Chapter 9 FOREIGN CAPITAL

ROLE OF FOREIGN CAPITAL IN DEVELOPMENT

Foreign capital coming to the LDCs in various forms can play an important role in the context of economic development. It can be summed up as follows –

1. Raising the rate of saving- LDCs are trapped in the vicious circle of poverty. Raising the rate of saving can break this. But saving is impossible for LDCs. Under such circumstances, if foreign capital supplements domestic capital, total capital formation rises above the static level and generates economic growth.

2. Attaining a higher level of investment- Saving and investment must balance. But when a development plan is prepared and executed a higher level of investment is needed. Savings can attain this, which is not possible for LDCs. This gap can be filled up by foreign capital.

3. Providing venture capital – There are many areas, which require heavy investments. But what is ‘heavy’ for an investor in an LDC can be ‘light’ for one from an advanced country. Again ‘new’ investments are familiar in advanced countries. Therefore, such investments can be left to the foreign investors.

4. Building up of infrastructure - The LDCs require the building up of economic infrastructure in the form of social investment such as railways, bridges, etc. All these involve huge investments, which is possible with the help of foreign capital.

5. Developing basic and key industries – Basic industries such as steel, cement, etc. need heavy investment, which is a burden over an underdeveloped economy. But investment in such industry is useful in development of growth, which can be made possible with the foreign investments.

6. Creating employment opportunities – Foreign capital invested in the building up of infrastructure, directly creates employment opportunities. As a result foreign capital becomes instrument in creating employment opportunities.

7. Raising Government Revenue – Government can impose an import duty on goods being imported. This way government can get revenue. An alternative policy is to allow multinational corporations to function in the country. This would avoid imports, start the process of import substitution and thereby contribute to development. At the same time, by taxing these multinationals, the government can get a share in their profit as a source of revenue.

8. Developing human resources – When foreign capital comes into a country, especially private foreign capital, it is in the form of plant, machinery and equipment along with the technological benefits. This helps the development of human resources of the LDCs.

9. Creating industrial culture- Industrial culture is useful in the overall development of economy, which cannot be found in LDCs. The way of working of foreign firms has a demonstration effect on local firms and entrepreneurs as well as workers. These new values and attitude are the basic to economic development.

LIMITATIONS OF FOREIGN AID

Foreign investment has its limitations. They are as follows –

1. Availability of funds – There are vry few countries who can spare surplus funds required on. Many advanced countries themselves have been borrowing from the US. Sparing surplus requires containing one’s own expenses. This involves several hurdles besides motivating and persuading democratic bodies like parliaments of donor countries.

2. Absorption capacity of the LDC – The aid receiving country may demand and does need large amounts of foreign capital. But the crucial question is how much an LDC can absorb? Absorption capacity of an economy depends upon the ability to plan and execute development projects.

3. Availability of resources – Capital is an important factor of production and foreign capital is welcome on a number of counts. But for utilizing capital, a country must possess other factors of production ie. Adequately developed human and natural resources must be available.

4. Repaying capacity – The recipient LDC must possess potentialities for repayment of debt. Debt-servicing itself involves a large burden in terms of foreign exchange. The repayment capacity therefore would depend upon the capacity to generate surpluses and because these surpluses must be in the form of foreign exchange.

5. Will to develop – Foreign capital is a catalytic agent. It is the economy that develops and the society promotes such a development. The people in the LDCs must therefore possess the will to develop. They must put in their efforts and work to make the best of scarce capital resources that have become available through foreign aid.

Arguments against Foreign Capital –

Some problems related with foreign capital can be spelt out as arguments against foreign capital. They are as follows.

1. Distortion of priorities – Most of the LDCs have prepared their own plans for development according to their priorities. But the lending governments may tie their aid to some projects, which may not stand priority.

2. Inappropriate techniques – Foreign capital is said to help a transfer of technology and modern managerial skills, etc. Sometimes this is inapplicable in the recipient countries.

3. Balance of payment problems – To overcome balance of payment problems, LDCs resort to foreign borrowing. Multinational companies’ investment helps in rise in income and employment. This creates inflationary pressures. But still developing countries have to face a serious problem of deficit in their balance of payment.

