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Panel Discussion: Demonetization

Date: 21st November, 2016

Panelists: Dr.AnirbanDasgupta, FES, Dr.Prabhash Ranjan, FLS, Dr. Ravi Kumar, FSS and Dr.SoumyaDatta, FES

Contributed by: Vasuprada Tatavarty

The objective of this panel discussion was to bring different perspectives from economics, law and sociology on the Indian government’s decision to demonetize Rs. 500 and Rs. 1,000 currency notes at the same platform. The event generated more than anticipated interest even though it was organised at a short notice with exams looming just around the corner.

Dr.Soumya Datta was the first speaker from the panel presenting the current macroeconomic scenario. He emphasized on the various aspects concerning implementation of this policy. The first aspect of his concern was regarding the disruption of economic transactions disproportionate effect on the agricultural and informal economy. Even though there is no black money in agriculture (Agricultural income is tax exempted in India), it will be one of the hardest hit sectors with the sowing season just about to begin. Dr. Datta recognised the difficulty in segregating cash into white or black money. Even if people just have two options, that is, to either deposit money in the bank or forgo it as a loss, the benefits are not so obvious to begin with. If the money is deposited in the bank, then it will be appropriately taxed but if it is foregone then the liability of the central bank cannot be written off unless the notes are destroyed. Therefore, the government cannot use the money for social expenditure as is being suggested. The speaker concluded with the prediction that the policy shall prove to be a disaster since the costs would far outweigh the benefits. Also, the credibility of the financial system would be adversely affected.

Dr.Prabash Ranjan started with some interesting figures to better assess the current exercise. About 14 trillion rupees was de-legalized with estimates suggesting that about 10-25% of it is in the form of black money hoarded in cash. This translates to about 3.5 trillion rupees. This 3.5 trillion is a miniscule 6-7% of the total black economy because a lot of black economy exists in the form of gold, benami property etc. This amount maybe insignificant in comparison to the total black economy but not in absolute terms since it amounts to 2.3 to 5.2 % of India’s GDP. The speaker posed the question that if 3.5 trillion rupees could be wiped out of the system, then why was this policy not worthwhile? The speaker believed that 10.5 trillion rupees will be tendered for exchange at banks and that which is not tendered can be presumed as black money in cash. This shall reduce the net liability of the central bank post December. It would reflect on the asset side of RBI’s balance sheet and any windfall profits that the central bank makes, will get transferred to the central government which would in turn give it more fiscal space. But the speaker noted that the grey area here was that the law on this front is ambiguous.

Though the speaker agreed that costs of transition were high coupled with a frequent change in govt. notifications, he believed that a fair assessment could be made only after December by considering the amount that would not been tendered back. The legal arguments of this policy are summarized as follows:

  1. What is the legal basis for the central govt to issue a notification and declare 86% of currency in circulation will no longer be legal tender?

The legal basis is provided by section 26(2) of the RBI act which states that the central government may declare with effect from a specified date, any series of bank notes of any denomination to no longer be legal tender. PILs have been filed in the Supreme Court over this legal issue stating that this section only gave the government a limited right to declare that a particular series of bank notes of a particular denomination shall cease to be legal tender. Therefore, it did not give the state the right to de-legalize one whole denomination. The government notification stated that bank notes of existing series (that is, the Mahatma Gandhi series) shall cease to be legal tender. Therefore, the speaker concluded that the govt’s action is consistent with the act.

  1. Does imposing restrictions on withdrawals have a legal basis?

Under normal circumstances, there was no basis for the government to declare how much a person can withdraw from his/her account but in the current situation of a cash crunch, this can only be dealt with by placing restrictions. Otherwise the very purpose of the policy would be defeated. Therefore, the speaker found it to be a reasonable restriction.

  1. Demonetized currency that has been expropriated by the government and this amounted to the violation of a person’s right to property.

Right to property is a constitutional right but anyone can be deprived of their property but only through an authority by law. Presuming that the government notification was law, even if there is an expropriation of property there was a procedure to get your notes exchanged. According to the speaker, the right of property was not violated. But that said for a person with considerable amount of cash holdings and no bank account, the government has effectively deprived such a person’s right to property. The courts would have to decide about such cases later.

Dr. Ravi Kumar began by discussing the very definition of black money. Since money accumulated by casual workers, housewives and different type of workers is being deposited in banks currently, a certain dis-aggregation according to the source should be made. The definition of black money, that on which tax has not been paid, depends on the process and the person because when a person with black money pays it to a person paying taxes, it is automatically converted to white money. Therefore, any estimates of black money are dependent on presumption. Bringing in the sociological perspective, the speaker gave the example of a maid who has saved up five lakhs over the years. The patriarchal nature of society does not allow her to open a bank account, since that will imply a disclosure to her husband who will choose to spend the money on alcohol. The speaker expressed concern whether the money the government will gain through this exercise will even be spent on health and education or any worthwhile social expenditure. Further, the speaker questioned the need of a policy that treats accumulation by housewives, casual workers, and that by corporates on par with each other. Drawing a parallel with the operation shock and awe conducted at the beginning of the Iraq war, the speaker felt that the purpose of this policy seems to be similar in nature. The speaker concluded by stating that like the Iraq war, this operation is also likely to backfire and called for a transparent system in which black money cannot be created in the first place.

Dr.Anirban Dasgupta, the last speaker on the panel, summarized the different perspectives presented by the speakers and drew a parallel between, the way the nation is being run in recent times and the patriarchal nature of decision making within a household. Next, he drew attention to the crowds standing in lines in an urban area in Delhi, visibly happy about the entire operation thinking that the head of the family is doing this for the greater good of the nation. The speaker ended the discussion by raising a pertinent question, that is, through what processes does this govt manage to retain the trust of the people and when will a moral outrage engulf this country that will see an end of this complacency?

This panel discussion was followed by two question-answer rounds and ended with a lively discussion which exceeded the allotted time by a wide margin.

 

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Politics, Diplomacy and Trade Relations

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Article Contributed by: Vidhi Garg, M.A. Development Economics, Second Year

In the wake of recent terrorist attack in Uri, the Modi government has taken certain bold steps like the surgical operation to damage terror related infrastructure in Pakistan occupied Kashmir. Further, the PM’s statement “blood and water can’t flow together” hinted at a review of the Indus Water Treaty with a threat to stop or reduce water flows to Pakistan. Also, a call to review the MFN status accorded by India unilaterally to Pakistan in 1996 has been made.

Trade relations between two countries have always been held hostage by political relations, often leading to a curtailment of trade. Thus, the call to review the MFN status accorded to Pakistan comes as no surprise. Granting MFN status to a county is a guarantee that their exporters will not pay tariffs higher than the nations that pay the lowest tariff. So the situation is that while Pakistani goods are entering Indian markets at minimum possible tariff rates but Indian goods may be paying a higher tariff than some other third country while entering Pakistani markets.

