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Economics & Business Forum Newsletter

5 December 2013

! ! Is Communism Fair? | Keeping the World on the Edge | Hey Europe - What’s Up? | Inequality | Laissez-Faire Economics | Aid or Trade?

About EBF We hold panel discussions with guest speakers and publish a regular newsletter on various topics related to Business and Economics in the contemporary world, seeking to provoke contemplation, dialogue and networking. Furthermore, we hope our students, faculty and people like you can contribute to positive and insightful discussion. If you travelling in India or visiting UWC Mahindra College’s campus we invite to engage with our initiative as guest speaker.

Message from our Founder, Dhruv Jain

!

A few guys from my time here know how much I love the field of Economics. In fact I loved Economics so much that some of my favourite MUWCI memories include working all day and all night on one of Arvin’s non-textbook essays where I tried my best to articulate the beauties of the free market or even frustratingly debating some of the gazillion socialists we have on campus. I know those are pretty unconventional ‘favourite memories’ but that’s just the way I was. The fact is that I only really studied Economics in MUWCI (and a bit of Physics). It’s a sad fact but its true. What’s even sadder I guess is that I don’t regret it one bit.$

The reason I came up with EBF was simply to show the MUWCI student body how cool Economics could be. I always felt Economics was one of the most applicable and relevant fields out there and thought it would be useful to share that idea with everyone else. I mean when you think of it, some of the major problems the world is facing today whether it is the after effects of the Global Financial Crisis, corruption in India and China or even the War on Drugs and Terror, they all have their roots or are partially rooted in Economics. $ To be honest with you guys, I never really did expect EBF to continue. Thank you Rongfei, John Roy and Arnav for taking this thing forward. I would also like to thank Arvin and my good friend, Will Hunt, for helping me establish EBF in the first place, late in my first year. $

UWC Mahindra College

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Economics & Business Forum Newsletter

WHO ARE WE?

5 December 2013

Finally, I would just like to emphasise that the primary goal of EBF was to facilitate student participation and encourage everyone to participate. Trust me, there’s a reason why I spent so much time on this stuff.$

! Communism & Justice: Is Communism Fair?$

! Arnav Patel

Rongfei Lu

John Roy Dommett

UWC Mahindra College

By Yashaswi Mohanty$

The idea of justice has been a much fervently debated subject amongst philosophers, given the central place it has had in both historical and contemporary society. Over the course of history, a number of theories of social justice have been proposed, many leading to serious reformulations of our understanding of the social contract. Many of these theories have drawn concrete but varied conclusions, each defining its own conception of a just society. Given its abstract and subjective nature, there’s no single defining answer to what justice actually is. It’s imperative therefore that we adopt an existing evaluative framework within which we can answer the question of whether Communism is fair or not. To find such a framework, we have to look at Communism and its central tenets. $ The intellectual tenets of Communism arose from the work of German philosophers Karl Marx and Friedrich Engels. Marx in his Critique of Political Economy, argued that while capitalism ensured rapid growth in productive capacity, it also lead to a problem of surplus. Surplus production did not benefit the laborers but was instead appropriated by the capitalists. In-fact the economic model proposed by classical economist David Ricardo, which was presented in his book On the Principles of Political Economy and Taxation, suggested that the wages of labor were inversely related with the profit earned by the capitalist. In other words there was a trade-off between the interests of the labor class and the capitalist class.
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Economics & Business Forum Newsletter

Marx was of the view that the labourers weren’t compensated enough for their input and the distribution of final goods was inequitable. Marx predicted that increasing disparity between the proletariat and the bourgeoisie would create a class consciousness in the minds of the labouring class, which would culminate in a social revolution. At the final stage, Marx and Engels envisioned a society which would be c l a s s l e s s , s t a te l e s s a n d h a v e co m m o n ownership to the means of production. Such a society would have an equitable distribution of produce ba sed on the principle of “From each according his ability, to each according to his need”. Such a society would be considered just if economic egalitarianism is our idea of justice. $ It is however important to note that such egalitarianism is not present in historical or contemporar y communist societies. A comparative study between the economic disparity which existed in West Germany and East Germany revealed that the communist regime in the East barely lead to any significant improvement1 . This is partly due to the fact that Marxist doctrine is not the only influence on existing communist s o c i e t i e s . In s te a d Ru s s i a n p o l i t i c i a n Vladimir Lenin expanded on Mar x and Engel’s theories to formulate MarxismLeninism, the basis of communist societies today. Lenin argued that a vanguard party w a s n e ce s s a r y to f a c i l i t a te t h e s o c i a l

