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The Econocrat | Spring Term Issue | May 2014
Contents Afghanistan’s Failing Economy 04 Bitcoin
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Civil War Affecting Economics 06 US Iraq Conflict
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Poverty: A Challenge 08 End of the road for Europe? 09 EconoQuote 10 Behavioural Economics
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The only working strategy in Chile? 12 The Ukraine Crisis 14 Validity of Inclusive Growth 16 Yukos 18 EconoFacts
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EconoQuiz 20 EconoSpeak 21 EconoPoll 23
The Econocrat | Spring Term Issue | May 2014
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From the Editor-in-Chief’s desk
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he Econocrat is a publication that has grown from strength to strength in school over the last few terms. Over my time on the Board, I have seen it transform from a four-page newsletter to having become one of the most widely read magazines on campus. As Editor-in-Chief, it is my prerogative to carry forward this tradition of development of the publication, and I hope this issue will achieve just that. I am proud to be spearheading the silent change that the Econocrat has ushered in: a publication can grow, both in quality and in number, through unwavering dedication. But this wouldn’t have been possible without Ritvik’s constantly coming up with revolutionary ideas such as the Opinion Poll or Quotes sections, which have become a feature of this publication for the first time. This wouldn’t have been possible without the innovative ideas that many of the board members came up with in their own capacity, in a real attempt to distinguish the Econocrat from other publications in school. The Econocrat started off as a publication that aspired to both inform, and inculcate economic discussion among students to a scale similar to the amount of debate that we often hear on political or social issues on campus. As you go through the pages to follow, we hope you will realize that through consistent work, this publication is fulfilling this very purpose! This time, we have focused on the impact that some of the greater wars and conflicts around the world have had on nations’ economies. In a volatile geopolitical scenario such as the one we are presently part of, it is important to understand the true implications that engaging in conflict can have on a nation’s functioning. We hope you will enjoy the issue and be willing to provide us with constructive feedback. As we look forward to taking out many more issues of this publication in the years to come, we hope your feedback will play the role of showing us the light we require in order to continue the brilliant journey that The Econocrat has undertaken. Happy Reading! 3
Editor-in-Chief Pulkit Agarwal Chief of Production Ritvik Kar Editors Jai Ahuja Devesh Sahai Associate Editors Devansh Agarwal Arth Gupta Arnaav Bhavnani Correspondents Ishaan Kapoor Raghav Kumar Bhuvan Verma Contributors Aditya Gandhi Vireshwar Singh Sidhu Shreyas Agarwal Atrey Bhargava Jaivir Puri Dhruv Johri Designed by Ritvik Kar Master-in-Charge Mr. Mohammad Istemdad Ali The Econocrat | Spring Term Issue | May 2014
Afghanistan’s Failing Economy by Atrey Bhargava
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fghanistan as a country has seen one of the worst economic conditions a country has ever faced. It has gone through removal of aid from the United Nations and the E.U to a still struggling relation with the Taliban. Afghanistan for decades hasn’t seen peace and is now synonymous with terror. Afghanistan’s conservative ideology and the constant wars have vanquished Afghanistan’s tourism (which once used to be their pride), the tourism is limited to the thousands of soldiers sent from the developed countries to aid Afghanistan with military help. Even the rich historical sights and places which used to be the hub of tourism and a great source of revenue for the country have now been destroyed. War has made Afghanistan to seek aid from foreign countries and subsequently lose their country’s sovereignty. Nearly half of the Afghan economy is supported by the developed nations and without them Afghanistan has a bleak future. The problem with Afghanistan is that it is not able to use its country’s rich resources, be it mineral or natural because of the constant threat of war. Afghanistan has itself nearly succumbed into a civil war and its economy is not very likely to progress in the future. Even the few small restaurants or places which manage to earn some revenue are continuously threatened by the Taliban, they are looted and civilians are killed with no repercussions from the public. What is also deeply devastating is that the conservative nature of the country has prohibited women from gaining employment which has culminated in the form of a male dependent economy.
Afghanistan spends huge amounts of its resources to complement with the military aid that it need from its neighbor Pakistan, as it is this neighbor which harbors the sole reason for the increasing amount of unrest in the Afghan economy and that is the Taliban. The amount of expenditure put forward from the Afghan’s treasury for military aid is enormous and one of the reasons for not able to use the aid given to the country effectively. Afghanistan’s executive is also reported to be full of corruption. The police have even been found raping children and molesting girls. The police is not using the resources given to it effectively and is thus playing a major role in destroying Afghan’s already weakened economy. The elections in Afghanistan have also taken up a major portion of the aid. A place where booth capturing and communal politics is rampant elections in Afghanistan yields no clear victor. Afghanistan is said to harbor the terrorist organization of Al-Queda which has led to it being a constant place for combat with the World’s developed nations. If the successor of Hamid Karzai is unable to make suitable negotiations with the United Nations and the E.U regarding financial help and military presence I am afraid that Afghanistan would incur a serious and devastating blow to their economy. For Afghanistan to recover it now has to help in eradicating terrorism from the nation and use its countries latent resources to the best benefit. It has to seek foreign help and make a better nation for itself.
The Econocrat | Spring Term Issue | May 2014
The 2009 UN office on Crime and Drugs has reported that opium constitutes 60% of Afghaistan’s economy. This black market which the Afghan economy has acquired from the Soviet Union has put thousands of people not only in Afghanistan but also in many developing nations addicted to it. As Afghanistan doesn’t posses any sovereignty the warlords are forcing farmers to cultivate Opium and this is causing great harm to the already sorrow stricken and undeveloped Afghan nation. The Opium economy is one of the only reasons for Afghan’s combat economy to sustain which is another devastating factor adding to much of Afghan’s coping economy. Even when the Afghan Government tried to stop such opium smuggling there was a fight among the drug lords which created more civilian causalities and moreover the amount of exploitation done by these drug lords on the opium producing farmers is immense. I believe that the opium market in Afghanistan is it is a necessity for the farmers, regardless of its exploitation, as it is their only means of survival. Until an alternative form to such an economy is found the immoral and illegal opium trade is the only means of survival for the Afghans. The political and financial instability has caused great distress in the Afghan economy and unless better utilization of the aid granted by the superpowers is found the Afghan economy would still remain in shambles.
