Economic Background For Investment In Thailand Part 5

July 1st, 2009
Manora asked:


The government adapted strict monetary and fiscal policies to control the rate of inflation during this period. Rigid monetary policies were used to limit credit expansion in the private sector. The fiscal policies were mostly the levying of import and export taxes. The export taxes were imposed on some commodities, such as rice and sugar, as a means to control domestic prices. The import tax on raw materials used for manufacturing was reduced. There was also a tax on raw materials used for manufacturing was reduced. There was also a tax rebate for importing raw materials for producing export commodities.

The Fourth Plan (1977-1981) : The Economic Recovery Period

During the Third Economic and Social Development Plan, Thailand was affected by the world economic fluctuations as were other countries. Regional, political instability also acted to weaken the Thai economy, as many neighboring countries changed from democratic to socialist countries. This resulted in investors losing confidence in Thailand. The consequence was a higher rate of unemployment.

By the end of the Third Plan, inequitable income distribution was a major problem. Therefore, one of the main objectives in the Fourth Plan was to distribute economic growth and social services to the remote regions of the to country. The population was targeted to increase at rate 2.3 percent a year. It was expected that this rate of growth was appropriate for cohabitation with the existing natural resources and would be suitable for economic development.

The Fourth Plan was set to be an indicative plan instead of allocative plan, as all earlier plans were. This indicative plan was intended to be a practical guideline for government agencies to improve their policies and set up practical objectives. The Fourth Plan was designed to resolve the economic recession and to maintain economic stabilization. It also intended to solve the basic economic and structural problems. It was planned not only to stimulate economic growth but also to reduce the economic inequality in society.

Concerning disparities in income distribution, the Fourth Plan was unable to find a solution to this problem. The per capital income in the agricultural sector was 5 times lower than manufacturing and commercial sectors, and 2 times lower than the service sector. The people in the Northeastern part of Thailand suffered the most poverty. Per capita income in Northeastern Thailand was five to seven times lower than in Bangkok in 1981. The proportion of regional production relative to GDP declined from 15 percent in 1976 to 14.3 percent in 1981.

With respect to social services, toward the end of the Fourth Plan, the rate of population growth was reduced to 2.2 percent. The government was unable to meet the targeted goals for provided were close to the goal, but not in all regions of the country.

Overall, the Fourth Plan was more successful than the Third Plan. The GDP increased at a rate of 7.5 percent a year. This high rate of growth was the result of attempting to maintain an economic stabilization policy to fight worldwide economic fluctuation. The government increased public investment spending from the target set at 14.6 percent to 24.8 percent a year. Economic expansion on terms of production sectors showed a higher growth rate than the target set in almost every sector except for agricultural and manufacturing sectors. The agricultural sector grew less than anticipated in the plan because of the limited planning area and the deterioration quality of planting soil. The manufacturing sector was curbed by the world wide economic recession so that the export of manufactured goods during the Fourth Plan was not as high as the Third Plan.



Economic Liberalisation Reforms and Growth

June 28th, 2009
Francis Mulenga Muma asked:


                                                       CHAPTER 1

INTRODUCTION AND THEORETICAL BACKGROUND

Economists through out the world are searching for what really are the major determinants of growth of an economy and different policies have been used in pursuit of the answers. The world as large has gone through a lot of economic problems, such as depressions of 1930s, 1970s and 1980s. The 1930 depression led to employing of the Keynesian policies of strict government intervention. However, the 1970s depression made policy makers lose faith in Keynesian economics. Nevertheless, most Third World countries continued with their central planning type of economic policies. There was strong disenchantment with this type of policies, which led growing number of economists and influential international development organisations to begin, in recent years, to advocate the increased use of the market mechanism that is to liberalise the markets, as the key instrument of promoting greater efficiency. In this regard economic liberalisation implies minimisation of government intervention in allocating economic resources and letting the market forces play the cardinal role, doing away with all forms of government distortions in running the economy. The market forces should play a leading role in financial, trade, labour, commodity markets and other sectors, increasing reliance in market forces is normally accompanied by stabilisation programs, (Krueger 1978,1985).

        There has been an increasing call for the private sector to take up the challenges of national development. According to Robert Barro (1996), most empirical facts point to primacy of government choices; countries that have pursued broadly free market policies, in particular trade liberalisation and maintenance of secure property rights, have experienced higher growth, than those which pursue central planning type of policies. For this reason, there have been calls for the privatisation programs.

  On the other hand Rodrik, (1992) argues that trade reforms is frequently met with scepticism on the part of the private sector and may lack support, the country implementing them suffers from terms of trade deterioration which may result into reduction of capital inflow and increase capital flights. He goes on to say that this is coupled with inflation and low zero growth. Krueger (1978) points out that to avoid this, appropriate macroeconomic policies need to accompany the increase in price of foreign exchange (devaluation), or else domestic inflation would soar and affect the intended benefits of liberalisation. That is why stabilisation programs, such as reduction in government expenditures, accompany liberalisation by cutting on government consumption, which is often negatively related to the growth of an economy.

         However Wha Lee (1993)’s findings in the case of Korea are very interesting, Korea gave subsidies to some firms manufacturing exports, managed to grow faster. He argues that the theoretical predictions about the link between growth and open trade may be ambiguous and misleading. According to critics, tariffs can either enhance or decrease growth rates, depending on which sector is protected. This is the argument of infant industry. Krueger (1985) notes that LDCs have been protecting infant industries for decades, but they have still remained infants; this is an indication that there is something wrong with the economics of protectionism. Nevertheless Wha Lee (1993) notes that since the current theory of liberalisation is inconclusive, as is the empirical evidence, the link between trade policy and dynamic efficiency is vague, depending on the industry considered.

Kirkpatrick (1995) argues that the orthodox arguments concerning the role of trade policy as the determinant of industrial performance are seen in the major role of creating price incentives. This is because liberalisation and a neutral incentives structure between import substituting and export activities is expected to yield both static and dynamic effects, static in form of technical efficiency and dynamic in the form of switching process. However, many models, both for planning and explaining the development process, according to Krueger (1978), have made a foreign exchange central to determination of the growth rates. This focus is on the role of foreign exchange (forex) in complementing domestic savings needed to support domestic investment. The effect on economic growth will be via an increased volume of exports and reduced imports due to liberalisation and devaluation respectively. It is argued that if trading partners removed tariffs, we expect the market to expand which will ultimately lead to growth of exports. Exports are also viewed as a stimulus to greater capacity utilisation, greater horizontal specialisation, increased familiarity with absorption of new technologies transmitted through trade, greater learning by doing, as a result of the increased market size and output levels and stimulation effects of having to achieve international price and quality. Expanded market economies of scale enable a producer to cast or spread a “net” widely on various consumers who may be helpful by sending back comments on how to improve the quality of the products. Since tariffs tend to be reactionary, if a country adopt liberalisation policies, its trading partners will also do away with tariffs the moment one country scraps trade restrictions, so the market size will expand.

           However, Trade liberalisation alone is not an answer. For this to be successful, there is a need to liberalise the financial sector, so that exporters can have ready capital for re-investment; nuisance taxes have to go, so that most of the foreign exchange earnings are retained by the exporters. This creates incentives to them. Macroeconomic stabilisation also has to be enforced so that inflation will not impede planning, and if this creates confidence in investors, exports should increase.

 Pro-liberalisation economists have argued that more open economies are more efficient in absorbing exogenously generated innovations, since, without barriers, not only will this increase the volumes of essential imports, but it will also facilitate the entry of new technology which developing countries are able to absorb and assimilate easily in order to expand their manufacturing base. Edwards (1992), finds strong evidence supporting the hypothesis that, with other things being equal, more liberal economies tend to grow faster than those which are not. He calls this learning by doing type of process, “technical progress ” where more contact with new commodities and technology enhances efficiency, which result in higher production. He argues that if the rate of technical progress is positively affected by the gap between the stock of the world and domestic knowledge with respect to the foreign source of technological improvement, then the country’s ability to appropriate world technical innovations depends positively on the degree of economic trade liberalisation. Therefore more open economies have an advantage of absorbing new ideas from the rest of the world. He finds that countries with more open and less distortive trade policies have tended to grow faster than those with more restrictive commercial policies. His results are in conformity with the catch up theory effect. Wha Lee (1992), points out that international trade is perceived as a vehicle through which foreign inputs are provided to domestic production. According to him trade distortions caused by tariffs and exchange rate controls decrease the long run growth rates more significantly in a country that needs to import more.

            Therefore, it can be summarised that liberalisation enhances international trade which provides comparative advantage and also provides an additional source of competition to domestic firms. Subsidies to ailing industries, no matter how much they may alleviate economic distress in the short run, represent an effort to decelerate growth, reduce incentives for mobility and lock in resources in the inefficient industries that should contract in the process of economic growth.

 However, there is a problem of measuring the benefits of trade liberalisation, which even Kirkpatrick (1995) acknowledged. Kirkpatrick admits that measuring of trade liberalisation benefits is a difficult and frustrating task. It involves two considerable methodological problems; it is important to assess the extent to which the World Bank’s conditions have been adopted. This is because most of the liberalisation policies of LDCs are not unilaterally adopted, but imposed, and therefore may lack consistency. The other problem is the assessment of the reforms that were implemented. It is complicated by problems of separating causality from association. According to him, it is difficulty to establish counter factual, and separating out the effect of multiple influences on economic performance.

             Larry Sjaastad (1982) noted that the economic liberalisation that swept Southern cone during the 1970s and 1980s was a clear reaction to the failures of preceding economics of protectionism. Uruguay and Argentina, once prosperous nations had fallen on hard times by the mid 1970s. Real per capita income in Uruguay had been declining at a rate of 1 percent in 20 years. Chile, though never a prosperous country, was crippled with a continuos fiscal deficit and an inflation of 1000 percent. Their economies were characterised by inefficient state enterprises, which despite massive tariff protection, regularly required subsidies to sustain their operating loses. Price controls, tariffs, subsidies and export taxes severely distorted relative prices with much of the private enterprises devoted to production of luxury goods. Regulatory bodies administered import duties and quotas, interest rates, credit allocation and wages. The monetary and financial sectors were dominated by the state banks with special rediscount privileges at the central bank. Their economies were in a bad state. Therefore all these countries introduced liberalisation programmes in the1980s, but their results were disastrous. The Southern cone experiences, according to Sjaastad (1982) are widely interpreted as evidence of the failure of economic liberalisation.

Zambia like Argentina, Uruguay and Chile had almost the same type of economic policies, with nationalised economy before the liberalisation program which swept the country in 1991. Its economy was characterised by inefficient state enterprises with massive tariff protection in order to enhance import substitution industries. Price controls, nuisance custom duties, subsidies on production and consumption, export taxes, foreign exchange controls. Private enterprises had to declare all their export earnings to the central bank, as it was illegal to hold forex. Zambia, before privatisation and liberalisation, had regulatory bodies to administer import quotas, interest rates, credit allocation and wages. All the macroeconomic factors were determined by political decree. The monetary and financial arenas were dominated by the state banks, with special rediscount privileges to the Bank of Zambia. According to the advocates of the liberal markets, poor rates of growth, massive inflation and balance of payment problems experienced by LDCs, and Zambia in particular, during the 1970s and 1980s were because of the rising burden of public spending through parastatal companies, excessive price distortion and inward looking trade policies which are the order of the day in the planned economy.

       Zambia today, according to the World Bank Report (December, 1997), has the most liberal and least nationalised economy in Africa. In 1991, more than 80 percent of the economy measured as a percentage of GDP was state owned. Now, as at 1997, more than 80 percent of the economy is in private hands. The one party state, which ruled Zambia since independence in 1964 from the British, chose the path of nationalisation and centralisation. According to the World Bank report (Dec., 1997), this was ruinous. The government and international organisations such as the World Bank and IMF believe that macroeconomic stability and growth are being achieved after years of inflation and decades of stagnation. According to them, the foundation for higher growth have been laid by liberalising the markets, broad tax and tariff reforms, financial sector reforms and by privatising the state enterprises. The key element in the government’s programme has been the reduction of inflation, which has fallen from 200 percent in 1990 to 20 percent in 1997. This helped the GDP to grow by 6.4 percent in 1996/7 period.

         This dissertation investigates whether there are genuine reasons behind economic liberalisation and related austerity measures, using Zambia as the case study, by describing and comparing its economic performance before and after liberalisation. We then use panel data and cross-section regression analysis on selected African countries to see if the econometric analysis results support the calls for liberalisation measures.  The dissertation is organised as follows Chapter 1 has provided introduction and theoretical background to economic liberalisation. In chapter 2, Zambia’s detailed account of its pre-liberalisation economic policies is presented. Chapter 3 looks at post-liberalisation economic policies of the country. Chapter 4 presents econometric analysis and empirical results, and Chapter 5 concludes the findings.  It should be borne in mind that this study is not about the direct measurement of the effects of liberalisation policies on economic performance. This is due to the problems cited by Kirkpatrick (1995) and the unavailability of many of the data required for undertaking a more detailed study of the country.

                                   CHAPTER 2

THE PRE-LIBERALISATION ECONOMIC POLICIES OF ZAMBIA

          Zambia’s economic history traces back to the colonial era. Zambia a former British colony was known as Northern Rhodesia. The British’s main emphasis was the mining of copper, which they exported as a raw material. Zambia obtained independence on 24 October 1964 with an economy characterised by an industrial enclave based on copper mining using British and USA capital (Hawkins, 1991). During this time there was little or no significant investment apart from the mining sector, and before independence most of the copper profits were expatriated and very little was re-invested. However, in the first years of independence 1964-69 the economy unfolded and great progress was recorded (Turok, 1979). The country had a GDP per capita that was amongst the highest in Africa; according to Turok, 1979, it was just below that of South Africa. Copper prices were high and the industry was profitable, so every indication was towards rapid growth and development. The economy was more of a capitalist than a state led.

2.1-Post-Independence Economic Reforms

          Few years after independence in 1968 and 1969, President Kaunda, with the then ruling United Nation Independence Party (UNIP), initiated reforms. According to him, this was to lead state control of the whole economy to enhance growth and equal distribution of income. It was also aimed at empowering the indigenous people to control and decide the destiny of their country’s economy. This was characterised by developmentalist philosophy (command economy) and recognition of political realities (Turok, 1979).

          The 1968 and 1969 Mulungushi and Matero economic reforms were meant to repossess the foreign economic and business interests, which now became under the state control. The UNIP government also introduced indigenous import substitutions in the industrial sector, this was aimed at reduction in the dependence on foreign manufactured goods. Although a small indigenous and foreign private sector was left, a large public sector was created and maintained by copper revenue and protected and supported by government controlled markets. As a result of the state controlled type of the economy, which emphasised the creation of industrial capacity, commercial agriculture perished and the private sector was crowded out.

