Cour

seMat
eri
al

BALLBI
VSEM

ECONOMI
CSI
I

UNI
TI
Basi
cConcept
s

MacroEconomi
cs:-Macr
oeconomi
csi
sthest
udyofaggr
egat
eeconomi
cvar
iabl
esofan
economy
.

Consumpt i
ongoods:-Arethosewhichareboughtbyconsumersasf i
nalorult
imat
egoodst o
sati
sfythei
rwants.Eg:Durabl
egoodscar,t
elev
isi
on,r
adioet
c.Non-dur
ablegoodsandser
vices
l
ikefrui
t,oi
l
,mil
k,vegetabl
eetc.Semidur
ablegoodssuchascrocker
yetc.

Capi
talgoods–capit
algoodsarethosefi
nalgoods,
whichareusedandhel
pint
hepr
ocessof
pr
oducti
onofothergoodsandserv
ices.E.
g.:
plant
,machi
ner
yetc.

Finalgoods:Arethosegoods,whi
char eusedeitherf
orfi
nalconsumptionorf
ori
nvestment
.It
i
ncludesfinalconsumergoodsandf i
nalproducti
ongoods.Theyarenotmeantforresal
e.So,
nov al
ueisaddedt ot
hesegoods.Thei
rv al
ueisincl
udedi
nthenational
income.

I
ntermedi
ategoodsinter
mediat
egoodsarethosegoods,whichar
eusedeit
herforr
esal
eorfor
f
urtherpr
oduct
ion.Examplef
orint
ermedi
ategoodis-mi
lkusedbyateashopforsel
l
ingt
ea.

Stock:-Quant
it
yofaneconomicv
ari
abl
ewhi chismeasuredatapar
ti
cularpoi
ntoft
ime.St
ock
hasnot i
medimensi
on.Stocki
sst
ati
cconcept.Eg:
wealt
h, wat
eri
natank.

Fl
ow: Flowi
sthatquant
it
yofaneconomicvar
iabl
e,whi
chismeasur
edduri
ngtheper
iodoft
ime.
Fl
ow hast i
medimension-l
i
keperhr,perdayetc.Fl
ow i
sadynamicconcept
.Eg:I
nvest
ment,
waterinastr
eam.

Inv
est ment
:Inv
estmenti
st henetadditi
onmadet ot
heexi
sti
ngstockofcapit
al.NetI
nvest
ment
=Gr ossinv
estment–depreciat
ion.Depreci
ati
on:
-depr
eci
ati
onr
eferstofal
lintheval
ueoffixed
assetsduetonormalwearandt ear,
passageofti
meandexpect
edobsolescence.

Rel
atedaggr
egat
es

Gr
ossDomest i
cproductatmar
ketpr
iceItist
hemoneyv al
ueofallf
inalgoodsandser
vices
pr
oduceddur
inganaccounti
ngy
earwi
thinthedomest
ict
erri
tor
yofacountr
y.

Gr
ossNationalpr
oductatmarketpri
ce:Iti
samoneyv al
ueofallfinalgoodsandservi
ces
pr
oducedbyacountr
yduri
nganaccounti
ngyeari
ncl
udi
ngnetf
act
orincomef r
om abr
oad.

Netf
actori
ncomefrom abroad:Di
ff
erencebet
weent hefactori
ncomesearnedbyourr
esi
dent
s
f
rom abr
oadandfactori
ncomeearnedbynon-resi
dentswithinourcount
ry.
Component sofNetfact
orincomef r
om abroad•Netcompensat
ionofempl
oyees•Neti
ncome
fr
om pr oper
tyandent r
epreneur
ship(ot
hert hanr
etai
nedearni
ngsofresi
dentcompani
esof
abroad)•Netret
ainedearni
ngsofresi
dentcompaniesabr
oad

For
mul
as

•NNPMp=GNPmp–depr
eci
ati
on

•NDPMp=GDPmp-depr eci
ati
onFir
msHouseholdSupplyofgoodsandser
vices(RealFl
ow)
Suppl
yofFactor
sofPr oduct
ion(RealFl
ow)Pay
mentf orgoodsandservi
ces( MoneyFlow)
Paymentf
orFact
orser
vices(MoneyFlow)

•NDPFc=NDPmp–Neti
ndi
rectt
axes(
indi
rectt
ax–subsi
dies)

•GDPFc=NDPf
c+depr
eci
ati
on

•NNPFc=GDPmp-depr
eci
ati
on+Netf
act
ori
ncomef
rom abr
oad–Neti
ndi
rectt
axes

•(NNPFCi sthesum t
otaloff
act
ori
ncomeear
nedbynor
malr
esi
dent
sofacount
rydur
ingt
he
account
ingyear
)

•NNPf
c=NDPf
c+Netf
act
ori
ncomef
rom abr
oad.

Conceptofdomest
ic(
economi
c)t
err
it
ory

Domest i
ct errit
oryi sageogr aphicalt er
ri
toryadmi nister
ed byagov ernmentwi thi
nwhi ch
persons,goodsandcapi talcir
culatef reel
y.(Areasofoper ati
ongener ati
ngdomest icincome,
fr
eedom ofci rculati
onofper sons,goodsandcapi t
al)Scopei denti
fi
edas* Poli
ti
calf ronti
ers
i
ncludi ngter r
itori
alwat ersandai rspace.* Embassi es,consul at
es,mi l
it
arybaseset c.located
abroadbuti ncludingt hoselocateswi thinthepolit
icalfront
iers.*Ships,air
craft
set c.,operated
byt her esidentsbet weent woormor ecount ri
es.*Fishingv essels,oi
landnat uralgasr igset c.
oper atedbyt her esidentsinthei nternati
onalwat ersorot herareasov erwhi cht hecount ry
enj
oy stheex clusiveright
sorjurisdi
ction.

Resident( normalresi
dent)
:-Nor
malr esidentisaper sonorani nsti
tut
ionwhoordi
nari
lyresi
des
i
nt hatcount r
yandwhosecent erofeconomi cinterestl
i
esi nt hatcountr
y.(
TheCent reof
economi ci nt
erestimpl
ies:-
(1)theresidentliv
esori slocat
edwi thi
ntheeconomicterr
it
ory.(
2)
Ther esidentcarri
esoutthebasiceconomi cactivi
ti
esofear ni
ngs,spendingandaccumulati
on
fr
om t hatlocati
on3.Hiscenterofi
nterestliesinthatcountr
y.

Rel
ati
onbet
weennat
ional
productandDomest
icpr
oduct
.

Domesticproductconceptisbasedont heproducti
onuni tsl
ocatedwithi
ndomest i
c(economic)
t
er r
it
ory
,operatedbot hbyr esidentsandnon-residents.Nati
onalproductconceptbasedon
resi
dentandi ncl
udest hei
rcont ri
but
iontoproduct i
onbot hwithi
nandout si
det heeconomi c
t
er r
it
ory
.Nat i
onalproduct=Domest i
cproduct+Resi dent
scont r
ibut
iontoproducti
onout si
de
t
heeconomi ct er
ri
tory(Factori ncomefrom abroad)-Non-r esi
dentcontri
but
iontopr oducti
on
i
nsidetheeconomi cter
rit
ory( Factori
ncometoabr oad)
Ci
rcul
arf
lowofI
ncome
The ci
rcul
arf
low 
ofi
ncomeandspendi
ngshowsconnect
ionsbet
weendi
ff
erentsect
orsofan
economy

 I
tshowsf
lowsofgoodsandser
vicesandf
act
orsofpr
oduct
ionbet
weenf
ir
msand
househol
ds
 Theci
rcul
arf
lowshowshownat
ional
incomeorGr
ossDomest
icPr
oducti
scal
cul
ated

Businessesproducegoodsandser v
icesandint
heprocessofdoingso, 
i
ncomesare
generated f
orfactor
sofproduct
ion(l
and,l
abour
,capi
talandent
erpri
se)–forexampl
ewages
andsalariesgoingtopeopl
einwork.

Leakages(
wit
hdr
awal
s)f
rom t
heci
rcul
arf
low

Notal
li
ncomewi ll
flowfr
om householdst
obusi
nessesdi
rect
ly.Theci
rcul
arf
lowshowst
hat
somepartofhousehol
dincomewillbe:

 1.
Putasi
def
orf
utur
espendi
ng,
i.
e. 
sav
ings 
(S)i
nbanksaccount
sandot
hert
ypesof
deposi
t
 2.
Pai
dt ot
hegov er
nmenti
n t
axat
ion 
(T)e.g.i
ncometaxandnat
ional
insur
ance
 3.
Spentonfor
eign-
madegoodsandservices,i
.e.
 i
mpor
ts 
(M)whichf
lowint
othe
economy

Wit
hdrawals 
arei
ncr
easesinsavi
ngs,t
axesorimport
ssor educi
ngt
heci
rcul
arf
lowofi
ncome
andleadi
ngtoamulti
pli
edcontr
acti
onofproduct
ion(out
put)

I
nject
ionsint
otheci
rcul
arf
low ar
eaddit
ionstoi
nvest
ment,
governmentspendi
ngorexpor
tsso
boost
ingthecir
cul
arfl
owofincomeleadingt
oamul t
ipl
i
edexpansi
onofoutput
.

1.Capi
tal
spendingbyfir
ms, i
.e.i
nvest
mentexpendi
ture(I
)e.g.onnewtechnology
2.Thegover
nment,i
.e.governmentexpendi
tur
e(G)e.g.ontheNHSordef ence
3.Over
seasconsumersbuy i
ngUKgoodsandser vi
ce,i.
e.UKexportexpendit
ure(X)

Aneconomyisi
n equi
l
ibr
ium 
whent
he 
rat
eofi
nject
ions=t
her
ateofwi
thdr
awal
s f
rom t
he
ci
rcul
arf
low.
Bui
l
dingupt
hemodel

Inthisnextser
iesofimageswebuildupthecir
cularfl
owmodel fr
om j
usthav i
ngadomest i
c
sectorandthenaddinginanexter
nalsect
or(export
sandimports)bef
oreincludi
ngt
hef i
nanci
al
sectorwhichchannelssavi
ngsandhopeful
lyprovi
desthef
inanceavai
labl
et ofundi
nvestment
.

TheDomest
icCi
rcul
arFl
owofI
ncomeandSpendi
ng

Theexter
nalsect
ori
nvol
vesbusi
nessesexpor
ti
nggoodsandservicesoverseas(
X)and
consumersandbusi
nessbuyi
ngimport
edproduct
sfr
om othercountr
ies(M)

Thedomest
icci
rcul
arf
low

TheCi
rcul
arFl
owofI
ncomeandSpendi
ngwi
tht
heExt
ernal
Sect
oradded
Ci
rcul
arf
lowwi
thext
ernal
sect
or

Fi
nanci
alSect
orAddedt
otheCi
rcul
arFl
owModel
Mar
ginal
Eff
ici
encyofCapi
tal
(MEC)andI
nvest
mentDemandFunct
ion

Busi
nessmenandent
repr
eneur
sar
einducedt
omakeani
nvest
mentwhent
her
etur
non
i
nvest
menti
sat
tr
act
ive.Bef
orei
nvest
ing,
busi
nessmencompar
ethey
iel
dfr
om t
hei
nvest
ment
andt
hecosti
ncur
redi
nmaki
ngt
hei
nvest
ment
.Iti
sonl
ywhent
her
etur
nisgr
eat
ert
hancost
,
i
nvest
menti
smade.

Pr
oduci
ngi
nacapi
tal
i
steconomy
,pr
ofi
tist
hepr
imar
yobj
ect
iveofbusi
nessf
ir
msand
manuf
act
uri
ngcompani
es.Soi
nor
dert
omaxi
mizet
hei
rpr
ofi
t,t
heyseekt
oinv
esti
nthose
v
ent
urest
haty
iel
dhi
gherpr
ofi
t.Key
nesi
ntr
oducedt
heconceptofmar
ginal
eff
ici
encyofcapi
tal
i
nor
dert
oanal
yzet
hepr
ofi
tabi
l
ityoft
hepr
ospectv
ent
ures.

Gener
all
y,mar
ginal
eff
ici
encyofcapi
tal
orMECr
efer
stot
heexpect
edr
ateofpr
ofi
tort
her
ate
ofr
etur
nfr
om i
nvest
mentov
eri
tscost
.Mar
ginal
eff
ici
encyofagi
vencapi
tal
asseti
sthe
hi
ghestr
etur
nthatcanbey
iel
dedf
rom t
headdi
ti
onal
uni
toft
hatcapi
tal
asset
. 

Key
nesdef
inedMECas‘
Ther
ateofdi
scountwhi
chmakest
hepr
esentv
alueoft
hepr
ospect
ive
y
iel
dfr
om t
hecapi
tal
assetequal
toi
tssuppl
ypr
ice’
.

Thus,
Key
nes’
mar
ginal
theor
yofcapi
tal
isbasesont
wof
act
orst
hati
ncl
ude

1.
  Pr
ospect
ivey
iel
dfr
om capi
tal
asset
s

Thet
erm pr
ospect
ivey
iel
dist
heaggr
egat
enetr
etur
nthei
nvest
orexpect
stor
ecei
veont
he
sal
eofcapi
tal
asset
saf
tert
hededuct
ionofr
unni
ngcost
sincur
redf
ort
hepur
chaseofcapi
tal
asset
sconsi
der
ingi
tst
otal
expect
edl
i
fe.

Usual
l
y,whent
het
otal
expect
edl
i
feoft
hecapi
tal
asseti
sdi
vi
dedi
ntoaser
iesofper
iods,
gener
all
yyear
s,t
heannual
ret
urni
sdet
ermi
ned.Thi
sisr
epr
esent
edasQ1,
Q2,
Q3…Qn 
andar
e
t
ermedasannui
ti
es.

2.
  Suppl
ypr
iceoft
hisasset
Thei
nvest
orhast
oconsi
dert
hesuppl
ypr
iceofassett
hathei
spl
anni
ngoni
nvest
ing.Suppl
y
pr
iceofassetr
efer
stot
hecosti
ncur
redf
ort
heacqui
sit
ionoft
hecapi
tal
asset
.Her
e,t
hecost
i
ncur
redi
sfort
hepur
chaseoforpr
oduct
ionofanewassetandnott
hepr
iceofanyoft
he
exi
sti
ngasset
s.

Thepr
esentv
alueofaser
iesofexpect
edi
ncomef
rom t
hei
nvest
edcapi
tal
assett
hroughouti
ts
l
i
fespani
sexpr
essedas

Wher
e,

SP=Suppl
ypr
iceofnewcapi
tal
asset
;

R1 
+R2 
+…+Rn 
=Ret
urnr
ecei
vedannual
l
y;
r
=Rat
eofdi
scountappl
i
edeachy
ear
;

R/(
1+r
)=Cur
rentv
alueofannui
tydi
scount
edatr
ater
.

Theconceptofmar
ginal
eff
ici
encyofcapi
tal
canbei
l
lust
rat
edwi
thanumer
ical
.

Fori
nst
ance,

Expect
edl
i
fespanofcapi
tal
asset
=2y
ear
s

Suppl
ypr
iceofcapi
tal
asset
=$3000

Expect
edYi
eld(
fi
rsty
ear
)=$1100

Expect
edYi
eld(
Secondy
ear
)=$1210

Then,
mar
ginal
eff
ici
encyofcapi
tal
(r)i
scal
cul
atedas

SP=R1/( )+R2/( 2
1+r 1+r
)
2
2000/(
1+r
)=1100/(
1+e) 
+1200
Thus,
r=10%

Taki
ngr
=1/
10

2 
SP=1100+1100/(
1+1/
10)=1000+1000/(
1+1/
10)=2000
 Fr
om t
heabov
ecal
cul
ati
on,
wecani
tmaybeobser
vedt
hat

1.Whent
heexpect
edy
iel
dincr oRn,
easest rat
eofdi
scounti
ncr
eases
2.Rat
eofdi
scountorMECdecr
easeswhensuppl
ypr
iceofcapi
tal
asseti
ncr
easeswi
tha
gi
venamountofexpect
edannual
ret
urnoncapi
tal
asset
,andv
icev
ersa.

Thus,
prospect
ivey
iel
dshav
eadi
rectef
fectonMECwher
eas,
suppl
ypr
icehasani
nver
seef
fect
.
Thi
smeanst
hatt
her
ateofr
etur
nov
ercostmayv
aryasar
esul
tofchangesi
ncostorchangei
n
t
heamountofr
etur
n.I
nvest
orswoul
dbewi
l
li
ngt
omakei
nvest
ment
sonl
ywhent
her
etur
nfr
om
pr
ospect
ivecapi
tal
inv
est
menti
sgr
eat
ert
hant
hesuppl
ypr
ice.
 

I
nvest
mentDemandFunct
ion

Accor
dingt
oJ.
M.Key
nes,
inv
est
mentdependsont
hemar
ketr
ateofi
nter
estandt
hemar
ginal
ef
fi
ci
encyofcapi
tal
.Aschedul
ethatshowst
her
elat
ionbet
weeni
nter
estr
atesandmar
ginal
ef
fi
ci
encyofcapi
tal
ist
ermedasi
nvest
mentdemandschedul
e.

Ahy
pot
het
ical
schedul
ecanbepr
epar
edt
hatshowst
hei
nvest
mentdemandatv
ary
ingl
evel
sof
i
nter
estr
atesandt
heef
fectt
hatmar
ginal
eff
ici
encyofcapi
tal
hasont
hedemand:

Rat
eofI
nter
est(% Vol
umeofI
nvest
ment Mar
ginal
Eff
ici
encyofCapi
tal
p.
a) Demand(
$) (
MEC)

10 10 10

9 20 9

8 30 8
 7 4 7

6 50 6

5 60 5

Fr
om t
heschedul
e,i
tcanbeobser
vedt
hati
nvest
mentdemandr
isesasi
nter
estr
atef
all
s.
Gener
all
y,i
nvest
menti
sat
tract
ivewhent
her
ateofi
nter
esti
slower
.Whent
her
ateofi
nter
esti
s
5%,
thei
nvest
orwoul
dexpectar
etur
nofatl
east5%ont
hei
nvest
ment
.

I
ncaset
hemar
ginal
eff
ici
encyofcapi
tal
isl
owert
hant
hecur
rentr
ateofi
nter
est
,inv
est
ors
woul
drat
hersav
ethanmakeani
nvest
ment
.

Thedi
agr
ammat
ical
repr
esent
ati
onoft
hei
nvest
mentdemandcur
vegi
vesacur
vewhi
chi
s
knownast
hei
nvest
mentdemandf
unct
ionort
hemar
ginal
eff
ici
encyofcapi
tal
cur
ve.

Asseeni
nthedi
agr
am,
thev
olumeofi
nvest
menthasi
ncr
easedwi
tht
hedecr
easei
nther
ateof
i
nter
est
.Gener
all
y,onav
erage,
thei
nvest
mentdemandcur
vei
sinel
ast
ic.So,
thechangei
nrat
e
ofi
nter
esthasv
erymi
nimum ef
fectont
hev
olumeofi
nvest
ment
.

Howev
er,
amor
eimpor
tantconceptt
oconsi
deri
stheshi
fti
nthei
nvest
mentdemandcur
ve.
Key
nes,
stat
est
hatr
ateofi
nter
esti
srel
ati
vel
yconst
anti
ntheshor
trun,
butMECi
shi
ghl
y
f
luct
uat
ing.So,
thei
nvest
mentdemandf
unct
ionandt
hev
olumeofi
nvest
mentmov
esal
ong
wi
tht
hei
ncr
easesordecr
easei
ntheMEC.

Thedi
agr
am showst
hatwi
tht
hechangei
nthemar
ginal
eff
ici
encyofcapi
tal
,thei
nvest
ment
demandcur
veshi
ft
supwar
dordownwar
dsal
thought
her
ateofi
nter
estr
emai
nedunchanged.

Bal
anceofTr
adeandBal
anceofPay
ment
s
Aftert heimplement at
ionofgl obal
izati
onpol i
cy,wor
ldhasbecomeasmal lv i
ll
ageandnow
everycont r
yf r
eelyt r
ansacts witht he othercount
ri
es ofthe worl
d.Int hi
s cont ext,t
wo
statement s are pr
epar ed to keep a r ecord ofthe tr
ansact
ions made by t he country
i
nt ernati
onall
y;t
heyar eBalanceofTr ade(BOT)andBalanceofPayments(
BOP) .The balanceof
pay ment  
keepsat rackoft ransact
ioni ngoods,servi
ces,andassetsbetweent hecount ry
’s
residents,wit
htherestofthewor ld.

Ontheotherhand,t
hebal
anceofexpor
tsandi
mpor
toft
hepr
oductandser
vicesi
ster
med
as 
Bal
anceofTrade.

ThescopeofBOPi sgr
eaterthanBOT,oryoucanalsosaythatBal
anceofTradei
samaj or
secti
onofBalanceofPayment.Let
’sunder
standt
hedif
fer
encebetweenBal
anceofTradeand
BalanceofPaymenti
ntheart
iclegi
venbel
ow.

Cont
ent
:Bal
anceofTr
adeVsBal
anceofPay
ment
s

1.Compar isonChart
2.Defi
nit
ion
3.KeyDifferences
4.Concl
usi on
Compar
isonChar
t
BASI
S FOR
BALANCEOFTRADE BALANCEOFPAYMENT
COMPARI
SON

Meani
ng BalanceofTradeisast atement BalanceofPay mentisast at
ement
thatcapt
uresthecount
ry'
sexport thatkeeps t r
ack of al
leconomic
and importof goods witht he transact
ionsdonebythecount
rywi
th
remaini
ngworl
d. theremainingworl
d.

Recor
ds Transact
ions r
elat
ed t
o goods Transact
ionsr
elatedto bot
hgoods
only. andservi
cesar
er ecor
ded.

Capital Ar
enotincl
udedi
ntheBal
anceof Ar
eincl
udedi
nBal
anceofPay
ment
.
Transfer
s Tr
ade.

Whi
chi
sbet
ter
? It gi
ves a par
ti
alv i
ew of t
he I
tgivesacl
earvi
ewoftheeconomi
c
countr
y'
seconomicst
atus. posi
ti
onoft
hecount
ry.

Resul
t I
tcanbeFavor
abl
e,Unf
avor
abl
eor Bothther
ecei
ptsandpay
mentsi
des
bal
anced. tal
l
ies.

Component I
ti s a component of Cur
rent Cur
rentAccountandCapi
tal
Account
.
AccountofBal
anceofPay
ment.

Def
ini
ti
onofBal
anceofTr
ade

Trader ef
erstobuyi
ngandselli
ngofgoods,butwheni
tcomestobuy i
ngandsel
li
ngofgoods
globall
y,theniti
sknownasi mportandexpor
t.TheBal
anceofTradeisthebalanceofthe
i
mpor t
sandexpor t
sofcommodi ti
esmadet o/
byacountrydur
ingapart
icul
aryear.I
tisthe
mosti mpor t
antpartofthe 
curr
entaccountofthecount
ry’
sBalanceofPayment.Itkeeps
recordsoftangi
blei
temsonly
.

TheBal anceofTr adeshowst hev ari

abi
lit
yinthei mportsandexportsofmerchandisemadeby
acount rywi t
ht her estofthewor ldoveraper iod.Ifthe 
import
sandexpor tsmadet o/bythe
countrytall
i
es,t hent hi
ssit
uationisknownasTr adeEqui l
ibr
ium,butifimpor
tsexceedexports,
thenthe conditionisunf av
ourableasi tstat
est hatt heeconomicstatusofthecountryisnot
good,andsot hissituat
ionist er
medasTr adeDef icit
.Now,ifthe 
valueofexport
si sgreat
er
thanthev al
ueofi mpor t
s,t
hisisaf avourabl
esituati
onbecausei ti
ndicatest
hegoodeconomi c
posit
ionoft hecount ry,t
husknownast radesurplus.
Def
ini
ti
onofBal
anceofPay
ment
s

TheBalanceofPay mentsisasetofaccount
st hatr
ecognisesal
lthecommerci
altr
ansact
ions
perf
ormedbyt hecountr
yinapar t
icul
arperi
odwi t
hther emaini
ngcountr
iesofthe 
worl
d.I t
keepstherecordofal
lthemonetar
yt r
ansact
ionsdonegloball
ybythecount
ryoncommodities,
servi
cesandincomeduringthey
ear.