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Bitcoin? by Vireshwar Sidhu
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itcoin is a peer to peer payment system developed by Satoshi Nakamoto. It was launched in 2009. Bitcoin is the first crypto-crurrency to come into existence. Bitcoin does not follow the conventional definition of a currency as it is not controlled by a central authority like a bank. As such, it is uncontrolled and the issuing of bitcoins is done collectively by the network. As said on the official Bitcoin Foundation, “Bitcoin is open source, its design is public, nobody owns or controls Bitcoin and everyone can take part.”
These transactions are verified by the computer. The distributed consensus technology which the system uses to cryptographically verify
made by hacking into the database that stores the keys of the users. Last November, $100 million in bitcoins were stolen from the online goods market ‘Sheep Marketplace’. The biggest reported theft amounted to $477 million, after which virtual currency handler Mt. Gox filed for bankruptcy. Many a times, bitcoin exchanges shut down, taking with them the bitcoins of the users.
The price of a bitcoin is extremely volatile, given how young its economy is. Moreover, bitcoin transactions are Bitcoin might be the first crypto-currency, but there irreversible, unless of are many others, called ‘altcoins’ floating around. course, the receiver Moreover, there are now many The identity of Satoshi refunds the applications that make use of the Nakamoto, the developer of this ‘blockchain’ concept. Bitcoin as a bitcoins. system, is still unknown. system and a currency, however, is Investigations were conducted by Fast Company and The New Yorker but nothing conclusive was found. Nakomoto cut ties with the Bitcoin system a year after its creation and he was reported to have ‘moved on to other things’. Conventionally, Bitcoin in capital is used to refer to the system as a whole whereas ‘bitcoin’ is used to refer to the currency. Bitcoin is created by a process called ‘mining’ and the individuals involved in this process of creation are called ‘miners’. The miners work in creation of bitcoins as they receive monetary rewards in the form of bitcoins. Bitcoins are added at a periodical but decreasing rate, such that there will be 25 million bitcoins in circulation by 2150. Users can send or receive bitcoins using wallet software either on the web application or on the mobile phone. All transactions are maintained in a public ledger. 5
transactions is called a ‘blockchain’. The price of a bitcoin is extremely volatile, given how young its economy is. Moreover, bitcoin transactions are irreversible, unless of course, the receiver refunds the bitcoins. Moreover, the policy of different governments towards bitcoins varies. The US is comparatively bitcoin friendly, but in countries such as China, a bitcoin cannot be converted into local currency. TheG7 Financial Action Task Force concluded that “internet based payment services pose challenges to countries in countering money laundering”.
still young. Bitcoin is still in its developmental stage. But it is safe to say that it can only move from strength to strength with time and increased usage.
Over the years, there have however, been a handsome number of cases of theft. Under the Bitcoin system, a user stores money in the wallet. This wallet is protected by a private key. In cases of theft, the unauthorised transfer of bitcoins is The Econocrat | Spring Term Issue | May 2014
Civil War Affecting Economies by Ishaan Kapoor
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t is unanimously agreed upon that today the world is constantly becoming smaller. Concepts such as globalization and foreign direct investment are rampant and a constantly sophisticating communications sector is causing global nations to unite. Countries are not only assisting each other but also investing and trading between two countries. This is causing several obligations among countries as they now need each other to sustain and function as massive global collaborations. In such an age no war can pertain to only one country, thus no war can be deemed merely civil. Thus if civil war were to break out it would do so as a global epidemic.
aid from all five continents of the world, hence involving the economies of various other countries. People would argue that if this were the case, why haven’t other countries stopped investing? Yet again this is simply because they are obliged to either party of a civil war. Moreover if they were to sever their ties, the possibility of their country being threatened by war would increase. Hence most countries take the easy way out by silently pooling in and investing in the war torn region. Civil war can also have disastrous effects on even unrelated and neutral economies that bear allegiance to related economies. For example Guatemala would become directly involved with the war are they are indebted to USA. Thus the economic effects of civil war do not concern only the war torn nation but the entire world at large and its effects can be devastating.
