Capital and Imperialism: Theory, History, and the Present

by Utsa Patnaik

  Third, there is a fundamental difference between the poverty that existed earlier and modern poverty that is associated with capitalism. Modern poverty is not just material deprivation; it involves the insecurity that comes with commodification and the cash nexus. The dissolution of personal relations; the loss of rights, even customary rights, to assets now endowed with a marketable integrated ownership title, allowing its passage into the hands of moneyed interests; linkage to a distant and unknown world market that transmits the effects of events in faraway lands into remote third world villages, visiting destitution on local producers; and the creation of a reserve army of labor so that employment becomes uncertain on a daily basis—all these give a particular poignancy to poverty that did not exist earlier. This modern mass poverty is the legacy of the impact of metropolitan capitalism upon the third world.12 And as we argue later in this book, this modern mass poverty will not go away as long as the capitalist mode of production remains dominant, even if this mode now spreads to the third world, and a whole range of activities get diffused from the metropolis to the third world along with this spread.

  CHAPTER 9

  Colonialism before the First World War

  The West European powers appropriated economic surplus from their colonies, and this materially and substantially aided their industrial transition from the eighteenth century onwards as well as the diffusion of capitalism to the regions of new European settlement. In the literature on economic growth, however, we find little awareness of the existence of such transfers, let alone their sheer scale, or the specific real and financial mechanisms through which these transfers were effected. Much research still remains to be done in this area. In the case of India, however, for well over a century there has been a rich discussion on transfers, termed the “drain of wealth,” initiated by two outstanding writers, Dadabhai Naoroji and R. C. Dutt.1 In this chapter we confine ourselves to discussing transfers only in the context of India.

  With few exceptions the literature on the eighteenth- and nineteenth-century industrial transition in the core countries ignores the drain of wealth, or transfers, from the colonies.2 The mainstream interpretation posits a purely internal dynamic for the rise of capitalist industrialization, and some authors even suggest that the colonies were a burden on the metropolis, which would have been better off without them.

  Conceptualizing the Drain of Wealth

  In the case of India, the concept of “drain” is based on the fact that a substantial part, up to one-third of total rupee tax revenues, was not spent in a normal manner but was used to acquire goods, which were exported and earned gold and foreign exchange from the world. However, these earnings, representing international purchasing power, were never permitted to accrue to the country; they were instead appropriated by the ruling power. The study by Folke Hilgerdt on the pattern of global trade balances and a detailed empirical investigation of Britain’s region-wide trade by S.B. Saul tell us that the gold and foreign exchange earned as export surplus by the tropical colonies, and preeminently by India (and treated by Britain as its own earnings), became so large from the last quarter of the nineteenth century that it underpinned the process of the rapid diffusion of capitalism.3 This took place through Britain’s large-scale capital exports, using its colonies’ export surplus earnings, that hastened the industrialization of Europe and of regions of new European settlement. The other side of the process was declining per capita food availability and pauperization of the masses in the colonies.

  This drain had a twofold dimension. First, there was an internal dimension, that is, extraction of economic surplus from producers through rent and taxes. In India, tax extraction in cash by the state was the most important method, with land revenue making up the bulk of taxes for much of the period. Independent producers paid land revenue directly to the state, while cultivating tenants were obliged to pay rent out of their economic surplus to the person designated as the landowner, who in turn paid the land revenue. The government’s opium and salt monopolies, whose burden fell on the peasants and workers, were additional important sources of revenue. However, taxation per se did not produce a drain. This arose from its combination with the second, external dimension, stressed by Naoroji and Dutt, namely, the designation of a substantial part of the tax revenues as “expenditure abroad” in the budget, that is, the use of this part not in the normal manner within the country, but as reimbursement to the producers for their export surplus with the world, which was kept in London. This export surplus earned specie and sterling, which was entirely siphoned off for its own use by the colonizing power, via manipulated accounting mechanisms that we discuss later.

  The use of the state budget in this manner to pay producers of export surplus out of their own tax contribution while the international proceeds of commodity export surplus never gets credited to the country is not found in any sovereign country; it is specific to the colonial system. All producers of export goods were apparently paid. A part of colonial exports was paid for through imports of British manufactures, mainly textiles, but this import arose from keeping the colonial economy trade-liberalized. Goods were absorbed at the expense of displacing local artisan spinners and weavers, whereas the metropolis practiced protection against colonial manufactures for well over a century. After deducting these virtually compulsory imports, the resulting net export surplus earnings were not paid to the producers in a normal manner, because they were paid out of the tax revenue raised within the country, and the overwhelming bulk of such taxes were extracted from the very same producers as rent/land revenue, and indirect taxes, especially from the salt monopoly. This meant that the producers were taxed out of their goods even while appearing to be paid.