Itcombinesallt
hepubli
c-pr
ivat
ei nv
estmentstoknowt hei
nfl
owandout f
lowofmoneyi nthe
economyov eraperiod.Ift
heBOPi sequalt ozer o,theni
tmeanst hatboththedebit
sand
credit
sareequal
,butift
hedebitismor ethancredit
,theniti
sasignofdefi
citwhi
leift
hecredi
t
exceedsdebit
,thenitshowsasur plus.TheBal anceofPay menthasbeendi vi
dedint
ot he
foll
owingset
sofaccounts:

 Cur
rentAccount
:Theaccountt
hatkeepst
her
ecor
dofbot
htangi
bleandi
ntangi
ble
i
tems.Tangi
blei
temsi
ncl
udegoodswhi
l
ethei
ntangi
blei
temsar
e ser
vicesandi
ncome.
 Capi
talAccount
:Theaccountkeepsar
ecor
dofal
lthecapi
talexpendi
tur
emadeand
i
ncomegener atedcollect
ivel
ybyt hepublicandpri
vat
esector.
 For
eignDir
ectInvestment
,
ExternalCommer cialBorrowing,Gov ernmentloan t
o Foreign Gover
nment ,etc.are
i
ncl udedi
nCapitalAccount.
 ErrorsandOmi ssi
ons:I fincaset her ecei
ptsandpay mentsdonotmat chwi t
heach
otherthenbal
anceamountwi l
l beshownaser ror
sand omissi
ons.

Macr
oeconomi
cSchool
OfThought
Cl
assi
cal
School

TheCl
assicalschool,whi
chisregar
dedasthefi
rstschoolofeconomi
cthought
,isassoci
ated
wit
hthe18t hCent uryScot
ti
sheconomistAdam Smi th,andthoseBri
ti
sheconomiststhat
fol
l
owed,suchasRober tMal
thusandDavi
dRicar
do.

Themai nideaoftheClassicalschoolwasthatmarket
sworkbestwhent heyarelef
talone,and
thatthereisnothi
ngbutt hesmal l
estrol
eforgover
nment.Theapproachi
sf i
rmlyoneofl ai
ssez-
fai
reandast r
ongbeli
efi ntheef f
ici
encyoffreemarket
stogenerate 
economicdev elopment.
Mar ketsshouldbelef
ttowor kbecausethe 
pri
cemechanism act
sasapower f
ul'
invi
siblehand'
toallocateresour
cestowher etheyarebestemployed.

I
ntermsofexplai
ni v
ng al
ue,thefocusofcl
assi
calt
hinki
ngwast
hati
twasdet
ermi
nedmai
nly
byscar
cit
yandcostsofproduct
ion.

Inter
msoft hemacr
o-economy,t
heClassi
caleconomi
stsassumedthattheeconomywould
alway
s r
etur
ntothef
ull
-employ
ment 
l
evelofrealout
putt
hroughanautomati
cself
-adj
ust
ment
mechani
sm.

I
tiswi
del
yrecogni
sedt
hatt
heCl
assi
cal
per
iodl
ast
edunt
il1870.
Key
nesi
aneconomi
cs

Keynesi
an economi sts broadly foll
ow the mai n macro-economi
c ideas of Br i
ti
sh
economist
 JohnMay nar
dKey nes.Keynesi
swi del
yregar
dedast hemosti
mportanteconomist
ofthe20thCentury
,despit
ef al
li
ngoutoffavourduri
ngthe1970sand1980sfoll
owingtheri
se
ofnewclassical
economics.

I
nessence,Keynesi
aneconomi
stsar
eskepti
calt
hat
,ifl
eftal
one,f
reemar
ket
swi
l
linev
itabl
y
mov
et owardsa 
full
empl
oymentequi
l
ibr
ium.

TheKeynesi
anappr oachi
si nter
v enti
onist
,comingfrom abel ieft
hattheselfi
nter
estwhich
gover
ns micr
o-economic behaviourdoes notal waysl ead tolong run macro-
economic
devel
opmentorshor trunmacr o- economicstabi
li
ty.Keynesianeconomicsisessenti
all
ya
theor
yofaggr
egatedemand, andhowbestt omanipul
ateitthr
oughmacro-economi
cpoli
cy.

Wi
tht
hisov
erv
iewi
nmi
nd,
Key
nesi
anTheor
ygener
all
yobser
vest
hef
oll
owi
ngconcept
s:

Unempl
oyment
:Undert
hecl
assi
calmodel
,unempl
oymenti
sof
tenat
tri
but
edt
ohi
ghand
ri
gidrealwages.Keynesar guesthereismor ecompl
exit
ythanthat,speci
fi
call
ythat
societ
iesarehighlyresi
stantt owagecut sandf ur
thermorethatreduci
ngwages
would pose a greatthreatt o an economy.Speci
fi
call
y,cut
ting wages reduces
spendingandmayr esul
tinadownwar dsspi
ral
.
Excessi
veSav
ing:Key
nes’
sconcepther
eissomewhatcompl
i
cat
ed,
buti
nshor
tKey
nes
notesexcessiv
esav i
ngasathreatandpr ospecti
vecauseofeconomicdecli
ne.Thisis
becauseexcessivesavi
ngleadst oreducedinvestmentandreducedspending,which
dri
v esdowndemandandt hepot ent
ialforconsumpt i
on.Thi
scanbeanotherspiral
ing
i
ssue,asmoneynotbei ngexchangedi sact i
vel
yr educi
ngprospect
iveemployment,
revenues,andfut
ureinv
est
ment s.
Fi
scal
Pol
i
cy:
Thekeyconcepti
nfi
scal
pol
i
cyf
orKey
nesi
s‘count
er-
cycl
i
cal
’fi
scal
pol
i
cy,
whichi st heexpect
ati
ont hatgovernmentscanr educethenegat i
veeffect
soft he
naturalbusiness cycl
e.Thi sis,generall
y,achiev
ed through defi
citspending i
n
recessions and suppressi
on of inflat
ion dur
ing boom t i
mes.Si mply put,the
governmentshoul dt
rytocurbtheextremesofeconomi cfl
uctuat
ionthr
oughinformed
fi
scal pol
icy.
TheMul
ti
pli
erEf
fect
:Thi
sideahasi
nmanyway
sal
readybeeni
mpl
i
edi
ntheat
om,but
i
nv er
sely
.Consi dertheunempl oymentandexcessivesavi
ngsproblems,andhowt hey
standtoleadtospi ral
i
ngdecline.Theothersi
deoft hatcoi
nisthatposi
tiv
eeconomi c
si
tuati
ons can spi ralupwar ds.Take forexampl e a governmentinv estmenti n
tr
ansportat
ion,puttingmoneyi nthepocketsofv ar
iousindi
vi
dualswhobui l
dtrains
andtracks.Thesei ndi
vidual
swi l
lspendthatextr
acapital
,put
ti
ngmoneyi nt hehands
ofotherbusiness(andt hi
swillconti
nue)
.Thisiscall
edthemulti
pli
ereff
ect.

Macr
oeconomi
cPol
i
cyObj
ect
ives:
Themacr
oeconomi
cpol
i
cyobj
ect
ivesar
ethef
oll
owi
ng:
(
i)Ful
lempl
oyment
,
(
ii
)Pr
icest
abi
l
ity
,

(
ii
i)Economi
cgr
owt
h,

(
iv)Bal
anceofpay
ment
sequi
l
ibr
ium andexchanger
atest
abi
l
ity
,and

(
v)Soci
alobj
ect
ives.

(
i)Ful
lempl
oyment
:
Per
for
manceofanygov
ernmenti
sjudgedi
nter
msofgoal
sofachi
evi
ngf
ullempl
oymentand
pr
icest
abi
l
ity
.Theset
womaybecal
l
edt
hekeyi
ndi
cat
orsofheal
thofaneconomy
.Inot
her
wor
ds,
moder
ngov
ernment
sai
m atr
educi
ngbot
hunempl
oymentandi
nfl
ati
onr
ates.

Unempl
oymentr
efer
stoi
nvol
unt
aryi
dle¬nessofmai
nlyl
abourf
orceandot
herpr
oduc¬t
ive
r
esour
ces.Unempl
oyment(
ofl
abour
)iscl
osel
yrel
atedt
otheeconomy
’saggr
egat
eout
put
.
Hi
ghert
heunempl
oymentr
ate,gr
eat
ert
hedi
ver
gencebet
weenact
ualaggr
e¬gat
eout
put(
or
GNP/
CDP)andpot
ent
ialout
¬put
.So,oneoft
heobj
ect
ivesofmacr
oeco¬nomi
cpol
i
cyi
sto
ensur
eful
lempl
oyment
.

Theobj
ect
iveoff
ullempl
oymentbecameupper
mostamongstt
hepol
i
cymaker
sint
heer
aof
Gr
eatDepr
essi
onwhenunempl
oymentr
atei
nal
lthecount
ri
esexceptt
het
hensoci
al¬i
st
count
ry,
theUSSR,
roset
oagr
eathei
ght
.Itmaybenot
edher
ethataf
reeent
erpr
isecapi
¬tal
i
st
economyal
way
sexhi
bit
sful
lempl
oy¬ment
.

But
,Key
nessai
dthatt
hegoaloff
ullempl
oymentmaybeadesi
rabl
eonebuti
m¬possi
blet
o
achi
eve.Ful
lempl
oyment
,thus,
doesnotmeant
hatnobodyi
sunempl
oyed.Ev
eni
f4or5p.
c.of
t
he t
otalpopul
ati
on r
e¬mai
n unempl
oyed,t
he count
ryi
s sai
dto be f
ull
yempl
oyed.Ful
l
empl
oyment
,thought
heor
eti
cal
l
yconcei
vabl
e,i
sdi
ff
icul
ttoat
tai
ninamar
ket
-dr
iveneconomy
.
I
nvi
ew oft
his,f
ullempl
oymentobj
ect
ivei
sof
tent
ransl
atedi
nto‘
hi
ghempl
oyment
’obj
ect
ive.
Thi
sgoali
sdesi
rabl
eindeed,
but‘
howhi
gh’
shoul
ditbe?Oneaut
horhasgi
venanansweri
nthe
f
ol¬l
owi
ng way
;“The goalf
orhi
gh empl
oymentshoul
dther
efor
e be nott
o seek an
unempl
oy¬mentl
evel
ofzer
o,butr
atheral
evel
ofabov
ezer
oconsi
stentwi
thf
ull
empl
oymentat
whi
cht
hedemandf
orl
abourequal
sthesuppl
yofl
abour
.Thi
slev
eli
scal
l
edt
henat
uralr
ateof
unempl
oyment
.”

(
ii
)Pr
icest
abi
l
ity
:
Nol
ongert
heat
tai
n¬mentoff
ullempl
oymenti
sconsi
der
edasamacr
oeconomi
cgoal
.The
emphasi
shasshi
ft
edt
opr
icest
abi
l
ity
.Bypr
icest
abi
l
itywemustnotmeananunchangi
ngpr
ice
l
evelov
ert
ime.Notnecessar
il
y,pr
icei
ncr
easei
sunwel
¬come,par
ti
cul
arl
yifi
tisr
est
ri
cted
wi
thi
nar
easonabl
eli
mit
.Inot
herwor
ds,pr
icef
luc¬t
uat
ionsofal
argerdegr
eear
eal
way
s
unwel
¬come.

Howev
er,i
tisdi
ff
icul
tagai
ntodef
inet
heper
missi
bleorr
easonabl
erat
eofi
nfl
ati
on.But
sust
ainedi
ncr
easei
npr
icel
evelaswel
lasaf
all
i
ngpr
icel
evelpr
oducedest
abi
l
isi
ngef
¬fect
son
t
heeconomy
.Ther
efor
e,oneoft
heobj
ect
ivesofmacr
oeconomi
cpol
i
cyi
stoen¬sur
e(r
elat
ive)
pr
icel
evelst
abi
l
ity
.Thi
sgoalpr
event
snotonl
yeconomi
cfl
uct
uat
ionsbutal
sohel
psi
nthe
at
tai
nmentofast
eadygr
owt
hofaneconomy
.

(
ii
i)Economi
cgr
owt
h:
Economi
cgr
owt
hinamar
keteconomyi
snev
erst
eady
.Theseeconomi
esexper
ienceupsand
downsi
nthei
rper
for
mance.Thi
sobj
ect
ivebecameupper
mosti
ntheper
iodf
oll
owi
ngt
heWor
ld
WarI
I(1939-
45)
.Economi
stscal
lsuchupsanddownsi
ntheeconomi
cper
for
manceast
rade
cy
cle/
busi
nesscy
cle.I
ntheshor
trunsuchf
luct
uat
ionsmayexhi
bitdepr
essi
onsorpr
osper
it
y
(
boom)
.

Oneoft
hei
mpor
tantbenchmar
kst
omeasur
etheper
for
manceofaneconomyi
sther
ateof
i
ncr
easei
nout
putov
eraper
iodoft
ime.Ther
ear
ethr
eemaj
or’
sour
cesofeconomi
cgr
owt
h,v
iz.
(
i)t
hegr
owt
hoft
hel
abourf
orce,(
ii
)capi
talf
ormat
ion,and(
ii
i)t
echnol
ogi
calpr
ogr
ess.A
count
ryseekst
oachi
evehi
ghereconomi
cgr
owt
hov
eral
ongper
iodsot
hatt
hest
andar
dsof
l
i
vingort
hequal
i
tyofl
i
feofpeopl
e,onanav
erage,i
mpr
ove.I
tmaybenot
edher
ethatwhi
l
e
t
alki
ngabouthi
ghereconomi
cgr
owt
h,wet
akei
ntoaccountgener
al,soci
alandenv
ironment
al
f
act
orssot
hatt
heneedsofpeopl
eofbot
hpr
esentgener
ati
onsandf
utur
egener
ati
onscanbe
met
.

Howev
er,pr
omot
ionofhi
ghereconomi
cgr
owt
hisof
tenhamper
edbyshor
trunf
luct
uat
ionsi
n
aggr
egat
eout
put
.Inot
herwor
ds,onef
indsaconf
li
ctbet
weent
heobj
ect
ivesofeconomi
c
gr
owt
handeconomi
cst
abi
l
ity(
inpr
ices)
.Inv
iewoft
hisconf
li
ct,
iti
ssai
dthatmacr
oeconomi
c
pol
i
cyshoul
dpr
omot
eeconomi
cgr
owt
hwi
thr
easonabl
epr
icest
abi
l
ity
.

(
iv)Bal
anceofpay
ment
sequi
l
ibr
ium andexchanger
atest
abi
l
ity
:
Fr
om amacr
o-economi
cpoi
ntofv
iew,onecanshowt
hatani
nter
nat
ionalt
ransact
iondi
ff
ers
f
rom domest
ict
ransact
ioni
nter
msof(
for
eign)cur
rencyexchange.Ov
eraper
iodoft
ime,al
l
count
ri
esai
m atbal
ancedf
low ofgoods,ser
vicesandasset
sint
oandoutoft
hecount
ry.
Whenev
ert
hishappens,
tot
ali
nter
nat
ional
monet
aryr
eser
vesar
evi
ewedasst
abl
e.
I
facount
ry’
sexpor
tsexceedi
mpor
ts,i
tthenexper
iencesabal
anceofpay
ment
ssur
plusor
accumul
ati
onofr
eser
ves,l
i
kegol
dandf
orei
gncur
rency
.Whent
hecount
ryl
osesr
eser
ves,i
t
exper
iencesbal
anceofpay
ment
sdef
ici
t(ori
mpor
tsexceedexpor
ts)
.Howev
er,depl
eti
onof
r
eser
vesr
efl
ect
stheunheal
thyper
for
manceofaneconomyandt
huscr
eat
esv
ari
ouspr
obl
ems.
Thati
swhyev
erycount
ryai
msatbui
l
dingsubst
ant
ial
vol
umeoff
orei
gnexchanger
eser
ves.

Any
way
,theaccumul
ati
onoff
orei
gnexchanger
eser
vesi
slar
gel
ycondi
ti
onedbyt
heexchange
r
atet
her
ateatwhi
chonecur
rencyi
sexchangedf
oranot
hercur
rencyt
ocar
ryouti
nter
nat
ional
t
ransact
ions.Thef
orei
gnexchanger
ateshoul
dbest
abl
easf
araspossi
ble.Thi
siswhatone
maycal
li
text
ernal
stabi
l
ityi
npr
ice.

Ext
ernal
inst
abi
l
ityi
npr
iceshamper
sthesmoot
hfl
owofgoodsandser
vicesbet
weennat
ions.I
t
al
soer
odest
heconf
idenceofcur
rency
.Howev
er,
mai
ntenanceofext
ernalst
abi
l
ityi
snol
onger
consi
der
edast
hemacr
oeconomi
cpol
i
cyobj
ect
iveaswel
lasmacr
oeconomi
cpol
i
cyi
nst
rument
.

I
tis,
howev
er,
becauseofgr
owi
ngi
nter
-connect
ednessandi
nter
dependencebet
weendi
ff
erent
nat
ionsi
nthegl
obal
i
sedwor
ld,t
het
askoff
ulf
il
li
ngt
hismacr
oeconomi
cpol
i
cyobj
ect
ivehas
becomemor
epr
obl
emat
ic.

(
v)Soci
alobj
ect
ives:
Thel
i
stofobj
ect
ivest
hatwehav
eref
err
edher
eisbynomeansanexhaust
iveone;
onecanadd
mor
eint
hel
i
st.Ev
ent
henwehav
eincor
por
atedt
hemaj
orones.

Macr
oeconomi
cpol
i
cyi
sal
sousedt
oat
tai
nsomesoci
alendsorsoci
alwel
far
e.Thi
smeans
t
hati
ncomedi
str
ibut
ionneedst
obemor
efai
randequi
tabl
e.I
nacapi
tal
i
stmar
ket
-based
soci
etysomepeopl
egetmor
ethanot
her
s.I
nor
dert
oensur
esoci
alj
ust
ice,pol
i
cymaker
suse
macr
oeconomi
cpol
i
cyi
nst
rument
s.

Wecanaddanot
hersoci
alobj
ect
ivei
nourl
i
st.Thi
sist
hegoalofeconomi
cfr
eedom.Thi
sis
char
act
eri
sedbyt
her
ightoft
aki
ngeconomi
cdeci
sionsbyanyi
ndi
vi
dual(
ri
chorpoor
,hi
gh
cast
eorl
owcast
e).

Busi
nessCy
cle
Busi
nesscy
clesar
echar
act
eri
zedbyboom i
noneper
iodandcol
l
apsei
nthesubsequentper
iod
i
ntheeconomi
cact
ivi
ti
esofacount
ry.
Thesef
luct
uat
ionsi
ntheeconomi
cact
ivi
ti
esar
eter
medasphasesofbusi
nesscy
cles.

Thef
luct
uat
ionsar
ecompar
edwi
thebbandf
low.Theupwar
danddownwar
dfl
uct
uat
ionsi
nthe
cumul
ati
veeconomi
cmagni
tudesofacount
ryshowv
ari
ati
onsi
ndi
ff
erenteconomi
cact
ivi
ti
es
i
nter
msofpr
oduct
ion,i
nvest
ment
,empl
oyment
,cr
edi
ts,pr
ices,andwages.Suchchanges
r
epr
esentdi
ff
erentphasesofbusi
nesscy
cles.

Thedi
ff
erentphasesofbusi
nesscy
clesar
eshowni
nFi
gur
e-1:

Ther
ear
ebasi
cal
l
ytwoi
mpor
tantphasesi
nabusi
nesscy
clet
hatar
epr
osper
it
yanddepr
essi
on.
Theot
herphasest
hatar
eexpansi
on,
peak,
troughandr
ecov
eryar
eint
ermedi
aryphases.

Fi
gur
e-2showst
hegr
aphi
cal
repr
esent
ati
onofdi
ff
erentphasesofabusi
nesscy
cle:

Asshowni
nFi
gur
e-2,
thest
eadygr
owt
hli
ner
epr
esent
sthegr
owt
hofeconomywhent
her
ear
e
nobusi
nesscy
cles.Ont
heot
herhand,
thel
i
neofcy
cleshowst
hebusi
nesscy
clest
hatmov
eup
anddownt
hest
eadygr
owt
hli
ne.Thedi
ff
erentphasesofabusi
nesscy
cle(
asshowni
nFi
gur
e-2)
ar
eexpl
ainedbel
ow.
1.Expansi
on:
Thel
i
neofcy
clet
hatmov
esabov
ethest
eadygr
owt
hli
ner
epr
esent
stheexpansi
onphaseofa
busi
nesscy
cle.I
ntheexpansi
onphase,t
her
eisani
ncr
easei
nvar
iouseconomi
cfact
ors,such
aspr
oduct
ion,
empl
oyment
,out
put
,wages,
prof
it
s,demandandsuppl
yofpr
oduct
s,andsal
es.

I
naddi
ti
on,i
ntheexpansi
onphase,t
hepr
icesoff
act
orofpr
oduct
ionandout
puti
ncr
eases
si
mul
taneousl
y.I
nthi
sphase,debt
orsar
egener
all
yingoodf
inanci
alcondi
ti
ont
orepayt
hei
r
debt
s;t
her
efor
e,cr
edi
tor
slendmoneyathi
gheri
nter
estr
ates.Thi
sleadst
oani
ncr
easei
nthe
f
lowofmoney
.

I
nexpansi
onphase,duet
oincr
easei
ninv
est
mentoppor
tuni
ti
es,i
dlef
undsofor
gani
zat
ionsor
i
ndi
vi
dual
sar
eut
il
izedf
orv
ari
ousi
nvest
mentpur
poses.Ther
efor
e,i
nsuchacase,t
hecash
i
nfl
ow and out
fl
ow ofbusi
nesses ar
e equal
.Thi
s expansi
on cont
inues t
il
lthe economi
c
condi
ti
onsar
efav
orabl
e.

2.Peak:
Thegr
owt
hint
heexpansi
onphaseev
ent
ual
l
ysl
owsdownandr
eachest
oit
speak.Thi
sphase
i
sknownaspeakphase.I
not
herwor
ds,
peakphaser
efer
stot
hephasei
nwhi
cht
hei
ncr
easei
n
gr
owt
hrat
eofbusi
nesscy
cleachi
evesi
tsmaxi
mum l
i
mit
.Inpeakphase,
theeconomi
cfact
ors,
suchaspr
oduct
ion,pr
ofi
t,sal
es,andempl
oyment
,ar
ehi
gher
,butdonoti
ncr
easef
urt
her
.In
peakphase,t
her
eisagr
adualdecr
easei
nthedemandofv
ari
ouspr
oduct
sduet
oincr
easei
n
t
hepr
icesofi
nput
.

Thei
ncr
easei
nthepr
icesofi
nputl
eadst
oani
ncr
easei
nthepr
icesoff
inalpr
oduct
s,whi
l
ethe
i
ncomeofi
ndi
vi
dual
sremai
nsconst
ant
.Thi
sal
sol
eadsconsumer
stor
est
ruct
uret
hei
rmont
hly
budget
.As a r
esul
t,t
he demand f
orpr
oduct
s,such as j
ewel
l
ery
,homes,aut
omobi
l
es,
r
efr
iger
ator
sandot
herdur
abl
es,
star
tsf
all
i
ng.