4. Debt trap – Continued dependence on foreign capital and unproductive or inefficient utilization of external debt may put a country in what is known as a debt-trap. A country can be said to be caught in a debt-trap when it is required to borrow for repaying of old debts. But this situation may arise even when a country is capable of repaying because their export –earnings is much more.

5. Wasteful utilization – Borrowing is a softer option. When external debt is easily available, a government is tempted to go on borrowing. Such easy loans tend to be utilized in a wasteful manner. Where they get invested may not stand priority.

6. Gap between rural & urban sector – Foreign companies are interested to invest in urban areas where they get ready infrastructure. They help the development of urban areas. This creates a wide gap between urban and rural areas. This encourages the rural-urban migration.

7. Damaging the domestic entrepreneurship – Foreign capital accompanied by foreign managerial skills and direct investment has damaging effects on domestic entrepreneurship of the host economies.

8. Erosion of Sovereignty – The most important objection to foreign aid when it comes through official channels is that it curbs the sovereignty of the LDCs. The conditions set by the donor countries are so humiliating that if the country were not in need of aid would not have accepted them.

***

TYPES OF FOREIGN INVESTMENT

Foreign investment takes different forms.

A] Private Foreign Investment –

1. Direct foreign investment – People in the investing countries may directly invest in the LDCs by starting a factory or a firm. A foreign company may set its subsidiary in a developing country. Or a corporation in some advanced country might operate various companies in different LDCs.

2. Indirect foreign investment – This type of investment is also known as portfolio investment. E.g. foreign individuals and financial institutions may hold shares of companies in India. Generally the government of India would guarantee such shares and securities. Holding of shares of companies in developing countries by private foreign investors does not involve right to control the company of which the shares or debentures are held by foreigners. They are only entitled to dividends.

B] Public Foreign Investment –

1. Bilateral loans – An LDC might enter into an agreement with an advanced country and under such an agreement, a loan may be made by the lender to the borrower country. Such agreement may or may not specify the purpose of the loan.

2. Bilateral soft loan – The lender country may grant a ‘soft’ loan, under a bilateral agreement. According to Public Law 480, the American president is empowered to give such loans to poor countries for specific reasons. The purpose of these loans is to purchase goods and commodities from specific (lender) country.

3. Multilateral loans – When developed countries contribute to ‘sow agency’ brought into existence for the purpose of giving development assistance to the LDCs and by agreement the loan made by such agency becomes a multilateral loan.

4. Intergovernmental grants – Grants given officially by one government to another government fall into this category. Such grants are usually conditional and for specific purposes only.

C] Tied and Untied Aid – Source, project and commodities can tie Aid, or it may be tied by both project and source and become double tying aid. Untied aid on the other hand is a general-purpose aid, which is also known as ‘non-project aid’ or ‘programme aid’

Chapter 8 International Economic Co-operation

[A]

International Monetary Fund (IMF)

The Bretton Woods Conference (1944) paved the way for the establishment of IMF. The fund came into existence in Dec 1945 with a modest membership of 44 nations. The number has gone up to 145 in 1990. The establishment of the IMF is a landmark in international monetary co-operation.

The purpose of IMF

1. To promote international monetary co-operation through a permanent institution which provides the machinery for consultation and collaboration on international monetary problems.

2. To facilitate smooth and stable growth of multilateral international trade.

3. To promote stability in exchange and to avoid competitive exchange depreciation.

4. To remove temporary disequilibrium in the balance of payment of member countries.

5. To assist in the establishment of a multilateral system of payments in respect of current transactions between members and in the elimination of foreign exchange restrictions, which obstructs the growth of world trade.

Organization

1. Every member country is required to subscribe to the capital of the fund at fixed quota.

2. USA, UK, China, France and India have the largest share in the initial capital, which is $8.5 billion.

3. The contribution of member countries was collected partly in gold and partly in domestic currency. A member country has to pay 25% of this quota in gold.

4. In 1969, IMF introduced a new currency called Special Drawing Rights (SDRs)

Management

1. The fund is carried by the Board of Executive Directors under the direction of Board of Governors and each member country deputing its governor to the Board of Governors.

2. The board of Executive Directors consists of 20 members of whom five are appointed by each of the five largest quota holding members. Rest of the members elects the remaining fifteen.

