Elinor Ostrom (born 1933) is the Arthur F. Bentley Professor of Political Science, and Co-Director of the Workshop in Political Theory and Policy Analysis at Indiana University Bloomington. She is also the Founding Director of the Center for the Study of Institutional Diversity at Arizona State University. Considered an expert on collective action, trust, and the commons, her institutional approach to public policy. Ostrom is considered one of the leading scholars in the study of common pool resources. In particular, Ostrom's work emphasizes how humans and ecosystems interact to provide for long run sustainable resource yields. Forests, fisheries, oil fields, grazing lands, and irrigation systems, among others, all exhibit the characteristics of common pool resources and Ostrom's work has highlighted how humans have created diverse institutional arrangements over natural resources for thousands of years that have prevented ecosystem collapse
Oliver Eaton Williamson is a prominent author in the area of transaction cost economics. His focus on the costs of transactions have led Williamson to distinguish between repeated case-by-case bargaining on the one hand and relationship-specific contracts on the other. Oliver Williamson is credited with the development of the term "Information Impactedness", which applies in situations where it is difficult to ascertain what the costs to information are. This condition exists "mainly because of uncertainty and opportunism, though bounded rationality is involved as well. It exists when true underlying circumstances relevant to the transaction, or related set of transactions, are known to one or more parties but cannot be costlessly discerned by or displayed for others."
Monday, October 12, 2009
Thursday, June 18, 2009
Deflation again in India after three decades !!!!!!!!!!
The Theory…..!
Deflation is a progressive reduction in the price level (Oxford). Deflation occurs when the annual inflation rate falls below zero percent, resulting in an increase in the real value of money — a negative inflation rate. This should not be confused with disinflation, a slow-down in the inflation rate (i.e. when the inflation decreases, but still remains positive). Inflation reduces the real value of money over time; conversely, deflation increases the real value of money.This would make real interest rates exceed nominal interest rates, which might make it impossible to lower nominal interest during a slump sufficiently to make real investment appear profitable. This is known as the “liquidity trap”. That is deflation is related to risk: where the risk-adjusted return on assets drops to negative, investors and buyers will hoard currency rather than invest it, even in the most solid of securities.
Deflation is caused by a shift in the supply and demand curve for goods and interest, particularly a fall in the aggregate level of demand. That is, there is a fall in how much the whole economy is willing to buy, and the going price for goods. Because the price of goods is falling, consumers have an incentive to delay purchases and consumption until prices fall further, which in turn reduces overall economic activity - contributing to the deflationary spiral. Deflation is generally regarded negatively, as it causes a transfer of wealth from borrowers and holders of illiquid assets, to the benefit of savers and of holders of liquid assets and currency. In this sense it is the opposite of inflation (or in the extreme, hyperinflation), which is a tax on currency holders and lenders (savers) in favor of borrowers and short term consumption. In modern economies, deflation is caused by a collapse in demand (usually brought on by high interest rates), and is associated with recession and (more rarely) long term economic depressions. Thus deflation can occur because of a combination of four factors:
1. The supply of money goes down.
2. The supply of other goods goes up.
3. Demand for money goes up.
4. Demand for other goods goes down
Deflation generally occurs when the supply of goods rises faster than the supply of money, which is consistent with these four factors. These factors explain why the price of some goods increases over time while others decline. Demand falls, and with the falling of demand, there is a fall in prices as a supply glut develops. This becomes a deflationary spiral when prices fall below the costs of financing production. Businesses, unable to make enough profit no matter how low they set prices, are then liquidated. Banks get assets which have fallen dramatically in value since the (mortgage) loan was made, and if they sell those assets, they further glut supply, which only exacerbates the situation.
What is happening in India?
For the first time in over 30 years, the year-on-year inflation strayed into negative territory at minus 1.61 per cent for the week ended June 6. The last time inflation turned negative was in late 1974-early 1975. This was the result of the severe anti-inflation package of July 1974 to compress demand and reduce money supply necessitated by the galloping inflation of the previous 18 months caused by the two poor monsoons of 1972 and 1973, and the first oil shock of October 1973 (The Hindu Business Line).
The major reason for negative inflation was the base effect. High inflation last year always made the rate of price rise look less in the current year.
What is WPI? Why there is a mismatch between WPI and CPI?
