1.

Concerns of the Current Global Economy

Global poverty and global terrorism are two concerns that are currently high on
the United Nations' agenda. Considering the global economy today, which do you
think is more important, global poverty or global terrorism? Are they related?
Ans 1.
In my view, if survey is done on this point, some nation may say Poverty is big
concern for them and some nations may say Terrorism. Some nation may also have
different concern other than these two concerns. The nations facing terrorist attacks,
for them terrorism is big concern.
In my view, Terrorism which is evolved due to unrest in the people due to unresolved
issues of them by society or government. Those groups are operating in targeted
cities, countries or areas.
But as per my understanding, Poverty is the biggest global concern. Poverty is seen in
Rich and Poor countries. That is because; in all the nations there are rich people and
poor people present.
Ans 2.
Poverty may be a cause of increased terrorism but there are various other factors also
which can be discussed in detail.
What is Terrorism?
The calculated use of violence or the threat of violence to inculcate fear; intended to
coerce or to intimidate governments or societies in the pursuit of goals that are
generally political, religious, or ideological. (U.S. Department of Defense)
Terrorism constitutes the illegitimate use of force to achieve a political objective
when innocent people are targeted. (Walter Laqueur)
Terrorism is defined here as the recurrent use or threatened use of politically
motivated and clandestinely organised violence, by a group whose aim is to influence
a psychological target in order to make it behave in a way which the group desires.
(C. J. M. Drake)
The unlawful use of force or violence against persons or property to intimidate or
coerce a government, the civilian population, or any segment thereof, in furtherance
of political or social objectives." (FBI)
Terrorism is the threat or use of violence against civilians to draw attention to an
issue. Those searching for the causes of terrorism -why this tactic would be selected,
and in what circumstances- approach the phenomenon in different ways.

Some see it as an independent phenomenon, while others view it as one tactic in a

larger strategy. Some seek to understand what makes an individual choose terrorism,
while others look at it at the level of a group.
What is Poverty?
Poverty is general scarcity or the state of one who lacks a certain amount of material
possessions or money.
It is a multifaceted concept, which includes social, economic political elements.
Poverty seems to be chronic or temporary, and most of the time it is closely related to
inequality. As a dynamic concept, poverty is changing and adapting according to
consumption patterns, social dynamics and technological change. Absolute poverty or
destitution refers to the deprivation of basic human needs, which commonly includes
food, water, sanitation, clothing, shelter, health care and education. Relative poverty is
defined contextually as economic inequality in the location or society in which people
live.
Material resource and infrastructure-focused solutions created in isolation perpetuate
dependency and can actually further widen the gap between the haves and havenots.
In fact, extreme poverty is more than the lack of material resources necessary to meet
an individuals basic needs. One critical component of the phenomenon is when an
individual lacks the opportunity to make meaningful choices that will sustain ably
improve her life. The work of Nobel Prize winning economist Amartya Sen
emphasizes the need for meaningful choice as the end and the means of development.
Choice is powerful and opens the door to hope, opportunity, change, and a better
future.
It is not very difficult to establish a relation between extreme poverty & terrorism.
People who has nothing to do for their lives, or who are hand to mouth & living their
lives with a very struggle or the people who are not educated & unemployed & also,
living in a very bitter condition, are prone towards terrorism.
One more point is that these people think that government is not doing anything for
them & they want to take revenge from the people of the country (specially
government official, Administrative offcials ) who are doing well. Anger, resentment,
and despair are a volatile combination in the minds of young men and women who
see little hope for escaping their situation.
The terrorist organizations who want to increase their power serves as a very good
opportunity for such type of people. These young peoples are very easy to be moulded
& manipulative on these emotional grounds. By insisting on poverty & injustice of the
community, any terrorist organization can cause damage to the country & its economy
in a very simpler manner. This anger and frustration is compounded by a sense of
injustice. When the gap between rich and poor is vast, the impoverished majority are
more likely to consider their situation as a function of either indifference or
criminality by those controlling the wealth.

So this may be a direct relation between terrorism & poverty. But the question arises
that to spread terrorism, these terrorists group requires weapons, guns, bombs etc.
from where these items are coming. Money is most important thing which is required
to strengthen any terrorist organization. This comes from the same market where we
are discussing the economy.
Most of the rich people of the country are directly or indirectly influencing politics.
The person who wins is ok but the person who looses will invest his money to
increase terrorist activities to bring down the winning peoples. These rich people are
funding these terrorist organizations.
How can one think that a person who is hand to mouth in his life can purchase one
AK47 & some bombs & increasing terrorism in a country.
These are terrorist organization who funded by rich & political persons of the country.
These organization recruits those people who are poor & can be easily manipulated
against the government & the country. Terrorist organizations are using these poor
peoples to increase terrorism.
Its not poverty which is fueling terrorism but its money & political power which is
fueling terrorism. Only the fact that poor people are being used to increase terrorism.
References:
http://developeconomies.com/development-economics/the-link-between-poverty-andterrorism/
Ans3.
There are many factors in form of economic perspectives, which affects Global
economy are Poverty, Terrorism, Corruptions and money scandals, Lac of education
and many more. But as per our discussion topic, we are considering effect of poverty
and terrorism over current Global economy.
The gap between the rich and the poor within countries is paralleled by that among
countries. Since countries have widely different populations, a common way to
compare countries is by their gross domestic product (GDP) per capita. Such a
comparison shows extremely large differences among countries. At the top are what
we can call rich countries these are for the most part those capitalist nations which
first industrialized and which early on took command, largely through conquest and
colonization, of much of the rest of world, from Latin America to Africa to Southeast
Asia. At the bottom are the poorest of poor countries, those nations on the receiving
end of the forced expansion of the rich nations. Countries such as the United States,
Norway, Japan, Germany, and France have per capital GDPs 20 to more than 100
times greater than countries like Ethiopia, Malawi, Afghanistan, and Bolivia. It is
remarkable to observe that most of the rich countries are those where capitalism first
arose, while most of the poor countries have long histories of colonial and imperial
domination. In terms of per capita GDP, no Latin American country ranks in the top
35, and no African country ranks in the top 55. More than one-half of the poorest 50

countries are in Africa. Sixty percent of the top 50 are either in Europe or North
America.
Even if we consider a poor nation that has grown more rapidly than a rich one, this
relatively greater growth will have to continue for a very long time for per capita
incomes to converge. Like India and China, having good economic growth, but
because of large population still considered among developing countries. For year
2014-15, India development growth has been 7.3% which is even higher from past
years and more than China also. But it is the long way to go ahead to improve GDP.
It has been argued that terrorism should not have a large effect on economic activity,
because terrorist attacks destroy only a small fraction of the stock of capital of a
country, In contrast, empirical estimates of the consequences of terrorism typically
suggest large effects on economic outcomes. Mobility of productive capital in an open
economy may account for much of the difference between the direct and the
equilibrium impact of terrorism.
Terrorism has been described to have four main effects. First, the capital stock (human
and physical) of a country is reduced as a result of terrorist attacks. Second, the
terrorist threat induces higher levels of uncertainty. Third, terrorism promotes
increases in counter-terrorism expenditures, drawing resources from productive
sectors for use in security. Fourth, terrorism is known to affect negatively specific
industries e.g. tourism.
Higher levels of terrorist risks are associated with lower levels of net foreign direct
investment positions, even after controlling for other types of country risks. On
average, a standard deviation increase in the terrorist risk is associated with a fall in
the net foreign direct investment position of about 5% of GDP. It is very high in
comparison to effect of poverty. Surveys of international corporate investors provide
direct evidence of the importance of terrorism on foreign investment. Corporate
investors rate terrorism as one of the most important factors influencing their FDI
decisions (see Global Business Policy Council, 2004).
Hence , Terrorism have a large effect on current global economy, even if it represents
a small fraction of the total economic risk.
Reference: 1 https://www.dosomething.org/facts/11-facts-about-global-poverty
2
http://monthlyreview.org/2004/02/01/poverty-and-inequality-in-the-globaleconomy/
3 European Economic Review 52 (2008) 1 27
4 http://timesofindia.indiatimes.com/india/At-UN-general-assembly
My DB Ans
It is observed that extreme poverty is a more serious problem for the world than
climate change, terrorism, or the state of the global economy. Today, more than half of
the world's population lives on less than $2 per day, and almost 1.1 billion people live
4

in extreme poverty, defined as less than $1 per day. Poverty prevents poor countries
from devoting sufficient resources to detect and contain deadly disease. As to the
World Health Organization (WHO), low- and middle-income countries suffer 90
percent of the world's disease burden but account for only 11 percent of its health care
spending. Poverty also dramatically increases the risk of civil conflict. Poverty is a
problem that affects much of the world directly, and the entire world indirectly.
Poverty, where prevalent, is a troubling obstacle for governments and can hinder the
growth and development of any society. In its worst form, poverty has had detrimental
effects on regions such as Africa, Asia and Latin America. The World Bank (2008)
found that while most of the developing world has managed to reduce poverty, the
rate in sub-Saharan Africa (the worlds poorest region) has not changed in nearly 25
years. In 2005, half of the population in sub-Saharan Africa was living below the
poverty line (about 380 million people) (Wroughton 2008, para.12). Famine, high
child mortality rates, vulnerability to diseases, lack of infrastructure, poor or nonexistent health care and sanitation, malnutrition and corruption are just a few of the
major problematic factors that developing nations have contended with due to
poverty. These damaging effects have caused greater problems, affecting not just the
African, Asian and South American continents, and the rest of the world.
Poverty continues to very much affect the developing world, causing deaths in the
millions from starvation and disease. Eliminating poverty may be impossible in the
short term, but its effects on the people of developing nations may be reduced,
especially when a concerted threefold approach (macro especially trade and debt
relief, macro and legal) is taken to poverty reduction. Whilst it is plain that this will
aid the developing world, it may, too, economically benefit the donors, the creditors
forgiving debt and those investors who are game enough to invest in developing
countries. By reducing poverty, new markets open up to first-world companies, new
labor pools, new ideas and thinkers. Whilst the short-term effects of poverty
reduction may be relative harm to the donors, the long term benefits to the world at
large starkly outweigh these costs.
Terrorism has in one form or another been a part of society throughout history. Since
the September 11, 2001 attacks in New York, the world community has been more
focused on terrorism than ever before in most recent modern history. Terrorism has
impacted multiple levels of society across the world community. One of those levels
is the business environment. A specific aim of terrorism is to disrupt and destroy
ongoing businesses. Therefore, the ability of governments to disrupt and destroy
terrorism is essential to the continued growth and expansion of the world economy.
Terrorism will directly impact a country's ability to attract and maintain business
development and investment.
Terrorism and Tourism are Linked
Terrorism and Tourism are two terms that are linked together, Terrorism impacts the
tourists & the whole tourism industry. Terrorist attacks on the tourists targets generate
a vast amount of media attention attaining widespread publicity. Media can
significantly influence the way that people perceive the destination, especially after
the Terrorist attacks. Through constant negative media attention, tourist destination
continually decrease in number of arrivals. Decrease in international arrivals has been

noticed post the terrorist attacks in Indonesia and Egypt etc. Unlike the events in
London and Madrid, where attacks were directed at major transport chains, with the
primary goal being to damage the countries economy. Eg. 9/ 11 Affected The Stock
Market badly, at the close of trading that Friday, saw the biggest losses in NYSE
history, the Dow Jones was down almost 1,370 points, representing a loss of over
14%. TheStandard and Poor's (S&P) indexlost 11.6%. An estimated $1.4 trillion in
value was lost in those five days of trading. New York Stock Exchange (NYSE) & the
Nasdaqdid not open for trading on 9/ 11, 2001 and remained closed until 9/17
(6Days). The first day of trading ,the market fell by 684 points, a 7.1%.
Recent studies have suggested that there is little or no direct causal link between
poverty and insurgent terrorism. Literature reveals that there is no relationship
between terrorism and per capita GDP. We find a strong nonlinear relationship
between income and terrorism, w also find that countries with high levels of income
inequality tend to have high levels of terrorism. As nations develop, the level of
domestic terrorism they experience is likely to decline once their real per capita GDP
passes a threshold of about $1000. However, if development is accompanied by an
increase in income inequality, domestic terrorism could increase.
Ref:
http://www.ibcl.lu/userfiles/documents/Impact-of-Terrorism.pdfhttp://www.eir.info/2008/01/04/discuss-and-evaluate-the-relationship-between-poverty-andterrorism/
DB 2 - Economic Priorities
Rank the following economic priorities in order of importance (1 for most
important, 6 for least important):
Fair income distribution
Price stability
Full employment
Exchange rate stability (or Balance of Payment stability)
Quality of life/environment
Rapid economic growth
Briefly comment on the two top priorities on your list.
Ans 1.
As per my initial understanding of below topics, my ratings are as below:
Fair income distribution 3
Price stability 1
Full employment
4
Exchange rate stability (or Balance of Payment stability) - 2
Quality of life/environment6
Rapid economic growth 5

Price stability
The situation whereby the prices of goods and services offered in the marketplace
either change very slowly or do not change at all. Factors affecting this include
employment and inflation.
Price stability exists when average prices are constant over time, or when they are
rising at a very low and predictable rate. Price inflation occurs when average prices
are rising above this low and predictable rate, and price deflation occurs when average
prices are falling. In both cases, the effects are potentially extremely harmful to a
countrys economic performance and to the welfare of its citizens. For this reason,
price stability is commonly regarded as the single most important macro-economic
objective.
Price inflation is regarded as a serious economic problem because it causes a number
of significant costs to an economy, including the following:

It erodes the value of money and assets

It redistributes income between groups

It is bad for the balance of payments.