3. A managing director who is also the ‘chairman’ of the board heads the Board.

Functions of IMF

1. Short-term Credit Institutions – The fund serves as a short –term credit institution and assets to the country facing a temporary disequilibrium in its balance of payments. A temporary disequilibrium can be caused by crop failure or other natural calamities, which can be effectively overcome by the fund.

2. Adjustment by Consensus – In the absence of a forum like the IMF, the rivalries among different countries of the world would have caused a great damage to al the countries. The IMF no only maintains a reserve of currencies but also examines the accuracy or otherwise of the currency parties of the member countries.

3. Active dispensation of justice – The IMF helps to tide over the balance of payment deficit. It also asks the countries facing a balance of payment surplus to revalue their currencies.

4. Training and technical assistance – The fund provides technical assistance to member countries in the formulation and execution of general economic policies, fiscal as well as monetary policies. It also provides training either at its headquarter or by sending its representatives for a period up to six months in member countries.

5. Publication – The fund also brings out several publications for the benefit of all the member countries. The annual reports of the executive directors, balance of payment year book, the annual report of exchange restrictions, international financial news survey, international financial statistics, schedule of par values are some of the regular publication of the IMF.

Evaluation of IMF

A] Achievements

1. The fund has been useful as a short-term credit institution.

2. The fund’s technical advice and assistance programme has helped the members from the third World.

3. It has also provided assistance to many LDCs to strengthen their central banking and monetary systems.

4. It has co-operated with many international organizations, to promote economic development of many countries.

5. It has maintained a limited flexibility of exchange rates.

6. It has established various special funds like the compensatory financing fund for meeting fluctuations in exports earning, etc.

B] Failures

1. One serious charge against the IMF is that it has served as the Rich Nations Club.

2. Though it is a fact that the IMF has helped to reduce exchange rate fluctuations, the fact remains that the fund could not take effective steps to remove the scarcity of certain currencies.

3. In the field of liberalization of trade and international liquidity, the success that the fund has achieved, is very limited.

[B]

SOUTH ASIAN ASSOCIATION FOR REGIONAL CO-OPERATION (SAARC)

SAARC was established in December 1985. The member countries were Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan and Sri Lanka.

Objectives and Principles of SAARC

1. To promote the welfare of the people of South-Asia and to improve their quality of life.

2. To accelerate economic growth, social progress and cultural development in the region and to provide all individuals the opportunity to live in dignity and to realize their full potentials.

3. To promote and strengthen collective self-reliance among the countries of south Asia.

4. To contribute mutual trust, understanding nd appreciation of one another’s problems

5. To promote collaborations and mutual assistance in the economic, social, cultural, technical and scientific fields.

6. To strengthen co-operation with other developing countries.

7. To strengthen co-operation among themselves in international forums on matters of common interest.

8. To co-operate with international and regional organizations with similar aims and purposes.

The institutional framework of SAARC consist of four tiers.

1. Heads of State, as the highest decision making authority, meet once a year.

2. The Council of Foreign Ministers formulates policies for which they meet twice a year.

3. Standing Committee of foreign secretaries reviews the progress of SAARC activities, approves projects and finalizes programme including their financing.

4. Technical Committees are responsible for implementation, co-ordination and monitoring the programme, besides identifying new areas of co-operation.

India’s Trade with SAARC Countries

In the last few years,

India’s trade with SAARC countries has shown a considerable growth but the growth is not uniform in respect of all the countries.

Bangladesh accounts for more than half of India’s total exports to SAARC countries.

The imports from Bangladesh, which were limited earlier, have started growing in recent years.

In case of Pakistan, imports have shot-up signifying a better economic co-operation.

In case of Nepal also, India’s export surplus is diminishing and imports from Nepal are growing.

India’s trade relations with Bhutan are however declining.

In respect of Sri Lanka, India’s exports have continuously increased but the imports in money terms have remained stagnant.

Problems SAARC facing

1. Barriers to Trade – Larger economies like India, Pakistan, and Bangladesh have higher tariff rates than those of other smaller economies.

2. Discriminatory bi-lateral arrangements – Regional trade organizations are expected to have equitable terms amongst all member countries. However, their mutual relations have obviously governed bi-lateral trade relations between countries. e.g. Indo-Pak Trade.

3. Lack of information – There exists a considerable information gap reporting export potential, import requirements, domestic economic policies, business opportunities, infra-structural facilities, etc.

