[Date]

National Economic
Planning- II
Assignment

Baskar M
ICHE-UGPA 13-16

Subject Name
.

: National Economic
Planning- II

Student Name

: Baskar M

Session

: 2013-2016

Batch

: Fall winter UG-A

Contact Number

: 96261-99981,

Mail

: baskar180@gmail.com

Submission Date

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Question 1:
It is suggested that the Indian growth story is only confined to the urban
India Do you agree with this statement? Why or why not? Give a detailed
answer.
Answer:
INDIAS recent economic experience appears at first sight to be an
enigma. It has recorded, prior to the current years slow down,
extraordinarily high rates of GDP growth, which made it a much-hyped
emerging economic superpower. Over the very same period, however,
it has witnessed an increase in the extent of absolute poverty. Poverty
in India is defined in terms of a food energy intake norm: those unable
to access 2100 calories per person per day in urban India and 2200
calories per person per day in rural India (originally 2400 but later scaled
down) are counted as poor. By this criterion, the percentages of
poor in urban India in rounded figures were 57, 65, and 73
respectively in 1993-94, 2004-5 and 2009-10; and in rural India 59, 70,
and 76 respectively (calculated by Utsa Patnaik from the basic
consumption and nutritional intake data provided in the National
Sample Survey Reports for those years). Thus, during the very period
when GDP growth rate has been unprecedented, around 8 per cent,
absolute poverty has increased.
This may appear odd at first sight, given persistent claims by the
Planning Commission about a rapid decline in poverty. But these
claims rely on a per capita daily poverty line expenditure, which is
obtained by bringing up to date, through a cost-of-living index, the per
capita expenditures at which these very calorie norms were accessed in
1973-4 (a bizarre procedure since direct data are available on current
calorie intake); the ludicrously low levels of these poverty lines are by
now well-known.
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The other side of the coin is the removal of all fetters on primitive
accumulation of capital through the withdrawal of State support from
the petty production sector, and the encouragement to big capital to
encroach upon this terrain. In agriculture itself, domestic prices have got
increasingly linked to world prices, with the removal of quantitative
restrictions and the non-use of tariff bounds (that could even, under the
present regime provide some protection to peasants); input costs have
increased through the reduction in subsidies; institutional credit for
agriculture proper (as opposed to other uses that get spuriously defined
as agriculture) has dried up, forcing the peasants to approach a new
class of money lenders; public extension services have collapsed, with
multinational seed, chemical, and agribusiness firms establishing direct
contact with the peasants; public research has dwindled; and even
procurement operations were on the verge of being wound up, until the
2008 inflationary upsurge gave such operations a fresh lease of life.
Agriculture, as is widely recognised, given such adverse policies, ceased
to be a profitable operation.
Alongside primitive accumulation which is shifting assets and resources
from petty and marginal producers to large capitalists and multinational
corporations, there is also a change in the pattern of asset use,
especially of land-use. Around 80 lakh hectares of land going out of
foodgrain production and per capita grain output declining, is a
reflection of this. And it exposes the country to the possibility of
deepening under-nutrition, especially since the surplus foodgrain stocks
that exist with the government owing to inadequate purchasing power
with the people, are being exported with alacrity.
This change in the nature of the relationship between the State and
capital, whereby the State becomes much more closely involved with
the interests of capital, is a fundamental feature of neo-liberalism. From
the fact that high growth has been associated with an increase in the
extent of absolute poverty because of the primitive accumulation of
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capital that this changed nature of the State has given rise to, it must
not be concluded, however, that a decline in the growth rate ipso facto
would reduce the extent of poverty. Since the process of primitive
accumulation would occur anyway, growth or no growth, the absence of
growth would simply mean that in addition to the petty and marginal
producers, and the working people, even the middle classes, who have
been beneficiaries of neo-liberalism, would now also face hardships.
This is already happening, with a drying up of jobs, even for this
segment of the population; and since in the context of the current
capitalist crisis, which if anything is deepening, a revival of Indias high
growth trajectory within a neo-liberal framework, seems out of the
question, a generalization of distress across all working classes is on the
horizon. This should, however, provide the basis for changing the class
orientation of the State, and thereby essaying an alternative, more
egalitarian and more humane trajectory of development than the
current neo-liberal one.