3.Recessi
on:
Asdi
scussedear
li
er,i
npeakphase,t
her
eisagr
adualdecr
easei
nthedemandofv
ari
ous
pr
oduct
sduet
oincr
easei
nthepr
icesofi
nput
.Whent
hedecl
i
nei
nthedemandofpr
oduct
s
becomesr
api
dandst
eady
,ther
ecessi
onphaset
akespl
ace.

I
nrecessi
onphase,
allt
heeconomi
cfact
ors,
suchaspr
oduct
ion,
pri
ces,
sav
ingandi
nvest
ment
,
st
art
sdecr
easi
ng.Gener
all
y,pr
oducer
sar
eunawar
eofdecr
easei
nthedemandofpr
oduct
sand
t
heycont
inuet
opr
oducegoodsandser
vices.I
nsuchacase,t
hesuppl
yofpr
oduct
sexceeds
t
hedemand.

Ov
ert
het
ime,pr
oducer
sreal
i
zet
hesur
plusofsuppl
ywhent
hecostofmanuf
act
uri
ngofa
pr
oducti
smor
ethanpr
ofi
tgener
ated.Thi
scondi
ti
onf
ir
stl
yexper
iencedbyf
ewi
ndust
ri
esand
sl
owl
yspr
eadt
oal
li
ndust
ri
es.

Thi
ssi
tuat
ioni
sfi
rst
lyconsi
der
edasasmal
lfl
uct
uat
ioni
nthemar
ket
,butast
hepr
obl
em exi
sts
f
oral
ongerdur
ati
on,pr
oducer
sst
artnot
ici
ngi
t.Consequent
ly,pr
oducer
sav
oidanyt
ypeof
f
urt
heri
nvest
menti
nfact
orofpr
oduct
ion,
suchasl
abor
,machi
ner
y,andf
urni
tur
e.Thi
sleadst
o
t
her
educt
ioni
nthepr
icesoff
act
or,
whi
chr
esul
tsi
nthedecl
i
neofdemandofi
nput
saswel
las
out
put
.

4.Tr
ough:
Dur
ingt
het
roughphase,
theeconomi
cact
ivi
ti
esofacount
rydecl
i
nebel
owt
henor
mall
evel
.In
t
hisphase,
thegr
owt
hrat
eofaneconomybecomesnegat
ive.I
naddi
ti
on,
int
roughphase,
ther
e
i
sar
api
ddecl
i
nei
nnat
ional
incomeandexpendi
tur
e.

I
nthi
sphase,i
tbecomesdi
ff
icul
tfordebt
orst
opayof
fthei
rdebt
s.Asar
esul
t,t
her
ateof
i
nter
estdecr
eases;t
her
efor
e,banksdonotpr
efert
olendmoney
.Consequent
ly,
banksf
acet
he
si
tuat
ionofi
ncr
easei
nthei
rcashbal
ances.

Apar
tfr
om t
his,t
hel
evelofeconomi
cout
putofacount
rybecomesl
ow andunempl
oyment
becomeshi
gh.I
naddi
ti
on,i
ntr
oughphase,i
nvest
orsdonoti
nvesti
nst
ockmar
ket
s.I
ntr
ough
phase,manyweakor
gani
zat
ionsl
eav
eindust
ri
esorr
atherdi
ssol
ve.Att
hispoi
nt,aneconomy
r
eachest
othel
owestl
evel
ofshr
inki
ng.

5.Recov
ery
:
Asdi
scussedabov
e,i
ntr
oughphase,
aneconomyr
eachest
othel
owestl
evelofshr
inki
ng.Thi
s
l
owestl
eveli
sthel
i
mitt
owhi
chaneconomyshr
inks.Oncet
heeconomyt
ouchest
hel
owest
l
evel
,i
thappenst
obet
heendofnegat
ivi
sm andbegi
nni
ngofposi
ti
vi
sm.

Thi
sleads t
orev
ersaloft
he pr
ocess ofbusi
ness cy
cle.As a r
esul
t,i
ndi
vi
dual
s and
or
gani
zat
ionsst
artdev
elopi
ngaposi
ti
veat
ti
tudet
owar
dthev
ari
ouseconomi
cfact
ors,
suchas
i
nvest
ment
,empl
oyment
,andpr
oduct
ion.Thi
spr
ocessofr
ever
sal
star
tsf
rom t
hel
abormar
ket
.

Consequent
ly,or
gani
zat
ionsdi
scont
inuel
ayi
ngof
findi
vi
dual
sandst
arthi
ri
ngbuti
nli
mit
ed
number
.Att
hisst
age,wagespr
ovi
dedbyor
gani
zat
ionst
oindi
vi
dual
sisl
essascompar
edt
o
t
hei
rski
l
lsandabi
l
iti
es.Thi
smar
kst
hebegi
nni
ngoft
her
ecov
eryphase.

I
nrecov
eryphase,consumer
sincr
easet
hei
rrat
eofconsumpt
ion,ast
heyassumet
hatt
her
e
woul
dbenof
urt
herr
educt
ioni
nthepr
icesofpr
oduct
s.Asar
esul
t,t
hedemandf
orconsumer
pr
oduct
sincr
eases.

I
n addi
ti
on i
nrecov
eryphase,banker
sst
artut
il
izi
ng t
hei
raccumul
ated cash bal
ancesby
decl
i
ningt
hel
endi
ngr
ateandi
ncr
easi
ngi
nvest
menti
nvar
ioussecur
it
iesandbonds.Si
mil
arl
y,
adopt
ingaposi
ti
veappr
oachot
herpr
ivat
einv
est
orsal
sost
arti
nvest
ingi
nthest
ockmar
ketAs
ar
esul
t,secur
it
ypr
icesi
ncr
easeandr
ateofi
nter
estdecr
eases.

Pr
icemechani
sm pl
aysav
eryi
mpor
tantr
olei
nther
ecov
eryphaseofeconomy
.Asdi
scussed
ear
li
er,dur
ingr
ecessi
ont
her
ateatwhi
cht
hepr
iceoff
act
orofpr
oduct
ionf
all
sisgr
eat
ert
han
t
her
ateofr
educt
ioni
nthepr
icesoff
inal
product
s.

UNI
TII

Economi
cGr
owt
h:Meani
ngandFact
orsaf
fect
ingGr
owt
h
Thet
erm economi
cgr
owt
hisassoci
atedwi
theconomi
cpr
ogr
essandadv
ancement
.

Economi
cgr
owt
hcanbedef
inedasani
ncr
easei
nthecapaci
tyofaneconomyt
opr
oduce
goodsandser
viceswi
thi
naspeci
fi
cper
iodoft
ime.

I
neconomi
cs,economi
cgr
owt
href
erst
oal
ong-
ter
m expansi
oni
nthepr
oduct
ivepot
ent
ialof
t
heeconomyt
osat
isf
ythewant
sofi
ndi
vi
dual
sint
hesoci
ety
.Sust
ainedeconomi
cgr
owt
hofa
count
ry’hasaposi
ti
vei
mpactont
henat
ionali
ncomeandl
evelofempl
oyment
,whi
chf
urt
her
r
esul
tsi
nhi
gherl
i
vingst
andar
ds.
Apar
tfr
om t
his,i
tpl
aysav
italr
olei
nst
imul
ati
nggov
ernmentf
inancesbyenhanci
ngt
ax
r
evenues.Thi
senabl
est
hegov
ernmentt
oear
next
rai
ncomef
ort
hef
urt
herdev
elopmentofan
economy
.Theeconomi
cgr
owt
hofacount
rycanbemeasur
edbycompar
ingt
hel
evelofGr
oss
Nat
ionalPr
oduct(
GNP)ofay
earwi
tht
heGNPoft
hepr
evi
ousy
ear
.Theeconomi
cgr
owt
hofa
count
ryi
spossi
blei
fst
rengt
hsandweaknessesoft
heeconomyar
epr
oper
lyanal
yzed.

Economi
canal
ysi
spr
ovi
desani
nsi
ghti
ntot
heessent
ial
sofaneconomy
.Iti
sasy
stemat
ic
pr
ocessf
ordet
ermi
ningt
heopt
imum useofscar
cer
esour
cesandsel
ect
ingt
hebestal
ter
nat
ive
t
oachi
evet
heeconomi
cgoal
.Mor
eov
er,economi
canal
ysi
shel
psi
nassessi
ngt
hecausesof
di
ff
erenteconomi
cpr
obl
ems,suchasi
nfl
ati
on,depr
essi
on,and economi
cinst
abi
l
ity
.Iti
s
per
for
medbyt
aki
ngi
ntoconsi
der
ati
onv
ari
ouseconomi
cvar
iabl
es,suchasdemand,suppl
y,
pr
ices,
product
ioncost
,wages,
labor
,andcapi
tal
.

Meani
ngofEconomi
cGr
owt
h:
Economi
cgr
owt
hcanbedef
inedasaposi
ti
vechangei
nthel
evelofgoodsandser
vices
pr
oducedbyacount
ryov
eracer
tai
nper
iodoft
ime.Ani
mpor
tantchar
act
eri
sti
cofeconomi
c
gr
owt
hist
hati
tisnev
eruni
for
m orsamei
nal
lsect
orsofaneconomyForexampl
e,i
na
par
ti
cul
ary
ear
,thet
elecommuni
cat
ionsect
orofacount
ryhasmar
kedasi
gni
fi
cantcont
ri
but
ion
i
neconomi
cgr
owt
hwher
east
hemi
ningsect
orhasnotper
for
medwel
lasf
arast
heeconomi
c
gr
owt
hoft
hecount
ry-i
sconcer
ned.

Economi
cgr
owt
hisdi
rect
lyr
elat
edt
oper
cent
agei
ncr
easei
nGNPofacount
ry.I
nrealsense,
economi
cgr
owt
hisr
elat
edt
oincr
easei
npercapi
tanat
ionalout
putornetnat
ionalpr
oductofa
count
ryt
hatr
emai
nconst
antorsust
ainedf
ormanyy
ear
s.

Economi
cgr
owt
hcanbeachi
evedwhent
her
ateofi
ncr
easei
ntot
alout
puti
sgr
eat
ert
hant
he
r
ateofi
ncr
easei
npopul
ati
onofacount
ry.Forexampl
e,i
n2005-
2006,t
her
ateofi
ncr
easei
n
I
ndi
a’
sGNPwas9.
1%,
whi
l
eit
spopul
ati
ongr
owt
hrat
ewas1.
7%.

I
nsuchacase,percapi
tai
ncr
easei
nGNPwoul
dbe7.
4%(
=9.
1-1.
7).Ont
heot
herhand,i
fthe
r
ateofi
ncr
easei
nGNPandpopul
ati
oni
ssamet
hent
heact
ualgr
owt
hofGNPwoul
dbezer
o,
whi
chi
mpl
i
est
hatt
her
eisadecr
easei
npercapi
tai
ncome.

Asar
esul
t,t
her
ewoul
dbenoeconomi
cgr
owt
h.Ther
efor
e,i
nsuchacase,
standar
dofl
i
vingof
peopl
ewoul
dnoti
mpr
oveev
enwhent
her
eisani
ncr
easei
nthet
otalout
putofacount
ry.
Howev
er,
suchagr
owt
hisbet
tert
hant
hest
agnat
ionofaneconomy
.
Theeconomi
cgr
owt
hofacount
rymaygethamper
edduet
oanumberoff
act
ors,
suchast
rade
def
ici
tandal
ter
ati
onsi
nexpendi
tur
esbygov
ernment
albodi
es.Gener
all
y,t
heeconomi
cgr
owt
h
ofacount
ryi
sadv
ersel
yaf
fect
edwhent
her
eisashar
pri
sei
nthepr
icesofgoodsandser
vices.

Fol
l
owi
ngar
esomeoft
hei
mpor
tantf
act
orst
hataf
fectt
heeconomi
cgr
owt
hofacount
ry:
(
a)HumanResour
ce:
Ref
erst
ooneoft
hemosti
mpor
tantdet
ermi
nantofeconomi
cgr
owt
hofacount
ry.Thequal
i
ty
andquant
it
yofav
ail
abl
ehumanr
esour
cecandi
rect
lyaf
fectt
hegr
owt
hofaneconomy
.

The qual
i
tyofhuman r
esour
ce i
s dependenton i
ts ski
l
ls,cr
eat
ive abi
l
iti
es,t
rai
ning,and
educat
ion.I
fthehumanr
esour
ceofacount
ryi
swel
lski
l
ledandt
rai
nedt
hent
heout
putwoul
d
al
sobeofhi
ghqual
i
ty.

Ont
heot
herhand,ashor
tageofski
l
ledl
aborhamper
sthegr
owt
hofaneconomy
,wher
eas
sur
plusofl
abori
sofl
essersi
gni
fi
cancet
oeconomi
cgr
owt
h.Ther
efor
e,t
hehumanr
esour
ces
ofacount
ryshoul
dbeadequat
einnumberwi
thr
equi
redski
l
lsandabi
l
iti
es,sot
hateconomi
c
gr
owt
hcanbeachi
eved.

(
b)Nat
ural
Resour
ces:
Af
fectt
heeconomi
cgr
owt
hofacount
ryt
oal
argeext
ent
.Nat
uralr
esour
cesi
nvol
ver
esour
ces
t
hatar
epr
oducedbynat
ureei
theront
hel
andorbeneat
hthel
and.Ther
esour
cesonl
and
i
ncl
udepl
ant
s,wat
err
esour
cesandl
andscape.

Ther
esour
cesbeneat
hthel
andorunder
groundr
esour
cesi
ncl
udeoi
l
,nat
uralgas,met
als,non-
met
als,and mi
ner
als.The nat
uralr
esour
ces ofa count
ry depend on t
he cl
i
mat
ic and
env
ironment
alcondi
ti
ons.Count
ri
eshav
ingpl
ent
yofnat
uralr
esour
cesenj
oygoodgr
owt
hthan
count
ri
eswi
thsmal
lamountofnat
ural
resour
ces.

Theef
fi
cientut
il
izat
ionorexpl
oit
ati
onofnat
uralr
esour
cesdependsont
heski
l
lsandabi
l
iti
esof
human r
esour
ce,t
echnol
ogyused and av
ail
abi
l
ityoff
unds.A count
ryhav
ing ski
l
led and
educat
edwor
kfor
cewi
thr
ichnat
ural
resour
cest
akest
heeconomyont
hegr
owt
hpat
h.

Thebestexampl
esofsucheconomi
esar
edev
elopedcount
ri
es,suchasUni
tedSt
ates,Uni
ted
Ki
ngdom,Ger
many
,andFr
ance.Howev
er,t
her
ear
ecount
ri
est
hathav
efewnat
uralr
esour
ces,
buthi
ghpercapi
tai
ncome,
suchasSaudiAr
abi
a,t
her
efor
e,t
hei
reconomi
cgr
owt
hisv
eryhi
gh.
Si
mil
arl
y,Japanhasasmal
lgeogr
aphi
calar
eaandf
ew nat
uralr
esour
ces,butachi
eveshi
gh
gr
owt
hrat
eduet
oit
sef
fi
cienthumanr
esour
ceandadv
ancedt
echnol
ogy
.
(
c)Capi
tal
For
mat
ion:
I
nvol
ves l
and,bui
l
ding,machi
ner
y,power
,tr
anspor
tat
ion,and medi
um ofcommuni
cat
ion.
Pr
oduci
ngandacqui
ri
ngal
lthesemanmadepr
oduct
sist
ermedascapi
talf
ormat
ion.Capi
tal
f
ormat
ioni
ncr
easest
heav
ail
abi
l
ityofcapi
talperwor
ker
,whi
chf
urt
heri
ncr
easescapi
tal
/l
abor
r
ati
o.Consequent
ly,t
hepr
oduct
ivi
tyofl
abori
ncr
eases,whi
chul
ti
mat
elyr
esul
tsi
nthei
ncr
ease
i
nout
putandgr
owt
hoft
heeconomy
.

(
d)Technol
ogi
cal
Dev
elopment
:
Ref
erst
ooneoft
hei
mpor
tantf
act
orst
hataf
fectt
hegr
owt
hofaneconomy
.Technol
ogy
i
nvol
ves appl
i
cat
ion ofsci
ent
if
ic met
hods and pr
oduct
ion t
echni
ques.I
n ot
herwor
ds,
t
echnol
ogycanbedef
inedasnat
ureandt
ypeoft
echni
cali
nst
rument
susedbyacer
tai
n
amountofl
abor
.

Technol
ogi
caldev
elopmenthel
ps i
nincr
easi
ng pr
oduct
ivi
ty wi
tht
he l
i
mit
ed amountof
r
esour
ces.Count
ri
est
hathav
ewor
kedi
nthef
iel
doft
echnol
ogi
caldev
elopmentgr
owr
api
dlyas
compar
edt
ocount
ri
est
hathav
elessf
ocusont
echnol
ogi
caldev
elopment
.Thesel
ect
ionof
r
ightt
echnol
ogyal
so pl
ays an r
olef
ort
he gr
owt
h ofan economy
.On t
he cont
rar
y,an
i
nappr
opr
iat
etechnol
ogy
-resul
tsi
nhi
ghcostofpr
oduct
ion.

(
e)Soci
alandPol
i
tical
Fact
ors:
Pl
ayacr
uci
alr
olei
neconomi
cgr
owt
hofacount
ry.Soci
alf
act
orsi
nvol
vecust
oms,t
radi
ti
ons,
v
aluesandbel
i
efs,
whi
chcont
ri
but
etot
hegr
owt
hofaneconomyt
oaconsi
der
abl
eext
ent
.

Forex
ampl
e,asoci
etywi
thconv
ent
ionalbel
i
efsandsuper
sti
ti
onsr
esi
stst
headopt
ionof
moder
nway
sofl
i
ving.I
nsuchacase,achi
evi
ngbecomesdi
ff
icul
t.Apar
tfr
om t
his,pol
i
tical
f
act
ors,suchaspar
ti
cipat
ionofgov
ernmenti
nfor
mul
ati
ngandi
mpl
ement
ingv
ari
ouspol
i
cies,
hav
eamaj
orpar
tineconomi
cgr
owt
h.

Obst
acl
est
oEconomi
cDev
elopment
Obst
acl
e# 
1.I
nter
locki
ngVar
iousCi
rcl
e:
Rapi
d economi
c gr
owt
his an hi
stor
icalabnor
mal
i
ty.Ther
efor
e,any ov
eral
lappr
oach t
o
dev
elopmentmustt
akenot
eoft
her
eal
i
ty,i
.e.
,thev
ari
ousobst
acl
est
ogr
owt
hasal
sot
he
per
sist
enceofsecul
arst
agnat
ionemphasi
sedbyA.
H.Hansen.

Themostf
ashi
onabl
econcepther
eist
hev
ici
ousci
rcl
eofpov
ert
y,aconcepti
ntr
oducedby
Nur
kseandot
her
s.Theessenceoft
heconcepti
sthatacount
ryi
spoorbecausei
tispoor
.The
i
mpl
i
cat
ioni
scl
ear
.Acount
ry’
spov
ert
yisi
tsel
famaj
orobst
acl
etogr
owt
handdev
elopment
.
Becauseacount
ryi
spoor
,itcannotdev
elop.

Andbecausei
tcannotdev
elop,
itr
emai
nspoor
.Inf
act
,lowpercapi
tai
ncomei
sbot
hthecause
andt
heef
fectofpov
ert
y,asFi
g.7shows.I
tisi
ntunewi
tht
hepr
evai
l
ingpost
-warmoodof
pessi
mism anddesper
ati
oni
nwhi
ch‘
vi
ciousci
rcl
es’(
ofpov
ert
yandl
owwagesl
eadi
ngt
olow
i
nvest
ment
,andl
ow pr
oduct
ivi
tyofl
abourl
eadi
ngt
opov
ert
y)l
oom l
argei
ntheeconomi
sts’
v
isi
on.

Fi
g.7showst
hat
,manyobst
acl
est
odev
elopmentar
erei
nfor
cing.Lowl
evel
sofi
ncomepr
event
sav
ing,r
etar
dcapi
talgr
owt
h,hi
nderpr
oduct
ivi
tygr
owt
h,andkeepi
ncomel
ow.Successf
ul
dev
elopmentmayr
equi
ret
aki
ngst
epst
obr
eakt
hechai
natmanypoi
nts.

Fi
g.7al
soi
l
lust
rat
eshowonehur
dler
aisesy
etot
herhur
dles.Lowi
ncomesl
eadt
olowsav
ing;
l
owsav
ingr
etar
dst
hegr
owt
hofcapi
tal
;i
nadequat
ecapi
talpr
e¬v
ent
sint
roduct
ionofmachi
ner
y
andr
api
dgr
owt
hinpr
oduct
iv¬i
ty;l
ow pr
oduct
ivi
tyl
eadst
olow i
ncomes.Ot
herel
ement
sin
pov
ert
yar
eal
sosel
f-
rei
nfor
cing.Pov
ert
yisaccompani
edbyl
owl
evel
sofski
l
landl
i
ter
acy
;these
i
ntur
npr
eventt
headapt
ionofnewandi
mpr
ovedt
echnol
ogi
es.

Ov
ercomi
ngt
hebar
ri
ersofpov
ert
yof
tenr
equi
resaconcer
tedef
for
tonmanyf
ront
s,andsome
dev
elopmenteconomi
stsr
ecommendeda“
bigpush”f
orwar
dtobr
eakt
hev
ici
ouscy
cle.I
fa
count
ryi
sfor
tunat
e,si
mul
taneousst
epst
oinv
estmor
e,dev
elopski
l
ls,andcur
bpopul
ati
on
gr
owt
hcanbr
eakt
hev
ici
ouscy
cleofr
api
deconomi
cdev
elopment
.

Mor
eov
er,t
hel
owl
evel
sofl
i
vingi
nLDCsmakef
oronl
yli
tt
lecapi
talf
ormat
ionandi
nvest
ment
.
Atl
ow l
evel
sofi
ncome,peopl
efi
ndi
tdi
ff
icul
ttomakeasubst
ant
ialamountofsacr
if
iceof
pr
esentconsumpt
ioni
nfav
ourofsav
ing.

So,
capi
talf
ormat
ionbecomesadi
ff
icul
ttask.I
fpeasantpr
oduc¬t
ivi
tycoul
dbei
ncr
eased,
such
sacr
if
ice mi
ghtoccurand capi
talcoul
d be accumul
ated.Butt
hisconst
it
utest
he v
ici
ous
ci
rcl
e,
 “
Fort
hesei
mpr
ove¬ment
sinpr
oduct
ivi
tywi
l
lty
pical
l
yrequi
ret
hatpeasant
shav
emor
e
andbet
tert
ool
s—t
hati
s,mor
ecapi
tal— t
owor
kwi
th.Wi
thoutcapi
talaccumu¬l
ati
on,out
put
andpr
oduct
ivi
tywi
l
lremai
nlow.Wi
thl
ow out
putandpr
oduct
ivi
ty,t
her
ewi
l
lbenosubst
ant
ial
sav
ingsorcapi
tal
for
mat
ion.
”
Ther
eist
he‘
vi
ciousci
rcl
eofal
i
mit
edmar
ket
’.I
napoorcount
rywher
ethebul
koft
he
popul
ati
onl
i
vei
nrur
alar
eas,t
heext
entoft
hemar
keti
sli
kel
ytobev
eryl
i
mit
ed.Anot
her
obst
acl
etodev
elopmenti
slackofadequat
etr
anspor
tandcommuni
cat
ionf
aci
l
iti
es.

Howev
er,
accor
dingt
oA.
O.Hi
rschman,
thekeyshor
tagei
nLDCsi
sdeci
sion-
maki
ngabi
l
ity
,not
capi
talorl
ackofanor
gani
sat
ionalf
ramewor
k.I
fthi
sresour
cecanbemobi
l
ised,manyoft
he
al
l
egedobst
acl
est
odev
elop¬mentwi
l
ldi
sappear
.Inf
act
,ther
eisawhol
egr
oupof‘
vi
cious
ci
rcl
es’
.