5 December 2013

revolution which accompanied the creation of a communist society. He advocated a single party control of the state in the name of the proletariat, a party which would control production and guide the economy in the direction of the Marxist-Leninist ideology. This was vanguard party was supposed to be transient; it would cease to exist once a true communist society would be established and the means of production would be directl y in the hands of the proletariat. However, as historical evidence suggests, it is unlikely that an established vanguard party would be willing to relinquish power once they have it. Vanguard parties such as the CPSU and the C o m m u n i s t Pa r t y o f C h i n a l e a d t h e revolution in Russia and China respectively, but the actual transfer of power to the proletariat never took place. In other words, the labouring class never actually got to control the industries of the nation. Instead politicians, in the name of the workers, controlled all the industrial assets in the countries. This prevented the egalitarian society that Marx envisioned from forming.$ Moreover, many vanguard parties have had a long history of human rights violations. S t a l i n e r a S o v i e t Un i o n w i t n e s s e d approximately 8 million deaths, with some historians contending the figure could be as high as 61 million. The Great Leap Forward in China was the cause of death of anything between 18 to 32.5 million. In total, mass killings under communist regimes amount

1 Marshall,  Gordon.  "Was  Communism  Good  for  Social  Jus9ce?:  A  Compara9ve  Analysis  of  the  Two  Germanies."  The  

Bri(sh Journal  of  Sociology.  no.  3  (1996):  397-­‐420.  hOp://www.jstor.org/stable/591359?seq=1  (accessed  November   18,  2013). UWC Mahindra College

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Economics & Business Forum Newsletter

to a death toll of between 85 to 100 million people.2 Deaths apart, communist regimes are known to suppress the freedom of people. Freedom of speech was curtailed in Russia, China, Vietnam, and East Germany and so on, people were forcefully resettled into labor camps in the Soviet Union, censorship was imposed on the media etc. The governments instituted ‘land reforms’ which aimed to passively exterminate class enemies by star vation and deliberate misallocation of resources. In short, the f reedom of the individual wa s greatl y diminished under a communist regime. This raises the question of whether economic egalitarianism is too narrow a framework to encapsulate justice; after all, it can’t be justice if all men are equal and equally suffering. $

If we conceive justice in the meritocratic sense then a communist society is far from fair. Far from distributing power and wealth according to the merit of the people, communism aims at creating a classless society in which every man is just like the other. In such a scenario there’s no scope for a person to achieve according to his or her ability; the state decides the kind of life a subject of the state would lead. Such a framework destroys the incentive to be creative, innovative and hardworking and renders man incapable of reaching his full potential. In this context, one can say that social justice is compromised.$ It is interesting to note that when need is taken as the distributive norm, a communist society scores fairly well in theory. Since the cornerstone of communism is need-based

5 December 2013

distributive justice, it’s not hard to see why this is true. However, a major criticism of this framework of justice is the fact that it relies on utilitarian notions to fulfil its claims: in order to maximise the happiness of the needy-which are usually the largest in number- one has to compromise on the needs of the prosperous few. While this sort of a system seems just from a macrocosmic perspective, it can be greatly unfair to individuals living in a society. $ In truth, it’s ver y difficult to ascertain whether a communist society is just in an a b s o l u t e s e n s e o r n o t . No t i o n s o f distributive justice differ widely in various schools of thought, and it is a rather arduous task to evaluate one form of justice as intrinsically superior to another. In theory one can say that communism is fair to society at large given that its egalitarian approach to justice, yet it is unfair to individuals due to its utilitarian philosophy a n d l a c k o f m e r i to c r a c y. Ho w e v e r i n practice, communist regimes have hardly dispensed justice to the society at large; various human rights violations have proved time and again that a communist regime is only tr uly suited to members of the vanguard party in power. In reality these parties drive the nation in the direction of their own ideology and perspectives, often neglecting what the proletariat truly wants or needs. This, in my opinion, is the main setback of communism. It’s unrealistic to assume altruism on the part of a small group of individuals and expect them to work tirelessly to improve social justice for the working class. This is where communism fails. The idea of justice has been a much $

2 hOp://en.wikipedia.org/wiki/Mass_killings_under_Communist_regimes

UWC Mahindra College

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Economics & Business Forum Newsletter

fer vently debated subject amongst philosophers, given the central place it has had in both historical and contemporary society. Over the course of history, a number of theories of social justice have been proposed, many leading to serious reformulations of our understanding of the social contract. Many of these theories have drawn concrete but varied conclusions, each defining its own conception of a just society. Given its abstract and subjective nature, there’s no single defining answer to what justice actually is. It’s imperative therefore that we adopt an existing evaluative framework within which we can answer the question of whether Communism is fair or not. To find such a framework, we have to look at Communism and its central tenets. $ The intellectual tenets of Communism arose from the work of German philosophers Karl Mar x and Friedrich Engels. Marx in his Cri(que of   Poli(cal   E c o n o m y , argued that while capitalism ensured rapid growth in productive capacity, it also lead to a problem of surplus. Surplus production did not benefit the labourers but was instead appropriated by the capitalists. In-fact the economic model proposed by UWC Mahindra College

