Describe the overall impact of the Industrial Policy, 1991 on Indian
industry. Give illustrations.
Answer. New Industrial Policy, 1991:
The New Industrial Policy of 1991 incorporated the concepts of liberalization,
globalization, internationalization, and privatization. They also incorporated the
following significant features: emphasis on consumer concerns, such as quality, cost,
and variety; encouragement of competition; quality assurance and the need to
continuously upgrade quality, and at reduced costs; a border-less, boundary-less
world, incorporating free exchange of money, ideas, and expertise; fostering of
strategic partnerships and alliances in the best service of the consumer; and human
resource development.
The recent economic and industrial policy reforms call for integration of the Indian
economy and industry with their global counterparts. This calls for quantum leaps in our
levels of productivity and efficiency to survive in the face of international competition. In
addition to resource constraints, we will have to conform to international levels in terms
of energy use and environmental appropriateness, in addition to quality, reliability, and
costs. Simultaneously, we have to maximize employment opportunities. The basic
philosophy of the new policy has been summed up as continuity with change.
Objectives:
To consolidate the strengths built up during the last four decades of economic
planning and to build on the gains already made.
To correct the distortions or weaknesses that may have crept in the industrial
structure as it has developed over the last four decades.
To maintain a sustained growth in the productivity and gainful employment; and
To attain international competitiveness. The pursuit of these objectives will be
tempered by (a) the need to preserve the environment, and (b) the need to ensure
the efficient use of available resources.
Policy Changes Important changes in the NIP 1991, including the subsequent
changes, can be recounted as follows:
Industrial Licensing Policy
Industrial licensing has been abolished for all projects except for a short list of
industries related to security and strategic concerns, social reasons, hazardous
chemicals and overriding environmental reasons, and items of elitist consumption.
Only three industries groups where security and strategic concerns predominate
will be reserved exclusively for the public sector.
In projects where imported capital goods are required, automatic clearance will be
given in the following cases:
Where foreign exchange availability is ensured through foreign equity.
If the CIF value of imported capital goods required is less than 25 per cent of the
total value of plant and equipment, up to a maximum value of Rs.2 crore.
There is no requirement of obtaining industrial approvals from the Central
Government (except for industries under compulsory licensing) for location not
falling within 25 kms. Of cities having population of more than one million.
Industries of non-polluting nature such as electronics, computer software and
printing can hi located within 25 kms. Of the periphery of cities with more than one
million population. Other industries are permitted only if they are located in
designated industrial areas.
The mandatory convertibility clause will no longer be applicable. for term loans
from the financial institutions for new projects.
Since July 1991, Indian industry has undergone a sea-change in terms of the basic
parameters governing its structure and functioning. The major reforms include widescale
reduction in the scope of industrial licensing, simplification of procedural rules
and regulations, reduction of areas reserved exclusively for the public sector,
disinvestment of equity of selected public sector undertakings, enhancing the limits of
foreign equity participation in domestic industrial undertakings, liberalization of trade
and exchange rate policies, rationalization and reduction of customs and excise duties
and personal and corporate income-tax, extension of the scope of MODVAT etc.
Separate policy measures have been announced in the form of specific packages
aimed at upliftment of the small scale, tiny and cottage industries as well as 100 per
cent EOU's (Export Oriented Units) and units located in the EPZs (Export Processing
Zone) and Technology Parks.
It is observed
from the table that since 1992-93, all the major sectors had responded to economic
reforms with dynamism and witnessed significant acceleration of their respective
growth rates. However, during the current year until October 1996 there has been a
deceleration of industrial growth rates due to poor performance by mining and
electricity generation.
The adoption of a New Industrial Policy in 1991 was accompanied by a series of
complementary reforms in fiscal, trade and foreign investment policies, which gradually
opened up the industrial sector to international competition. There was a shift in focus
from import substitution to competitiveness in international markets, with trade
liberalization contributing to reducing effective protection for industry.
The Foreign Direct Investment (FDI) policy was further liberalized and limits for foreign
equity participation in domestic industrial undertakings were enhanced. In 1996, a list
of nine industries, which included infrastructure, electronics and software, for which
joint ventures upto 74% foreign equity would be automatically cleared, was approved.
The number of industries eligible for automatic approval upto 51% foreign equity was
also expanded from 35 to 48.
Domestic industry is increasingly open to competition from international markets, with
quantitative restrictions on imports removed with effect from April 1, 2001 (Planning
Commission, 2001a). Tariff levels have also been decreased drastically since the
initiation of reforms. It is estimated that India's weighted import tariff has declined from
around 90% at the start of reforms to around 34% in 2001/02.
Environmental Impact
The energy and resource intensity of industrial production has been associated with
adverse environmental impacts. These can be categorized under four heads:
emissions, effluent discharges, generation of wastes including hazardous wastes and
the production of ozone-depleting substances (ODS). The quantum of industrial solid
wastes (non-hazardous) generated has nearly doubled in the last decade, from 77
MTPA (million tonnes per annum) in 1990 to 147.05 MTPA in 1999. In addition, about
7.2 million tonnes of industrial hazardous wastes are generated in the country (MoEF,
2000). A discussion of the extent of industrial emissions and effluent discharge is
presented in the chapters on Atmosphere and Water.
Employment generation and labour welfare
The industrial sector is an important source of employment in the country. The estimate
of employment in organized public and private sector stood at 27.9 million (MoF, 2002).
In addition, large numbers are employed in the unorganized sector. In the context of
economic reforms and restructuring of the industrial sector, changes in the labour
market involving redeployment and retrenchment of labour would be associated with
social costs. These costs would have to be minimized by providing for social security
mechanisms. Most importantly, productive employment generation and labour welfare
in the unorganized sector, where it will have the greatest poverty-reducing impact, will
have to be ensured.
Wednesday, June 10, 2009
Write a note on the annual trends of these collaborations
Collect data on foreign technical and financial collaborations for the past onedecade
and write a note on the annual trends of these collaborations.
Answer. Developing countries like India have been using import of technology through
foreign collaboration as a strategy to bridge the technological gaps in the country, to
expedite economic development.