It is pretty obvious that if war were to break out within a country, its economy would head south. That is its economic stability would spiral, crash and cause a major economic slump within the country. But how would this war affect the economies of other countries? In more or less the same way. It would cause a global economic depression and lead to inflation. Let’s put this into perspective by examining the indemnities of the Syrian Civil war. USA has played no active part in the crisis as of now, but has managed to spend a mammoth sum of 20 billion USD just to financially aid both rebel factions and to some extent the government. Similarly Russia has also managed to lighten its purse by supplying arms to the Syrian government. The domino effect that followed has also caused France, Iran, Turkey and Lebanon to invest in the indemnity fund. This “civil” war has managed to call for The Econocrat | Spring Term Issue | May 2014
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US Iraq Conflict by Devansh Agarwal
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t has been said that as long as there is profit in any sort of war the world will never know peace. When one takes a look at the situation that the US government created for its economy, through the purview of this quote; one cannot help but grin with irony. Granted that the US claims to have invaded Iraq based on substantial evidence of a potential threat, it is also safe to assume that the US invasion was fueled by a motive for ulterior gain. Perhaps having being blinded by these ulterior motives the US failed to realize that its prolonged invasion of Iraq would prove fatal for their economy. Back in 2006; Larry Lindsey, President Bush’s economic adviser, estimated the total cost of the invasion would be somewhere Watson Institute around 200 of International billion dollars. Studies at The White B r o w n House at that University. As point of time one can q u i c k l y imagine, the responded by shock delivered stating that by this number was a ‘unaccounted g r o s s for’ vacuum of overestimation. money put Lindsey was America in indeed wrong, economic for she had misery. grossly under estimated this Truth be told, very cost. In even though March 2013, the many a times total cost of the the potential Iraq War was harm caused by estimated to a particular have been $1.7 action can be trillion by the estimated, often people prefer turning a blind eye towards this very possibility. This is because we as a race prefer to cling onto false hope. In a similar way the US also clung onto false hope and hence faced its demise. Post the sixth year, of having a relatively higher defense spending due to the invasion of Iraq, the economy of the US faced a far more negative turn of events. 10 years down the line due to this very increase, payroll employment would be 464,000 less than in the baseline scenario. In a similar fashion, since this rise in the rate of unemployment is proportional to the time for which the defense spending is kept at an inflated position, after 20 years the job loss rises to 668,100 compared to the baseline scenario. Higher military spending also ensures a drastic increase in the inflation and rate of interest in the US. The last couple of years experienced an annual inflation rate that was an average 0.3 percentage points higher than the past. If given the full twenty year period, inflation will rise a tentative 0.5 percentage points more than the past few years. Thus it can clearly be observed that the decision taken by the US regarding this invasion was not their brightest. Agreed that they may have had various reasons that fueled this drastic measure, however that does not change the fact that the ultimate harm faced was by the US itself. 7
The Econocrat | Spring Term Issue | May 2014
Poverty : A Challenge by Shreyash Agarwal
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he United States of Americaa nuclear superpower in the world-is suffering with a high ratio of poverty in their country. The statistics show that 16% of the total population of the United States are below the poverty line, in spite of its ever increasing economy and power. Another rising superpower suffering with a high rate of poverty is China, with 13% of the total population to be below the poverty line. Even though it has decreased as a result of its growing economy, poverty is and had always been a major challenge and continues to be an issue concerning the country. The question which arises when we come across such is “How can poverty be dealt with in slow developing countries when superpowers like the United States and China are themselves
struggling with the challenges imposed by poverty?” Furthermore, in other countries like those in the Indian subcontinent have to face challenges imposed by corruption, while the southeastern Asia has to combat human trafficking. The under-developed and poor countries of Africa suffer even more with this issue where the average income of the citizens is barely one-third than that of Europe. When the country is in such a terrible situation, the poor sections of community have to face extremely adverse conditions, with every living day being a struggle for basic human needs. Even in the well established countries of Europe, poverty is not an issue well-dealt with. Though poverty rates vary from country to country, the European union as a whole is suffering with a poverty rate of 16% which includes a population of around 80 million people. Poverty refers to as the general scarcity or lack of a certain amount of money or possessions. In African countries, citizens below the poverty line lack basic human needs while in developed countries, citizens who are privileged with basic requirements may still fall below the poverty line. The former is termed as absolute poverty and the latter is termed as relative poverty. The poverty line differs from country to country based on their economic conditions. However, globally it refers to the financially weaker sections of the society. The basic characteristics of poverty range from the lack of a proper housing facility to the deprivation of basic education. It also leads to adverse health condition, due to malnutrition and consumption of contaminated
The Econocrat | Spring Term Issue | May 2014
food and water. An extremely common cause of poverty is deception into trafficking, slavery and prostitution. This is extremely common in south eastern Asia where certain individuals damned with poverty are also opting into this lucrative industry as a form of employment. Joining criminal gangs or individual crimes in the form of theft and murder are also often driven by poverty. Suffering with non-feasible conditions of crime is seen as an easy method of making quick money. Another question which arises is “Can we blame the individuals who turn to theft in order to feed their crying families?” Mismanaged land and misused money are the primary causes of growing poverty rates. A lack in infrastructural development, along with growing corruption also contributes to poverty. Another major cause of poverty are the continuous internal and international conflicts amongst nations. The time and money spent in resolving such conflicts could be better utilized in the education of a child who is deprived of it, simply because he cannot afford it. A direct solution to this issue is government assurance to employment and education to all citizens. As a great mind once said “give a man a fish and you feed him for a day, teach him how to fish and you feed him for a lifetime..” It is the same case with money and this can be ensured by providing financial services in the form of loans or providing government aided education to poverty ridden children. Poverty is a recognized global issue which demands necessary steps to be kept under control and minimizing sufferance with lack of basic human needs. 8
End of the Road for Europe? by Arnaav Bhavanani