On the face of it, it may sound like a good idea to withdraw the MFN treatment which is yet to be reciprocated. Though the approach of Pakistan on this issue has been gradual, it would not make economic sense for India to withdraw the MFN status already granted to Pakistan. It has to be noted that Pakistan has already moved from specifying a positive list (i.e. listing products or services on which the country agrees to lower tariffs) which allowed only 1946 out of 5203 goods (as per HS code at six-digit level) to be imported from India to specifying a negative list (i.e. listing products or services on which trade barriers will be maintained) in November, 2011. The current negative list that bans 1209 products would also be hopefully phased out over time. Under a similar negative list, India also restricts import of 428 of 5203 items from Pakistan. But this is the same set of commodities on which India restricts imports from all countries of the world.

Next, if we look at trade figures, India has been consistently maintaining a trade surplus vis-a-vis Pakistan. India’s exports to Pakistan have been more than USD 2 billion while imports have been less than USD 0.5 billion. In this scenario, if we cancel the MFN status to Pakistan and in retaliation Pakistan gives up its negative list approach, the increased taxes will increase the prices of Indian products in Pakistani markets hence hurting the interests of Pakistani consumers and producers using Indian inputs to manufacture export goods. But the simple law of demand and supply states that increased prices tend to reduce the demand which will have adverse effects on both Indian exporters’ and India’s balance of payments (though relatively small as share of exports to Pakistan in India’s total exports are 0.74% according to UNCTAD WITS database). The worst hit would be top traded items.

Table 1: Top Items of India’s Exports to Pakistan (2015-16)

HS Code Brief Product Description Value in million USD
520100 Cotton 647.1
390210 Polypropylene 84.02
71320 Chickpeas 62.62
540710 Woven Fabrics 45.81
520527 Yarn 42.18
170199 Sugar 41.12
70200 Tomatoes 38.63

(Source: Directorate General of Foreign Trade)

Table 2: Top Items of India’s Import from Pakistan (2015-16)

HS Code Brief Product Description Value in million USD
271012 Light oils and preparations 90.62
80410 Dates 87.98
252329 Other petroleum oils 48.61
271019 Cotton 25.77
520100 Petroleum oils 21.59
270900 Gypsum 20.72
252010 Aluminum ores 18.14

(Source: Directorate General of Foreign Trade)

Often formal channels of trade are being circumvented in this region, making way for significant informal trade between two countries which is estimated to be almost double the value of formal trade.
So an adverse political outcome will not lead a situation of no trade but rather trade will continue to happen via informal routes. Informal routes include trading through third countries like Dubai, Iran and Afghanistan using land, sea and airways or across LOC (Uri-Salamabad and Poonch-Rawalkot). According to a survey conducted by ICRIER[1], the major reasons for informal trade include a long negative list by Pakistan, high duties, inadequate payment mechanism in formal route, difficulty in meeting standards, ease of sending goods via third country, harassment by custom officials, etc. According to the survey conducted in India and Dubai, informal trade between India and Pakistan is estimated to be around USD 4 billion.
The survey also quotes that comparison of transaction costs between the direct Delhi-Lahore route and indirect and informal Delhi-Mumbai-Dubai-Karachi-Lahore route shows that the indirect route is 11 times longer than the direct route; 4 times more expensive than the direct route; but is almost 3 times more efficient. This informal trade via informal route not only causes a loss of revenue to governments on both sides, but also leads to trade of sub-standard products, which is of grave concern when it involves products like drugs and pharmaceuticals.
So if formal routes of trade are discouraged by political events, it will provide a further impetus for trade to happen via informal routes. It is next to impossible to wipe out informal trade in the presence of historical ties between people on both sides of the border as well as weaker institutions to regulate the implementation. Thus it will simply be inefficient to formally restrict trade between the two countries and hence bad economics.

Reference:

[1] Nisha Taneja and Samridhi Bimal (2016), “India’s Informal Trade with Pakistan”, Indian Council of Research on International Economic Relations, Working Paper 327.

Disclaimer: The views expressed in this article are that of the author and do not reflect the view of the Faculty of Economics, South Asian University.

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DSG Movie Screening 1: Inequality for all

 

Director: Jacob Kornbluth

Stars: Robert Reich, Mary Tyler Moore, Lily Tomlin

Premiere: 19th January 2013, Sundance Film Festival, USA

Screening date: 16th September 2016

Venue: FSI Hall, South Asian University

 Article Contributed by: Chaitanya Talreja

“Inequality for all” is a narrative depicting widening material inequality in the American society since 1970s while explaining the functioning of modern capitalism. Inequality has been a significant issue of debate in social sciences from various socio-economic perspectives. This movie wraps in itself theoretical concepts from sociology and economics, politically associated with the leftward oriented philosophy in the American context. Robert Reich[1] manages to find wit and humor amidst the complexity of this subject. A message that the movie effectively conveys is that Inequality per seis not problematic, but it is the widening income gap among the social groups in the American society which is of concern. To explain this, it uses the apparatus of the State, market and class. The state and the market are the two most important institutions in a capitalist society within which the capitalists (owners of the means of production) and the working class operate. While these are serious theoretical concepts, the movie does a decent job of bridging the gap between abstraction and “reality” through recent and archival footages, interviews of various people belonging to different strata of the society and anecdotes from Reich’s own personal and professional life experiences.

The post second world war period until 1970s is understood as the “Golden Age of Capitalism” for America in particular. Their society witnessed decreasing rates of inequality. But this trend reversed during the last 30 years. This according to the movie has been because of rising income gap between upper income and middle-lower income groups and the shrinking size of the “middle class” (population lying between the interval of median income minus 50% of the median income to median income plus 50% of the median income). The middle class is associated with the working class that works for capitalists. But, the middle class is also an important consumer of the commodities sold by the capitalists. A direct consequence of shrinking size of middle class could be shrinking demand for capitalist commodities as the marginal propensity to consume out of income for this class is usually higher than the upper income groups. This has been explained using the concepts of virtuous cycle and vicious cycle. In a virtuous circle, when companies hire more, workers can buy more, productivity increases and as a result higher profits generate greater tax revenues which could be spent on enhancing public welfare, improving the quality of workforce, economy expands and again companies expand and so on. In a vicious circle, when companies downsize to preserve profits, unemployment rises, workers buy less, profitability is negatively affected, fall in tax revenues affect welfare spending which decelerates the economy and so on. The pre-1970s period here represented an economy in a virtuous cycle while the subsequent period a vicious one. This happened because of a few inter-related events. In the post 1970s period the American companies started facing stiff competition from the Japanese companies. As a response they substituted their relatively expensive labour costs by disintegrating their production chains. They outsourced the produce from regions inhabiting cheaper labour resources across the globe. The state forms the rules within which the market operates and this period also saw a shift in the regulatory behavior of the state. The trade unions were clamped down and the workers protests in America were suppressed. As a consequence, it was difficult for workers to maintain their household income and the period saw greater number of females entering the labour force to maintain the household income along with increased personal borrowing.