4. Problems of finance – There is lack of credit and finance to the exporters and importers.

5. Co-ordinating transport facilities – The transport and communication networks are not the same in all the member countries.

6. A matter of relations – For growth of regional trade, an atmosphere of mutual trust is required. In respect of SAARC, this condition does not obtain.

[C]

GENERAL AGREEMENT ON TARIFFS AND TRADE (GATT)

The agreement, which had the membership of 83 nations and coverage of four-fifth of the world trade, came into existence in 1947. In 1960 a provision was made for the creation of a board of representatives for the administration of the agreement. This board kept a watch so as to ensure that the conditions agreed upon by the member countries were observed. The General Agreement on Tariffs and Trade (GATT) is the first successful effort at increasing international co-operation in the field of trade aimed at removing trade barriers and laying down a cod of conduct for the member countries.

The main objectives of the GATT are as under:

1. World trade should be placed on a non-discriminatory footing.

2. Domestic industries may e protected by raising tariffs but no other commercial measures should be taken.

3. The international co-operation and consultations should aim at protecting theinterests of the member country.

4. The agreement should server as a frame for negotiations among the member countries, regarding tariffs and the removal of trade barriers.

Various rounds of discussions held from time to time on matters of trade and tariffs, settlements of complaints or disputes and encouragement of bilateral trade pacts are the characteristic features of this Agreement.

The developing countries have been given a special treatment in the GATT in as much as it allowed –

1. Uni-lateral facilities

2. Physical restrictions

3. Freedom of extending financial help for the growth of exports.

Even though GATT is called “Rich Nations’ Club” it is not denied the fact that the GATT has facilitate the growth of trade and has provided a forum for mutual consultations and settlement of disputes.

The Uruguay Round -

GATT works through periodical conferences. The eighth conference was held at the Punta del Estc in Uruguay. Hence this is known the Uruguay round. This round raised a number of controversial issues. It contained the mandate to have negotiations in fifteen areas; fourteen areas in respect of trade of goods forming part one of the mandate and trade in services forming the fifteenth area in part two which related to the trade in services. The new subjects like Trade Related Investment Measures (TRIMs) and Trade Related Intellectual Property Rights (TRIPs) and the entire part two related to trade in services were included in the agenda of GATT for the first time. But there was no unanimity among the participant countries and the Uruguay found itself in a deadlock. To overcome this difficulty, the Director General (D.G.) of GATT, Mr. Arthur Dunkel prepared a document and presented it before the member countries as a compromise solution. This document is known a Dunkel Proposals. By the end of 19*93 these proposals were passed as the Final Act and was signed by 117 nations including India, on April 15^th, 1994.

Effects of the Uruguay round agreement on the Indian economy –

1. Import Duties and Export Subsidies – India has promised reduce the basic duty by 30% within six years. Raw materials, intermediate goods and capital goods are covered by this provision. Countries like India ith a per capita income of below $1000 were exempted form the removal of such subsidies, this has not much impact on India’s exports.

2. TRIPs and the Indian economy – Because of the provisions of TRIPs, according to some critics, India was likely to face disastrous effects in respect of pharmaceuticals and agriculture. By its coverage the entire industrial and agricultural sectors and part of the biotechnology sector are covered under the patent provisions. Because the patent holder can challenge all price-centered measures this provision was feared to be disastrous for India.

3. Protection in Agriculture – The TRIPs text demands protection for microorganisms, non-biological and microbiological processes and plant varieties. India can provide for protection of plant varieties by patent or some other effective method after completing the first transitional ten years.

4. Possibility of bio-piracies – India is rich in herbal wealth and has inherited traditional wisdom regarding its use. This whole traditional knowledge is in danger of bio-piracy. Unless we are alert enough, foreign companies and multi-nationals will try to take patents of preparations based on Indian herbal wealth and wisdom.