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or quite some time now, Europe has been in the grip of an economic meltdown. With countries finding it hard to meet their debt deficits and make their economies grow, the Euro is falling, and falling hard. Many economists have predicted the fall of the Eurozone in the near future, and it looks like despite the best efforts of their leaders, it will be nothing short of a miracle that it will save the debt-hit continent. So how and when did the Euro Crisis begin? Though there isn’t a specific date, it all started around 1999, when Greece and Portugal joint the EU. They became used to spending too much money, and this grew unnoticed because the Euro was doing well and loans were being given at a cheap rate. Thus, the economies of these countries inflated, becoming bloated with money like too much water had been poured in a plastic bag. Needless to say, all plastic bags can only hold a certain amount of water, and when the financial crisis hit, the bag burst, and the EU fell into great debt. The amount of money they had spent was inconceivably enormous, and levying high taxes was not enough to cover these expenses. To help these countries, the ‘Troika’, the trio comprising the European Commission, the International Monetary Fund and the European Central Bank gave a bailout package in the form of billions of dollars to these nations, formally known as the PIIGS nations. However, Greece needed more money to cover its debt, and thus the EU leaders decided on a “selective default” system for Greece, where the investors were willing to pull out with a loss,popularly known as a ‘haircut’. It was around this time that the economy of the EU became unpredictable, and this crisis, which had so far permeated only a few countries, had spread like the Plague to occupy all the nations of the EU. Economists were baffled as to how this happened, and it took some time for them to get acclimatized to the fact that in a few years, the EU might just cease to exist. The banks began buying bonds and shares from the PIIGS countries, namely Portugal, Ireland, Italy, Greece and Spain, but soon these lost their high ratings, and other countries were unwilling to compensate for overspending on the part of the PIIGS countries by printing more money. This is obvious, as printing more money would lead to loss in value of the currency and deflation of assets which would not help anyone involved. In the end, money was printed to control the increasing debt deficit. It was what many called a rash decision, and now the problem is that all extra money in the system and Greece’s woes add to the already rocky economy of the EU. Investors are reluctant whether to pull out of the system or stay and hope that things would change. Getting new investors is a daunting task in itself, as the EU, like the Titanic, sinking slowly in a sea of debt. The calls for help have been heard and answered, but it isn’t enough. The weight of the debt is simply too much, and the rickety economy looks like it’s in for a long journey to the bottom. Like the rats abandoning a sinking ship, many have left the continent in search of newer pastures. Can the EU be saved? I don’t know, and neither do the world’s top economists. The crisis surprised many with its unprecedented spread from a few countries to the rest of the EU, and it may surprise again. The world’s economy is ever-changing, dynamic as the water of a river. It may swell its banks from time to time, but the waters always recede. The question is, will it recede in time for the EU to work out a successful strategy?, or is the European economy doomed to a catastrophic end? Is this the end of the road for Europe? I feel that only time will tell. 9 The Econocrat | Spring Term Issue | May 2014
EconoQuote “There can be no liberty unless there is economic liberty.” Margaret Thatcher “In our seeking for economic and political progress, we all go up - or else we all go down.” Franklin D. Roosevelt “I contend that for a nation to try to tax itself into prosperity is like a man standing in a bucket and trying to lift himself up by the handle.” Winston Churchill “The whole of the global economy is based on supplying the cravings of two per cent of the world's population.” Bill Bryson “Inflation is taxation without legislation.” Milton Friedman "A global economy is characterized not only by the free movement of goods and services but, more important, by the free movement of ideas and of capital." George Soros “Economics, politics, and personalities are often inseparable.” Charles Edison “Years ago, I noticed one thing about economics, and that is that economists didn't get anything right.” Nassim Nicholas Taleb “Economics is not a discipline that comes to correct answers - economies are too complex.” Adam Davidson “Too many people think that economics is this subject that should wait until the university level. But it can't wait that long.” Robert Duvall
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Behavioural Economics by Ishaan Kapoor
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here does exist a less notorious branch in economics, which though not known to many is an integral part of all economic concepts. It is commonly known as behavioral economics and quantifies the effects of society and emotions on decision making of individuals. More simply put it is fundamentally the way human emotions affect the want of a person to buy or sell a commodity. An understanding of behavioral economics provides as a mould for most market Humans are behaviorally oriented organisms models as all sellers tend to maximize and their actions are cyclic in nature. profits. The easiest way to do this is Most of these actions are to understand how the buyer universal and are used by works. most humans. These behaviors become easy Suppose you are walking to interpret. Behavior down a market and such as choosing you spot a small place cheaper over selling some watches expensive and that are extremely choosing popular popular. Just next to over useful. it another shop is These are the selling imported concepts on scarce goods. Which w h i c h one would you buy? shopkeepers and This is where suppliers supply behavioral economics goods to comes into play. Let’s consumers. take another example. This division This time you are in at a encompasses several shop, where you can either theories and financial buy a good which you love, or concepts. A particular labor a marginally cheaper good which theory explores how organisms your friends would envy. Which one become socially conditioned to would you buy? perform repeated non sense actions just because they have become accustomed to it. Another The human brain is an excessively complicated organ game theory termed as the monkey trading behavior that operates on the difference of densities of sodium explores how if a trading mechanism is introduced; to transmit nerve impulses. How is one supposed to monkeys (who are similar to humans) abide by it. All interpret these signals? Technically one does not. these experiments lead to one grand conclusion: humans (and monkeys) respond to social likes and function on social trends. There does exist a herd mentality. These are some of the concepts that behavioral economics explores.
Some might confuse behavioral economics to be a sub sect of psychology rather than economics. The fact persists that all economic concepts from law of diminishing marginal utility to anomalous behavior of humans are all quantified and explored by this field of economics.
Some might confuse behavioral economics to be a sub sect of psychology rather than economics. The fact persists that all economic concepts from law of diminishing marginal utility to anomalous behavior of humans are all quantified and explored by this field of economics. This is that branch which shows us the reason what we call the common sense in economics. Hence the study of the effects of human behavior is a core on which economics operates. 11
The Econocrat | Spring Term Issue | May 2014
The only working strategy in Chile?
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by Aditya Gandhi
eptember 11 has resonated as one of the most formidably violent dates for over a decade now. Four decades ago this date marked the dawn of General Augusto Pinochet’s reign in Chile following a military coup that ended the short lived tenure of the democratically elected President, Salvador Allende. However, before getting into the nitty-gritty of the Pinochet Regime, it is important to understand how socialist Salvador Allende came to power and to what extent was he responsible in bringing General Augusto Pinochet to power. Allende was elected as the Chilean President, on his fourth attempt, in 1970 with 37% of the vote. For those wondering what went wrong during Allende’s three years as president: Inflation in the country rose up to 306%, the society fell victim to the trenchant class conflict, and most importantly biggest political party i.e Christian Democratic Party, failed to protect the three sectors of the economy from Allende’s nationalisation policy. Thus, Allende eventually fell down in the eyes of the business class and the society at large. The business class, moreover, emphatically opted a confrontational stance with the government.
