SEZs: Plain Old Economics View

This is something that is completely based on an article by Kaushik Basu in The Hindustan Times. Kaushik Basu is the Director, Analytic Economics, Cornell University.Maybe it is just because I am an economics student, but his article titled “Economics of Land Acquisition” fascinated me. I read it around the time I had finally managed to grasp the Nandigram issue, so it engrossed me even further.

As far as I could understand, I do not think the man in question here, Mr. Kaushik Basu, is averse to the idea of SEZs and I am just not interested in getting into it in this article. I am more interested in presenting to you economics that I fell in love with.

He started off with his take on agricultural lands being grabbed by big businesses for industrial purposes. Basu held that fertile agricultural land could be handed over for industrial purposes, if it meant that the loss of agricultural production would be more than made up for by the additional value of the industrial output. Suppose that land is question is a piece of land near a port, which makes trade easy for the industry along with readily available labour and all such other necessities can be put to various uses. Therefore, to look at it from only the agricultural point of view is not holistic enough!

Makes sense? Read on…

He was of the view that market principles should be the basis of making such a decision. The most important question, however, was that whether the industry, which wanted the fertile land, could compensate the people engaged in agriculture adequately. More fertile the land, more money demanded by the farmers!

Now comes the most interesting part…

He says that ‘voluntary’ exchange is the heart of economics. A deal where both buyer and seller, and everyone who is associated in the deal are better off and no one is worse off is called a “Pareto Improvement”! It is only through such successive pareto improvements that a country develops.

Now consider a situation where an industrialist wants to buy hundred acres of land from (say) a hundred farmers. He makes an offer and ninety farmers agree to it. However, the remaining ten refuse to part with their land at the amount quoted by the industrialist. They, in turn, quote a price so high, that the industrialist would rather abandon the project. At this point the pareto principle ceases to apply because if the ten farmers are forced to sell off their land at the industrialist’s price they suffer, otherwise if the project is abandoned, the rest of the ninety farmers too have to give up their lands and livelihood

This problem has been recognized all over the world (I still didn’t know it), and th

United States has even extended the principle of ‘Eminent Domain’. According to this principle, the government can step in to acquire the land for the private firms. This also discourages the private firms from exploiting the farmers through their ‘goons’ technique of grabbing land.

However, there are very strict rules in place to ensure that the government doesn’t use the ‘goons technique’ too (remember Nandigram?). The acquisition price needs to have a very high mark up over the market price – atleast 50per cent above it. And a larger proportion of the farmers involved need to be endorsing the deal. Even then, they should have access to legal counsel and a right to appeal.

When I started writing this piece, I had mentioned that I would refrain from discussing the pros and cons of the SEZs. However, these rules can be relaxed a little.

Personally, I am very confused about the SEZs issue. There are flaws – food security concern, environmental degradation, moral issues, plight of the farmers etc.. however, if wisely implemented, this legislation could well take India’s GDP growth rate into double figures.

Purav Goswami

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