5 December 2013

classical economist David Ricardo, which was presented in his book On the   Principles   of   Poli(cal   Economy   and   Taxa(on, suggested that the wages of labour were inversely related with the profit ear ned by the capitalist. In other words there was a tradeoff between the interests of the labour class and the capitalist class. Marx was of the v i e w t h a t t h e l a b o u r e r s w e r e n’t compensated enough for their input and the distribution of final goods was inequitable. Marx predicted that increasing disparity between the proletariat and the bourgeoisie would create a class consciousness in the minds of the labouring class, which would culminate in a social revolution. At the final stage, Marx and Engels envisioned a society which would be classless, stateless and have common ownership to the means of production. Such a society would have an equitable distribution of produce based on the principle of “From each according his ability, to each according to his need”. Such a s o c i e t y w o u l d b e co n s i d e r e d j u s t i f economic egalitarianism is our idea of justice. $ It is however important to note that such egalitarianism is not present in historical or 5


Economics & Business Forum Newsletter

contemporar y communist societies. A comparative study between the economic disparity which existed in West Germany and the disparity which existed in East Germany revealed that the communist r e g i m e i n t h e E a s t b a r e l y l e a d to a n y significant improvement3. This is partly due to the fact that Marxist doctrine is not the onl y influence on existing communist s o c i e t i e s . In s te a d Ru s s i a n p o l i t i c i a n Vladimir Lenin expanded on Mar x and Engel’s theories to formulate MarxismLeninism, the basis of communist societies today. Lenin argued that a vanguard party w a s n e ce s s a r y to f a c i l i t a te t h e s o c i a l revolution which accompanied the creation of a communist society. He advocated a single party control of the state in the name of the proletariat, a party which would control production and guide the economy in the direction of the Marxist-Leninist ideology. This was vanguard party was supposed to be transient; it would cease to exist once a true communist society would be established and the means of production would be directl y in the hands of the proletariat. However, as historical evidence suggests, it is unlikely that an established vanguard party would be willing to relinquish power once they have it. Vanguard parties such as the CPSU and the C o m m u n i s t Pa r t y o f C h i n a l e a d t h e revolution in Russia and China respectively, but the actual transfer of power to the proletariat never took place. In other words, the labouring class never actually got to control the industries of the nation. Instead politicians, in the name of the workers,

5 December 2013

controlled all the industrial assets in the countries. This prevented the egalitarian society that Marx envisioned from forming.$ Moreover, many vanguard parties have had a long history of human rights violations. Stalin era Soviet Union was witness to approximately 8 million deaths, with some historians contending the figure could be as high as 61 million. The Great Leap Forward in China was the cause of death of anything between 18 to 32.5 million. In total, mass killings under communist regimes amount to a death toll of between 85 to 100 million people.4 Deaths apart, communist regimes are known to suppress the freedom of people. Freedom of speech was curtailed in Russia, China, Vietnam, and East Germany and so on, people were forcefully resettled into labour camps in the Soviet Union, censorship was imposed on the media etc. The governments instituted ‘land reforms’ which aimed to passively exterminate class enemies by star vation and deliberate misallocation of resources. In short, the f reedom of the individual wa s greatl y diminished under a communist regime. This raises the question of whether economic egalitarianism is too narrow a framework to encapsulate justice; after all, it can’t be justice if all men are equal and equally suffering. $

If we conceive justice in the meritocratic sense then a communist society is far from fair. Far from distributing power and wealth according to the merit of the people, communism aims at creating a classless society in which every man is just like the

3 Marshall,  Gordon.  "Was  Communism  Good  for  Social  Jus9ce?:  A  Compara9ve  Analysis  of  the  Two  Germanies."  The  Bri(sh  Journal  of  Sociology.  

no. 3  (1996):  397-­‐420.  hOp://www.jstor.org/stable/591359?seq=1  (accessed  November  18,  2013). 4  hOp://en.wikipedia.org/wiki/Mass_killings_under_Communist_regimes

UWC Mahindra College

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Economics & Business Forum Newsletter

other. In such a scenario there’s no scope for a person to achieve according to his or her ability; the state decides the kind of life a subject of the state would lead. Such a framework destroys the incentive to be creative, innovative and hard working and renders man incapable of reaching his full potential. In this context, one can say that social justice is compromised.$ It is interesting to note that when need is taken as the distributive norm, a communist society scores fairly well in theory. Since the cornerstone of communism is need-based distributive justice, it’s not hard to see why this is true. However, a major criticism of this framework of justice is the fact that it relies on utilitarian notions to fulfil its claims: in order to maximise the happiness of the needy-which are usually the largest in number- one has to compromise on the needs of the prosperous few. While this sort of a system seems just from a macrocosmic perspective, it can be greatly unfair to individuals living in a society. $ In truth, it’s ver y difficult to ascertain whether a communist society is just in an

5 December 2013

a b s o l u t e s e n s e o r n o t . No t i o n s o f distributive justice differ widely in various schools of thought, and it is a rather arduous task to evaluate one form of justice as intrinsically superior to another. In theory one can say that communism is fair to society at large given that its egalitarian approach to justice, yet it is unfair to individuals due to its utilitarian philosophy a n d l a c k o f m e r i to c r a c y. Ho w e v e r i n practice, communist regimes have hardly dispensed justice to the society at large; various human rights violations have proved time and again that a communist regime is only tr uly suited to members of the vanguard party in power. In reality these parties drive the nation in the direction of their own ideology and perspectives, often neglecting what the proletariat truly wants or needs. This, in my opinion, is the main setback of communism. It’s unrealistic to assume altruism on the part of a small group of individuals and expect them to work tirelessly to improve social justice for the working class. This is where communism fails. The rest IDGAF.