The Wholesale Price Index or WPI is the price of a representative basket of wholesale goods. Some countries use the changes in this index to measure inflation in their economies, in particular India – The Indian WPI figure is released every 10 days and influences stock and fixed price markets. The Wholesale Price Index focuses on the price of goods traded between corporations, rather than goods bought by consumers, which is measured by the Consumer Price Index. The purpose of the WPI is to monitor price movements that reflect supply and demand in industry, manufacturing and construction. This helps in analyzing both macroeconomic and microeconomic conditions. There are altogether 435 articles/items in the new series (1993-94 as base) of Whole Sale Price Index (WPI), comprising of 98 primary articles 19 items of “fuel, power, light and lubricants" and 318 manufactured items, making up the sample basket of the 1993-94 Wholesale Price Index series. But this is not the index that affects you. What impacts the ordinary consumers is the Consumer Price Index. Interestingly the various consumer price indices show an increasing trend in India. Why this is so? The point is, if the weightages in the two indices are so different. The major culprit is the price rise in food, which is given a much lower weightage in the WPI than in the CPI. The weightage of food items in the WPI is only 15.4%; in the CPI, it accounts for almost half the index: 47.13%. The effect of soaring prices in food is reflected far less in the WPI than in the CPI. This has single-handedly widened the gap between the two indices. Thus high food prices are still not reflected in the overall rate of inflation since primary articles (which include food) enjoy a weightage of 22.02 per cent in calculating WPI. In the calculation, the Government presumes that the common man spends almost 80 per cent of his wages on manufactured goods and fuel. The Government is busy playing up the low WPI, while the Consumer Price Index (CPI), which actually reflects the burden on the consumer’s pocket, is still very high. When we talk about industrial workers, their wage is in a declining trend because of the decline in WPI and at the same time they have to spend more for their food. This is really a very complex situation that the Reserve Bank of India and the Government is trying very hard to tackle. Moreover, the present situation also throws light that the benefits of the cheap money policy by the RBI and pump priming policy of the government is not reaching the large sections to the economy. In a way it is good to have a deflation situation now that the government can include more proactive policies in the coming national budget.
Definitely the present situation is not the one that the global depression starts feeling in India. In my opinion the present deflationary pressure in India is as expected and it will not sustain long and will recover the economy within two weeks of time. Why because, 1) the government is thinking about the upward rise in fuel prices in the economy, 2) the national budget is coming in two weeks 3) RBI is going to come with even more cheap money policy 4) CPI is still very high in India 5) The changes in the capital market is favorable and 6) the marginal propensity to consume of the majority of the people in India is still very high. This is not the time to get panic.
References and Sources.
1. “The Oxford Dictionary of Economics”, John Black, Oxford University Press, 2008.
2. “Macroeconomic Theory”, Gardner Ackley, The Macmillan Company, 2007.
3. “The Hindu Business Line” Various issues
4. “The Financial Times” Various issues
5. Central Statistical Organization, Govt. of India.
6. Ministry of Finance, Govt. of India.
7. Planning Commission, Govt. of India.
Deflation is a progressive reduction in the price level (Oxford). Deflation occurs when the annual inflation rate falls below zero percent, resulting in an increase in the real value of money — a negative inflation rate. This should not be confused with disinflation, a slow-down in the inflation rate (i.e. when the inflation decreases, but still remains positive). Inflation reduces the real value of money over time; conversely, deflation increases the real value of money.This would make real interest rates exceed nominal interest rates, which might make it impossible to lower nominal interest during a slump sufficiently to make real investment appear profitable. This is known as the “liquidity trap”. That is deflation is related to risk: where the risk-adjusted return on assets drops to negative, investors and buyers will hoard currency rather than invest it, even in the most solid of securities.
Deflation is caused by a shift in the supply and demand curve for goods and interest, particularly a fall in the aggregate level of demand. That is, there is a fall in how much the whole economy is willing to buy, and the going price for goods. Because the price of goods is falling, consumers have an incentive to delay purchases and consumption until prices fall further, which in turn reduces overall economic activity - contributing to the deflationary spiral. Deflation is generally regarded negatively, as it causes a transfer of wealth from borrowers and holders of illiquid assets, to the benefit of savers and of holders of liquid assets and currency. In this sense it is the opposite of inflation (or in the extreme, hyperinflation), which is a tax on currency holders and lenders (savers) in favor of borrowers and short term consumption. In modern economies, deflation is caused by a collapse in demand (usually brought on by high interest rates), and is associated with recession and (more rarely) long term economic depressions. Thus deflation can occur because of a combination of four factors:
1. The supply of money goes down.
2. The supply of other goods goes up.
3. Demand for money goes up.
4. Demand for other goods goes down
Deflation generally occurs when the supply of goods rises faster than the supply of money, which is consistent with these four factors. These factors explain why the price of some goods increases over time while others decline. Demand falls, and with the falling of demand, there is a fall in prices as a supply glut develops. This becomes a deflationary spiral when prices fall below the costs of financing production. Businesses, unable to make enough profit no matter how low they set prices, are then liquidated. Banks get assets which have fallen dramatically in value since the (mortgage) loan was made, and if they sell those assets, they further glut supply, which only exacerbates the situation.