          According to Turok(1979), it is commonly accepted that the weaknesses of the economy, which levelled off in 1972 and then began declining, cannot be solely blamed on the falling copper prices, though this might have been one of the contributing factors. This is because, even by 1974 before the collapse of copper prices, foreign exchange had started posing a serious constraint on economic development. A major explanation lies in the economic policies of the day. Despite its inheritance of highly concentrated and buoyant foreign owned mining enclave, the Zambian government was determined to use the state for development. The state sector share of manufacturing output was growing almost every year. Four years after Mulungushi reforms in 1968, in which the government announced its acquisition of major companies it was 53 percent of total manufacturing output and this was concentrated on essential consumer goods required by Zambia. However, despite its size and scope, the state sector which included parastatals had not established an integrated economy with forward and backward linkages, parastatals, though they were import substitution industries (ISI) deeply depended on essential inputs from abroad. The government intervened extensively and imposed a number of restrictions on the private sector, while parastatals’ decisions were made by political leaders and ministers who sat on their boards. The parastatals were to be organised on lines of the country’s philosophy of ‘Humanism’, which was coined by the President as an African socialism. There was intervention in pricing policy, which seemed to be concerned more with social welfare than with pursuing economic development goals.

In 1970, barely two years after the Mulungushi and Matero reforms capital expenditure was only growing at a marginal increase, while consumption expenditure soared. Table 2.1 shows the higher government consumption and lower gross domestic consumption from 1964-90. Due to little emphasis which was made on capital expenditure, in 1973, value added in manufacturing recorded only a marginal increase from 106 Million Kwacha to only 107.5 Million Kwacha in 1976, compared to 480 Million Kwacha in 1965 a year after independence (GRZ Economic Report, 1977). Value added by manufacturing in 1978 real terms was 15 percent lower than 1974. Hence by the mid 1970s, the bells of economic doom were loud enough in politicians’ ears, but pretended to be deaf. They instead nurtured and guarded the inefficient parastatals and the command economy. To make the situation worse, some more parastatals were created and added to the list of inefficiency. After 1970, a substantial part of Zambia’s economy was dominated by parastatal organisation, about 60 percent of the economy in terms of GDP was now in parastatal hands. Most larger companies which had been run and owned by foreigners came under government control through Industrial Development Corporation (INDECO), an agency of a government holding company.

These newly nationalised companies were especially active in such industries as food processing, textiles, auto assembly and mining. Through large- scale capitalisation, using copper revenue, these parastatals became the pillar of the Zambian formal sector. They employed 1/3 of the workforce and maintained their employment levels even during the recession, for political reasons. For instance during recession, the number of employees in private manufacturing fell from 27,370 to 23,390 in 1977, about 14.5 percent reductions, while in the parastatals they remained constant over the same period (Turok, 1979). In these parastatal bodies there were rampant and continuing reports of corruption, inefficiency and mismanagement, but government decided to give it a deaf ear. The Kayope Commission (1976), revealed catastrophic failures in major parastatals and widespread misappropriation of funds, but still the government shelved the report, and continued to give subsidies and protection to these inefficient parastatals.  Real Gross domestic fixed investment declined as there was no significant capital formation. The emphasis was put on government consumption while the economy continued   to decline. This can be seen in the decrease in capital expenditure which fell in 1979 to its lowest since independence in 1964 as Table 2.1 shows. This shows that INDECO, on which the government relied as agency of intervention was performing poorly.

 At independence, Zambia’s economy had poor foundation, domestic production supplied less than one third of the local market for manufactured goods, while total manufacturing goods accounted for only 6 percent, the same setting continued even 10 years after independence, domestic economy was not integrated lacking forward and backward linkages. In trying to enhance domestic integration the government after its 1968 Mulungushi and 1969 Matero economic reforms bought out the private share holders in INDECO which was established in 1965, but reinforced after these reforms, and obtained a larger share of profits from copper by means of higher taxation, which was then used for public investment.











TABLE 2.1: GOVERNMENT CONSUMPTION IN COMPARISON TO GROSS DOMESTIC FIXED INVESTMENT 1964-90 (IN KWACHA MILLION)

   Year              Government consumption                     Gross domestic fixed 

                                                                                             investment

1964

309.2

76.2

1965

383.4

120.4

1966

435.8

175.8

1967

558

225.8

1968

594

264.7

1969

589.4

253.6

1970

717.5

279.8

1971

801.9

264.7

1972

857.3

381.1

1973

900.7

426

1974

1083.1

560

1975

1241.8

510

1976

1337

483

1977

1547.8

437

1978

1789.3

450

1979

2045.6

65.8

1980

2473.5

566

 



Economic Justice and Democratization of Economy to Create Ideal Society

June 21st, 2009
Prof Viswanathan asked:


Economic Justice and Democratization of Economy to create Ideal Society

By

Prof Viswanathan,

Director,

International Socio-Economic Research Bureau

(E Mail Id : economist@dataone.in)



DECLARATION OF JUSTICE AND HUMAN RIGHTS

We, the people of all the countries, in harmony with the sovereignty of the Universal Justice hold these truths to be self-evident that every creator has inalienable ‘Right to Ownership’ on his creations and the Natural laws empowers the creators that only he should use his creations exclusively for the welfare and uplift of the human society as a whole, in which he is an inseparable member.

We declare with all judicial power derived from Natural laws that among all creations of man, his creation of capital alone has enormous ‘economic power’ capable of transforming all the socio-economic-political structures and reconstitute them to suit the aspirations of the owners of capital.

We further declare in unequivocal terms since the capital is created by the collective labor of the people as a whole it should be directly owned by the people and then only the people would secure equal ‘Economic power’ and requisite ‘Fundamental Economic Rights’ with which they could establish an ‘Ideal Society’ in the way in which they desire.

In accordance with ‘Economic Justice’ when the capital is directly owned by the people, we declare that the people would naturally secure what we consider the best among the ‘Fundamental Economic Rights’ like ‘Right to live’, ‘Right to work’, ‘Right to Economic Equality’, ‘Right to economic liberty’, ‘Right to Economic Security’, ‘Right to participate in the management’, ‘Right to capital creation’, ‘Right to live with fraternity’, and requisite ‘socio-economic-political rights to pursuit of decent happiness’

We further proclaim when the people secure the above mentioned ‘fundamental rights’ they would succeed ultimately to establish an Ideal Society or Just Society for which they were tirelessly striving in transforming one form of society into another since the dawn of civilization, and to execute their noble concept of ‘One World, One Government, and One Humanity’ and in the end the people would be victorious in choosing what form of ‘Economic System’ that would be the best of all other systems for the establishment of an Ideal Society for which they would secure all requisite authorities of Natural laws that bestow on them.

1. Emergence of Economic Systems:

Different economic systems had emerged on the horizon of the history of mankind whenever different kinds of ‘Capital Ownership’ sprang up. Especially capitalism and socialism emerged after industrial revolution on the determinant factor of ‘capital ownership’. Generally in all economic systems ‘the ownership of capital’ forms the ‘basic structure’ of a society on which the fabrics of super structure of society are determined. The super structure usually exhibits the qualitative fabrics of society such as religion, culture, education, laws, customs and conventions etc. which are determined according to the aspirations of the owners of capital. In short the social elements are dependent factors of capital ownership.

During the turbulent period of 1750s when Industrial Revolution burst upon the England and other European countries it introduced gigantic machines – a kind of capital – in the factory system of production of goods and services. It engulfed the mankind like huge deluge and tossed the world societies and changed each and every super structural elements of society in such a manner not to even to trace out their originality. We, the people, at that period were deeply perplexed and confused what to do as we were in the vicinity of utter economic ignorance.

2. Two Economic Affidavits:

During Industrial Revolution the economic environments in the factory system was not only in muddle but also demoralizing the societies. No one had any knowledge how the economy was operating and how should it be operated. Everyone was expecting for the worst to come. Whole Europe was plunged into utter ignorance. At that crucial period of time it was Adam Smith, the Father of Economics, published his famous book ‘An enquiry into the Nature and Cause of the Wealth of Nations’ in 1776.

3. Economic Affidavit of Adam Smith: In his book Adam Smith spelt out an ‘Economic Affidavit’ solemnly and sincerely that if we, the people, entrusted our capital to a few capitalists in the name of ‘Capitalism’ (Individualism), they would not only change even the sand into gold but also drive the mankind to march towards an ‘Ideal Society’ by modernizing production potentialities with the help of scientific technologies and division of labor. Completely ignoring the working class who constitutes the society, Adam Smith concentered and focused his interest on a few capitalists and advocated that they without the interference of State would accumulate wealth of nations with the help of division of labor using modern machines and assured that the few independent capitalists would moreover create a favorable climate for the establishment of Ideal Society by increasing production many folds. Adam Smith completely neglected the equitable distribution of wealth to the mass working class. He linked the establishment of an ideal society with the mass production but not equitable distribution of wealth. Thus he misguided the whole world convincingly and decisively for a long period during which the working class was thrown into appalling poverty and horrible living hood.

Ricardo and Malthus, drawing he thread of arguments from the wisdom of Adam Smith, eloquently presented their views in favor of a few capitalists and equally convinced the people to surrender their capital in the possession of capitalists who would solve all the socioeconomic problems of mankind. Thus when the people entrusted their capital in the hands of a few capitalists a ‘Capitalistic Mode of Production’ emerged with strong magnitudes in England and some other European countries. This capitalistic mode of production, shattering hitherto existing highly valuable cultures and customs of people, created a complex and conflicting, and highly demoralizing ‘Capitalistic Society’.

The newly emerged ‘capitalistic Society’ forced the social elements such as law, art, culture, customs, religion, education and other economic and political rights and liberties to work for the benefit and security of a few capitalists because on their welfare the welfare of mass working class was depending on. The capitalistic mode of production converted the ‘Right to live’ of mass working class into a dependent factor of the security of the capitalist class who owned the capital and modern factories. This was because if a capitalist collapsed with his factory, the livelihood of the workers working in that factory would also collapse. So all the social elements ranging from culture to human liberty had to work for the security of a few capitalists. Thus the Ideal Society which the people dreamt for long span of time became a myth and mirage. In the capitalistic mode of production the Ideal Society was meant by ‘Capitalistic Society’ representing a few capitalists.

4. Counter Economic Affidavit of Karl Marx:

Having abundant flow of sympathy on the exploited mass working class and endless stream of hatred on the capitalists who caused for the appalling poverty of workers the mentally and morally agitated Karl Marx and Engels declared a ‘Counter Affidavit’ in 1848 in their ‘Communist Manifesto’ and Karl Marx alone in 1867 in his magnum opus the Das Capital. In their counter affidavit they advocated that if We, the people, forfeited our capital from the few capitalists with the help of Bolsheviks (communists) and entrusted the capital in the hands of the ‘State’ under the control of ‘Proletariat Dictatorship’, that the ‘State’ would lead us ‘Towards an Ideal Society’ and establish ‘One World’.* Believing their ‘Counter Affidavit’ word by word, in the October Revolution of 1917 we forfeited our capital from the few capitalists and handed over it to the trustworthy of the ‘State’. The State introduced a ‘Socialistic mode of production’ and on the basis of this, a fearful and subjugating ‘Socialistic Society’ emerged. The working class was engulfed with awe and fearsome and terribly perplexed on the outcome of the ‘Revolution’ and utterly disappointed for not even tracing any hope of achieving ‘Ideal Society’ which their Bolshevik masters promised during the ‘Revolution’.

__________________________________________________________________

*In the words of Karl Marx : “ In a higher phase of communist society, after the enslaving subordination of the individual to the division of labor, and therewith also the antithesis between mental and physical labor has vanished; after labor has become not only a means of life but life’s prime want; after the productive forces have also increased with the all-round development of the individual, and all the springs of cooperative wealth flow abundantly - only then can the narrow horizon of bourgeois right be crossed in its entirety and society inscribe in its banners : From each according to his ability, to each according to his needs!”

– Marx(1875), pp 21-23


Karl Marx and Engels were not alive at that time of October Revolution. They were great champions for working class and ‘buts’ about it. They worried wept for working class, they suffered for working class, they sacrificed everything for the working class, and above all they were exiled, especially Karl Marx, from country to country for the cause of working class, and they really wanted to see the working class of all the countries in an ‘Ideal Society’. But the ‘October Revolution’ in Russia proved that their ‘Theory and Practice’ did not coordinate with each other and did not function in harmony. There was something wrong in the ‘Theory and practice’ which resulted in utter collapse of Socialism at the end process. What was the fault that penetrated for its collapse?

I have same streak of opinion in respect of Adam Smith and Malthus as well. I believe when they advocated that we, the people, should entrust our capital in the possession of few capitalists, they believed that the capitalists would not exploit the working class. But when their theories put into practice it was the selfish capitalists who manipulated their theories as convenient and convincing tools to exploit the mass working class. It was the capitalists who portrayed the theories in a darkest dark when they put them in practice because of their selfish motives. In other words there was unbridgeable disparity ( a deep wide chasm) between the theory and practice which the capitalists utilized it to fulfill their selfish motive of maximization of profit in exploiting the mass working class. What was the terrible fault that was penetrating here also?

Though the original proponents of capitalistic and socialistic theories were not enemies of working class, the executors of these theories, the capitalists on one hand and the ‘State’ on the other hand misled the working class for their selfish motives. The primary fault was that we, the people, instead of retaining the capital with us, separating ourselves into two diametrically opposite poles, surrendered our capital to a few capitalists in West European and North American countries and to ‘State’ in Russia, China and other East European countries.

The inherent contradictions that deeply and widely penetrated in the theories and practices of the two economic systems originated a fierce vicious spiral and exploded like a ‘Big Bang’ and scattered away violently but suddenly all the socio-economic problems throughout the world like inextinguishable fire balls. Instead of establishing an ‘Ideal Society’ these two systems, even after a prolonged period of experiments, have pushed the mankind at the verge of nuclear holocaust and wide spread day - to-day terrorism.

5. Democrism – People’s Direct Ownership of Capital:

As long as more than 200 years, Capitalism had left no avenues unexplored to establish an Ideal Society but disastrously collapsed during 1930s throughout the world due to the pressure of its own weight of self contradictions and brutal ambition of maximization of profit. On the same footing, Communism too after exerting all methods of cruel tortures (Stalin’s roughshod treatment of the kulaks) in the name of ‘Proletariat Dictatorship’ for nearly 75 destroyed itself in 1992 in its own breeding place. As both the systems are now struggling for their own survival, they have now decided to end the ‘cold war’ between them. Since the both the systems pushed us into great disappointments and they did not effective economic techniques to solve our economic problems in accordance with ‘Economic Justice’, we, the people, hereby declare to forfeit our own capital both from the capitalists and the ‘State’ and retain it under our direct ownership in peaceful manner or by force if necessity demands and create a ‘new economic system’ known as ‘Democrism’ on the basis of people’s Direct Ownership of Capital and we, further declare the Natural Laws have entrusted upon us all executive powers to do so as our birth right.

On the People’s Direct Ownership of Capital a just economic system known as ‘Democrism’ will in the world and it will provide us ‘Democratic Mode of Production’ which is an inevitable must for the establishment of an ‘Ideal or Just Society’. I venture to say in short,

“Capitalism is popular and popularly defective;

Socialism is destructive and destructively popular;

Democrism is justifiable and justifiably inevitable.”