! Hey Europe - What’s up?$ By Elias Tuomaala$

!

Beginning in late 2009, the news coverage of t h e E u r o p ea n Deb t Crisis b eca m e overwhelming – and justifiably so, as the crisis seemed one of the most dangerous in the economic history of Europe. However, after two years of active reporting on the crisis, the European press replaced the financial news with more everyday topics.$ UWC Mahindra College

So really, what is up with the European Debt Crisis?$ Let’s first consider briefly how exactly the Eurozone Crisis began. In late 2009, two years after the international financial crisis began in the USA, interest rates for the Greek government bonds peaked and investors realised that the budget deficit and debt levels 7


Economics & Business Forum Newsletter

of the Greek state were extremely high. As a result, trust in the Greek Government’s ability to repay its debts disappeared. For Greece, this meant an immediate crisis. States continuously raise funds on debt markets and Greece was no exception. The fact that no one wanted to lend to Greece meant that the wheels of the state ceased to run.$ A great proportion of Greece's creditors were banks in Western European countries, and those banks couldn't afford their loans being left unpaid: not only would there have been a direct expense in the form of an unpaid debt, but furthermore investors lending money to those banks would have been affected and prone to move their funds to institutions with fewer undesirable loans as part of their wealth. This would have lead many of those banks themselves to default, and spread the crisis even further. This possibility is being referred to as the ‘contagion'.$ To prevent the contagion from spreading, other Euro leaders came together with the IMF to lend Greece a bail out package to prevent it from defaulting. Once the crisis had been realised, the contagion spread. Banks recalled loans from Portugal, Ireland, Spain & Italy and the Greek situation now plagued these countries as well. Furthermore, Greece itself fell back into crisis and required more support.$ S o v e r e i g n d ebt is by n o mean s a n extraordinary phenomenon. In fact, there is usually quite a straightforward solution available. If the government has borrowed its own currency, it can simply print whatever amount of money it needs and pay back to the investors. Japan, for example, has much more debt than any of the European debt crisis countries (over 200% of the GDP) but faces UWC Mahindra College

5 December 2013

no problems with further borrowing. The reason Europe faces problems is because it is the E uropea n C entr al Ban k (and n ot individual governments) that print Euros and ECB is judicially banned from lending money directly to the member states. Hence, when one Eurozone country goes into crisis, the rest of the Eurozone governments are left with no other option but to keep the problematic countries in shape by lending them money from their own reserves. This might work in a better financial situation, but none of the creditor governments are in a good situation themselves: only Luxembourg, Estonia, and Finland have a debt level less than 60% of their GDP. Funnily enough a prerequisite for adopting the Euro as a currency was remaining below a cer tain debt le vel which e ven Germany and France exceed by more than 20 percent. Furthermore, the budget deficit level of Eurozone remains above 4% - again, significantly more than the initial joining conditions would have allowed.$ While managing the bailouts, the European governments were struggling with a recurring budget deficit. The bailouts were only a temporary solution. Their intention was to give the indebted governments more time to regain the trust of the private investors and avail reduced interest rates on loans once again.$ Seemingly, European leaders succeeded with their bailout packages. The interest rates for loans to the bailed-out countries have decreased drastically since their peaks in 2011 and 2012, and the opposition in the countries in question, most importantly in Greece, haven't been able to take over. Since Cyprus’ April bailout, further bailouts are not likely.

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However, the long-term causes for the crisis are in place. $ At its early stage, high spending was justified as an expansionary fiscal policy measure to fight the recession. It has, however, proved ineffective. Excessive government spending cannot solve the complex European economic woes. The debt levels as proportions of the GDP, too, remain high and indeed keep growing.$ An underlying problem is that even in the 2000’s, the countries in question couldn't manage their financial policies. It is not only intuitively clear but also agreed upon by all major schools of economists that permanent government deficit during a boom period of economy isn’t effective. Furthermore, excessive spending wasn't used on any longterm investments. Greece, for example, spent its budget deficits on very high salaries and welfare benefits for government employees.$ Economic desperation remains! Public debt level of Greece has reached 160% of their GDP and the economy is declining 3% per year. The tense political situation in the country and the weakening economies of Greece's traditional trade partners suggest that the Greeks are not going to be able to fix their fundamental economical problems anytime soon. While Greece seems worst off, other European countries share the same problem. Hence, the Eurozone Crisis is, at most, “taking a break.” The investors, while temporarily calm due to the bailout packages,