It causes uncertainty and falling investment.

It can create unemployment

Inflation distorts the price mechanism and creates inflation noise

It creates money illusion

Deflation

Consumers may delay consumption

Real interest rates are pushed up

Rising debt burdens

Recession

Exchange rate stability:

It is important to businesses when they are trying to determine whether or not to
invest in a foreign country and how much. Workers are often wary of taking jobs in
countries whose exchange rates fluctuate often and by large amounts.
To understand this concern imagine you are back at the bank. You have your 45 Euros
in exchange for $15. If the exchange rate stays at 3 Euros per dollar you could get
back your $15. But suppose after you made your first exchange, the rate went to 6
Euros per dollar. When you go to trade back to dollars, you will only get $7.50. If you

can image this happening with millions of dollars, you can understand why even small
fluctuations in exchange rates would cause concern for investors.
Countries, especially developing ones, pursue stable exchange rates to attract foreign
capital. They usually accomplish this by fixing their currencies to that of a more stable
country, a practice called pegging. A country's central bank may increase or decrease
the money supply to maintain this rate. Many countries have their currencies pegged
to the U.S. dollar, but some such as China and Kuwait have dropped the connection in
recent years as the dollar has lost strength.
Fair income distribution
The increasing inequality in income and wealth in recent years, together with
excessive pay packages of CEOs in the U.S. and abroad, is of growing concern,
especially to policy makers. Income inequality was identified as the #1 Top 10
Challenging Trends at the 2015 World Economic Forum annual meeting in Davos last
January.
References:
http://www.businessdictionary.com/definition/price-stability.html#ixzz3bxq3Lz3c
http://phys.org/news/2015-05-fair-theory-income-inequality.html
http://www.economicsonline.co.uk/Managing_the_economy/Stable_prices.html
http://www.ehow.com/about_5312051_definition-exchange-rate-stability.html/
Ans3
In my view economic priorities can be ranked as under:
1 Full employment-1
2 Price Stability-2
3 Rapid Economic Growth-3
4 Exchange rate stability -4
5 Quality of life/environment-5
6 Fair income distribution-6

Now we will discuss first two priorities, i.e. Full employment and price stability.

Full Employment: Absence of full employment is Unemployment , which refers to

involuntary idleness of mainly labour force and other productive resources.
Unemployment (of labour) is closely related to the economys aggregate output.
Higher the unemployment rate, greater the divergence between actual aggregate
output (or GNP/CDP) and potential output. So, it is the key factor for development of
country economy.
The objective of full employment became uppermost amongst the policymakers in the
era of Great Depression when unemployment rate in all the countries except the then
socialist country, the USSR, rose to a great height. It may be noted here that a free
enterprise capitalist economy always exhibits full employment.
Price Stability: By price stability we must not mean an unchanging price level over
time. Not necessarily, price increase is unwelcome, particularly if it is restricted
within a reasonable limit. In other words, price fluctuations of a larger degree are
always unwelcome.
However, it is difficult again to define the permissible or reasonable rate of inflation.
But sustained increase in price level as well as a falling price level produce
destabilizing effects on the economy. Therefore, for economic growth of any country,
it is must to ensure (relative) price level stability. This goal prevents not only
economic fluctuations but also helps in the attainment of a steady growth of an
economy
Reference:
1 Subject Content
2 www.economicsdiscussion.net
Instruments by Nikita Dutta

article Macroeconomic Policy: Objectives and

My DB Ans:
Priorities

Rank

Fair income distribution

Price stability

Full employment
Exchange rate stability (or Balance of Payment stability)
Quality of life/environment
Rapid economic growth

3
5
1
6

In my opinion Quality of life and fair income group are two top economic most
priority area in modern world. Quality of life [QoL] embraces the multiple
dimensions of human experience that affect well-being. This include infracture,

meeting minimum requirement of person. If people are given good quality of life they
may focus on further improvement and contribute in development of economy and
self development. Quality of life can be measured by certain result and control
indicator. Control indicators are those external to the individual and encompass
measures of material living levels and their components, as well as family life,
physical and mental health, work,environment, and so on. The measures relate both to
circumstances whose increase raises QoL, such as level of nutrition or life expectancy,
and to bads, like pollutants and crime, whose increase lowers QoL. Subjective
measures are self-reports of personal wellbeing, as obtained in surveys of happiness,
general life satisfaction, prevalence of positive and negative moods, and the like.
Much of the literature relating economic growth to quality of life examines cross
sectional (point-of-time) relationships, usually how countries at different levels of real
GDP per capita differ in regard to various QoL indicators, where GDP per capita (or a
variant thereof) is taken as a summary index of the level of economic development.
If one focuses on objective indicators and material well-being, then there can be no
disputing that modern economic growth has improved quality of life. With economic
growth comes markedly larger amounts of food, clothing, and shelter per capita, as
well as sweeping qualitative changes in the level of living. If, however, it is
recognized that modern economic growth has also been the prime mover in the
concentration of population in cities, large and small, then reservations start to arise
about the benefits of economic growth, because of the congestion and air, water, and
noise pollution fostered by urban concentrations. To this must be added the negative
spin-offs of ever-rising consumption, such as carbon dioxide emissions of motor
vehicles and increased fat accompanying higher food intake. Of course, appropriate
public policies may offset these bads, as has happened in regard to cigarette
smoking. But public policy often operates independently of economic growth, and is
by no means an inevitable accompaniment. As the QoL criteria are broadened to
encompass objective indicators in the social and political areas, such as health,
education, and political and human rights, the central role of economic growth
becomes even more dubious. This is made clear by the typical failure of time series
evidence to reproduce off-cited cross sectional patterns. Economic growth may make
possible advances in the social and political realms by making more resources
available, but the evidence makes clear that such a result is not sure to occur.
Fair income group is also key factor in economy growth. The increasing inequality in
income and wealth in recent years, together with excessive pay packages of CEOs in
the world, is of growing concern, especially to policy makers. Income inequality was
also identified as the #1 Top 10 Challenging Trends at the 2015 World Economic
Forum annual meeting in Davos last January. Columbia Engineering Professor Venkat
Venkatasubramanian has led a study that examines income inequality through a new
approach: he proposes that the fairest inequality of income is a lognormal distribution
under ideal conditions, and that an ideal free market can "discover" this in practice.
While economists have known that the Scandinavian countries have a more fair
distribution of income, especially when compared with the U.S., they have not known
how close to the ideal distribution these countries are, Sethuraman observes, until
now: "It is interesting that the economies that are generally perceived to have a fairer
distribution of income are also those that are closer to the benchmark income
distribution we have found with our new approach," comments Sethuraman.

10

"As we all know, fairness is a fundamental economic principle that lies at the very
foundation of the free market system," Venkatasubramanian adds. "That's why we
have regulations and watchdog agencies that punish unfair practices such as
monopolies, collusion, and insider trading to ensure the proper functioning of free
markets. So it is reassuring to find that maximizing fairness collectively is the
condition for achieving economic equilibrium and stability. I'm excited to have a
theory of fairness for a free market economy that is analytical and quantitative, and
makes testable predictions that can be verified with real-world data on income
inequality."
Ref: http://phys.org/news/2015-05-fair-theory-income-inequality.html#jCp
DB 1- Setting Macroeconomic Policies
Universitaca is a hypothetical country that is experiencing 10% inflation and 7%
unemployment. Real GDP growth is at a mere 1% a year. The stock market has
crashed.
What policies would you propose that the central bank and the government
pursue to lower inflation, lower unemployment and speed up GDP growth?
Ans1
Inflation is when the economy grows due to increased spending. When this happens,
prices rise and the currency within the economy is worth less than it was before.
When a currency is worth less, its exchange rate decreases when compared to other
currencies.
There are three main ways to carry out lower inflation. The first is to increase interest
rates through the Federal Reserve. The Federal Reserve rate is the rate at which banks
borrow money from the government, but, in order to make money, they must lend it at
higher rates. So, when the Federal Reserve increases its interest rate, banks have no
choice but to increase their rates as well. When banks increase their rates, less people
want to borrow money because it costs more to do so if that money accrues interest.
So, spending drops, prices drop and inflation slows.
The second method is to increase reserve requirements on the amount of money banks
are legally required to keep on hand to cover withdraws. The more money banks are
required to hold back, the less they have to lend to consumers. If they have less to
lend, consumers will borrow less, which will decrease spending.
The third method is to directly or indirectly reduce the money supply by enacting
policies that encourage reduction of the money supply. Two examples of this include
calling in debts that are owed to the government and increasing the interest paid on
bonds so that more investors will buy them. The latter policy raises the exchange rate
of the currency due to higher demand and, in turn, increases imports and decreases
exports. Both of these policies will reduce the amount of money in circulation because

11

the money will be going from banks, companies and investors pockets and into the
governments pocket where they can control what happens to it.
To improve GDP growth and bring inflation at acceptable level, the present Indian
government came out with some of the measures and action plan as below:
This article is taken from The Economic Times dated Jun 9, 2014.
1) Poverty elimination: The government is dedicated towards poverty elimination.
With a firm belief that the first claim on development belongs to the poor; the
government will focus its attention on those who need the basic necessities of life
most urgently. It will take necessary steps to provide security in its entirety to all
citizens; through empathy, support and empowerment.
2) Containing food inflation: Containing the food inflation is the first priority of
present government. Keeping a check on food inflation has been of utmost importance
for both the RBI and government. For the same the government has suggested supplyside measures. There would be an emphasis on improving the supply side of various
agro and agro-based products. The present government will take effective steps to
prevent hoarding and black marketing as they declared.
3) Agriculture: Agriculture is the source of livelihood for majority of people. The
government will increase investment in agriculture, both public and private, especially
in Agri-infrastructure. Steps will be taken to convert farming into a profitable venture
through scientific practices and Agro-technology. The government will address issues
pertaining to pricing and procurement of agricultural produce, crop insurance and
post-harvest management. Productivity of Animal Husbandry will be increased.
Government will incentivize the setting up of food processing industries. Existing
cooperative sector laws will be reviewed to remove anomalies and lacunae.
Government will adopt a National Land Use Policy which will facilitate scientific
identification of non-cultivable land and its strategic development," he added.
4) Federal structure: Greater co-operation between the state and the central
governments. The States and the Centre should function as an organic Team India. In
order to actively engage with the States on national issues, the government will
reinvigorate fora like the National Development Council and the Inter-State Council.
The Centre will be an enabler in the rapid progress of States through Cooperative
Federalism.
5) Transparent systems and time bound delivery of government services: The
government is committed to providing a clean and efficient administration focused on
delivery. Government will take steps to build the confidence and morale of
bureaucracy; enabling it with the freedom to work, and welcoming innovative ideas.
The government will stress on putting in place transparent systems and time bound
delivery of government services."
Government systems and processes will be revisited to make them citizen friendly,
corruption free and accountable. Efforts will be made to eliminate obsolete laws,
regulations, administrative structures and practices. Rationalization and convergence
among Ministries, Departments and other arms of the government will be ensured to

12

have focused delivery. Digitization of government records will be done for improving
accessibility.
6) E-governance: E-governance brings empowerment, equity and efficiency, feels the
new government. "The backbone of present government's new ways of working will
be a Digital India. The National e-governance plan will be expanded to cover every
government office from the centre to the Panchayat; to provide a wide variety of
services to citizens. Emerging technologies like Social Media will be used as a tool
for; participative governance, directly engaging the people in policy making and
administration.
7) Ease of doing business: The government aims to create a policy environment which
is predictable, transparent and fair. It will embark on rationalization and simplification
of the tax regime to make it non-adversarial and conducive to investment, enterprise
and growth.
Government will make every effort to introduce the GST while addressing the
concerns of States. Reforms will be undertaken to enhance the ease of doing business.
Government will follow a policy of encouraging investments, including through FDI;
which will be allowed in sectors that help create jobs and assets," the President said.
8) Job creation: In a country favored by a young population, creating employment
opportunities is very important. For the same, the government wants to strategically
promote labor-intensive manufacturing.
Employment opportunities will also be expanded by promoting tourism and agrobased industries. Government will transform Employment Exchanges into Career
Centers - connecting Indian youth with job opportunities in a transparent and effective
manner through the use of technology as well as through counselling and training.
The government will strengthen the pension and health insurance safety nets for labor
force of all categories and would provide them access to modern financial services.
9) Infrastructure: For any nation, development of infrastructure is essential to ensure
growth. India has lagged on this front for some time now and the present government
plans to give a major push to infrastructure.
The government will chalk out an ambitious infrastructure development program to
be implemented in the next 10 years. A fast-track, investment friendly and predictable
PPP mechanism will be put in place. Modernization and revamping of Railways is on
top of the infrastructure agenda. Government will launch a Diamond Quadrilateral
project of high speed trains.
The country will have a network of freight corridors with specialized Agri-Rail
networks for perishable agricultural products. Investment in railways will be
increased using innovative financing methods. Expansion of railways in Hilly States
and Northeast region and modernization of rail safety systems will be prime focus
areas. We will encourage R&D and high level local manufacturing for railway
systems."