Whatever race we relate to, whatever language we speak to, whatever color we cover to, whatever religion we follow to, whatever nation we belong to, we are always being influenced by justice and by its emphatic authority of supremacy. The laws may be in transient from time to time, and vary from country to country, but the concept of justice remains illuminant everywhere. We want justice, only the justice and nothing but the justice. Throughout the long passage of history we have honored justice; we have kept in high esteem the men of justice right from king Solomon to Gandhiji . We have unshakable faith that justice is perpetual and ever pervading. We have always fought for justice and it has united us without any discrimination. In his book ‘Anatomy of Liberty’, William O. Douglas, the Justice to the United States Supreme Court, says this truth in every respect as follows:

“The appetite for justice is indeed a cementing influence amon all races, whatever language they speak, whatever of their skin”

-Douglas,William O. “Anatomy of Liberty” (p: xxiv) : (1965)


The universal fact is that if there is justice there will be harmony and immortality. The scientific facts are immortal because they are based on experimental truths. On the other hand if the socio-economic-political principles want to be immortal they should based on justice, only the justice and nothing but justice and perhaps on natural justice. The capitalistic and socialistic principles lack application of justice and therefore they struggle vainly to solve our life problems and they are marching towards their last destiny - the inevitable grave yard. Keeping the above facts in mind I have with utmost care and concern formulated the economic principles on the natural justice in the name of ‘DEMOCRISM’ which will secure universal acceptability. The genesis of all natural justices is to uphold ‘People’s Direct Ownership of Capital’ for which we have to forfeit our capital from the few capitalists and the ‘State’. Why?

“People’s Direct Ownership of Capital : Why do we want?”

1. Denying the natural justice of ‘Right to live’ by Capitalism and Socialism: (Capital promotes and intensifies war)

We, the people of all the countries, unanimously **** intensely the wars which germinate in any form or for any cause. Naturally we are peace loving people. Despite our strong protests the wars have been fought all over the world and billions and billions of innocent people having no association with the war, have been brutally killed and massacred and the skeletons of these people have been heaped like mountains in graveyards. What cause underlies for these wars? The answer is simply one word – ‘the capital’. It is the ‘Ownership of Capital’ by a few capitalists or the ‘State’ that attributes for all kinds of war that negates one’s ‘Right to live’ in the name of patriotism in particular.

Let us for time being set aside the wars fought before Industrial Revolution. The factory system facilitated for the production of ‘weapons of mass destruction’ that can be employed from the land, from the ocean and from the air. The whole world turned into open battle field for the nuclear bombs, ballistic missiles, supersonic jets, various kinds of military rockets and the military satellites orbiting the earth. Whatever might be the causes of First and Second World Wars, but their consequences were horrible that pushed the mankind to the very verge of its extinction from the earth planet. Why?

Wars before and after Industrial Revolution: Before the industrialization the wars were fought on a particular battle fields and between two hostile warriors only. The range of destruction was very narrow and limited in coverage because the warriors used only spears and swords. The weapons were manufactured in cottage industries or by the warriors themselves. Natural boundaries like mountains, rivers, oceans and great deserts prevented the enemies to enter into a independent country.

After industrial revolution, weapons of mass destruction were produced with the help of highly sophisticated technologies with help of huge capital in factories owned by a few capitalists and the ‘State’. The natural bounties disappeared and the whole world became open battle field. These weapons were maneuvered only by the highly skilled technocrats. The technocrats used these weapons on the common innocent people to terrorize the enemy-governments to surrender immediately. For example, in World War II USA used nuclear atom bombs to bombard on millions of Japanese civilians and terrorized the government to surrender without fighting in the battle field. Nowadays the battle fields are disappeared and the whole world has become open battle field in the face of mighty ballistic missiles and nuclear atom bombs. They can be produced only with the help of scientists and huge capital owned by the ‘State’ and a ‘few capitalists’. As long as the capital is owned by the ‘State’ and ‘few capitalists’ we cannot escape from nuclear holocaust. Originally Capital was created by the working class to assist them to increase their productivity of consumption goods. As soon as the capital went into the illegal ownership of ‘State’ and ‘Capitalists’ it was used for the production of mass destructive weapons. If we scrutinize the expenditure of the world governments we can detect that a large portion of government expenditure has been allocated for ‘military up gradation’ than for the ‘promotion of education’ and ‘elimination of poverty’.

2. ECONOMIC THEORY OF WAR :

Firstly “if the accumulation of destructive capital increases the temptation for war will increase and vice versa”. The destructive capital means the capital that is used for the production of destructive weapons used by military forces. Secondly the difference in economic ideology of a country prompts it to increase its military power to show its ideological success over the other country and spread its ideology over other countries through war. For example USA and Russia used war as a weapon to spread their capitalistic and socialistic ideologies over other countries. The pages of recent past history will illustrate the fact and also the reason for accumulation of nuclear weapons and other variety of scientific weapons of mass destruction. Thirdly on the globalization of world economy the capitalist rich countries invest huge volume of their excessive capital in poor and developing countries. In order to protect their huge capital from nationalization by the beneficiary countries a mighty military force is required by the investing countries. For instance the American war and threatening of war over Arabian countries to protect her huge capital invested in exploration of petrol and fuel industries. Now American capitalists are investing billion and billions of dollar in I T industries of India and other developing countries. The American capitalists believe that they can protect their capital by their country’s military power. If any country try to nationalize these industries it will result in war. Fourthly the over production of industrial goods by rich countries force them to dump their over production in poor countries through their military power.

Economic reason for two world wars : Virtually after Industrial Revolution in most of the European countries the capital was owned by a few individuals. Since the very aim of capitalism was ‘maximization of profit’ the workers were paid less and it resulted in deficiency of effective demand which caused for ‘over production’. These European countries occupied the poor countries by their military power and converted them as their ‘political colonies’ and with the concept of ‘Free Trade’, they dumped their over-production in the colonies and also exploited the wealth of the colonies. India was the notorious example for that.

With the help of exploited wealth these ‘mother countries’ strengthened mainly their military power. The safety and security of the other ‘Dictatorial European countries’ which had ‘State or less individual Ownership of Capital’ were in jeopardy and unprotected in front of the mighty capitalist countries. On detection of the geographical track these countries found that there were no countries in the world to occupy them as their colonies for exploitation in order to increase their wealth and thereby their military power. These lately wakened dictatorial countries sniffed the fact that their ‘political and military supremacy’ would be pulled down rapidly on the downward track. In order to surpass the supremacy of the Capitalistic European Countries the ‘Dictatorial European Countries, found no other alternative except ‘war’ on the Capitalistic European Countries and on their colonies all over the world. The ‘lust for supremacy’ over the other countries forced them to wage two world wars. Napoleon and ****** waged war against all of Europe because for the sake of supremacy.

Ayn Rand emphatically points out the genesis for the two world wars in his book ‘Capitalism’ as follows:

“……World War I was started by monarchist Germany and Czarist Russia,

who dragged in their freer allies. World War II was started by alliance of

‘Nazi’ Germany with the Soviet Russia and their attack on Polland” *

- Rand Ayn :“Capitalism: The Unknown Ideal” (New American Library-1967) p:37


In this nuclear age we witness a political and economic turbulence all over the world for a mad race for military equilibrium and economic supremacy. Both the Capitalism and Socialism have no blue-print to terminate the opportunity for Third World War. The rich capitalist and socialist countries want to become richer and richer by pushing the vast majority of poor countries to become poorer and poorer as per World Economic Reports. At present the silent turbulence boiling in the poor countries will burst into a Third World War which will be fought between the rich northern countries and the poor southern countries of the world and result in nuclear holocaust. That is why the USA is very keen on preventing the proliferation of nuclear technology among the southern countries using its military might. The only way left for the mankind to stop the flow of ever threatening danger of nuclear war is the execution of economic equality by rich countries in extending their helping hand to poor countries to pull them up from poverty and to reduce the economic imbalance between rich and poor. The capitalist countries will not permit the economic equality within and without but fight for upholding their economic supremacy which will be the ultimate cause for the Third World War.

We, the people, therefore, have no other alternative except to forfeit our capital from the capitalists and the ‘State’ and retain it under our ‘Direct Ownership’ to coordinate with the command of Natural Laws to save the mankind.

2.1. Consequences of World wars and destructive capital:

The First World War was fought between 1914 and 1918. During the span of 4 years the war was fought violently 120 million seconds. Nearly 48 million people (including soldiers) were dead and wounded.* In other words in every 10 seconds 4 people were killed either dead or wounded.

· Nehru, Jawaharlal : “Glimpses World History” : p.637


In the Second World War When the war was virtually approaching its end, on 6th August, 1945 an Atom bomb by name ‘Little Boy’ – a new war machine that the mankind hitherto never experienced – was dropped on Hiroshima. With in 10 seconds one million innocent people were killed. The first world war took 10 seconds to kill 4 people but the second world war, at its end, took 10 seconds to kill one million innocent people. The annihilation depends on the density of population of a city on which an atom bomb drops on. The Super Powers like USA and Russia, have now heaped in their arsenal million times more powerful atom bombs than the one that was dropped on Hiroshima.

No doubt the atom bombs that dropped on Hiroshima and Nagasaki were invented by the nuclear scientists. The billion dollar question is whether the scientists produced them with their bare hands or in cottage industries or in sophisticated industries created by huge capital. No capitalist will ever afford such huge capital for the production of weapons of mass destruction because their aim is always ‘maximization of profit’. Only the State can siphon huge capital for the production of atomic bombs only with the help scientists to threaten the other countries and to enjoy the status of ‘super powers’.

Though the atom bombs are the brain-children of atomic physicists the capital required to manufacture them is funded only by the governments secretly against the wishes of the people. As long as the capital is owned by the governments, irrespective of Socialist or Capitalist governments, they spend huge capital for the production of atom bombs in order to achieve military supremacy over other countries or to attain at least an equilibrium in military power. Extensively it is the hard-core radical politicians brain wash the people under the guise of ‘patriotism’, ‘National security’ and ‘National pride’ for the production of atom bombs and other ballistic weapons. Since most of the atomic scientists are the government scientists they have to produce atom bombs at the insistence of governments in the name of national security.

“In 1943 the Manhatten Project Laboratory at Los Alamos, New Mexico, with

J.Robert Oppenheimer as its director, was assigned the task of developing an

atom bomb. The first test at Alamogordo on July 16, 1945, was an outstanding

success (the desert sand was fused to glass for hundreds of yards around the

the site). In August two atom bombs were dropped on Japan”.

“Hiroshima inaugurated not only a new age of science but a new kind of scientists

-the government servants whose knowledge and talent are an important part of the

national arsenal. Furthermore, the scientists were now much more conscious of their

social position and responsibilities. This was true in all advanced industrial countries,

put particularly in the United States and the Soviet Union. Presumably, Soviet

scientists were satisfied to follow the dictates of government leaders, but after World

War II, Oppenheimer and other American scientists entered into a great debate over

the human, political and social implications of atomic science and a profound searching of their own consciences. Oppenheimer resisted the building of the hydrogen bomb - a much more devastating weapon than the bombs used against Japan - in the early

1950’s, and he made important enemies. When Oppenheimer’s security clearance was

withdrawn in 1954, a great outcry from his colleagues expressed more than personal

indignation. The Frankenstein myth appeared to be true, and the monster had locked

the scientist out of his own laboratory. Certain branches of scientific research are not

only secret today, they are expensive secrets; the cyclotrons and reactors of the 1960’s

are far beyond the means of any university or other institution without government support”.*

( * - Cantor, Norman F. – “Western Civilization : Its Genesis and Destiny” III –1970; pp:528-529)


I can arrive two conclusions from deducing the above historical facts:

Firstly, we have to free the atomic scientists from the clutches of governments.

Secondly, we have to forfeit our capital from the hands of governments and to keep it under our own control and possession.

Unless we, the people, forfeit our own capital from the governments and restore ‘people’s direct ownership of capital’ we could not prevent the governments from the mad race for producing ‘weapons of mass destruction’ ranging from AK-47 to atom bombs (of 20,000 megaton attack)

When we pay the tax-money to the governments, we intend tacitly that they would spend it to solve our poverty; but they do not do so. In a speech on April 16, 1953, President Eisenhower said :

Every gun is fired, every warship launched, every rocket fired signifies, in the final sense, a theft from those who hunger and are not fed, those who are cold and are not clothed …

The cost of one modern heavy bomber is this: a modern brick school in more than thirty cities…… We pay for a single fighter with a half million bushels of wheat. We pay for a single destroyer with new homes that could have housed more than eight thousand people…………

This is not a way of life at all, in any true sense. Under the cloud of threatening war, it is humanity hanging from a cross of iron…….”


Professor Dallas W. Smythe of Illinois said, “Billions for defense but not a cent for socialism. It is not socialism to have the government spend 50 billion dollars for weapons; it would be socialism if the government spent the same amount for education or for public works”.

When we entrusted our capital to the capitalist as well as the socialist governments we constituted a tacit ‘Economic Contract’ with governments. The first and foremost element of the ‘Economic Contract’ was that the governments should utilize our capital to solve our basic economic problems such as poverty, unemployment, economic disparity etc. But the governments in violation of the Economic Contract have spent our capital to destroy our own survival by engaging in the production of weapons- mass-destruction. The governments with the help of scientists produce variety of ballistic missiles and nuclear bombs and test them day in day out to display their scientific genius and military power to other governments. The accumulation of such deadly weapons have now pushed the mankind to the very verge of nuclear holocaust. We, the people of all the countries, therefore, want to recover our capital from the governments and to keep it under our own control and ownership to preserve a perpetual world peace, our birth right.

__________________________________________________________________________________

“Little Boy” is the nick name given to the atomic bomb dropped on Hiroshima on August 6, 1945. It was Monday morning. Little Boy was dropped from the Enola Gay, one of the B-29 bombers that flew over Hiroshima on that day.

Little Boy

After being released, it took about a minute for Little Boy to reach the point of explosion. Little Boy exploded at approximately 8:15 a.m. (Japan Standard Time) when it reached an altitude of 2,000 ft above the building that is today called the “A-Bomb Dome.”

The July 24, 1995 issue of Newsweek writes:

“A bright light filled the plane,” wrote Lt. Col. Paul Tibbets, the pilot of the Enola Gay, the B-29 that dropped the first atomic bomb. “We turned back to look at Hiroshima. The city was hidden by that awful cloud…boiling up, mushrooming.” For a moment, no one spoke. Then everyone was talking. “Look at that! Look at that! Look at that!” exclaimed the co-pilot, Robert Lewis, pounding on Tibbets’s shoulder. Lewis said he could taste atomic fission; it tasted like lead. Then he turned away to write in his journal. “My God,” he asked himself, “what have we done?” (special report, “Hiroshima: August 6, 1945″)

note: Paul Tibbets was Colonel, not “Lt. Colonel,” when he was the pilot of the Enola ***.