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Question 2:
Financial globalization, like other forms of globalization has actually proved
to be disastrous for the world economy. What do you have to say on this
issue? Give a well-argued answer.
Answer:
Trades of financial assets are the easiest to globalize. Nothing is involved
beyond exchanging pieces of paper or making entries in electronic
ledgers. The communications revolution makes transactions easy, fast,
and cheap. No movements of physical goods or of people are involved.
No frontiers have to be crossed. The only barriers are national
regulations. As these have been liberalized in country after country,
international financial flows have flooded into national securities
markets and banking systems all over the world. These flows could be
the vehicles by which savings in the advanced capitalist democracies are
channeled into productive capital investments in the developing
countries of Asia, Africa, and Latin America. Or they could be causes of
currency crises, recessions and depressions, unemployment and
deprivation in those countries. Or both.
The 1990s have been a decade of disturbances in international finance,
beginning in Europe in 1992, followed by Mexico in 1994-95, climaxed
by East Asia in 1997-98, Russia this year, and perhaps Brazil in near
future. Is the problem that liberalization in developing and transition
economies is still incomplete? Or has it gone too far? That is the big
debate today.
Despite the apparent pace of recent financial globalization and its
spectacular technological support, it is in fact nothing new. Finance was
much more completely internationalized in the nineteenth century,
particularly the period 1870-1914, the heyday of the gold standard. All
countries made their currencies convertible into gold at fixed prices per
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ounce; for example, the pound sterling was worth $4.86, the ratio of
between the gold value of sterling set by Isaac Newton and the gold
value of the dollar set by Alexander Hamilton. There were virtually no
restrictions on international financial transactions. In particular, the
United Kingdom lent overseas as much as half its national saving,
financing the economic development of the Americas, Australia, India,
and other realms of the British empire in Asia and Africa. The Bank of
England served as a sort of world central bank and lender of last resort.
This regime was destroyed by the first World War, the debts it left in its
wake in the 1920s, the unwillingness or inability of the United States to
take over Britain's pre-1914 role, the Great Depression, and the second
World War. Globalization gave way to a maze of national restrictions on
currency transactions, as governments sought competitive trade
advantages in vain hopes of rescuing their economies from depression.
The Bretton Woods Agreement of 1945 brought some order out of
world monetary chaos and inaugurated a period of liberalization. Yet,
taking into account the new national participants in world financial
markets, the pre-1914 degree of liberalization has not yet been restored
and, more important, transfers of saving from developed to developing
economies are still, relative to the size of the world economy, much
smaller than at the beginning of this century.
Nostalgia for the gold standard is understandable, but it is misplaced. In
the 1920s and 1930s it was disastrous. During the first World War
Britain had to sell off its foreign wealth and suspend the gold
convertibility of the pound. In 1925 Winston Churchill, Chancellor of the
Exchequer, bowed to the City and returned sterling to gold at the prewar value, i.e. $4.86, prompting John Maynard Keynes to write "The
Economic Consequences of Mr. Churchill." Because of its wartime
inflation of prices and wages, Britain couldn't compete at that exchange
rate, and suffered depression and high unemployment from 1925 to
1931, when the coalition government finally gave up and devalued. In
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1931-33 the determination of other governments and central banks,