Lar
ge-
scal
eindust
ryr
equi
resabi
gmar
ket
.Butt
heext
entoft
hemar
keti
sli
mit
edi
nLDCsi
nthe
i
nit
ialst
agebef
oret
her
eoccur
sal
arge-
scal
eindust
ri
ali
sat
ion.Thi
smayactasabar
ri
ert
o
gr
owt
h.

Ther
eis al
so a r
elat
ed and mor
e gener
al‘
vi
cious ci
rcl
e ofi
nter
dependentpr
oduct
ion’
.
Speci
ali
sedi
ndust
ryi
sint
erdependenti
ndust
ry.
 “
Afi
rm musthav
enotonl
ymar
ket
sinwhi
cht
o
sel
lit
spr
oduct
sbutal
sosuppl
yi
ngi
ndust
ri
est
opr
ovi
det
het
ool
sandunl
i
mit
edgoodsi
ts
pr
oduct
iveact
ivi
ti
esr
equi
re”
.
So,i
tbecomesdi
ff
icul
ttoest
abl
i
shonei
ndust
rywhent
hesuppor
t¬i
ngi
ndust
ri
eshav
enoty
et
comei
ntoexi
stence.And,
ifwecannotsucceedi
nset
ti
nguponepar
ti
cul
ari
ndust
ryi
tisdi
ff
icul
t
t
oseehowwecanest
abl
i
shaser
iesofi
nter
dependenti
ndust
ri
es.

Obst
acl
e# 
2.Popul
ati
onPr
obl
ems:
Rapi
dpopul
ati
ongr
owt
hcr
eat
esser
iouspr
ob¬l
emsf
orpoorcount
ri
esi
nwhi
cht
her
ateof
capi
tal
for
mat
ioni
slow.Thi
sscar
cecapi
tal
simpl
ygoesi
ntospr
eadi
ngal
argerquant
it
yoft
ool
s
ov
eral
argernumberofpeopl
ewi
thoutr
aisi
ngpercapi
tapr
oduct
ivi
ty.

Mor
eov
er,t
he i
ncr
ease i
n popul
ati
on cr
eat
es ser
ious pr
obl
ems i
nthose count
ri
es wher
e
popul
ati
oni
sal
readydensei
nrel
ati
ont
olandandot
herr
esour
ces.Duet
oscar
cit
yofcapi
tal
goods,
thegr
owi
ngl
abourf
orcecannotf
indj
obsi
ntheur
banar
easandj
ustaddst
otheexi
sti
ng
l
abourf
orce i
nrur
alar
eas.The consequence:open and di
sgui
sed unempl
oymentas a
per
cent
ageofl
abourf
orcei
ncr
easeswi
tht
hepassageoft
ime— t
her
ever
seofsuccessf
ul
dev
elop¬ment
.

I
fwer
eal
l
yconsi
dert
hepopul
ati
onpr
obl
em ofLDCs,
asv
isual
i
sedbymostcl
assi
calandl
abour
-
sur
plust
heor
ies,wecani
magi
nea‘
vi
ciousci
rcl
e’or‘
popul
ati
ont
rap’occur
ri
ngatv
eryl
ow
l
evel
sofpercapi
tai
ncome.Suppose,
inav
erypoorcount
ry(
wit
hapercapi
tai
ncomeofi
nFi
g.
8)i
ncr
easei
npercapi
taout
putcausesashar
preduct
ioni
nthedeat
hrat
e.

Consequent
ly,t
her
eoccur
sar
api
drat
eofpopul
ati
ongr
owt
h.I
tcanwel
lbei
magi
nedt
hat
 “
for
anysmal
lchangesofout
putpercapi
ta,t
her
ateofgr
owt
hofpopul
ati
onwoul
dtendt
oexceed
t
hepossi
bler
ateofgr
owt
hofi
ncome.
”
Thei
mpl
i
cat
ioni
scl
ear
.Percapi
tai
ncomewoul
dagai
nfal
lbackt
otheor
igi
nall
evel
.InFi
g.8a
mov
etowar
dst
her
ightofT(
thet
rap)woul
drai
set
hepopul
ati
on-
growt
hcur
veabov
ethe
gr
owt
hoft
het
otal
-out
putcur
ve.And,
percapi
tai
ncomeagai
nfal
l
sbackt
oOT.

Ont
hecont
rar
y,athi
gherl
ev¬el
sofpercapi
tai
ncome,f
urt
heri
ncr
easesi
nst
andar
dsofl
i
ving
woul
dhav
eli
tt
le,i
fany
,impactont
hegr
owt
hofpopul
ati
on.I
not
herwor
ds,gr
owt
hwoul
dtend
t
obesel
f-
per
pet
uat
ing.I
nfact
,ifwecoul
dmanaget
omov
etot
her
ightofG,t
hegr
owt
hin
out
putwoul
dexceedt
hatofpopul
ati
on,
leadi
ngt
oahi
gherr
isi
ng)percapi
tai
ncome(
out
¬put
).

Thepoi
ntGi
sthecr
it
icalpoi
ntatwhi
chi
ncomeexpan¬si
onort
hecont
ract
ionpr
ocesst
endst
o
becumul
ati
ve,i
.e.
,ifonebecomesr
ich,i
tbecomesr
icherst
il
l;i
fpoor
,itst
ayspoor
.So,Fi
g.8
i
l
lust
rat
esoneki
ndofv
ici
ousci
rcl
eofpov
ert
ythatmi
ghtoccuri
nLDCs.
Nodoubt
,moder
nLDCsdohav
eamostpot
enti
nst
rumentofgr
owt
hatt
hei
rdi
sposal
—moder
n
t
echnol
ogy i
mpor
ted f
rom t
he West
. But t
her
e ar
e cer
tai
n pr
obl
ems whi
ch cr
eat
e
i
nsur
mount
abl
eobst
acl
est
omat
eri
alpr
o¬gr
ess.

Thesemaket
hepr
ocessof‘
get
ti
ngst
art
ed’
mor
edi
ff
icul
t.

Somesuchobst
acl
esar
eli
stedbel
ow:
Obst
acl
e# 
3.TheDi
ff
icul
tofAdapt
ingWest
ernTechnol
ogy
:
TheLDCsoft
hewor
ldof
tenf
acecer
tai
ndi
ff
icul
ti
esi
nadapt
ingwest
ernt
echnol
ogy
.Iti
sso
becausesucht
echnol
ogyi
snoti
deal
l
ysui
tedt
othei
rowncondi
ti
ons.Sucht
echnol
¬ogyi
s
mai
nlyofcapi
tal
-usi
ngt
ype.ButLDCsar
ebasi
cal
l
ycapi
tal
-scar
ce.

So,t
heycannotut
il
iset
hist
echnol
ogyef
fect
ivel
yduet
otheuseofsucht
echnol
ogyi
sal
sonot
possi
bleduet
oshor
tageofent
repr
eneur
sandski
l
ledper
sonnelwhi
chchar
act
eri
semostLDCs.
Att
hesamet
ime,
thei
rownt
echnol
ogyi
sout
-dat
ed.

So,t
heyneedani
nter
medi
atet
echnol
ogywhi
chconsi
stsofanadapt
ati
onofmoder
nmet
hods
t
othei
rownspeci
alcondi
¬ti
ons.I
ntheabsenceofsucht
echnol
ogyt
hel
atestwest
ernmet
hods
maybei
mpor
ted.Theconsequence:coexi
stenceofshor
tageofcer
tai
nfact
ors(
capi
taland
ski
l
led per
sonnel
)and sur
pluses ofot
her
s(l
arge number
s ofunempl
oyed and unski
l
led
wor
ker
s).

Fi
g.8showst
hati
fapoorcount
rymov
esf
rom t
het
echnol
ogysuggest
edbyt
hef
ir
stmar
ginal
pr
oduct
ivi
tyofl
abourcur
ve(
MPL1)t
othesecond(
MPL2)i
twi
l
lgetahi
ghert
otalout
put(
the
shadedar
ea)
,buti
twi
l
lbeabl
etoempl
oyf
ewerl
abour
ersatt
hegoi
ngwage.Thus,abasi
c
di
l
emma i
s encount
ered — t
her
eis a ser
ious conf
li
ctbet
ween out
putand empl
oyment
obj
ect
ives,
bet
weengr
owt
handj
obcr
eat
ion.
Obst
acl
e# 
4.LackofPr
epar
ati
onf
oranI
ndust
ri
alRev
olut
ion:
Fori
ndust
ri
aldev
el¬opmentt
otakepl
acet
hesoci
alandeconomi
cgr
oundwor
kmustbel
aid
f
ir
st.But
,int
oday
’sLDCsat
tempt
sar
ebei
ngmadet
oaccompl
i
shsi
mul
taneousl
ybot
hthe
i
ndust
ri
alr
evol
uti
onandt
hepr
epar
ati
onsf
orsuchar
evol
uti
on.

I
nfact
,insuchcount
ri
esagr
icul
tur
alandcommer
cialsect
orshav
enotsuf
fi
¬ci
ent
lydev
eloped
soast
osust
ainr
api
dindust
ri
alpr
ogr
ess.Mor
eov
er,
theexi
sti
ngi
nst
it
uti
onsandv
aluesy
stems
ar
ehar
dlyconduci
vet
omat
eri
alpr
ogr
ess.

Thebasi
cpr
erequi
sit
esofeconomi
cgr
owt
h— ast
rongdesi
ref
ormat
eri
albet
ter
ment
,a
wi
l
li
ngnesst
owor
khar
dandwi
thr
egul
ari
ty,
ser
i¬ousnessandpunct
ual
i
ty,
andabi
l
ityt
oassess
t
hef
utur
ebenef
it
sofpr
esentsacr
if
icesar
econspi
cuousbyt
hei
rabsencei
nmostLDCs.

Obst
acl
e# 
5.TheI
nter
nat
ionalCont
ext
:
Mostdev
elopedcount
ri
esoft
odaygr
ewwi
tht
hehel
poff
orei
gncapi
tali
nthepast
.Butnowt
he
cl
i
mat
efori
nvest
¬menti
nLDCsi
snotencour
agi
ngduet
ocol
oni
alabusesandast
rong
upsur
geofnat
ional
i
sti
cfeel
i
ngandv
ari
ousr
est
ri
cti
onsi
mposedbycapi
tal
-impor
ti
ngcount
ri
es
ont
heki
ndsandt
het
ermsoff
orei
gni
nvest
ment
.

Addedt
othesear
edanger
sofnat
ional
i
sat
ionandexpr
opr
iat
ion.Thi
siswhy
,todayt
hef
lowof
pr
ivat
ecapi
talf
rom r
icht
opoorcount
ri
esi
sinsuf
¬fi
cientcompar
edt
oneeds.Thi
shamper
sthe
pr
ocessofgr
owt
hinasmuchaseconomi
cdependsoncapi
talandi
nvest
ment
.Howev
er,t
he
r
ecentt
rendst
owar
dgl
obal
i
sat
ionhasl
edt
ogr
eat
eri
nfor
meroff
inanci
alcapi
tal
toLDCs.

I
nfr
ast
ruct
ureDev
elopment-Ani
mper
ati
vef
orI
ncl
usi
veGr
owt
h
Nar
eshWadhwa,
Presi
dent&Count
ryManager
,Ci
scoI
ndi
aandSAARC

Indiai soneoft hef astestgr owi ngeconomi esi nt hewor ldtoday .Amat terofpr idei ndeed,
exceptt hatt hiseconomi cboom appear stobei ndi str
esswi t
houtani nfrastructuret omat ch.
Ev er
y t
hingf r
om goodr oadsandmoder ntransporttor el
iablepowerandcl eanwat erarei nshort
suppl y.Thisi nf
rastructuredef i
citisnotonl ycomi ngi nthewayofachi evingpr osper i
tybuti s
alsowi deningt hegapbet weent her i
chandpoor ,potential
lydestabili
zingthenat ion.
So, whatdoesi ttaket obui l
dr el
iableinfr
astruct
ure?Ver ysimpl y,i
tcall
sf orami xofpol iti
calwil
l
,
wel lchanneledi nvestment sandt echnologyinnovation.
Historicall
y,i
nv estmenti ninfrastructur
ehaspr ov i
dedaf i
ll
ipt ostrongeconomi cdev el opment.
TheUSandWest ernEur opear eex amplesofsol i
di nfr
ast r
ucturehelpingt ol eadt hewor ld
economy ,byencour aginginnov ation,al
lowingsustaineddev el
opmentandi nclusivegr owt h.Our
count erpart
si nSout hAsi a,includingChina,JapanandSout hKor ea,haveanedgeov erusi n
termsofi nfrastructure,publicameni ti
esandov erallquali
tyofl i
fe.ForI ndiat ogett hereand
ensur esustainabi l
it
y,itisimpor tanttofocusoni nclusivegrowt h.

Chal l
engesi nIndia:
Apar tfrom bei nga62y earolddemocr acywi t
hov erabill
ionpeopl e,
Indiaisal andofvast,
dispar at
egeogr aphicandsoci o-
economi ccondi ti
ons.Thecount r
y '
sdemogr aphicmake-upisin
ast ateoff l
ux,withwi despreadmi grati
onf r
om r uralt
ourbanar eas.Accor dingtoa2007UN
Stateoft heWor l
dPopul ati
onr eport,by2030, 40.76%ofI ndia'
spopul ationwoul dbeli
vingin
urbanar eascompar edt oabout28. 4%i n2007.
Ahostofi nfrastr
ucturalproblemspl agueourur banandr ur alpockets-badr oads,t
raf
fic
congest ion, unrel
iableandcr owdedpubl i
ctranspor t
,err
aticsuppl yofelectrici
tyandwat erar
ea
few.I ssuessuchasl ackofaccesst ohealthcare,educati
on, bankingf acil
i
ties,i
nter
netand
mobil
econnect
ivi
tyal
soincr
easerural
migrati
ontour
banareas.
Howt hen,
doweenableasystem t
hatwil
lprovi
deabett
erquali
tyofl
i
fei
rr
espect
iveoft
hese
chal
l
enges?

Thewayout :
Acommonpr oblem wi thmostI ndi aninfrastruct urepr oj ectsi st hel ackofant icipat i
onoff uture
needandcapaci ty.Asar esult,theypr ovet obei nadequat eacoupl eofy ear saf terbei ng
commi ssi oned.I nv est ment sandr esour cesear mar kedf orsuchpr ojectsmustbechannel i
zed
proper lyf orsuccessf ul i
mpl ement ation.Anef fect i
vewayt odot hati stoimpl ementpr ojects
throughPubl i
cPr ivatePar tnershi ps( PPPs) .Thesepar tnershi pshel pt hegov ernmentand
compani esshar ecost s, r
isks,rewar dsandensur ethatf undsar eav ai
lablef orconst ructionand
mai ntenance.Theyi nf useef ficiencyt hroughcompet it
ion, pr ov idescopef orinnov ationand
enabl eimpl ement ationofi nternat i
onal bestpr actices.Mr .Nar eshWadhwa, President&Count ry
Manager ,CiscoI ndi aandSAARC 
Adopt ionoft echnol ogyi sakeyi nv estmentt hatwi lldet ermi net hef utureofourpubl i
c
i
nf r
ast ruct ure.I nformat ionandcommuni cationst echnol ogy( ICT)canbeusedt oenabl e
solutionsov eracommonpl atform andhel pinef f
icientpl anni ngandmanagementofpubl i
c
uti
lit
iessuchaspower ,wat er,br oadband, int
er nett elephonyandt ranspor t.Thi swi lli
nt urn
i
mpr ovet heircost ,access, andqual i
ty.Citiesandcommuni tiesoft hef uturecanbecome
sustainabl ebyembr aci ngsmar tregul ati
onandst rat egicpubl i
cpr ivat epar tnershi pswi th
technol ogyasanenabl er.
Acasei npoi ntist hedev elopmentof' Lav asaCi ty
,'India'sf irstcompl etee- city.Par tofCi sco' s
Smar t
+Connect edCommuni t
iesv i
sion, i
tisbasedont hepr emi set hatconnect edcommuni ties
runningonnet wor kedi nformat ioncanachi ev eeconomi c,soci al andenv i
ronment al
sustainabi l
ity.
Technol ogycanal sohel pr educet hedi spar i
tybet weenr ural andur banI ndia.TheCommon
Serv i
ceCent er s( CSCs)ar eanexampl eofhowt echnol ogycanbeusedf orext endi ngser v i
ces
l
ikepr imar yheal thcar e, bankingandeducat i
ont other ural popul at i
on.I ncreasi ngbr oadband
penet rationandusi ng' smar tbroadband' -integr ated, fi
xed, mobi l
e, andWi -Fi broadbandcan
helpt opr ovidet hebestofeducat ion, healthcar eandeGov er nancef acili
ti
es.Bet terpl anning,
foresightandj udicioususeoft echnol ogywi llhel pIndi at oachi ev ei nclusivegr owt h,sust ai
ni t
andgetcl osert obecomi nganeconomi csuper power .

Pov
ert
y:Meani
ng,
Causes,
Eff
ect
s
Meaning:
 Pov
ert
ycanbedef i
nedasthelackofbasi
cneedsthatarenecessaryforonetoleada
rel
ati
vel
ycomfort
abl
eli
fe.Suchrequi
rementsmayincl
udeshel
ter,
clot
hing,food,educat
ion,
and
heal
thcar
e.

Pover
tycaneitherberel
ati
veorabsol
utebecausewhereasot
herpeopl
emaybecomf ort
abl
e
wit
htheirl
i
ves,theymaybedeemedt obeli
vinginpov
ertywhencomparedagai
nstt
hosewho
ar
eextremelywealt
hy.

Aper
soncanalsobedescri
bedtobeli
vi
nginpovert
ywhenheorsheisunabl
etomakeends
meet
.Itcanr
angef
rom notbei
ngabl
etoaff
ordt
hingsli
keagoodmeal
orrunni
ngbehi
ndonbi
l
l
pay
ment
sandt
hei
nabi
l
ityt
oser
viceexi
sti
ngdebt
s.

Tomanypeopl e,al
if
eofpov
ert
yisonewhereani
ndi
vi
duall
acksmoneyori
swit
houtmat er
ial
possessi
on.Poorpeopl
emostl
yli
vefr
om handtomouthandhavet
oseekforassi
stanceto
makeendsmeet .

Li
feisalwaysast
ruggl
eforpeopl
ewhoar epoor
.Theyexper
iencedi
ff
erenthar
dshi
psandar e
oft
endepriv
edofthesimpl
ejoysandpleasur
esthatmakeli
feworthli
vi
ng.Apersonliv
ingin
pover
tyonmanyoccasionsdoesnothavepeaceofmindbecauseofal waysworr
yingabout
whattomorrowwi
l
lbri
ng.

I
tisalif
efil
l
edwi t
hinadequaciesandinsuf
fi
cienci
es.From t
heshor
tageofr
esour
cest
othe
l
ackofbasi
cneeds,i
tisaconstantst
ruggl
etogetbyt hr
ougheachday
.

CausesofPov
ert
y

Therearedif
fer
entsi
tuat
ionsthatmaycauseanindi
vi
dualtoliv
ei npover
ty.Someofthese
si
tuati
onsareuni
quetoeverypersonwhi
l
eother
sareuni
ver
sal.Thesearesomeofthecauses
ofpovert
y:

1.Over-populati
on:Whentoomanypeopl eli
veinageographicallocat
ion,t
heycompeteforthe
avai
labl
er esources.Thechancesarethatt
heresour
cesar enotal waysgoingtobeenought o
supporteveryone.Thosewhomi ssoutwil
lhavetost
ruggletomakeendsmeet .Over
populat
ion
canresultint heunavai
l
abil
i
tyoflandwhichisanimportantfactorofproduct
ion.Ev
enwi t
hout
for
mal empl oyment,t
hosewhohav el
andcanculti
vat
ecropsf orfoodandsale.

2.Ill
i
teracy
:Lackofeducat i
oncanl eadt opov ert
yindi f
ferentway s.Whenpeopl egot oschool,
theybecomeequi ppedwi thskil
lsandt echniquest hatmaket hem employable.Theycant hus
earngoodi ncomesandl eadgoodl ives.Ont heot herhand, peoplewhohavenotgonet oschool
willeit
herbeempl oyedascasuall abor er
swi t
hmi nimum wagesorcompl etelybewi t
houta
meansofget ti
ngincome.Educat ionopensapat htosuccessev enforpeoplewhoar ebor ninto
l
ow- i
ncomef amili
es.Ill
it
eracyalsomeanst hatani ndi
viduallackstheint
ellectualcapacit
yt o
makesoundf i
nancialdecisi
ons.Itcanr esultinpoori nvestmentmov esorbadspendi nghabits
thatcausepov ert
y.

3.Casteism andUntouchabil
i
t y
:Castesyst
emsdenythosewhoar
econsider
edaslessworthya
fai
rshotatsuccess.I tcondemnst hem t
oamedi ocr
ekindofl
ifeevenwhentheyhav ethe
potent
ialtobegr eatandfindsuccess.Itmeanst
hatifonei
sbornint
othewrongcaste,heor
shewillbeconfinedtotheli
vingstandar
dsofit
.

4.Genderinequal
it
y:Thisissti
llamajorproblem inthe21stcentur
y.Eventhoughtherehave
beensomer emarkabl
ei mprovementsinaddr essi
ngt heissueofgenderequal i
ty,alotof
chall
engesstil
lexi
st.Thephenomenonofunequalpaybasedongenderhascausedmor e
woment hanment oliv
einpov ert
y.Thefai
lur
et oeducatethegir
lchi
ldbyseveralcommuniti
es
aroundtheworldcondemnst hem toalif
eofpov er
ty.Theyhavetodependonment oprovi
de
forthem andsometimesgetmar ri
edjusttoescapepov ert
y.Somesocieti
esdonotl ett
hegirl
chi
l
dinher
itpr
oper
tysuchaslandfrom aparent
.They
,ther
efor
e,hav
enomeanst
ogener
ate
i
ncomeandmakeagoodlif
eforthemsel
ves.

5.Economi cinequalit
y:Inequaldistr
ibut
ionofweal thespeciall
yincountri
eswherether ul
ing
el
it
ecomef rom acer t
ainregionusual l
yli
vest hosewhoar enotrepresentedi
ngov ernment
wall
owinginpov erty.Theyaredeni edbasici
nfrastruct
uresthatarecr
iti
caltothedevelopment
andhavet ocontendwi ththeli
ttl
eresourcesavailabl
e.Thiscreat
esacycleofpovert
yandmany
soci
o-economi cproblems.

6.NaturalCauses:Env ir
onmentalandgeogr aphi
calfact
orsmayal socausepov erty.Floods,
ear
thquakes,anddr oughtscancausedev ast
ati
onsandeconomi chardshi
psaswel laspov er
ty.
Peoplemayl osetheirbusinesses,sourcesofincome,andhousesasar esultofnat ural
di
sasters.Changei n weat
herpat t
ernsand soildegradat
ion can someti
mesl ead to poor
agr
icult
uralharvest
s.Ifthecommuni tydependsonfarmingforincome,itwi
llbeleftwithouta
vi
ablewayt ogeneratemoney .

7.Laborexpl
oit
ati
on:Unet
hicalbusi
nesspract
iceslikel
aborexpl
oit
ational
soresul
tinpover
ty.
Therearebusinessownerswhoi nabi dtoincreaseprof
itmargins,payworkersver
ylit
tl
e
amountsofwages.Ast heyaccumul at
ewealth,thepoorpeoplewhobr eakbloodandsweat
whil
eearni
ngthem moneyli
veinv er
ypoorcondit
ions.