The number of foreign collaborations has been increasing on a cyclical manner in the
first forty years, from 1951-91, starting with a meager 44 collaboration in the year 1951,
it increased to 592 in the year 1961 and then suddenly to 402 in 1962, the year in
which India faced war with China. The number of collaborations hovered around the
same figure. until 1965, when India faced war with Pakistan, when number dropped
further to 343. This was followed with further decline due to political turmoil and rapid
changes in government policies, marked with stricter regulatory requirements. The
trend continued more or unchanged during 1970s, when the country underwent
dramatic changes is political arena, with the imposition of emergency followed by short
lived Janata Party government at the Centre. Eighties, however, saw the return to the
rising trend, which became steeper and steeper in the 1990s, Total number of
collaborations in the eighties equaled the total number of collaborations in the three
decades of 1950s, 1960s and 1970s. The period 1991-2000 saw total number of
collaborations in the decade surpassing the total number of all the collaborations in the
4 decades preceding it. Indeed, the total number collaborations in the 9 years of postliberalization
(1992-2000) period is observed to be 17810, while in the 41 years of preliberalization
(1951-91), there were only 15105 foreign collaborations. India is thus
banking on expert technological support for goods and services at an accelerated pace
than in the pre-liberation era. The rise in number is substantial in the post liberalization
era, 10-fold compared to the decade of 1950s, 5- fold compared to the decades of
1960s and 1970s and 2-fold compared to the decade of 1980s.
An interesting development is observed in terms of number of countries with whom
India has foreign collaborations.
In the 41 years of pre-liberalization era, the foreign collaborations were limited to 25
countries only. In the post liberalization era, the number of countries, with whom India
has entered into foreign collaboration, swelled to 112, a dramatic over 4-fold rise
indeed. It would be noticed from the table 2 that the number of countries with whom
India has very large number of collaborations (more than 1000 each) during the 41
years of preliberalisation era (1951-91) and the 9 years of post- liberalization era
(1992-2000) has not changed substantially, except that NRIs have engaged in a big
way in the post liberalization era.
The approvals of foreign collaborations have been classified in two classes; namely
technological (without foreign equity participation) and financial (having Foreign equity
participation).
and write a note on the annual trends of these collaborations.
Answer. Developing countries like India have been using import of technology through
foreign collaboration as a strategy to bridge the technological gaps in the country, to
expedite economic development.
The number of foreign collaborations has been increasing on a cyclical manner in the
first forty years, from 1951-91, starting with a meager 44 collaboration in the year 1951,
it increased to 592 in the year 1961 and then suddenly to 402 in 1962, the year in
which India faced war with China. The number of collaborations hovered around the
same figure. until 1965, when India faced war with Pakistan, when number dropped
further to 343. This was followed with further decline due to political turmoil and rapid
changes in government policies, marked with stricter regulatory requirements. The
trend continued more or unchanged during 1970s, when the country underwent
dramatic changes is political arena, with the imposition of emergency followed by short
lived Janata Party government at the Centre. Eighties, however, saw the return to the
rising trend, which became steeper and steeper in the 1990s, Total number of
collaborations in the eighties equaled the total number of collaborations in the three
decades of 1950s, 1960s and 1970s. The period 1991-2000 saw total number of
collaborations in the decade surpassing the total number of all the collaborations in the
4 decades preceding it. Indeed, the total number collaborations in the 9 years of postliberalization
(1992-2000) period is observed to be 17810, while in the 41 years of preliberalization
(1951-91), there were only 15105 foreign collaborations. India is thus
banking on expert technological support for goods and services at an accelerated pace
than in the pre-liberation era. The rise in number is substantial in the post liberalization
era, 10-fold compared to the decade of 1950s, 5- fold compared to the decades of
1960s and 1970s and 2-fold compared to the decade of 1980s.
An interesting development is observed in terms of number of countries with whom
India has foreign collaborations.
In the 41 years of pre-liberalization era, the foreign collaborations were limited to 25
countries only. In the post liberalization era, the number of countries, with whom India
has entered into foreign collaboration, swelled to 112, a dramatic over 4-fold rise
indeed. It would be noticed from the table 2 that the number of countries with whom
India has very large number of collaborations (more than 1000 each) during the 41
years of preliberalisation era (1951-91) and the 9 years of post- liberalization era
(1992-2000) has not changed substantially, except that NRIs have engaged in a big
way in the post liberalization era.
The approvals of foreign collaborations have been classified in two classes; namely
technological (without foreign equity participation) and financial (having Foreign equity
participation).
"Business must be run in a socially responsible manner". Comment on the statement.
"Business must be run in a socially responsible manner".
Comment on the statement in the context of Indian business along with
examples.
Answer. Social responsibility of a business refers to what the business does, over and
above the statutory requirement, for the benefit of the society. The term corporate
citizenship is also commonly used to refer to the moral obligations of the business to
the society. This implies that just as individuals, corporates are also integral part of the
society and their behaviour shall be guided by certain social norms. The operations of
business enterprises affect a wide spectrum. The resources they make use of are
limited to those of the proprietors and the impact of their operations is felt also by many
a people who are in no way connected with the enterprise.
The current concept of CSR (corporate social responsibility) covers a range of issues
that could perhaps be covered under and be linked to the fabric of sustainable
development. Protection of the environment and a country's natural resources would
certainly be a paramount element of this concept of sustainable development. But what
would be equally important is the need to ensure that society does not suffer from
disparities of income and provision of basic services like health care, education and
literacy. To carry this list further, it could be argued that the United Nations' Millennium
Development Goals (MDGs) and the WEHAB (Water, Energy, Health, Agriculture, and
Biodiversity) agenda of the UN Secretary General are key essentials for bringing about
a solution to the very basic problems facing society. Consequently, if corporate actions
are to target the most fundamental problems facing a poor country like India, then the
components of the MDGs, including water and sanitation, prevention of eradicable
diseases and the items included in the WEHAB agenda in some sense become
guideposts for corporate social strategy and action. It is often asked why a company
should worry about anything other than the bottom line measured purely in financial
terms.
One response is of course to say what has been stated above, namely the cliche that
business cannot succeed in a society that fails. Hence, in an indirect but powerful way
the success of business even in narrow financial terms depends on the success of
society as a whole. The progress and welfare of society is not merely the responsibility
of governments alone. In an effective sense it involves appropriate actions by all
stakeholders, of which the corporate sector is extremely important. Hence, actions to
address some of these basic challenges also become important for leaders of business
and industry.
Social Responsibility Examples
Companies in India enjoy touting their socially responsible credentials, but are failing to
demonstrate accountability in real. Corporate responsibility in India has come out of its
infancy and has become a business in itself. If one goes by the number of companies
touting their achievements, civil society groups and consultants offering ethical
corporate services, and government framing policies to involve business in
development issues, then corporate responsibility has evolved to be acceptable to all,
at least in concept.
Case 1- A V Birla Group - Hindalco
The social projects are carried out under the aegis of the Aditya Birla Centre for
Community Initiatives and Rural Development, which is stewarded by Mrs. Rajashree
Birla, who is a Director on your Board.
The footprint of our social work straddles across 332 villages that we have adopted,
close to our plants at Renukoot and Renusagar in Uttar Pradesh and our mines at
Jharkhand and Chattisgarh. The work has touched the lives of more than 400,000
people.