The relaxed regulatory environment led to greater “financialisation”, which opened avenues for the upper income groups to speculate and earn financial profits and borrowing became an important component in middle class consumption. These features of the post 1970s period became important contributors to the 2007 economic crisis. This in brief what the entire movie was about. While the experience of the movie is something personal and here it was an endeavour to bring out the best words can!

Post Movie Discussion:

The movie screening was open to all the departments of the University and we were glad to see students from International Relations and Sociology. There are two important points raised in the discussion which are worth mentioning here. One of the sociology students raised an issue that the movie though used the Marxists concepts of class and crisis in a capitalist economy it abstained acknowledging Marxian association. It supported capitalism as a system and only suggested fixes within a capitalist set-up. Although, this is a philosophical position that the movie makers chose which we do not have  control over, but was an important point from that student’s perspective. The second key point in the discussion raised by a student was that the movie was politically biased as it selectively showed people from certain political affiliations in American politics and abstaining from speaking about the others. The rest of the discussion briefly involved technicalities associated with taxation (regressive and progressive taxes) and the context of inequality and middle class in developing countries.

[1]Professor of Public Policy at the University of California at Berkeley and former Secretary of labor in the Clinton Administration

Movie Courtesy: Sahil Mehra

Development Study Group Meeting 1: Muzaffarpur: A Personal Experience

Speaker: Pratyoosh Kashyap, M.A. Development Economics

Date: 9th September, 2016

Contributed by: Vasuprada and Chaitanya

The first DSG meeting started off in an engaging manner with one of our M.A. second year students, Pratyoosh sharing his personal experiences from a three week-long visit to a few villages in Muzaffarpur, an extremely impoverished district in North Bihar.

The theme underlying his talk was as to understand the nuances of how socio-economic conditions affect implementation of public schemes targeting the poor. ‘Information gaps’ were found to be a major public policy challenge in this region. The villages covered were described as “isolated islands” with no electricity, access to toilets, modern education (dysfunctional government schools). Since 95 per cent of people in the three panchayats surveyed by the speaker were found to be illiterate, a direct consequence was a complete lack of awareness about Government Schemes created for their welfare.  Since the Mahatma Gandhi National Rural Employment Guarantee Act (MNREGA) is a national scheme enacted to guarantee employment to the poorest of the poor, thus, its functioning happened to be of significance in this context. The speaker visited an MNREGA worksite where a pond was being constructed. It was observed that the worksites were dominated by women and small children.The Act guarantees certain basic work conditions such as shelter from the rain and sun and crèche for infants, which were absent. It was noted that a rainy day meant no work could be accomplished and therefore, no income. Thus, the actual working days worked out to be less than those guaranteed.

Corruption was found to be rampant and embedded within the system. The Rozgar Sewak, the person who monitors the MNREGA worksite would only come post-lunch and take attendance and leave. This led to internal quarrels among the workers as to the division of tasks. Due to this coordination failure, the chances were high that the workers would be ‘working’ on the same project at the same site next year too. Another form of corruption was observed with contractors colluding with officials and withdrawing MNREGA funds. That is, the contractors got the work done and workers on the MNREGA roll were denied employment with official records stating otherwise. This example portrays the lack of awareness partly due to their illiteracy and other conditions of exploitation.

The extreme conditions of poverty inspired a general lack of hope among the local populace. This led to social problems of drunkenness and no effective contribution to household income. Further, space was created for newer forces such as SamajParivartan Shakti Sangathan(SPSS) founded by Sanjay Sahni who has devoted himself to the cause of empowering the local population for demanding their rights. SPSS aims at creating more awareness about public services in Muzaffarpur district.

The usual training in economics often abstracts the students from the actual conditions in various segments of the society. This presentation was an essential eye opener giving us a glimpse of contrast between development in theory and practice.

One of the key questions in the discussion following the presentation, we feel was about the higher proportion of women observed at the MNREGA work sites. The response speculated the problem of drunkenness and also migration of men to urban regions. Rest of the discussion only sought to elaborate the nature of exploitation and the living conditions which the speaker witnessed and it was pointed out that these regions need proactive involvement by individuals and organisations in empowering the inhabitants of such impoverished regions than research as an end in itself. While research plays an important social role of knowledge generation but the quality of knowledge depends on the minimisation of ‘information gap’ between reality and development economics theory . This discussion precisely aimed at doing the same.

Words would not be enough to describe what the presented pictures do. Please take a look.  (Picture Courtesy: Pratyoosh)

Dharna organised by Samaj Parivartan Shakti Sangathan

Dharna organised by Samaj Parivartan Shakti Sangathan

 

Women at MNREGA work site

Women at MNREGA work site

 

 

Rozgar Sewak taking a role call

Rozgar Sewak taking a roll call

Experimenting with Contract Design :Moral Hazard outside the Textbook!

Course: Microeconomics-ll (4 credits)

Instructor: Debdatta Saha

Team: Shelly Gulati, Komal Biswal, Prem Kumar, Juhi Jayanandan, Manish Prasad, Sakshi Jindal, Vrinda Gupta

SUMMARY

As a part of our Microeconomics II course (dwelling on the economics of information in detail), we used the experiment provided in Gchter and Knigstein (2006) to understand finer aspects of the moral hazard problem in a principal-agent framework. In the experiment, the principal has to outsource a piece of work to an agent, with the effort put in by the agent unobservable by the principal. The classroom experiment based on this problem comprises of a two-person game. Students first take up the role of the principal and set up a contract which specifies return share and a fixed payment to/from the expert. The contracts are then shuffled and redistributed in the class. The students subsequently play the role of the agent (expert). Ideally, the agent should accept or reject the contract according to the incentives provided in the contract and for each accepted contract; the student should offer a unique effort level.

The purpose of the game here is to make the students come up with a contract which according to them ensures maximum incentives to the agent (more than the outside option) in order to extract the highest possible effort level. This in turn should ensure the maximum surplus is extracted from the expert. Then, on the other hand, while responding to someone else’s contract, the student plays the role of the expert. Now the student should think of the minimum effort level which she/he shall put in for the contract (since effort is a disutility) to maximize his return share. The innate conflict of interest of principal-agent setup is made obvious to the student by the role play on both sides of the transaction.

DESCRIPTION OF THE GAME

A principal wishes to contract with an agent for completing an assignment. The principal does not observe the effort put in by the agent. However, it is common knowledge that the agent’s outside option is $100, whereas the principal gets $0 if the contract is not signed.