5 December 2013

will sooner or later come to realise that they are in the same situation as in 2009: the crisis states are in a fundamentally unsustainable financial situation. If long-term solutions aren’t implemented soon, the debt crisis will re appea r a nd this tim e the i nf a m ou s contagion might indeed take place.$ It seems that there are only two ways to solve the problem in the long term. One is to simply say bye to the Euro as a concept and return back to national currencies. Future crises could be dealt with by the central banks of the countries in question just like US and Japan do. This would be a huge step backwards in terms of international co-operation and is unlikely to make Europe in general any better off. The other solution would much more radical one: to expand the currently existing monetary union into a fiscal union. In other words, the budget power would be moved from national governments to the European Commission. While judiciall y slightl y different, in practice this would imply the creation of a ne w federal state. If the nationalist powers in individual sovereign states could be overcome and the United States of Europe could indeed come to exist, there would be no such thing as a debt crisis of an individual state – and, again, all debt crises could be dealt with as any sovereign state would. $ It is easier said than done. Beating the deeply rooted European nationalism and considering the economic benefits of a European State are something worth considering.


! ! UWC Mahindra College

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Economics & Business Forum Newsletter

5 December 2013

EBF Events

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Electricity for All by Ann Josey!

!

Ann Josey is a Research Associate in Prayas Energy Group in Pune. On the 28th November, she held an EBF related talk at our college. $ "Electricity for All” spoke about the “relationship between electricity and development and the challenges that the energy sector in India faces. This lecture is highly recommended for those students taking Environmental Systems or Economics, and for those interested in development in India”.! It was a highly relevant talk concerning issues of rural electrification, financial viability of distribution companies, the growing role of market operations and governance challenges in India’s power sector.$

The Economics of Waste with attempts compost the Conception of Waste By Lisa Bjerke!

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Lisa Bjerke is a UWC Red Cross Nordic ’09 Alumni, and graduate with a BA in Human Ecology from COA, with a focus on business management and ecological economics. $ She has visited UWCMC on behalf of College of the Atlantic and as a postUWC experience. She is currently a Watson Fel low, doing independent exploration on waste management and c u l t u r a l c o n ce p t i o n s o f w a s te a n d compost around the world.$ On Tuesday, the 3rd of December, we held an informal discussion about the human construction of the concept of waste. It considered consider the economical and social tools and structures with which we understand waste of resources in our economic framework. $ What is waste? How we engage with waste? Opposing models: Germany VS India. The Case of New Delhi: The dilemma between the Informal Waste Sector and Privatisation of Waste Collection/Management. These were some questions and issues raised during the session. $

UWC Mahindra College

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Economics & Business Forum Newsletter

5 December 2013

Keeping the World on the Edge, China Shifts Towards Real Reform$

! Forget the Federal Reser ve. Forget the European Central Bank. The institution whose decisions will matter most to the world economy over the next ten years is China's Communist Party's Third Plenum. No v. 1 2 t h's d e c i s i o n b y t h e C h i n e s e Communist Party's Third Plenum to pursue a n e co n o m i c r e f o r m a g e n d a s i g n a l s a fundamental turning point in the relationship between state and society, and oversees a sweeping economic transformation with global consequences. The 60-point document that emerged from the session -- a blueprint for social and economic change over the next decade -surprised many China-watchers with its ambition and detail. It also should settle a long-running debate by China watchers on what drives Chinese politics, factionalism or ideas. How smoothly they manage China's planned transition from an unsustainable growth model that's been based on exports and state-directed investment toward an open, consumer-driven economy will have vast implications for the rest of the world. Pr i ce s f o r e v e r y t h i n g f r o m E u r o p e a n government bonds to iron ore are on the line. How it transpires will even dictate whether and when the Fed and the ECB can normalise their extraordinary monetary easing policies.$ In short, the 'Resolution Concerning Some Ma j o r Is s u e s i n C o m p r e h e n s i v e l y Deepening Reform,' as the Third Plenum document is ponderously titled, attempts to UWC Mahindra College

By Rongfei Lu! do what many liberals in China and the West believe is impossible: advance both the power of the state and the freedom of the individual. That, say the skeptics, is the unresolved tension that clouds the future of the world's second-largest economy. $ The Third Plenum document provides real, if modest, gains for individual rights in China. It promises to relax the despised one-child, one-family policy, which gives the state the unchallenged right to barge into the bedrooms of Chinese households. Farmers are to gain more freedom to sell or mortgage their land and move to cities, easing their bonda ge to the villa ge 'collective,' which nominally owns all rural land in China on behalf of the state. $ And, says the blueprint, out goes laojiao, the system of 're-education through labor,' which dispatches vagrants, petty criminals and prostitutes -- as well as dissidents, petitioners and anyone else who challenges the party-state -- to a vast gulag with no judicial review.$ Their goal, he says, was 'not to protect people against the tyranny of too much government but to use efficient and authoritarian government to build a strong state, [one] capable of making a people weary of defeat and exploitation feel pride in the rejuvenation of their nation.’$ Predictions of the Third Plenum's outcome based on personal factional ties proved wrong or irrelevant. Many believed that 11