Case 2: HLL's INITIATIVE IN RURAL DEVELOPEMENT
HLL has been proactively engaged in rural development since 1976 with the initiation
of the Integrated Rural Development Programme in the Etah district of Uttar Pradesh, in
tandem with the company’s dairy operations. This Programme now covers 500 villages
in the district. Subsequently, the factories that HLL continued establishing in lessdeveloped
regions of the country have been engaged in similar programmes in
adjacent villages.
ACTIVITIES
To improve the business skills of the SHG women, extensive training programmes are
being held. Such workshops have already covered a large number of Shakti
Entrepreneurs in Andhra Pradesh, Karnataka, Gujarat, Madhya Pradesh, Uttar
Pradesh, Tamilnadu, Chattisgarh and Orissa
As part of their training programme, all HLL Management Trainees spend about 4
weeks on Project Shakti in rural areas with NGOs or SHGs. Assignments include
business process consulting for nascent enterprises engaged in the manufacture of
products such as spices and hosiery items.
Shakti: The Vision
HLL envisions the creation of 25,000 Shakti Entrepreneurs covering 100,000 villages,
and touching the lives of 100 million rural people by the year 2005.
Case 3: Coca Cola
Coca-Cola continues to face agitation from local communities around its plant in the
southern state of Kerala; the agitation is now a thousand days old. Ironically, Pepsi and
Coca-Cola claim to be socially responsible in India, and have HIV/AIDS and water
harvesting projects respectively. Are they socially responsible in the true sense?
Case 3: Reliance Energy
Reliance Energy continues to pollute the soil around its plant in Maharashtra, even
after being held responsible for it. Rather than correcting its own operations, it is busy
influencing policymakers and authorities to revise the local law in its favour. This at a
time when its chief Anil Ambani was given the ‘CEO of the Year’ award at the Platts
Global Energy Awards for 2004 in New York.
These illustrations are not meant to disfigure all the genuine good happenings in India,
but to pause and reflect on the state of affairs. In conclusion, but a beginning of a
useful thought, corporate responsibility reports about India need to be absorbed with
caution. It is important to look beyond the obvious and question every statement made
by both businesses and NGOs about the improvements on the Indian environmental
and social responsibility scene.
Comment on the statement in the context of Indian business along with
examples.
Answer. Social responsibility of a business refers to what the business does, over and
above the statutory requirement, for the benefit of the society. The term corporate
citizenship is also commonly used to refer to the moral obligations of the business to
the society. This implies that just as individuals, corporates are also integral part of the
society and their behaviour shall be guided by certain social norms. The operations of
business enterprises affect a wide spectrum. The resources they make use of are
limited to those of the proprietors and the impact of their operations is felt also by many
a people who are in no way connected with the enterprise.
The current concept of CSR (corporate social responsibility) covers a range of issues
that could perhaps be covered under and be linked to the fabric of sustainable
development. Protection of the environment and a country's natural resources would
certainly be a paramount element of this concept of sustainable development. But what
would be equally important is the need to ensure that society does not suffer from
disparities of income and provision of basic services like health care, education and
literacy. To carry this list further, it could be argued that the United Nations' Millennium
Development Goals (MDGs) and the WEHAB (Water, Energy, Health, Agriculture, and
Biodiversity) agenda of the UN Secretary General are key essentials for bringing about
a solution to the very basic problems facing society. Consequently, if corporate actions
are to target the most fundamental problems facing a poor country like India, then the
components of the MDGs, including water and sanitation, prevention of eradicable
diseases and the items included in the WEHAB agenda in some sense become
guideposts for corporate social strategy and action. It is often asked why a company
should worry about anything other than the bottom line measured purely in financial
terms.
One response is of course to say what has been stated above, namely the cliche that
business cannot succeed in a society that fails. Hence, in an indirect but powerful way
the success of business even in narrow financial terms depends on the success of
society as a whole. The progress and welfare of society is not merely the responsibility
of governments alone. In an effective sense it involves appropriate actions by all
stakeholders, of which the corporate sector is extremely important. Hence, actions to
address some of these basic challenges also become important for leaders of business
and industry.
Social Responsibility Examples
Companies in India enjoy touting their socially responsible credentials, but are failing to
demonstrate accountability in real. Corporate responsibility in India has come out of its
infancy and has become a business in itself. If one goes by the number of companies
touting their achievements, civil society groups and consultants offering ethical
corporate services, and government framing policies to involve business in
development issues, then corporate responsibility has evolved to be acceptable to all,
at least in concept.
Case 1- A V Birla Group - Hindalco
The social projects are carried out under the aegis of the Aditya Birla Centre for
Community Initiatives and Rural Development, which is stewarded by Mrs. Rajashree
Birla, who is a Director on your Board.
The footprint of our social work straddles across 332 villages that we have adopted,
close to our plants at Renukoot and Renusagar in Uttar Pradesh and our mines at
Jharkhand and Chattisgarh. The work has touched the lives of more than 400,000
people.
Case 2: HLL's INITIATIVE IN RURAL DEVELOPEMENT
HLL has been proactively engaged in rural development since 1976 with the initiation
of the Integrated Rural Development Programme in the Etah district of Uttar Pradesh, in
tandem with the company’s dairy operations. This Programme now covers 500 villages
in the district. Subsequently, the factories that HLL continued establishing in lessdeveloped
regions of the country have been engaged in similar programmes in
adjacent villages.
ACTIVITIES
To improve the business skills of the SHG women, extensive training programmes are
being held. Such workshops have already covered a large number of Shakti
Entrepreneurs in Andhra Pradesh, Karnataka, Gujarat, Madhya Pradesh, Uttar
Pradesh, Tamilnadu, Chattisgarh and Orissa
As part of their training programme, all HLL Management Trainees spend about 4
weeks on Project Shakti in rural areas with NGOs or SHGs. Assignments include
business process consulting for nascent enterprises engaged in the manufacture of
products such as spices and hosiery items.
Shakti: The Vision
HLL envisions the creation of 25,000 Shakti Entrepreneurs covering 100,000 villages,
and touching the lives of 100 million rural people by the year 2005.
Case 3: Coca Cola
Coca-Cola continues to face agitation from local communities around its plant in the
southern state of Kerala; the agitation is now a thousand days old. Ironically, Pepsi and
Coca-Cola claim to be socially responsible in India, and have HIV/AIDS and water
harvesting projects respectively. Are they socially responsible in the true sense?
Case 3: Reliance Energy
Reliance Energy continues to pollute the soil around its plant in Maharashtra, even
after being held responsible for it. Rather than correcting its own operations, it is busy
influencing policymakers and authorities to revise the local law in its favour. This at a
time when its chief Anil Ambani was given the ‘CEO of the Year’ award at the Platts
Global Energy Awards for 2004 in New York.