5. TRIMs and its effects – The main provisions of TRIMs are as follows which have become harmful to Indian economy –

1. Removal of all restrictions on foreign investments

2. Non-discrimination between national and foreign companies

3. Opening all areas for foreign investment

4. No ceiling on equity participation by foreigners

5. Free imports of raw materials and components

6. No obligations regarding use of local material or export of out put

7. Removal of restriction on repatriation of dividend, interest and royalty

7. Effects on Textile – Certain proposals under this agreement aim at liberalizing the trade of textile and clothing. The liberalization is supposed to take place in a planned manner spread over ten years. The provisions of this move also are titled in favour of the developed countries. As a result, India’s most important sector is also likely to be in danger.

$$$

[D]

WORLD TRADE ORGANIZATION (WTO)

GATT was converted form a provisional agreement into a formal international organization as the consequence of the Uruguay Round Agreement. This organization is called World Trade Organization, which became functional with effect from January 1, 1995. The General Council of WTO is in charge of its regular business while a ministerial conference meeting atleast once every two years gives direction to the working of WTO.

Principles of WTO –

1. Non-discrimination – this principle implies that all trading partners shall be granted the most favoured nation treatment and foreign goods, capital, services, trade marks, and patents are given the same treatment as is given to their national or domestic counterparts.

2. Freedom of trade – The most important and ultimate objective of WTO is progressive liberalization of trade so that there remain no barriers in the free flows of goods and services internationally.

3. Stability and predictability – The WTO is committed no to create or raise trade barriers arbitrarily.

4. Fair competition – The WTO system of trade, it is claimed aims at creating open fair and undistorted competition.

5. Cases of developing countries - In respect of developing countries, especially the least developed, is given more time to adjust and is given special privileges.

Functions of WTO –

1. Facilitating the implementation, administration and operation for the furthering of the objectives of multilateral trade agreements and providing the framework for such implementation and operation.

2. Providing a forum for negotiations among the members concerning their multilateral trade relations.

3. Administering the ‘Understanding on Rules And Procedures Governing the Settlement of Disputes’

4. Administering the Trade Review Mechanism.

5. Achieving greater global economic policy co-ordination in co-operation with such agencies as IMF, IBRD, etc.

Functions of General Council of WTO –

1. To supervise the operations of revised agreements relating to goods, services and TRIPs.

2. To act as the Dispute Settlement Body.

3. To serve as the Trade Review Mechanism.

4. To establish the three councils for goods, services and TRIPs as its own subsidiaries.

The agreements covered by WTO -

The WTO agreements are three in number. They are

1. General Agreement on Tariffs and Trade (GATT)

2. General Agreement on Trade in Services (GATS)

3. General Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPs)

These are followed by extra agreements and annexure dealing with special requirements of specific sectors like agriculture or textiles, etc. besides there are detailed and lengthy schedules of commitments made by individual countries allowing specific foreign product or services and access to their markets.

###

[E]

EURO-DOLLAR MARKET AND EURO CURRENCY

During the periods when some strong national currency performed as an international currency, international liquidity was no problem and trade and transactions were facilitated. On the other hand, the absence fo such a strong currency or the fluctuations in the exchange rates of national currencies vis-à-vis (in comparison with) the strong currency has always created obstacles in the growth of trade.

Meaning and scope –

Eurodollars, in a narrow sense, are financial assets and liabilities denominated in US dollars but traded in Europe. The scope of the market, however, is not longer limited to Europe and the Eurodollar transactions are now held in its broader sense. Today, Eurodollar transactions are held in money markets other than the European markets and in currencies other than the US dollar. Today, the term euro-currency Market is in popular use, rather than the Eurodollar market. In the wider sense, the dollar deposits with banks in Montreal, Toronto, Singapore, Beirut, etc. are also Eurodollars, and so are the deposits denominated in European currencies in the money markets of USA and at the above centers. The term foreign currency market should be more appropriate to describe the expanding Eurodollar market of the present day.

Characteristic features of the market –

1. International market Sans (without) national Control – The Euro currency market is a international currency market and it is under no national control. In fact this market has emerged out of necessity and as the most important channel for mobilizing and developing funds at the international level.

2. Short-term money market – The deposits in this market are short-term deposits with maturity ranging from one day to several months. All these deposits are paid interest. The Eurodollars loans are short-term loans for a period less than or equal to three months.

3. A wholesale market – The Eurodollar is said to be a wholesale market because it deals with large sums of money in the form of Eurocurrencies.

4. A highly competitive and sensitive market – This market has undergone a qualitative growth and operational expansion because of its efficiency and competitiveness. Eurodollar market responds to the interest rate changes promptly by varying the supply of and the demand for funds.