13

10) Tourism & Culture: India has a vast untapped potential for tourism which can play
a special role in our socio-economic progress. "The government will initiate a mission
mode project to create 50 tourist circuits that are built around specific themes. With a
view to encouraging pilgrimage tourism, a National Mission for beautifying and
improving the amenities and infrastructure at pilgrimage centers of all faiths will be
launched.
Reference:
http://articles.economictimes.indiatimes.com/2014-0609/news/50448036_1_president-pranab-mukherjee-indian-economy-high-growth-path
Ans2
Inflation, Growth and Unemployment
There is no stable relationship between inflation, growth and unemployment. While
growth and unemployment are consistently negatively related, they seem to move
independently of inflation. Five RICH countries, France, Ireland, Italy, the UK and
the US, give a clear example of this lack of relationship
In France, per capita GDP growth was low during the entire period, especially the
early nineties. Unemployment consequently climbed steadily until 1994, and only
began to descend later in that decade, as growth picked up again. In contrast, inflation
declined steadily during the entire period.

In Ireland, per capita GDP growth increased regularly during the sample period,
starting from very low base and reaching extraordinarily high 10 per cent annual rates
towards the end of the period. Unemployment that started from a relatively high base
peaked at 17.1 per cent in the mid-eighties, but it began to decline steadily in the early
nineties, and reached 4.7 per cent in 2000. Inflation fell until 1989, then increased
slightly but only touched above 5 per cent in 1998.

In Italy, GDP growth was stable but low, and unemployment was also stable but
high during the entire period. In contrast, inflation declined almost every year.

In the UK, economic growth was strong and stable during the eighties and since
the mid-nineties, but unemployment responded only slightly. In contrast, inflation
tumbled (in spite of a recrudescence in the early nineties). It has been maintained well
below 5 per cent since 1992.

Economic growth in the US was stronger than in the UK, although it showed a
similar pattern. Unemployment reacted more strongly, and declined steadily
especially since the early nineties. In contrast, inflation fell in the early eighties and
has been under control ever since.
Government policy co-ordination and social co-operation play important roles in the
success of pro-poor anti-inflation policies at different levels.

14

First, co-ordination between state institutions. By careful choice of personnel and

competent management
Second, co-ordination of economic policies. Pro-poor anti-inflation program do not
rely on one single policy. Rather, they require the coordinated deployment of a broad
range of policies, among them fiscal, monetary, incomes, price, industrial and
exchange rate policies in order to address the causes of inflation rather than its
symptoms or propagation mechanisms. Combining a wide variety of policies
facilitates the involvement of society in the pursuit of low and stable inflation. In the
absence of a social commitment to macroeconomic stability governments will be
forced to deploy blunt instruments with insufficient information, possibly against
unwilling social sectors. This will increase the cost of inflation control and, in all
likelihood, reduce the welfare of the majority.
Third, co-ordination between the state and other social sectors. This is more
complicated, and different types of incentives will be required to obtain the
cooperation of reluctant social groups. Social co-operation is more easily created
through the democratic involvement of the citizens in economic policy-making and
the implementation and assessment of government policies.
In sum, low inflation can be achieved at an acceptable social cost, but this requires
more than just controlling the supply of money or jacking up interest rates as much as
necessary to deliver arbitrary inflation targets.
Policies for Reducing Unemployment
There are two main strategies for reducing unemployment
Demand side policies to reduce demand-deficient unemployment (unemployment
caused by recession)
Supply side policies to reduce structural unemployment / (the natural rate of
unemployment)
Demand Side Policies
Demand side policies are important when there is a recession and rise in cyclical
unemployment.
1. Fiscal PolicyFiscal policy can decrease unemployment by helping to increase
aggregate demand and the rate of economic growth. The government will need to
pursue expansionary fiscal policy; this involves cutting taxes and increasing
government spending. Lower taxes increase disposable income (e.g. VAT cut to 15%
in 2008) and therefore help to increase consumption, leading to higher aggregate
demand (AD).
With an increase in AD, there will be an increase in Real GDP (as long as there is
spare capacity in the economy.
2. Monetary Policy
15

Monetary policy would involve cutting interest rates. Lower rates decrease the cost of
borrowing and encourage people to spend and invest. This increases AD and should
also help to increase GDP and reduce demand deficient unemployment.
Also lower interest rates will reduce exchange rate and make exports more
competitive.
In some cases, lower interest rates may be ineffective in boosting demand. In this
case, Central Banks may resort to Quantitative easing. This is an attempt to increase
money supply and boost aggregate demand.
Supply Side Policies for Reducing Unemployment
Supply side policies deal with more micro-economic issues. They dont aim to boost
overall Aggregate Demand, but seek to overcome imperfections in the labour market
and reduce unemployment caused by supply side factors. Supply side unemployment
includes:
Frictional
Structural
Classical (real wage)
Policies to Reduce Supply Side Unemployment
1. Education and Training. The aim is to give the long term unemployed new skills
which enable them to find jobs in developing industries, e.g. retrain unemployed steel
workers to have basic I.T. skills which helps them find work in service sector..
2. Reduce Power of trades unions. If unions are able to bargain for wages above the
market clearing level, they will cause real wage unemployment.
3. Employment Subsidies. Firms could be given tax breaks or subsidies for taking on
long term unemployed. This helps give them new confidence and on the job training.
4. Improve Labour Market Flexibility. It is argued that higher structural rates of
unemployment in Europe is due to restrictive labour markets which discourages firms
from employing workers in the first place.
5. Stricter Benefit requirements. Governments could take a more pro-active role in
making the unemployed accept a job or risk losing benefits. After a certain time
period the government could guarantee some kind of public sector job (e.g. cleaning
streets). This could significantly reduce unemployment.
6. Improved Geographical Mobility. Often unemployed is more concentrated in
certain regions. To overcome this geographical unemployment, the government could
give tax breaks to firms who set up in depressed areas. Alternatively, they can give
financial assistance to unemployed workers who move to areas with high
employment.
16

Methods to Control Inflation

Monetary Policy
The Central bank could increase interest rates. Higher rates make borrowing more
expensive and saving more attractive. This should lead to lower growth in consumer
spending and investment.
A higher interest rate should also lead to higher exchange rate, which helps to reduce
inflationary pressure by
Making imports cheaper.
Reducing demand for exports and
Increasing incentive for exporters to cut costs.
Fiscal Policy
The government can increase taxes (such as income tax and VAT) and cut spending.
This improves the budget situation and helps to reduce demand in the economy.
Both these policies reduce inflation by reducing growth of Aggregate Demand.
Other Policies to Reduce Inflation
Wage Control
If inflation is caused by wage inflation (e.g. powerful unions bargaining for higher
real wages), then limiting wage growth can help to moderate inflation. Lower wage
growth helps to reduce cost push inflation, and helps to moderate demand pull
inflation.
Monetarism
Monetarism seeks to control inflation through controlling the money supply.
Monetarists believe there is a strong link between the money supply and inflation. If
you can control the growth of the money supply, then you should be able to bring
inflation under control. Monetarists would stress policies such as:
higher interest rates (tightening monetary policy)
reducing budget deficit (deflationary fiscal policy)
Control of money being created by government
However, in practice, the link between money supply and inflation is less strong.
Supply Side Policies

17

Often inflation is caused by persistent uncompetitive ness and rising costs. Supply
side policies may enable the economy to become more competitive and help to
moderate inflationary pressures. For example, more flexible labor markets may help
reduce inflationary pressure.
However, supply side policies can take a long time, and cannot deal with inflation
caused by rising demand.
Ways To Reduce Hyperinflation
In a period of hyperinflation, conventional policies may be unsuitable. Expectations
of future inflation may be hard to change. When people have lost confidence in a
currency, it may be necessary to introduce a new currency or use another like the
dollar (e.g. Zimbabwe hyperinflation).
Ways to Reduce Cost Push Inflation
Cost push inflation (e.g. rising oil prices can lead to inflation, but, also lower growth.
This is the worst of both worlds, and is more difficult to control without leading to
lower growth
Role of central bank in economic development
The central bank in a developing country aims at the promotion and maintenance of a
rising level of production, employment and real income in the country. The central
banks in the majority of underdeveloped countries have been given wide powers to
promote the growth of such economies. They, therefore, perform the following
functions towards this end.
Creation & Expansion of Financial institution
One of the aims of a central bank in an underdeveloped country is to improve its
currency and credit system. More banks and financial institutions are required to be
set up to provide larger credit facilities and to divert voluntary savings into productive
channels.
Proper adjustment between demand and supply of money
The central bank plays an important role in bringing about a proper adjustment
between demand for and supply of money. An imbalance between the two is reflected
in the price level. A shortage of money supply will inhibit growth while an excess of it
will lead to inflation. As the economy develops, the demand for money is likely to go
up due to gradual monetization of the non-monetized sector and the increase in
agricultural and industrial production and prices
A Suitable Interest Rate Policy:
In an underdeveloped country the interest rate structure stands at a very high level.
There are also vast disparities between long-term and short-term interest rates and
between interest rates in different sectors of the economy. The existence of high
18

interest rates acts as an obstacle to the growth of both private and public investment,
in an underdeveloped economy.
In order to discourage the flow of resources into speculative borrowing and
investment, the central bank should follow a policy of discriminatory interest rates,
charging high rates for non-essential and unproductive loans and low rates for
productive loans.
Debt Management:
Debt management is one of the important functions of the central bank in an
underdeveloped country. It should aim at proper timing and issuing of government
bonds, stabilizing their prices and minimizing the cost of servicing public debt. It is
the central bank which undertakes the selling and buying of government bonds and
making timely changes in the structure and composition of public debt.
Credit Control:
Central Bank should also aim at controlling credit in order to influence the patterns of
investment and production in a developing economy. Its main objective is to control
inflationary pressures arising in the process of development. This requires the use of
both quantitative and qualitative methods of credit control.
They curtail the demand for imports by making it obligatory on importers to deposit
in advance an amount equal to the value of foreign currency. This has also the effect
of reducing the reserves of the banks in so far as their deposits are transferred to the
central banks in the process. The selective credit control measures may take the form
of changing the margin requirements against certain types of collateral, the regulation
of consumer credit and the rationing of credit.
Solving the Balance of Payments Problem:
The central bank should also aim at preventing and solving the balance of payments
problem in a developing economy. Such economies face serious balance of payments
difficulties to fulfill the targets of development plans. An imbalance is created
between imports and exports that continue to widen with development.
The central bank manages and controls the foreign exchange of the country and also
acts as the technical adviser to the government on foreign exchange policy. It is the
function of the central bank to avoid fluctuations in the foreign exchange rates and to
maintain stability. It does so through exchange controls and variations in the bank
rate. For instance, if the value of the national currency continues to fall, it may raise
the bank rate and thus encourage the inflow of foreign currencies.
References:
www.economicshelp.org/.../policies-for-reducing-unemployment/
www.economicshelp.org/.../ways-to-reduce-inflation

19

My DB Ans
First of all let me define macroeconomic policy
They are the set of government rules and regulations to control or stimulate the
aggregate indicators of an economy frames. Aggregate indicators involve national
income, money supply, inflation, unemployment rate, growth rate, interest rate and
many more. In short, policies framed to meet the macro goals
Two main regulatory macroeconomic policies are fiscal policy and monetary policy.
Fiscal policy is the macroeconomic policy where the government makes changes in
government spending or tax to stimulate growth. Monetary policy deals with changes
in money supply or changes with the parameters that affects the supply of money in
the economy.
DB1- Setting Macroeconomic Policies
There are different policies that can be used to promote economic growth (increase
real GDP). Essentially policies to increase economic growth involve either an increase
in aggregate demand or aggregate supply. Demand side policies become important
during a recession or period of economic stagnation.
Demand side policies aim to increase aggregate demand. This needs to be done during
a recession or a period of below trend growth. If there is spare capacity (negative
output gap) then demand side policies can play a role in increasing the rate of
economic growth. However, if the economy is already close to full capacity (trend
rate of growth) a further increase in aggregate demand will mainly cause inflation.
Monetary Policy
Monetary policy is the most common tool for influencing economic activity. To boost
aggregate demand, the Central Bank (or government) can cut interest rates. Lower
interest rates reduce the cost of borrowing, encouraging investment and consumer
spending. Lower interest rates also reduce the incentive to save, making spending
more attractive instead. Lower interest rates will also reduce mortgage interest
payments, increasing disposable income for consumers.
Quantitative Easing
In a liquidity trap, where lower interest rates fail to boost demand, the Central Bank
may need to pursue more unconventional types of monetary policy. Quantitative
easing involves increasing the money supply and buying bonds to keep bond rates
low. The hope is that the increase in the money supply and lower interest rates will
boost investment and economic activity. The fear is that increasing the money supply
could cause inflation.
Fiscal Policy

20

The government can boost demand by cutting tax and increasing government
spending. Lower income tax will increase disposable income, encouraging consumer
spending. Higher government spending will create jobs and provide an economic
stimulus.
The problem with expansionary fiscal policy is that it leads to an increase in
government borrowing. To finance this extra spending, the government have to
borrow from the private sector. If the economy is already growing, then higher
government borrowing can crowd out the private sector. Expansionary fiscal policy is
also criticised by those who fear it is an excuse to permanently increase the size of the
government sector.
However, if the economy sees a rapid fall in private spending, and rise in the saving
ratio, expansionary fiscal policy can help provide a boost to demand in the economy
without causing crowding out.
Devaluation
For countries stuck in a fixed exchange rate. Devaluation can help restore
competitiveness and boost domestic demand. A fall in the exchange rate makes
exports cheaper and imports more expensive.
The disadvantage of devaluation is that it can lead to short-term economic pain.
Rising import prices increase inflation and reduce standards of living. Devaluation is
also seen as a sign of economic and political weakness.
In the case of Eruozone countries, devaluation is needed (see: competitiveness in
Europe), but it is much harder to devalue and leave the exchange rate because of the
likelihood of capital flight.
Policies to reduce unemployment
Policies such as apprenticeship schemes aim to provide the unemployed with the new
skills they need to find fresh employment and to improve the incentives to find work.
Unemployment policies are designed to
1.Improve skills / human capital to make people more flexible in the workplace
2.Provide stronger incentives to look for and accept work
3.Increase the occupational and geographical mobility of labour
4.Maintain a sufficiently high level of demand to create enough new jobs
5.Encourage entrepreneurship and innovation as a way of creating new products and
market demand, which will generate new employment opportunities
There are always cyclical fluctuations in employment. If growth can be sustained it
should be possible to create a steady flow of new jobs. There are always changes in
21

the pattern of demand for different jobs the labour force needs to be sufficiently
flexible to deal and adjust to this.