What is happening in India?
For the first time in over 30 years, the year-on-year inflation strayed into negative territory at minus 1.61 per cent for the week ended June 6. The last time inflation turned negative was in late 1974-early 1975. This was the result of the severe anti-inflation package of July 1974 to compress demand and reduce money supply necessitated by the galloping inflation of the previous 18 months caused by the two poor monsoons of 1972 and 1973, and the first oil shock of October 1973 (The Hindu Business Line).
The major reason for negative inflation was the base effect. High inflation last year always made the rate of price rise look less in the current year.
What is WPI? Why there is a mismatch between WPI and CPI?
The Wholesale Price Index or WPI is the price of a representative basket of wholesale goods. Some countries use the changes in this index to measure inflation in their economies, in particular India – The Indian WPI figure is released every 10 days and influences stock and fixed price markets. The Wholesale Price Index focuses on the price of goods traded between corporations, rather than goods bought by consumers, which is measured by the Consumer Price Index. The purpose of the WPI is to monitor price movements that reflect supply and demand in industry, manufacturing and construction. This helps in analyzing both macroeconomic and microeconomic conditions. There are altogether 435 articles/items in the new series (1993-94 as base) of Whole Sale Price Index (WPI), comprising of 98 primary articles 19 items of “fuel, power, light and lubricants" and 318 manufactured items, making up the sample basket of the 1993-94 Wholesale Price Index series. But this is not the index that affects you. What impacts the ordinary consumers is the Consumer Price Index. Interestingly the various consumer price indices show an increasing trend in India. Why this is so? The point is, if the weightages in the two indices are so different. The major culprit is the price rise in food, which is given a much lower weightage in the WPI than in the CPI. The weightage of food items in the WPI is only 15.4%; in the CPI, it accounts for almost half the index: 47.13%. The effect of soaring prices in food is reflected far less in the WPI than in the CPI. This has single-handedly widened the gap between the two indices. Thus high food prices are still not reflected in the overall rate of inflation since primary articles (which include food) enjoy a weightage of 22.02 per cent in calculating WPI. In the calculation, the Government presumes that the common man spends almost 80 per cent of his wages on manufactured goods and fuel. The Government is busy playing up the low WPI, while the Consumer Price Index (CPI), which actually reflects the burden on the consumer’s pocket, is still very high. When we talk about industrial workers, their wage is in a declining trend because of the decline in WPI and at the same time they have to spend more for their food. This is really a very complex situation that the Reserve Bank of India and the Government is trying very hard to tackle. Moreover, the present situation also throws light that the benefits of the cheap money policy by the RBI and pump priming policy of the government is not reaching the large sections to the economy. In a way it is good to have a deflation situation now that the government can include more proactive policies in the coming national budget.
Definitely the present situation is not the one that the global depression starts feeling in India. In my opinion the present deflationary pressure in India is as expected and it will not sustain long and will recover the economy within two weeks of time. Why because, 1) the government is thinking about the upward rise in fuel prices in the economy, 2) the national budget is coming in two weeks 3) RBI is going to come with even more cheap money policy 4) CPI is still very high in India 5) The changes in the capital market is favorable and 6) the marginal propensity to consume of the majority of the people in India is still very high. This is not the time to get panic.
References and Sources.
1. “The Oxford Dictionary of Economics”, John Black, Oxford University Press, 2008.
2. “Macroeconomic Theory”, Gardner Ackley, The Macmillan Company, 2007.
3. “The Hindu Business Line” Various issues
4. “The Financial Times” Various issues
5. Central Statistical Organization, Govt. of India.
6. Ministry of Finance, Govt. of India.
7. Planning Commission, Govt. of India.
Tuesday, June 16, 2009
Resoruce from Moon and Energy Security of India
Development needs of developing countries have been recognized globally. Such development process will necessitate consumption of higher levels of energy. Energy is the prime mover of economic growth. Availability of energy with required quality of supply is not only key to sustainable development, but also the commercial energy has a direct impact and influence on the quality of service in the fields of education, health and, in fact, even food security. Inadequacy of energy supply would obviously affect very adversely these vital and essential requirements of any society. India’s per capita consumption of energy has been quite low, despite the fact that India is the sixth largest electricity market in terms of power generation. Per capita electricity consumption in India is only 615 Kwhr per year as compared to world average of 2516 Kwhr and 1585 Kwhr in China.