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former leader Jiang Zemin and, to a lesser extent, Hu Jintao, stuffed the current leadership with their cronies and that this would prevent an economic reform breakthrough. Instead the leadership has embraced a risky strategy of reform with the sense that without doing so the party, not just themselves, would be doomed.$

h a v e b e e n t h e b a r o m e te r o f s u c c e s s . Companies can still expect a welcoming environment, but they will increasingly share the sta ge with their employees, retirees, homeowners, the sick, families, and anyone who breathes. The new currency of political success in China will be overall human welfare.$

A core operating principle of China's policy process since the late 1970s ha s been particularism, with privileges distributed to select beneficiaries. Standards and policies vary by province, sector and individual. Last week's decision instead aims to institute a principle of unification, reducing regional barriers and policy differences, treating rural and urban residents according to a common standard, reducing the privileges of SOEs relative to those of domestic private and foreign companies, and moving toward a unified system of laws and courts.$

Finally, the party has put forward a platform that portends the rise of other sources of authority over which it does not exercise direct control. The most important will be d e c e n t r a l i s e d m a r ke t s , b u t o t h e r mechanisms could play a growing role, including NGOs and the media.$

“Forget the Federal Reserve. Forget the European Central Bank. The institution whose decisions will matter most to the world economy over the next ten years is China's Communist Party's Third Plenum.”

$

Pi c k i n g w i n n e r s a n d l o s e r s h a s b e e n fundamental to industrial policy, but it is also a key source of rampant corruption that is damaging the economy and eating at the fabric of society. As a result, the discretion that many officials now have will narrow substantially.$ In addition, for the past three decades China has been a country by, of and for industry. Profits and raw economic growth UWC Mahindra College

L o o k i n g f r o m a h i s to r i c a l a p p r o a c h , previous Third Plenums have had a major impact on China's development. At the Third Plenum in 1978, former leader Deng Xiaoping announced the opening-up of China's economy, spearheading major market-oriented reforms. In 1993's Third P l e n u m , f o r m e r l e a d e r Z h u Ro n g j i announced the "socialist market economy" and dismantled a large part of China's stateowned sector. What will happen after 2013’s Third Plenum? Will the reform be carried out? Let’s wait and see.$ Pi c k i n g w i n n e r s a n d l o s e r s h a s b e e n fundamental to industrial policy, but it is also a key source of rampant corruption that is damaging the economy and eating at the fabric of society. As a result, the discretion that many officials now have will narrow substantially.$ In addition, for the past three decades China has been a country by, of and for industry. Profits and raw economic growth h a v e b e e n t h e b a r o m e te r o f s u c c e s s . 12


Economics & Business Forum Newsletter

Companies can still expect a welcoming environment, but they will increasingly share the sta ge with their employees, retirees, homeowners, the sick, families, and anyone who breathes. The new currency of political success in China will be overall human welfare.$ Finally, the party has put forward a platform that portends the rise of other sources of authority over which it does not exercise direct control. The most important will be d e c e n t r a l i s e d m a r ke t s , b u t o t h e r mechanisms could play a growing role, including NGOs and the media.$ L o o k i n g f r o m a h i s to r i c a l a p p r o a c h , previous Third Plenums have had a major

5 December 2013

impact on China's development. At the Third Plenum in 1978, former leader Deng Xiaoping announced the opening-up of China's economy, spearheading major market-oriented reforms. In 1993's Third P l e n u m , f o r m e r l e a d e r Z h u Ro n g j i announced the "socialist market economy" and dismantled a large part of China's stateowned sector. What will happen after 2013’s Third Plenum? Will the reform be carried out? Let’s wait and see.$

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Inequality - Changes in Economics and Civil Society$

! The world today is characterised by the tremendous divide between rich and poor. A frequently quoted figure is that 1% of the world owns more than 50% of the world’s wealth. The real numbers are quite different. Exactly 0.1% of the world population owns 81% of the world’s wealth, 44.8 trillion dollars, as opposed to the 10.3 trillion dollars shared by 99.9% of the remaining population. What implications does this have? Does inequality change the way we live or feel compelled to live? Moreover, we must ask ourselves the so UWC Mahindra College

By John Roy Dommett$ what question. Who cares? Should we care? This worldwide phenomena is specifically re le v ant in le ss e conomi c de v elo pe d countries, but equally important in more developed countries. Sometimes discernible, other times very noticeable, inequality comes to reality in the form of health and social problems, lower level of utility of resources and economic growth when human capital it neg lec te d a nd de v ote d f or hig h e nd

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co n su mp ti on5 . Wh y is it p resen t a nd ultimately, what must be done to eradicate inequality? These are pivotal questions whose answers deserve our attention. $