including the Hoover administration and the Federal Reserve, to defend
their gold parities by high interest rates and austere budgets aggravated
their depressions and provoked bank crises. In Weimar Germany the
resulting distress hastened Hitler's advent to power. In America FDR
devalued the dollar in 1933-34; this act was the most effective New Deal
policy for recovery from the Great Depression.
The worldwide system of exchange rates agreed at Bretton Woods was a
sort of gold standard. Every member of the International Monetary Fund
set the gold content of its currency. In practice conversions of currencies
into gold were rare; the U.S. dollar was used instead. The United States
Treasury stood ready to exchange gold and dollars at a fixed price ($35
an ounce)-- with foreign governments, not with private individuals.
Countries' pegs to gold and the dollar were adjustable, and devaluations
were frequent. This exchange rate system lasted until 1971, when the
Nixon administration abandoned the U.S. commitment to redeem
dollars in gold. The dollar was under pressure, and the administration
was frustrated because it could not get Germany and Japan to
appreciate their currencies against the dollar. The upshot was that since
1973 the exchange rates among the three major currencies -- dollar,
Deutsche mark, and yen -- have floated in free currency markets. Other
countries have generally fixed their currencies in terms of one of these
three "hard" currencies or some combination of them.
Western European currencies have typically been pegged to the D-mark,
the key currency of the European Monetary System. Now eleven of
those currencies are being permanently merged into the euro, which
will supplant the D-mark and will float against the dollar and the yen.
The new European Central Bank will make monetary policy for all of
"Euroland," the new European Monetary Union. The mighty Bundesbank
will be just one of the new Bank's branches.

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Here is a "trilemma" of which international economists are quite fond: A

nation can maintain no more than two of the following three conditions:
(1) A fixed rate of exchange between its currency and other currencies.
(2) Unregulated convertibility of its currency and foreign currencies. (3)
A national monetary policy capable of achieving domestic
macroeconomic objectives.
For example, consider a government and central bank that wish to
reduce unemployment by raising aggregate demand for the goods and
services its economy produces. This typically requires cutting the
interest rates facing domestic businesses and households and making its
products more competitive in world trade. But this is not possible if the
exchange rate is fixed and arbitrages across currencies are unimpeded.
The country's central bank will then be unable to reduce interest rates
below those available elsewhere in the world, particularly in big centers
like New York or Tokyo or Frankfurt or London. Maybe the government
can empower its central bank by giving up condition (2) and imposing
direct controls over movements of funds across the exchanges.
Alternatively, the government could sacrifice condition (1) and let its
currency float in the market to a lower level at which activity and
employment, especially in export industries, would be greater, while
lower local interest rates would also be tenable.
In the wake of World War II, it was apparent that the economies of
Europe and Asia were in no position to make their currencies wholly
convertible. The articles of the International Monetary Fund adopted at
Bretton Woods did not, and still do not, require that of its members.
What they do require is "current account convertibility," namely that
foreigners be free to convert any of a country's currency they earn in
trade. "Capital account convertibility," which would allow any holder of a
currency, resident or non-resident, to buy foreign-currency assets, was
put off to the indefinite future. Under the Marshall Plan 1948-1951 the
United States encouraged European countries to set up a multilateral
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clearing system for their currencies, while restricting conversions into

dollars. Currency exchange restrictions in Western Europe were not
wholly abandoned until the mid-1980s. Today, however, the world
financial powers, private and public, are impatiently pushing developing
countries and transition economies towards full convertibility.
Likewise, fixed exchange rates, adjustable pegs to hard currencies., are
the prevailing exchange rate regime among developing economies,
"emerging" and "transition" and others. Typically, they are "managed
crawling pegs", which do allow for some flexibility. Markets are allowed
to move the exchange rate within a specified band. The entire band is
itself moved from day to day by an announced percentage, usually
designed to depreciate the currency to compensate for a local inflation
trend in excess of the inflation trend in the hard currency's economy.
For example, the central parity and the band of Brazil's real rise at a
monthly rate of 0.7 percent. However, if under market attack the price
of a dollar in terms of reals should rise to its upper limit (depreciation of
the real) then the central bank would have to use its dollar reserves to
redeem reals just as if it were defending a simple fixed peg.
An attack on a currency is like a run on a bank. A depositor worried
about the ability of a bank to redeem deposits will want to ask for her
cash before the bank runs out, and any depositor worried about what
other depositors will think and do will act the same way even if she
thinks the bank is solvent. A country on a fixed exchange rate is like a
bank, its holdings of hard currency reserves are like the bank's cash, and
the local currency assets outstanding are like the public's deposits in a
bank. The same instability and vulnerability apply in both cases. For a
domestic banking system, deposit insurance is an effective protection
against runs, and a nation's central bank acts as a "lender of last resort"
to provide liquidity to banks under attack. The analogous institutions do
not exist on an international scale, to protect currencies against runs.