The Little Boy generated an enormous amount of energy in terms of air pressure and heat. In addition, it generated a significant amount of radiation (Gamma ray and neutrons) that subsequently caused devastating human injuries.

The people who saw the Little Boy often say “We saw another sun in the sky when it exploded.” The heat and the light generated by the Little Boy were far stronger than bombs which they had seen before. When the heat wave reached ground level it burnt all before it including people.

The strong wind generated by the bomb destroyed most of the houses and buildings within a 1.5 miles radius. When the wind reached the mountains, it was reflected and again hit the people in the city center. The wind generated by Little Boy caused the most serious damage to the city and people.

The radiation generated by the bomb caused long-term problems to those affected. Many people died within the first few months and many more in subsequent years because of radiation exposure. Some people had genetic problems which sometimes resulted in having malformed babies or being unable to have children.

It is believed that more than 140,000 people died by the end of the year. They were citizens including students, soldiers and Koreans who worked in factories within the city. The total number of people who have died due to the bomb is estimated to be 200,000.

The A-Bombs used over Japan; Little Boy (left) and Fat Man (right)

Just three days after the bomb was dropped to Hiroshima, the second atomic bomb called “Fat Man” was dropped to Nagasaki. Though the amount of energy generated by the bomb dropped to Nagasaki was significantly larger than that of the Little Boy, the damage given to the city was slighter than that given to Hiroshima due to the geographic structure of the city. It is estimated that approximately 70,000 people died by the end of the year because of the bombing.

We strongly believe that the world must learn about weapons of total destruction. We hope that the information presented here will help you understand the pain and devastation that nuclear weapons can cause. We don’t want you to just feel sorry for the people of Hiroshima and Nagasaki, the war inflicted untold pain and suffering on many people in Asia and the Pacific. Rather we want you to work with us to ensure that all of us can live in a safe world.

We hope this document helps you understand what it was, what it means and what we have to do.

____________________________________________________________________

2.2 The cause for dropping atom-bomb on Japan:

There are two theories for dropping atom bomb on Japan. The first is to take retaliation on Japan for its attack on Pearl Harbor. The second is to prevent Socialist Russia to capture Japan. The first theory do not sound reasonable because :

Hitler committed ******* on 30th April, 1945. Immediately on 7th May the Germans agreed to unconditional surrender. Moreover Mussolini and his mistress were killed on April by anti-Fascist Italian partisans. Japan’s position was now completely helpless, and the emperor supported a party in the Japanese government that wished to seek a negotiated peace. The second world war was more or less approaching to its end.

The second theory sounds well because :

On 16th July 1945 President Harry S. Truman - who had assumed office on Roosevelt’s death on 12th April, - was informed that an atom bomb had been successfully tested in New Mexico. The U.S. military found that no other weapon was so awful in destructive power as that of the atom bomb.

At the same time the military forces of Socialist Russia were rapidly advancing towards Japan - the border country of Socialist Russia – to capture it.

The Capitalist America was now in great distress that the Socialist Russia would not only capture Japan but also convert it a Socialist state. To uphold its supremacy America thought that it had no other choice except to execute two things:

1. to prevent immediately the invasion of Socialist Russia on Japan;

2. Instead, it had to capture Japan without sacrificing any more lives of American soldiers in the invasion of Japan.

In order to fulfill the above aims, the Capitalist America was left with only one option that was to use the awful new weapon - the atom bomb - on the civilians to force Japan to immediate surrender. Persuaded by the military strategy, Truman decided to use the bomb and it was dropped on the Japanese city Hiroshima on 6th August, 1945. About 80,000 civilians were killed immediately. Nearly 200,000 died later of radiation or were maimed for life.On the sudden turn of events, Soviet Russia sensed that Japan would go out its hand though it was within its reach. So two days later, on 8th August, Russia declared war on Japan and crossed the Manchurian frontier as the Japanese army remained committed to a fight to the finish.

Since there was a race for supremacy between Socialist Russia and Capitalist America to capture Japan and moreover Russian army crossed the Manchurian frontier, the Capitalist America was forced to act swiftly. So, a second atom bomb – Fat Man - was dropped on Nagasaki on 9th August, 1945 by Capitalist America. Nearly 70,000 civilians died immediately. The following day the Japanese government offered to surrender. On 14th August the terms laid down at Potsdam were accepted and the Second World War was over.

The truth is still solid and sound that the atom bombs were dropped on Japanese cities not because Japan would succeed in the second World War but because the governments of Capitalist America and Socialist Russia were arrogantly desirous to show their supremacy over the other as their economic systems were quite contradictory with each other. Both Capitalism and Communism wanted to prove that it was their system that ultimately led the Second World War towards victory. This ideological conflict between the America and Russia, at the end of the war, resulted in nuclear holocaust of Japan.

There is no assurance to the people of all countries that another nuclear war will not burst out due to the ideological conflicts between the countries or to show their supremacy or for some other reasons the time will decide. Not only America and Russia but all the nuclear countries do not now wish either to destroy all their nuclear weapons or dismantle the industries which produce such weapons of mass destruction. Under these circumstances and ground realities how can we believe and console ourselves that yet another nuclear war will not threaten mankind and cause to vanish the very existence of mankind on the earth. So, we, the people of all the countries, declare to forfeit our capital from the few capitalists and the State and to keep it with ourselves. When we have ‘direct ownership of capital’ we will not allow our capital for the production of nuclear weapons or any other weapons of mass destruction.

3. Economic Justice in jeopardy and in peril:

When we handed over our capital to a few capitalists, we were under strong presumption, that they would in certain sense, solve at least our basic problems of poverty and unemployment. On the contrary, since the very basic aim of capitalists is ‘maximization of profit’ they execute all kinds of nefarious designs to exploit the laborers and treat them like other business commodities. So with the enrichment of new technologies the capitalists always intend to replace the workers or minimize the labor force by sophisticated machines. The capitalists never show any interest to promote the economic justice in solving the human problems like poverty, unemployment, economic inequality, unequal distribution of income and wealth etc.

But now the capitalists in some way or other have promoted the welfare of society only by way of promoting their own self interest. In other words if and only if the capitalists are assured that their self interest would be promoted then alone they will allow the betterment of welfare of other members of society. The welfare of huge majority of society is always considered to be a ‘dependent factor of a few capitalists’ in the system of private ownership of capital.

In other words the Welfare of Society (WoS) operates as ‘function of Interest of Capitalists (IoC)’. We can write it as

WoS = f(IoC) ……………. 1

The Interest of Capitalists, in turn, depends on their ‘Maximization of Profit (Max o P). So the equation becomes

IoC = f(Max o P) ……………. 2

The Maximization of Profit (Max o P) by the capitalists results in the ‘Exploitation of Working class’ (EoW). It may written as

Max o P = f(EoW) ……………. 3

The Exploitation of Working class (EoW) creates ‘Maldistribution of National Income’ (Md o NI).

EoW = f(Md o NI) …………….. 4

The degree of maldistribution of national income exposes how the workers are exploited in a country. Generally speaking in most of the countries the top 10% of population enjoys 80% of the national wealth and only just 20% of national wealth is distributed to a vast majority of 90% of population. The maldistribution of national income has always kept the vast majority of people to suffer with low purchasing power and in due course it results in over production. Due to over production the producers are forced to reduce their volume of production and level of employment. On finding the disequilibrium that the goods are not consumed at the rate at which they are produced the producers are forced to close their industries. The very aim of capitalists, the maximization of profit, not only crushes them but also the whole society. Therefore, the private ownership of capital will be dangerous to the whole society and the national capital capital should be equally distributed among the people for the welfare of the mankind. So, Betrand Russel says:

“Private ownership of land and capital is not defensible on the groundsof justice or on the grounds that is economical way of producing what the community needs”

– Russel, Bertrand : “Political Ideals” (p ; 35)


Equally the Marxian theory of “State Ownership of Capital” lacks perfection and threatens human rights. Marxian theory is formed on adamant and inflexible principle and it will not coordinate with the changing world conditions. It preaches a kind of ‘economic fundamentalism’ which wants the elements of society to remain in rigidity for ever. So Loucks rightly states:

“Errors in the theoretical of Marxian thought are so serious and so basic that they cannot be corrected by interpreting or modernizing Marx not can they be considered superficial”

Loucks : “Comparative Economic Systems” ( p : 166)
4.

Poverty in the midst of plenty:

We, the people of all the countries, have accumulated capital more than enough and the goods that could be produced with the help of that capital is more than adequate to eradicate poverty in the world. The statistics of “World Development Report – 1991” substantiate that if we distribute the goods produced equally among the people of all the countries, each one would receive the goods approximately worth of Rs.300 per day, which is more than enough for one’s needs. But in contrary with this fact, two third of world population is now subjected to appalling poverty and suffering with hunger and various diseases for want of adequate notorious food.

The poverty prevails not only between the countries but also within the countries irrespective of whether the country is developed or developing. As there is darkness below the burning candle so is the poverty even in the affluent society due to maldistribution of income and wealth. John Meynard Keynes criticizes the capitalistic system with this ever prevailing paradoxical element of “poverty in the midst of plenty”. Since the capitalism do not know how to distribute income and wealth equally among the people, the capitalists have no moral right or legal right to keep our capital with themselves. They have to honestly return us our capital and we know how to solve our problems under ‘people’s direct ownership of capital’.5.

Absence of Right to Live:

Throughout the length and breadth of the world we can notice the youth both in rural and urban areas bearing great agony in their eyes, having no value for their education are wandering desperately on the streets in seeking employment. The unemployment has pushed them to strip away their dignity, self respect and equal status among others not only in the society but also in their own family. Everywhere they are treated as insignificant trivial and above all less than a human being. In the economic systems, both in capitalism and socialism, they feel that they have deprived of the possession of ‘Right to Live’ at all.

6. Origin of terrorism and economic crimes:

It is partly true that unemployment generates economic insecurity among the youth. But by and large it victimizes the youth an easy prey to drug addiction, trafficking, terrorism, and other socio-economic evils.

The universal accepted fact is that capitalism cannot solve unemployment. The function of capitalism is such that if we want to adhere with capitalism we have to live with unemployment at certain level. The advocates of capitalism have now proved that full-employment in capitalism is only a myth and mirage. Hence as long as capitalism is prevailing in the world, so long as the socio-economic evils will also be pervading in the world as its by products and they will be deteriorating all the well-nurtured cultural fabrics of society. If we want capitalism, we have to learn to live with terrorism and other socio-economic evils.

7. Economic Equality is a Mirage :

It is evident throughout the world, the economic inequality among the people not only within the country but also between the countries is going on widening with an accelerated momentum. In 1982 the per capita income of developed countries in average was 42 times more than that of developing countries like India and China, but the gap was still widening 56 times in 1989. As the gap is going on increasing the poor countries are becoming still poorer and rich countries are more richer. It is natural not only among the people but also among the countries to develop strong feeling of jealousy and hatred, and an impression of inferiority complex and a sentiment of economic slavery. In the complex and confused modern economic systems, the concept and reality of ‘economic equality’ is rushing over beyond the orbit of one’s reach. In this context, our strategic fiscal and monetary policies are reducing to be insignificant to face the challenges. Hence Jawaharlal Nehru rightly blames the capitalistic system of economy for the economic equality:

“Normally speaking it may be said that the forces of a capitalist society, if left unchecked, tend to make the rich, the richer and the poor, the poorer, and thus increase the gap between them”

- Nehru, Jawaharlal : “The Years of Power” (1960) p;294


It would be faulty conclusion that the economic inequality is inseparable function of capitalism alone; even in communist countries we can notice wide economic disparities among the people. Prof.P.T.Baur states:

“….. But there are evident wide differences in income in communist countries after decades of communist rule. And in Soviet Union (a country often thought to be dedicated to the removal of economic differences), the differences in income and living standards are quite as pronounced as in some market oriented societies and this after more than half a century of mass coercion”.*

-* Baur, P.T. : “The Grail of Equality”


The economic equality is one the three basic necessities of ‘Equality, Liberty and Fraternity’ for the establishment of an Ideal Society. But neither capitalism nor communism do not know any effective economic technique to ensure us ‘economic equality’. Hence I venture to say it is futile to allow our capital to remain in possession of some individual capitalists or the State.

8. No Right to Work :

Invariably the ‘Declaration of Independence’ of all the countries proclaim that man has ‘Right to Live’. On the introduction of ‘Division of Labor’ in the modern production system, no one can produce all the goods that require even to lead a very simple life, or a single whole commodity one needs.

On the Division of Labor, everyone is trained to produce only a part of a commodity for which he can receive his wage and with which he has to buy the necessary goods in the market to lead his life. Since a man cannot produce whatever he wants to live, his ‘Right to Live’ solely depends upon his ‘Right to Work’. But no Constitution of any country is powerful enough to provide ‘Right to Work’ as one of the ‘Fundamental Rights’ because the economic systems that the countries pursue are basically defective and incompetent to face the economic challenges. In the absence of ‘Right to Work’ irrespective of what kind of economic system a country follows, the employers never consider man as a man and not even as a commodity. On the other hand they treat man as a ‘rental commodity’ that can be engaged by paying wages as ‘rent’. The defect of economic systems have reduced man and humiliated him as mean and ignoble thing. With full of depression in heart, P.A.Samuelson exhibits the real condition of man as follows:

Since slavery was abolished, human earning power is forbidden by law

to be capitalized. A man is not even free sell himself; he must rent himself at a wage” *

-* Samuelson, P.A. : “Economics” (p : 52)


9.Absence of Stable Just Price :

Universally in all economic systems - whether it is market oriented economy or State controlled economy - the prices in the market are behaving erratically and disorderly. Especially the prices of consumption goods of poor people are always enhancing. But the income of poor people is not increasing as much as the increment of price of their consumption goods. Consequently this economic phenomenon is horribly crushing the purchasing power of the poor. Hence the fact is universally accepted that ‘the poor people are born in poverty, live in poverty and die in poverty’ Whenever the governments declare that they have contained or reduced the rate of inflation it seems always to the benefit of the rich. The economic systems, existing now, do not know any economic techniques to sustain a just price level at stable for the welfare of the vast majority poor.

10. Injustice to Working Class:

In Jerusalem I heard the Israeli Supreme Court say : “It is better that ten guilty persons be acquitted than that one innocent person be convicted”.

This legal justice should not be confined only to the courts of justice but it should be equally extended to govern both the economic justice and economic systems. The economic systems, on the contrary, conveniently permit the economic criminals to escape from punishment and in turn punish the innocent workers who perform their social duty.

The utmost duty of a worker is to produce socially needed goods and services only; but it is not the duty of the worker to bear the responsibility whether the goods and services he produced are sold out. On the other hand it is the duty of the consumers to buy the goods and services that are produced for their consumption at a just price and at the rate at which the goods and services are produced for them.