In September 11, 1973 marked a coda to the Allende presidency, with the ‘Military Junta’ time comprising the army, the air force, the navy and the local police force taking charge of Chile. Being the oldest member of the ‘Junta’, Pinochet was chosen as the first president Pinochet of the ‘Junta’. The presidency was, however, subject to change every few years. In 1973, the task of managing the Chilean economy was divided among the Junta’s fourth diversified and branches with the air force handling the social matters, the police force handling agriculture, the army handling the security and the navy controlling the economy. growth of the ex Coming back to Chile’s economy, Pinochet did not give neoliberalism the kick also gave birth t start that was expected of him. The government gradually promoted economic liberalisation during the first two years of the regime. It was not until 1975, when business class the Chicago Boys occupied key economic and financial posts in the economy, to q that the doctrinal penchant neoliberal model was fully protectionist ec implemented. The model focused mainly and more inclin at deflation and in the in deregulation. The economists of the Christian financial Democratic Party, who supported a more circumspect modus operandi to economic liberalisation, were estranged due the political differences between their party and the ruling military government. But what benefits did Pinochet reap by allying himself with the Chicago Boys? This alliance allowed Pinochet to expropriate power from the navy when it came to the functioning of the economy, ergo bringing him one step closer in establishing his own rule in Chile. With the navy now in a moribund economic position, the business class that once cloyed Admiral Merino, started courting Pinochet. Pinochet now had the
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economic wing under his control. Furthermore, the economic footing of the Chicago Boys among the global conglomerates also boosted investment into Chile. This move also gave Pinochet a chance to shift the power from the domestic, inward looking business conglomerates, that he openly despised, to the internationallyoriented ones. This poses yet another question. Why did Pinochet promote and implement neoliberalism? Like every other economy at that time, Chile was in desperate need for foreign reserves. Copper, in the 1970’s gauged over 80% of the Chilean foreign currency. However, the world prices of Copper fell from $1.26 to $0.62 in one quarter during 1947, which aggravated the economic conditions in Chile. Thus, the alliance with the Chicago Boys now came into play. The inward looking business conglomerates drained the foreign reserves, due to their increased reliance on protectionism, whereas the globally-oriented conglomerates, that the alliance with the Chicago Boys invited, brought the much required foreign currency into the country. The fact that various international lending institutions closed their doors to the Chilean economy due its human rights record further induced the Chicago Boys alliance as it abridged the gap between the Chilean Economy and the Wall Street.
n e, the
The one thing that still impeded economic growth was inflation, the bête noir of neoliberalism. Inflation during the initial years of the regime hovered between 200% to 300%. Even though the Chicago Boys eventually circumscribed inflation, they were blind to the suffering of the people that was shrouded behind the veil of numbers and graphs. Their stark adherence to technocracy is what turned them blind to the suffering of the people.
regime d boosted the Eventually the parties that once opposed the Pinochet regime realised that the xport sector and only way to live in harmony with the military government was to adhere to the to a new flexible free market economic model. time, the Pinochet regime diversified and boosted the growth of the export that was less Insector and also gave birth to a new flexible business class that was less penchant to quest after the protectionist economic model and more inclined to compete quest after the in the international financial markets. Towards the end of Pinochet’s regime, however, inflation rose to 31.5% after it had conomic model stabilised at 9% during the past few years. The overvalued peso and more expensive ned to compete labour further enervated the economy. Moreover, as exports rose by 20%, imports rose by a perturbing 46%, the growth of new investment in the economy fell to 15.4% nternational p.a. in the 1980’s as compared with 21% p.a. during the 1970’s. The exports prices during the 1980’s were undesirably high, thus reducing Chile’s competitiveness in the international markets. market. Many investors portended the demise of the Chilean economy and started divesting. Ergo the radical economic liberalisation that the Pinochet regime complemented had short lived and disparately distributed benefits. Average salaries during 1989 were lower than they were during 1970 i.e during Allende’s tenure as President. Furthermore, the GDP Growth Rate had increased only by a meagre 1% p.a. since 1984 and 6% of GDP was diverted to pay the international debt. Thus the fast paced exports economy of Chile was imbricated on an underfunded and disparate domestic economy. The implementation of neoliberalism came at a very high opportunity cost to the society. Between 1970 and 1988 total social expenditures per capita fell by 8.8 %, and health alone by almost 30%. The family allowance that helped reduce income inequality in the society fell by over 70% in real terms between 1970 and 1980. The proportion of families living in extreme poverty rose from 8.4% in 1969 to 14.9% in 1989; and in poverty from 20.1% to 26.3%. This is what the Chilean Economy had been reduced to during Pinochet’s regime, which brings me to the question : Is his the only strategy that Works? 13
The Econocrat | Spring Term Issue | May 2014
The Ukraine Crisis by Jaivir Puri
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he current situation in the Crimean region has not only created vast turmoil politically, with large resentment over the Russian military intervention but has also triggered a series of economic blows which could affect various countries in a profound way. The political turmoil is rooted in the countries current economic position with Ukraine in the need of a major economic revival. The crisis broke out after Viktor Yanukovych insisted he was planning on signing a trade agreement with the European Union which indeed would have boosted economic growth and would have opened borders to trade the one thing Ukraine needed chiefly. Their noisy neighbors on the other hand Russia opposed this deal and threatened Ukraine with trade sanctions and steep gas bills. Russia instead was ready to give Ukraine massive discounts on natural gas if they were not to sign the agreement with the European Union. Russia knew if it were to hold on Ukraine it would gain huge advantages economically however fortunately or unfortunately as the crisis broke out the prospect of other economic problems became conspicuous.
Firstly, Ukraine is in the form of an important connection between Russia and west Europe. It is certain that Ukraine has lost the economic power it once possessed however it does maintain its advantageous location. It is a fact that Russia provides roughly 32 percent of Europe’s gas, and roughly 50% of it is by pipelines connected through Ukraine. Moscow as a result of the dispute has discontinued these supplies and this could definitely boost energy prices for the most of Western Europe which is dependent on Russian gas supplies which is coming through Ukraine. Furthermore the prospect of sanctions against Russia by United States Of America could also harm the Russian economy in a
The impact of the crisis does not only pertain to Europe but to the world in turn as the world’s supply of grain is affected.