8.Resi stancetochange:Thiscancausepov ert

yinmanyway s.Whent hepeopl
eofacount ry
refuset ousherinanewandv isi
onaryleader
shi
pthathasgoodpl anst obr
ingsocio-economi c
dev elopment,thenati
onisl ef
tlaggingbehindindevelopment.Al otofcountr
ieshav ebeen
plagued bybad l eader
ship and thi
shascaused economi char dshipsamong t heci t
izens.
Resi sti
ngchangesuchast heneedt oeducategir
ls,openi
ngupt hecount ryt
of oreigndirect
i
nv est mentandacallt
oembr acenewway sofdoi
ngbusinesscanalsocausepov er
ty.

9.UnorganizedLoansathi gherinterestr
atesinrur
alar eas:Suchloansthatarepai
dathi gher
i
nterestrates r
educe profitmar gins and ki
lloffsmal lbusi
nesses.Theyal so encourage
consumerism,andt hi
scr eatessev eralfi
nanci
alproblemsespeci al
lyforthoseli
vinginr ural
areas.Unorgani
zedloanscanl eavet heborr
owerwor seoft hanheorshewasbef oretakingthe
credi
tfaci
li
ty.

10.Wastageofr esources:Improperuti
li
zat
ionofr esourcesbygov er
nmentagenci
esand
i
ndiv
idual
scanl at
erleadt opovert
y.Peoplewhoareini
tial
l
yr i
chcanal
sobecomepoorthrough
wastef
ulexpendit
ure.Thisisgreat
lydr
ivenbythecul
tureofconsumeri
sm.

Ef
fect
sofPov
ert
y

Povertyhassomanynegat
iveef
fect
sonbotht
hei
ndi
vi
dualandt
hesoci
ety
.Thesear
esomef
o
thereasonswhypov
ert
yisnotagoodthi
ng:

1.Hinderseconomi cpr
osperi
tyoft
henation:Theeconomicgrowthofacountryi
smostl
y
dri
venbyt hebusinessvent
uresofi
tsci
ti
zens.Ifmanyofthem arepoor
,thecount
rywi
l
lbe
underdev
eloped.
2.Cr
imes:I
thasbeenestabl
ishedthatcr
imer atesar
eusuallyhi
gheri
nareasorcount
ri
eswi
th
hi
ghlev
elsofpover
tycomparedtothosethatareexper
ienci
ngrapi
deconomicgrowt
handgood
amount
sofincomeperhousehold.

3.Mal
nutri
ti
on:Insuff
ici
entfoodandtheinabi
l
ityt
oaffor
dadecentmealr
esul
tsi
nmalnut
ri
tion.
Manypeoplewhol iveinpovertyf
oregosever
almealsandsometi
meswhentheyeat
,thefood
l
acksessenti
alnutri
entsnecessar
yforgoodgrowth.

4.Healthpr
obl ems:
Manypeopl
eli
v i
nginpover
tyareunabl
etoaffor
dgoodheal
thcar
e.Theyar
e
theref
oreplaguedbydif
fer
enthealthprobl
emssincetheycannotaff
ordt
reat
ment.Thepoor
l
ivingcondi
tionsmayal
socausediseases.

5.Lessli
berty:Theysaymoneyi snotevery
thi
ngbutnev ert
heless,iti
simport
antt ohaveit.It
canaff
ordy outhebestthi
ngsinli
feandgiveyoudiff
erentopti
onst ochoosefr
om.Poorpeopl e
donotgett ochooset hei
rprof
essionsbecausetheyhav etomakedowi t
hwhati savai
lable.
Manywillgetyouagoodeducationandmakei tpossi
bletostudythecareerofyourchoi
ce.

6.Moralandself-esteem: Thisissomet
hingthatiseasytoobser
veinasocialset
up.Thosewho
l
iveinpovertyusuall
yf eelli
ketheydonothavet hemoralaut
hori
tytodemandbet t
erservi
cesor
askthattheyar etreatedf ai
rly
.Manyoft hem alsosuff
erfrom l
ow sel
f-
esteem becausethey
thi
nkthattheyarenotgoodenough.

7.Insuff
ici
entf
oodandwater:Toeat
,onehast
ohavemoneytobuythef ood.Thati
soneluxur
y
thatthosewhol i
veinpover
tydonothave.Poorar
eashaveinsuf
fi
cientfoodandl ackcl
ean
watertouseinthehome.

8.Lackofbasi cameniti
es:I
mpor t
antpubli
camenit
iessuchasgooddrainagesyst
ems,pi
ped
water,schools,heal
thcent
ers,andpersonalameni
ti
esli
keheat
ingar
et hingst
hatthosewho
l
iveinpov er
tylack.

9.Str
ess:I
ncreasedsocialdi
sturbancescancausestress.Themindwi l
lbeatconstantwar
thi
nki
ngofwher etogetthenextmeal ,whatthef
utur
eholdsorhowt oovercomethediff
erent
probl
emsassociat
edwithpoverty
.Apoorper sonr
arel
yexperi
encespeaceofmind.

10.Feminizat
ionofpovert
y:Thisiswheret
heburdensofpov
ertyar
ebornebywomen.Theyar
e
l
eftwit
ht heresponsi
bil
i
tyoftakingcar
eofthechi
ldr
enandholdi
ngthef
amilyt
oget
her
.

Maj
orPov
ert
yAl
l
evi
ati
onPr
ogr
ammesi
nIndi
a
Thesixpover
tyall
evi
ati
onpr
ogrammesareasf
oll
ows:
Anumberofpr ogr
ammeshav ebeeni
nit
iat
edt
otackl
ethepr
obl
em ofpov
ert
y,speci
all
yfort
he
rur
alsect
or.

1.I
ntegr
atedRur
alDev
elopmentPr
ogr
ammewasi
nit
iat
edonOct
ober2,
1980.Thepr
ogr
amme
hasbeendesignedinamannert hatthebenefi
tsflow t
othepoor
estasthef
ir
stpri
ori
ty.The
smallfarmer
sgetasubsi dyof25% ofthecapitalcostwhil
ethemargi
nalf
armersshareis
33.3%.TheLandl
esslabour
ersandrur
alar
tisansareenti
tl
edt
oa50%subsidyf
oracqui
sit
ionof
assets.

Theprogrammehadsetoutt ogener ateincomeofRs.2000perfamil

y.HoweverMi
d-t
erm
appr
aisaloftheNinthPlanrev
ealedt hattheaveragei
nvest
mentperfamil
yremai
nedtoo
i
nadequatetogener
atet
hetar
getincomeperf ami
ly
.

Thesuccessoft
heprogr
ammewoul dhavebeenmuchhi gherbutf
orthefactthatsel
ect
ionof
fami
li
esisnotalway
sguidedbyeconomicandbusi nessconsi
der
ati
ons.Wher ethesel
ected
fami
lydoesnothavetherequi
sit
eapti
tudeandabi l
it
ytomanage,thegai nshavenotbeen
commensurat
ewitht
hesubsi
dymadeav ai
labl
eunderthePl
an.

Presentl
yallf
amili
eshavi
nganannualincomebel
ow Rs.11,
000havebeenmadeel i
gibl
efor
assist
anceunderIRDP.BytheendoftheEight
hPlanperi
od,over89l
akhf ami
li
eshadbeen
assist
ed.50% fami
li
esofthebenef
ici
ari
eswereSC/ST.Howeverthet
argetofassi
sti
ng40%
womencoul dnotbeachi
eved.

2.Nat i
onalRur
alEmploymentProgrammei sthenew namef ortheOriginalFoodforWor k
Programme.Itiscent
ral
lysponsoredwiththeCentralgov
ernmentprov
iding50% assist
ance.
UndertheProgr
ammet hetar
getistocreat
eadditi
onalemploy
mentoftheor der300-
400mi l
l
ion
men day sannual
ly
.Thebenef i
ciari
esaret o betheunempl oy
ed and theunder -
employed
persons.

Acr it
icalassessmentoft heper f
ormanceunderthePlanshowsthatwhi
l
efundsar eputi
nthe
programmel iber
allytheout putinter
msofempl oymentgener
ati
onremainswellbelow t
he
target.Theempl oymentpr ovi
dedisofshortdurati
onandt hewagespaidarelessthanthe
prevaili
ngmar ketrates.Ev
ent hesel
ecti
onofbenefi
ciar
iesi
snotal
waysaboveboard.

Themostcommonwor ksundertakenundert hepr ogrammear edev el

opmentofkut charoad
withinthev i
ll
ages.TheStatesar
er equir
edtocont r
ibute50%oft hetotal
Planexpendi t
ureoutof
theirresources.ButwhattheStat
eshav ebeendoingi sthati
nsteadofpumpi ngnewf unds,
the
existi
ngpr ogrammesoft hePublicWor ksDepar t
mentar eshownaswor ksundert heNREP.I n
somecasest hefundsarespentov erconst
ructi
onsi nvol
vi
nghighpr i
cedmaterialcomponent s.
Insuchcasest ot hebasicpurposeofut il
izi
ngl ocall
yavail
ablemat eri
alandl abourget s
defeated.

3.RuralLandl
essEmploymentGuaranteePr
ogr
ammelaunchedinAugust1983i
sasupplement
totheNREP.Undert heprogramme,thewagestol
andl
esslabourer
sarepaidpar
tlyi
nmoney
andpar t
lyinfoodgr
ains.Theproject
sundert
heProgr
ammear eunder
takendur
ingthedays
ther
eisnotmucht odoont hefar
ms.

Thei deabehindthepr ogrammei sthatatl

eastonememberf r
om eachlandl
essf ami l
yshould
be pr ovided wi
th 100 day s ofgainfulempl oyment.The project
s under
taken undert he
Programmei ncl
udeimpr ovementofminorirr
igati
onfacil
i
ties,
recl
amationofwastel and,social
forestryandsoilconservati
on.Theotherproj
ectscoveredunderthePr ogr
ammei ncludeIndir
a
AwasYoj naandtheMi ll
ionWellsScheme.NREPandRLEGPhav emanyov erl
appingar eas.Iti
s
nowpr oposedtomerget hetwoProgrammes.
4.JawaharRozgarYojnaisimplement
edt hr
oughtheagencyofvi
ll
agepanchayat
s.TheCent
ral
gover
nmentprovides80%f i
nanceandtheStatesshar
eisabare20%.Fundsareal
locat
edtot
he
vi
ll
agepanchayat
si npropor
ti
ont ot
hesizeofpopulat
ionl
i
vingbel
owthepovertyl
i
ne.

Thetargeti
stoprovi
de50-
100daysofemploymenttoatl
eastonememberofev
erypoorfamil
y
wit
hinthev i
l
lagewit
ha30%r eservat
ionf
orwomen.Itwasassessedt
hat50%oft hehouses
const
ructedundert
heJawaharRozgarYoj
nawereofgoodquali
ty.

Theav er
agecostperhousecamet oaroundRs. 13,543.Thisexpendit
urehassincebeen
i
ncreasedto Rs.20,000t o cov
ercostescal ati
onandf ori
mprovingfurthert
hequalit
yof
constr
ucti
onwor k.Ruralr
oadsaccount edfor33% oft hetot
alexpendit
ure.Anot
her9% was
spentonmi nori
rri
gati
onproject
s.Otherbenefici
ari
esincl
udesocialfor
estryandschool
sand
communitybuil
dingsl
ikePanchayathal
ls.

Thei mpactoftheJawaharRozgarYoj naincreat

ingaddi
ti
onalemploy
menthasnotbeen
sati
sfact
ory
.Whilethetargetwastocreate100daysofemploy
menttheachi
evedt
argethas
beenjust11day
s.(1993-1994eval
uat
ion)
.

These programmes hav e an indi

rectpositi
vef allout
.Wi t
h mor e money avai
labl
ef or
consumptionint herur
alsect
or,thereisani ncreasei
nruralconsumpti
onexpendit
ure.This
i
ncreasedex pendit
urealsohelpsincr eati
ngnew demandsandconsequent l
yEmpl oy
ment
AssuranceSchemewasi ntr
oducedinOct ober1993.

Theai
m oftheschemewast oprovi
de100daysofunski
ll
edmanualworkt
otheruralpoor
.Al
l
menandwomenabov e18y ear
sofagewer eint
endedt obecoveredunderthescheme.
However
,theachi
evedt
argetwasonly41.
3day
sinay ear
.

5.Swar anjayant
iGram SwarozgarYojnawaslaunchedinApr
il1999.Mil
li
onWellsScheme, and
Dev el
opmentofWomenandChi ldr
eni nRuralAreashavebeenmer gedintheScheme.The
schemeat temptst
ocombi neBankloanswithsubsidywit
hav i
ewtoenablethebenefi
ciar
iesto
createincomegener at
ingassets.

Therei
snomonet aryl
i
mi tf
orsubsidyincaseofirri
gat
ionproj
ect
s.Inothercases,
however
,the
subsi
dyi sl
imit
edt o30% subjectt
oamaxi mum ofRs. 7500.Ahigherli
mitofRs,10,
000has
beenprescri
bedforSC/ STbenefi
ciar
ies.TheStateshavetocontr
ibutejust25%whil
etherest
ofthefundsarebeingprovi
dedbytheCent r
algovernment.

6.JawaharGr
am Samr i
dhiYojnaistherest
ructur
edf orm oftheearl
ierJawaharRozgarYojna.It
ai
msatgener ati
ngadditi
onalempl oy
mentoppor tunit
iesfortheunempl oyedpoorinther ural
sector
.Wageempl oymentisli
mitedtothoseunderPov ert
yLine.Theschemeai msatcr eati
ng
vi
ll
ageinfr
ast
ructureanddurableassetsatv i
l
lagel evelsuchthatadditi
onalopport
unit
iesfor
sustai
nedemploymentaregenerated.

UNEMPLOYMENT–MEANI
NG,
TYPES,
CONSEQUENCESANDSOLUTI
ONS
Unemploy
ment
 i
s a condi
ti
on thatoccur
s when a person who i
s act
ivel
y sear
chi
ng f
or
employ
menti
sunabl
et ofi
ndone.Iti
sasit
uat
ionwherethosewhoarewill
i
ngandabl et
owork
cannotgetawor kt odo.
Unempl oy mentr ate: Thisi sameasur eoft hepr ev alenceof  unempl oy ment .
 I
t 
iscal culat edasa
per cent agebydi v i
dingt henumberofunempl oy edi ndi v i
dual sbyal li ndivi
dualscur rent lyint he
labourf or ce.Dur ing per i
ods ofr ecessi on,an economy usual l
y exper i
ences a r elativel
y
high  unempl oy mentr ate.
Ty pesofunempl oy ment
1.Massunempl oy ment :Al soknownasCy cli
calUnempl oy ment ,occur sbecauseoft heups
anddownsoft heeconomyov ert i
me.Whent heeconomyent er sar ecession,manyoft he
jobsl ostar econsi der edMassUnempl oy ment .
 Cycl ical unempl oy ment  
occur sasar esul tof
gener al falli
nt hequant ityofgoodsdemanded.
2.St ruct ur alUnempl oy ment :Thi soccur swhent her ei sami smat chbet weent henumberof
peopl ewhowantt owor kandt henumberofj obst hatar eav ail
able.Theunempl oyed
wor ker smayl ackt heski ll
sneededf orthej obs, ort heymaynotl ivei nthepar toft hecount r
y
orwor ldwher et hej obsar eav ai l
abl e.
3.Vol unt aryUnempl oy ment :Thi si sasi t
uat ionwher eUnempl oy edpeopl edeci dednott akea
jobpr obabl ybecauset hepayi snotat tract i
v eorbecauset heyar eget tingbenef itsf rom t he
gov ernmentoranyot herl egal sour ce.
4.Resi dualunempl oy ment :Thi s arisesasar esul tofphy sicalorment aldi sabi li
tiesoft he
per sont hati st obeempl oy ed.
5.Casualunempl oy ment :Thi si scommonwi tht heunski l
ledki ndofl abour s;i
tinv ol vesj obt hat
isnotper manent .
6.Fr i
ct ionalunempl oy ment :Al socal l
edt echnol ogicalunempl oy ment ,occursasar esul tof
adv ancementi nt echnol ogy ,wher ewor ker sar er epl acedwi thmachi nesi nt hepr ocessof
pr oduct i
on.
7.SeasonalUnempl oyment :Thi soccur sini ndust r i
eswhosepr oduct ionissubj ectt oseasonal
var iationsi .e.t heseasonorev entatat imedet ermi net hei rl evelofpr oductionsowheni tis
nott imef orpr oduct i
on, wor ker sbecomeunempl oy ed.
Causesofunempl oyment
 Somepe oplev olunt arilyqui tunf ulfil
li
ngj obs.Theyhav et hel uxur ytosear chunt ilt heyf i
nd
justt her i
ghtoppor tuni ty .
 I t i
sal socausedwhenwor ker smustmov ef orunr el atedr easons.Theyar eunempl oy edunt il
theyf indaposi tioni nt henewt own.
 I t occur swhennewwor ker sent ert hewor kfor ce.Thati ncl udesst udentswhogr aduat ef r
om
highschool ,col l
ege, oranyhi gherdegr eepr ogr amme.
 Te chnol ogy adv ances can l ead t o unempl oy ment .That ’s when comput ers orr obots
repl ace  wor ker s.Mostoft hesewor kersneedr et r
aini ngbef or et heycangetanewj obi nt heir
field.
 JobOut sour cing.That ’s whenacompanymov esi ts manuf act uring or 
callcent erf unct ions
toanot hercompanyorl ocat ion.
 De mand- def i
cientunempl oy ment–Thi soccur swhent her ear ef ewerj obst hant henumber
ofj obseeker s.
 L arge- scal eunempl oy mentr esul tswhenconsumer s’demandsbecomev er yl ow,andt he
companybegi nst ol osepr ofit.Ifsal esi snotexpect edt opi ckupany ti
mesoon,somest aff
wi llbel aidof f .
NotAl lCausesofJobl essnessCr eateUnempl oy ment
Someone who v olunt arily gi v es of fempl oymentcannotbe cl assi fi
ed as unempl oyed.I f
someoner etires,goesbackt oschoolorl eav est hewor kf orcet ot akecar eofchi ldrenorot her
fami lymember s, thatisnotunempl oy ment .That ’
sbecauset heynol ongerl ookf orwor k.

I
ftheeconomyi sgrowi
ng,mor
eworkersareneeded.I
fitshr
inks,t
henworkersl
osetheirj
obs.
Duri
ngrecessi
ons,
 unempl
oyment
 r
atestendtogrow.The ef
fectsofunemployment
 arewide-
rangingandi ncl udehi ghcost st ot hegov ernment ,areduct i
oni nspendingpowerf orconsumer s
andeconomi cr ecessi on.
 Consequencesofunempl oy ment
1.Unempl oymentl eadst ot hreatt opeaceandst abil
i
tyi nthesociety
2.Wast ageofhumanr esour ces
3.Ther ewi llbehi ghr ateofdependency
4.I t 
leadst ohi ghmi grationr ate
5.I tleadst oi nsecur it
yamongstempl oyees
6.I tleads toi ncreasei nther ateofcr ime.
7.Loseofski ll
s’usage:  Theunempl oyedi snotabl et oputhi s/herski ll
st ouse.Andi na
situati
onwher ei tgoesonf ort ool ongt hepersonmayhav et ol
osesomeofhi s/herskill
s.
Solutionstot hepr oblemsofunempl oyment
1.Popul ationcont rol:Whent hepopul ati
onofacount ryisr educed,itwi llhelpt oreducet he
numberoft hosewhoar elooki ngf orjob.Thepopul ati
onshoul dbeabl et omat chupwi t
ht he
av ai
lableresour ces.
2.I ndustriali
sat ion:Whent herear eenoughi ndust r
iessi nacount ry
,demandf orlabourwi l
l
increase.
3.I ncentivet opot entialinvest ors:i nvestorsshouldbemot i
vatedtocr eatej obs.Incent i
veslike
taxhol i
day s, prov i
sionofsoci al amenit i
esetc.shoul dbemadeav ai
lablet oinvestors.
4.Pr operdev elopment alplans:Thegov ernmentshoul dmakepr operdev elopment alplansf or
thosewhoar eunempl oyedi nacount ry.
5.Redesi gningofeducat ionalsy stem:Theeducat i
onalsy stem shouldi ntroducecur ricul
at hat
canhel pgr aduat et ocr eateempl oyment .

I
nequal
i
tyofI
ncomeandWeal
thi
nIndi
a:CausesandMeasur
es
Causes:
I
nIndia,
inequal
i
tyi
nthedi
str
ibut
ionofi
n¬comehasi
ncr
easedf
orv
ari
ousr
easons.

Themai nr
easonsarethef ol
lowing:
1.Unempl oyment:
Themai nreasonforl
owl evelofincomeoft hemajorit
yofI ndianpeopleisunempl oymentand
underemploy mentandt heconsequentl ow productiv
ityofl abour.Low la¬bourpr oduct
ivit
y
i
mpl i
esl owr at
eofeconomi cgr owthwhi chisthemai ncauseofpov er
tyandinequalit
yoft he
l
argemassesofpeopl e.Infact,inequali
ty,pover
tyandunempl oymentareint
er¬relat
ed.Si
nce
suff
icientempl oymentcoul d notbe cr eat
ed through the pr ocess ofplanned economi c
development ,i
twasnotpossibletoincreasetheincomel ev
el sofmostpeopl e.

2.Infl
ati
on:
Anothercauseofi nequali
tyi
sinfl
ati
on.Dur i
nginfl
ati
on,fewpr ofi
tearner
sgainandmostwage
earnerslose.Thi
sisexactlywhathashappenedi nIndi
a.Sincewageshav elaggedbehindprices,
profi
tshav eincr
eased.Thishascre¬atedmor eandmor einequal
it
y.Moreover,dur
inginfl
ation,
moneyi ncomei ncreasesnodoubtbutr eali
ncomef al
ls.Andt hi
sleadstoaf al
lint
hest andard
ofliv
ingoft hepoorpeoplesi
ncetheirpurchasi
ngpowerf all
s.

No doubt ,inequal
it
yhasi ncreased due tori
se i
n pri
ces.Dur ing i
nflat
ion worker
si nthe
or¬ganisedsectorgethigherwageswhi chpartl
yoff
¬settheeffectofpricerise.Butwagesand
salar
iesofwor kersinunor gani
sedsect or
s(suchasagri
¬cultureandsmal l
-scaleandcott
age
i
ndust r
ies)donotincrease.Sotheirr
ealincome(pur
chasein¬come)f al
ls.Thisishowinequal
it
y
i
nthedist
ri
¬but
ionofincomeincr
easesbet
weent
het
woma¬j
orsect
orsoft
heeconomy—
or
gani
sedandun¬or
ganised.

3.TaxEv asion:
InIndia,t
heper sonali
n¬comet axr
atesarev eryhi
gh.Hightaxr at
esen¬cour ageev asionand
avoidanceandgi vebirt
ht oaparal
leleconomy .Thisisexactl
ywhathashap¬penedi nIndia
duri
ngt hepl anperi
od.Here,t
heunoffi
cialeconomyi sasstrongas( i
fnotst rongerthan)t he
off
icialeconomy .Hightaxrat
esarere¬sponsiblefori
nequali
tyinthedi st
ri
butionofi n¬come
andweal th.Thisisduet oundueconcentra¬t
ionofincomesi naf ew handscausedbyl arge-
scaletaxevasion.

4.RegressiveTax:
Theindirecttaxesgi
vemaxi mum r
evenuetothegov
ernment.Butt
heyar
er egr
essi
veinnature.
Sucht axeshav eal
so cre¬at
ed moreand moreinequal
it
yov ertheyearsduet o gr
owing
dependenceoft heGovernmentonsuchtaxes.