Factors responsible for the growth of the Eurodollar Market –

1. The Suez Crisis – In 1956 during the Suez crisis, sterling credit facilities came under restriction. This crisis provided a stimulus to the growth of the Euro dollar market.

2. Exchange control relaxations and convertibility of currencies – After the process of the post-II war reconstruction got ell under way, the exchange controls came to be gradually relaxed. The stability of the exchange rate markets enabled the West European countries to resume currency convertibility. This gave a further motivation to the growth of the Eurodollar market.

3. The political factor- The cold war between the capitalist and the communist blocks of countries also contributed to the growth of the Euro market. A fear always creep around in the minds of banks that the dollar balances might be seized by the US if the cold war turned hot. This tendency served to supplement the dollar resources of the Euro market.

4. Deficits in the American Balance of Payment – Since 1950, the USA continuously experienced deficits, which went on increasing during the subsequent period. This was another important factor leading to the rapid growth of the Euro market.

5. The Regulation ‘Q’ – The regulations of the Federal Reserve System, which prohibited interest payment deposits for a period of less than 30 days greatly, contributed the fast growth of the Euro dollar market. This is because the Eurodollar market paid interest for less than 30 days also.

6. Innovations in Banking – The beginning of innovative banking in Europe and America attracted more and more customers encouraging the growth of the Euro market.

7. The Petrodollars – The flow of petrodollars, which resulted from OPEC’s hikes in oil prices since 1973, has been a significant source of the Eurodollar market.

8. The participants in the market – Participants in the Euro currency business include governments, international organization, commercial banks, central banks, the multinational corporations, export-import firms and trading firms and individuals also.

Chapter 7 Growth Of Global Economies In 1990’s

Population As An Important Determinant Of Development

The size of the population along with its structure and quality acts as a constraints on the economic development of a country. It is necessary to remember that given a large capital stock and a high quality of population, the size of population can become an asset. World’s top ten populous countries in 1999 are China, India, USA, Indonesia, Brazil, Russian Federation, Pakistan, Bangladesh, Japan and Nigeria. China and India account for 37.6% of the World’s population. Though China’s population is one and quarter times India’s population, the surface area with China is almost three times that of India. As a result, the density of population i.e. the number of people living per sq. km is 134 in China but336 in India.

These top ten populous countries account for 355.7 crores or 59.4% of the World’s population. However, they occupy just 38.9% of the world’s surface are. Among the top ten Bangladesh is the most crowded country with 981 people per sq km. While the Russian Federation is the most thinly population country with 9 persons per sq km. China has 20.9% of the world’s population and 7.2% of the world’s surface area. India other hand has 16.7% of the world’s population with just 2.5 of the surface area of the world.

Low density of population can be an advantage in the sense that it shows a larger surface area, meaning a greater share of natural resources available, per person. Along with the manageable size of population, a higher quality of population larger stock of capital per person and a higher level of technological advancement make for rapid economic development.

Explain The Challenges of Initiating and Sustaining Reforms.

The revolution in the information technology, introduced several countries the economic reforms. But India was undergoing apolitical transition from a single-party rule to the coalition rule. This made the policy decisions difficult and on the eve of 90s, India was forced to initiate the first phase of reforms for overcoming the ‘first-order problems’ afflicting the Indian economic policy. The challenges of initiating and sustaining (maintaining) reforms can be described as follows:

1. Sustaining Mass production without economic concentration – Today’s industrial economy is sustained by mass consumption. This needs a) growing demand ensured by variety, quality and warranty. And b) Technically dominated production processes. Large sized firms have these advantages. These trends would indicate concentration of economic power. Also access to information is available to large firms. India has always opposed the concentration of economic power and dominance of multinational companies (MNCs).

2. Technological progress – Technical knowledge is important in today’s production. Traditionally, land, labour and capital were given importance. But today, we find that technical knowledge and innovation change the comparative advantage of a country. With technology an innovation, a nation can increase it’s competitiveness. New ideas, new products, new processes, new inventions, etc. are coming out at such a speed that products become outdated much before they are worn out.