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massive way since Russia rely on products imported from the west in order for their economy to be running. The political tie between the west and Russia will continue to affect global trade and situations are said to only be more critical as the situation in Ukraine escalates. The impact of the crisis does not only pertain to Europe but to the world in turn as the world’s supply of grain is affected. We are aware of the fact that Ukraine is one of the biggest exporters of corn and wheat which it has been for a long time, and prices could push up which could definitely result in the stop the production(which has happened in the past) of these certain exports. The crisis would certainly not be so destructive provided Ukraine’s economy included more foreign investment and trade. The country owes a total of 16 billion dollars due their ever increasing debt before 2015 which is alarming. Without any assistance and bilateral cooperation Ukraine could be headed for a complete downfall which would trigger other economic impacts all over the world. Ukraine’s crisis is adversely affecting emerging nations all over the globe and Ukraine have to now be wary of the fact that countries will soon pull out from all trade relations with them, if the crisis doesn’t show any signs of improvement soon. There are always two sides to a coin and interestingly looking at things from a different perspective there are few to gain from the crisis too. In the issue of the Ukrainian crisis as reckoned the USA compared to other nations economically are most likely to benefit from all of this confusion. There is without doubt that the USA would fervently want a military discrepancy with Russia in which the USA will largely benefit from, and could amount to USA breaking all relations with Russia resulting in an economic downfall for Russia and obviously a lot to gain for themselves .There is growing contention that Western Europe have indulged in close ties with Russia which they are not willing to keep up to and as a result want to break all relations with Russia, and find other countries for trade which they can count on. It goes without saying that USA want to have most of Europe dependent on US natural gas, resulting in the decrease for demand of Russian natural gas which is only going be more expensive with time and by the current scenario of the crisis. We are now likely to see USA indulging in increased trade relations with Europe especially in terms of gas and power supplies, the root cause being Russia failing to provide cheap gas prices all thanks to the current crisis . In order to achieve this goal however it requires the loosening of Europe’s dependency on Russian natural gas which will not only harm the economy of Russia’s but of Ukraine’s as well in a massive way. It is imperative to understand the Ukrainian crisis poses a number of potential wounds for the European economies and should the crisis escalate, it will lead to the hike in natural gas and oil prices in Europe and food prices globally. The gains from this crisis also come at the expense of other countries economies and thus it is important that countries prevent a total collapse of the Ukrainian economy due to the crisis as otherwise it would lead to long term catastrophic situations and the halt in the growth of emerging economies. The world needs to react fast, before economic situations really get horrific.
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The Econocrat | Spring Term Issue | May 2014
The Validity of Inclusive Growth by Arnaav Bhavanani
A
man stands hunched, his silhouette clear against the fading glow of dusk. His hands and arms ache, and he’s been bathed in sweat the whole day. Once his work is over, he will go to the overseer to collect his daily wage. Before entering the master’s room, he wipes his hands and cleans his face, afraid that if he doesn’t, he might not get his money. He walks in, apprehensive, and the overseer flings some coins at him. Catching them, he hurries out, content that with this, he can get some dinner for his family, something they haven’t enjoyed for a while now.
opportunities for all people part of that economy, with equal distribution of wealth among all these sections of the economy. It is a type of strategy which aims to reduce the disparity between the rich and the poor, something our forefathers have been trying to do for generations. The Occupy Movement in the United States calls for exactly this, and their slogan “we are the 99%” is pretty much a reflection of the situation the capitalism inherent in the US system has caused. There exists a wealth concentration in the hands of as few as 1% of the US population, while the rest suffer from unemployment, rising inflation and unpredictable changes in the country’s economy. There are such divides between the rich and the poor because of the main reason that the rich possess the power and means to help bridge this disparity, but instead choose to further their own goals and make more money for themselves. Thus the rich get richer and richer, while the poor remain at the bottom, soullessly ignored, and helpless of act out effectively. Although India is not an established capitalist nation, it is one that is moving towards it. Already the divide is established, and according to Credit Suisse, the top 10% of India’s rich p o s s e s s around 53% of the c o u n t r y ’s wealth. Now distribute the remaining a m o u n t among the poor and one can see why this country is stuck in a quagmire, going nowhere.
India’s growth story is an interesting one, and today the country boasts a massive influence in the global market.
Not far away, another man stands hunched, his silhouette clear against the fading glow of dusk. His hand and arms ache, and he’s almost never been bathed in sweat (too unhygienic, he says). He holds the precision-made golf club and lines up for a shot into the green. On his first swing, he misses the ball. On the second, he chips it. Frustrated, he throws the club (worth thousands) into the pond, vowing never to waste his time on such ridiculous things again. He India’s growth story is an interesting one, and today the country boasts a drives home in his Ferrari, annoyed massive influence in the global market. From a broken wreck of an with his day. economy when the British left, to where we are today, I’d say we’ve done really well but for the fact that in the process, we forgot to provide for Such is India. A condition of around 1 billion of the Indian population. paralysis prevails, where the rich and affluent only get more, and the There are many reasons inclusive growth is something of a Utopian dram. poor remain where they are It requires the involvement and participation of all sections of Indian because of a multitude of reasons society, sans religion, caste, creed, and other such differences. It also that I intend to explore in this requires the government to provide for each and every single Indian. article. People say that inclusive Such a system is sketchy at best, especially with the inherent corruption growth is the answer. I say we and rampant indolence present in this democracy. Sure, it’s not like it should think again, and think hasn’t been tried. The governments’ ambitious methods like MGNREGA wisely. and Aadhar are examples of such an effort. The UPA government, however inept it may seem to the general populace, has started a number of Inclusive growth is an economic initiatives worth carrying on. These are ideas that are based on bridging provides for equitable the gap between the Richie-Riches of India, and the poor farmers in the The Econocrat | Spring Term Issue | May 2014
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fields, working day and night to provide food and shelter for their children. It is a sad state our country is in when one man has more money than he knows what to do with, but just a couple of mils away, another man, an Indian just like him, is bending over backwards just to make ends meet. Inclusive growth may seem like a beautiful solution, one worth striving for, but one must be practical. For such a system to even have a chance to work, there are a number of things that need to be addressed. One of them would obviously be corruption, the one problem that gives rise to all others. Once this is tackled effectively, we can start looking at poverty
alleviation, better employment, better education to produce skilled workers, impetus to agriculture as the backbone of our country’s economic progress, and last, but not the least, dealing with regional disparities, which usually arises on the basis of religion and money. India’s rise from the bottom has not been easy. Dealing with independence, the creation of Pakistan, the 200 years of subjugation, it’s never been an easy ride for this country. And yet, here we are, close to seventy years later. It might be tad too much to expect the perfect society in such a diverse country, although working towards it will certainly change a lot. In this sense, I fell the validity of inclusive growth in this country stands till a point, a point which is often blurred over by selfishness and money-mindedness. After this, it becomes unfeasible, and the notion of a working society, where one works for material gain, collapses. To face the cold hard truth, money is almost never made for the benefit of another individual apart from oneself, and that is what requires a change. Hard? Yes. Impossible? No. This nation needs some spirit, something it sorely lacks in a number of fields, and there has to be somebody to provide such spirit. Inclusiveness is a concept for a reason. It’s never been tried to the extent it should, because if it were, a lot of people would lose a lot of money and power, something we Indians have an intrinsic love for. Before we rush into rash decisions, the one question we must ask ourselves (especially the rich reading this): Are we willing to be the change?