Inequality typically refers to differences between individuals, populations and countries as a measure of wealth and income, and is connected with that notions of equity, outcomes, opportunities and life expectancy. Whether inequality can be eradicated is very different from whether it must be eradicated. In fact, our analysis and response will differ greatly based on our stake and the urgency we consider there to be. Right now, it is up to us to decide what our global development priorities are, what exact measures will be taken and how.$ Development economics dwells into the details about what can be done to attenuate t h e e f f e c t o f in eq ua lity wo rld wide. A significant part of public discourse claims that we are helpless toward the inequality but isn’t a concerted effort to reduce disparity worth a try? Why not begin with accountability? Who and what is accountable for the widespread inequality? As an article in Forbes put it, “Poverty and social dysfunction are what plague us; they cannot be fixed by taking from the haves to give to the have-nots. To improve the situation, the havenots must become the do-somethings”6. This doesn’t pinpoint who is to blame but heads in the right direction. Involving those most affected by inequality in the process of designing solutions and systems to reduce inequality is li kel y to i ncre a s e t h e success of implementation. As to what can be done,

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there is divergence of opinions mainly because of the multidimensional nature of issue we are dealing with. Some say that we should establish strong institutions to empower people to be free, productive and prosper, while others assert that redistribution of wealth and government inter vention is necessary. Either way, my contention is that this divergence is but the tip of the iceberg and that many alternative solutions exist. First, we must understanding why there is inequality.$ Labor market outcomes, globalisation, technological changes, policy reforms, regressive taxation, among others are areas of im pa ct of m ost conce r n. Factors o f production are the inputs used in the production of goods and services with the objective of making profit (land, labour, capital and entrepreneurship) are known as factors of production.7 These play an important role in determining the status of economies, their “health and wealth”. Each one merits its’ own discussion but let us focus on labour and entrepreneurship first. With the exception of the entrepreneur, labour consists of all the input work by labourers at all levels and sectors of an economy. An entrepreneur also makes profit but does so by taking risks and combining various different factors of production. $

5 Pickett and Wilkinson, The Spirit Level, 2011, p. 5.; HAPPINESS: HAS SOCIAL SCIENCE A CLUE? Richard Layard 2003; More or Less| Branko Milanovic| Finance & Development| September 2011| Vol. 48, No. 3 6

http://www.forbes.com/sites/maurapennington/2013/03/08/to-fix-income-inequality-the-have-nots-must-become-the-do-somethings/

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http://www.investopedia.com/terms/f/factors-production.asp

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5 December 2013

”To eradicate inequality we must first accept that we will never do so, and second, thrive to raise the standard of life of as many people possible (…)” $ Different labour wages around the world are a strong reason for the changing socioeconomic d em o gr ap h i cs . D iverse eco n om ic opportunities in foreign countries among other incentives to immigrate pared with the trend towards a globalised world have changed the labour market both domestically, and internationally. Since wages are based on the market price of individual’s skill sets, supply and demand for different types of work varies accordingly. Market failure thus becomes highly relevant, namely, in that labourers often suffer from information asymmetry. Inequality is hence driven by the unpredictable price mechanism. An added dynamic is that market liberalisation has enabled labour to be outsourced to developing countries where it is cheaper, further intensifying the challenges that, even the qualified, labourers face in their countries. Workers rights, lobbying and union pressure don’t simplify the issue. Wealth accumulates unequally based on polarised wages. We cannot ignore the drastic effect t h a t th e techn o lo g ical re vo lution, mechanisation and industrialisation has had on economies. What is an average man’s day of work really worth? If we take the example of a skilled carpenter who builds boats in a mediterranean countr y, we come to the realisation that he cannot safeguard his income. Two hours of intense physical work are equivalent to a particular number of kW hours which can easily substitute him. And

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further, his contemporary in Bangladesh is willing to work with the same effort for a fraction of what he has to charge. What does this equation mean for this carpenter and the entire labour market? Does it add up? Can we even quantify it? In the long rung, the effect of choosing the machine or the Bangladeshi carpenter conceivably creates a generation of unemployed carpenters lining up for subsidies due to their “inaptitude” to accompany the requirements of the market. The question that arises is what are people supposed to do? What will this carpenter do? Are there alternatives? Is he skilled enough to find alternative work? What about domestic competition? Are there labour transition programmes? Can he sustain his family or will be forced to consider move abroad?$ With regard to entrepreneurship and by extension, a whole culture of business, the logic of profit has taken over. Competition and the various incentives brought to the market by capitalism are incredible stimulants of ventures which most of time, have great outcomes. However, we may question the ways in which profit is made. Arguably the most influential aspect, Internet, has changed the ways in which inequality manifests itself in that it has opened a world of opportunities, diversified markets, created niches and benefited from large consumer audiences. It has created a market of intangible goods and services with interesting implications for production and consumption. The internet economy implies that many countries are no longer producing things, yet our desire for tangible things remains. Is this not an incompatible and paradoxical situation? Even if the re is a n a c tive c ulture of entrepreneurship, when production no longer is an essential aspect of economies, what will 15