On the contrary, the consumers, as a whole, behave in the market, guided by their erratic psychological factors, create time lags in purchasing the goods that are produced for their consumption and sometimes neglect the goods to buy at all. These negative and duly non-responsive factors affect the economy severely and ultimately result in the stagnation of goods in the markets. Due to the stagnation of goods in the market an equal volume of goods stagnated are not produced in the subsequent round of production. On the reduction of production of goods the workers who have fulfilled ‘the production – duty’ of the economy, have to lose their employment. The unemployment of a worker not only affects his ‘Right to Live’ but also of the whole family that depends on him. The unemployment of a worker ruins the education of his children, their future ambition in life and their morality and social dignity and their future economic security.

The present economic systems are not competent and efficient enough to secure and save the “Right to live” of the workers who have honestly accomplished their ‘production-duty’ of the economy.

To strengthen my argument I like to quote the words of Prof. Mrs. Joan Robinson :

It is true, with adequate organization there need be no unemployment … There is always something useful that can be done even with a man’s bare hands”*

*– Prof. Mrs. Joan Robinson : “Economic Philosophy” (p : 114)


Joan Robinson too finds fault on the economic systems for wide range of unemployment; in other words, the economic systems that we pursue now are the primary reasons for the failure to provide “Right to Live” to the workers throughout the world. In the present economic systems and economic conditions ‘employment’ and ‘Right to Live’ are synonymous or just the same.

What is the basic cause, today, throughout the world, for billions of youth are crushed by the burden of unemployment? It is the cause :

“Every person, only up to the standard of education and technical training that the society has offered to him, can produce socially needed goods with his bare hands or with the help of small and simple capital that he can afford by himself and thus create ‘self-employment’ opportunities and secure right to live by himself. The creation of self-employment creates an expectation in the mind of the of the worker that the society i.e. the consumers should behave with a sense of ‘economic responsibility’ by consuming the goods at the rate at which he produces, at a reasonable price to sustain the livelihood of the worker. But every self-employed youth knows that the ‘economic responsibility’ is absolutely lacking in the minds of consumers. What is deeply rooted in the minds of unemployed youth is ‘a fear about the future’ that the consumers or the society that he belongs to would not perpetually and automatically accept the goods at a reasonable price that he produces by ‘self-employment’. The ‘fear about the future’ in the minds of the youth who wants to venture in ‘self-employment’ is reasonably justifiable. Due to ‘fear on the future’ the unemployed youth are not venturing in self-employment competing with the highly sophisticated industries. It is then whose fault if the youth are unemployed? The present economic systems have no economic techniques or ‘action programs’ to evacuate the ‘fear of the future’ in the minds of the unemployed youth and to induce ‘economic responsibility’ in the minds of society to save the ‘self-employed’ youth from the competition of well-organized industries.

I have to point out it is the fault of the economic systems for the cause of unemployment and moreover I wish to state that the capitalists and equally the governments should not lay blame on the ‘fate’ of the youth for their unemployment. On the other hand the capitalists and the governments are persistently blame the fate of the youth and try to escape from their ‘economic responsibility’. So we have no other alternative except to forfeit our capital from the them and retain it with ourselves as we know perfectly well how to solve our unemployment and other economic problems.

11.Economic Gambles:

The basic intention leading for the invention of money is it should be used as a ‘medium of exchange’ in buying and selling goods and services. On the contrary, our present economic systems have invariably paved way for the money not only to be used as a ‘medium of exchange’ but also at a large extent as a ‘Medium of Economic Gambles’ throwing away the honesty and morality of societies to the winds. The multi-millionaires, today, have idly and futilely invested billions and billions of money in the stock markets as a medium of gambles uprooting the very noble function of money. The electronic media and the news papers extensively propagating the stock market indices for the benefit of the rich gamblers, the economic criminals, who want to earn quick and easy money with out shedding even a drop of sweat. The present economic systems have accepted this kind of economic gambles without any shyness.

In addition, in the cradles of civilization, especially in the places of sports and games like cricket stadium, Tennis courts, Football grounds, Boxing arenas billions and billions of money are set into circulation as a ‘medium of gambles’. With the help of the ‘capital-power’ the capitalists today have vigorously transformed the noble arts, skillful sports, beautiful games and wonderful cultures into easy-money-earning centers instead of promoting these symbols of civilization. The capitalists in the name of ‘promoters’ have developed strong hatred not only in the minds of ‘players’ but also in the minds of ‘audience’. This kind of economic gambles is now rapidly spreading like dangerous virus in all four corners of the world. For example, the ‘Statesman’ in its 10th October 1978 issue states as follows :

“Britain is a gambling nation. Nearly 94 percent of population indulge in an occasional flutter on races, at the gambling tables, on foot-ball pools or on a variety of other sports. 39 percent of all Britons are habitual gamblers. In 1977 an estimated $ 800 million were stated on races and gamblers. In 1977 an estimated $ 800 million were stated on races and other sports”. Instead of producing socially needed goods and services and creating employment opportunities, the capitalists are utilizing ‘our capital’ for economic gambles extensively and demoralizing our long cherished cultures and civilizations throughout the world.

The capitalists now adopt a new business strategy to exploit the consumers : ‘First kill the civilization and then sell the goods’. The capitalists know the consumers will become a easy prey for sexual exposition. So they in all their advertisements use ‘women in half ***** beauty’ to enchant consumers to buy their commodities. We know the capitalists are misusing ‘our capital’ to ‘sexually assault’ the consumers to maximize their profit at the cost of cultural destruction and spreading demoralization. With deep mental agony I like to state that millions of young women have now turned as *********** as a source of employment and the International Labor Organization (ILO) now recommends to accept prostitution as ‘flesh industry’ which contributes reasonable amount of foreign exchange for many countries.

12.Class distinction and failure of economic machinery :

In lieu of promoting fraternity among the people the present economic systems create various class distinctions such as 1. proletariat and capitalist, 2. consumer and producer, 3. savers and investors. The class distinction between proletariat and capitalist is always underlying at the bottom of strikes, lock outs and innumerable industrial disputes. The class distinction between ‘consumers and producers’ is attributable for the failure of determination of ‘just price’ in the market and for uneven distribution of goods among the people. The class distinction between ‘savers and investors’ is harmfully preventing the requisite acquisition of investment to eradicate poverty and unemployment expeditiously in the world. The present economic systems are full of contradictions without which they can not function. Our capital in the possession of few capitalists and the State is the root cause for all class distinctions. Once the capital comes under the ‘direct ownership of people’ all the class distinctions will disappear

13.Maximization of profit destroys morality of society:

In the present economic systems the industries project their ‘volume of profit’ as the ‘balance of judgment’ of their determination of ‘industrial success’ The industry which earns more profit is considered to be more successful. The mental attitude forces the capitalists even to destroy the natural environment extensively in order to produce goods cheaply. With the sole aim of maximization of profit, the capitalists have no even an iota of concern over the future welfare

Political Economy of India’s Special Economic Zones: a Conceptual Frame Work

June 19th, 2009
jipson v.paul asked:


 

 Every country stands for its own development. For this purpose the state introduces and implements new policies and programmes such as Special Economic Zones Act. After 60 years of its independence India with its 110 core population has evolved a new paradigm of its political economy which is confusing. The policies and programmes initiated by Indian government to create a ‘global village’ based on free market economy and free trade among nations cutting across all barriers, abolition of national boundaries and dismantling the nation –state system giving priority to ‘market’ over the ‘state’ . After the enactment of Special Economic Zone Act 2005, it created tremendous effects on political economy of the country.

            The term ‘political economy’ came from the two Greek words ‘Politiko’ and ‘Oikonomia, where ‘Politiko’ stands for the state and society and ‘Oikonomia’means managing the house hold economy. Political economy thus means a study of the state, society and house hold economy. The concept of political economy arose historically as the economic doctrine of a new class – the capitalist class. It has been evolved since the days of Aristotle who gave a model of public good through guaranteeing each person private possession of what he was rationally and morally entitled. Private property was elaborated later by Locke, Adam Smith, Ricardo and the physiocrates, who came to be known as the Laissez Fairists in Economics, or, the liberal democrats in politics. Adam Smith referred to political economy as a branch of the system of civil government. It was concerned with public policy.

            In Marxian view, political economy can be regarded as a subject which studies the social relations evolves between different classes of people in course of production, distribution, exchange and consumption. Political economy belongs to the broad land of economics, which opens on to political science. After a prolonged period of hibernation, the subject has again been resurrected.

Marxist political economy makes a study of how the productive forces are used under the given relations of production taking account of the lines and trends in technical progress; political economy studies the influence of production relations on such progress and its socio economic consequences. Marxist political economy starts from the assumption that human vital activity is objectively based on social material production which includes man’s interactions with the nature and whole range of relations which arise in the process. It has been realized that every political action has its obvious economic repercussion, and every economic action has had its political implications.

 The liberal school of political economy offers economic implications of political facts and factors. The liberal school has economized politics. The liberal system focuses on the atomistic individual as the relevant unit, on the description of economic behavior in terms of subject choices among alternatives, on the notion of social welfare as the maximizations of individual utility sums. The socialist system views the entire economic system as the basic unit, views economic progress in terms of the growth of the forces of production and focuses on ‘relations of production’ ‘surplus value’ and the rapid increase of social product.

By contrast the Gandhian system eschews both the notions of the atomistic autonomous individual maximizing his utility in a self regulating economy and the notion of processes of production autonomously effecting changes in the organization of production ,class relationship and the magnitude and distribution of social product instead of the Gandhian model suggest that the fundamental attribute of human economic behaviour lies in the relationship of individual to socioeconomic micro groups and the relationship of micro groups to society .The basic economic act is neither the choice between economic alternatives nor the social division of natural products, but the adjustment between individual and the micro groups to which they belong, and of those micro groups to society .It is this collaboration which is the basic theme of the Gandhian system of political economy.

The Gandhian system is viewed in micro groups that are fundamental constituents of the economic system and given full scope to develop their potential in the context of no coercive forms of political control. Social welfare is defined in terms of the functioning of the collaborative micro groups vis –a-vis its members. Gandhi believed that the introduction of technology and patterns of development must be consistent with the full employment objective.

Today economist speaks of sustainable development and ecological values. Gandhi was not against industry but as he predicted it could not give people more employment. His constructive programmes were to give employment to all people whether it be kadhi, gobar gas or tree plantations, where all can be engaged in constructive work. Gandhian economics is an alternative to overcome the exploitation of both capitalism and communism for the exponents of human social order.He was against the large scale use of machinery which kept millions without work. Swadeshi is one of the core elements in the socio-economic organisation of Gandhian system.

Gandhi observes

                       “Life here will not be a pyramid with the apex sustained by the bottom, but it will be an oceanic circle whose centre will be the individual, always ready to perish for the village, the latter ready to perish for the circle of the villages, till at last the whole becomes one life composed of individual, never aggressive in their arrogance, but ever humble sharing the majesty of the oceanic circle of which they are integral units’. The idea of the circle stands for integrating, fullness and self-sufficiency. He wrote that independence must begin at the bottom. Thus every village will be a republic or Panchayat having full powers. It follows therefore, that every village has to be self sustained and capable of managing its affairs even to the extent of defending itself against the whole world.”

 Politics and economy are considered as two basic factors in determining the nature of the state and society. They are interrelated to such an extent that the changes in one affect the other, and hence both are ‘dynamic’ and ‘flexible’ ingredients of the national and the international systems. Politics and economy taken together as political economy refers to ‘managing the economy of the state’. Conceptually political economy connotes the relationship between the state, society and the economy, the cause–effect relationship between technological change and the process of development, the economic relations among the different nations of the world.

DEFINITION OF SPECIAL ECONOMIC ZONE

            A special economic zones is a geographical region that has economic; laws more liberal than a countries typical economic laws. According to the SEZ Act 2005, A SEZ is a ‘specially delineated duty free enclave and shall be deemed to be foreign territory for the purpose of trade operations and duties and tariffs. A SEZ also been viewed as “a geographical region with different economic laws than a countries typical economic laws with the main goal of attracting foreign investment’. “A SEZ or a Free Trade Zone (FTZ) is typically an enclave of units operating in a well –defined area within the geographical boundary of a country where certain economic activities are promoted by a set of policy measures that are generally not applicable to the rest of the country”.

            The concept of special economic zones is not new. In an International Labour Organization (ILO) report traces the roots of the concept to 13th centaury Spain and in more recent times to Ireland and Puerto Rico, which established Export Processing Zones (EPZ). Export Processing Zones is the former name of the Special Economic Zones. The countries like China, United Arab Emirates, Malaysia, India, Jordan, Philippines and Russia have utilized the concept of SEZ. In 1986, there were 176 zones across 47 countries. Now the number has increased to over 5000 across 147 countries.  

The zones are known by different names in different parts of the world. Most often these are Free Trade Zones  (FTZ),Industrial Free Zones (IFS) Export Processing Zones (EPZ) Bonded Free Zones and Special Economic Zones (SEZ).

          Export Processing Zone is the ancestor of SEZ. An Export Processing Zone is relatively small geographically spread area within a country. The purpose of which is to attract export oriented industries, by offering them especially favorable investment and trade conditions as compared with the reminder of the host country. The EPZ is just an industrial enclave but SEZ is an integrated township with fully developed infrastructure. The UN Industrial Development Organization (UNID) identifies five basic attributes of EPZ s are:

 ? EPZs are dominated by market mechanisms.

 ? EPZ are restricted to a limited region.

 ? EPZs specialize in the production of exports goods and offer special incentives for such production.

 ? Their major aims are to attract foreign investments, earn foreign exchange and to  generate employment

? Secondary aims are technology transfer, development linkages and regional             development .

Policies taken by the governments for the development of the nation obviously affect the people. SEZ policies are for the development of the country. These Developmental projects have economic, political and social impact. In Gandhian political economy, village level development is needed. Land needed for the establishment of the SEZs projects also affected the political economy of the country. Tax incentives, Foreign Direct Investment, New type of employment generation also affect the political economy of the country. The macro economic changes driven by SEZs will push the countries down the path of increasing socio-political crisis.  

A BRIEF HISTORY OF INDIA’S SPECIAL ECONOMIC ZONES

India became independent in 1947 and chose self- sufficiency along with economic autonomy. The Industrial Policy Resolution of 1948 marked the beginning of the evolution of the Indian Industrial policy. The Resolution not only defined the broad contours of the policy. But it delineated the role authority of the state in industrial development both as an entrepreneur and as an authority

The industrial policy Resolution of 1956 gave the public sector a strategic role in the economy. It categorized industries, which would be the exclusive responsibility of the state or would progressively come under state control and others. Earmarking the pre-eminent position of the public sector, it envisaged private sector coexisting with the state and thus attempted to give the policy framework flexibility. India opted for a planned economy with emphasis on state sponsored industrialization. The argument was that capital being scare in India, it was essential to regulate the flow of the available capital in to socially desirable channels. This was achieved by an elaborate system of industrial licensing and state monopoly and control over key industries.                                                                                                                        

More than 80% of the Indian population is still living in agricultural field. Agri-centered model of development was prevalent during the 1950sand the 60s. Agriculture contributes approximately one-fifth of total gross domestic product (GDP). It provides the means of livelihood to about two-thirds of the country’s population. The Sector provides employment to 59 percent of the countries workforce and is the single largest private sector occupation. Agriculture accounts for about 10 percent of the total export earnings and provides raw material to a large number of industries.