Reducing the geographical immobility of labour

Many people have the right skills to find fresh work but factors such as high house
prices and housing rents, family and social ties and regional differences in the cost of
living make it difficult and sometimes impossible to change location in order to get a
new job. Many economists point to a persistently low level of new house-building as
a major factor impeding labour mobility and the chances finding new work.

Benefit and tax reforms

To some economists, a policy that reduces the real value of welfare benefits might
increase the incentive for the unemployed to take a job. But it is rare that the root
cause of someone staying out of work is the prospect of out of work welfare handouts.
Targeted measures to improve people's incentives might include linking welfare
benefits to participation in work experience programmes or lower marginal tax rates
for people on low incomes.
An economic recovery creates new jobs, the issue is whether people in the labour
market have the right skills, qualifications and experience to take them many
training schemes lead to qualifications which don't necessarily help people back into
work.
Demand and supply-side policies need to work in tandem for unemployment to fall.
Simply boosting demand if the root cause of unemployment is structural is an
ineffective way of tackling the problem. If demand is stimulated too much, the main
risk is rising inflation
Full-employment does not mean zero unemployment! There will always be some
frictional unemployment it may be useful to have a small surplus pool of labour
available. Most economists argue that there will always be some frictional
unemployment of perhaps 2-3% of the labour force.

DB 2- Impact of Political System on Economic Growth

Looking back at history, most East Asian countries were under some form of
authoritarian government during the period of take-off; for example, General
Chiang Kai-shek was head of Taiwan, General Park Chung Hee was head of
South Korea, the British government ruled in Hong Kong, and the military ruled
Thailand.
Does the political system have anything to do with the miracle?
Ans1

22

The impact of political system played a major role for the economic growth and for
success in Hong Kong, Indonesia, Japan, Malaysia, the Republic of Korea, Singapore,
Taiwan (China), and Thailand. These are eight high-performing East Asian economies
(HPAEs).
The East Asia miracle, achieving high growth with equity---is due to a combination of
fundamentally sound development policies, tailored interventions, and an unusually
rapid accumulation of physical and human capital.
First, governments in northeast Asia developed institutional mechanisms that allowed
them to establish clear performance criteria for selective interventions and to monitor
performance. Intervention has occurred in an unusually disciplined and performancebased manner. Second, the costs of interventions, both explicit and implicit, did not
become excessive. When fiscal costs threatened the macroeconomic stability of Korea
and Malaysia during their heavy and chemical industries drives, governments pulled
back. In Japan the Ministry of Finance acted as a check on the ability of the Ministry
of International Trade and Industry to carry out subsidy policies, and in Indonesia and
Thailand balanced budget laws and legislative procedures constrained the scope for
subsidies. Indeed, when selective interventions have threatened macroeconomic
stability, HPAE governments have consistently come down on the side of prudent
macroeconomic management. Price distortions arising from selective interventions
were also less extreme than in many developing economies.
In the newly industrializing economies (NIEs) of Southeast Asia---Indonesia,
Malaysia, and Thailand---government interventions played a much less prominent and
frequently less constructive role in economic success, while adherence to policy
fundamentals remained important. These economies' capacity to administer and
implement specific interventions may have been less than in northeast Asia. Their
rapid growth has occurred in a very different international economic environment
from the one that Japan, Korea, and Taiwan (China) encountered during their most
rapid growth. Thus the challenge is not only to try to understand which specific
policies may have contributed to growth, but to understand the institutional and
economic circumstances that made them viable. The experience of these NIEs, whose
initial conditions parallel those of many developing economies today, may prove to
have more relevance outside the region than that of northeast Asia.
In most of these economies the government intervened---systematically and through
multiple channels---to foster development, and in some cases the development of
specific industries. Policies to bolster savings, build strong financial markets, and
promote investment with equity included keeping deposit rates low and maintaining
ceilings on borrowing rates to increase profits and retained earnings, establishing and
financially supporting government banks, and sharing information widely between
public and private sectors. Policies to bolster industry included targeting and
subsidizing credit to selected industries, protecting domestic import substitutes,
supporting declining industries, and establishing firm- and industry-specific export
targets.
Reference:

23

http://graduateinstitute.ch/files/live/sites/iheid/files/shared/executive_education/summ
er_international-affairs_faculty-IA_professors/The%20making%20of%20the%20East
%20Asia%20miracle.htm
Ans2
Increase in real GDP of a country is the Economic growth of that country. And
Economic development of a country can also be termed as the improvement in living
conditions of its people.
During the period 1965-1990, eight East Asian countries viz., Japan, Hong kong,
Taiwan, South Korea, Singapore, Malaysia, Thailand and Indonesia have shown an
highly impressive and outstanding performance in terms of Economic growth and
development. These eight countries because of its turnaround performance were titled
as High-performing Asian Economies. And also World Bank had labeled these eight
countries as East Asian Miracle Economies.
Now looking back at their success stories, though these East Asian countries were
under authoritarian type of government during the period of take-off, I wish to give
credit to the following 5 factors and policies that contributed to high economic
performance of these countries as endorsed by World Bank.
1. High Private Investment these eight miracle countries have shown incremental
growth in their gross domestic investments year on year from 1960 to 1990. And since
1970 GDI of these countries was higher than any other developing regions in the
world.
2. Growth in Agricultural Sector though importance of Agriculture was reducing,
this sector in these 8 eight countries was growing rapidly, which provided raw
materials required for continuous growth in manufacturing sector.
3. Manufactured Exports growth these High performing eight Asian Economies
were open to foreign technology and hence manufactured exports grew rapidly. And
the limitations of domestic market were overcome by exports which in turn created a
more competitive environment.
4. Declining Population population in these eight countries was declining which
allowed for greater consumption and better saving levels.
5. High Productivity levels productivity levels in these eight countries were
relatively higher than in other developing countries.
In addition to the 5 basic factors that contributed to the high performance of these
eight countries, the following market friendly policies implemented by their
governments have also helped them in getting their basics right.

24

1. Macroeconomic Management this policy facilitated private investment and kept

inflation at a reasonable level and pegging the local currency to a basket of currencies.
This policy was executed through discipline in government budget and kept national
debt much below the average of developing countries.
2. Integration of the financial system has allowed government to pool resources from
non-traditional savers / those in rural areas
3. Low cost education has enabled these counties to upgrade skills of labour force
easily
4.
Improvements in Agricultural sector As majority of their population was
concentrated in this sector, improving productivity levels of this sector resulted in
improving majority of the population. Also agricultural sector was not taxed
excessively.
5. Minimized Price distortions - these countries have had adopted proper tariffs,
taxes on imported goods, quotas, price controls and managed to keep price distortions
to a minimum level, which enabled foreign technology to infuse through the economy
and in turn set the stage for higher productivity growth.
Along with the basic factors and market-friendly policies, the following state
interventions are also believed to the contributors for East Asian Miracle:
1. Autonomous bureaucracy
2. Emphasis on growth
3. Focus on chosen sector
4. Outward oriented policies
I wish to conclude that the common feature of HPAEs is their similarity and
connection. They all are fundamentally Chinese / multiracial but with large Chinese
population. This common tradition and culture would have had a large impact on the
economic behavior of the people as well as government bureaucracy.
In an large country like India with varied culture, traditions, behaviors, heritage and
language, it is very much essential that the union / central government must have
absolute / clear majority to take bold / strong economic decisions and mandate to
implement economic reforms i.e., in a democratic type of governance a strong
leadership can perform much better than any autocratic / imperialistic / military
regime.
Strong leadership will play a vital role in leading & implementing policies to get
sustainable economic growth. Economic growth is linked to the overall investment
behavior which can be influenced by the government. India, all along due to
successive week / coalition governments was forced to take populist decisions only.
Hope, now with strong leadership, Indias turning point has started.

25

References : 1) GlobalNxt study material & DBs

Ans3
Looking back at history, most East Asian countries were under some form of
authoritarian government during the period of take-off; for example, General Chiang
Kai-shek was head of Taiwan, General Park Chung Hee was head of South Korea, the
British government ruled in Hong Kong, and the military ruled Thailand.
Does the political system have anything to do with the miracle?
This is a very good question to answer and interesting one to understand in detail the
scenario.
Answer can be discussed as:
To break away from the poverty trap and initiate growth, most countries in East Asia
installed authoritarian Government may be an authoritarian state with economic
capability. The key ingredients of this regime are:

Powerful and economically literate leader

Development as a supreme national goal, ideology, and obsession

An elite technocrat group to support the leader in designing and executing

policies

Political legitimacy derived from successful development

One important aspect of authoritarian Government is its transitional nature. Unlike
democracy, it is not a regime where all countries should aspire to and defend in the
long run. Rather, it is a short-term regime of convenience whose value lasts only for a
few decades exception in some of the countries still continue. It was an instrument for
achieving fast growth at a critical moment in the history of a particular country. Once
the desired level of development is attained, it should be thrown away just like the
first-stage booster must be ejected when the space craft reaches a certain height. If it
is not detached, it will become a serious obstacle for further flight. The evaluation of
this regime must be made in dynamic context, not by static comparison of attained
level of democracy.
When authoritarian Government is mentioned in international conferences, there are
typically two types of reaction. The first is acceptance and even praised of this regime
as an effective tool for the development of latecomer countries & the second is
rejection and abhorrence, with a strong conviction that democracy is sacred and
should not be sacrificed in the name of development. It is typically true also. Officials
and researchers in East Asia who have witnessed the actual working of authoritarian
development-alism have more favorable views of it than their Western counterparts.
In the narrowest sense, democracy is said to exist if political representatives are
chosen in free elections. For our purpose, however, the scope of democracy should be
broadened to include the following components, which collectively define political
regime:

26

Purposesfreedom, basic human rights, equality, security, social and economic

benefits for all, coexistence based on mutual respect, and so on
Procedureslegitimacy (election as a means of transition), rule of law, participation,
multi-party system, balance of power among legislature, executive and judiciary, local
autonomy, and so on
Supporting propertiescompromise, tolerance, patience, transparency, accountability,
and so on.
For example, freedom to criticize the government is usually not fully granted in
authoritarian developmentalism, but random arrests, torture, and execution of political
enemies at the whims of a dictator should never be allowed. Many of the procedural
components listed above, such as free election, participation and balance of power,
also tend to be restricted in such a regime, but the same principle should also apply in
evaluating these restrictions. In low-income countries, some deviations from the
Western norm may be tolerated, such as legitimacy through delivering peace and
prosperity rather than through election, dominance of the executive branch, and lack
of decentralization and local autonomy, provided that they are moderate, conducive to
economic policy making, and for the apparent purpose of benefiting all social groups.
Clearly, which restrictions are moderate and which are excessive is subject to
judgment and also dependent on the development stage. Surely, there will be tension
between those who prioritize growth and those who value democracy.
Perhaps democratic Government is a regime that places much greater weight on
democratic components at early stages of development compared with East Asias
authoritarian development-alism in the past. Under democratic development-alism,
the government must exercise strong self-control in imposing restrictions supposed to
be helpful in conducting economic policies, and the situation should be constantly
monitored by domestic and international watchdogs. If so, differences between
democratic and authoritarian developmentalism are a matter of degrees. As a matter of
fact, East Asias authoritarian developmental states also exhibited a wide range from
the very suppressive Park regime in South Korea to the far more democratic rule of
Dr. Mahathir in Malaysia. Low-income developing countries should be able to choose
from a broad spectrum of political regimes instead of between full democracy and no
democracy. The important question is whether the selected regime is suitable for the
country, and whether national leaders are making a serious effort to embrace everhigher levels of democracy as well as economic development at the right speed.
Political instability adversely affects productivity. By increasing uncertainty about the
future, it may lead to less efficient resource allocation. Additionally, it may reduce
research and development efforts by firms and governments, leading to slower
technological progress. Violence, civil unrest, and strikes, can also interfere with the
normal operation of firms and markets, reduce hours worked, and even lead to the
destruction of some installed productive capacity. Thus, we hypothesize that higher
political instability is associated with lower productivity growth. Finally, human
capital accumulation may also be adversely affected by political instability because
uncertainty about the future may induce people to invest less in education.