Over a period of time, when economy grows, industrial sector is bound to increase at a faster pace and thus with the change in sectoral composition, demand of electricity would grow at much faster rate. As noted economist Samuelson has said that ‘choices create its own preferences’. This is true in the context of Indian energy sector as well. Obviously, meeting such huge energy needs would call for exploitation of all available energy resources. Continued use of fossil fuels for meeting the energy needs has raised concerns about climate change and particularly global warming across the world. Given the fluctuation and volatility in oil prices and concentration of most of the world oil and gas resources in few countries, the depletion of natural resources like coal, accentuated the hunt for new energy sources.
There may be an opportunity for lunar resources to play a role in the energy industry here on Earth. Power generation is a vast and growing market. Energy is a product that may legitimately be worth bringing back to the Earth's surface from the Moon. A NASA report concluded that, for the energy needs of the next century, we need to consider two alternatives enabled by a lunar outpost: solar energy collected on the lunar surface and beamed back to Earth via microwaves, and the return to Earth of a light isotope of helium, He-3. Both of these options would largely avoid the biggest problems of energy generation here on Earth: pollution, acid rain, ozone generation, carbon dioxide production with its potential for global warming, and large operations with highly radioactive fuels.
"Just 25 tonnes of helium, which can be transported on a space shuttle, is enough to provide electricity for the US for one full year," Lawrence Taylor, director of the US Planetary Geosciences Institute, Department of Earth and Planetary Sciences. Helium 3 is deposited on the lunar surface by solar winds and would have to be extracted from moon soil and rocks. To extract helium 3 gas the rocks have to be heated above 1,400 degs F. Some 200 million tonnes of lunar soil would produce one tonne of helium
Millions of dollars being spent in space missions to the moon is a strategic investment which will not only reap unimaginable benefits in the future, but may prove as a lifeline for the country to satisfy the needs of the world’s second largest population with limited natural resources. India’s energy sources at the present rate of consumption, which is nearly 20 times less than the developed countries, will only last for half a century.
Over a period of time, when economy grows, industrial sector is bound to increase at a faster pace and thus with the change in sectoral composition, demand of electricity would grow at much faster rate. As noted economist Samuelson has said that ‘choices create its own preferences’. This is true in the context of Indian energy sector as well. Obviously, meeting such huge energy needs would call for exploitation of all available energy resources. Continued use of fossil fuels for meeting the energy needs has raised concerns about climate change and particularly global warming across the world. Given the fluctuation and volatility in oil prices and concentration of most of the world oil and gas resources in few countries, the depletion of natural resources like coal, accentuated the hunt for new energy sources.
There may be an opportunity for lunar resources to play a role in the energy industry here on Earth. Power generation is a vast and growing market. Energy is a product that may legitimately be worth bringing back to the Earth's surface from the Moon. A NASA report concluded that, for the energy needs of the next century, we need to consider two alternatives enabled by a lunar outpost: solar energy collected on the lunar surface and beamed back to Earth via microwaves, and the return to Earth of a light isotope of helium, He-3. Both of these options would largely avoid the biggest problems of energy generation here on Earth: pollution, acid rain, ozone generation, carbon dioxide production with its potential for global warming, and large operations with highly radioactive fuels.
"Just 25 tonnes of helium, which can be transported on a space shuttle, is enough to provide electricity for the US for one full year," Lawrence Taylor, director of the US Planetary Geosciences Institute, Department of Earth and Planetary Sciences. Helium 3 is deposited on the lunar surface by solar winds and would have to be extracted from moon soil and rocks. To extract helium 3 gas the rocks have to be heated above 1,400 degs F. Some 200 million tonnes of lunar soil would produce one tonne of helium
Millions of dollars being spent in space missions to the moon is a strategic investment which will not only reap unimaginable benefits in the future, but may prove as a lifeline for the country to satisfy the needs of the world’s second largest population with limited natural resources. India’s energy sources at the present rate of consumption, which is nearly 20 times less than the developed countries, will only last for half a century.
Wednesday, May 13, 2009
The Phenomenon of 'Deflation' in India
Deflation is a general decline in prices, which is often caused by a reduction in the supply of money or credit. Everywhere one looks, prices are falling. The major reason for deflation is the decline the consumer spending due to a reduction of general demand in the economy. Deflation can also come due to high base effect, which is an impact of high inflation last year on the current level of the rate of price rise. The real danger to the economy is that due to the large negative demand shock, deflationary forces get entrenched, leading to a vicious cycle of falling output and declining prices.