The mapping from effort to outputs is common knowledge and is given as follows:

 

Second results sheet (“Optimal effort choice”)

Return share % Payoff maximizing  effort Actual efforts Average efforts
0, 10, 20 1 0,1,1,5,10 3.4
30, 40 4 0,0,2,4,4 2
50 6 0,0,1,1,4,5,6,6,6,6 3.5
60, 70 8 0,0,1,2,3,3,8,10 3.375
80, 90, 100 10 10 10

Reference: Gchter and Knigstein (2006)

The timing of the game is: first, at time period (t=0) the principal offers the contract then at time period (t=1) the agent accepts or rejects the contract, then at time period (t=2) if the agent accepts the contract he then exerts a non-verifiable effort (asymmetric information), at time period (t=3) the outcome is realized and at time period (t=4) the contract is executed. The principal can offer a non-linear contract, with the fixed payment varying between -$700 and +$700 and a return share of the output, varying between 0 per cent to 100 per cent. A negative fixed payment implies a payment made by the agent to the principal, whereas a positive fixed payment implies a salary over and above the return share to the agent. Higher incentives can be passed on to the agent by increasing the return share at the cost of the fixed payment. The trade-off between the return share and the fixed payment is to be exploited by the principal to provide the correct incentives to the agent.

LEARNING OUTCOMES

The experiment proved to be an interesting exercise for the class of 30students present in the class. A total of 29 valid student responses were available. The composition of the class, with students drawn from six different countries of South Asia, adds an interesting dimension to the experiment.

In terms of learning outcomes, the responses from the class indicate that as a principal deciding the optimal return share and fixed payment was the most challenging part of the game. For most students designing the contract was way more difficult than responding to the contract as an agent. This is in conformity with the observation of Gachter and Konigstein (2006). However, one thing that goes amiss is that even though students report that they don’t have any problem while answering the contract as agents, most of them tend to ignore the outside option. The opportunity cost of accepting the contract is $100 (the amount the agent gets if she/he does not work at all). Therefore, they end up accepting contracts that ought to be rejected. This is not a part of rational behavior; however this is what happens actually while people answer contracts in real life. They responded to some notional idea of what is a fair share, rather than noting the given $100 fixed outside option, mentioned at the beginning of the experiment.

A careful analysis of the given data shows us that for various return shares we have various optimum effort levels. The principal who identifies this problem will offer a return share of “at least 80 per cent” to extract the highest effort (e=10) level from the agent. At this optimum level the fixed payment turns out to be -$219 considering that the expert’s outside option was $100. It was also observed in the class that while answering the contracts most of the students choose sub-optimal effort levels, apart from ignoring  the outside option of $100 in deciding whether or not to accept or reject the contract.

It should be noted that the fixed payment is the participation constraint for the expert and the return share is the incentive constraint. This paper claims that the correlation between return share and the effort level is usually highly significantly positive.

The results obtained from our classroom experiment suggest that the correlation is very slight though it is positive (0.23).

Student responses after the experiment reveal that the most challenging part of the experiment was designing optimal incentives (72 per cent of responses as the principal), whereas about 40 per cent of valid responses as agent reported no problems in coming up with their responses.

Capture 6

Capture 2

There was considerable  heterogeneity in responses in the class, where students from six different South Asian countries were present. The composition of the class is shown below:

 

Capture 3                                                Capture 4

Capture 5

An interesting observation is that the identity of the principal did not matter for an agent in deciding whether or not to accept or reject. While answering the contract the agent only focused on giving the optimal share of effort according to his/her own benefits.

All in all the experiment turned out to be a splendid learning experience. We learnt about the choices that people tend to make which are driven not only by profit and loss motives, but also by their expectations and wishes. The paper assumes certain things; however when we actually conduct the experiment in the class we see some assumptions falling apart while a few others were valid. The class thoroughly enjoyed playing and then analyzing the game as well.

RESULTS*

1st data set (Aggregate)

  1. When the return share is 100% the agent who pockets the entire return has an incentive to work at the highest effort level. From the analysis however, we see that the return share of 80% suffices to induce full effort of an optimizing agent. At 80% the fixed payment turns out to be – 219, at 90% it is -259 and at 100% it is -299.
  1. Data from the experiment reveals that this point was not captured by many students. 7 out of 29 agents rejected the contract because they viewed it as “unfair”. So we can say that the agent’s participation constraint is not just his outside option, but also what the agent is willing to accept, on the basis of some notion of “fairness”.
  1. The correlation between return share and actual effort level is marginally positive (0.2251).

2nd data set (Cross-country responses)

  1.  The cross country correlation is the correlation between the return share given by the principal of country 1 and the effort level as a result given by the agent of country 2. It has to be made sure that the principal and agents are of different countries.In our classroom experiment, all the agents who were not from India obtained contracts from principals of a different country. No principal agent pair had to be kept out of the analysis.
  1. The cross country correlation between return share and actual effort level is positive (0.5353).
  1. 6 out of 17 agents (cross country results) viewed this contract as unfair and rejected it. So again the data does not conform to the results that we found in the experiment.
  1. 13 out of 17 agents have chosen sub optimal effort levels.

*The total class size is 32. 30 students were present. 29 responses were there.

Reference

Gchter, S. and Knigstein, M. (2006), Design a contract! : A simple principal-agent problem

as a classroom experiment, , Discussion paper / Universität Erfurt, Staatswissenschaftliche Fakultät, No. 2006,001E

Social Welfare and Household Consumption in India

Faculty Seminar

Speaker:Professor Manoj Panda, Director Institute of Economic Growth

Venue: FSI Hall, South Asian University,

Date : February 28, 2014  (Friday)

Time: 2:30 p.m.

Professor Santosh C. Panda, Dean  & Professor of Faculty of Economics gave a warm welcome to the speaker for coming and invited to deliver the lecture.

The speaker started his lecture by introducing some quick facts about Indian Economy. Indian economy has continued to grow at a rate well above the world average rate during the last three decades. Average growth rate of last three decades was 6.5%, in 2003-07 it was 8.6%. Unless there was a total failure of the trickle down process there should have been a significant reduction in the incidence of poverty.

Then he defined the Lorenz Curve which shows the cumulative percentage of total national income against the cumulative percentage of the corresponding population. The extent to which the curve stays below the diagonal line indicates the degree of inequality of income distribution. Thereafter, he used Gini Coefficient which is commonly used as measure of inequality of income. He spoke about the poverty line in India in which the absolute number of poor was 270 million in 2011-12.  Poverty line is the minimum level of living necessary for physical and social development of a person which includes both food and non-food components.

Then he gave a brief description of the Tendulkar Committee Poverty Line in which it was found that the rural and urban Head Count Ratio (HCR) declined from period 2009-10 to 2011-12.

 He went on explaining generalized Lorenz curve which shows the cumulative income on consumption accruing to the poorest. The World Bank has recently advocated the use of shared Prosperity Index Indicator. NSSO underestimates the line in general. He also compares the rate of growth of per capita consumption expenditure of the bottom four deciles and that of the population as a whole. The scatter diagram of the rates of growth for these deciles and of average consumption shows an upward trend, providing some indication that the trickle-down hypothesis may have worked.