27

Since political instability is associated with greater uncertainty regarding future

economic policy, it is likely to adversely affect investment and, consequently, physical
capital accumulation. In fact, several studies have identified a negative relation
between political instability and investment.
Political instability is likely to shorten policymakers horizons leading to sub-optimal
short term macroeconomic policies. It may also lead to a more frequent switch of
policies, creating volatility and thus, negatively affecting macroeconomic
performance.
Institutional sclerosis is the phenomenon which institutions is effective in changing in
some areas but unable to adjust the changes in other areas. Institutions can evolve
efficiently in areas of expanding original goals to meet changing environment or
including more members. At the same time, however, institutions or organizations
face difficulties in adjusting itself to new structures or internal policies.
Institutional sclerosis is clearly a factor to be considered. The younger a nation is the
more rapid its rate of growth, institutional sclerosis as a negative determinant of
economic growth according to one interpretation. There is little or no support for the
other political hypotheses. The nature of the regime - democratic or authoritarian does not matter, and there is no
indication of any link between socialist strength and high levels of economic
growth.
The hypothesis that one political factor is related to economic growth is confirmed
when the investment function is regressed on the political factors. The causal pattern
is the same with regard to the variation in investments as with the variation in
economic growth. Institutional sclerosis makes a difference for economic growth in
rich countries.
It is interesting to look more closely at the impact of public sector expansion on
economic growth.
Economic growth is not determined by the level of affluence or the overall social
structure. Economic growth is not predetermined by forces that cannot be influenced
by political action. In the Third World, economic growth is closely tied up with the
overall investment behavior which may be affected by government. In the rich
countries, economic growth is related to institutional sclerosis which also is affected
by politics and policies. A deeper understanding of the impact of politics on economic
growth would take us into an analysis of how and why nations differ in terms of
crucial choices about the allocation of resources between the present and the future as
well as about the status and power of distributional coalitions.
Ref:
http://en.wikipedia.org/wiki/Institutional_sclerosis
https://tidsskrift.dk/index.php/scandinavian_political_studies/article/view/12954/2470
5
www.eastwestcenter.org/fileadmin/stored/pdfs/POPop123.pdf

28

My DB post
Political influence is highly essential to start a business in India. Especially if you are
planning to start a multi billion business, some sort of political patronage is an
absolute necessity. Not only for safeguarding the interest of the company but even to
begin the process of getting the required sanctions, one requires hold in the high
echelons of politics and administrative circles. Indian society is highly plural. It is the
biggest democracy in the world with multi party political system. In population, India
is second to China, with nearly 1200 million people. This is the most important
consumer market in the world. It is a fast developing world. India is the third largest
economy in the world and second fast growing economy in Asia. It has the
tremendous potential of development with huge intellectual human force. With all
these advantages and the huge market potential, world super entrepreneurs are looking
for business establishments in India. With the overcrowded population and the
millions of hard working and qualified personals, India offers a very cheap work force
to the world. Many have realized the business potential in India, started exploring the
unique opportunities of investments. During the last couple of decades, India has
opened its market to world. It has absolutely become an open global market. Banking
sector, Insurance sector and all fields of industrial and business are now open for
multi national investment. Of course there are many obstructions to cross. And mostly
all issues can overcome and establish business if you have the political patronage.
India has a plural political system. With numerous political parties, national level and
state level, it is very difficult to get a consensus among all parties for starting any
business. Also these political parties have patronage of many factors, caste, creed and
ideologies.
DB 1-Trade embargoes
Trade embargoes are commonly used by developed countries to punish countries
that do not adhere to accepted international community relations. The US in
particular has imposed trade embargoes on Vietnam, Iraq, Cuba, North Korea,
Libya and others.
To what extent do these embargoes work? Are these embargoes more deadly
than, say, an outright war?
Ans1
Trade embargoes (from the Spanish word embargo, meaning hindrance, obstruction,
etc. in a general sense) is a move taken by a government to prohibit some category of
trade.
It may apply to exports and/or imports, to a particular product or on all trade, all over
the world or a particular country or countries.
Since World War II, the growth of modern economic institutions and relations has
afforded governments, especially rich and powerful ones like that of the United
States, an arsenal of commercial weapons extending far beyond an outright stoppage
of trade, including denial of aid and loans, commodity dumping, import and export

29

limitations, revocation of most-favored-nation (MFN) trade status, and freezing

assets. As those means increased, the word "embargo" seemed less applicable to the
wide range of economic coercive measures that the United States, the United Nations,
and other entities were using to accomplish noneconomic goals.
For example, Trade embargo imposed by the United Nations on Iraq, allowing it to
export oil only in exchange for food.
A trade embargo is a political move by one country against another. Generally
speaking, the country imposing the embargo will prohibit most or all people in their
country from doing business with the country against which it is imposed. It may even
mean that citizens from the imposing country are banned from visiting the prohibited
country. Essentially, a trade embargo is a strategy to make another country either do
something or refrain from doing something.
Some trade embargoes may be meant to sanction a government that is not abiding by
laws, treaties, or agreements. They are sometimes called economic sanctions. It is
one means by which one country may compel others to cooperate with international
laws.
Perhaps, one of the most famous trade embargoes in recent times is that the United
States holds with Cuba. The embargo was established in the hope that prohibiting
trade with Cuba would weaken the countrys economy to the point where Cuba would
overthrow Fidel Castro and implement a democratic government. In fact, the law
prohibiting trade with Cuba was renamed the Cuban Democracy Act in 1992, though
the initial embargo began in 1962.
Under the terms of the Cuban Democracy Act, the United States does not transact
business with Cuba, and does not allow Cuban investors to spend money in the US.
Visiting Cuba means either traveling illegally, or obtaining a special license for a visit.
Political visitors from the US must account for the money they spend in Cuba, and
may also be restricted to a certain amount of spending per day. Purchasing items from
Cuba or sending money to Cuban family and friends is not permitted. Though the
Cuban economy has been weakened by the decades old US trade embargo, it shows
no signs of implementing a democratic government.
In the US, participating in a secondary trade embargo is outlawed. This occurs when a
country attempts to coerce a business's dealings with a third party country. An
example of this would be a decision made by the US to pressure businesses not to
trade with Israel, because Israel established economic sanctions with any Arabic
country, or alternately, for the US to compel businesses not to trade to the country to
which Israel has halted trade. Pressuring businesses to form secondary trade
embargoes is not only illegal, but must be reported.
This does not mean that a trade embargo cant be established by more than one
country. In fact a country in violation of international laws may have several countries
impose economic sanctions against it. A trade embargo is more likely to achieve its
ends if multiple countries end financial relationships with the country.

30

Under most laws in most countries, there are special times when a trade embargo can
be violated. A country can still offer help or aid if a natural disaster occurs, or they
may sponsor the efforts of organizations like the Red Cross to help get assistance to
the extremely poor or those in need of medical attention. Yet, when a trade embargo
exists, one country will never hand money to another countrys government. Instead,
they will fund humanitarian efforts that reach the people directly, as often doubt exists
that giving money to a government would ever reach or benefit its citizens.
In the 1970s, the United States also began using embargoes specifically against
terrorism. Congressional legislation in 1976 and 1977 prohibited aid and exports to
nations abetting terrorism. At the behest of Congress, the State Department began
issuing lists of nations supporting terrorism. These lists included Libya, Syria, Iraq,
Cuba, South Yemen, and Iran.
In the same decade, the United States and many other nations began using sanctions
to discourage the proliferation of nuclear weapons. These sanctions sought to stop
trade in items related to nuclear weapons with nations that refused to sign the NonProliferation Treaty. The nations most affected were Brazil, Argentina, India,
Pakistan, and Iraq.
Despite UN, US and EU sanctions, the Iranian nuclear programme has continued to
advance; therefore, it could be concluded that embargoes did not achieve their main
objective. However, the nuclear programme has slowed down and it is doubtful that
the alternative to this would have led to a better outcome.
The Iranian regime has shown resilience in the face of sanctions. The countrys
economy has adapted to sanctions and has developed ways of circumventing them.
The imposition of embargoes has also shown some of the structural limitations when
implementing targeted measures. The limited border control and some of the rulings
by the Court of Justice are good indications which help us to correctly evaluate what
sanctions can and cannot achieve in countering the proliferation of nuclear weapons.
By imposing an embargo before declaring war, a nation could keep friendly ships
from falling into the hands of the enemy and hold enemy ships hostage for future
contingencies.
The United States was the first modern nation to make significant use of the embargo
as a substitute for, rather than a prelude to, war.
Historical experience suggests that embargoes may include actions or reactions that
are neither orderly nor predictable and that they are not simple, safe, and controllable
substitutes for war.
Another example in terms of using embargo as political weapon is as under:

31

A handful of Arab countries, most importantly Saudi Arabia, dominated global trade,
and saw the potential to exercise political power as a result. Their first attempt to
exercise such power came during the 1967 Six Day War with Israel, when they
imposed an embargo on exports of oil to the US, and other countries that supported
Israel. The embargo was a complete failure, having no significant impact on either the
US economy or the course of the war, which ended in disaster for the Arab side. (Its
at least arguable that Israels military victory, leading to the occupation of the West
Bank, has been just as much a disaster for the victors in the long run, but thats a topic
for another day).
The next embargo, imposed during the 1973 Yom Kippur War, was far more
successful, at least superficially. The embargo was maintained for months, during
which Americans endured gasoline rationing and long lines. Better still, the price of
oil rose dramatically, enriching the states that had imposed the embargo.
More importantly, from the viewpoint of the Arab countries, the embargo failed to
achieve its political objectives. The embargo of 1973 was the last time that exporters
attempted to use oil as a political weapon. But in the ensuing decades, oil-producing
countries have repeatedly been subjected to, or threatened with, sanctions on exports
imposed with the aim of enforcing changes in their foreign and domestic policies.
Examples include Iran, Iraq, Libya, Sudan, Syria and Venezuela. These sanctions have
had mixed success, but have certainly had more effect than the 1967 and 1973
embargos.
Often in todays world imposing an embargo by a single country would make little
difference to the economy of the country on which it is being imposed hence an
embargo being enforced from the UN would be more effective to bring the country &
its government to terms.
Imposing a trade embargo may not be an effective tool to improve a country as it
makes both the parties (imposed country & Rest of The World) worse off in absence
of free trade.
References:
1
The effectiveness of EU sanctions An analysis of Iran, Belarus, Syria and
Myanmar (Burma)
E P C I S S U E P A P E R NO. 7 6, N O V E M B E R 2 0 1 3
By Francesco Giumelli and Paul Ivan

2
The Impact of International Economic Sanctions on Trade An empirical
Analysis by Raul Caruso at Universita Cattolica del Sacro Cuore di Milano

3
Embargoes in Historical Perspective by ROBERT A. DOUGHTY and
HAROLD E. RAUGH, JR.

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Ans2
Trade Embargo
A government order that restricts commerce or exchange with a specified country. An
embargo is usually created as a result of unfavorable political or economic
circumstances between nations. The restriction looks to isolate the country and create
difficulties for its governing body, forcing it to act on the underlying issue.
An embargo will restrict all trade with a country, or aim to reduce the exchange of
specific goods. For example, a strategic embargo prevents the exchange of any
military goods with a country. A trade embargo will restrict anyone from exporting to
the target nation. Because many nations rely on global trade, an embargo is a
powerful tool for influencing a nation.
A trade embargo is a law or policy a state initiates which prohibits or otherwise
restricts the importation/exportation of goods. Trade embargoes are typically
motivated by political, economic, moral, or environmental reasons, and used as a form
of protest against another country's practices.
An embargo is a tool of economic warfare that may be employed for a variety of
political purposes, including demonstrating resolve, sending a political signal,
retaliating for another countrys actions, compelling a country to change its behaviour,
deterring it from engaging in undesired activities, and weakening its military
capability. For example, in 1992 the United States redoubled its efforts to enforce
compliance with its decades-long embargo against Cuba in order to retaliate for the
downing of a civilian American airplane by the Cuban air force and to demonstrate its
resolve to maintain the trade restrictions despite growing opposition to them at home
and abroad.
An embargo also may be employed to prohibit exports of arms and other war materiel
to belligerent states or to states in rebellion, either in an attemptusually collective
to force a cessation of hostilities or in an individual states effort to preserve its
neutrality. In 1937 the United States imposed an arms embargo for this purpose on
both sides in the Spanish Civil War, and in 1991 the United Nations attempted to halt
the fighting in the former Yugoslavia by imposing an arms embargo against all the
belligerents.
An embargo may also be imposed to prevent potentially threatening countries from
increasing their military power. Throughout the Cold War, for example, the
Coordinating Committee for Multilateral Export Controls (COCOM) managed a
multilateral embargo that restricted the export of strategic goods from its member
states to the Soviet Union. Since the end of the Cold War, strategic embargoes have
been imposed against Iraq, Libya, and North Korea.
Embargoes are not imposed against enemy ships and other property, because their
status as enemy property usually subjects them to other types of action (e.g., military
attack), but they can be imposed by belligerents on neutral shipswho also may