During the Jawaharlal Nehru’s period, foreign collaborations were promoted in certain sectors and foreign investment was encouraged. First Export Processing Zone (EPZ) was set up in 1965 at Kandla, in Gujarat. This was a predecessor of the Special Economic Zone in India. The Santa Cruz EPZ in Mumbai became operational in 1973.

After the death of Jawaharlal Nehru, Indira Gandhi became the prime Minister of India in 1966. She also did a lot for the economic development of the country. The Foreign Investment Board was set up in 1968. In 1973, Foreign Exchange Regulation Act (FERA) was enacted.. India set up the Santa Cruz Electronics Export Processing Zone (SEEPZ) between1973-74. It was the first EPZ which was dedicated to the electronic industry.

Doors of the Indian economy were opened during the 1980s, by Indira Gandhi and later by Rajiv Gandhi. From 1984 to 1989, the policy was to enable the middle class to consume more so as to raise the internal demand. This resulted in the raise of imports and the growth of Foreign Direct Investment. The government tried to raise the level of exports in order to balance this phenomenon. In 1984, the Free Zone policy received a fresh start. By 1991, the Indian economy was opened up for linking up the Indian market with the world leading to free flow of trade and commerce .The multilateral Financial Institutions like the World Bank and the International Monetary Fund while assisting the developing countries like India also insisted upon restructuring the polity and the administrative machinery. Following a change in the policy regime in this period and the formation of the World Trade Organization (WTO) with India becoming its founder member, it opted for a liberalized capitalist strategy. There had been introducing policies since July 1991 particularly in the industrial sector.

De-reservation of industries for the public sector was one of the major step taken by the government as part of the policy changes in the industrial sector. It was against the earlier 17 industries were reserved, there are now industries like defense production, atomic energy, coal and lignite, railways and mineral oils reserved for the public sector. Core industries like iron and steel, electricity, air transport, shipbuilding, and heavy machinery industries such as heavy electrical plants telecommunication cables and instruments are now open to private sector participation. Besides, equities held by the government in selected public sector enterprises like ONGC etc are now available to mutual funds, financial institutions, the general public and workers through a policy of divestment

In1998, the first private SEZ started its operations in Surat .This was under the jurisdiction of the Mumbai (SEEPZ)Development Commissioner, who was a nominee of the central Government.

From the beginning of the 21st century, most of the developing countries in the world have recognized the importance of facilitating international trade for the sustained growth of the economy and increased contribution to the GDP of the nation. As part of its continuing commitment to liberalisation, the Government of India has also adopted a multi-pronged approach to promote foreign investment in India. The Government of India has pushed ahead with second-generation reforms and has made several policy changes to achieve this objective.  The annual growth rate ranged between six and nine percent.

Bharathiya Janatha Party (BJP) government decided to re-launch the Free Trade Zone Policy in 2000. It changed the name of Export Processing Zone (EPZ) to Special Economic Zone (SEZ). The policy intended to make SEZs an engine for economic growth supported by quality infrastructure complemented by an attractive fiscal package both at the Centre and the State level with the minimum possible regulations. 

The salient features of the SEZ scheme are:

v No licenses required for import

v Manufacturing or service activities allowed.

v SEZ units to be positive net foreign exchange earner within three years.

v Domestic sales subject to full customs duty and import policy in force.

v Full freedom for sub contracting.

v No routine examination by customs authorities of export/import cargo.

  The United Progressive Alliance (UPA) government Currently in power enacted Special Economic Zone Act, 2005 which was passed in June 2005 and came into force on 10th February 2006 with the notification of the SEZ Rule in 2006. The Act provides for drastic simplification of rules and single window clearance on matters relating to the union and state governments .The state governments have also been enacted their own SEZ laws to cover State subjects.

The Act provides for single window clearance mechanisms for developers and operators for ensuring orderly development of SEZs, the responsibility is assigned to the Board of Approval, constituted by the union Government. The Union Government may set up a SEZ on its own or on the basis of proposals of the state government or private developers after the Board of Approval has duly screened them .At the regional level, the Development Commissioner and his /her office will exercise administrative control of SEZs. The Labor Commissioner’s power is also delegated to the Development Commissioner. There is an approval committee to approve /reject /modify proposals for setting up units in SEZs. All suits of civil nature and notified offences in SEZs will be tried and settled by specially notified courts and affected parties may appeal to high courts against the orders of the designated courts. The  corporate units operating under SEZs will enjoy special privileges and protection granted by law.

          The Act offers a special fiscal package to the units set up in the SEZs. This package includes, exemption from customs duties, central excise duties, service tax, central sales taxes, and securities transaction tax to both the developer and the units set-up, tax holiday for 15 years like 100 percent tax exemption for five years ,50 percent for next five years, and 50 percent for the ploughed back export profits for the next five years.100percent income tax exemption for 10 years in a block of 15 years for SEZ developers.

 There is a three-tier administrative structure. On the top, a Board of Approval at the level of the Union Government has been set up for the functioning of the SEZs. Next an authority has been created by the state governments for creation and promotion of the infrastructure within each state. Finally, in SEZ mechanism /authority is provided for single window approval.   According to the 2005 Act, these zones can be set up by the developers, who could be private real persons, companies, both Indian and foreign, as also the State governments or the central government by themselves or jointly with private parties. It is also being envisaged that some of the existing Export Processing Zones would be converted into Special Economic Zones.  The SEZ Act, 2005 supported by SEZ Rules, has come in to effect on 10th  February 2006.

THREE CATEGORIES OF SEZ

In India SEZs are divided in to three categories, Multi-product SEZs Sector specific SEZs, Free Trade and Ware housing Zone (FTWZ). The first category signifies a SEZ where units may be set up for manufacture/rendering of services of two or more goods in a sector or good/services falling in two or more sectors. For multi-product service SEZ, a contiguous area of 100 hectares or more is required. 

The second category defined as a zone meant exclusively for one or more product/services. The minimum area requirement is 100 hectors of contiguous and vacant land. Within sector specific SEZs, Bio-technology, Gems and Jewellery, Non conventional energy, electronics, hardware and software SEZ-including IT can be set up with minimum area has been relaxed to 50 hectares for Assam, Meghalaya, Nagaland and, Arunachalpradesh, Uttaranchal, Sikkim, J&K, Goa and the Union Territories.

 Free trade and warehousing zone (FTWZ) is the third category which minimum area requirement is 40 hectares of contiguous and vacant land. Built up area should not be less than 10 hectares.

There are 19 functional SEZs in the country which were set up prior to SEZ Act, and 154 SEZs that were notified under SEZ Act 2005. The maximum numbers of SEZs are coming up in the IT sectorThe total land requirement for the formal approvals granted till date is approximately 44,268 hectares. Out of this, about 87 approvals are for State Industrial Development Corporations (SIDCs) State Government ventures which account for over 21,169hectares 

ISSUES RELATING SEZs IN INDIA

One of the main issue is related with SEZ is locating land for SEZs. Many state governments are in the process of establishing SEZs. The issue of displacement, that of compensation or land price, rehabilitation, residential property development and land speculation, the threat of possible relocation of units from other parts of the state to SEZs and the consequent loss of revenue have been flagged . Farmers are protesting against the forced acquisition of their lands. The development of SEZs would lead to the destruction of employment of peasants whose land will be acquired and will create very little employment for high tech or high skilled persons and total net employment generated may well be negative. Handing over thousands of hectares of land cheaply to promoters of industry and relaxing the laws of the land, including those that relate to the welfare of the industrial workers, protection of the environment, taxation, etc, would automatically promote industrialization and solve the nagging unemployment problem of the country overnight. The farmers/peasants in various states such as West Bengal, Orissa, Maharastra, and Punjab have opposed acquisition of their land for SEZs. The highest level of opposition has been observed in West Bengal when land was acquired by the state government for the Tata group at Singur and Salim group of Indonesia at Nandigram.  Besides the loss of agriculture land, concerns have also been raised about the project affected People.

Using water for SEZs is one of the major problems rising from different parts of the country. Mundra SEZ as per official website of the SEZ, it expects to get at least 6 million liters per day from the Sardar sarovar project, as promised by Gujarat water infrastructure Ltd.

The another main issue is rising from different parts of the country, the labour laws applicable to the rest of the country have been relaxed for the SEZs. The existing laws are well intentioned and they promote worker welfare. Relaxing such laws exclusively for the SEZs shows the government’s lack of conviction in its own commitment to social justice.

In some SEZs, the state governments are joint venture partners. In the case of some, special incentives by way of concessional electricity and water tariffs have been offered .In almost all the cases, valuable lands have been given away at concessional prices.

Considering the SEZ Act, it violates the letter and spirit of the Indian Constitution; it infringes the Fundamental Rights of the citizen guaranteed in part 3rd of the Constitution. Relaxation /inapplicability of many labour Laws (including under the Industrial Dispute Act, Contract Labour Act, Factories Act, Minimum wages Act, Trade Union Act), Environment (Protection) Act is inapplicable to SEZs ,No environmental clearance needed.  Violates  Panchayat Raj Act (1996) for local self government, violating laws granting rights and control to adivasi communities over their land, violating many international conventions on human rights.

To sum up, SEZs and other emerging developmental issues can be seen in a broad perspective and theoretical underpinnings of neo-liberalism. As far as Indian polity is considered the implications emerging from SEZs may cause increasing socio-political crisis because the society is far more complex than we assumed and that will result in organized or unorganized resistance and that may even cause anti-neo liberal political forces. So, in order to avoid the polarization of the society, civil society should engage to create a consensus on developmental issues. More over, in order to understand the continuities and changes that are taking place in the developmental scenario it needs further study.     

Endnotes

Bijoiny Mohanthy and S.C Hazary(Ed), Political Economy of India Retrospect and Prospects (New Delhi: APH Publ).

 S.C Hazary, Political Economy of India Retrospect and Prospects, ( New Delhi: APH Publi,1997.)

 

Sukhendu Mazumder, Politico-Economic Ideas of Mahatma Gandhi  (New Delhi: Concept Publishing House, 2004.).

B.Mohanan,(Ed), Gandhis Legacy and New Human Civilisation, Gyam publishing house, New Delhi,1999.

Vineetha Sharma, ‘Implications Of A Special Economic Zone on Project Affected People a case study of Reliance Haryana SEZ”, Man & Development, Vol.39,Dec,2007.

Jermy Grasset and Frederic Landy, ‘Special Economic Zones in India Between International integration and Real Estate Speculation’, Man &Development, Vol. 39,No.4, Dec, 2007.

India 2008, A Reference Annual, Publication Division, Ministry of Information and Broadcasting , Govt:of India, New Delhi,2008.

Partha Mukhopadhyay, “The promised land of SEZs” Seminar, Jan, 2008

.

Sheetal Sharma and Kishan Pratap,  “ The Prosperous Few and the Pauperized Many: A Perspective on Special Economic Zones”, Mainstream, February,23-March,1,2007.

 



Fundamentals of Economics & Core Issues in Economics

June 9th, 2009
Amer Naveed Raja asked:


FUNDAMENTALS of ECONOMICS

The Aim & Scope of Economics:

The study of economics is aimed at finding the natural law governing an economy and its scope is to find the ideal principles for the working of an economy based on those findings.

There is no such Thing as Free Lunch:

It is the most fundamental law of nature that every thing has either monetary or non-monetary value. Though generally things have both monetary and non-monetary aspects, never the less for the purpose of simplicity and understanding we only consider monetary aspect of things in economics.

INVISBILE HAND

This is the most vital as well as an extremely difficult idea to logically explain, and however absolutely impossible to mathematically prove it. Perhaps in order to understand it one needs to think beyond logic and one may comprehend it after one’s own peculiar experiences. How the invisible hand plays it role in making financial shifts among individuals, groups and even among nations can be understood by studying natural phenomenon viz., the animal world, the plant world, the rotation of the solar system, the rain, diseases, wars, natural disasters etc. Moreover the mental state of an individual changes continuously and mysteriously which affects one’s decision making and other faculties that results in changes in one’s economic/financial conditions. Uncontrollable and unpredictable invisible factors beyond human control brought financial changes.

Defining Economics:

Economics deals with the efficient management (by the individuals & entrepreneurs) of scarce resources to satisfy unlimited human wants by applying science & technology in the market.

* Efficiency can be defined as doing things in a best possible manner.

Basic Economic Problem:

Scarcity of Resources, Unlimited Wants & Choice:

It is a known fact that our resources (time, raw materials, land, human resources, machines, money etc.) are limited while our wants are unlimited and recurring therefore we have to make some choice among available alternatives to satisfy our wants.

Economic Resources:

Economic resources can be broadly divided into following four categories:

o Land & Raw Materials:

These are free gifts of nature. All things derived from nature are included in this category.

o Labor:

It consists of the contribution of human beings.

o Capital:

It consists of plant & Equipment.

o Mind/Entrepreneurial Ability:

Entrepreneurial ability refers to the ability to organize production and bear risks. Some people are more intelligent and have the gift of managing things better than others. It is due to their contribution that societies develop. Due to this reason we categorize this resource separately from labor.

Motivating Force - Self Interest:

It is the self-interest that makes us act. Here it is also very important to mention that economics cannot be separated from other fields of study. All knowledge is interrelated. Adam Smith, who has significant influence in formulating modern western economic thought, was a professor of moral philosophy, which deals with finding the ideal kind of life. It is a fact that every individual tries to gain best from his/her available resources to make one happy. It is assumed that individuals will follow his/her interest to make choice among different alternatives. It is also important to mention here that self-interest is entirely different from selfishness. As a general rule of life: “Enlightened Self Interest is the best interest”.

*Selfishness is a short term while enlightened self-interest is a long-term phenomenon.

Logic & Logical Fallacies:

All interpersonal communication is based on logic. Likewise all human knowledge, that is experiences and views of all human beings since inception, is also communicated on the base of logic. Though logic fails at very minute as well as very huge levels, still because of human limitation in our interpersonal communication we are dependant on logic. Logic can be defined as a science of correct reasoning.

o Logical Errors/Mistakes:

Here we will mention the two main fallacies of logic that makes human knowledge erroneous. They are:

§ post hoc, ergo propter hoc fallacy (association as causation)

It occurs when one incorrectly assumes that one event is the cause of another because it precedes other.

§ Fallacy of composition

It occurs when it is incorrectly assumed that what is true for each individual in isolation is also true for an entire group.

Demand & supply:

In any economy prices of goods are determined by the interaction of demand and supply. All study of economics revolves around these two fundamental concepts.

o Demand:

Demand is a relationship between price & quantity demanded of a good in a given period of time while keeping other factors like tastes, preferences, status etc. constant i.e., considering only price as a determining factor.

o Supply:

Supply is relationship between price and quantity supplied of a good in a given period of time while keeping other things constant i.e., considering only price as a determining factor.