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The recent epidemic of currency crises makes it unmistakably clear that

fixed but adjustable exchange rates are a bad idea. The only viable
regimes in our increasingly globalized financial world are floating rates,
on the one hand, and irretrievably fixed rates, on the other.
Floating rates have since 1973 worked for the Big Three currencies. They
have fluctuated, but there have been no crises. From 1995 to 1997 the
yen gradually and unobtrusively fell 50 percent against the dollar, but
this decline never rated headlines or evening TV news. (One of the
causes was Japan's recession and stagnation, a disaster for Japan itself
and for its neighbors -- indeed a principal source of their currency crises
and economic recessions. But this macroeconomic disaster would have
been worse if the yen/dollar rate had been fixed.)
Floating rates would work for most currencies. They would forestall
extreme crises. Of course, exchange rates would go up and down,
people would speculate on them, and often the fluctuations would be
unpleasant for the economies affected. But the trauma of discrete
regime change, default of solemn official promises, and the bandwagon
momentum these events generate, would be avoided. Foreign lenders
would be more careful if they understood that exchange rates were not
guaranteed. Events that triggered the Asian crises would have likewise
pushed down those currencies had they been floating, but surely not
nearly as far as they plunged in the panicky free falls following the
collapse of fixed rates. Fixed rates are, after all, a hangover from the preglobalized Bretton Woods system.
At the other extreme is the alternative of fixing the national currency
irretrievably to the dollar or some other hard-currency standard. The
trouble with this course is that it surrenders monetary sovereignty. This
is what the eleven European countries are doing. They will no longer
have their individual monetary policies, or even discretionary fiscal
policies. It remains to be seen whether political and economic
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advantages, comparable to those of the two hundred year old monetary

union of the American states, can be quickly manufactured in Europe.
An individual country can tie itself tightly and permanently to a hard
currency. Examples are Hong Kong and Argentina, which are effectively
dollarized. The idea is to sacrifice every other possible objective of
monetary and fiscal policies to the defense of the exchange rate. Indeed
the dollar may partly or wholly replace local currency as unit of account
and means of payment. This is the essence of a "currency board" -- one
well enough endowed with reserves of the hard currency to convince
the world of convertibility, and convincingly determined to protect those
reserves. For example, if it takes double- or triple-digit interest rates to
attract and hold enough reserves, so be it, regardless of macroeconomic
consequences. The rule is that local currency outstanding must be
covered 100 percent by the central bank's hard currency reserves. In
terms of the trilemma, the country meets condition
(1) Fixed exchange rate, and
(2) Convertibility. But it sacrifices
(3) Monetary sovereignty,
Thus forfeits all possibility of controlling its own macroeconomic fate.