33

exercise the right of angryand by neutrals on belligerent ships. For example, in

1941, before it officially became a belligerent, the United States seized German,
Italian, Danish, and French ships lying idle in American waters and also froze the
assets of the Axis powers.
Multilateral embargoes require collective cooperation and are most likely to be
effective when all countries that have the capacity to undermine them abide by their
restrictions. The ability of a targeted country to acquire embargoed goods from a third
party is likely to reduce its effectiveness. In addition, embargoes put exporters in
countries imposing the embargo at a disadvantage relative to their competitors in
countries that do not abide by the embargo by denying them access to markets in the
targeted country. For example, American companies often complained that the U.S.
embargo against Vietnam did not prevent Vietnamese consumers from acquiring
American computers and other embargoed goods through third parties. The issue of
foreign availability is often used to justify exemptions from participating in an
embargo, and indeed it was one of the primary justifications offered for ending the
U.S. embargo against Vietnam in 1994. In other contexts, critics of embargoes have
challenged them on ethical grounds, arguing that they often impose greater costs on
the general population in the targeted country than on its political or military
leadership.
Reference:
http://en.wikipedia.org/wiki/Embargo
http://darwin.bio.uci.edu/~sustain/issueguides/Embargoes/
http://www.britannica.com/EBchecked/topic/185507/embargo
Ans3
Embargo can be termed as legal prohibition by a government or a group of
governments restricting the movement of goods and services from some locations to
one or more countries.
Embargoes could be narrow or broad in scope. As in case of Trade Embargo, it is a
prohibition on exports only to one or more countries, though the term is used to refer
to stop all commercial activities. And a strategic embargo restricts only to goods
which would make impact on countrys military power. On the similar lines, oil
embargo prohibits only export of Oil as in case of Iran. Broad embargoes permit
export of goods like medicine and food required for humanitarian purposes.
Embargo is a type of civilized warfare used for various political purposes such as
demonstrating decision, sending a political signal, retaliation, compelling a country to
change its behavior / make up its mind, trying to weaken a countrys military
capability. USA in 1992 redoubled its efforts to further force compliance with its
decades long embargo against Cuba (since 1960) to retaliate downing of a civilian
American airplane by Cuban Air force and to demonstrate its seriousness to maintain
trade restrictions in spite of opposition for the same from within and other countries.
Embargoes require cooperation and would be effective only when all countries with
capacity to weaken them abide by their restrictions. The ability of the targeted country

34

to get embargoed goods from other countries would reduce effectiveness of the
embargo. And also embargoes place exporters of countries imposing embargo at a
disadvantageous position in comparison with countries that do not abide by the
restrictions / embargo. American companies found that U.S embargo on Vietnam did
not stop Vietnamese consumers from getting American computers through other
countries / parties. Analyses also suggest that embargoes impose greater cost on
common people of the targeted country than the political leadership or military
leadership.
I am of the view that Embargo always will not be effective in putting pressure on the
country as it would have negative effect on the imposed country as well as rest of the
countries due to absence of free trade i.e., in a long run all economies would suffer.
To me it appears that the embargo of U.S on Cuba, Iran, Vietnam etc., has not yielded
the desired results of U.S and instead these embargoes have made effected countries
more innovative / stronger to face challenges.
In any case these embargoes are very powerful tools to influence a nation rather than
going for an outright war, which definitely is not an option to be exercised in the
present era.
References : 1) www.britanica.com
Ans 4
Sanction in the grain trade by US on Iraq,Iran,Libya,Sudan, North korea,
Vietnam,Cuba
A favorite U.S. foreign policy tool, when dealing with countries following policies
that the U.S. government officially opposes, is to impose unilateral sanctions. Even
when there are also multilateral sanctions, like in Iraq and Libya, the U.S. imposed its
own set of conditions and criteria.
But the evidence indicates that sanctions rarely work and are usually
counterproductive, at least in the grain trade.
For a time in the 1990s, no wheat sales were permitted to a group of countries that
comprised of Vietnam, Cuba, Libya, Iraq, Iran, Sudan, and North Korea, closing as
much as 20% of the worlds wheat market to U.S. wheat sales.
Although most of the sanctions are now officially removed or eased, U.S. Wheat
Associates finds that market entry back into these countries is not an easy task, as
detailed in the following case studies some of these previously sanctioned markets
show promise, others remain essentially closed. USW is funded in part through wheat
checkoff dollars to promote the sale of American wheat around the world.
Iraq
First on the list of difficult situations is Iraq, which was sanctioned by the UN as well
as the U.S.

35

For the couple of years immediately following the 1991 Gulf War, the U.S. continued
to sell wheat to Iraq under the UN sanctions. However, as is now well documented,
the Oil for Food (OFF) program became a tool for Saddam Husseins manipulation,
and a large share of bidders could not or would not perform to Saddams terms. The
Australian Wheat Board was then able to capture a large share of the market under
OFF. Any possibilities for U.S. wheat exports came to a definitive halt when Saddam
Hussein refused to buy from the U.S. after the inspectors left Iraq.
Better opportunities exist now, though tendering shipments with the newly constituted
Iraqi Grain Board different from the Oil for Food program is taking time to develop.
USW is hoping to bring Iraqi wheat buyers and quality control technicians to the U.S.
this year, to familiarize them with the U.S. marketing system and to demonstrate the
viability of working with normal trade terms
Iran
Iran offers a different set of challenges. Although President Clinton eased restrictions
on the sale of food to Iran (and Libya and Sudan) in April 1999, the Iranian buyer
GTC, a government agency is not inclined to allow U.S. wheat into the country.
USW has nurtured relations with Iranian millers, who have expressed an interest in
using U.S. wheat and, at a couple of points over the past couple of years, U.S. wheat
sales were under discussion. Some millers have even discussed the possibility of
buying American wheat through other companies outside Iran and re-selling it to
themselves. It has occurred that just when talks and contacts might be made,
something happens on the bigger geo-political stage, and talks break off.
Libya
Changes in wheat trade relations with Libya have been slow but steady over the four
and a half years since an ease was made in sanctions here. USW the first commodity
group to go into Libya in 1999 has tried to renew relations with Libyan wheat
buyers whenever and however possible, and good sales happened from time to time,
resulting in total U.S. wheat exports of 352,000 metric tons over the last 4 years.
Now that the door is opened wider, thanks to better relations between Tripoli and the
White House, USW is cautiously optimistic about competing more directly in this 750
TMT wheat import market. A U.S. wheat crop quality seminar in Libya to report on
the 2004 U.S. wheat harvest, with 70 Libyans in attendance, is a solid step forward.
Sudan
The ban on exports to Sudan was lifted in 1999 after eight years, but restrictions and
difficult licensing requirements still exist that make trade difficult, resulting in less
than 100 thousand metric tons of U.S. wheat sold commercially into this country over
the past four years.
Sudan, while one country, is essentially three markets. Darfur, the site of recent
violence, must rely totally on food aid, and the U.S. government recently announced

36

wheat purchases and a 200 TMT release from the Bill Emerson Humanitarian Trust
for the two million suffering people in this remote section of western Sudan.
The north and south areas in Sudan have two separate consumption patterns, divided
by language, culture and a long running civil war. The U.S. has contributed wheat as
food aid but, because of the trade sanctions, millers and buyers are not familiar with
the U.S. marketing system or wheat qualities that are available using appropriate
specifications. The licensing requirements are also a disincentive to the traders who
would otherwise offer U.S. wheat commercially to Sudan, especially when these
traders have many other options that are not as difficult.
Australia grabbed this market while the U.S. was absent, and the Canadians made
good inroads as well when the market shifted from a solid HRW market to a higher
protein market favoring Canadian wheat.
USW sees the need to provide millers and bakers here with information on flour
performance and value of U.S. wheat compared with Canadian and Australian, but
U.S. government funding restrictions for market development limit USW efforts.
USW also watches the food aid donations closely, trying to ensure that it reaches the
intended market in order to prevent possible damage to the U.S. quality image for the
longer term, commercial trade.
North Korea
Theres not much opportunity American wheat producers can look forward to in North
Korea, with relations so strained that the U.S. and North Korea cant even agree on
how to talk to each other.
Although the U.S. officially eased sanctions, North Korea is more a candidate for
food aid than a viable commercial market. Until recently, the U.S. was making
sizeable wheat donations, but even that has been cut dramatically, from 200 TMT in
2001/02 to 24 TMT during the last marketing year. In fact, in the last marketing year
the Japanese have donated more U.S. wheat to North Korea (25 TMT) than the U.S.
government (24 TMT), according to USDA statistics.
Vietnam
Even though the milling and baking industries in Vietnam recognize the value of U.S.
wheat and graciously invite USWs collaboration as their industries develop, the way
back from sanctions has been a long, long road for the U.S. wheat industry.
In 1994, the U.S. lifted its 19-year trade embargo, and the first U.S. wheat was sold
into Vietnam three years later in 1997, after representatives from Binh Dong Flour
mill attended a USW buyers conference. The U.S. government had granted limited
exceptions to the sanctions in 1992, and USW has been working with industry there
ever since.
Vietnams potential as an important market for the U.S. in the long-term is excellent,
but American wheat still faces tremendous competition and other obstacles. In
2002/03, India became Vietnams major wheat supplier, with Australia dropping to

37

second with a 28% market share. China, Pakistan and the Ukraine also made inroads
into the market, capturing a combined market share of 12%. Now, India has dropped
out of the equation for the moment, and Australia has targeted Vietnam as a priority
market.
Although Vietnamese millers recognize that U.S. dark northern spring wheat and soft
white wheat are premium wheats which produce premium-priced flours, U.S. exports
remain low due to higher freight costs, and a lack of port infrastructure to make
shipments from the U.S. feasible, in addition to Australias push to recapture market
share through price discounts.
USW continues our collaboration with prospective Vietnamese buyers, and mills have
started demanding U.S. wheat from their buying groups, resulting in small lots being
transhipped through Malaysia, Indonesia and the Philippines as well as by containers.
Recent infrastructure improvements coming through development may prove pivotal,
as a mill with port and storage capacity for Panamax vessels was brought online in
2003, and other port projects are underway that will increase the opportunities for
U.S. wheat. As mills continue to develop their technical proficiency and market savvy,
USW expects buyers to source greater amounts of higher quality wheat from the U.S.
Cuba
After 40 years of sanctions, the U.S. agricultural community began selling food to
Cuba three years ago. By every indication, the wheat trade has been good for
Americas farmers, with Cuba buying nearly a million tons of U.S wheat since trade
resumed 2001/02.
Impediments still come up that obscure trade, however, including a U.S. regulatory
proposal that would require Cuba to prepay for wheat and other products before the
goods are even shipped, rather than before delivery, which is far more restrictive than
normal cash sales as practiced throughout the world. The change would increase
costs, create tremendous logistical problems, negatively impact the price for
agricultural products and generally make U.S. exports less competitive.
USW, other commodity groups and concerned members of Congress called on the
White House to drop consideration of any new onerous requirements, and have urged
that the U.S. move beyond old and ineffective policies and conduct trade with Cuba
on a more normal basis.
New legislation might help: The recently introduced Agricultural Export Facilitation
Act of 2005, brought forth by Sens. Larry Craig (R-Idaho), Max Baucus (D-Mont.),
Pat Roberts (R-Kan.) and others, would authorize Cuba to make payments directly to
U.S. banks, clarify that Cubas payments do not have to be received before exports
leave U.S. shores, make it easier for U.S. citizens to travel to Cuba to market
agricultural products and expedite temporary visas for Cuban nationals to visit the
United States to inspect goods before they are shipped.