These illustrations are not meant to disfigure all the genuine good happenings in India,
but to pause and reflect on the state of affairs. In conclusion, but a beginning of a
useful thought, corporate responsibility reports about India need to be absorbed with
caution. It is important to look beyond the obvious and question every statement made
by both businesses and NGOs about the improvements on the Indian environmental
and social responsibility scene.
"Liberalisation, privatization and globalization are the means to achieve certain ends by the society."
"Liberalisation, privatization and globalization are the means to
achieve certain ends by the society." In the light of the statement, list five major
goals/ends, which these instruments are intended to achieve.
Answer.
Liberalisation
In general, liberalization refers to a relaxation of previous government restrictions,
usually in areas of social or economic policy.
Policies that make an economy open to trade and investment with the rest of the world
are needed for sustained economic growth. The evidence on this is clear. No country in
recent decades has achieved economic success, in terms of substantial increases in
living standards for its people, without being open to the rest of the world. In contrast,
trade opening (along with opening to foreign direct investment) has been an important
element in the economic success of East Asia, where the average import tariff has
fallen from 30 percent to 10 percent over the past 20 years. The goals of Liberalization
are listed below:
1) Opening up their economies to the global economy has been essential in enabling
many developing countries to develop competitive advantages in the manufacture of
certain products. There is considerable evidence that more outward-oriented countries
tend consistently to grow faster than ones that are inward-looking.
2) Indeed, one finding is that the benefits of trade liberalization can exceed the costs by
more than a factor of 10.
3) Countries that have opened their economies in recent years, including India,
Vietnam, and Uganda, have experienced faster growth and more poverty reduction.
4) On average, those developing countries that lowered tariffs sharply in the 1980s
grew more quickly in the 1990s than those that did not.
5) Freeing trade frequently benefits the poor especially. Developing countries can illafford
the large implicit subsidies, often channeled to narrow privileged interests, that
trade protection provides. Moreover, the increased growth that results from freer trade
itself tends to increase the incomes of the poor in roughly the same proportion as those
of the population as a whole.
6) New jobs are created for unskilled workers, raising them into the middle class.
Overall, inequality among countries has been on the decline since 1990, reflecting
more rapid economic growth in developing countries, in part the result of trade
liberalization.
7) The potential gains from eliminating remaining trade barriers are considerable.
Estimates of the gains from eliminating all barriers to merchandise trade range from
US$250 billion to US$680 billion per year. About two-thirds of these gains would
accrue to industrial countries. But the amount accruing to developing countries would
still be more than twice the level of aid they currently receive. Moreover, developing
countries would gain more from global trade liberalization as a percentage of their GDP
than industrial countries, because their economies are more highly protected and
because they face higher barriers.
Although there are benefits from improved access to other countries' markets, countries
benefit most from liberalizing their own markets. The main benefits for industrial
countries would come from the liberalization of their agricultural markets. Developing
countries would gain about equally from liberalization of manufacturing and agriculture.
The group of low-income countries, however, would gain most from agricultural
liberalization in industrial countries because of the greater relative importance of
agriculture in their economies.
Globalization
Economic "globalization" is a historical process, the result of human innovation and
technological progress. It refers to the increasing integration of economies around the
world, particularly through trade and financial flows. The term sometimes also refers to
the movement of people (labor) and knowledge (technology) across international
borders.
The term has come into common usage since the 1980s, reflecting technological
advances that have made it easier and quicker to complete international
transactions—both trade and financial flows. It refers to an extension beyond national
borders of the same market forces that have operated for centuries at all levels of
human economic activity—village markets, urban industries, or financial centers.
Markets promote efficiency through competition and the division of labor—the
specialization that allows people and economies to focus on what they do best. Global
markets offer greater opportunity for people to tap into more and larger markets around
the world. It means that they can have access to more capital flows, technology,
cheaper imports, and larger export markets. But markets do not necessarily ensure that
the benefits of increased efficiency are shared by all.
The globalization integrates the Indian Economy with world economy. It is a reform
package. It allows the:
Reduction of barriers in various countries regarding imports & exports. Various
trade norms have been setup that allows free flow of information, goods & services
countries have agreed to follow a common protocol with reference to the trade
polices. This allows an easy approach towards business activities, leading to a
win-win situation of business activities among various nations
There is an environmental setup where free flow of capital takes place. One
country can invest in the fruitful products / projects of the other countries & this
happens only when there is an environment of harmony for it. The disputes among
various nations lead to the friction in relationship thereby creating a distrustful
environment. No business can prosper in such an environment. In order to have a
prosperous business one need to have an environment of harmony. Thus a free
trade can only happen in an environment where capital flow occurs freely.
Technology is essential for prosperity of a nation. A nation can prosper only if it
has technology driven attitude. Technology could be imported from other nations
& can be developed in house as well. This can happen only when there is an
environment of the kind, maintained therein, Technical collaborations are the key
to globalization activities. There must be parity among the countries of world in
terms of technology being used, otherwise they would lag behind. In order to have
uniformity in the process, behaviour & price of technology there must be sufficient
measures to propagate it to the counties access the world. Thus free flow of
technology among nations and states is another benefit of globalization.
Globalization also makes sure that the manpower skills can be utilized effectively.
Once we have integrated the economy there happens a free flow of information,
labour, resources from one nation to another thereby reducing the distances &
narrowing the gaps. The labour forces learn to work in an environment that
belongs to foreign culture. Thus the world acts as a global village where everyone
can work as per international rules & scenarios.
Promotion of globalization has been prioritized in the Indian economy. Restrictions of
imports Exports, education, technical collaborations etc. have been lifted up. Bans on
certain restricted goods have also been taken off. This has provided a way towards
broadening of activities among the two nations. Foreign investment has been
encouraged & certain policies with effect to it have been framed. Direct foreign
investment has been invited by the government of India for better functioning. Now
technicians can move across the world to solve the problems of their clients. No
permission is needed for them to hire & take their services. Thus globalization has
eased the working among the technicians & businessmen. It has helped a lot in
generating effective development policy.?.
Privatization
Privatization (sometimes privatization, denationalization, or, especially in India,
disinvestment) is the process of transferring property, from public ownership to private
ownership and/or transferring the management of a service or activity from the
government to the private sector. The opposite process is nationalization or
municipalization.
Privatization is frequently associated with industrial or service-oriented enterprises,
such as mining, manufacturing or power generation, but it can also apply to any asset,
such as land, roads, or even rights to water. In recent years, government services such
as health, sanitation, and education have been particularly targeted for privatization in
many countries. In theory, privatization helps establish a "free market", as well as
fostering capitalist competition, which its supporters argue will give the public greater
choice at a competitive price. Conversely, socialists view privatization negatively,
arguing that entrusting private businesses with control of essential services reduces
the public's control over them and leads to excessive cost cutting in order to achieve
profit and a resulting poor quality service.