CORE ISSUES IN ECNOMICS:

Role of Government:

The proper role of government should be as minimal as possible. For efficient management, civil society is much more important and efficient than political society.

The market, by the interaction of demand and supply, not the state, should set wages and prices. Similarly monetary policy should also be set by interaction of market forces. Taxes levied by the government should be minimal. Lower taxes would provide the fundamental incentive for the entrepreneurs and individuals to work hard and to reinvest for greater profits that would consequently raise economic activity. The role of government should be as minimal as possible so government should do only those things private citizens can’t do for themselves. The corruption level is extremely high in public enterprises and also the efficiency of public enterprises is much lower than that of private enterprises.

Government should control its expenditure and it should match expenses with revenue. Bigger government is the biggest problem. Therefore decentralization and only taking those tasks that private enterprise cannot perform; are highly desirable for efficient management.

Rules and regulations should be formulated with a view for maintaining justice among members of the society and law should be equal for all.

Tariffs and other barriers to trade should be completely abolished, gradually. Free trade can greatly and rapidly improve the general economic condition and consequently social condition of the society. In short, government governs best which governs least.

Entrepreneur & Entrepreneurship:

Entrepreneurship is a vital aspect for economic growth and development. Because of its importance this should be studied in depth. Entrepreneurs are gifted individuals who have the gift of managing resources and have keen foresight to visualize things much better than ordinary people. High growing economies provide viable environment and freedom for the entrepreneurship to grow that eventually led to the development and growth of economies.

Economic Growth:

An important element and field of study in economics is economic growth. Essentially the motive behind all economic activity is in raising the standard of living. We study that how standard of living is raised. Education plays a pivotal role in raising general standard of living in the long run. Capital formation results from prudently managing resources and by finding new ways to improve the present means of production by using new technology; that is a consequence of knowledge gained by acquiring education. Therefore capital formation is the key factor for economic growth.

Trade:

Exchange, monetary or non monetary, is an integral part of any human activity. Human exchange views/goods/services etc because they feel that they will gain by exchanging. However, in economics we are only concerned with monetary exchange of views/goods/services etc. It is wrongly assumed that our world is a zero-sum world where gain by some is loss of other. Factually and fortunately we are living in a positive sum world. If this had been the case then progress in our world would have never been possible. Never the less it does not entail that in all monetary exchanges both parties will equally gain. Moreover the value gained in an exchange between two individuals or groups can never be evaluated precisely by the third party because the value of an exchange is very different for different individuals.

Free and greater trade, free from force and coercion, would result in comparatively more fair deals and consequently the chances of greater gains by both parties are more realizable.

Factually accurate information is not fully known that results in greater imbalances from trade. As a hypothetical rule we can very easily infer that where accurate information is known both trading parties gain.

Competition:

The prevalence of competition in the filed of economics in world is universal, because of scarce resources and innumerous and recurring wants. Where competition has negative implications, it has also positive implications. It is the element of competition that drives different individuals to excel from others, which results in greater discoveries, technological advancements and pursuit for finding new ways to earn greater profits that consequently raise general prosperity level in the world. It is unethical aspects of competition where some individuals initiate force and fraud that causes violence in the society. Competition can never be eliminated from any society; rather any attempt to eliminate competition would result in regression and more violence. Therefore, check should only be imposed on negative effects of competition.

Cooperation:

For the efficient management of the resources (time, skills, natural etc) human need to cooperate to make optimal use of these resources. Moreover most of the natural resources need to be transformed for use and to make them valuable. Groups need to cooperate to be successful. Cooperation juxtaposed with positive competition is an ideal combination for efficiency.

Specialization & Comparative Advantage:

Natural inequality among humans is a fact of life. Economics aims at efficient management; therefore to make best use of human resources different individuals specializes in those particular fields in which they can be better than others because of their natural abilities. Due to this reason some individuals have comparative advantage over others.

Information:

Information is very important for making informed rational decisions. However accurate information is impossible by any individual because of the human mind, because every human being is unique, and also due to unpredictable future. Information about market behavior is extremely diverse and ubiquitous. Therefore it is not possible for any individual to accrue the available information and our decisions about future at best are mere estimate with enormous possibilities.

Profit & Loss:

The expectant and prevailing profit and loss are the determining factors for the investments. It provides the criteria for the goods and services to be produced. Where in the short run demand of the products is the primary factor in stimulating the investment trends, profit or loss is the litmus test for products produced in the long run.

Trade Off:

It’s a general principle that in order to gain something one needs to loose something. The most important resource for an individual, time is limited. Therefore no one can do all the things oneself, so a rational individual focuses one’s time on those tasks where one can perform best. However it is quite impossible to precisely quantify the time one put in some particular activity is equal to the forgone activity/activities. Nonetheless for the purpose of understanding this concept economists assume that the price of engaging in some activity is equal to the cost of the other activity/activities one has forgone.

Price Theory:

Demand for and supply of products determines their prices in the market. It is wrongly asserted by the majority of the people that cost of goods determines the prices of the product. In actuality it is the marketing activities of the producers and the perception of the consumers about the products that determine the prices of the products. As a general rule higher the prices lower will be the demand and vice versa. However in some cases due to the nature of the product and the marketing efforts of the producers higher prices lead to higher demand.

Causality — Cause & Effect:

Despite limitations of logic, causality is the most important phenomenon in understanding economic theory and practice. Excluding mega-microscopic and mega-macroscopic phenomenon, every cause has some effect and that effect is a cause of some other effect ad infinitum. Due to this cause and effect relationship in a world of numerous individuals and groups their actions has great impact on other elements in the economy. Despite the complexity of this relationship that is also chaotic, understanding this relationship can help enormously in making good estimates about the future and to form comparatively sound opinions about the market trends.

Labor Economics:

In this field we study that how wages are determined. Like all other markets the wages are set by the interaction of demand and supply. Higher wages can only be achieved by greater investment and economic activity in the long run. Employment and unemployment are also the key issues that we study in this field. Ups and downs in the economy are the facts that cannot be avoided. Higher consumption level asks for greater capital investments that will raise general wage level and results in lower unemployment.

Uncertainty:

No one knows the future. It’s the fear of future that is an integral part of our lives and also an impetus for human activity. This factor of uncertainty gave birth to the idea of risk. There is always degree of risk in all human activities. As a general rule: “higher the risk, higher the reward”. Uncertainty is also nature’s law of rewarding and punishing the human actions. Moreover it is also a way of nature of teaching

and making known new ideas to the new participants and making room for the new and efficient members.

Public Finance:

The filed of public finance is directly related with role of government. Bigger the government, larger the funds are needed to finance it. The accountability principle is of pivotal importance in public enterprises because the ownership of these enterprises has no personal owners. Moreover, fund should be received from those who get benefits from that service.

Money & Banking:

Banking in an economy is the determining factor for gauging its performance. Money is the medium of exchange that facilitates transactions among participants of an economy. Banks play the role of intermediaries. Interest rates and value of currency with relation to other international currencies is set by central banks. However ideally it is best that market forces of demand and supply determine them.

Consumption & Saving:

Raising the consumption level is key factor to all economic activities for reducing costs, creating employment, raising standard of living and eliminating poverty.

On the other hand, raising consumption greatly can result in undue depletion of resources in a given market and cause inflation. If this situation prolongs that would result in recession to depression. Therefore a sagacious policy of moderation is the ideal combination.

Marketing:

Marketing is the key for stimulating demand and consequently enhancing economic activity. Entrepreneurs have the sharp ability of marketing to understand the economic environment and knowing the customer demand ahead of time and finding new segments that would consequently raise general standard of living.

Cost & Production:

Every thing entails cost. Finding the best methods to produce goods at minimum possible cost is essential for firms to earn profits and compete successfully.

Technology:

Technology makes the difference between the present age and the previous one. The problems faced by humans in all times are quite similar yet the technology of their respective eras determines the mode of production as well as way of living. Technology is of utmost importance for understanding economics because by applying it we enormously reduce costs and even reach new markets that could not have been possible with out technology. Moreover it raises standard of living by simplifying the complex tasks.

Poverty:

The problem of poverty is the focal point in the field of economics. Ignorance is the main cause of poverty. The best way to eradicate poverty is by spreading knowledge.

(Lahore, Nov 16, 2003)



The Importance of Understanding Economic Terms

May 27th, 2009
Vladimir Gonzalez asked:


The Importance of Understanding Economic Terms

The term "Economics" is commonly defined as "The science of how people make choices for the allocation of scarce resources to satisfy their unlimited desires."

Though a major concern, which analysts should pay more attention to, the distribution of wealth has lately become less important than it used to be. The science dealing with this is political economy, which is the science that has to do with the nature of and of economic value, together with the production and distribution of valuable goods and services.

It is very important for everyone to thoroughly understand a set of highly used economic terms, such as wealth, production, value, labor, land, etc, and here are some of the definitions of these economic terms:

· Wealth - all material things produced by labor for the satisfaction of human desires and having a certain exchange value.

Moreover, wealth is material and is produced by workforce and it can satisfy human desires. However, contrary to common belief, money is not considered wealth, if not a medium of exchange, because of which, one can acquire wealth, which also has exchange value.



Production - all the processes by which human labor creates valuable goods and services and brings them to the ultimate consumer.



Production includes not only the producing or manufacturing of goods, but it also has to do the process of bringing them directly to the consumer. The factors that help produce wealth are land, labor and also capital.

· Value - the quantity of labor or products of labor that people are generally willing to give in exchange for something.

The economic value of an item is just what it will exchange for, under normal circumstances.

· Land - the entire material universe exclusive of people and their products.

Land includes not only the dry surface of earth, if not all other natural materials, as well as forces and opportunities.

· Labor - all human exertion in the production of wealth and services.

Both entrepreneurs along with blue-collars are part of this category; labor does not only refer to physical strength, whereby finished products are produced, if not also to mental work, whereby wealth is also produced.

· Capital - wealth used in the process of production, or in the course of exchange.

· Distribution - The division of wealth among the factors, which produce it.

Rent, wages and interest are the avenues of distribution are, and here is also their definition:

· Rent - that part of wealth, which is the return for the use of land.

· Wages - that part of wealth, which is the return to labor.

· Interest - that part of wealth, which is the return for the use of capital.

These factors involved in production all work together and produce a "pie", called "wealth."

Further reading on www.economywatch.com and www.economypedia.com:

Economic Terms on EconomyWatch

Encyclopedia of Economic Terms - Economypedia.com

Definition of "Global Economy"



How to trade economic data even if you don’t understand it

May 26th, 2009
LC asked:


During the beginning of my trading career it was difficult to decipher the numbers that were released with economic data.

One of the biggest challenges is to determine which category of information is more accurate and the market will react to.

For example, often times we will see economic data released that not only has the headline numbers for the report but also core numbers.  It was said for some time that it was mostly the US that chose to focus on core numbers. While many disagree with this idea of looking at core numbers because it often skews the data, it does pose a problem because of all the confusion.

At the moment economic data is released most news traders will simply listen to the headline numbers and make a decision.  However there are often times subcategories which the markets/traders will often want to focus on.  If you are not aware of the specific report you are trying to trade and spend some time studying the details and reactions for some time, I would be very cautious trading real money on a gamble like this.

In the past news trading was an eccentric trading technique.  Which of course did not last very long as brokers were able to determine how to prevent traders from scoring on easy money.

I will stress, trading is a serious business.  If your goal is to make a living as a trader making a consistent income, then you will need to spend time understanding what moves the markets you are trading.  You also must understand how other markets can affect the Forex markets.

When I began my trading career I realized from the start I would need to study slowly and consistently.  I also realized I can only see the market’s reaction to a specific economic report once a month for the most part.  So having a good understanding of how the market interprets the news will take more than two or three opportunities to witness the results of the report and the reactions.

Now the challenging part is… as markets change, so will the way traders react to a specific economic report.   Markets move in cycles.  For example there are times when markets are watching economic reports such as employment numbers or perhaps data that will affect the Feds decision to change interest rates.  Other times it’s expected that interest rates will stay at current levels and markets will then be focusing on other issues and economic reports.

Of course all of this seems overwhelming especially in the beginning of your career.  So what can you do for an opportunity to trade around the news?

The first thing to remember is trade slowly.  If you do not trade during economic announcements, it’s okay.

No one should ever be in a hurry to lose money on something they do not understand.

Even to this day, the way I trade the news is to wait for the outcome or the reaction of traders to specific economic data reports. If it is uncertain at the time of the data release, I will either stay out of the trade or wait until I see a technical opportunity develop after the news is released.  I prefer to see this technical trade develop and point in the same direction that I am able to determine (with a little more time), the direction of price and momentum.

Several things can happen and even situations I do not mention here but in general, price will remain inside of consolidation if the news is not significant enough or traders are looking beyond the data.  It’s also possible the news was priced into the moves we see up to the release of the data.

So the first tip if you are new to trading is to learn how to identify consolidation.

If the news is sufficient to break price outside of consolidation, it is important to confirm that move outside of consolidation.  You may choose to use indicators however it is important that you learn to gauge market sentiment and momentum.  This is a much more reliable method than simply looking at an indicator at the bottom of your charts for confirmation.  There are obviously several methods to gauge market sentiment and momentum and that is another important step you must take in order to be a consistent and profitable trader.

If the breakout of consolidation is confirmed and the news is the driver for the move, I will often wait for a pullback.  This takes a great deal of patience.  It is not easy to watch price move 30 or 50 pips without participating.

Waiting for a pullback after a significant move or break out of consolidation, allows for a much more affordable stop loss level.  This is for several reasons.

The first is if you enter when price is breaking outside of consolidation, it is possible that the retracement could be anywhere from the middle of consolidation or back to the opposite side of the range it broke out from.  This could be an enormous stop loss level.

If you are looking for a pullback, you are doing several things.  

The first is watching how the markets and traders are reacting to the news and price moving outside of consolidation.

The next thing you are able to do by using this technique is to confirm the outcome of the economic data release.  This will give you time to study the news and confirm the direction.

In most cases, but not every case, a pullback will stop around a support or resistance level.  Often times you can use your Fibonacci tool and it will line up at a 382, 50, or 618 retracement level.  Often times the pullback will also stop around psychological levels or old highs and lows, specifically the high or the low of consolidation from where price has broken out.

It is important that you understand both fundamental and technical analysis.  It is one of the safest ways to trade and in most cases the most reliable.  Often times the release of economic data simply has no effect and you can often times it see that in the charts.  There isn’t always a trade available everyday or at all times. and this is another great asset every successful consistent trader must possess, patients.

If you do not understand what you see happening in price or in the markets or if you do not see your specific trade set up, stay out of the markets and just watch.  There is a lot to learn from watching price and how traders react.