38

My DB Ans
As per my understanding, trade embargo is a political move by one country against
another. Generally speaking, the country imposing the embargo will prohibit most or
all people in their country from doing business with the country against which it is
imposed. It may even mean that citizens from the imposing country are banned from
visiting the prohibited country. Essentially, a trade embargo is a strategy to make
another country either do something or refrain from doing something.
Some trade embargoes may be meant to sanction a government that is not abiding by
laws, treaties, or agreements. They are sometimes called economic sanctions. It is
one means by which one country may compel others to cooperate with international
laws.
Trade embargoes are a form of economic sanction that can be used against another
nation. A trade embargoes restricts trade with a nation. This may involve banning the
import and export of only a few goods, such as arnaments, or may encompass a wider
range of goods. Embargoes are usually employed to apply pressure to a nation that
gas or will engage in action undesirable to the body applying the sanction. Simply put,
they are an economic means of applying political pressure. They are a common
method for forwarding foreign policy and for enforcing international law. When
applied as such, they are often the first sanction applied against an offending nation
where subsequent sanctions may lead towards physical conflict.
Embargoes and other economic sanctions have been used throughout history to
varying degrees. During the Napoleonic wars of the early 19th Century, France
embargoed most European trade with Britan. During this timer, America also
embargoed trade with both England and france after these nations attempted to
prevent americas trade with other. The American embargo act of 1807, however, was
more damaging to Americas own economy. It was lifted and eventually replaced with
trade embargo on England alone. This precipitated the war of 1812 between America
and England.
Embargoes became a more prominent measure in international politics in the 20th
century. After world war I, sanctions were considered to be an alternative weapon
for governments generally disinclined to pursue war once again. In 1919, American
President Woodrow Wilson said A nation that is boycotted is a nation that is in sight
of surrender. Apply this peaceful, economic, silent, deadly remedy and there will be
no need for force. Although subsequent history questions this quote and effectiveness
of economic sanctions, they have become a staple of foreign policy. After World War
II, they have frequently been used by many countries.
Embargoes and other sanctions may be used for various goals. Initially, the threat of
sanction may be used to deter a nation from engaging in undesired activities. An
embargo may also be used to encourage compliance with policies by international
bodies such as the United Nations. Economic sanctions also can be imposed as
punishments for events caused or actions taken by the target nation. While some
embargoes may only have minor impact on the nation, they may be symbols of the

39

sanctioning countrys disapproval. This may often be the case with multilateral
sanctions.
While sanctions seek to encourage a nations compliance, in some cases they may be
intended to destabilise a regime. This has been the general intent of the Cuban
embargo imposed by America. While the effectiveness of the Cuban embargo is
uncertain, some instances of sanctions have been instrumental in removing some
regimes from power. Example of successful destablising sanctions are those imposed
on Haiti in 1986 and Chile in 1973.
Ref: www.iminds.com trade embargoes
DB 2- Effect of FDI Inflow
Discuss the positive and negative contributions of FDI inflow to the competitive
advantage of host countries with regard to the following issues:
Entrepreneurship
Efficiency
Political, social and cultural issues
Ans1
FDI occurs when an investor based in one country (the home country) acquires an
asset in another country (the host country) with the intent to manage the asset.
Investments can take place for many reasons, including to take advantage of cheaper
wages, special investment privileges (e.g. tax exemptions) offered by the country.
FDI Requirement for Host Country:
For any country Domestic capital is inadequate for purpose of economic growth hence
foreign capital is usually essential, at least as a temporary measure, during the period
when the capital market is in the process of development.
The economic impact of FDI is difficult to measure with accuracy. Benefits of FDI
do not increase automatically and equally across countries, sectors and local
communities. These benefits vary from one country to another and are difficult to be
separated and measured.
Relationship between FDI inflows and entrepreneurship is in fact negative, indicating
crowding out at both the aggregate and intraindustry levels. In entrepreneurship, FDI
has revolutionized businesses and investment strategies in host countries.
Positive Contribution of FDI Inflow in respect of Entrepreneurship:

40

 Diffusion of technology and knowledge between foreign entrants and domestic

incumbents. Foreign firms are assumed to own more advanced technology and to be
able to motivate superior managerial performance compared to their local
counterparts.
Interaction with foreign firms operating at higher levels of technology and imitation
of their innovations may enable local firms to achieve higher productivity in their
operations. Furthermore, as the novelties stemming from FDI presence are already
tested in markets, domestic entrepreneurs may recognize their viability and convert
them into profitable undertakings in a shorter time and with less risk of failure
.
Enhancement in Labor mobility through which technology, skills and knowhow may
diffuse to local firms. Being equipped with these new skills, the local workforce
previously employed and trained by foreignowned firms might take jobs in local
enterprises or create businesses of their own.
Exposure to knowledge accumulated through foreign firms enhances international
experiences which influence the export decisions of existing domestic firms.
Being part of the multinationals supply chain may allow local suppliers to achieve
economies of scale due for example to increased demand for intermediate goods and
this may stimulate domestic entry into intermediate goods producing sectors.
In small economies, large foreign companies can and often do, abuse their dominant
market positions. Hence, it is eminent that FDI is not always in the host countys best
interest and therefore it should be controlled.
Negative Contribution of FDI Inflow in respect of Entrepreneurship:
The entry of foreign firm increases competitive pressures on domestic ones, which
may drive less efficient local firms out of the market.
FDI induced competitive forces may lead to a reduction in prices, ultimately
resulting in displacement of local firms, which though inefficient in an international
sense may provide local employment and income. The effect may be more severe if
domestic firms are not efficient enough to compete with foreign firms for example
due to a technological gap.
If the foreign entry is by acquisition, existing local supplier links may be weakened
over time, and ultimately replaced by international sourcing that meets global
standards.
Foreign firms can exploit their domestic and international market power to offer
better working conditions and higher wages in the host economy than domestic
competitors, so talented workers may take positions in foreign firms instead of
utilizing their skills in the development of domestic firms.
Foreign firms may exploit their superior market position in the domestic and global
marketplace to crowd out domestic entrepreneurs.
Technical efficiency is defined as the potential maximum output obtained based on a
vector of production inputs. It refers to the efficiency achieved (or not) towards the
production frontier. Technical efficiency varies across countries and firms.

41

Foreign firms are more efficient than domestic competitors and the presence of the
former increases the inefficiency of the latter.
Positive Contribution of FDI Inflow in respect of Efficiency:
Foreign ownership can bring advanced technology, capital investment and better
organization, which make firms more efficient.
Host Country skill up gradation with modern international technologies, in turn
increase in efficiency of manpower and organizations as well.
FDI will increase the existing stock of knowledge in the host country through labour
training, transfer of skills, and the transfer of new managerial and organizational
practice.
Foreign management skills acquired through FDI may also produce important
benefits for the host countries with High World Class efficiency, optimum utilization
of available natural resources.
Bigger size of foreign firm contributes to technical efficiency in bigger way.
Foreign Firms, or firms after their technology transfer, remains updated with modern
technologies, consequently more efficient.
In terms of export behavior, exporting firms display a higher level of efficiency than
the non-exporting firms. The foreign ownership structure positively affect both
exporters and non-exporters.
In most third world countries, outdated technologies have been in use particularly in
government corporations. With the inflow of foreign technology, such systems have
been highly improved in terms of performance.
Increased Productive efficiency due to competition from multinational subsidiaries,
with increase opportunity of Employment, Consumer benefit with latest products.
Expertise transfer, research and development requires the fees to the high cost of
developing the technology.
Negative Contribution of FDI Inflow in respect of Efficiency:
Host country may lack the economic capacity to adopt a certain technology due to
the cost involved or inadequate manpower to use the technology as well as the
cultural attitude of the populace to such systems.
Dependency for technical knowhow, raw materials, spares and consultancy &
expertise in case of technology transfer through FDI.
Positive Contribution of FDI Inflow in respect of Political, Social and Cultural
issues:
FDI can help the improvement of environment and social condition in the host
country by relocating cleaner technology and guiding to more socially responsible
corporate policies.
Social development in all respect of host country through acquisition of international
culture, life style and up gradation in professional education standard.
Increase in jobs with FDI.
Host country infrastructural development with FDI inflow like linkages of logistics
through air, water and road etc.
Increase in wages, consequently upgrade life style.
Replace declining market sectors with high technology substitutes through FDI.

42

Wage differentials between income groups will be exacerbated.

More jobs, in an effort to increase productivity, skilled and semi-skilled workers
needed which will further reduce unemployment and thus reduce social problems.
Foreign flow of capital might spread the best practices of corporate governance,
accounting rules, and legal traditions to less developed countries (LDCs).
Negative Contribution of FDI Inflow in respect of Political, Social and Cultural
issues:
The host country has a number of state secrets is something that not meant to be
exposing to the world.
The national defense is at risk because of Foreign Direct Investment in the country.
Language and cultural differences that exist between countries and investors of the
host country also cause problems in the case of foreign direct investment.
Local entrepreneurs of underdeveloped countries might view foreign investors as
seizing valuable resources that belong to the indigenous population. For MNCs
involved in the removal of natural resources, the locals may view the MNC as taking
the host country's resources without adequate compensation to the local population.
In more traditional cultures, rapid urbanization is seen as a threat to the local culture.
In any of these situations, an increase in FDI can lead to political conflict in the host
country.
With High inflow of FDI, some abuses like use of drugs, hazardous wastes, harmful
for host country and various diseases prevailed may affect host country. The
potentially harmful environment impact of FDI, especially in the heavy industries and
the effects on competition in national markets.
Increase in high level scandals and corruption with high inflow of FDI.
Effort to attract investment by subsidies and tax breaks can lead to substantial
reduction of government revenues, which could otherwise be used to invest in
education and infrastructure what ultimately fastens economic growth and increases
total welfare.
References:
NEGATIVE AND POSITIVE EFFECTS OF FOREIGN DIRECT INVESTMENT
By Asta Zilinske of Kaunas University of Technology, Lithuania
THE EFFECTS OF FDI INFLOWS ON HOST COUNTRY ECONOMIC GROWTH
Version 31 August 2005 by Andreas Johnson
Foreign Direct Investment and Domestic Entrepreneurship: Blessing or Curse?
IZA DP No. 7796, in December 2013 by Secil Hulya Danakol, Saul Estrin, Paul
Reynolds &
Utz Weitzel.
The Effects of Foreign Direct Investments for Host Country s Economy by Selma
KURTISHI ,at American University of the Middle East, Faculty of Business, Kuwait
Ans2
(a) Economic fundamentals, namely, large market size; low labour cost (in terms of
real wages); availability of high skill levels (captured by secondary enrolment ratio
and productivity of labour); lower external debt; and extent of electricity consumed in
the economy are found to be significant determinants of aggregate

43

FDI.
(b) After controlling for the effect of economic fundamentals, FDI policies are found
to be important determinants of FDI inflows. Results show that lower tariff rates
attract FDI inflows. However, fiscal incentives offered by the host governments are
found to be less significant as compared to removal of restrictions in attracting FDI
inflows.
(c) Bilateral investment treaties (BITs) which emphasise on non-discriminatory
treatment of FDI, play an important role in attracting FDI inflows into developing
countries. However, bilateral investment agreements with developed countries and
developing countries may have differential impact. Results show that BITs with
developed countries have a stronger and more significant impact on FDI inflows as
compared to BITs with developing countries. With respect to regional investment
agreements we find that different regional investment agreements have different
impact. While APEC is found to have a significant positive impact on FDI inflows
ASEAN is not found to affect FDI inflow. However, it is noted that regional
agreements may be still too new to show an impact in the period studied.
(d) The results of the analysis with respect to FDI from developed and developing
countries show that economic fundamentals differ in terms of their significance in
attracting FDI from developed countries and developing countries. FDI from
developed countries are attracted to large market size, higher education levels, higher
productivity of labour, better transport and communication and lower domestic
lending rates, while cost factors play a more significant role in attracting FDI from
developing countries. The determinants found significant are large market size,
potential market size, lower labour cost, devaluation of exchange rate, better transport
and communication, lower lending rates and lower budget deficit.
(e) The impact of FDI policies also differs on FDI from developed and developing
countries. Lower tariff rates are significant determinants of FDI from developing
countries but do not attract FDI from developed countries. Fiscal incentives are found
to attract FDI from developing countries but it is removal of restrictions on their
operations that attract FDI from developed countries. This is corroborated by the
results with respect to BITs. BITs with developed countries are found to attract FDI
from developed countries but BITs with developing countries is not found to be a
significant determinant of FDI from developing countries.
The above results of the study highlight the importance of government policies in
attracting FDI inflows into developing countries. They show that apart from the
economic fundamentals of the economy, which may attract FDI inflows, FDI policies
of the host governments and investment agreements also play an important role. With
in the national FDI policies adopted by the government, it is the removal of
restrictions on the operations of foreign firms in the host country that matter the most,
especially to FDI coming from the developed countries. Bilateral investment
agreements that focus on the non-discrimination in the treatment of foreign firms, lay
specific standards of investment protection and contain provisions for the settlement
of disputes, have an important impact on FDI inflows. BITs and regional investment