Types of privatization
In terms of outright privatization (that is, sale of a business), there are three major
types:
share issue privatization (SIP) - selling shares on the stock market
asset sale privatization - selling the entire firm to an investor, usually by auction
voucher privatization - shares of ownership are distributed to all citizens, usually
for free or at a very low price.
Share issue privatization is the most common type. Voucher privatization has mainly
been used in the transition economies of Eastern Europe - countries such as Russia,
Poland and the Czech Republic. Share issue can broaden and deepen domestic
capital markets, boosting liquidity and potentially economic growth, but if the capital
markets are insufficiently developed it may be difficult to find enough buyers, and
transaction costs (eg underpricing required) may be higher. Risks (political risk,
currency risk) are also higher, deterring foreign portfolio investors. As a result, asset
sales are more common in developing countries.
Arguments in Favour of privatization
Advocates of privatization argue that governments run businesses poorly for the
following reasons:
Performance. The government may only be interested in improving a company in
cases when the performance of the company becomes politically sensitive.
Improvements. Conversely, the government may put off improvements due to
political sensitivity — even in cases of companies that are run well.
Corruption. The company may become prone to corruption; company employees
may be selected for political reasons rather than business ones.
Goals. The government may seek to run a company for social goals rather than
business ones (this is conversely seen as a positive effect by critics of
privatization).
Capital. It is claimed by supporters of privatization, that privately-held companies
can more easily raise capital in the financial markets than publicly-owned ones.
Unprofitable companies survive. Governments may "bail out" poorly run
businesses with money when, economically, it may be better to let the business
fold.
Unprofitable units survive. Parts of a business which persistently lose money are
more likely to be shut down in a private business.
Political influence. Nationalized industries can be prone to interference from
politicians for political or populist reasons. Examples include making an industry
buy supplies from local producers (when that may be more expensive than buying
from abroad), forcing an industry to freeze its prices/fares to satisfy the electorate
or control inflation, increasing its staffing to reduce unemployment, or moving its
operations to marginal constituencies. It is argued that such measures can cause
nationalized industries to become uneconomic and uncompetitive.
Privatization Goals
It reduces the fiscal burden of the State by relieving it of the losses of the SOEs
and reducing the size of the bureaucracy.
Privatization of SOEs enables the govt. to mop up funds.
Privatisation helps the State to trim the size of the administrative machinery.
It enables the government to concentrate more on the essential State functions.
Privatization helps accelerate the pace of economic development as it attracts
more resources from the private sector for development.
It may result in better management of the enterprise.
Privatization may also encourage entrepreneurship.
Liberalization, Globalization & Privatization are the economic reforms aiming
towards the regulation of the basic activities related to opening new arenas,
providing better control & defining uniformity in operations across the world. It
helps the countries to achieve higher growth rates, employment & self reliance.
achieve certain ends by the society." In the light of the statement, list five major
goals/ends, which these instruments are intended to achieve.
Answer.
Liberalisation
In general, liberalization refers to a relaxation of previous government restrictions,
usually in areas of social or economic policy.
Policies that make an economy open to trade and investment with the rest of the world
are needed for sustained economic growth. The evidence on this is clear. No country in
recent decades has achieved economic success, in terms of substantial increases in
living standards for its people, without being open to the rest of the world. In contrast,
trade opening (along with opening to foreign direct investment) has been an important
element in the economic success of East Asia, where the average import tariff has
fallen from 30 percent to 10 percent over the past 20 years. The goals of Liberalization
are listed below:
1) Opening up their economies to the global economy has been essential in enabling
many developing countries to develop competitive advantages in the manufacture of
certain products. There is considerable evidence that more outward-oriented countries
tend consistently to grow faster than ones that are inward-looking.
2) Indeed, one finding is that the benefits of trade liberalization can exceed the costs by
more than a factor of 10.
3) Countries that have opened their economies in recent years, including India,
Vietnam, and Uganda, have experienced faster growth and more poverty reduction.
4) On average, those developing countries that lowered tariffs sharply in the 1980s
grew more quickly in the 1990s than those that did not.
5) Freeing trade frequently benefits the poor especially. Developing countries can illafford
the large implicit subsidies, often channeled to narrow privileged interests, that
trade protection provides. Moreover, the increased growth that results from freer trade
itself tends to increase the incomes of the poor in roughly the same proportion as those
of the population as a whole.
6) New jobs are created for unskilled workers, raising them into the middle class.
Overall, inequality among countries has been on the decline since 1990, reflecting
more rapid economic growth in developing countries, in part the result of trade
liberalization.
7) The potential gains from eliminating remaining trade barriers are considerable.
Estimates of the gains from eliminating all barriers to merchandise trade range from
US$250 billion to US$680 billion per year. About two-thirds of these gains would
accrue to industrial countries. But the amount accruing to developing countries would
still be more than twice the level of aid they currently receive. Moreover, developing
countries would gain more from global trade liberalization as a percentage of their GDP
than industrial countries, because their economies are more highly protected and
because they face higher barriers.
Although there are benefits from improved access to other countries' markets, countries
benefit most from liberalizing their own markets. The main benefits for industrial
countries would come from the liberalization of their agricultural markets. Developing
countries would gain about equally from liberalization of manufacturing and agriculture.
The group of low-income countries, however, would gain most from agricultural
liberalization in industrial countries because of the greater relative importance of
agriculture in their economies.
Globalization
Economic "globalization" is a historical process, the result of human innovation and
technological progress. It refers to the increasing integration of economies around the
world, particularly through trade and financial flows. The term sometimes also refers to
the movement of people (labor) and knowledge (technology) across international
borders.
The term has come into common usage since the 1980s, reflecting technological
advances that have made it easier and quicker to complete international
transactions—both trade and financial flows. It refers to an extension beyond national
borders of the same market forces that have operated for centuries at all levels of
human economic activity—village markets, urban industries, or financial centers.
Markets promote efficiency through competition and the division of labor—the
specialization that allows people and economies to focus on what they do best. Global
markets offer greater opportunity for people to tap into more and larger markets around
the world. It means that they can have access to more capital flows, technology,
cheaper imports, and larger export markets. But markets do not necessarily ensure that
the benefits of increased efficiency are shared by all.
The globalization integrates the Indian Economy with world economy. It is a reform
package. It allows the:
Reduction of barriers in various countries regarding imports & exports. Various
trade norms have been setup that allows free flow of information, goods & services
countries have agreed to follow a common protocol with reference to the trade
polices. This allows an easy approach towards business activities, leading to a
win-win situation of business activities among various nations
There is an environmental setup where free flow of capital takes place. One
country can invest in the fruitful products / projects of the other countries & this
happens only when there is an environment of harmony for it. The disputes among
various nations lead to the friction in relationship thereby creating a distrustful
environment. No business can prosper in such an environment. In order to have a
prosperous business one need to have an environment of harmony. Thus a free
trade can only happen in an environment where capital flow occurs freely.