Deflation hurts the economy much more than inflation. Consumers postpone expenditure, because they think prices will be cheaper going forward. This affects firms, who then scale back production and investment plans, leading to job losses, further affecting purchasing power and demand, which leads to a downward spiral in the economy. At the same time a deflationary environment, those sectors with a high proportion of variable costs are likely to benefit from falling input prices.
Monetary policy, although it has been loosened considerably, still has considerable room left to ease. Monetary policy alone, however, will not be enough. The onus will then have to fall on fiscal policy. In particular, there needs to be additional stimulus. But at the same time we have to be cautious about the possible ‘crowding out’ phenomenon in the economy.
The slowdown in the economy translates into lower wages and job insecurity further dampens consumer confidence setting off another deflationary cycle. It takes years for an economy to recover when it is caught in a prolonged downward spiral. Is India about to enter this cyclical downturn?
The current deflation is a temporary phenomenon, mostly because of the base effect and the impacts of external shocks. The WPI and CPI are already started showing an upward trend. After the general elections about 20,000 crores of rupees is being pushed to the economy. Consumption demand is expected to receive a boost once the lagged effects of the aggressive policy responses by the Government and the RBI start unfolding. The rightly intervention of RBI through cheapening of credit and reduction of deposit rates will help to pump more money in to the economy. This will generate consumer demand and thereby help to create more output, employment and income in the economy.
Deflation hurts the economy much more than inflation. Consumers postpone expenditure, because they think prices will be cheaper going forward. This affects firms, who then scale back production and investment plans, leading to job losses, further affecting purchasing power and demand, which leads to a downward spiral in the economy. At the same time a deflationary environment, those sectors with a high proportion of variable costs are likely to benefit from falling input prices.
Monetary policy, although it has been loosened considerably, still has considerable room left to ease. Monetary policy alone, however, will not be enough. The onus will then have to fall on fiscal policy. In particular, there needs to be additional stimulus. But at the same time we have to be cautious about the possible ‘crowding out’ phenomenon in the economy.
The slowdown in the economy translates into lower wages and job insecurity further dampens consumer confidence setting off another deflationary cycle. It takes years for an economy to recover when it is caught in a prolonged downward spiral. Is India about to enter this cyclical downturn?
The current deflation is a temporary phenomenon, mostly because of the base effect and the impacts of external shocks. The WPI and CPI are already started showing an upward trend. After the general elections about 20,000 crores of rupees is being pushed to the economy. Consumption demand is expected to receive a boost once the lagged effects of the aggressive policy responses by the Government and the RBI start unfolding. The rightly intervention of RBI through cheapening of credit and reduction of deposit rates will help to pump more money in to the economy. This will generate consumer demand and thereby help to create more output, employment and income in the economy.
Monday, January 19, 2009
Making Neo Liberalism Work for Poor in India.
The pro-liberalizers predicted two things: first, a dramatic breakthrough in growth rates, and second, a steady decline in the fiscal deficit. The neoliberals always insist on cutting the fiscal deficit because they want to reduce capital expenditure by the state. This has been a big mistake in the Indian context. Around the world, the reality is that neoliberalism does not bring an expansion of high productivity-and therefore high-wage-jobs. The farm crisis in India is acute. Under the dictums of neoliberalism, sometimes called globalization, India has opened its agricultural sector to foreign, mostly U.S. imports. Grains and cotton come into India at below market prices. Total capital formation in agriculture continues to stagnate in India in real terms, with sharply reducing public investment not being compensated adequately by rising private investment (Utsa Patnaik, 2006).
The adoption of newer terminology such as inclusive growth is basically an attempt to democratic deceit to facilitate the survival and extension of new-liberal policies by stealth. Social exclusion can only increase in such a framework, especially in the sense of marginal, uncertain and occasional inclusion in the market prices on unfair terms, leading to further worsening of income distribution (Alternative Economic Survey 2007-08)
The imbalance between the structure of overall demand with a large tilt in favor of goods and the aggregate supply tilting in favor of services is widening as the services sector continues to increase both its relative and absolute share. It is the supply side and the marketing machinations under the grab of free markets that are pushing up the prices.
India now uses more of imported manufactured goods than the domestically manufactured goods and the export of manufactured goods from India fails to act as a compensating factor. India seems to be becoming the accounts office of the world. The post liberalization years the country has witnessed an investment growth asymmetry that flows from a combination of services intensive growth pattern and a manufacturing intensive investment pattern.