5.NewAgr i
cul
turalStr
ategy:
Nodoubt ,Indi
a’snew agr i
cult
uralstr
ategyledtotheGr eenRev ol
uti
onandr aisedagricul
tural
product i
vit
y.Butt hebenef i
tsofhigherproducti
vi
tywereen¬j oyedmai nl
ybyt herichfarmers
andl andowner s.Atthesamet ime, t
heeconomi ccondi
ti
onsofl an¬dl
esswor ker sandmar ginal
farmer sdeteri
oratedoverthey ear
s.MostfarmersinIndi
acoul dnotenjoythe-
benef i
tsofhigher
agricult
uralproduc¬tiv
ity.Asar esul
t,i
nequali
tyinthedi
st r
ibuti
onofincomei nther ur
alareas
hasi ncreased.

Reduci
ngInequali
ty:
Vari
ousmeasur eshav ebeenadopt
edbyt
heGov
ernmentdur
ingt
hepl
anper
iodt
oreduce
i
n¬equal
it
yinthedistri
but
ionofi
ncome.

Fourim¬por
tantmeasur
esaret
hefoll
owi
ng:
1.PaymentofBonus:
Fi
rstl
y,thepaymentofbonus(cal
l
edannualpay
ment
)hasbeenmadecompul
sor
yinev
ery
i
ndustry
.

2.Ceil
ingonLandHoldi
ng:
Secondly,acei
li
ngonl andholdingshasbeenimposedint her ur
alareas.Eachhousehold(or
famil
y)isall
owedtoholdacer t
ainamountofland.Anysurplusabovethisistakenoverbyt
he
Governmentandisredi
stri
but edamongt hel
andlessworkersandmar ginalf
armers.Moreov
er,
i
n1976acei li
ngonurbanpr opertyhasal
sobeenimposed.

3.Sel
f-
EmploymentProject
s:
Moreover
,vari
ousself
-employ
mentproj
ect
shav
ebeent
akenbot
hinr
uralandur
banar
east
o
sol
vethegrowingunemploymentpr
obl
em.

4.TransferPayments:
Fi
nally,var
ioustypesoft
ransferpayments(suchasunempl oy ¬ment
,compensat
ion,
sof
tloans,
pensionst ofree¬dom fi
ghters,concessi
onst o seni
orcitizens,et
c.)havebeen madef or
i
mpr ovingthewelfar
eofcer¬tai
nweakersectionsofthesociety.
UNI
TII
I

Pr
ivat
eandPubl
i
cFi
nance

Theupcomi
ngdi
scussi
onwi
l
lupdat
eyouaboutt
hedi
ff
erencesbet
weenpr
ivat
eandpubl
i
c
f
inance.

1.Thepat
ter
nandv
olumeofexpendi
tur
eofani
ndi
vi
duali
sinf
luencedbyhi
stot
alr
esour
ces—
i
ncomeandweal
th— buti
ncaseofgov
ernmentex
pendi
tur
edet
ermi
nesi
ncome.Mor
eov
er,
gov
ernmentexpendi
tur
esde¬t
ermi
nepeopl
esi
ncome.I
fgov
ernmentspendsmoneyonr
oad
const
ruc¬t
ion,
someempl
oymenti
saut
omat
ical
l
ygener
ated.

2.Pr
ivat
eindi
vi
dual
sorf
ir
msar
emai
nlyconcer
nedwi
thpr
ivat
econ¬sumpt
ionorpr
ofi
ts.The
gov
ernmentai
msatpr
omot
ingt
hewel
far
eofsoci
etyr
athert
hant
hatoft
hei
ndi
vi
dual
.The
i
ndi
vi
dual(
oraf
ir
m)i
smai
nlyconcer
nedwi
thhi
s(i
ts)pr
esentgai
nsandpr
ospect
s,notwi
th
t
hatofdi
stantf
utur
e.Thegov
ernmenthast
oser
vesoci
etygener
ati
onaf
tergener
ati
on.

3.Pr
ivat
efi
rmsder
ivei
ncomebysel
l
inggoodsandt
heypayt
ofact
orsofpr
oduct
ionaccor
ding
t
othequant
it
yorqual
i
typur
chased.Theser
vicesofgov
ernment
sar
eusual
l
ymadeav
ail
abl
eto
i
ndi
vi
dual
squi
tei
rr
espect
iveoft
hecostandof
tenatr
atest
hatdonotcov
erf
ull
cost
s.

4.Thepr
oduct
sorf
inanci
alasset
s(l
i
kebonds)ar
evol
unt
ari
l
ypur
chasedbymember
sof
soci
ety
.Ther
eisnocompul
sioni
nthi
smat
ter
.Butgov
ern¬ment
shav
eal
way
sapowert
ofor
ce
peopl
etodowhatt
heywantt
hem t
odo.
Notonl
ypeopl
ear
efacedt
omakecompul
sor
ypay
ment
sthr
ought
axesbutgov
ernment
smay
al
sof
orcepeopl
etobuyi
tsownbonds(
mti
mesofwaroremer
gency
)forr
aisi
ngr
esour
cesor
f
orcont
rol
l
ingi
nfl
ati
on.

5.Thei
ndi
vi
dualconsumer(
orf
ir
m)must
,ofnecessi
ty,bal
ancehi
sincomeandexpendi
tur
eor
r
ecei
ptsandpay
ment
s.Butagov
ernmentmayr
educet
axesi
fit
sincomei
sgr
eat
ert
hani
ts
expendi
tur
eandcanr
aiset
axesori
ncurdef
ici
tsi
nthebudgeti
ntheconv
ersecase.

Thus,i
tissai
dthat
,inpr
ivat
efi
nance,t
hecoati
scutaccor
dingt
ocl
othav
ail
abl
e,but
,inpubl
i
c
f
inancet
hesi
zeoft
hecoati
sdet
ermi
nedf
ir
standt
hent
heaut
hor
it
iest
ryt
ocol
l
ectt
he
necessar
ycl
oth—t
hroughsal
eofgoodsandser
vices,
taxat
ionandbor
rowi
ng.

6.Ani
ndi
vi
dualcanbor
row f
rom anot
heri
ndi
vi
dual
.Butagov
ernmentcanbor
row ei
ther
i
nter
nal
l
yorext
ernal
l
y(i
.e.
,fr
om af
orei
gncount
ry)
.

Meani
ngofTax
Ataxisacompulsor
ypaymentl
eviedont heper
sonsorcompani
est omeett
heexpendi
tur
e
i
ncur
redonconf
err
ingcommonbenefi
tsuponthepeopl
eofacount
ry.

Twoaspect
softaxesfoll
owfrom t
hisdef
ini
ti
on:
(1)At
axisacompulsorypay
mentandnoonecanr ef
uset
o-payi
t.

(2)Proceedsfrom t
axesareusedforcommonbenef
it
sorgener
alpur
posesoft
heSt
ate.I
n
otherwords,
therei
snodir
ectquidpr
oquoinv
olv
edint
hepay
mentofatax.

Thi
simpliesthatani
ndi
v i
dualcannotexpectordemandthattheGov ernmentshouldr
enderhi
m
a speci
fi
c servi
ce i
nr et
urnf orthe taxpaid byhim.Howev er,this does noti
mplythat
Governmentdoesnothi
ngforthepeoplefrom whom i
trecei
vestaxes.

InfactGover
nmentspendst hetaxmoneyf orthegeneralorcommonbenefit
sofallthepeopl
e
rat
herthanconferr
inganyspeci albenefi
tonapar t
icul
artaxpay er
.ToquoteTaussig,“
The
essenceofatax,asdist
ingui
shedf r
om theot herchargesbyGov er
nmenti
stheabsenceofany
dir
ectquidpr
oquobet weenthetaxpay erandt hepubl
icauthori
ty.
”

Taxshouldbecar efull
ydisti
nguishedf r
om af ee.Feeisalsocompul sor
ypay mentmadebya
personwhor eceivesinretur
napar t
icul
arbenef i
torservi
cefrom theGov er
nment .Forpayi
ng
fee on a t
elevi
sion orr adi
o,a per son getst he benef
it
s ofpr ogrammes relayed bythe
Gov er
nmentont el
evisi
onorr adi
o.Likewise,student
swhopayt heeducati
onfeeinschoolsand
col
leges,
obtainthebenefitsofteachi
ngar rangedbytheGov er
nment .

Theamountoff eeisalwaysl
essthanthecostofservi
cerenderedbyt heGover
nmentinr
etur
n
andther
eforecoversonlyapar
tofthecostofserv
icerendered.Thus,eveni
ncaseoffee,
ther
e
i
sagener alpubli
cinter
estorcommonbenef i
toft heservi
cer ender
edbyt heGov
ernment.I
n
thi
scase,theGov
ernmentundert
akesaservi
ceforthecommonbenefi
tsoftheciti
zensand
obtai
nsafeefr
om t
hosewhoav ai
loft
hatser
vicet
ocoverapar
toft
hecostofser
vicerender
ed.

Classifi
cati
onofTaxes:
The t axes hav
e been vari
ouslyclassi
fi
ed.Taxes can be dir
ectori
ndir
ect
,theycan be
progressiv
e,propor
ti
onalorr egr
essiv
e,andi ndi
rectt
axescanbespeci
fi
corad-val
orem.We
spelloutbelowthemeaningsofthesedif
ferentty
pesoftaxes.

DirectandIndir
ectTaxes:
Thedi st
inct
ionbetweendirectandindir
ecttaxesi sbasedonwhet herornott heburdenofatax
canbeshi f
tedwhol l
yorpartl
yt oothers.I
fat axissucht hatit
sbur dencannotbeshi f
tedto
othersandt hepersonwhopay sitt
ot heGov ernmenthasal sotobeari t
,iti
scalledadir
ecttax.
Incomet ax,annualweal
thtax,capi
talgainstaxar eexamplesofdirecttaxes.Incaseofadir
ect
taxthereisadirectcont
actbetweent hetaxpay erandtaxl
ev yi
ngpublicauthori
ty.

Ontheot herhand, indi

recttaxesar ethosewhoseburdencanbeshi f
tedtoot
herssothatthose
whopayt heset axestot heGov ernmentdonotbeart hewholeburdenbutpassitonwhollyor
part
lytoot hers.Forinstance,excisedutyontheproducti
onofsugari sani
ndir
ecttaxbecause
themanuf act
uresofsugari ncludet heexci
sedut yinthepr i
ceandpassi tont obuy ers.
Ult
imatel
y ,iti
st heconsumer sonwhom t heinci
denceofexcisedutyonsugarfal
l
sast heywi l
l
payhigherpr i
cef orsugarthanbef orethei
mpositi
onofthetax.

Thus,t
houghexcisedutiesareont
heproduct
ionofcommodit
iesbutt
heycanbeshif
tedtothe
consumers.Li
kewise,
salestaxoncommoditi
escanalsobepassedontobuy
ersorconsumers
i
nt hef
orm ofhi
gherpriceschar
gedfort
hecommoditi
es.

Therefor
e,exci
seduti
esandsalestaxesoncommodi t
iesareexamplesofindi
recttaxes.They
arealsoknownascommodi tytaxes.I
nthecaseofindir
ecttaxes,t
herei
sani ndi
rectrelat
ion,
betweentheGov er
nmentandthosewhoult
imatel
ybeartheburdenofthet
axes.

Specifi
candAd- Val
orem Taxes:
Indir
ecttaxescanbeei therspecif
icorad-val
orem.Aspeci
fi
ctaxonacommodityi
sat axper
unitofthecommodi ty
,what everit
sprice.Thustheamountoftot
alspeci
fi
ctaxwil
lvaryin
accordancewiththechangesi nt ot
aloutputorsal
esofthecommodit
yandnotwit
ht hetot
al
valueofoutputorsal
es.

Ont heotherhand,anad- val

orem t
ypeofanindir
ecttaxislevi
edaccordi
ngtot hev alueoft he
commodi ty.Forinst
ance,salest
axinIndi
aisanad-valor
em taxastherateofsalest axincase
ofseveralcommodi t
iesis10percentoft hevalueofsalesofthecommodi ties.Ad- val
orem
taxesar
epr ogressiv
ei nt
heirbur
denonconsumerswher easspeci
fi
ctaxesareregressive.

Progr
essive,Proport
ionalandRegr essiveTaxes:
Accordi
ngt oanot hercl assi
fi
cati
on,t axescanbepr ogressi
ve,proport
ionalorregressiv
e.In
caseofproportionaltax,thesamer at
eoft hetaxischarged,whateverbet hemagnit
udeoft he
baseonwhi chi ti
slevied.Forinstance,ifr
ateofincomet axis25percentwhat everthesizeof
i
ncomeofaper son,i
twi llt
henbeapr oporti
onali
ncomet ax.Likewi
se,ifrateofweal
tht axis5
percent
,itwill
bepr oportionalwealthtax.

Thus,
incaseofpr
opor
ti
onalt
axi
tist
her
atewhi
chi
sfi
xedandnott
heabsol
uteamountoft
he
tax.Thuswi ththerateof25percentpr oport
ionali
ncometax,apersonwit
hi ncomeofRs.
25,000willpayRs.6,250ast het
ax,andaper sonwi t
hincomeof50,
000wil
lpayRs.12,500as
thetax.Thus,evenunderproport
ionali
ncomet ax,ari
cherper
sonhastopaygreateramountof
taxthoughrateofthetaxi
st hesame.

Ont
heot herhand,incaseofaprogressi
vetax ,r
ateoft het
axincr
easesastheamountoft he
t
axbase( i
ncome,wealthoranyotherobj
ect)increases.Thepri
nci
pleunder
lyi
ngaprogressive
t
axi
st hatgreatert
hetaxbase,t
hehigherthet axrate.I
nIndi
aincometax,animpor
tantdirect
t
axl
eviedbyt heCentr
alGover
nment,ispr
ogressive.

It
srateatpresent(1998-99)var
iesf
rom 10percenti
ntheslabofRs.40,000to60,000to30per
centi
nt heslabofincomeabov eRs.1,50,
000.Underpr
ogressi
veincomet ax,t
her i
cherper
son
paysnotonl yabsol ut
elymor etaxbutal soahigherrat
eoft het ax.Thus,t heburdenof
progr
essivetaxfal
l
smor eheavi
lyontheri
cherper
sonsascomparedt oproport
ionali
ncometax.

Aregressi
vetaxistheoppositeofaprogr
essi
vet ax.I
ncaseofar egr
essiveincomet ax,t
herat
e
i
sl oweredast heincomerises.Thus,underregressiv
et axsy
stem,t hebur denoft hetaxi
s
rel
ativ
elymoreont hepoort hanont heri
ch.Ar egressi
vetaxistherefor
ei nequi
tableandno
civ
ili
sedGovernmentinthewor l
dtodaywi
lll
evysuchat ax.

Obj
ect
ivesandI
nst
rument
sofFi
scal
Pol
i
cy

Thewor d fi
scal 
comesf rom aFr enchwor Fi
d  sc,whi chmeans  tr
easureofGov ernment .All
the taxat
ionandexpendi turedecisions ofthegov ernmentcompr isetheFiscal Policy.
FiscalPolicyisdiff
erentfrom monet arypoli
cyi nthesenset hatmonet ar
ypol i
cydeal switht he
suppl yofmoneyandr at
eofi nterest.Thegov er
nmentandRBIuset heset wopol i
ciestost eer
thebr oadaspect soft heI ndi
anEconomy .Whi
  l
egov ernmenti sconduct sFiscalPol i
cy,RBIi s
responsibleformonet arypol i
cy.
RBIal sohelpst hegov ernmentinimpl ement i
ngi tsfiscalpolicy
decisions.
Conduct i
ngf iscalpoli
cyi soneoft hemai ndut i
esoft hegov er
nment .Viaf iscalpol i
cy,t he
gov ernmentcol l
ectsmoneyf rom differentresourcesandut il
izesitfordi f
ferentexpendi tures.
Sinceal lwelfarepr oj
ectsar ecar ri
edoutunderpubl icexpendi t
ures,fiscalpol icyiscl osely
relatedtothedev el
opmentpol i
cy.

Object i
v esofFi scalPol icy
Theobj ectivesoft hef iscal pol
icyofthegovernmentar easf ol
lows:
Resour ceMobi l
izat i
on
Fiscalpol icy al l
ows t he gov ernmentt o mobi li
ze resour ces forpubl i
c expendit
ure and
dev elopment .Ther ear et hreeway sofr esourcemobi li
zationv iz.t
axation,publicsavingsand
privatesav ingst hr oughi ssueofbondsandsecur i
ti
es.
Resour ceAl l
ocat i
on
Thef undsmobi lizedunderf i
scalpoli
cyar ef urt
herallocatedf ordev elopmentofsoci aland
phy sicalinf r
astruct ure.Forexampl e,t
hegov er nmentcol l
ectedt axrev enuesar eall
ocatedto
variousmi nistr
iest ocar ryoutt hei
rschemesf ordev el
opment .
Redi stri
butionofI ncome
Thet axescol l
ectedf rom r ichpeoplearespentonsoci alupl i
ftmentoft hepoorandt hisfi
scal
policyinawel f
ar est atet ri
edt oreduceinequal
itiesofincomeusi ngresour ceal
locat
ion.
 Pricest ability
,cont rolofInflati
on, Empl oymentgener ation
Gov ernmentusesf iscalmeasur essuchast axati
onandpubl icexpendi
tur
et ostabili
zet he
pricesandcont rolinf l
ati
on.Gov ernmental sogeneratesempl oymentbyspeedinginfrastruct
ure
dev el opment .
Bal ancedRegi onal Dev el
opment
Al ar gepar tofthegov er
nmentt axr evenuesar egivenoutt ol essdevel
opedstat esasst atut
ory
anddi scretionarygr ant.Thishel psint hebal ancedregionaldev el
opmentofthecount ry.
Bal anceofPay ment s
Usi ngf iscalpol i
cymeasur esgov ernmentt ri
estopr omot eexpor t
stoearnf oreignexchange.
Thishel psinmai nt ainingfav ourablebal anceoft r
adeandbal anceofpayments.
Capi tal For mat i
onandNat i
onal Income
Fiscalpol icymeasur eshelpi nincreasingt hecapitalformationandeconomi cgr owth.Increased
capi tal format i
onl eadst oincr easei nnat i
onal i
ncomeal
Component sofFiscalPol icy
Ther ear ef ourkeycomponent sofFi scal Poli
cyareasf oll
ows:
 Ta xat i
onPol i
cy
 Expendi
tur
ePol
i
cy
 I
nvest
ment&Di
sinv
est
mentpol
i
cy
 Debt/sur
plusmanagement
.
Taxati
onPolicy
We hav e al
readydi scussed i
n det ai
laboutt he taxati
on policyin previ
ous modul e.The
gover
nmentget sr evenuefrom dir
ectandi ndi
recttaxes.Viait
sf i
scalpol
icy,gov
ernmentai ms
tokeept hetaxesasmuchpr ogressiveaspossi bl
e.Further
,judici
oustaxati
ondeci si
onsare
ver
yimpor t
antforeconomybecauseoft woreasons:
 Higherthanusualt axratewillreducethepur chasi
ngpowerofpeopl eandwi l
lleadt oan
decreaseininvestmentandpr oducti
on.
 Lowert
hanusualt
axr
ateswoul
dleav
emor
emoneywi
thpeopl
etospendandt
hiswoul
dlead
t
oi nflation.
Thus, thegov ernmenthast omakeabal anceandi mposecor recttaxratef ortheeconomy.
Expendi t
ur ePol icy
Expendi t
ur epol i
cyoft hegov er
nmentdeal swithr evenueandcapi talexpendit
ures.These
expendi t
ur esar edoneonar easofdev elopmentl i
keeducat i
on, healt
h,infrastr
uctur
eetc.andto
payi nter nalandext er
naldebtandi nterestont hosedebt s.Gov er
nmentbudgeti sthemost
i
mpor tanti nst r
umentembody ingexpendi turepoli
cyoft hegov ernment.Thebudgeti salsoused
fordef ici
tf inanci ngi .
e.fil
l
ingt hegapbet weenGov ernmentspendi ngandi ncome.
InvestmentandDi sinvestmentPol icy
Opt i
mum l evelsofdomest icaswel lasf oreigni
nvestmentar eneededt omai ntai
ntheeconomic
growt h.I nr ecenty ears,thei mportanceofFDIhasi ncreaseddr amaticall
yandhasbecomean
i
nst r
umentofi ntegr ati
ngt hedomest iceconomi eswi thgl obaleconomy .
Debt/Sur plusManagement
Ifthegov er nmentr eceivedmor ethanitspends, itiscalledsur plus.I
fgov ernmentspendsmor e
thani ncome,t heni tiscal l
eddef i
cit.Tof undthedef i
cit,thegov er
nmenthast obor r
ow fr
om
domest icorf oreignsour ces.Itcanal sopr intmoneyf ordef i
citfi
nancing.
 UNI
TIV
St
ruct
ural
Adj
ust
mentDef
ini
ti
on
Str
uctur
alAdjustmentr
efer
stoasetofeconomi
cpol
i
ciesof
teni
ntr
oducedasacondi
ti
onf
or
gai
ningaloanfrom t
heIMF.

Structuraladj
ustmentpol i
ciesusual l
yinvol
veacombi nat i
onoff ree-marketpoli
ciessuchas
privat
isati
on,fi
scalausteri
ty,freet radeandder egulat
ion.St r
ucturaladj
ustmentpol ici
eshav e
beencont r
oversi
alwithdet ractorsar gui
ngthef reemar ketpol i
ciesareof tenunsui t
ablefor
dev el
opingeconomi esandleadt olowereconomi cgrowt handgr eateri
nequalit
y.Supportersof
struct
uraladjustment(IMFandWor ldBank)arguet hatthesef r
ee-marketreformsar eessential
forpr omotingamor eopenandef fici
enteconomy ,whi chulti
mat elyhelpt oimpr oveli
ving
standardsandr educerelat
ivepov erty.

I
nrecentyear
s,t
her
ehasbeensomerefor
mt ostr
uct
ural
adj
ust
mentpol
i
cies,
‘pov
ert
yreduct
ion’
hasbeenaddedasanel
ementofst
ruct
uraladj
ust
ment.

St
ruct
ural
Adj
ust
mentPol
i
cies

Tobeeligi
blef
oral oanf
rom I
MF,
dev
elopi
ngcount
ri
esof
tenhav
etoi
mpl
ementsomeoral
lof
thef
oll
owingpoli
cies.

 Cutt
ingGovernmentSpendingt oreducethebudgetdefi
cit
.Al
soknownas‘ fi
scalaust
erity
’
 Rai
singtaxrevenuesandtr
y i
ngt oimprov
et axcol
lect
ionbyclampingdownont axavoidance.
 Control
ofInfl
ati
on.Usual
l
yt hroughMonet arypol
i
cy(higheri
nter
estrat
es)andfiscal
aust er
it
y–
whi
chhav
etheef
fectofdepr
essi
ngaggr
egat
edemand.
 Pr
ivat
isat
ionofst
ate-
ownedi
ndust
ri
es.Thi
srai
sesmoneyf
ort
hegov
ernment
,butal
so,i
n
t
heory,can hel
pimprove ef
fi
ciencyand product
ivi
ty.because pri
vat
efi
rmshave a pr
ofi
t
i
ncenti
vetobemoreeff
ici
ent.
 De-
regul
ati
onofmarket
stoencour agecompeti
ti
onandmor efir
mst oent
ert
hei
ndust
ry.
 Openi
ngtheeconomytofr
eetr
ade–removingt
ari
ffbar
ri
erswhichpr
otectdomest
ici
ndust
ri
es
 Endi
ngfoodsubsidi
es.Thi
scandistor
tthemarketandl eadtoover-suppl
yandholdback
di
versif
icati
onoft
heeconomytoamor ei
ndust
ri
albasedeconomy.
 Devaluati
onofcurr
enci
estorestor
ecompeti
ti
venessandreducecur
rentaccountdef
ici
t.Thi
s
usual
lyleadstohi
gheri
mportpr
ices.