Finally he raised the question that: Has growth pattern covered the poor?

He took on with the measure of pro-poor growth, for measuring absolute shared prosperity index, in which he found that the measure was biased towards the poor. He continued on explaining the differential shared prosperity index and found that there was a high differential in period 1997-99, there was also an evidence of trickle down.

In his concluding remarks he said, if growth is pro-poor then the actual reduction would be greater than the benchmark reduction and so the pro-poor measure will be positive.

Then Professor Panda opened the floor for open discussion. Professor Ahsan, Professor Anirban, Shraddha Jain, Surbhi Kesar, Yashika Sardana and some other students took part in the Q&A session.

Rapporteur : Komal Biswal and Manish Kumar Prasad

Overall Trend in India’s Foreign Trade in the Era of Pre and Post Liberalization      

By Manish Kumar Prasad*

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Indian economy and foreign trade are closely interlinked. The early policy initiatives aimed at liberalization of India’s foreign trade, the outward looking trade policy measures announced in 1991 marks the initiation of a new era in India’s foreign trade. The total value of India’s merchandise exports increased from US $ 1.3 billion in 1950-51 to US $ 251.1 billion in 2009-10. The proportions of high value and differentiated products have increased our export basket. The composition of trade is now dominated by manufactured goods and services. Though the gradual liberalization had picked up trade growth, the trade deficit has widened much more following the reforms. The unprecedented raise in the price of oil in 2008 skyrockets our import bills though the export sector has not been affected so much during the recent face of global slowdown. Thus, India’s potential in trade is great, but the challenges are also plenty.

 Indian economy and foreign trade have come a long way in value terms from the time of gaining independence in 1947.The total value of merchandise exports increased from US $ 1.3 billion in 1950-51 to US $ 178.75 billion in 2009-10. India’s trade growth has been robust at 20 percent plus since 2002-03.Indian economy and foreign trade has shown progress post liberalization. While India’ trade growth has a strong correlation with world trade growth particularly in two time period, first following the 1990 reforms and second after 2003. India adopted import substitution strategy before the reforms to protect its domestic industries by imposing high tariffs and quantitative restrictions on imports. After the post liberalization India adopted export promotion strategy just to promote its export so as to increase its foreign exchange earnings. It was during the eighties that the government undertook expansionary fiscal and monetary policies. But this rapid expansion was supported by a large current account deficit. A mounting deficit, coupled with high inflation (at 13.5 percent) and the Gulf war led India to a balance of payment crisis in 1991. Following the crisis, the Indian economy was opened up to foreign participation for the first time, in an attempt to improve the efficiency and competitiveness of Indian industries. Post 1991, the gradual liberalization of the Indian economy characterized by such policy reforms created a conducive environment for India’s exports to flourish and evolve into an engine of social and economic growth. Hence, the last two decades have witnessed India transform from a closed economy to a considerable player in the global market.

India’s susceptibility to international crises became evident when the financial crisis of 2008 had an impact on India’s economic performance. The financial turmoil had a dampening effect on global demand and slowed down capital inflows which affected India’s export sector. The impact of the crisis was felt most acutely in job oriented sectors which experienced up to a 70 percent fall in their growth rates and affected other segments as well. This had a cascading effect on overall economic growth, as India’s GDP growth rate fell from 9 percent in 2007-08 to 7.1 percent in 2008-09. The impact of this crisis on the export sector was evident as India’s exports which had previously grown at nearly 20 percent between 2002 and 2008 plummeted to a negative 20.3 percent in 2009-10.Though India had previously experienced a negative growth in its exports, such a prolonged period of decline had not been witnessed in over two decades. It is evident from the preceding discussion that India’s export performance and economic growth are closely inter-linked. Over time, the export sector has grown to be a significant earner of foreign exchange and a major contributor to India’s national income. Further, the performance of this sector is highly dependent on domestic as well as global factors. As a consequence of this, domestic as well as international economic policies have a bearing on the overall export performance of India.

In the post liberalization period i.e. post 1991, India followed export promotion strategy which geared up export from 13970 US $ million in 1988-89 to 22238 US $ million in 1993-94 which is around 59.18 percent growth following reforms. Many pro export policies were started after the reforms. The liberalization of the Indian economy following the balance of payment crisis resulted in major policy and exchange rate changes, which had a favourable impact on India’s trade. India’s export performance since 1991 has fluctuated. The East Asian Crisis of 1997 had a serious impact on India’s exports, which registered a negative growth of 2.33 percent in the same year. In 1997, for the first time after liberalization, India’s exports registered a negative growth of 2.33 percent. The situation for India worsened when its competitor countries (in ASEAN) devalued their currencies amidst the crisis, which reduced the competitiveness of India’s exports in the international market for textile and electronics commodities, where India directly competed with ASEAN exports in overseas markets.

In 2001-02, India faced another setback in its exports, at large, due to the semi-recession faced by the US; one of India’s biggest trading partners. The slowdown of the US economy permeated to other economies in the next major setback for India’s exports was the global crisis of 2008. The collapse of large investment banks around the world coupled with high oil prices and rising inflation led to a global recession. The next major setback for India’s exports was the global crisis of 2008. The collapse of large investment banks around the world coupled with high oil prices and rising inflation led to a global recession.

Even though the export sector plays a significant role in the domestic economy by contributing close to 25 percent to India’s GDP (in 2009), its contribution to world exports continues to remain minimal, at a mere 1.5 percent of world exports in 2009 (however, this share has improved since the economic reforms of 1991). Between 1991 and 2009, India’s share in world exports rose from 0.56 to 1.52 percent. But overall, the economic reforms implemented in India did not have a significant impact on India’s position in the world export market, unlike the reforms implemented in countries like China, South Korea or Taiwan.

The share of agriculture has fallen more rapidly post trade liberalization, which may, in part be because an important goal of agricultural policy was to achieve self sufficiency in agriculture and this limited the scope of trade. In 2008-09 agricultural and allied products share had declined to around 9.59 percent of exports whereas manufactured goods share have been around 68.89 percent of exports of which the exports of gems and jewellery has been around 15.08 percent which shows that the diversification in export products has risen rapidly following the reforms.

The Global recession only slightly jolted the continued upward growth in India’s export sector with exports rising at a reasonable rate of 15.6 percent in 2008-09.The compound annual growth rate(CAGR) for India’s merchandise exports for the five year period 2004-05 to 2008-09 increased to 22 percent from 14 percent of the preceding five year period. However in 2009-10 export growth was negative at (-) 3.5 percent, partly reflecting the effect of global recession and partly the higher base effect due to the lagged export data of 2008-09.Despite this negative growth, India’s ranking in the leading exporters in merchandise trade which slipped marginally from 26th in 2007 to 27th in 2008 improved to 21st in 2009.

