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.

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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.

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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.

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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.