44

agreements can therefore form an important policy instrument for attracting FDI
inflows into developing countries.
Given the fact that FDI from developed and developing countries are attracted to
different polices of the host governments, the question that arises is should the host
governments in developing countries aim at attracting FDI from the developed
countries and formulate their policies accordingly like signing investment agreements
with developed countries or should they concentrate on policies like fiscal incentives
to attract
FDI from developing countries?
The answer to this question is however beyond the scope of this study and is also
country specific in nature since FDI from developed and developing countries
constitute different shares in total FDI inflows in a particular country. But what comes
out clearly from the analysis is that policies with respect to cost factors, e.g., lower
tariff rates, tax concessions, tax holidays etc. play an important role in attracting FDI
from the developing countries but these policies may not attract FDI from developed
countries. What matters more to FDI coming from developed countries are the
policies that facilitate business of foreign firms in the host country.
Positive effects of FDI on host countries
Trade effects
FDI influences economic growth by increasing total factor productivity and the
efficiency of resource use in the host country. It increases the capital stock of the host
country and thus raises the output levels. The main trade-related benefit of FDI is that
it contributes to the integration of host countries into the global economy by
engendering and boosting foreign trade flows as well as the establishment of
transnational distribution networks. This, in turn, implies that host countries will
pursue a policy of openness to international trade to benefit from FDI.
Human capital contribution
FDI's contribution to human capital in host countries is significant. MNEs increase
workplaces, thereby reduce the unemployment in the host country. They usually
provide higher wages and working conditions due to their higher productivity which
is explained by greater technological know-how and modern management skills that
enables them to compete effectively in foreign markets. The transfer of technological
and managerial know-how through affiliates also gives rise to direct benefits and
increases competitiveness in host countries. For example, domestic employees can
move from foreign to domestic firms. Local firms might increase their productivity
through learning from foreign firms by collaboration. The presence of MNEs may
also cause a useful demonstration effect, forcing the government to invest in
education more, as the demand for skilled labour by these firms is very high.
Spill over effects

45

MNE's usually possess a higher level of technology, especially "clean", which is the
main factor of their higher productivity. One of the positive effects of FDI is that it
generates significant technological spillovers in the host countries. MNE's usually
provide technical assistance, training and other information to increase the quality of
the suppliers' products.
Local firms might increase their productivity as a result of gaining access to modern,
improved, or cheaper intermediate inputs produced by MNE in upstream sectors.
Sales of these inputs by MNE might be accompanies by provision of complementary
services which might not be available through imports. Local sub-contractors can also
benefit from MNE's international contacts, thus gaining more access to foreign
markets. FDI can also increase research and development initiatives of local
companies (Dunning, 1995).
Competition level
FDI exerts a significant influence on the competition level in the host country. The
presence of MNEs assists the economic development by stimulating the domestic
competition and thereby leading to higher productivity, innovation, lower prices and
more efficient resource allocation.
Management and governance practises
FDI through acquisition of local firms result in the changes in management and
corporate governance. MNEs generally impose their own company policies, internal
reporting systems and principles of information disclosure. This effect improves the
business environment and develops the corporate efficiency. Moreover, different cases
show that foreign investments also create a more transparent environment in the host
country as MNEs encourage more open government policy, raise corporate
transparency and assist in the fight against corruption.
Since foreign investments provide needed resources to developing nations such as
capital, technology, managerial skills, entrepreneurial ability, brands, and access to
markets, they are important for these economies to industrialize, develop, and create
jobs reducing the poverty level in their countries. Therefore, most developing
economies recognize the potential value of investments and have liberalized their
investment regimes and conducted investment promotion activities to attract FDI from
developed countries.
Ref:www.ukessays.com
Negative effects of FDI on host countries
Crowding out effect of FDI
FDI can have both crowding in and crowding out effects in host country economy.
The main negative effect of crowding out effect is the monopoly power over the
market gained by MNEs. Empirical evidence in that regard is mixed. Econometric test

46

by Agosin and Mayer (2000) covering 39 countries for a long period (1970-1996)
demonstrated that crowding out and crowding in was detected in 10 economies, but in
19 the effect was neutral. Crowding out effect did not exist in Asia, but it was quite
obvious in Latin America. Another study of 83 economies over the period of 19801999 found no impact of FDI on host country for 31, crowding out for 29 and
crowding in for 23 countries (Kumar and Pradhan, 2002).
This diversity might be due to the fact that various economies attract different types of
FDI. Countries that attract mostly domestic market-seeking investments will
experience crowding out as the establishment of foreign subsidiaries results in tough
competition with domestic firms. But for export-oriented investment, it might be less
so (Bhalla and Ramu, 2005).
MNE with lower marginal costs increases production relative to its domestic
competitor, when imperfectly competitive firms of the host country face fixed costs of
production. In this environment, foreign firms that produce for the domestic market
draw demand from local firms, causing them to reduce the production. The
productivity of local firms falls as their fixed costs are spread over a smaller market
which forces them to back up their average cost curves. When the productivity
decrease from this demand effect is large enough, total domestic productivity can
diminish even if the MNE transfers technology or its firm-specific asset to local firms
(Aitken and Harrison, 1999).
In general, crowding out might take place due to two reasons: 1) when domestic firms
disappear because of higher efficiency and better product quality of foreign
subsidiaries, and 2) when they are wiped out because these foreign affiliates have
better access to financial resources and/or engage in anticompetitive practices. In the
first case, the net impact on welfare is positive as firms with higher efficiency and
better product quality contribute to the economic development of the host country.
But in the second case, there is welfare loss and governments intervene through
different channels in order to help the local firms. For example, they might establish
or subsidize financing for domestic small and medium firms (Bhalla and Ramu,
2005).
Negative wage spillovers
Wage spillovers of the FDI are considered to be mostly positive as workers of MNEs
can leave their workplace and become entrepreneurs in future, which will increase the
competitiveness of domestic firms. However, it might cause negative consequences as
well, especially, if MNEs hire the best workers due to their high wages and thereby
leave lower-quality workers at the domestic firms (Lipsey and Sjoholm, 2004). In
response to that domestic firms can increase or copy MNEs' wages artificially to
prevent their high-quality employees from changing the workplace in favour of
foreign firms. But this action can lead to competitiveness decrease of them as MNEs
have productivity advantages over the domestic firms.
Gorg and Greenaway (2001) reviewed six studies on wage spillovers and reported that
three panel studies of those studies found negative spillovers, while two cross-sections
studied showed positive ones. One possible reason of the negative results in some
developing countries is that the gap between MNE and domestic firms is very large

47

for one party to influence another. Moreover, the labour markets in some developing
economies are too segmented for wages in one party to influence another (Lipsey and
Sjoholm, 2004).
Profit repatriation
When MNEs make investments in foreign countries their main objective is to
maximize their profit. Some advantageous characteristics of these countries, such as
cheap labour force, natural resource abundance or high quality expertise, allow MNEs
to enhance their economic performance. MNEs regularly repatriate their profits from
investment to the account of their parent companies in the form of dividends or
royalties transferred to shareholders as well as the simple transfer of accrued profits. It
also helps them avoid larger taxes by using transfer prices. However, this profit
repatriation results in huge capital outflows from the host country to the home country
and negatively affects the balance of payment of the former. Thus the host countries
often set limits on the amount of profits that MNEs can repatriate in order not to have
balance of payment deficits or reduced foreign exchange reserves. Such policy can
induce these MNEs to invest profits in different projects within the host country
(Billet, 1991).
But there is also a possibility that such limitations might discourage MNEs from
investing in these countries, which will move FDI to the countries with less profit
repatriation limitations. For example, a survey of chief executive officers from 193
American MNEs revealed that nearly 70% of them viewed profit repatriation as a
main factor positively motivating the FDI behaviour of them (Kobrin et al). One of
the biggest FDI receivers in the world, India, permits 100% profit repatriation for
foreign investors in most sectors (NRI Repatriation).
Ref:www.uwessays.com
My DB ans
Foreign Direct investment (FDI) is investment made to acquire a lasting interest in or
effective control over an enterprise operating outside of the economy of the investor.
FDI net inflows are the value of inward direct investment made by non-resident
investors in the reporting economy, including reinvested earnings and intra-company
loans, net of repatriation of capital and repayment of loans. FDI net outflows are the
value of outward direct investment made by the residents of the reporting economy to
external economies, including reinvested earnings and intra-company loans, net of
receipts from the repatriation of capital and repayment of loans.
In other words we can say that Foreign direct investment (FDI) is the net flow of
investment into a foreign economy with an ultimate aim of acquiring a lasting interest
in business. This is achieved through different avenues such as purchasing shares in
an enterprise of interest, incorporating an entirely owned subsidiary or enterprise or
through a merger as well as investing in equity joint venture in collaboration with
other investors. The FDI inflow has both positive and negative effects on the
competitive advantage of host countries with regard to three key elements.

48

A)

Entrepreneurship
- Positive effect of FDI inflow

FDI is responsible for enhanced transfer of intangibles as well as general development

of host country economies. In entrepreneurship, FDI has revolutionized businesses
and investment strategies in host countries. The new knowledge acquired by the host
nations helps in starting of new enterprises. This in turn leads to increased capital
inflow. In many countries, the local firms enjoy cordial relationships with many
industry players and for foreign firms to achieve such status, they must be ready to
share beneficial information for them to get a chance to compete on favorable grounds
with locally owned enterprises. Other ways for the foreign investor to gain acceptance
may be through joint ventures. This will in turn boost the local enterprises through
acquisition of new skills and higher capital base.
Workers in the foreign companies get a chance to acquire modern skills in
management and operations and may in turn use these skills to start their own
enterprises. For instance in Ireland, indigenous entrepreneurship has taken precedence
over the years since foreign software companies such as Apple and Microsoft invested
in the country. The locally owned related companies benefited from outsourced deals
such as disc duplication and printing of manuals. To this end, the locally owned
enterprises export over 70% of all software output. This may never have been
achieved had foreign investment not been allowed in the country in the first place.
- Negative effect of FDI inflow
Foreign direct investment also has negative impact on local enterprises. In many
countries where foreign companies have invested, there have been reports of locally
owned firms collapsing as a result of lacking the ability to compete favorably with the
foreign owned companies. This affects economic development of such countries since
the foreign companies repatriate most of their profits to the countries of origin. Large
foreign investments may also take advantage of their size to engage in unscrupulous
business practices that may be unfair for the survival of the small local firms. The
firms may also use their power to influence policy formulation in the countries they
operate to favor their own success. Most foreign firms have impacted negatively on
the entrepreneurial skills of locals as they have a tendency of bringing on board their
own experts instead of relying on the local experts in the host countries. This denies
the locally trained experts the chance to access and acquire the more advanced skills
used in running these firms.
B) Effeicincy
- Positive effect of FDI inflow

49

In terms of efficiency, FDI has proved beneficial in improving technologies in

countries they invest in. For instance, in most third world countries, outdated
technologies have been in use particularly in government c corporations. With the
inflow of foreign technology, such systems have been highly improved in terms of
performance. The technological applications used by these foreign companies are also
adopted by the locally owned firms hence improving their performance. In an indirect
way, the use of efficient systems by the foreign investments arouses the local firms to
improve efficiency so as to remain competitive.
The efficiency element is not only in new improved technology but the technical skills
and managerial prowess as well. There is strong evidence that improved efficiency in
the communist economies of central Europe resulted from imported expatriate
knowledge from the western world. Most of the foreign firms that invested in these
countries brought with them western trained managers and other experts from whom
the local managers gained relevant skills. This improved efficiency gives the host
country competitive advantage on the global scale.
- Negative effect of FDI inflow
The disadvantage of the modern efficient systems on an economy may arise out of
incompatibility in her operation systems (Bulcke, Verbeke &Yuan, pg.261). For
instance, the host country may lack the economic capacity to adopt a certain
technology due to the cost involved or inadequate manpower to use the technology as
well as the cultural attitude of the populace to such systems.
C) Political, social and cultural
- Positive effect of FDI inflow
The impact of foreign direct investment on the political, social and cultural
environment of the host country may be positive or negative. The political landscape
of the host country may benefit from acquisition of new knowledge that may
influence policy formulation. New investments into a country may require some legal
framework which may be lacking. For the government to accrue the benefits
associated with such an investment, it has to enact the appropriate legislature. On the
other hand, FDIs have been accused of manipulating politics and sovereignty of
nations for their selfish benefits. Owing to their international structure and
connections the multinationals have the alternative of relocating at will. When faced
with new legal demands in the host country that for instance might affect their profit
margins, they may shift to other friendlier countries. This may render many states
helpless and avoid implementing such legislature in fear of losing such an investor.
- Negative effect of FDI inflow
FDI influences on the social and cultural environment of the host country is varied.
The developmental advantages accrued from international enterprises benefit the host
country in such ways as creation of employment opportunities.in many countries,
significant numbers of locals have benefited from the opportunities availed by the
multinationals. They may benefit directly or indirectly as a result of a company setting

50

base in their country. Many sub-Saharan countries that for years depended on
subsistence farming have benefited from multinational companies that have
introduced technologically led agriculture which brings profits to them. This has
revolutionized their social and cultural lifestyles. Similarly, foreign firms may
introduce unique cultures that may affect surrounding communities. Workers in such
firms may be introduced to foreign cultural and social practices that could have both
negative and positive influence on their conventional way of living. The economic
status of the host country may also be affected by FDI leading to improved lifestyles
of the locals due to increased income, infrastructural development and provision of
other major social amenities. Many foreign companies have also initiated projects for
the benefits of the communities in which they operate. Similarly foreign firms have
interfered with cultural environment of some communities especially when their
establishment involves displacement of communities from their cultural dwelling.
Ref:
http://www.un.org/esa/sustdev/natlinfo/indicators/methodology_sheets/global_econ_p
artnership/fdi.pdf
http://thecustomwritings.com/effects-of-fdi-inflow/
www.investopedia.com/terms/f/fdi.asp
http://economictimes.indiatimes.com/topic/FDI-inflows

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