A drastic fall in the foreign exchange reserves to a level not enough to pay for three weeks of imports bill, a fiscal deficit of nearly 9 percent of GDP and many other factors led to the reforms of 1991.In the post liberalization period i.e. post 1991 import growth picked up. The import to GDP ratio has increased from an average of 7.7 percent for the 1980s to 10 percent in the 1990s as a result of increasing import dependence of the Indian economy in the wake of trade liberalization and changing patterns of development. During the period of 1991-2001 the average growth rate of India’s imports was around 17.1 percent in dollar terms as a percent of GDP. The average weighted tariff rate has come down from 87 percent to 20 percent from the same period. The non-tariff measures for most of the commodities have also been phased from 1st April 2001. The process of trade liberalization is still not completed. Given the fact that demand for many of the items of imports is price elastic, the future tariff reductions may lead to higher imports. In particular, consumer goods imports may be highly sensitive to liberalization.

Import licensing was abolished relatively early for capital goods and intermediates which became freely importable in 1993, simultaneously with the switch to a flexible exchange rate regime. Import licensing had been traditionally defended on the grounds that it was necessary to manage the balance of payments, but the shift to a flexible exchange rate enabled the government to argue that any balance of payments impact would be effectively dealt with through exchange rate flexibility. Removing quantitative restrictions on imports of capital goods and intermediates was relatively easy, because the number of domestic producers was small and Indian industry welcomed the move as making it more competitive. Quantitative restrictions on imports of manufactured consumer goods and agricultural products were finally removed on April 1, 2001, almost exactly ten years after the reforms began, and that in part because of a ruling by a World Trade Organization dispute panel on a complaint brought by the United States. . The government has announced that average tariffs will be reduced to around 15 percent by 2004, but even if this is implemented, tariffs in India will be much higher than in China which has committed to reduce weighted average duties to about 9 percent by 2005 as a condition for admission to the World Trade Organization.

The composition of imports also underwent changes in this decade. The share of food and allied products imports which fell to 2.1 per cent in 2008-09 from 3.3 per cent in 2000-01, increased to 3.7per cent in 2009-10 and fell to 3.2 per cent in the first half of 2010-11 with slight fall in import shares of edible oils and pulses. The share of fuel imports, however, remained at around 33 per cent. The most notable change is the sudden rise in share of capital goods imports from 10.5 per cent in 2000-01 to 15.0 per cent in 2009-10 and again a fall to 13.1 per cent in the first half of 2010-11 due to the See-saw movement in shares of imports of transport equipment. The share of gold and silver and electronic goods in the import basket decreased in the first half of 2010-11 compared to 2008-09 and 2009-10.The share of pearls, precious, and semi-precious stones saw a see-saw movement with negative growth in 2009-10 and very high growth (129 per cent) in the first half of 2010-11.

The country’s trade to GDP ratio hardly changed at all between 1980 and 1990; it remained fixed at a little over 14 percent. Things have moved rapidly since then. Three years into the reforms, the ratio was already above 18 percent in 1993-94. Contrary to what is generally believed this increase was attributable more to an increase in exports than to increased imports. While both exports and imports have grown faster than GDP, thereby pushing the trade-GDP ratio to 25.6 percent for the year 2003-04, the overall growth in exports has outpaced the growth in imports.

The export to GDP ratio almost doubled from a little over 6 percent in 1990-91 to 14.7 percent in 2003-04. The growth in the import to GDP ratio was more moderate, from 8 percent to 14 percent. Imports exceeded exports in 1980 and in 1991, and they continue to do so in 2003-04, by almost 25 percent. But the difference between the two in proportionate terms has been coming down, rather than going up. Indeed, it would be seem that the trade deficit over the period has increased over the years.

*Manish Prasad is a Postgraduate student of Development Economics

  References

  • Ahluwalia, M.S., (2002), Economic Reforms in India since 1991: Has Gradualism Worked?, Journal of Economic Perspectives, Vol. 16, No. 3, pp. 64-88.
  • Commerce Ministry, (2010), Trend in India’s Foreign Trade, Ministry website. (Available at:  http://commerce.nic.in/publications/annual-report-pdf-2010-11/CHAPTER_2.pdf (Accessed on 10th Jan 2014 at 09:32)
  • Pillania, R.K., (2008), An Exploratory Study of Indian Foreign Trade, Journal of Applied Economic Services, Vol. 3, No. 5 pp 281-292.
  • Shinde, B.K. (2009), Trend in India’s Foreign Trade Policy since planning period, SSMRAE website.( Available at:          http://www.ssmrae.com/admin/images/4c2b113d5a8fd4e4372c22b9273e5672.pdf (Accessed on 15th Jan 2014 at 14:13)

A Democratic Policy Regime in South Asia

The allocation of resources, more than the lack of government revenue, is the real problem. Governments must make a commitment towards three major public expenditures.

By Alauddin Mohammad

The visa, travel and trade constraints that exist between the countries of South Asia make it the world’s least connected region. Political insurgencies, fragile democratic institutions, fundamentalism, terrorism and ethnic conflicts all threaten regional peace and prosperity. How do we address these problems? Where is our starting point? What are our priorities, and on what basis?

Let me state an overview of the major prioritized economic sectors of South Asian countries, identify the major problems, and advance an agenda of policy reforms based on factual analysis.

The world’s most populated region is home to 1.62 billion people including half of the world’s poor. Some 87 per cent of its workers will remain poor or near poor until 2017 despite much claimed success in economic growth and poverty reduction, says recent UNDP research. In 2012, 56 out of 1000 children below five years of age died in India, compared to 72 in Pakistan and 101 in Afghanistan, according to the World Bank. The economic realities of this region abound in contradictions, fueling various forms of social unrest and extremism. On the one hand, more and more billionaires are emerging from this region. On the other, millions are starving or leading miserable lives.

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The top five per cent of India’s rich consume 15 times more than the bottom five per cent. In Bangladesh, the top 10 per cent rich have nearly 36 per cent of the country’s total income while the bottom 20 per cent own less than six per cent. This is the worst region after Sub-Saharan Africa in terms of starvation, malnutrition, and stunted human growth.

Some economists argue against taking such inequalities seriously in the early stages of development. Providing incentives to the capitalists to help economy grow will lead to a decline in inequality after a certain income level, they say. However, this approach does not in reality yield optimum results and can actually increase the gap in some cases.

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However, incentive mechanism can be thought in a reverse way. As the consumption elasticity of the poor is high, an increase in income levels will increase the aggregate consumption level of the economy, thus pushing the economy towards a higher growth path. The growing income of the poor will allow them to spend a larger amount on education and healthcare, consequentially improving the capability of their workforce and contributing towards fostering economic growth.