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Question 3:
In near future America will remain number-1 nation in the world,
whichever way we look at it-economically, militarily, or politically. Do you
think China or any other nation can prove this statement to be false?
Explain.
Answer:
Each country measures economic growth by its gross domestic product
or GDP. Negative or positive GDP indicates whether the economy is
contracting or expanding. When you combine the total economic output
of each country, the result is global GDP. In this article, we will reveal
how Americas contribution to global GDP has been falling while Chinas
has been rising.
Changes in the Global Economy
The Conference Board estimates that by 2018, Chinas contribution to
global GDP will surpass that of the U.S. In other words, Chinas economy
will become more significant than Americas. How is this possible? Is the
golden era of Made in America in our rearview mirror? Is China
entering a modern-day economic dynasty? To find the answer, we will
examine the period beginning in 1970 and the forecast through 2025.
As the chart below indicates, the U.S. contributed 21.2% of total global
economic output in 1970. This remained consistent until the year 2000.
In every year since, with one exception, Americas percentage of the
worlds economic output has declined. In 2015, the U.S. contributed
16.7% of the worlds economy. By 2025, this is expected to fall to 14.9%.
Equally noteworthy is the exceptional rise in Chinas economy. In 1970,
China was responsible for a mere 4.1% of the total. This rose to 15.6% in
2015. In 2025, Chinas contribution to the global economy is projected
to be 17.2%. Since 1990, Chinas percentage of total global output has
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risen every year with one exception (1998), when it fell by one percent.
The vertical black-dotted line on the chart denotes the year (2018) that
Chinas economic contribution is projected to surpass the U.S.
There are some other notable conclusions we can make from the chart.
Europes economic contribution to global GDP is rapidly declining. India
is gaining economic influence but still has a long way to go. In 2015,
Indias contribution to global GDP was 6.7%. This is expected to rise to
8.7% by 2025. One of the most significant observations is that large
developed economies are becoming less significant while smaller,
emerging economies are gaining power. This is not a complete surprise
as smaller economies are much more nimble than large ones.
Chinas Rise
How has China become such a dominant economic power? Part of the
reason is its booming auto industry. To illustrate, the total number of
autos sold last year in China was 24.6 million. This dwarfs total auto
sales in the U.S. last year, which hit a record 17.5 million cars and trucks.
In addition, SUV sales in China increased a whopping 52% in 2015.
Chinas auto industry is thriving and should provide stiff competition for
U.S. auto manufacturers in the years ahead. Unless the U.S. government
levies high tariffs on imports to equalize prices between Chinese autos
and those made in America. It is important to remember that the cost of
production (labor included) is much lower in China.
The worlds economy is changing and globalization is alive and well.
There will likely be a large number of new trade agreements in the
months ahead as well as an increase in U.S. based companies deriving
revenue overseas. Gone are the days when it was sufficient for
investment analysts to analyze trends in the U.S., to the exclusion of
foreign markets. In the current global climate, we must recognize how
foreign companies will compete with U.S. corporations. Rising
globalization should result in greater competition. If the federal
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government does not levy new and increased tariffs on imported goods,
the added competition will result in lower prices for the consumer.
However, I wouldnt get too optimistic about a lack of tariffs. The federal
government will likely view this as a source of revenue and a way to help
its constituents rather than allow cheap imports to flood the U.S.
Perhaps Americans will be buying more goods online, directly from
foreign companies.

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Question 4:
Which institution is better suited for solving the economic problems of
an economy-the state or the market? Explain with the help of actual
examples of various national economics.
Answer:
Institutions are "stable, valued, recurring patterns of
behavior. As structures or mechanisms of social order, they govern the
behaviour of a set of individuals within a given community. Institutions
are identified with a social purpose, transcending individuals and
intentions by mediating the rules that govern living behavior.
The term "institution" commonly applies to both informal institutions
such as customs or behavior pattern important to a society, and to
particular formal institutions created by entities such as
the government and public services. Primary or meta-institutions are
institutions such as the family that are broad enough to encompass
other institutions.
While institutions tend to appear to people in society as part of the
natural, unchanging landscape of their lives, study of institutions by the
social sciences tends to reveal the nature of institutions as social
constructions, artifacts of a particular time, culture and society,
produced by collective human choice, though not directly by individual
intention. Sociology traditionally analyzed social institutions in terms of
interlocking social roles and expectations. Social institutions created and
were composed of groups of roles, or expected behaviors. The social
function of the institution was executed by the fulfillment of roles. Basic
biological requirements, for reproduction and care of the young, are
served by the institutions of marriage and family, for example, by
creating, elaborating and prescribing the behaviors expected for
husband/father, wife/mother, child, etc.