In a country in which the people controlling the corporate sector number under one percent of the population but control a share of GDP larger than that contributed by the entire agricultural sector supporting about 60% of the population. 53% of Indian children under five (about 67 million) in India are without access to basic healthcare. According to UNICEF, out of 9.7 million children who die before the age of five, as many as 21% are in India. In terms of all the manor conventional development indicators, India ranks lower than the average for the Third World countries taken as a whole (Human Development Report 2007-08)
If we are to get the best out of globalisation and avoid the worst, we must learn how to govern better at the local and national levels, and to govern better together at the international level
The adoption of newer terminology such as inclusive growth is basically an attempt to democratic deceit to facilitate the survival and extension of new-liberal policies by stealth. Social exclusion can only increase in such a framework, especially in the sense of marginal, uncertain and occasional inclusion in the market prices on unfair terms, leading to further worsening of income distribution (Alternative Economic Survey 2007-08)
The imbalance between the structure of overall demand with a large tilt in favor of goods and the aggregate supply tilting in favor of services is widening as the services sector continues to increase both its relative and absolute share. It is the supply side and the marketing machinations under the grab of free markets that are pushing up the prices.
India now uses more of imported manufactured goods than the domestically manufactured goods and the export of manufactured goods from India fails to act as a compensating factor. India seems to be becoming the accounts office of the world. The post liberalization years the country has witnessed an investment growth asymmetry that flows from a combination of services intensive growth pattern and a manufacturing intensive investment pattern.
In a country in which the people controlling the corporate sector number under one percent of the population but control a share of GDP larger than that contributed by the entire agricultural sector supporting about 60% of the population. 53% of Indian children under five (about 67 million) in India are without access to basic healthcare. According to UNICEF, out of 9.7 million children who die before the age of five, as many as 21% are in India. In terms of all the manor conventional development indicators, India ranks lower than the average for the Third World countries taken as a whole (Human Development Report 2007-08)
If we are to get the best out of globalisation and avoid the worst, we must learn how to govern better at the local and national levels, and to govern better together at the international level
Wednesday, November 19, 2008
Keynes once said "In the long run we are all dead"...Is it true in the wake of present global financial crisis?
Keynes was among the most important economists of the 20th century. The work that really cemented his place in economic history, though, was 1936's titled General Theory of Employment, Interest and Money. Most contemporary economists subscribed to the neoclassical theory that held that the problems of unemployment were best dealt with by leaving it to the market to reduce wage levels to a point at which employers would start to take people on again. Keynes disputed the idea that recessions were self-correcting. He made the argument that it was quite possible for an economy to be in equilibrium with less than full employment, and that high unemployment would depress demand, thus making an escape from recession difficult and slow. In his view, it was up to the government to stimulate demand by enacting public spending projects that would increase employment and by reducing taxation to encourage people to spend more.
Keynes's approach began to appear limited in relatively uncompetitive economies. A labour shortage and an excess of demand triggered stagflation – the combination of inflation with economic stagnation – and traditional Keynesian remedies seemed unable to control it.
Deep structural causes based on free market principles and an addiction to economic growth underpin the global economic crisis. How do we explain these causes - and does the renewed fixation with the policies of John Maynard Keynes offer an adequate solution? There is much discussion of short-term causes of the financial meltdown with a focus on credit derivatives, high-risk investments and excess deregulation. The use of complex terminology in highlighting short-term policy problems will inevitably mask the deeper crisis facing a global economic system based on the unbridled profit motive. So what next? In previous eras it has taken war, revolution or prolonged recession before political leaders established new institutional structures.
Rediscovering the virtues of Keynes is an indication of the gravity of the economic crisis. The free market strategy behind the Raegan/Thatcher revolution has been abandoned – we are now in a new world. However, Keynes was never able to translate his solutions from national level to international action. In the face of the current financial crisis, government after government has moved towards more Keynesian solutions to economic problems. It was responsible to boost spending with the aim of speeding up economic activity, even if borrowing had to increase to do so. John Maynard Keynes once said that "in the long run, we are all dead";
Today's economic circumstances do seem to fit a more Keynesian solution. Inflation is likely to stay low in the coming downturn, meaning that the upward pressure of increasing demand is likely to be manageable; and critics who say that public spending often takes too long to counter the economic problems they were instituted to solve can be answered with the point that this is likely to be a fairly long recession. In that environment, the government seems to have decided that the time is ripe for a Keynesian renaissance. Keynes's approach is most effective at times when inflationary pressures are not particularly high – like now. Keynes proposed that governments should systematically intervene in the economy by boosting the demand for goods and services – spending money on public works and cutting interest rates to make investment more attractive.