Technology is essential for prosperity of a nation. A nation can prosper only if it
has technology driven attitude. Technology could be imported from other nations
& can be developed in house as well. This can happen only when there is an
environment of the kind, maintained therein, Technical collaborations are the key
to globalization activities. There must be parity among the countries of world in
terms of technology being used, otherwise they would lag behind. In order to have
uniformity in the process, behaviour & price of technology there must be sufficient
measures to propagate it to the counties access the world. Thus free flow of
technology among nations and states is another benefit of globalization.
Globalization also makes sure that the manpower skills can be utilized effectively.
Once we have integrated the economy there happens a free flow of information,
labour, resources from one nation to another thereby reducing the distances &
narrowing the gaps. The labour forces learn to work in an environment that
belongs to foreign culture. Thus the world acts as a global village where everyone
can work as per international rules & scenarios.
Promotion of globalization has been prioritized in the Indian economy. Restrictions of
imports Exports, education, technical collaborations etc. have been lifted up. Bans on
certain restricted goods have also been taken off. This has provided a way towards
broadening of activities among the two nations. Foreign investment has been
encouraged & certain policies with effect to it have been framed. Direct foreign
investment has been invited by the government of India for better functioning. Now
technicians can move across the world to solve the problems of their clients. No
permission is needed for them to hire & take their services. Thus globalization has
eased the working among the technicians & businessmen. It has helped a lot in
generating effective development policy.?.
Privatization
Privatization (sometimes privatization, denationalization, or, especially in India,
disinvestment) is the process of transferring property, from public ownership to private
ownership and/or transferring the management of a service or activity from the
government to the private sector. The opposite process is nationalization or
municipalization.
Privatization is frequently associated with industrial or service-oriented enterprises,
such as mining, manufacturing or power generation, but it can also apply to any asset,
such as land, roads, or even rights to water. In recent years, government services such
as health, sanitation, and education have been particularly targeted for privatization in
many countries. In theory, privatization helps establish a "free market", as well as
fostering capitalist competition, which its supporters argue will give the public greater
choice at a competitive price. Conversely, socialists view privatization negatively,
arguing that entrusting private businesses with control of essential services reduces
the public's control over them and leads to excessive cost cutting in order to achieve
profit and a resulting poor quality service.
Types of privatization
In terms of outright privatization (that is, sale of a business), there are three major
types:
share issue privatization (SIP) - selling shares on the stock market
asset sale privatization - selling the entire firm to an investor, usually by auction
voucher privatization - shares of ownership are distributed to all citizens, usually
for free or at a very low price.
Share issue privatization is the most common type. Voucher privatization has mainly
been used in the transition economies of Eastern Europe - countries such as Russia,
Poland and the Czech Republic. Share issue can broaden and deepen domestic
capital markets, boosting liquidity and potentially economic growth, but if the capital
markets are insufficiently developed it may be difficult to find enough buyers, and
transaction costs (eg underpricing required) may be higher. Risks (political risk,
currency risk) are also higher, deterring foreign portfolio investors. As a result, asset
sales are more common in developing countries.
Arguments in Favour of privatization
Advocates of privatization argue that governments run businesses poorly for the
following reasons:
Performance. The government may only be interested in improving a company in
cases when the performance of the company becomes politically sensitive.
Improvements. Conversely, the government may put off improvements due to
political sensitivity — even in cases of companies that are run well.
Corruption. The company may become prone to corruption; company employees
may be selected for political reasons rather than business ones.
Goals. The government may seek to run a company for social goals rather than
business ones (this is conversely seen as a positive effect by critics of
privatization).
Capital. It is claimed by supporters of privatization, that privately-held companies
can more easily raise capital in the financial markets than publicly-owned ones.
Unprofitable companies survive. Governments may "bail out" poorly run
businesses with money when, economically, it may be better to let the business
fold.
Unprofitable units survive. Parts of a business which persistently lose money are
more likely to be shut down in a private business.
Political influence. Nationalized industries can be prone to interference from
politicians for political or populist reasons. Examples include making an industry
buy supplies from local producers (when that may be more expensive than buying
from abroad), forcing an industry to freeze its prices/fares to satisfy the electorate
or control inflation, increasing its staffing to reduce unemployment, or moving its
operations to marginal constituencies. It is argued that such measures can cause
nationalized industries to become uneconomic and uncompetitive.
Privatization Goals
It reduces the fiscal burden of the State by relieving it of the losses of the SOEs
and reducing the size of the bureaucracy.
Privatization of SOEs enables the govt. to mop up funds.
Privatisation helps the State to trim the size of the administrative machinery.
It enables the government to concentrate more on the essential State functions.
Privatization helps accelerate the pace of economic development as it attracts
more resources from the private sector for development.
It may result in better management of the enterprise.
Privatization may also encourage entrepreneurship.
Liberalization, Globalization & Privatization are the economic reforms aiming
towards the regulation of the basic activities related to opening new arenas,
providing better control & defining uniformity in operations across the world. It
helps the countries to achieve higher growth rates, employment & self reliance.
Distinguish between free trade and protection.
Distinguish between free trade and protection. Discuss the merits
and demerits of free trade vs. protection for a developing country like India.
Answer. External Sector Management refers to Policies adopted by a country with
reference exports and imports. It can be free trade policy or restricted trade policy. A
restricted trade policy seeks to maintain a system of trade restrictions with the objective
of protecting domestic economy from competition of foreign products. A free trade
policy involves complete absence of tariffs, quotas, exchange restrictions etc.
Thus, external sector management strongly influences the direction, trend and growth
of foreign trade of country. This is an important economic instrument, which can be
used by a, country, with suitable modifications from time to time, to achieve its longterm
objectives.?
Trade policy is alternatively called as (EXIM) Export- Import policy. In India Trade
policy is a policy, which is adopted by a country with references to exports and imports.
FREE TRADE POLICY: A policy that doesn’t impose any constraints on the
interchange of goods and services between separate countries. A policy includes full
absence of tariffs, quotas; interchange constraints on production taxes and subsidies.
Case in favour of Free Trade
Most arguments for free trade have been built on the grounds of efficiency, economic
growth and welfare. According to Samuelson "trade promotes a mutually profitable
regional division of labour, greatly enhances the potential real national product of all
nations, and makes possible higher standards of living all over the globe"
Free trade policy is economically advantageous to the participating countries since it
maximizes their social product. Free trade is supposed to be carried out under the
conditions of free competition in which price mechanism "… automatically ensures that
each country, specialized in the production of those goods, and those goods which it
can produce more cheaply, talking account of transport (cost)". Given the real
resources of a country, if it specializes in the production of goods in which it is
relatively more efficient, or its cost of production is comparatively lower, its total
national product will be much larger than if it spreads its limited resources over the
production of all goods, irrespective of the cost of production. With specialization in the
efficient sectors, a larger national product can be achieved; a larger exportable surplus
can be generated; and a larger volume of goods & services of the country’s
requirements can be imported from other countries at lower prices. This increases total
availability of goods and services and raises the standard of living of the people.