Cr
it
ici
smsofSt
ruct
ural
Adj
ust
ment

1.LossofNat ionalSov er ei
gnt y.I MFpol iciesneedt obei mplement edot herwiset herecanbea
heav yf i
nanci alpenal t
y .Thi sgi vesf oreignbodi esgr eatinfl
uenceov erkeyeconomi cissuesi n
developingeconomi es.
2.Greateri nequal i
ty.Str ucturaladj ust mentpol i
cieshav eoftenshownat endencyt o great er
i
nequal ity
.Forexampl e,pr ivatisat i
onhasof t
enbenef it
tedasmal lr i
chel it
e( e.
g.Russi a1995)
andhav enotbenef i
tt
edwi derpopul ation.
3.Ignoresoci albenef it
s.Pr i
v ati
sat ionofkeypubl i
cut il
iti
esli
keWat er(e.g.Bol i
v i
a)havel edt o
higherpr i
cesf orakeycommodi ty .Arguabl ymar ketincenti
vesdon’ thav ethesamei mport ance
whent heindust r
yplay sani mpor tantsoci alwel f
ar efuncti
on.But ,structuraladjustmentpol icies
haveof t
enst uckt oacer t
aini deol ogyev enwhennotappr opri
at e.
4.Cont r
olofi nflati
onandf iscalaust eri
tyhasl edt ohi gherunempl oymentandl owereconomi c
growt h–atl eastint heshor t-term.
5.Socialdev elopmenti gnor ed.To meetf iscalcr iteri
a,gover nment s hav e often cutwel fare
spendi ngpr ogr amswhi chbenef itthepoor estmember sofsoci ety.
6.Freet radeof t
enhamper sdi versification.Dev elopingeconomi esof t
enhav eacompar ative
advant agei nsel l
ingr aw mat erials.But ,thispr eventseconomydi ver
sifyi
ng.Tomaket hings
wor se,dev eloped count ries of ten i mpose t ariffs on agricult
ur alexpor ts,butt hen want
developingcount r
iestohav efreet radef ort heirexpor t
s.

  St
ruct
ural
Adj
ust
menti
nIndi
a
 
 

Backgr
ound 

I
n1991, I
ndi
afacedanunpr ecedentedbalanceofpaymentscr i
sis.Foral
mosta
decadethegovernmenthadbor rowedheav il
ytosupportaneconomi cst
rategy
thatr
eli
edonexpansionarypubl i
cspendingtof i
nancegrowth.From 1980to1991
I
ndia'
sdomesticpublicdebtincreasedsteadil
y,fr
om 36percentt o56percentof
theGDP,whil
eitsexternaldebtmor ethantri
pledto$70bil
li
on. 

Polit
ical changes, unrestinpartsofthecount ry
, andt he1990Per sianGulfcr i
sis
compoundedt healreadyvolati
lesit
uation.Thecr isiscausedoi l
pricestorise,
substant iall
yi ncreasingthecostofoi limports,andf oreignexchangeear ni
ngst o
drop.Indi a'scr edit
wor t
hiness,alr
eadyunderst rain,becameev enmor evulnerable
asIndi ansf rom abr oadwi thdr
ewt heirsubstantialforei
gncur r
encydeposi tsand
commer ci albanksr educedt heirexposure.Towar dt heendof1990, Indi
a's
creditwor thinesswasdowngr aded,effecti
vel
ycut tingitsaccesst osourcesof
commer ci alcredit.Byear l
y1991, I
ndiawasont hebr i
nkofdefault. 

Ast hecri
sisunf
oldedt
hedebatesinIndi
a'spol
i
tical
andeconomi ccir
cles
i
ncreasingl
yfocusedonref
orm.InIndia'
slar
geandhighlydiv
ersedemocracy,
thosedebatesprovedi
mportanti
nbuildi
ngpoli
ti
calconsensusaroundthevoi
ces
 forref
orm.Nevert
heless,i
ttookanewgov er
nment,whi
chcamet opowerinJune
1991,tol
aunchIndia'
sfir
stcomprehensi
veeconomicpoli
cyref
orm pr
ogram,
whichtheWorldBanksuppor t
edwitha$500mi l
l
ionstr
uctur
aladj
ustment
operat
ion(SAL)
,approvedinDecember1991andclosedinDecember1993. 

Pr
ojectgoal
sandi
mpl
ement
ati
on 

TheSAL'sobjecti
veswer etwofol
d:(1)tohel
pI ndiaaddr essi
tsimmedi ate
balanceofpaymentscrisi
sand( 2)t
osuppor tabr oadsetofpolicyreformsaimed
atli
beral
izi
ngtheIndi
aneconomyandopeni ngi tupt omor ecompetit
ionbot h
fr
om wi t
hinandabroad.TheSALwascompl ement edbyanI MF-supported
stabil
i
zati
onprogram.Andpar all
elf
inanci
ngwaspr ovi
dedbyotherdonor s,as
agreedatconsort
ium meetingsconvenedbyt heBank.  

TheSALpr ov edt
obet heri
ghtr esponseatt her
ightti
me.Thepr ogram i
t
support
edwasbol dbutcar eful
lysequencedt ocreat
eawor kablebalance
betweeneconomi cnecessi
t yandt hereal
it
iesofIndi
a'spoli
ti
caleconomy.The
refor
msf ocusedfi
rstonthemostbi ndingconstr
aint
s,whichalsoproducedqui
ck
resul
ts,
helpingtostr
engthenconsensusar oundtherefor
ms. 

Withinweeksofannounci ngthereform package,thegov ernmentdev aluedt he

rupeeby23per cent,r
aisedint
erestrates,andrevi
sedthe1991/ 92unionbudget ,
makingshar pcut sinsubsidi
esandt ransferst
opubl i
cent erpr
ises.Overt henext
sixmont hs,itaboli
shedthecompl exsy st
em ofindustr
ial andimportlicensing,
l
iberali
zedt r
adepol i
cy,andintr
oducedmeasur estostrengthencapital markets
andinstit
utions.Thereform agenda,thoughambi ti
ous, wasnear l
yfull
y
i
mpl ement edduringthe1991-93SALper i
od. 

Thesemeasur eswerefol
lowedbyaddit
ionalref
ormst oliberal
izei
nvestment,
fur
therderegul
atetr
adepoli
cy,i
mprovetaxadmi ni
strati
on, andstr
engthenthe
fi
nancialsect
or.By1995,I
ndi
ahadmov edf r
om ar egimei nwhichpri
vate
i
nvestmentwasnotal l
owedinmajoreconomi csectorstoonewhoseopenness
toforei
gninvestmentcomparesf
avor
ablywiththatofmostAsi ancountri
es. 

Resul
ts 

Ther eformspr oducedi mmedi at eresult

s.Thetimelyprovisi
onoff orei
gn
exchangehel pedI ndi
aweat heritsbalanceofpay ment scri
sisandimpr ov
ei t
s
creditworthi
ness.Sev eralkeymacr oeconomicindicatorsi
mpr ovedmor ethan
projected(seet abl
e).Afterdeclininginthefir
styearoft herefor
ms, GDPgr owth
resumedt o5per centin1993/ 94and6. 3percenti
n1994/ 95.Expor t
sincreased
almost12per cent.Mosti mpor tant,t
herewasasur geofforeigninvest
ment ,
whichi ncreasedal mostsev enfoldov erproj
ecti
ons.

Fr
eeTr
adeandPr
otect
ioni
sm
•
 Def
ini
ti
onofFr
eeTr
ade

Free t
rade is a syst em thatallows countri
es tot r
ade and t r
ansactwi t
houtgov ernment
i
nterf
erence(e.g.throughtheusesoft arif
fs,quotas,
subsides,etc.
).Anidealtradingsi t
uat i
onis
oneoft hefreet r
ade,becauseeachcount ryhascompar ativeadvantagesi npr oducingcer tai
n
thi
ngs.Compar ati
veadv antagesmaket r
adet hemostef fi
cientmet hodofpr oductionand
consumpt i
on.Freet radedi
f f
ersfrom otherforms,suchast radepolicywher et heallocationof
goodsandser v i
cesamongstt radingcountri
esar edeter
mi nedbyar ti
fici
alpricest hatmayor
maynotr efl
ectthetruenatureofsuppl yanddemand.

•
 Tar
if
fs

Tarif
fsaret axesthatarepl acedonimpor t
edgoods.Theyr ai
ser evenuefort hegov er
nment ,but
alsoraisest hepri
cef ort heciti
zensbecauset hedomest icequi l
ibr
ium priceisal mostalway s
higherthant heinternationalpri
ce.Thishur t
sf oreignsuppl iersbecausei trai
sest heirpri
ces,
l
ower i
ngt heirconsumpt i
onandcut t
ingtheirov erallrevenue.Tar i
ffsaregoodf orthedomest ic
producersbecauset heirgoodsseem r el
ativelycheaperwi t
htar i
ffsonf or
eigngoods.Tar i
ff
sar e
alsogoodf ort hegov ernmentbecauseoft hemoneyt hegov ernmentcol lectswi t
ht hetari
ffin
place.Tarif
fsar ebadf ort heconsumer ,thef oreignpr oducerandcr eateadeadwei ghtloss.
Howev er,tarif
fsarei nsomeway sbettert hanquot as,becauset hecount r
yst i
llgetssome
revenueoutoft hetariff
s.St i
l
l,bot
harebadsi nceal l t
radebarr i
erscreatelossesi nthelongrun.

•
 Quot
as

A quotai sapr otecti

onisttrader estri
ctiont hatl i
mitst hequant i
tyofagoodt hatcanbe
i
mpor tedintoacount ry.Limi
tingt hesuppl yofagoodr aisest hepriceofthei mportedgoodand
makesi tmor eexpensiv eincompar isont ot hepr i
ceunderf reet r
ade.Quot asmakei teasierfor
domest icproducerstocompet ewithf oreignpr oducersbecausei mpor t
ingfrom for eignersis
now mor eexpensivethanpur chasingdomest icall
y.Ther efore,quotascanbequi t
eusef ulin
prot
ecting inf
anti ndustry.In cont rastt ot ari
ffs,quotas do notbr i
ng inr evenue f ort he
government .Quotasar eusual l
yabadi deabecauset heymaket hesedeadwei ghtl ossspot s
wheret hegov er
nmentcanbeear ni
ngt axmoneyi nst
eadofi tjustgoingt owaste.Iti softena
l
ossforbot hcount ri
es.Thenetl ossf orquot aswi l
lgotof oreignproducers.

• 
Subsidies
A subsidyisdef i
nedasagr antpai dbyt hegov ernmentt oanent erpr
isethatbenefit
st he
specif
icbusiness.Subsi diesar eaf orm off i
nanci
alassi stancethataregenerall
ygivenbyt he
governmentofacount rytoapr oducerinagi v
eni ndustry,usuall
ytokeept heindustr
yaf l
oat
andhelpkeeppr oducti
onst eady.Commonsubsi di
esi ncludemoneyt oexpandacompanyort o
hir
emor ewor kers.Subsi diesar eal soat radebar r
ier,assubsi di
zi
ngcompani eswithi
nt he
countrymakesi tharderf orf oreigncompani estocompet e.Whenasubsi dyi sinplace,the
producergainsbutt heconsumerl oseswithoutknowi ngi t
.Fr om aconsumer'spointofvi
ew,a
goodseemscheapert hani tactuallyis,
becauset heyar eunawar eoftheamountt heyarepaying
forthegoodt hrought heirt axes.Subsidiesar eonlygoodf orgoodswi thposit
iveexter
nali
ti
es.
• 
VoluntaryExportRest r
aints( VERs)

Atrader est
ri
cti
onont hequant
ityofagoodthatanexpor
ti
ngcountr
yisallowedtoexportto
anothercountr
y.Thi
slimiti
ssel
f-i
mposedbytheexpor
ti
ngcount
ry.Ty
pical
l
y ,VERsarearesult
ofrequestsmadebyt heimport
ingcount
rytoprov
ideameasur
eofprotect
ionforit
sdomest i
c
businessesthatproducesubstit
utegoods.VERsareoft
encreatedbecauset heexporti
ng
countr
ieswouldpref
ert
oimposet
hei
rownr
est
ri
cti
onst
hanr
isksust
aini
ngwor
set
ermsf
rom
tar
if
fsand/orquot
as.

• 
Admi nistrativ
eobst acles:
Theyusual l
ycomei nt hef orm ofBureaucraci
esorVERswhi chisdef i
nedi ntheabov esect i
on.
Bureaucr aciesar eor ganizati
onswi thsetl awsorr ulesthatmayi nt
ervenewi thtradei nt he
country.Anexampl eofabur eaucracyisOHSA,t hisbureaucracymakessur et hatcertain
poli
ciesar emetwi thincompani esthatmayormaynoti nterf
erewi t
htrade.•  
Healt
handsaf ety
standards:Basi call
y,wear enotaccept i
nggoodsbecauseofpossi bl
eheal thri
sks.Ifsomet hing
wast ogowr ong,t henmanyl iveswoul dbeatst akebot hintheUni tedSt atesandout side
countri
es.Anyi ndustrycr uci
alt onationalsecur
it
y ,suchaspr oducer sofmi l
it
aryhar dwar e,
shouldbepr otected.Thatwayt henati
onwi l
lnothav etodependonout sidesupplier
sdur ing
poli
ti
cal ormi l
i
tar ycri
ses.

Nationalsecuri
ty 
isatstake wit
hr egar
dt osomei ndust r
ies.Defensei sthebestexampl eofan
i
ndust ryt
hatrequiresprot
ectionont hebasisofnationalsecur i
ty.Steelmaybeanot her,butthe
steelindust
ryhasbeenonl ypar t
lysuccessfulwi t
ht hisargument .Oi lisanotherindustr
yon
whichnat i
onalsecurit
ycandepend,al t
houghU. S.consumpt ionofanddependenceonf or
eign
oilhasbeenv i
rt
uallyencouragedbyt hephaseoutoff ueleffi
ciencyst andar
dsf orpassenger
vehicl
esandl owgasolinetaxes(relat
ivetothoseinEur ope).

Althougheconomi st
sdisagreeaboutv ari
ousway st opr ot
ectindustriesonwhi chnati
onal
securit
ydepends,mostagr eethatsomei ndustr
ieswar r
antsuchprot ecti
on.Theyalsoagree
thatsomeindustr
iesthathavecl
aimedthisstatusprobabl
ydonotwar rantit.

I
talldependsonhow muchwearewill
i
ngtosacri
fi
ceourheal
thandsafet
ystandar
dsinthe
f
reetradeandpr
otect
ioni
sm.I
fwev
alueoursaf
etymore,
itwi
l
lbehardert
oacceptf
reetr
ade

•
 Env
ironment
alst
andar
ds:

From anenv i
ronment alviewpoint,fr
eetradei snotnecessar il
yagoodt hing.Itisagener all
y
acceptedconceptt hattheenv i
ronmentwillsufferift r
adei sl i
berali
zed.Oner easont hatthe
standardsareboundt owor senisthatt
hei nt
ernationaltradel awunderWTOr egul
at i
onsgives
countri
esandi ncentiv
etodecr easeenvi
ronment alregulat i
onofdomest icpr oduction,sothat
thedomest i
cpr oducerswi l
lbeont hesamel evelast hef orei
gncompet it
ion.Anot herconcern
hadi sthatt
hei dealsbehindt heGeneralAgreementonTar if
fsandTr ade( GATT)suppor tthe
poli
cyof“ pr
oduct ,notprocess”.Thisprohibi
tst hediscriminat i
onoft radebasedonhow i tis
produced,whichcausespr oducerstouset hecheapestmet hodsav ai
lablet omaket hei
rgood,
whichar eof
tent hemostdamagi ngmethodsf ortheenv ir
onment .

Businesseswantt oproduceascheapl yaspossibl

e,andnotr educingpol
luti
onsav esthem al ot
ofmoney .Domest i
cpr oducerscancl ai
mt hatf or
eignpr oducershaveanunf airadvant age
becauseoft hei
rcount
ry’slowerenvi
ronmentalstandards,sothedomest i
cpr oducerslobbyf or
l
owerst andardsathome,sot heycanst i
llcompete.Anexampl eoft hisisthet una-dolphin
scandalbet weentheU. S.andMexico,whi chbegani nabout1960,butcont i
nuedf arbey ond.
TheU. S.imposedt r
aderestri
cti
onsonMexi cobecauseoft helargenumberofdol phinskill
edby
thei
rtunaf isher
men.Mexi coappeal
edt oGATTandwon,wi thGATTdeci di
ngt hattheU. S.was
i
mposingunfairtr
adepracti
ces,andt hatt heyhadov erl
ookedseverallessextr
emeopt i
ons
whentheyusedanembar go.Asar esult,U.S.canner
iesstart
edtopr i
nt“dol
phin-fr
iendl
y”on
t
heirl
abel
s,becausepeopl
edon’tl
ikethingst hathur
tdolphi
ns,andwouldmuchr atherbuydead
t
unathatdoesn’
tdoso.

Thereissomear gumentthatt
hepr edi
ctedenvir
onment
alconsequencesoffr
eet r
adear
e
exagger
ated,butingener
al,t
hetheor
yi saccept
ed.Now i
t’
sjustaracetoseewhichwil
lwi
n,
tr
adeortheenv i
ronment
.

Argument sforProtectionism
• 
Infantindustryargument  -I
fani ndust ryi
snewl ydevelopi
nginacount ry,itwil
lnotbe
ablet o be compet i
ti
ve wi thi nt
ernat i
onalpri
ces f r
om compani es thathav e been
producingthepar ti
culargoodf oralongt i
me.Thegov ernmentsetsupt radebar r
ier
sin
ordert oprotectthisindust r
yf rom foreignbusinessesuntili
tisdevelopedenought o
keepupi nthewor ldmar ket.Howev er ,ift
heindustryconti
nuestobepr ot ect
ed,itmay
neverbecomer eadyfort hewor ldmar ketbecauseithasnothadani ncentivetobemor e
effi
cientandt herefor
echeaper .Iti
sal soimpossibl
et okeeptrackandmeasur ewhen
thebusinessi soldenought o"walkoni tsown."

• 
Effor
tsofadev el
opingcount r
yt odiver si
fy 
-Acount r
yshoul ddi
versi
fybecausei fi
t
onlyproducesasmal l
v ar
iet
yofgoodsi naf ewi ndust
ri
es,whensomet hi
ngbadhappens
tothosei ndustr
iestheycoul dbei nalotoft roublefi
nancial
ly
.Theywoul dlosethose
specif
icexpor t
swi t
hnoneot hertostil
lr elyon.Thisiswhywi thsmallcountri
es,when
thereisadest r
ucti
onoft heirli
mitedf actori
es,theysuffergreat
ly.Thi
si deaisv er
y
simil
artot hei
deaofhav i
ngabi ol
ogical
lydi ver
sifi
edpopulat
ion.

Ex:Insteadofspeci al
izi
nginonepr oductliker
iceinThail
and.Theyshouldproduceot her
productst oo,sot heyarenotsodependantont heexportsofrice.
•Protectionofempl oyment-Thisargumentst ems,usuallyfrom misguidedpatri
oti
sm.
Thecl aimi sthatbuy inggoodsfrom ot hercountr
iesasopposedt odomest i
cproducer s
will
dest royjobsathome.Thecount erargumentisthatbuyingatthelowestpri
ceallows
forhigherl evelsofpr oduct
ionandot herlostjobswillbemadeupi nothersectorsand
bylower edi nputprices.
•Sour ceofgov er
nmentr evenue-tari
ffequalsbri
ngingingovernmentrevenue

-Oncegov ernmenthasmor emoneyf r

om tari
ff
s,t ax,etc.
..
theywi l
lbeabl etopl ugit
backi ntot heeconomyt hroughgov ernmentspendi ngori nv estment ,whichal l
owsan
economyt obecomemor eadv anced.
•St r
ategicar gument s- 
Acount ryshoul davoidimpor ti
ngweaponsandot hermat eri
als
fornat i
onalsecur i
tyfrom ot hercount r
ies.Forexampl e,i
fcount ryAi sr eceiv
ingnat i
onal
securitytechnol ogyf rom count ryB,andt heyendupi nconf l
ictwi t
heachot her,country
Ai satr i
sk.Becausenow t hatsuppl yfrom count ryBwi llbecut ,leavingcount ryA
vulnerabletocount ryBat tacks.
•Meanst oov ercomeabal anceofpay mentsdi sequil
ibri
um-  A balanceofpay ment s
disequili
bri
um ( cur r
entaccountdef icit
)isasituat
ionwher eexpor trevenuef oracount ry
i
sl esst hanimpor texpendi t
ur e(tr
adedef ici
t)
.Thecount rywoul dt henputat ar
iffont he
i
mpor t
ingcount rysot hatt heconsumer swouldwantt obuymor edomest icgoods
ratherthanf oreigngoods.
 •Ant i-dumpi ng- Whenacount rysellsgoodsbel ow t heproduct i
oncost s-
ordomest i
c
pri
cel evel-thent hesegoodsar ebei ngdumpedont heimpor t
ingcount r
y.Whent he
i
mpor tingcount rytaxesthesei mpor t
edgoodst or efl
ectthetruecostofpr oduct i
on,that
i
scal ledant i
-dumping.Usual lyanti
-dumpi ngact
ionmeanschar gi
ngext r
aimpor tdutyon
thepar ti
cularproductf r
om t heexpor t
ingcountryinor dertobringitspriceclosertot he
“normalv al
ue”ort or emov ethei nj
urytodomest icindustryi
nt heimpor t
ingcount r
y.The
problem wi t hthispolicyisthatitisof tenimpossibletoknowwhet hergoodsar ebei ng
soldatpr i
cesbeneat hact ualv al
ue;t heref
oreant i
-dumpingpol icymaycr eatemor e
problemst hani tsolves.

Ar gument sagai nstPr otecti

oni sm
Freet radei sal way sbenef i
cialt ot hecount ri
esi nvolvedunl esst heyhav eexact l
yt he
samepr oducti
onpower .
• 
Inef fi
ci encyofr esour ceal l
ocat i
on -Whenacount r
ypr oducesagoodandi tdoesnot
hav eacompar ativ
eadv antagei npr oduci ng,thecount rypay sahi gheroppor tuni
tycost
andt her eisnetwel f
ar elossbecauseoft heincreasedoppor tunitycost .Whenacount r
y
doeshav ecompar ativeadv ant age,i tismuchl essofanoppor t
uni t
ycostt oobt ainit
from t hem.Theycoul dobt aini tf r
om f or ei
gner s,decr easingt heoppor tunit
ycostof
maki ng i tthemsel ves.wi th prot ectionism i twi l
lpr eventa count ryfrom ef f
icientl
y
allocatingt heirresour ces.
•Cost sofl ong-runr eli
anceonpr ot ecti
oni stmet hods-  
Count rieswhopl acet r
adebar ri
ers
i
npl acef orthei nfantindust r
yar gumentassumet hatev entual l
yt hedomest icindust r
y
wi l
lbeabl etocompet einternat ionally.Howev er ,theindust rymayuset hebar ri
erasa
crutchandnev erpr oper l
ydev elopi tspr oduct.Theywi llrelyont heset r
adebar ri
er sto
often keep peopl et o buydomest icall
y.Thi si sof tent i
mest hecasei n developing
count r
ieswhoi niti
allyintendt ot ransi t
ionf rom pr imaryt osecondar yandterti
arygoods.
Apr otect i
onistmeasur et hatcanbehel pfulintheshor t-runisnotl i
ftedandencour ages
retaliation.

•Incr
easedpr i
cesofgoodsandser vi
cestoconsumers-I
ftradebar
ri
erswereplacedon
i
nputgoods, notonlywilliti
ncreaset hepr
iceofthosei
nputgoodsbutal
sothepr oduct
fr
om theinputgoods.Int heend, consumersaret
heonepay ingmor
efortheinputcosts
andtheregularcostofthepr oduct.