In the economic sphere, it is clear that the expansion over the past 15 years has produced a highly unstable situation—accelerated economic growth in some regions, albeit on unstable foundations, as in the case of China, coupled with far-reaching changes in the economic structure of the most advanced capitalist countries. The rise of American capitalism in the twentieth century was associated above all with the dominance of its manufacturing industry. By the end of the twentieth century, however, the finance, insurance and real estate (FIRE) sector comprised 20 percent of the US economy, compared to 14.5 percent for manufacturing. In his book American Theocracy, Kevin Phillips writes: “Financial-sector profits shot past those of manufacturing in the mid-1990s, thereafter moving farther ahead. By 2004 financial firms boasted nearly 40 percent of all US profits. The financial sector commanded a quarter of America’s stock market capitalization that year, up from just 6 percent in 1980 and 11 percent in 1990. Historically, this transformation is as momentous as the emergence of railroads, iron and steel and the displacement of agriculture during the decades after the Civil War” (Kevin Phillips, American Theocracy, Penguin, 2006, pp. 265-266).
The profits of finance capital do not so much involve a direct appropriation of surplus value as they are accumulated through changes in asset values—that is, by operations in financial markets. In a nutshell, the downturn in the rate of profit in the 1970s and the failure of profit rates to sufficiently recover in the 1980s. Following the decline in the earnings of commercial banks in the United States in the 1980s, regulations limiting banks to deposit-taking and short-term lending were relaxed to allow a wider range of capital market activities, in particular, the creation of affiliates not previously engaged in these activities. This system has produced a new set of bank operations now known as ‘originate and distribute,’ in which the banks seeks to maximize its fee and commission income from originating assets, managing those assets in off-balance-sheet affiliate structures, underwriting the primary distribution of securities collateralized with these assets and servicing them.
The financialisation of the American economy—a process which has been duplicated in other major capitalist countries—has been the central mechanism through which wealth has been transferred up the income scale. It has rested on low interest rates and the expansion of credit, which have fueled the growth of asset values and the accumulation of vast profits as a result of financial transactions. These low interest rates, in turn, have been made possible only by the deflationary impact of the integration of China and other low-cost producers into the world capitalist market.
Keynes's approach began to appear limited in relatively uncompetitive economies. A labour shortage and an excess of demand triggered stagflation – the combination of inflation with economic stagnation – and traditional Keynesian remedies seemed unable to control it.
Deep structural causes based on free market principles and an addiction to economic growth underpin the global economic crisis. How do we explain these causes - and does the renewed fixation with the policies of John Maynard Keynes offer an adequate solution? There is much discussion of short-term causes of the financial meltdown with a focus on credit derivatives, high-risk investments and excess deregulation. The use of complex terminology in highlighting short-term policy problems will inevitably mask the deeper crisis facing a global economic system based on the unbridled profit motive. So what next? In previous eras it has taken war, revolution or prolonged recession before political leaders established new institutional structures.
Rediscovering the virtues of Keynes is an indication of the gravity of the economic crisis. The free market strategy behind the Raegan/Thatcher revolution has been abandoned – we are now in a new world. However, Keynes was never able to translate his solutions from national level to international action. In the face of the current financial crisis, government after government has moved towards more Keynesian solutions to economic problems. It was responsible to boost spending with the aim of speeding up economic activity, even if borrowing had to increase to do so. John Maynard Keynes once said that "in the long run, we are all dead";
Today's economic circumstances do seem to fit a more Keynesian solution. Inflation is likely to stay low in the coming downturn, meaning that the upward pressure of increasing demand is likely to be manageable; and critics who say that public spending often takes too long to counter the economic problems they were instituted to solve can be answered with the point that this is likely to be a fairly long recession. In that environment, the government seems to have decided that the time is ripe for a Keynesian renaissance. Keynes's approach is most effective at times when inflationary pressures are not particularly high – like now. Keynes proposed that governments should systematically intervene in the economy by boosting the demand for goods and services – spending money on public works and cutting interest rates to make investment more attractive.
In the economic sphere, it is clear that the expansion over the past 15 years has produced a highly unstable situation—accelerated economic growth in some regions, albeit on unstable foundations, as in the case of China, coupled with far-reaching changes in the economic structure of the most advanced capitalist countries. The rise of American capitalism in the twentieth century was associated above all with the dominance of its manufacturing industry. By the end of the twentieth century, however, the finance, insurance and real estate (FIRE) sector comprised 20 percent of the US economy, compared to 14.5 percent for manufacturing. In his book American Theocracy, Kevin Phillips writes: “Financial-sector profits shot past those of manufacturing in the mid-1990s, thereafter moving farther ahead. By 2004 financial firms boasted nearly 40 percent of all US profits. The financial sector commanded a quarter of America’s stock market capitalization that year, up from just 6 percent in 1980 and 11 percent in 1990. Historically, this transformation is as momentous as the emergence of railroads, iron and steel and the displacement of agriculture during the decades after the Civil War” (Kevin Phillips, American Theocracy, Penguin, 2006, pp. 265-266).