Science, Ideology, and Economics

May 11th, 2009
John Kozy asked:


Alan Greenspan’s The Age of Turbulence contains a chapter titled The Modes of Capitalism which is full of revelations which Mr. Greenspan unfortunately failes to recognize. The chapter describes the various forms Capitalism has taken in a number of countries, mostly North American and European. Of course, that such various forms of Capitalism have been implemented in different countries is not news. But what Mr. Greenspan fails to notice is that similar chapters could not be written about physics, chemistry, geology, meteorology, astronomy, physiology, botany, astronomy, etc. but could easily be written about Christianity, Islam, Hinduism, Buddhism, and even astrology. The point is, science does not have sects, but ideologies do. Of course, economists shun the word sect, preferring instead the euphemism school in an attempt to gloss over the non-scientific nature of economics. Mr. Greenspan’s modes of Capitalism are nothing more than sects, and no endeavor that is comprised of sects is a science.

Mr. Greenspan’s attempts to explain the existence of these sects begins to reveal just how unscientific economists can be. He writes, “To me, the degree of willingness to take risks is in the end, the major defining characteristic that separates countries into the various modes of capitalism.” Mr. Greenspan ranks “the United States as the most ‘free’ of the larger economies” and believes, apparently, that therefore, Americans are less risk averse than people elsewhere. But there is not a lick, jot, fleck, or speck of evidence to support this belief. So although it may be true that the United States is the most free of the larger economies, other reasons for which there is considerable evidence can be cited as more likely explanations. The most obvious of these is differences in educational systems. It may be, for instance, that Americans support this freer economic system because they are poorly educated and therefore more gullible than people in countries that have better educational systems.

There is no question that the American educational system is inferior to the educational systems in many other countries. The will-publicized country-by-country comparisons that invariably show that American students are less competent in many areas of study need not be repeated. But there are far more telling examples of American educational inferiority. When graduates of some of America’s most prestigious universities, such as the current crop of presidential candidates, can openly reject evolution and when various branches of the national government routinely rewrite scientific studies to make them conform to the administration’s political ideology, the failure of the American educational system becomes evident. In America, ideology trumps truth.

An explanation of the failure of even America’s universities to educate their graduates is not hard to find. That America has had a long-standing anti-intellectual culture has been well documented. See Richard Hofstadter’s Anti-Intellectualism in American Life, for instance The American educational system is fractured. Local control of primary and secondary schools, often controlled by school-boards made up of poorly educated people who seek to promote personal agendas, is a tradition dating back to the nation’s founding. The makeup of state school boards is not different, and there are fifty of these. No common standards exist and even state-by-state comparisons are difficult to make. Then, too, American universities were not generally founded to educate people. They were founded to train people for professions; in effect, they were founded as vocational training rather than educational institutions. After the Civil War, the creation of the land-grant university system was explicitly designed for vocational training. As a result, students are taught how to carry out techniques, but rarely taught to critically examine the theories from which those techniques are derived. This description characterizes what goes on in most of the professional schools and colleges attached to our universities. It especially characterizes our graduate departments of economics. One small but revealing example provides anecdotal evidence that supports this view and the view that America’s universities promote ideology over truth is this: Gilles Raveaud, I believe, commenting on Greg Mankiw’s teaching at Harvard has written, “Some of the students I had at Harvard have described Mankiw’s course to me during private conversations as ‘massive conservative propaganda.’ One of them told me that he thought that Mankiw manages to ‘indoctrinate a whole generation.’ In 2003, a protest against a similar course then proposed by professor Marty Feldstein, an ex-adviser to President Reagan, led to the creation of an alternative intro economics course, taught by radical economist Steve Marglin. But while Mankiw’s course gives the required credits to students, Marglin’s does not.” Just as there is no honor among thieves, there is apparently no honor in universities that get huge donations from America’s capitalists who have gotten their fortunes by picking the pockets of consumers and employees and who would be loathe to see their ability to continue to pick those pockets restricted by some idealistic idea of truth.

Mr. Greenspan ignores completely one salient difference between American and Continental educational systems. In the American educational system, analytical thinking prevails. Everything is considered in isolation from everything else. Economic phenomena are examined as though they had no consequences to society in general. In Europe, however, phenomena are considered together as a gestalt. The consequences of changes in one social environment are related to the effects those changes have in other social environments. Whereas American economists think almost exclusively in terms of economic growth, Europeans think in terms of society as a whole. American economists can always find ways of excusing the adverse human consequences of an economic process; the Europeans emphasize the adverse consequences to society as being more important than the economic process. This distinction has been evident in economic circles since the formation of the so-called historical school, and Mr. Greenspan should have recognized it.

But Mr. Greenspan reveals something else about economics that is rarely called attention to—the delusions economists labor under in relation to the real-world economy. When Mr. Greenspan makes risk-taking the characteristic of the American economy, he is delusional. Certainly America has its share of risk-takers. Whether it has more or fewer risk-takers than other nations is questionable. But risk-taking does not characterize the American or any other economy. Economic risk-taken may be thought of as a characteristic of entrepreneurs. But entrepreneurs alone cannot make an economy; if everyone was an entrepreneur, no workers would exist to carry out entrepreneurial ventures. Kurt Wicksell in his Lectures on Political Economy nicely defines the entrepreneurial process: “He who borrows money at interest does not as a rule intend to keep it, but to exchange it at the first suitable opportunity for goods and services, by the productive use of which he hopes to be able to acquire not merely the equivalent of their price but a surplus value. . . .” Although that may be true of entrepreneurs, it is not why most people in today’s real economy borrow money. When people borrow to buy homes, automobiles, appliances, etc., they do not intend to use their purchases in ways that will create surplus value. In fact, these people are not investing at all. The money they borrow is a sunk cost for a place to live, a means of transportation, and other such uses. And although Americans have become a nation of borrowers, they have not become entrepreneurial risk-takers. Any economist who thinks of the economy in terms of entrepreneurial risk-taking is engaged in self delusion.

Mr. Greenspan is also delusional when he writes about creative destruction. Certainly, creative destruction does happen, but not nearly as often as Mr. Greenspan and other economists seem to think. As examples of creative destruction, Mr. Greenspan mentions the telegraph industry’s demise because of the introduction of the telephone, the tin can’s demise when the aluminum can became feasible, which he relates to the demise of the steel industry. Certainly some workers were displaced when the telephone industry replaced the telegraph industry and then the aluminum industry reduced the steel industry. And certainly such displacements cannot be avoided and no attempt should be made to avoid them. But that is not what is happening in America today. When Fisher-Price offshored the manufacturing of toys to China, it was not because the Chinese had developed new toy-making technology. In fact, those Chinese employ older technologies than those what would have been used in America to manufacture the same toys. When computer related industries offshore their helpdesks, it is not because new helpdesk technologies have been developed in the offshored countries. The technology used in offshore places is exactly the same technology that is being used in America or Europe or anywhere else. So although there is a phenomenon known as creative destruction, what is happening in America today is mere destruction. The other half of Mr. Shumpeter’s thesis is entirely absent, and for Mr. Greenspan to think otherwise is delusional.

Again, Mr. Greenspan writes, for instance, that “in a free society . . . the vast majority of transactions must be voluntary, which, of necessity, presupposes trust in the word of those with whom we do business. . . .” And “It is remarkable how much trust we have in the pharmacist who fills the prescription ordered by our physician.” But this is sheer delusion. People don’t trust the businesses they buy from. In the case of the pharmacist, people buy from him because there is no alternative. And does anyone trust the pharmaceutical firms that market the medicines we are prescribed? If they do, they must be wholly ignorant of the revelations that such firms hide from regulators, physicians, and consumers data of adverse effects and even life-threatening dangers. Do I exhibit trust in Microsoft when I purchase one of its operating systems or applications, knowing full well that what I am getting are poorly coded programs containing innumerable bugs and security lapses that Microsoft will attempt to patch by incessant releases of what it euphemistically calls Service Packs? Trust is something that does not exist in business; that is why contracts exist, and why firms such as Microsoft exempt themselves from all liability for damages within their contracts. If Mr. Greenspan trusts the firms he does business with, he is delusional.

But the unavoidable problem with Classical/Neoclassical economics, which Mr. Greenspan glosses, is its immorality. He writes that, “Clearly, not all activities undertaken in markets are civil. Many, though legal, are decidedly unsavory.” But he also writes, “When I was a child, jokes about the scruples of used-car salesmen were widespread, but in truth a flagrantly (italics mine) unscrupulous used-car salesman is one who will be out of business before long.” Mr. Greenspan fails to recognize that this statement is entirely meaningless. It does not say that businessmen are not unscrupulous; it does not say that competition puts unscrupulous businessmen out of business; it does not say just how unscrupulous a businessman must be to be flagrantly unscrupulous.

Everyone knows that businessmen routinely break even the most fundamental moral maxims, and any economist who denies this must explain the neologising and persistent existence of such phrases as Caveat Emptor, a pig in a poke, and letting the cat out of the bag. In an honest economy, these expressions would have no use. As a matter of fact, there is absolutely no reason to believe that people in business are any more honest than the population in general, and there is good reason to believe that business in a free-market promotes crime and vice, both of which are epidemic in the United States. It is no mere coincidence that when the Soviet Union collapsed and when Israel was persuaded by the Reagan administration to abandon its socialist traditions and free-market practices were introduced, both crime and vice emerged as important social problems.

In fact, free-market economics institutionalizes immorality, which is proven by the mere fact that puffery is an acceptable practice. Businesses that employ puffery to market products will, without batting an eyelash, discharge an employee who is found to have puffed up his resumé. I’m not talking about sophisticated moral philosophies such as Kant’s Categorical Imperative, but those simple maxims embodied in the Decalogue and the Golden Rule. These immoral practices of business are widespread and far-reaching and they contradict many of the favorite clichés of economists.

Mr. Greenspan claims, that free markets increase material well-being to a greater extent than regulated markets. But tell me, how does the marketing of bottled water, which is never tested and whose source is rarely identified, increase the well-being of the people who are snookered into buying it, especially when ordinary tapwater is regularly tested, comes from a well-known source, and is considerably cheaper? In fact, doesn’t it reduce that well-being, since the money wasted on it could have purchased something that provided a real material benefit? The same questions can be asked about numerous other products—the McDonalds hamburger, Taco Bueno’s tacos, pizza from numerous pizza vendors—the list is endless. But there’s more. The Fox affiliate in Dallas regularly runs a feature called “Deal or Dud.” The channel buys products heavily advertised on television and has them tested by ordinary viewers. If a product works as advertised, it’s called a Deal, if not, it’s called a Dud. Every so often the channel comes up with Deals, but most products tested are Duds. As a matter of fact, Mr. Greenspan’s book is itself a dud. It was not published because of the merit of its content; it was published merely because of the notoriety of its author. Mr. Greenspan’s name on the title page can be likened to other forms of puffery. So how does manufacturing and marketing products that don’t work increase the material well-being of consumers? And consider the snake-oils people are sold that are classified as dietary supplements? The manufacturers of these products could easily have them double-blind tested to determine their effectiveness. But they don’t. Is it because they know that if they did, the products couldn’t be sold?

Mr. Greenspan and other economists claim that the free market results in the most efficient allocation of capital. But how can anyone claim that the capital expended on the products mentioned in the previous paragraph is efficiently allocated? In fact, one could easily claim that it is completely wasted, as is the capital lost during economic downturns. So anyone who believes that American business are generally honest are as deluded as the insane person who believes he’s Napoleon.

Not only is free-market economics immoral, there is some evidence that it could not exist if the immorality were removed. In an impressive new book, The Social Conscience, Michel Glautier asks whether a caring society can exist in a market economy? His analysis suggests that recent and continuing changes to the market economy are putting the achievement of a caring society beyond reach. And the following passage comes from an abstract of a paper by Andrei Shleifer: Explanations of unethical behavior often neglect the role of competition, as opposed to greed, in assuring its spread. Child labor, corruption, “excessive” executive pay, corporate earnings manipulation, and commercial activities by universities all promote censured conduct. When unethical behavior cuts costs, competition drives down prices and entrepreneurs’ incomes, and thereby reduces their willingness to pay for ethical conduct. Unfortunately, both authors are ambivalent when it comes to drawing hard conclusions.

In a rational society, a distinction would be made between scientific enterprises, always keeping in mind that all science is a work in progress, and enterprises grounded in mere belief. The political system would defer to scientists in matters involving the former and allow the people to decide the kind of society they would prefer in matters involving the latter. So the choice of an economic system ultimately comes down to what kind of society people not only want for themselves but for their progeny in future generation. Do we really want an economic system that institutionalizes prevarication and encourages greed, crime, and vice? Those who answer this question affirmatively should, perhaps, have 666 tattooed on their foreheads.

In the second chapter of The Age of Turbulence, Mr. Greenspan writes that he “discovered that some of the scientists in the Manhattan Project subscribed to a philosophy called logical positivism. . . . The mathematician in me embraced this stark analytical credo. . . . The world became a better place, I thought, if people focused exclusively on what was knowable. . . .” Unfortunately somewhere alone the way, Mr. Greenspan lost this focus and became an apologist for the free-market system when he “decided to engage in efforts to advance free-market capitalism.” We are all now faced with the consequences of his decision.

Wise men know the importance of periodically asking themselves, What if what I believe to be true is wrong? It is time that our economists start asking themselves this question.

© 2008, John Kozy



Taking Advantage of Programs in Economic Strategy - Distance Learning in Economics

May 7th, 2009
Jim Zorn asked:


Distance learning in Economics provides students with advanced knowledge in key areas such as economic applications, information usage and strategic advantage. The students are enabled in specific career and professional goals and in the areas of strategy and analysis. Courses in economics that focus on the principles and techniques form the foundation for specializations in the area. The student may then acquire skills in setting and managing corporate strategy or study in depth the management of economic crimes. The program may be a certificate program, an undergraduate program, a post graduate program or a doctoral program!

Course Content

Economics is a vast subject and distance learning in economics offers a variety of basic and specialized courses for the novice and the expert in the field. The principles and techniques of economics are studied at varying levels of detail at the certificate, undergraduate, post graduate and doctoral levels. Management in commercial banks, corporations, international agencies, ministries of finance and so on require students who have a through understanding of the basic economic principles that govern markets and the basic quantitative techniques that are used to analyze them. Specializations are offered at the post graduate and doctoral levels and may be focused on environmental economics, agricultural economics, development finance or international business. The content of each of these courses will be determined by the focus area of the program.

Universities

The Bircham International University offers programs on Economic Analysis while the Universiti Sains Malaysia and Kakatiya University offers basic programs in Economics. The Akamai University offers graduate programs in Economic development that emphasize sustainable development, natural resources and environmental economics, anti poverty programs, productivity and growth economics and community action programs. The Katholieke Universiteit Leuven has a course in International Business Economics. The University of Southern Queensland has courses in Economic Studies. Closer to home, the Cardean University offers a graduate certificate program in Economics. Ellis College offers an MBA in strategy and economics. Utica College has an M.S. program in Economic Crime Management to offer. The London University, too has a number of courses at the graduate and postgraduate levels for distance learning in economics.

Registering for anyone of the courses would benefit you immensely if you are contemplating a career in economics. The online study of economics will also benefit individuals in other fields such as law or engineering. So explore your options and launch your career in this fertile field of work!