  To illustrate this proposition, suppose that a peasant-cum-artisan producer in India, in the period of East India Company rule, paid Rs.100 as tax to the state and sold 10 yards of cloth and 2 bags of rice worth in total Rs. 50 to a local trader. This sale would be a normal market transaction and not connected in any way to his tax payment, since the trader would advance his own funds for the purchase, expecting to sell the cloth and rice, and recoup his outlay with a profit. Now, suppose an agent of the Company, not a local trader, bought an additional 10 yards of cloth and 2 bags of rice for export from the peasant-cum-artisan producer by paying him Rs. 50 of the same producer’s own money, out of the Rs. 100 total tax taken from him. This means the producer was not paid at all. The producer might have raised questions if the agent of the Company who collected his tax also bought his goods out of that money. But the two agents were different, and the two acts—collecting tax and buying produce—took place at different times by different agents, so the producer did not connect them. Purchase by the Company’s agent would appear to the producer as a normal market exchange no different from purchase by the internal trader, but it was qualitatively quite different, since a part of his own tax payment came back to him—a fact he did not know—while his cloth and rice were taken away. In this transaction, the form of half of the total tax of Rs. 100 he had paid changed from Rs. 50 cash to 10 yards cloth and 2 bags rice. In effect, he handed over these goods for export completely free to the Company, as the commodity equivalent of Rs. 50 tax, worth, say, £5.0 (at the then current exchange rate of Rs. 10 to £1). The cloth and rice were then exported to England, and sold, say, for £7 after adding freight, insurance, and trader’s margin. (Only the rice would be sold and the cloth re-exported because there was an official ban from 1700 on the consumption of Asian textiles in England, on which more later.)

  Since the peasants and artisans were the main contributors to the total tax revenue, this meant they were not actually paid; all that happened was that the relevant part of their tax merely changed its form from cash to goods for export. This direct linking of the fiscal system with the trade system is the essence of drain in colonies where the producers were not slaves but nominally free petty producers, namely tax-paying peasants and artisans.

  The transfer process at i
ts inception was relatively transparent. The East India Company’s trade monopoly granted by the British Parliament began in 1600. The Company had to pay for its import surplus from Asia with silver, arousing the ire of the early mercantilists. The Company acquired tax revenue-collecting rights in Bengal province in 1765, and the substantive drain starts precisely from that date. Some form of drain was already taking place through underpayment for goods using coercion on petty producers, but this was nothing compared to the bonanza after 1765, when the free acquisition of export goods using local taxes started. Bengal’s population of about 30 million was nearly four times that of Britain, and the rapacity of the Company, which forcibly trebled revenue collection over the following five years, decimated one-third of that population in the great 1770 famine. Full recovery had not taken place by 1792, and yet the land revenue fixed under the permanent settlement in that year in Bengal exceeded the British government’s taxes from land in Britain. In the next eighty years, revenue collections trebled as the Company, using Bengal as its economic base, acquired political control over several other Indian provinces—the Bombay Deccan, Madras, Punjab, and Awadh. Three wars were fought by the Burmese; fertile Lower Burma was occupied by 1856 and the entire country by 1885. Land revenue collection systems were promptly put in place; the very term for the British district administrator was “Collector.” Britain saw a steadily increasing and completely costless inflow of tax-financed commodities—textiles (up to the 1840s), rice, saltpeter, indigo, raw cotton, jute—which far exceeded its own requirements; this excess was re-exported to other countries.

  The transfer or drain consisted in the fact that Britain’s trade deficit with India did not create any external payment liability for Britain, as its trade with a sovereign country like France did. Britain’s perpetual trade deficit with France had to be settled in the normal way through outflow of specie, borrowing, or a combination of the two. This was true of its deficits with all other sovereign regions and also true of its trade with India up to 1765. After that date, when local tax collection began, the situation changed. On Britain’s external account, the cloth and rice import from India now created zero payment liability, since Indian producers had been “paid” already out of their own taxes, that is, effectively not paid at all. This system of getting goods free as the commodity equivalent of the economic surplus extracted as taxes was the essence of the drain, or transfer. It not merely benefited the Company as trader by raising its profit rate to dizzying heights, given that its outlay on purchasing the goods became zero, it also benefited Britain as a country. The growing import surplus of tropical goods created no payment liability, and re-exports of these free goods also bought England goods from other sovereign countries like France, reducing its trade deficit with them.

  In England, it was clearly recognized that the apparently negative feature of a trade deficit vis-à-vis India was a net addition to England’s resources, since locally raised revenues served to acquire goods for import. In England’s Export and Import Report for the year 1790 it was stated:

  The great excess of the Imports over the Exports in the East India trade, appears as a Balance against us, but this excess consisting of the produce of the Company’s territorial revenues and of the remittance of fortunes acquired by individuals, instead of being unfavourable is an acquisition of so much additional wealth to our public stock.4

  Had the colony been a sovereign country, its foreign exchange earnings would have accrued entirely to itself, boosting its international purchasing capacity while the local producers of export surplus would have been issued the local currency equivalent of their earnings, not connected in any way to taxes they might or might not pay. The taxes they did pay would have been spent entirely under normal budgetary heads.