Possibly the mist attractive argument in favour of free trade is that ‘it lowers the prices
of imported goods’. Moreover, free trade in international market has an ‘educative
effect’ in the sense that it compels countries to enhance their efficiency through better
management of resources and quick adoption of improved and more efficient
techniques of production.
In theoretical terms, free trade offers various MERITS in realistically below developed
countries where as DEMERITS in such a system of international trade. As an
inference, international economy survives a difficult period of protective trade policies.
Trade policies may be outward looking or inward looking.
(i) Outward looking: An outward looking trade policy encourages not only free trade
but also the free movement of capital, workers enterprises and students, a welcome to
the (MNC) organizations and an open system of communications
Primary outward Policies: Goaled at encouraging export of raw material and
agricultural.
Secondary outward Policies: Goaled at promoting manufactured exports
(ii) Inward looking: An inward looking true policy stresses the requirement for a
Country to its own style of development and to be the master of its own fate with
limitations on the movement of goods, services and people in and out of the Country.
Primary inward policies: Opinion is to get agricultural self-sufficiency
Secondary inward policies: By import substitution opinion is attaining
manufactured commodity self-sufficiency.
Merits of FREE trade
If free trade between nations did not exist, then economies would stagnate.
Free trade allows nations to flourish at what goods and/or services they excel at
providing, fits into this scenario like a hand to a glove.
Free trade gives consumers more, and cheaper, choices.
It also helps to facilitate co-operation between the weaker developing countries
and help the South build a joint economic perspective.
Demerits
FREE trade affects every country in the world and every section of society within
those countries.
Industries face stiff competition from foreign companies.
Small scale industries, which already have very less resources have to face high
competition.
Protection
For some political reasons most countries had adopted a projectionist policy. Perhaps
the world market never provided the perfect conditions required for free trade on a
global scale. For the purpose of regulating foreign trade or protecting a country’s
interest in foreign trade, tariff is one of the most important tools.
Merits
1. A protective trade policy by a country seeks to maintain a system of trade limitations
with the opinion of protecting the domestic economy from the competition of foreign
products.
2. During the decades of 50, 60 and 70 and some enhanced in 80. Protective trade
policy constituted a significant plank (part) in the commercial policies of below
developed countries.
3. It helps in development of the industries in the country.
4. Local industries don't have to face high competition from the foreign countries.
DEMERITS
Many undeveloped countries continue to have protective trade policies.
The product prices are high due to protective trade policies.
Consumers have to feel the heat of protective trade policies.
The economy can't grow at high pace.
It also discourages foreign investments.
In a developing country like India, we cannot have a full-fledged free trade policy due
to the following reasons:
Several industries in a developing country like India are in the initial stage of
industrial growth, most industries are in their infancy. In infant industries are
exposed to competition with the industries of developed nations, which have
achieved a high level of technical efficiency , economies of scale and financial
strength, they would run the risk of dying out in their infancy. The infant industries
of developing economy need protection.
Promotion of employment: Tariff protection is also suggested as an effective
remedy to the serious unemployment problem in underdeveloped countries.
Imposition of tariffs on imports directly competing with the domestic products helps
to expand employment opportunities in the import-competing industries by
securing the domestic market.
and demerits of free trade vs. protection for a developing country like India.
Answer. External Sector Management refers to Policies adopted by a country with
reference exports and imports. It can be free trade policy or restricted trade policy. A
restricted trade policy seeks to maintain a system of trade restrictions with the objective
of protecting domestic economy from competition of foreign products. A free trade
policy involves complete absence of tariffs, quotas, exchange restrictions etc.
Thus, external sector management strongly influences the direction, trend and growth
of foreign trade of country. This is an important economic instrument, which can be
used by a, country, with suitable modifications from time to time, to achieve its longterm
objectives.?
Trade policy is alternatively called as (EXIM) Export- Import policy. In India Trade
policy is a policy, which is adopted by a country with references to exports and imports.
FREE TRADE POLICY: A policy that doesn’t impose any constraints on the
interchange of goods and services between separate countries. A policy includes full
absence of tariffs, quotas; interchange constraints on production taxes and subsidies.
Case in favour of Free Trade
Most arguments for free trade have been built on the grounds of efficiency, economic
growth and welfare. According to Samuelson "trade promotes a mutually profitable
regional division of labour, greatly enhances the potential real national product of all
nations, and makes possible higher standards of living all over the globe"
Free trade policy is economically advantageous to the participating countries since it
maximizes their social product. Free trade is supposed to be carried out under the
conditions of free competition in which price mechanism "… automatically ensures that
each country, specialized in the production of those goods, and those goods which it
can produce more cheaply, talking account of transport (cost)". Given the real
resources of a country, if it specializes in the production of goods in which it is
relatively more efficient, or its cost of production is comparatively lower, its total
national product will be much larger than if it spreads its limited resources over the
production of all goods, irrespective of the cost of production. With specialization in the
efficient sectors, a larger national product can be achieved; a larger exportable surplus
can be generated; and a larger volume of goods & services of the country’s
requirements can be imported from other countries at lower prices. This increases total
availability of goods and services and raises the standard of living of the people.
Possibly the mist attractive argument in favour of free trade is that ‘it lowers the prices
of imported goods’. Moreover, free trade in international market has an ‘educative
effect’ in the sense that it compels countries to enhance their efficiency through better
management of resources and quick adoption of improved and more efficient
techniques of production.
In theoretical terms, free trade offers various MERITS in realistically below developed
countries where as DEMERITS in such a system of international trade. As an
inference, international economy survives a difficult period of protective trade policies.
Trade policies may be outward looking or inward looking.
(i) Outward looking: An outward looking trade policy encourages not only free trade
but also the free movement of capital, workers enterprises and students, a welcome to
the (MNC) organizations and an open system of communications
Primary outward Policies: Goaled at encouraging export of raw material and
agricultural.
Secondary outward Policies: Goaled at promoting manufactured exports
(ii) Inward looking: An inward looking true policy stresses the requirement for a
Country to its own style of development and to be the master of its own fate with
limitations on the movement of goods, services and people in and out of the Country.
Primary inward policies: Opinion is to get agricultural self-sufficiency
Secondary inward policies: By import substitution opinion is attaining
manufactured commodity self-sufficiency.
Merits of FREE trade
If free trade between nations did not exist, then economies would stagnate.
