politically conscious and demanding. Rudolph suggest that the demands emerging from these groups influence the public policy formulation and resource distribution by the state.

Critique of political economy of development in India has been broadly to reflect the urban-centric focus of the public policy or influence of various demand and interest groups on public policy. In fact, given the influence of the rich farmers and rural dominant castes, it may not be appropriate to characterize public policy as merely urban-centric or biased, because it assumes class homogeneity in both urban and rural areas. To say that the rural rich farmers of the green revolution are biased is an incorrect representation of the political economy. The objectives of demand groups, both urban and rural, are to influence the state public policy in their favour.

Review Questions

1. What is meant by political economy approach to politics?
2. What are the different approaches to understand political economy? How is the Marxian approach to political economy different from the liberal approach?
3. ‘Both development and underdevelopment were and are processes, more accurately, they were and are both part of the same processes.’ (Andre Gunder Frank). Discuss the political economy of the developing countries in the light of dependency theory.
4. Can political activity be studied and explained as result of rational choices of economic actors?
5. Policy and programmes of governments reflect the preferences of interest groups within the economy? Discuss the role of dominant proprietary classes in India's politics.
6. Political economy of the Indian state is best explained within the dynamics of demand-command economy. Is the Indian state autonomous from the pressure of interest groups?
7. How far the concepts of ‘poverty line’, ‘urban bias’, ‘dominant proprietary classes’ and ‘command-demand economy’ explain the nature of the Indian political economy?
8. Political economy of development in India is best characterized by the mixed economy. Discuss the nature of the political economy of development in post-divestment India.