  The colonizing power always needed to establish property rights in some form over the local population, because this was the necessary condition for surplus extraction and transfer. In India, this was the sovereign right of tax collection, but in the West Indies, plantation slavery meant that the extraction of surplus by British owners took the form mainly of slaverent, namely the excess of output net of material costs over the bare subsistence of the enslaved workers. In Ireland, English settler landlords took over the land of the local peasantry, and economic surplus was extracted as land rent as well as taxes. (“Land rent” is used here in the sense specified by Adam Smith and Karl Marx, as absolute ground rent, not in the sense in which the term is used by Ricardo.)5 In all cases, goods were obtained free as the commodity equivalent of the economic surplus appropriated, no matter what the specific form in which this surplus was extracted, whether as slave-rent, land rent, taxes, or a combination of all these.

  Tax-financed transfer by the Company was direct and transparent. One-quarter to one-third of the annual net tax revenues was used for purchasing export goods, cotton textiles making up the major part until the 1840s. Thereby the metropolis obtained a vast flow of goods, far in excess of its needs; it retained a part of these within the country and re-exported the remainder to other countries, against the goods it needed from them. Cotton textile imports were entirely re-exported because in 1700, at the insistence of the jealous British woollen industry, Parliament in England had passed a law banning the consumption of imported pure cotton goods from India and Persia, and had enforced the ban in 1721 with heavy fines on those found to violate it. All textiles imported by the Company from India were warehoused in English ports and re-exported, mainly to Europe and the Caribbean. To perfect the spinning jenny and the water frame took seven decades; once cotton yarn could be mechanically spun in England, from 1774, the ban on the consumption of pure cotton goods was lifted but the restriction on the entry of Asian textiles into the British market continued in the form of tariffs, which were raised steeply between 1775 and 1813, with the last tariffs ending only in 1846.6

  Britain’s stringent protectionist policy against Asian textiles, maintained for nearly 150 years, has been ignored completely both in the Cambridge Economic History of India7 (1984) and in the widely read work of historians of Britain’s Industrial Revolution and technical change in cotton textiles, and recent authors continue to write in the same blandly amnesic tradition.8 We have to read earlier works by List, Dutt, Mantoux, and Baran for the true picture regarding Britain’s mercantilist policies of discrimination against manufactures from tropical regions, which started even before they became colonies.9 Economic historian Paul Mantoux’s detailed account of machinery in cotton textiles, the driver of the Industrial Revolution in England, makes it clear that the ban on Asian textiles spurred innovation and import substitution to meet pent-up demand. Friedrich List’s comments on discrimination against Indian textiles suggest the same. In Mantoux’s words regarding the ban on consumption of pure cottons, “The import of pure cottons from whatever source remained forbidden. No protection could be more complete, for it gave the manufacturers a real monopoly of the domestic market.”10

  Under the Navigation Acts dating from the 1650s, every important colonial good, whatever its final destination, had to first come to Britain’s ports and then be re-exported. The goods had to be carried only in British ships manned by British officers. There is a misconception that the most important import from colonies was raw materials, but foodstuffs were the most important import all through the eighteenth century and remained so to the mid-nineteenth century when raw cotton imports were growing rapidly.11

  Phyllis Deane in 1965 in The First Industrial Revolution discussed at length how important re-exports were in the eighteenth century, allowing Britain to purchase strategic naval materials from Europe (bar-iron, pitch and tar, timber).12 This discussion was cut out in her jointly authored book with W. A. Cole in 1969, and re-exports were eliminated from both the import and the export figures, when the authors presented what they called “the volume of British trade.”13 They calculated this by taking retained imports plus domestic exports, a concept called “special trade” that is not to be found in any m
acroeconomics textbook, nor is it ever applied by the international organizations presenting trade data (United Nations, World Bank, IMF), which always take as the volume of trade the sum of total imports and total exports inclusive of re-exports if they are present. This is the correct concept, for re-exports financed imports, whether of final consumer goods or of raw materials, just as a country’s domestic exports did.

  Calculating from the Deane and Cole data series using the accepted trade concept, namely total imports plus total exports, we find that Britain’s total trade-to-GDP ratio had reached 58 percent by the three years centered on 1800 compared to only 36 percent estimated by Deane and Cole using their special trade concept.14 The confusion was compounded by Simon Kuznets,15 who reproduced an earlier version of the Deane-Cole figures without mentioning they were not comparable with the trade figures of the other countries he presented.16 A critique of these trade estimates that have misled many development economists is available in a study by Utsa Patnaik.17

  Asymmetry of Production Capacities between the North and the South

  A country located in the cold temperate region of Europe that controlled a tropical region sat, in effect, over an inexhaustible gold mine. It was more lucrative than gold, for gold seams might eventually run out, but the surplus-producing and taxable capacity of the peasants and artisans would not, as long as they were not entirely decimated through overexploitation. They could be set to produce more tropical (and sub-tropical) crops like cane sugar, rice, tapioca, and spices, stimulants like coffee, tea, cacao, and tobacco, vegetable oils like groundnut, linseed, and palm oil, drugs like opium, raw materials like indigo, jute, sisal, and cotton, and cut more tropical hardwoods (teak, mahogany, rosewood, ebony) from the forest or from timber plantations, all goods that could never be produced in cold temperate lands.