No economy including South Asia can escape from increasing inequality with growth in a neo-liberal regime without adopting some active policy. Governments in the short run must spend enough to ensure the basic needs and amenities of life and in the long run, design such policies to run the system automatically in favour of the poor.

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This is where the question of the governments’ capability comes in. We know that the government’s revenue depends on economic growth and South Asian countries have the lowest direct tax revenue regime in the world. However, the problem lies in the allocation of resources more than the lack of government revenue.

Aside from physical infrastructure, two primary sectors of public expenditure for any government are health and education, the fundamentals of social infrastructure. Public expenditures on these two sectors determine the social progress as well as in the long run.

South Asian governments need to make a commitment towards three major public expenditures.

First, increase the public expenditure on education, currently at abysmal levels. Given the lack of development of the private sector in these countries, public expenditure in education is particularly crucial. Even developed economies spend a substantial share of their GDP on education – the USA and UK spends 5.6 and 6.3 per cent respectively despite a strong private sector in education.

Secondly, public health expenditure as a share of GDP and per capita expenditure in South Asian countries is extremely low (except in Maldives, omitted here to avoid outlier in graph).

Third, major south Asian economies spend a significant amount in military budget, both as a share of GDP and share of government expenditure. Meanwhile, the military expenditure of all these countries is far higher. This implies a priority on security threat perceptions far beyond our fundamental basic needs for survival, unjustified by ethics or efficiency.

If we don’t educate our children or provide healthcare and basic facilities we will create a frustrated generation, leaving to social problems and threatening society.

Indeed, the priority must be to address the problem of underdevelopment and achieve the goal of social welfare. Trying to resolve social problems through military instruments will only exacerbate the problems.

It is not a matter of dearth of resources in the region, but a need to reallocate expenditure to the sectors that need them most. In the process, peoples’ participation in economic policy decision is indispensable. “Unless people can participate meaningfully in the events and processes that shape their lives, national human development paths will be neither desirable nor sustainable,” says the UNDP report 2013.

In that context, we must re-define South Asian economic policies and focus on solving the problem of poverty, inequality and underdevelopment. This can be achieved through a democratic policy regime that can bring peace and prosperity to the region.

This write-up was first appeared in: The News Pakistan & Aman Ki Asha

Feasibility of Export-Led & Import Substitution Industrialization under Dependency and Unequal Exchange Framework

By Mohammad Alauddin*

This paper contrasts and compares the arguments of the unequal interdependence framework with the dependency theories on the sources of dichotomy between the core and the periphery. It also contrasts their arguments on the non-feasibility of the export-oriented strategy or the import-substituting industrialization respectively for the Third World countries to break out of this dichotomy.

Key Words: Core-Periphery, Export Led Industrialization, Import Substituting Industrialization (ISI), Dependency School of Thought, Unequal Interdependence

Suggested Citation:  Alauddin, Mohammad, Feasibility of Export-Led & Import Substitution Industrialization Under Dependency and Unequal Exchange Framework (October 17, 2013). Available at SSRN: http://ssrn.com/abstract=2438251

Introduction

The visualization of developed and developing countries as core and peripheries has significant implications in describing their interdependence in global perspective. This interdependence is portrayed differently by different schools of thoughts. The first school of thought originated from the Latin American development experience is structuralism in which the basis of industrialization was Import Substituting Industrialization (ISI). However, the response to the failure of Latin American structuralism gave birth to the dependency theories those were predominantly based on the Radical American Monopoly School and they suggest in delinking with the capitalist core to escape from this dependency (Barron & Seewzy, 1966). Furthermore, in this dependency relation another argument was made regarding international trade where it was argued that there exists an Unequal Exchange [1]between the core and periphery and so the relation between the core and periphery is a relation of Unequal Interdependence (Amin, 1976). The understanding of the evolution of unequal interdependence from the dependency theories and their difference from each other is important in addressing the development debate.

Dependency Theory

Dependency school of thought comes from the critique of structuralism and influence of US monopoly capital school. It was developed in the 1960’s and 1970’s by mainly Andre Gunder Frank, R M Marini, Fernando Henrique Cardoso, Samir Amin and Immanuel Wallenstein. The central idea of dependency theory is, as peripheral economies produce and export primary goods and dependent on central core countries for raw materials, technology and luxury imports so the flow of resources will take place from the periphery/satellites to core/metropolis. In this process, the underprivileged periphery is impoverished and the rich core become enriches further which increase the gap between the two parts, thus deteriorate the condition. So, development is not possible following the prescription of modernization theories which do not consider the unique feature of underdevelopment created in periphery. So the only possible way to development is breaking the dependency relation by cutting all relation with the core capitalist world and define an own way of development which is necessarily socialism (New School, 2009).

As mentioned earlier, the dependency school was established as a response to the failure of Latin American Structuralism and immensely influenced by US Monopoly Capital School. They offered a radical critique of capitalism in peripheries in the context of post-World War-II economic boom in the core and collapse of Import Substitution Industrialization (ISI) in the peripheries. This is primarily concerned with the exploitation of the periphery by the center, including the different form of extraction of economic surplus and mechanisms of transfer of surplus to the core. Indeed the critiques pointed out by the school is the reality of developing countries and their spirit for such global justice influenced lots of movements and organizations, and still today lots of people are influenced by their anti-globalization idea (Derrida, 2004).

Three Major Arguments

1)      World System Argument

Dependency theory focuses on an integrated World System (The concept of World System comes from the idea of Immanual) based on a network of exchange relations in which center and periphery play different but inseparable roles. Historically the peripheries were related to world system in various forms. So, they contrast with the neoclassical idea by affirming that the backwardness of the peripheries is not due to the lack of capitalist development but prevailing international relations of capitalist exploitation and subordination (Wallerstein, 1974).

2)      Peripheral Demand Argument

The condition is not like that only the central capitalists exploit the subordinate class. Rather dependence has created and sustained a social structure in the periphery where the ‘comprador ruling class and lumpenbourgeoisie’ manage the exploitation of the locals on behalf of the center. As a result of high living standards of local bourgeois class, peripheries lack both resources and market for autonomous development. Dependence is based on a coincidence of interests between the center based elites and the peripheral comprador class thus marginalizes and impoverishes the masses (Frank, 1972).

3)      Unequal Exchange Argument

There exists an unequal exchange and transfer of surplus from periphery to centers.These transfers depress incomes, welfare standards and investment in the periphery, and produce a distorted growth pattern which favors the growth of primary products for export and luxury goods domestic consumption. This process enchains the periphery towards a long term dependency relation (Amin, 1976).