3. Lessons from the American Text of Development – USA is the largest economy in the world has greatly benefited though the development of new technologies. India has got the potential to become the cradle of innovators, designers, thinker, artists and entrepreneurs because she has democratic, secular, diverse, individualistic society. But firmly establishing the conditions listed above as American lessons is a challenge, which calls for a political will, and courage to remove communalism, fanaticism, regionalism and what Gandhi has once called ‘misguided patriotism’.

4. Global Trading – Communication technology reaches millions and millions of people around the world. Globalization is a fact and not an option. Trade in goods must increase. But trade in commercial services has still greater a scope to increase. Freedom of trade in goods and services is itself a challenge because such a trade imposes a strong discipline on local producers as well as labourers. Higher levels of work ethic and productivity norms, which need to be accepted as a challenge.

5. Financial Sector Integration – Private capital flows for direct and portfolio investment to developing countries has grown rapidly. According to World Bank’s Report (2000-01) net private capital flows to the low and middle income economies have increased for 6.28 times in eight years. And a seven times growth in foreign direct investment. Financial market reforms would encompass foreign exchange market, stock market, banking sector reforms and so on. It involves several considerations and several issues. India will have to adapt its policies to sort out these issues and turn the difficulties into opportunities by carrying out second-generation reforms.

6. Outward orientation – Economies emphasizing exports of manufactured goods have given a better performance than inward looking economies like Indian one. India will have to give an outward orientation to her economy. The growth of manufacturing exports form India faces three basic hurdles – a) poor infrastructure b) high cost of capital and c) high barriers to imports. By removing the hurdles, we can accept the challenge. Similarly knowledge-oriented services need to be exported in larger and larger quantities.

7. Higher education – The knowledge economy requires highly educated people. But for that primary education is important. Education plays an important role in HRD. To flourish the Indian creativity it has to be rewarded. A system of intellectual property rights will open up possibilities of large rewards for innovators.

8. Legislative Reforms – Industrial Relation Act, Factory Acts and such other business laws need amendments that would facilitate the structural reforms in the Indian economy. Several barriers to domestic trade and transport will have to be removed.

9. High growth rates in Agricultural sector - Indian farmers must be free from all domestic restrictions on storage, transport and sale of agricultural products. Public investments on irrigation, agricultural research and infrastructure must be enhanced as to remove market imperfections and help exports of agricultural products.

10. Empowering the poor – Employment programmes are the most effective kind of anti-poverty measures. They should be strengthened. HRD policies should be reoriented. Private sector initiatives in the service sector such as health, education, etc. is the today’s need.

These are the challenges of economic reform. They are worth accepting. What needed is the courage and will to introduce these reforms and take corrective steps to ptotest the vulnerable sectors from their fall-out. If this done, the Indian economy can demonstrate a rare capacity of rapid growth.

***

Explain Economic Rationale Of State Intervention.

India has opted for a mixed economy. Such an economy with democratic planning placed special responsibility on the state. The government accepted several economic functions. Some of them were directly carried out through the public sector, which had emerged as the senior partner in the economic activity of the country. With the dawn of liberalization and globalization the whole context of state intervention changed. Therefore it is necessary to redefine the role of state in term of economic intervention.

1. Promotion of Social Welfare – In the present Indian society almost 35 crores of people are below the poverty line. The government has to accept the responsibility of poverty alleviation by undertaking programmes like employment generation and providing facilities for training the people for self-employment. One of the important causes of poverty is the lack of income earning assets available to the poor. Land reforms- especially the ceiling on the land holding – aimed at providing assets to the tenants and landless labour. Besides the building up of rural infrastructure is going to provide an opportunity for the poor to avail of credit and obtain income-earning assets.

2. Economic and social infrastructure – The state, in a developing country like India, has to come forward and take initiative in building up economic and social infrastructure. The provision of roads and railways, hydro-electricity and irrigation projects, drinking water and sewerage projects, etc.constitute economic infrastructure. Even though private sector is coming forward in the fields of power generation and telecommunication it is accepted as the primary responsibility of the state. The social infrastructure in te form of health and education is another area of state intervention. The same way provision of health facility also requires state participation because the private sector does not come forward to accommodate the poor by providing free or cheap medical aid.