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The Econocrat | Spring Term Issue | May 2014
Yukos by Dhruv Johri
T
he oil business has always been referred to as the “dirty business” by many world economists, this however is not because of the lack in viable products but because of the lack in the viability of leaders. Many a time oil companies get caught up in the crossfire of political battles; as a result money and jobs are lost. The Yukos oil company also has a past which got caught in the crossfire. Yukos was started in 1993 as per the Russian resolution No. 354 which was made up of the Siberian oil extraction enterprise. As companies many a time did, even Yukos come under scandal when one of its security chiefs was accused of multiple accusations of murder along with other company officials. Mikhail Khordokovsky, someone who was once upon a time Russia’s richest man and one of the world’s most influential oligarch’s bought Yukos t h r o u g h and his partner auctions with Platon Lebedev, his pesticide Yukos was able c o m p a n y to recover Menatep. at that q u i c k l y time Yukos, like between the most other years 2000-2003 industrial firms being the most had been productive affected by years for them recession of the in their short 1990’s quite history. They badly, and this were producing was the cause of a total of 2% of the company’s the world’s oil, most of the which was 20% actions.. After a of Russia’s oil.. great deal of In 2003 Mikhail privatization Khordokovsky under the able and Platon guidance of the Lebedev were new CEO arrested and M i k h a i l sent to prison Khordokovsky on account of Tax evasion and Tax fraud. Many have said that this decision was one which was taken on the basis of Vladmir Putin’s personal vendetta, more than anything else. This was because just a few months earlier Khordokovsky had criticized Putin’s governing style and had proposed to fund the opposition party in the upcoming election, on nation wide television. The assets and shares of both partners as well as many other’s were frozen, and this was because of the investment that was led by Mikhail in the US oil Company ‘Exxon’. The Russian government froze 44% of Yukos’s assets. As a result of the various political intrusions, Yukos was forced to sell its shares at the lowest possible price and finally were forced to file for bankruptcy in 2006. In protest to the attrocities against them, Yukos appealed to the European Court of human rights to complain about how their rights, which they said had been impugned by the Russian government and especially its top brass leaders and judges. Mikhail Khordokovsky appealed to the world of how he was a culprit of unfair and corrupt practices in his country and how the Judicial system of Russia failed to give him a fair trial. He was to be released from jail in 2010, however Putin filed further charges of money laundering a total sum of 20 Billion US dollars through Yukos, giving him further time in jail. He was released early in January early due to his mother’s failing healthcare. Platon Lebedev is currently still in prison and is set for release in August this year. Yukos Oil was finally claimed to be defunct in 2006 and with it went billions of dollars in investment.
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EconoFacts During President Barack Obama’s first term, the federal government accumulated more debt than it did under the prior 42 U.S presidents combined.
In 2007, the top five hold $6,775,079,249,000.00 in assets. That’s six trillion dollars!
In the next three years, up to 25% of the world's new workers will be Indian
Half the world’s outsourced IT services come from India, amounting to a $47 billion dollar Industry
Back in 1950, more than 80% of all men in the United States had jobs. Today, less than 65% of all men in the United States have jobs.
A bigger movie market than America and Canada combined, India sold 3.2 billion tickets last year
The three wealthiest families in the world have more assets than the combined wealth of the forty-eight poorest nations
Back in 1970, the total amount of debt in the United States (government debt + business debt + consumer debt, etc.) was less than $2 trillion. Today it is over $56 trillion.
Nigeria is the world’s largest producer of oil
India’s GDP per capita will quadruple from 2007 to 2020, according to Goldman Sachs
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The Econocrat | Spring Term Issue | May 2014
EconoQuiz
How many deputy governors does the RBI have?
What was the largest Scam in India?
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Coalgate Scam
Who is the highest paid Indian CEO?
Which country has the highest per capita income?
Kalanithi Maran
Qatar
Which is the 2nd highest employing sector in India?
What is called the greatest act of corporate espionage?
Textile
England stealing tea from Chinese
What was the lowest point that the Rupee fell to?
68.8
The Econocrat | Spring Term Issue | May 2014
Which is the top earning company in the world?