According to Andre Gunder Frank, underdevelopment is not a transitional stage, rather than due to the relationship between the centers and periphery which has been continuously generating a process of ‘development of underdevelopment’. In Immanuel Wallerstein’s argument, division of labor is the main cause of unequal exchange between core and periphery. In Samir Amin’s view capitalism creates different social orders in the core and periphery. For them, dependent capitalism is not progressive because it does not lead to the systematic development of labor productivity and the satisfaction of wants in the periphery, while capitalism in the center is no longer progressive because it is parasitical on the periphery. In the Dependency framework, the source of dichotomy between core and periphery mostly comes from the productivity of labor and wage differentials. So the developing countries can develop only through a radical political shift which includes delinking of all dependency relations which definitely leads to the agenda of socialism (Love, 1990).

Unequal Interdependence

Technological innovation is part and parcel of modern capitalist development. But the technological innovations do not come at free of cost. The capitalists’ investment in innovations brings higher economic growth where per capita capital stock is the crucial component of investment (Nelson, 1966). So based on the differential of initial capital stock the level of economic growth also varies. The burdens of extra cost incurred from the technological innovations create an accommodating problem in the core as the capitalists are more concerned about profit; workers have high bargaining power which leads core to look at the peripheral market for solution. So in this view, the driving force of growth is technological progress which will be determined by the initial level of capital stock where the core countries are already favored with.

The dependency school assumes that the periphery produces only primary goods where the unequal interdependence school takes the fact that some level of manufactured production is done by the periphery. But the goods produced in periphery’s industrial sector is not the same type as the core which produces high demand modern manufactured goods. The core invests a portion of their GDP for technological innovations in three stages: generation, absorption and marketing which has a direct functional linkage to the manufacturing output. The more investment in technology the more gain in productivity and the more in output growth. The technological innovation will reduce the per unit labor cost for production because of less raw materials use. That will shift the production process for cheaper raw materials and the extended effects of productivity increase in core will further cheapen the raw materials for the core producers. Due to gains from the technological innovations, the core workers’ taste and preferences will change and they will Andaman less of primary goods from periphery, rather more of manufactured goods which will affect the output of the periphery though the capitalists of the periphery demand core’s commodity which will help increasing the growth of core. In this process the unequal interdependence sustains in global level (Amin, 1976).

The same situation can be viewed from the terms of trade (TOT) argument. An increase in the innovation expenditure will lead to a lower demand for periphery’s primary commodities and the share of periphery’s income will fall. Since the capitalists’ share in the periphery is constant, the lowering income will be accommodated through lowering the wage rate of the workers which will again lowering the manufacturing demand produced in the periphery. So the impact of a negative TOT for the primary commodity will necessarily lead to an adverse effect on periphery’s manufactured sector as the sole demand for periphery’s manufactured good comes from the workers class of the periphery. The result of declining TOT in two major sectors of periphery leads to a slower growth for the periphery than the core which creates unequal interdependence (Patnaik, 1997).

Critical Understanding of the Theories

 The Dependency School argues that the labor is not mobile unlike capital and the TOT is dependent on the commodities. But later it was questioned by the Unequal Exchange School that, international prices and wage levels cannot be equated due to uneven development in the core and periphery.

 The basis of dependency argument differs between dependency school and unequal interdependence school. The dependency school’s idea of unequal specialization comes from the structuralist idea of comparative advantages where the unequal interdependence school argues that, after facing a high bargaining power in the core the core capitalist’s profit is stabilized at the cost of periphery’s workers’ exploitation. Although Patnaik finds it contradictory after observing the textile industries in Manchester during the colonial India (Patnaik, 1997).

 The first difference between the two school is on basis of the existence of monopoly capital in the core. The Dependency School is based on the Monopoly Capital theory in the core where it is assumed that the labors in the core have high bargaining power. The Unequal Interdependence School denies the argument of monopoly capital and deteriorating TOT as a primary cause of underdevelopment.

 The Dependency School focuses more on the surplus form the periphery through monopoly power in the core. But the Unequal Interdependence School is more focused on understanding the structural and technological constraints on the developing economy which leads to an adverse situation for the periphery.

 The dependency theory assumes that, the capitalist development is not possible in the periphery due to dependency relation thus prescribes for de-linking with the core capitalist world and go for an socialist policy (effectively ISI through strong interventionist state) whereas in unequal exchange, the breaking of the system might not solve the problem if the proportion of unorganized or informal sector is so high with a low degree of unionization in the economy.

Concluding Remarks

As discussed before dependency theory in economics has come out in response to the Structuralist School which agrees with some points of the Structuralist argument but contrasts in the question of coming out from the system. They do not support the ISI strategy because of having a skeptic view on the global relation between the core and periphery. Another is export led growth which mainly comes out from the core for their need of cheap commodities. But dependency school argues that ISI is not a feasible strategy where the unequal interdependence argues that Export led growth is not a sustainable strategy thus there is uneven development in core and periphery. So, breaking out from the dichotomy is not possible in both ways. If we consider innovation as a source of uneven development then also we see the same implications. Only the high capital stock country can invest in innovation where the core is always privileged with the capacity to innovate and the periphery can only imitate which is also not possible due to various Patent Rights strictly imposed by the International organization like WTO. Even if the developing countries try to invest in R&D, it will need capital which has to be taken from the core which will further create dependency relation. So export led which we can visualize more clearly manner in terms of services or outsourcing (in limited sense for export) led growth strategy cannot break the cycle of unequal development. According to my opinion, it is possible to achieve economic development for the peripheries only through forced diffusion of technology with active participation of state which can utilize its domestic market as well as create a broader space for external demand as a strategy for stimulating growth.

End notes

[1] 1972a. Unequal Exchange: A Study of the Imperialism of Trade. (Trans. of Emmanuel 1969a by B. Pearce.) New York & London: Monthly Review Press.

* Alauddin, Mohammad is a Postgraduate Student of Development Economics at South Asian University

References

Amin, S. (1976). Unequal Development: An Essay on the Social Formations of Peripheral Capitalism. New York: Monthly Review Press.

Barron, P., & Seewzy, P. (1966). Monopoly Capital: An Essay on the American Economic and Social Order. New York: Monthly Review Press.

Derrida, J. (2004, May). Enlightenment past and to come, speech at the party for 50 years of Le Monde diplomatique. (L. M. diplomatique, Interviewer)

Frank, A. (1972). Lumpenbourgeoisie: Lumpendevelopment, Dependence, Class, and Politics in Latin America. New York: Monthly Review Press.

Love, J. L. (1990). The Origins of Dependency Analysis. Journal of Latin American Studies, pp. 143-168.

Nelson, R. a. (1966). Investment in Humans, Technological Diffusion, and Economic Growth. Source: The American Economic Review, Vol. 56, No. 1/2 (Mar. 1, 1966), pp. 69-75. New School. (2009). Economic Development. New York: New School.

Patnaik, P. (1997). Accumulation and Stability under Capitalism. London: Oxford University Press.

Wallerstein, I. (1974). The Modern World-System I: Capitalist Agriculture and the Origins of the European World-Economy in the Sixteenth Century. New York: Academic Press.