Free trade allows nations to flourish at what goods and/or services they excel at
providing, fits into this scenario like a hand to a glove.
Free trade gives consumers more, and cheaper, choices.
It also helps to facilitate co-operation between the weaker developing countries
and help the South build a joint economic perspective.
Demerits
FREE trade affects every country in the world and every section of society within
those countries.
Industries face stiff competition from foreign companies.
Small scale industries, which already have very less resources have to face high
competition.
Protection
For some political reasons most countries had adopted a projectionist policy. Perhaps
the world market never provided the perfect conditions required for free trade on a
global scale. For the purpose of regulating foreign trade or protecting a country’s
interest in foreign trade, tariff is one of the most important tools.
Merits
1. A protective trade policy by a country seeks to maintain a system of trade limitations
with the opinion of protecting the domestic economy from the competition of foreign
products.
2. During the decades of 50, 60 and 70 and some enhanced in 80. Protective trade
policy constituted a significant plank (part) in the commercial policies of below
developed countries.
3. It helps in development of the industries in the country.
4. Local industries don't have to face high competition from the foreign countries.
DEMERITS
Many undeveloped countries continue to have protective trade policies.
The product prices are high due to protective trade policies.
Consumers have to feel the heat of protective trade policies.
The economy can't grow at high pace.
It also discourages foreign investments.
In a developing country like India, we cannot have a full-fledged free trade policy due
to the following reasons:
Several industries in a developing country like India are in the initial stage of
industrial growth, most industries are in their infancy. In infant industries are
exposed to competition with the industries of developed nations, which have
achieved a high level of technical efficiency , economies of scale and financial
strength, they would run the risk of dying out in their infancy. The infant industries
of developing economy need protection.
Promotion of employment: Tariff protection is also suggested as an effective
remedy to the serious unemployment problem in underdeveloped countries.
Imposition of tariffs on imports directly competing with the domestic products helps
to expand employment opportunities in the import-competing industries by
securing the domestic market.
"All modern economies have certain economic problems to deal
"All modern economies have certain economic problems to deal
with". Examine and illustrate the statement.
Answer. Most economic problems arise due to limited resources and unlimited wants.
The problem of economy is how to use the relatively limited resources with alternative
uses in face of unlimited wants. Society has to decide which commodities to make. For
example, do we make missiles or hospitals? We have to decide how to make those
commodities. Do we employ robot arms or workers? Who is going to use the goods that
are eventually made? Do we build a sports hall in Wigan or Woking? Seven general
problems that are faced by all economies, whether they are capitalist, socialist, or
communist, and mixed are listed below:
What commodities are being produced and in what quantities? This question
arises directly out of the scarcity of resources. It concerns the allocation of scarce
resources among alternative uses.
By what methods are these commodities produced? This question arises
because there is almost more than one technically possible way in which goods
and services can be produced. Agriculture goods, example, can be produced by
farming a small quantity of land very intensively, using large quantities of fertilizer,
labour and machinery, or farming a large quantity of land extensively, using only
small quantities of fertilizer, labour and machinery. Both methods can be used to
produce the same quantity of some good; one method is frugal with land and uses
larger quantities of other resources, whereas the other method uses large
quantities of land but is frugal in its use of the other resources. The same is true
with manufactured goods.
How is society’s output of goods and services divided among its members?
Why can some individuals and groups consume a large share of the national
output while other individuals and groups can consume only a small share? The
superficial answer is because the former earn large incomes and the latter earn
small incomes? Economists wish to know why any particular division occurs in a
free- market society and what forces, including government interventions, can
cause it to change.
Such questions have been of great concern to economists since the beginning of
the subject. These questions are the subject of Theory of Distribution.
How efficient is the society’s production and distribution? This question quite
naturally arises out of the 1, 2, and 3. Having asked what quantities of goods are
produce, how they are produced and to whom they are distributed, it is natural to
go on to ask whether the production and distribution decisions are efficient.
The concept of efficiency is quite distinct from the concept of justice. The latter is a
normative concept, and a just distribution of the national product would be one
that our value judgements told us was a good or a desirable distribution. Efficiency
and inefficiency are positive concepts. Production is said to be inefficient is it
would be possible to produce more of at least one commodity without
simultaneously producing less of any other – by merely reallocating resources.
The commodities that are produced are said to be inefficiently distributed if it
would be possible to redistribute them among the individuals in the society and
make at least one person better off without simultaneously making anyone worse
off. Questions about the efficiency of production and allocation belong to the
branch of economic theory called welfare economics.
Are the country’s resources being fully utilized, or some of them lying idle?
We have already noted that the existing resources of any country are not sufficient
to satisfy even the most pressing needs of all the individual consumer. Surely if
resources are so scarce that there are not enough of them to produce all of those
commodities which are urgently required, there can be no question of leaving idle
any of the resources that are available. Yet one of the most disturbing
characteristics of free - market economies is that such waste sometimes occurs.
When this happens the resources are said to be involuntarily unemployed (or,
more simply, unemployed). Unemployed workers would like to have jobs, the
factories in which they could work are available. The managers and owners would
like to be able to operate their factories, raw materials are available in abundance,
and the goods that could be produced by these resources are urgently required by
individuals in the community. Yet, for some reason; nothing happens: the workers
stay unemployed, the factories lie idle and the raw materials remain unused. The
cost of such periods of unemployment is felt both in terms of the goods and
services that could have been produced by the idle resources, and in terms of the
effects on people who are unable to find work for prolonged periods of time.
Why do market society's experiences such periods of involuntary unemployment
which are unwanted by virtually everyone in the society, and can such
unemployment be prevented from occurring in the future? These questions have
long concerned economists, and have been studied under the heading Trade
cycle Theory
Is the purchasing power of money and savings constant, or is it being
eroded because of inflation? The world's economies have often experienced
periods of prolonged and rapid changes in price levels. Over the long swing of
history, price levels have sometimes risen and sometimes fallen. In recent
decades, however, the course of prices has almost always been upward. The
1970s, 1980s and 1990s saw a period of accelerating inflation in Europe, the
United States and in most of the world, more particularly in the less developed
countries.
Inflation reduces the purchasing power of money and savings. It is closely related
to the amount of money in the economy. ,Money is the invention of human beings,
not of nature, and the amount in existence can be controlled by them. Economists
ask many questions about the causes and consequences of changes in the
quantity of money and the effects of such changes on the price level. They also
ask about other causes of inflation.
Is the economy's capacity to produce goods and services growing from year
to year or is it remaining static? Why the capacity to produce grows rapidly in
some economies, slowly in others, and not at all in yet others is a critical problem
which has exercised the minds of some of the best economists since the time of
Adam Smith. Although a certain amount is now known in this field, a great deal
remains to be discovered. Problems of this type are topics in the THEORTY OF
ECONOMIC GROWTH.
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