Walmart Stores
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EconoSpeak
Do you think India’s economic policy will undergo a significant change after the elections? AST: I do not see that there would be any drastic change in the government policy with the coming in of a new government. In fact, whichever party gets to form the next government they would have to hasten the pace of economic reforms to take the proverbial India's growth story forward. One thing is certain that they would have to answer some critical questions pertaining to FDI in retail, use of natural resources, financial sector reforms, investment in building economic and social overheads .The government would also have to address the pressing agricultural questions along with finding remedies to India's BOP crises. Issue regarding subsidies and taxation reforms and the growing fiscal deficit also would have to be addressed. What India needs is a stable government, which is able to not only provide good governance, but is also willing to put good economics before politics. The development agenda needs to get pushed more than just getting a lip service. Given the present political scenario we can just hope that some sanity prevails and the various political parties come true to the promises they are making in their respective manifestos. MHF: To be honest there is nothing that can be said for certain regarding any alterations in the economic policy of India after the general elections. Few things are for certain, crony capitalism will definitely increase and foreign investment is bound to decrease. The corporate sector by far is going to play the most important role and the prospect of significant changes in the corporate sector is probable. However, it will be interesting to see if the coming government will tackle the issues of crony capitalism and foreign investment and whether there will be a more dynamic and efficient economy policy. PDT: As India completes the sixth round of elections to the 16th Lok Sabha; speculations are rife on the likelihood of changed policies that might be brought in by the new government. However, the nature and extent of such change is dependent on which political party will take over the reins of the country’s government. Political pundits seem to agree that the BJP is most likely to garner a large number of seats this time, enough to be the undisputed leader of a ruling coalition at least. Meanwhile, as Indian economy has touched unprecedented lows in recent decades, political parties such as the BJP have made development and economic growth the major plank of their election campaigning. However, once in power, the policy changes that the BJP might wish to pursue will be tempered by the stance of other coalition partners. Besides, schemes such as the NREGA or the Food Security Bill will be difficult for the BJP to discard, since scrapping these populist schemes would show up the new government in poor light in the eyes of vast number of people. So expecting overnight economic changes will not be realistic. However, one thing seems to be certain - if the BJP is indeed to come to power, Modi will push for greater foreign investment-friendly policies. And if his policies for Gujarat so far are any indication, he will also encourage the states to pursue foreign investment deals at their levels. Abhinav Kejriwal: recent reports suggest that India will regain its economic footing once elections are held and a new government is formed. These reports all emphasize the effect that creating a stable government will have on India’s economy. Of course, the performance of the economy will also depend on the policies and preferences of that new government. It is difficult to predict what a BJP economic policy would be because there is considerable debate within the party between pro-market and protectionist factions. During its years as an opposition party, the BJP has not behaved in a way that is clearly in favor of the market. However this assuming that the BJP will come into power even though they have the odds. Vrindam Nagpal: I personally believe that these elections will have a big impact on the economic policy of India especially if Narendra Modi will take over, which is very likely. Though foreign investment will be a area of concern knowing Modi's nature we cannot ignore the great work of him in Gujarat and how he has promoted industry while being chief minister of Gujarat. We can expect changes i the foreign policy that will pertain 21
The Econocrat | Spring Term Issue | May 2014
to keeping economic growth the prime objective however I do hope he looks into other aspects of the economy however I do hope closer trade relations are maintained with economic powers of the world. Yuvraj Nathani: I have not really observed a change in the economic policy of India for a long time and my firm belief is nothing is going to change in near future no matter who comes to power. I feel crony capitalism will definitely increase as it already has been for quite a long time. Taking the large possibility of Modi being the next prime-minister the only thing I fear is a break in economic relations with US knowing his history with them. I do hope he gives importance to foreign investment. Even though Narendra Modi has never really spoken about what he plans for his economic policy it will not differ largely from the congress's. It will be interesting to see in which direction our economic policy goes after the results of the election. Devesh Sahai: The economic policy will witness a change post general elections the way I see it. It is difficult to predict the changes, considering that the result of the elections is yet to settle. However, there are a few changes that I foresee regardless of the party that forms the government. I sense a change in India’s trading policy, which I believe might become more inclusive and perhaps equal. I do feel that the place of Public Sector Units may witness a change in the near future; there will be an increase in impetus to PSUs. There shall be a proliferation in focus on the development of skills. There is a possibility of decentralization of power to a great extent. This, however, will be the case if the BJP forms the government. Only time will tell if these policies are put into effect. C. C. Chengappa: Changes in leadership aside, there are significant problems with the Indian economy at the heart of the current slowdown. So I fail to see how India’s economic problems will suddenly disappear, regardless of the election results. To truly make change, future governments would need to resolve some of the country’s deep- seated issues and build state capacity. How they propose to do that, however, is unclear. Sustained growth in India therefore depends not merely on a strong or decisive leader but on better institutions, increased state capacity, and stronger rule of law. India needs a transparent, rules-based economic framework. Some rebound is likely as the US economy improves. But it is important for India to undertake legal and regulatory reform, adopt the rule of law, improve its courts, and build capacity if growth is going to be sustained. Once we have these things in place a change in government and its effects on the economy will hardly matter.
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EconoPoll
Do you support BJP's anti-FDI policy? YES-33% NO-67%
Do you think, the RBI Governor should become a part of the Lok Sabha? YES-61% NO-39% Can a stable ruling party control the drastic fall of the rupee? YES-57% NO-43% Can reducing taxes and economic regulations control inflation? YES-71% NO-29% If all loans were neutralized would economies prosper? YES-23% NO-77% Should economic crisis be talked about first or poverty? Economic crisis-31% Poverty-69% Should India lift it’s subsides on books? YES-21% NO-79% Will legalizing bit-coin trade in India improve our economic condition? YES-59% NO-41% What is more important to the Indian economy, FDI or a stable government? FDI-76% Stable Govt.-24% Do you think there should be a common constituency development fund and not separate allowances? YES-16% NO-84%
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The Econocrat | Spring Term Issue | May 2014
An Accounts, Commerce and Economics Department Publication (C) The Doon School, 2014 The Econocrat The Econocrat | Spring Term Issue | May 2014
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