The profits of finance capital do not so much involve a direct appropriation of surplus value as they are accumulated through changes in asset values—that is, by operations in financial markets. In a nutshell, the downturn in the rate of profit in the 1970s and the failure of profit rates to sufficiently recover in the 1980s. Following the decline in the earnings of commercial banks in the United States in the 1980s, regulations limiting banks to deposit-taking and short-term lending were relaxed to allow a wider range of capital market activities, in particular, the creation of affiliates not previously engaged in these activities. This system has produced a new set of bank operations now known as ‘originate and distribute,’ in which the banks seeks to maximize its fee and commission income from originating assets, managing those assets in off-balance-sheet affiliate structures, underwriting the primary distribution of securities collateralized with these assets and servicing them.
The financialisation of the American economy—a process which has been duplicated in other major capitalist countries—has been the central mechanism through which wealth has been transferred up the income scale. It has rested on low interest rates and the expansion of credit, which have fueled the growth of asset values and the accumulation of vast profits as a result of financial transactions. These low interest rates, in turn, have been made possible only by the deflationary impact of the integration of China and other low-cost producers into the world capitalist market.
Eventhough the financial crisis is global in nature, a careful balancing of Keynesian and neoclassical policies are necessary at the regional or natioanl level which should make sure more employment, income and demand generation on the one hand and higher production, investment and economic growth on the other. Here the 'India model' is unique.
Thursday, November 6, 2008
Outsourcing - The Obama Effect !!!!!!!!!
US President-elect Barack Obama is a solid supporter of the growing Indo-US strategic partnership and backs the landmark bilateral nuclear deal, but has strong views about outsourcing of US jobs overseas, a cause of concern for Indian businesses. He felt that it was ‘only natural’ that the world’s oldest and largest constitutional democracies should enjoy ‘strong relations’. “America and India share many common goals and interests and the US is New Delhi’s largest trading and investment partner,”
However, one factor that is creating unease among Indians is Obama’s strong anti-outsourcing stance, which came to fore repeatedly during the campaign trail.Unlike John McCain, he is for stopping to give tax breaks to companies that ship jobs overseas, and he said he will start giving the tax concessions to companies that create good jobs in America. This was one of the key issues on which the Indian- American supporters of his rival John McCain were focusing on to argue that an Obama presidency will be a bad news for India’s growing BPO sector.
However, some experts have noted that protectionist measures will be difficult to implement in a globalised world and felt that the fears were overblown. Not only that, due to outsourcing of jobs to India, the American companies are benefiting more than that of Indian people. The American Inc’s are getting their jobs done in more cheaper and there by their product will be less priced in America. If Obama will go for stringent measures against outsourcing of US companies, will create a situation of withdrawal of investments largely by companies in America and will move to countries like India. I strongly believe that this will help to strengthen the Indian industries. We should remember what happened to China when the US invoked all kinds of embargos on trade and capital restrictions. China was forced to create its own infrastructure to develop the domestic potential and which led now to placed that country into number one position among world countries regarding trade and other areas.
Today, India is a country that no longer heavily depends on outsourcing. The financial ties run much deeper. Obama's ability (or inability) to tackle his country's financial woes will play the biggest part of India's near term growth,"
However, one factor that is creating unease among Indians is Obama’s strong anti-outsourcing stance, which came to fore repeatedly during the campaign trail.Unlike John McCain, he is for stopping to give tax breaks to companies that ship jobs overseas, and he said he will start giving the tax concessions to companies that create good jobs in America. This was one of the key issues on which the Indian- American supporters of his rival John McCain were focusing on to argue that an Obama presidency will be a bad news for India’s growing BPO sector.
However, some experts have noted that protectionist measures will be difficult to implement in a globalised world and felt that the fears were overblown. Not only that, due to outsourcing of jobs to India, the American companies are benefiting more than that of Indian people. The American Inc’s are getting their jobs done in more cheaper and there by their product will be less priced in America. If Obama will go for stringent measures against outsourcing of US companies, will create a situation of withdrawal of investments largely by companies in America and will move to countries like India. I strongly believe that this will help to strengthen the Indian industries. We should remember what happened to China when the US invoked all kinds of embargos on trade and capital restrictions. China was forced to create its own infrastructure to develop the domestic potential and which led now to placed that country into number one position among world countries regarding trade and other areas.
Today, India is a country that no longer heavily depends on outsourcing. The financial ties run much deeper. Obama's ability (or inability) to tackle his country's financial woes will play the biggest part of India's near term growth,"
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