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The relationship of institutions to human nature is a foundational

question for the social sciences. Institutions can be seen as "naturally"
arising from, and conforming to, human naturea fundamentally
conservative viewor institutions can be seen as artificial, almost
accidental, and in need of architectural redesign, informed by expert
social analysis, to better serve human needsa fundamentally
progressive view. Adam Smith anchored his economics in the supposed
human "propensity to truck, barter and exchange".
Modernfeminists have criticized traditional marriage and other
institutions as element of an oppressive and obsolete patriarchy. The
Marxist viewwhich sees human nature ashistorically 'evolving' towards
voluntary social cooperation, shared by some anarchistsis that supraindividual institutions such as the market and the state are incompatible
with the individual liberty of a truly free society.
Economics, in recent years, has used game theory to study institutions
from two perspectives. Firstly, how do institutions survive and evolve? In
this perspective, institutions arise from Nash equilibria of games. For
example, whenever people pass each other in a corridor or
thoroughfare, there is a need for customs, which avoid collisions. Such a
custom might call for each party to keep to their own right (or leftsuch
a choice is arbitrary, it is only necessary that the choice be uniform and
consistent). Such customs may be supposed to be the origin of rules,
such as the rule, adopted in many countries, which requires driving
automobiles on the right side of the road.
Secondly, how do institutions affect behaviour? In this perspective, the
focus is on behaviour arising from a given set of institutional rules. In
these models, institutions determine the rules (i.e. strategy sets and
utility functions) of games, rather than arise as equilibria out of games.
For example, the Cournot duopoly model is based on an institution
involving an auctioneer who sells all goods at the market-clearing price.
While it is always possible to analyse behaviour with the institutions-asequilibria approach instead, it is much more complicated.
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In political science, the effect of institutions on behavior has also been

considered from a meme perspective, like game theory borrowed from
biology. A "memetic institutionalism" has been proposed, suggesting
that institutions provide selection environments for political action,
whereby differentiated retention arises and thereby a Darwinian
evolution of institutions over time. Public choice theory, another branch
of economics with a close relationship to political science, considers how
government policy choices are made, and seeks to determine what the
policy outputs are likely to be, given a particular political decisionmaking process and context.
In history, a distinction between eras or periods, implies a major and
fundamental change in the system of institutions governing a society.
Political and military events are judged to be of historical significance to
the extent that they are associated with changes in institutions. In
European history, particular significance is attached to the long
transition from the feudal institutions of the Middle Ages to
the modern institutions, which govern contemporary life.
Informal institutions have been largely overlooked in comparative
politics, but in many countries it is the informal institutions and rules
that govern the political landscape. To understand the political
behaviour in a country it is important to look at how that behaviour is
enabled or constrained by informal institutions, and how this affects
how formal institutions are run. For example, if there are high levels of
extra judicial killings in a country, it might be that while it is prohibited
by the state the police are actually enabled to carry out such killings and
informally encouraged to prop up an inefficient formal state police
institution. An informal institution tends to have socially shared rules,
which are unwritten and yet are often known by all inhabitants of a
certain country, as such they are often referred to as being an inherent
part of the culture of a given country. Informal practices are often
referred to as "cultural", for example clientelism or corruption is
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sometimes stated as a part of the political culture in a certain place, but

an informal institution itself is not cultural, it may be shaped by culture
or behaviour of a given political landscape, but they should be looked at
in the same way as formal institutions to understand their role in a given
country. Informal institutions might be particularly used to pursue a
political agenda, or a course of action that might not be publicly popular,
or even legal, and can be seen as an effective way of making up for lack
of efficiency in a formal institution. For example, in countries where
formal institutions are particularly inefficient, an informal institution
may be the most cost effective way or actually carrying out a given task,
and this ensures that there is little pressure on the formal institutions to
become more efficient. The relationship between formal and informal
institutions is often closely aligned and informal institutions step in to
prop up inefficient institutions. However, because they do not have a
centre, which directs and coordinates their actions, changing informal
institutions is a slow and lengthy process. It is as such important to look
at any given country and note the presence of informal institutions
when looking at the political landscape, and note that they are not
necessarily a rejection of the state, but an integral part of it and
broadening the scope of the role of the state in a given country.

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