3. Macro economic management – The state has to intervene to promote industries where the poor and the unorganized workers are seeking employment. The state has also to come forward in rectifying the regional imbalances in respect of economic development in general and industrial development in particular. Besides financial assistance to small-scale industries, boosting the micro finance schemes and plugging the credit gaps, supply9ing market information to the agricultural sector etc. are other examples of micro economic management.

4. Reform of the public sector – Many public sector enterprises are experiencing hardships due to lack of autonomy, red-tapism, interference from the politicians as well as the bureaucrats and several other drawbacks. The reformulation of policy and restructuring of the administrative set- up with regard to public sector is an urgent need of the hour.

5. Market failures – The market failure comes from the lack of wage and price flexibility which leads to evils like business fluctuations, unemployment and inflation. Under such circumstances the state has to come forward.

6. External constraints – Problems arise when government lose creditability in financial markets. In this situation private investors are likely to be scared away. In such cases the government of the country is called upon to become active obtain assistance from international as well as foreign agencies.

7. Conflicting interests – In a federal country like India, the interests of constituent states are likely to be conflicting. Conflicts may also arise among national interests of various countries. Sometimes nations resort to anti-social practices like dumping. In all such cases, not only state intervention by state initiative in securing international co-operation is needed.

The role of the state has undergone a considerable change especially during the last two decades. The economic rationale of such a change itself goes on changing due to the changing environment, not only inside but also outside the country. The current role of the state would not last very long or attain an equilibrium at least for some years to come.

$$$

US Dollar as an International Currency

From World War II the United States emerged not only victorious but as a big brother with its economy intact – able and willing to help top reconstruct the economies of the countries all over the world. The major international economic institutions, which were created during the post warr period, were GATT, the Bretton Woods exchange rate system, the International Monetary Fund (IMF), and International Bank for Reconstruction and Development (IBRD) or the World Bank. But still there were major economic crises.

Under the leadership of John Maynard Keynes, nations gathered in 1944 at Bretton Woods, and hammered out an agreement that led to the formation of major economic institutions. The outcome was a system for regulating international financial transactions. The participants of the conference were aware of the rigidities of the Gold Standard. They wanted the Bretton Woods system to replace the gold standard. This system established a parity of each currency in terms of both the US dollar and Gold.

American economy was the strongest economy unaffected by the war and because the USA had stated a plan of helping the nations rebuild their economies, American dollar enjoyed a prestige backed by a worldwide demand. This made the dollar a hard currency. In addition the Bretton Woods Agreement had almost recognized the US dollar as an international currency.

For the first three decades after World War II, under the Bretton woods arrangements, the US dollar was the key currency. Most ot the international trade and finance were carried out in dollars. In international transactions, payments were very often made and accepted in dollars. Exchange rate parties were quoted in dollars. Private and government reserves were kept invested dollar securities. This period was remarkable for rapid recovery and beginnings of development of the LDCs. During this period, the world was on a dollar standard and the US dollar was the world currency because of its stability, convertibility and worldwide acceptability.

This situation last up to the trade deficits of the US. Growing overseas investments by the American companied resulted in a piling u of dollars abroad. By the beginning of the 70s, the stock of liquid dollar balances had become so large that governments found it difficult to maintain the official parties with the dollar. Dollar no longer enjoyed public confidence. In 1971 President Nixon officially served the connection between the dollar and gold. With this the US dollar would no longer allow an automatic conversion of dollars into other currencies no would it allow the conversion of dollars into gold for $35 per ounce. As the US abandoned the Bretton Woods system, the role of dollar as the world currency came to an end.

()()()()()

Partially Convertible Indian Rupee

After independence Indian rupee was pegged to the pound sterling on account of historic links with Britain and this was in line with Bertton Woods system. With the breakdown of the Bretton Woods system in the early seventies and the consequent switch towards a system of managed exchange rates, and with the declining share of the UK in India’s trade the Indian rupee, effective September 1975 was delinked from the pound sterling in order to overcome the weakness of pegging to a single currency. The exchange rate, now determined with reference to the daily exchange rate movements of an undisclosed basket of the currencies of the countries with which India was trading partner. The basket composition was at the discretion of the RBI, subject to approval of Government of India. The basket linked management of the exchange rate of rupee, however, did not fully reflect the market dynamics and developments in exchange rates of competing countries, the rupee’s external value has been allowed to determined by market forces in a phased manner following the payments difficulties since the early 90s.