•Thecostef fectofprotect
edimportsonexpor
tcompetiti
veness- 
Byput ti
ngupt r
ade
barr
iers,ot
hercountri
escanr et
ali
ateandputupthei
rownt radebarr
iers.Thisinturn
backfir
esandcausesy ourgoodst onow bemor eexpensivealso.Decr easi
ngy our
numberofexpor t
s,decreasi
ngAD becauseexport
saf actorofaggr egatedemand,
causingADt oshi
fttothelef
t.

TheI
MFandt
heWor
ldBank

TheInt
ernat
ionalMonet
aryFund(I
MF)andt heWor l
dBankar einstit
uti
onsi
ntheUni t
edNat i
ons
syst
em.Theyshar et
hesamegoalofr aisi
ngli
v i
ngstandar
dsi nt hei
rmembercount ri
es.Thei
r
appr
oachest othi
sgoalarecomplementary
,withtheIMFf ocusingonmacr oeconomicissues
andtheWorldBankconcentr
ati
ngonlong-t
erm economicdevelopmentandpov er
tyreducti
on.
Whatar
ethepur
posesoft
heBr
ett
onWoodsI
nst
it
uti
ons?

The I
nternati
onalMonet ar
yFund and the 
World Bank wer
ebot h created atan i
nt ernat
ional
conferenceconvenedinBrett
onWoods, NewHampshi re,Uni
tedStatesinJuly1944.Thegoal of
theconf er
encewast oestabl
ishaframewor kforeconomiccooperat i
onanddev el
opmentt hat
wouldl eadtoamor establ
eandprosperousglobaleconomy .Whi
let hi
sgoalremainscent ralto
bothinstit
uti
ons,t
heirworkisconstant
lyevolv
inginresponsetoneweconomi cdev elopment s
andchal l
enges.

TheI MF’smandat e. 

TheI MFpr omotesi nt
ernationalmonetarycooper ati
onandpr ovi
des 
poli
cy
advice and capaci
ty development suppor t 
to hel p countr
ies bui ld and mai ntai
n strong
economi es.TheI MFal so makesl oansandhel pscountri
esdesi gnpol i
cyprogr amst osolve
balance ofpay ment
s pr oblems when suf f
icientf i
nanci
ng on af fordableter ms cannotbe
obtainedt omeetnetinternationalpayment s.IMFl oansareshortandmedi um term andfunded
mai nl
ybyt hepoolofquot acont ri
butionst hatitsmember spr ovide.I MFst affarepr i
maril
y
economi stswi t
hwideexper i
encei nmacr oeconomi candf i
nanci
al policies.

TheWor l
dBank’ smandate. TheWor ldBankpr omoteslong-ter
m economi cdev elopmentand
povertyreducti
onbypr ov
idingt echnicalandfi
nancialsupporttohelpcount r
iesref orm cert
ain
sectorsorimpl ementspecificpr oject
s—suchasbui l
dingschoolsandheal thcenter s,provi
ding
waterandel ectri
cit
y,fi
ght
ingdi sease, andpr
otecti
ngtheenv i
ronment .Worl
dBankassi st
anceis
generall
ylongt erm andisf undedbot hbymembercount rycont r
ibuti
onsandt hroughbond
i
ssuance.Wor l
dBankst affareof tenspecial
i
stsonpar t
icul
arissues,sect
ors,ortechni ques.

Fr
amewor
kforcooper
ati
on

TheIMFandWor ldBankcollaborater egular

lyandatmanyl ev
elstoassistmembercountr
ies
andworktoget
heronseveralini
ti
atives.In1989,thetermsfort
heircooperat
ionwer
esetoutin
a 
concor
dat 
toensur
eeffecti
vecollabor at
ioninareasofshar
edresponsi
bil
ity
.

Hi
gh-l
evelcoordi
nat
ion.Duringt he AnnualMeet i
ngs ofthe 
BoardsofGov ernorsoftheIMF and
t
heWor ldBank,Gov ernor
sconsul tandpr esenttheircount
ri
es’viewsoncur r
entissuesin
i
nter
nati
onaleconomi cs and f inance.The Boar ds ofGov ernors decide how to address
i
nter
nati
onaleconomicandf inancialissuesandsetpr i
ori
ti
esfortheorganizat
ions.

AgroupofIMFandWor l
dBankGov ernor
salsomeetaspartofthe 
Devel
opmentCommi ttee,
whosemeeti
ngscoinci
dewiththeSpri
ngandAnnualMeeti
ngsoftheIMFandt heWorl
dBank.
Thi
scommitteewasestabli
shedin1974t oadvi
set
hetwoinst
it
uti
onsoncrit
icaldevel
opment
i
ssuesandont hefi
nanci
alresour
cesr equi
redtopr
omoteeconomi cdevelopmentinlow-
i
ncomecountri
es.

Managementconsul
tat
ion.
 TheManagingDirectoroftheIMFandt hePresidentoftheWor l
d
Bank meetregul
arl
yto consul ton maj
ori ssues.They al
so i
ssue j
ointst at
ements and
occasi
onal
l
ywrit
ejoi
ntarti
cles,
andhavevi
sit
edsev er
alregi
onsandcount
riestogether
.

Staffcoll
abor
ation. 
IMFandBankst af f
scol l
aboratecl osel
yoncount ryassi
stanceandpoli
cy
i
ssuest hatarer el
evantforbothi nsti
tut
ions.The t wo insti
tutionsoft
en conductcountry
missionsinpar al
lelandst af
fparti
cipateineachot her’
smi ssions.IMFassessment sofa
country’
sgeneraleconomi csi
tuat
ionandpol i
ciesprov i
deinputtot heBank’
sassessmentsof
potenti
aldevel
opmentpr oj
ect
sorr eforms.Si milar
ly,Bankadv iceonst r
uctur
alandsectoral
refor
msi sconsideredbyt heIMFi nitspolicyadv i
ce.Thest affsoft hetwoinsti
tut
ionsal
so
cooper
ateont
he 
condi
ti
onal
i
ty 
i
nvol
vedi
nthei
rrespect
ivel
endi
ngpr
ogr
ams.

The2007ext ernalrevi
ewofBank- Fundcoll
aborati
onledtoa JointManagementAct ionPlan 
on
Wor l
dBank- I
MFCol l
aborati
on( JMAP)t of urt
herenhancet hewayt hetwoi nst
it
utionswork
together.Undert he plan,Fund and Bankcount ryteams discuss theircount r
y-l
evelwork
programs,whichi denti
fymacr oeconomi candsect orali
ssues,thedi vi
sionofl abor,andthe
work needed i nt he coming y ear.A revi
ew ofBank- Fund Collaboration 
underscored t
he
i
mpor tanceofthesejointcountr
yt eam consul
tati
onsinenhancingcollaborati
on.

Reduci
ngdebtbur dens.
 TheI MFandWor l
dBankhav ealsoworkedtogethertoreducethe
ext
ernaldebtburdensofthemostheavil
yindebt
edpoorcountr
iesunderthe Heav
il
y 
Indebt
ed
PoorCountri
es(HIPC)I
nit
iat
iveandt
he 
Multi
l
ater
alDebtRel
i
efIni
ti
ati
ve(MDRI).

Theyconti
nuetohel plow-i
ncomecountr
iesachievethei
rdevel
opmentgoalswithoutcr
eati
ng
fut
uredebtproblems.IMFandBankst af
fjointl
ypreparecount
rydebtsustai
nabil
it
yanaly
ses
undert
he DebtSustai
nabil
i
tyFramewor
k(DSF) devel
opedbythetwoinst
it
uti
ons.

Reducingpovert
y. 
In1999,theIMFandtheWor l
dBankl aunchedt he PovertyReduction St
rategy
Paper(PRSP) 
approachasakeycomponenti ntheprocessl eadi
ngt odebtr eli
efundert heHI PC
I
niti
ativ
eandani mportantanchorin 
concessionallendingbyt heFund  andt heBank.Whi le
PRSPscont i
nuet ounderpi
nt heHIPCInit
iativ
e,theWor l
dBankandt heI MFadopt edinJul y
2014andJul y2015,respectiv
ely
,new appr oachest o countryengagementt hatno l onger
requi
resPRSPs.TheI MFst r
eamli
nedit
sr equirementfor povert
yr eduction 
document at
ion for
programssupportedundert he 
Ext
endedCr edi
tFacili
ty(ECF)  
orthe PolicySuppor tInstr
ument
(PSI)
.

Sett
ingt hest agef ort he2030dev elopmentagenda.  Between2004and2015t heI MFandt he
Bankj ointlypubl ishedt heannual  
GlobalMoni tori
ngRepor t(GMR) ,
 whichassessedpr ogress
towardsmeet ingt he Millenni
um Dev elopmentGoal s( MDGs) .
 In2015,wi t
ht hereplacementof
theMDGswi tht he  SustainableDev el
opmentGoal s( SDGs) underthe2030Gl obalDev elopment
Agenda,t heIMFand t heBankhav eact iv
elyengaged i nt heglobalef fortto suppor tthe
DevelopmentAgenda.Eachi nsti
tuti
onhascommi tt
edt onewi ni
ti
ati
ves,withinthei
rr espect i
ve
remits,tosuppor tmembercount ri
esinr eachingt heirSDGs. Theyareal sowor ki
ngt oget herto
bett
erassi stthej oi ntmember shi
p,includingthroughenhancedsuppor tof 
strongertaxsy stems
i
ndev elopingcount ri
es,andsuppor toft heG- 20 Compactwi thAf r
ica—incol l
aborationwi th
the 
Af r
icanDev elopmentBank—t opr omot eprivateinvestmentinAf r
ica.

Assessingf i
nanci
alstabi
li
ty.
 TheIMFandt heWor ldBankareal
sowor ki
ngt ogethertomake
fi
nancial sectors in member count ri
es resil
i
ent and wel lr egulat
ed. The  Fi
nanci
al
Sector
 AssessmentPr ogram (FSAP) wasintr
oduced i
n 1999 t
oi dentif
yt hestr engt
hsand
vul
nerabil
i
tiesofacount r
y'
sfinanci
alsyst
em andrecommendappropri
atepolicyresponses.

Speci
alEconomi
cZone(
SEZ)
TheSpeci
alEconomi cZone(SEZ)pol i
cyinIndiafi
rstcameintoinceptiononApr i
l1,
2000.The
pri
meobject
ivewast oenhanceforeigninvestmentandprovideani nternati
onal
l
ycompetit
ive
andhassl
efreeenvir
onmentforexpor ts.Theideawast opr
omot eexpor t
sfrom t
hecountr
yand
real
i
singt
heneedt hatl
evelpl
ayingfiel
dmustbemadeav ai
labletot hedomest i
center
pri
ses
andmanufactur
erstobecompet it
ivegloball
y. 

Alegisl
ati
onhasbeenpassedper mitti
ngSEZst ooff
ertaxbreakstoforei
gninvestors.Overhal
f
adecadehaspassedsi nceitsincepti
on,buttheSEZBillhascert
aindrawbacksduet othe
omissionofkeyprovisi
onsthatwoul dhaverelaxedr
igi
dlabourrul
es.ThishaslessenedIndia'
s
chanceofemul at
ingthesuccessoft heChineseSEZmodel ,t
hroughforei
gndirectinvest
ment
(FDI
)inexport-
ori
entedmanuf actur
ing.

Thepol i
cyr el
atingt oSEZs, sofarcontainedi
nthef or
eigntr
adepol i
cy,wasorigi
nal
ly
i
mpl ement edthr oughpi ecemealandadhocamendment stodiff
erentlaws,
besidesexecut
ive
orders.Inordert oav oidthesepit
fall
sandt ogivealong-t
erm andstablepol
icyfr
amewor kwit
h
mi ni
mum r egulation,theSEZAct ,'
05,wasenact ed.TheActprovidestheumbrell
alegal
framewor k,cover i
ngal li
mpor t
antlegalandregulat
oryaspectsofSEZdev el
opmentaswel las
forunitsoperatingi nSEZs.  

Whati
saSpeci
alEconomi
cZone(
SEZ)
?

SpecialEconomicZone( SEZ)isaspecif
icall
ydel
ineat
eddut y-f
reeenclaveandshallbedeemed
tobef orei
gnter
ri
tor
yfort hepurposesoftradeoperat
ionsanddut i
esandt ari
ffs.I
norderwords,
SEZisageogr aphi
calregionthathaseconomi cl
awsdi f
ferentfr
om acount r
y'stypi
cal
economi clawsUsual
lythegoal i
stoincreasefor
eigninvestments.SEZshav ebeenestabl
ished
i
nsev eralcount
ri
es,i
ncludingChina,I
ndi
a, Jor
dan,Pol
and, Kazakhstan,Phi
li
ppinesandRussia.
NorthKor eahasal
soat t
empt edthi
stoadegr ee 

Wher
ear
eSEZsl
ocat
edi
nIndi
a? 

Atpresentt
hereareeightfuncti
onalSEZslocat
edatSantaCruz(
Mahar ashtr
a),Cochi
n( Keral
a),
KandlaandSurat(Guj
arat)
, Chennai(
TamilNadu),
Visakhapat
nam (
Andhr aPradesh)
,Falta
(WestBengal)andNoida(Ut t
arPradesh)i
nIndi
a.Furt
heranSEZinIndore(Madhy aPradesh)is
nowr eadyf
oroperati
on. 

I
naddi ti
on18appr oval
shav ebeengivenforsetti
ngupofSEZsatPosi tr
a(Gujarat
),Navi
Mumbai andKopata(Mahar asht
ra),
Nanguner i(
Tami l
Nadu) ,
KulpiandSaltLake(WestBengal)
,
ParadeepandGopal pur(Ori
ssa),Bhadohi,Kanpur,MoradabadandGr eat
erNoi da(UP),
Vishakhapatnam andKakinada(AndhraPr adesh)
, Val
l
arpadam/ Put
huvypeen( Ker
ala)
,Hassan
(Karnat
aka),Jai
purandJodhpur(Raj asthan)ont hebasisofproposal
sreceivedfrom t
hestat
e
governments. 

WhocansetupSEZs?Canf
orei
gncompani
essetupSEZs?

Anypr
ivat
e/publ
i
c/j
ointsect
ororst
ategov
ernmentori
tsagenci
escansetupanSEZ.
 

Yes,
afor
eignagencycansetupSEZsi
nIndi
a. 
Whati
sther
oleofst
ategov
ernment
sinest
abl
i
shi
ngSEZs?

Stategovernmentswillhaveav er
yi mport
antrol
et opl
ayintheestabli
shmentofSEZs.
Representati
veofthestategovernment,whoi samemberoft heinter-
mini
steri
alcommi t
teeon
pri
vateSEZ, i
sconsultedwhil
econsi der
ingtheproposal
.Beforer
ecommendi nganypr oposal
s
tothemi ni
stryofcommer ceandi ndust
ry(depart
mentofcommer ce) ,
thest
atesmustsat i
sfy
themselvesthattheyareinapositiontosupplybasici
nputsli
kewat er
,el
ect
rici
ty,et
c. 
AreSEZ'scont r
oll
edbyt hegovernment?

I
nallSEZsthestatut
oryfuncti
onsarecontr
oll
edbyt hegover
nment.Gov
ernmentalsocont
rol
s
t
heoperati
onandmai ntenancefuncti
oninthesevencentr
algov
ernmentcont
rol
ledSEZs.The
r
estoftheoperati
onsandmai ntenancear
eprivat
ised.
 

Ar
eSEZsexemptf
rom l
abourl
aws?

Normallabourlawsar
eapplicabl
etoSEZs, whichareenf
orcedbytherespecti
vestate
gover
nment s.Thest
ategovernmentshavebeenr equest
edtosimpli
fytheprocedures/r
etur
ns
andfori
ntroducti
onofasinglewindowclearancemechanism bydel
egati
ngappr opri
atepower
s
todevel
opmentcommi ssi
oner sofSEZs.

Theperf
ormancesoftheSEZunitsar
emonit
oredbyaunitappr
ovalcommi t
teeconsi
sti
ngof
devel
opmentcommissioner
,cust
om andr
epresent
ati
veofst
ategov
er nmentonanannualbasi
s.

Whatar
ethespeci
alf
eat
uresf
orbusi
nessuni
tst
hatcomet
othezone?

Businessunit
sthatsetupestabli
shment
si nanSEZwouldbeenti
tl
edforapackageof
i
ncentivesandasimplif
iedoperati
ngenv
ironment
.Besi
des,nol
icensei
srequi
redfori
mpor
ts,
i
ncludingsecondhandmachi neri
es.

HowdoSEZshel
pacount
ry'
seconomy
? 

SEZspl ayakeyr oleinrapi

deconomi cdev el
opmentofacount ry.I
nt heear l
y1990s, i
thel
ped
Chinaandt herewer ehopes( per
hapsnev erver
yhighones, admi tt
edly)thattheest abli
shment
i
nI ndi
aofsi mil
arexpor t
-pr
ocessi ngzonescoul doffersi
mi l
arbenef i
ts--provided, however
,that
thezonesof fer
edat tr
acti
veenoughconcessi ons. 
Tradit
ionall
ythebiggestdet errentstoforei
gn
i
nv est
menti nIndiahavebeenhi ght ari
ff
sandt axes,redtapeandst r
ictlabourlaws.Todat e,
theserestr
icti
onshav eensur edthatIndiahasbeenunabl et ocompet ewi thChina'smassi v
ely
successfulli
ght-
industri
alexportmachi ne.Indi
a'sgoodsexpor tsin2004wer eanest i
mated$68
bncompar edwi th$594bnf orChina,andt hestockofinwar dFDI,at$42bn, wasl essthana
tenthofChina's$544bn.  

For
eignDi
rectI
nvest
ment
Forei
gndi rectinvest
ment 
iswhenani ndiv
idualorbusinessowns10per centormoreofa
for
eign company .Ifan invest
orowns l ess than 10 percent,the I
nter
nati
onalMonet ar
y
Fund defi
nesi tas 
par
tofhisorherstockpor tf
oli
o.
A10per cent 
ownershi
pdoesn'tgivethei nvest
oracontroll
i
ngi nter
est.Itdoesall
owinfl
uence
overthecompany '
smanagement ,operati
ons,andpolici
es.Fort hi
sreason,government
st r
ack
whoi nvestsinthei
rcount
ry'
sbusinesses.
 
In2016,gl obalFDIwas$1. 75t rilli
on,accor dingt ot he  Uni tedNat ions.  Ithadf all
en2per cent
from 2015' sr ecor dof$1. 76t rillion.  
Impor t
anceofFDI
For eign di recti nv est menti s cr i
t i
calf or  dev eloping  and  emer ging mar ket  count ries.Thei r
compani esneedt hemul tinat ional s' fundi ngandexper tiset oexpandt hei ri nternat i
onalsal es.
Thei rcount riesneedpr ivat ei nv est menti ni nfrast ructur e, ener gy ,andwat ert oincr easej obsand
wages.The  UN  repor t war nedt hat  cl imat echange  woul dhi tthem t hehar dest . 
 
In2016,dev elopi ngcount ries  r ecei ved37per centoft ot algl obalFDI .Theyhad43per centi n
2015.Thedownt ur nwasduet osl owergr owt hi nt hedev el opedwor l
d.   
TheUni tedSt ates
economyonl ygr ew 1. 5per cent ,compar edt o2. 9per centi n  2015.TheUN f or ecastt hat  
an
i
mpr ov ingeconomyi n2017wi ll i
ncr easewor ldFDIt o$1. 8t ri
ll
ion.  
Thedev elopedeconomi es, suchast he  Eur opeanUni on  andt heUni tedSt ates, alsoneedFDI .
Thei rcompani esdoi t f
ordi f fer entr easons.Mostoft hesecount ries' inv est menti sv i
a  mer ger s
andacqui sitions  bet weenmat ur ecompani es.Thesegl obalcor por ations'i nv estment swer ef or
eitherr est ruct ur i
ngorr ef ocusi ngoncor ebusi nesses.
Adv ant ages
For eigndi recti nv est mentbenef itst hegl obal economy ,aswel l asi nv estor sandr ecipient s.
Capi tal goest ot hebusi nesseswi tht hebestgr owt hpr ospect s,any wher ei nt hewor l
d.That 's
becausei nv est or sseekt hebestr et ur nwi tht hel eastr isk.Thi s  prof itmot ive iscol or -bl
indand
doesn' tcar eaboutr eligionorpol i
tics.
Thatgi v eswel l-runbusi nesses,r egar dlessofr ace,col ororcr eed,a  compet iti
v eadv ant age.I t
reducest heef fect sofpol itics,cr ony i
sm,andbr ibery .Asar esul t,thesmar testmoneyr ewar ds
thebestbusi nessesal lov ert hewor ld.Thei rgoodsandser v i
cesgot omar ketf astert han
wi t
houtunr est rict edFDI .
Indiv iduali nv est or sr ecei vet heext r
abenef i
tsofl ower edr isk.FDI  
di ver sifi
es  theirhol dings
out sideofaspeci ficcount ry,i ndust ryorpol iti
calsy st em.Di ver sifi
cat ional way si ncreases
retur nwi thouti ncr easi ngr isk.
Reci pi entbusi nessesr ecei v e" bestpr act ices"management ,account i
ngorl egalgui dancef rom
theiri nv est or s.Theycani ncor por at et hel at estt echnol ogy ,oper at i
onalpr act ices,andf i
nanci ng
tool s.Byadopt ingt hesepr act ices,t heyenhancet hei rempl oy ees'l ifest y l
es.Thatr aisest he
standar dofl ivingf ormor epeopl ei nt her eci pientcount ry.FDIr ewar dst hebestcompani esi n
anycount ry.I tr educest hei nf l
uenceofl ocal gov ernment sov ert hem.
Reci pi entcount riesseet hei r st andar dofl iving  r
ise.Ast her eci pi entcompanybenef i
tsf rom t he
i
nv est ment ,i tcanpayhi ghert axes.Unf or tunat ely,somenat i
onsof fsett hisbenef itbyof f
er i
ng
taxi ncent i
v est oat tr
actFDI .
Anot heradv ant ageofFDIi st hati tof fset st he  volatility creat edby" hotmoney .
"That '
swhen
shor t-t
er ml ender sand  cur rencyt r ader s cr eat ean  assetbubbl e.Theyi nv estl ot sofmoneyal lat
once, t
hensel l thei ri nv est ment sj ustasf ast .
Thatcancr eat ea  boom- bustcy cl e thatr uinseconomi esandendspol iti
calr egi mes.For eign
directi nv est mentt akesl ongert osetupandhasamor eper manentf ootpr inti nacount ry
. 
Disadv ant ages
Count ri
esshoul dnotal lowf or ei gnowner shi pofcompani esi nst rat egical lyi mpor tanti ndust ries.
Thatcoul dl owert he  compar at iv eadv ant age  oft henat ion,  accor dingt oanI MFr epor t.
Second,  for eigni nv est or smi ghtst r ipt hebusi nessofi tsv aluewi thoutaddi ngany .Theycoul d
sellunpr of itabl epor ti
onsoft hecompanyt ol ocal ,lesssophi sticat edi nv est ors.Theycanuse
thecompany '
scol l
at er alt ogetl ow- cost , l
ocall oans.I nst eadofr einv est ingi t,theyl endt he
fundsbackt ot he  par entcompany .
 
FreeTr adeAgr eement sandFDI
Tradeagr eement s  areapower fulwayf orcount riest oencour agemor eFDI .Agr eatexampl eof
thisi s NAFTA,t hewor ld'sl ar gest  freet radeagr eement .Iti ncr easedFDIbet weent heUni ted
St
ates,
 
Canada,
and 
Mexi
co 
to$452 
bil
l
ionby2012.Thatwasj
ustoneof
 NAFTA'
sadv
ant
ages.