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replace it and how will this sustain the levels of consumption that populations increasingly demand? Globalisation has allowed economies to produce and specialise, hire and fire, import and export at much larger scales and with greater opportunities for profit. However, the opportunities for negative externalities and failure are equally high. The uncertainty factor which haunts economists should also seize to dilute any hope of objective and sensitive evaluation of what might really happen. Instead of focusing on the problems, coming to terms with the unpredictable nature of market agents and the predictably irrational nature of human beings8 is an important step towards dealing with unexpected change in economics. Entrepreneurial activity is aware of the unpredictability of consumers and the market. Their experience can provide many lessons to governments and civil society. $

As Hobbes and Rousseau argued, inequality is inescapable and therefore, we can only aim at making sure that the standards at which we are unequal are decent. If we acknowledge this, we are one step closer to concrete ways of eradicating inequality. Standards of living or quality of life are connected to wealth and income as relative concepts. If we aim to raise the decency of living standards we cannot forget that what is decent wealth for some is relative, heading towards insignificant, for others, and therefore, defining the specific areas of action and intervention is key to prevent disillusionment and failure. The idea of decency suggests that our worldviews and ideas about the economics are currently not recognising that human beings are equal beings, not in economic status, conditions, competing backgrounds, nor faculties of the

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mind and body, but equal in the economic opportunities that arguably should exist so to sustain decent livelihoods for all seven billion of us. Being aware of the lack of decency in livelihood and economic conditions of large numbers of people is not enough. To eradicate inequality we must first accept that we will never do so, and second, thrive to raise the standard of life of as many people possible conceding that inequality will remain but it will no longer be characterised by a multitude of subhuman socioeconomic conditions. “Change the world by changing your shopping basket”. This is one single example of a behavioural change that can take place from the consumers side that will eventually lead to structural changes in the distribution of wealth. Furthermore, there is a whole field of economics which I see a need to be further developed which is that of Economics in Transition. Long term oriented, ethically a wa re , comm itte d to e colo gy a nd y e t conciliable with a world of trade, money and profit. Development and diffusion of a strong philosophy of economics averse to the “evils” of dependency, debt and consumer greed is becoming increasingly relevant and the economic writings over Mahatma Gandhi and E.F. Schumacher have a lot to contribute to this task. $ When looking at inequality, the recent crises are evidence that even in MEDCs, there are structural divides between those with wealth a nd those w it ho ut it. Co rpo ra te irresponsibility paired sudden unfulfilled expectations in everlasting growth and confidence in economic stability as seen in the economic meltdown in Europe and the United States is a powerful lesson of what not to do

Predictably Irrational: The Hidden Forces That Shape Our Decisions, Dan Ariely

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with economies. The reason why the Bretton Woods System failed for example, was because governments no longer wanted fixed exchange rates. This sug gests that, str ucturall y, inequality has to exist in the world. Since fixed exchange rates were less profitable, the dollar became the fiat currency which implied that economies would not only be unequal in resources, size and capacity of production, but would be subject to the changes of the foreign exchange market. China for example, would not be interested in buying countries debt if there were a fixed exchange rate and would not hold its long term economic power over the world. The implications of this for international trade and inequality among countries is significant. Alternative systems exchange rate agreements or self-regulatory practices should be considered to address this issue. Despite the prevailing negative narrative and examples presented, looking at the etymology of the word “crisis” holds the key to many of it’s own problems. In Mandarin, the wor d c r i s i s m ea n s b o t h d an g er a nd opportunity. The media and a large number of people portray the past 6 years as dangerously uncertain times however, it is essential to acknowledge that in many ways, opportunities for positive change and work directly focused on inequality have increased tremendously. The labour market is flexible and eager for unemployment to fall, technology never seizes to simplify and contribute to the efficiency of markets, and in general, there is a growing public and private will to cooperate in initiatives that address problems of inequality. To eradicate inequality one must support the multiplication of these initiatives without ever forgetting the reasons we are unequal in the first place. $

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As we’ve briefly outlined, a stake worth taking is one which creatively combines the following aspects of the bigger scenario. Structurally, entrepreneurship needs to be continually boosted while the labour market needs reforms in the direction of diversification of opportunities, recognition of the intrinsic need for human labour and development of higher standards of wealth for collective liv elihoods. In ac a de m ic s, eco no mi c philosophies need to be revised so to influence corporate culture not to repeat the same mistakes and nudge governments down a safer path. The rejection of one-size-fits-all solutions like those prescribed by the Washington Consensus in 1989 will avail to significant changes in the way further inequality develops. In addition to this, m oul ding e conom ic models to a de e p understanding of the psychology of consumers and producers which is constantly improved by behavioural economics, must take place simultaneously with work on the public a ttitude towa rd crisi s, v ola tility a n d uncertainty.$ The scale and speed at which economic growth takes place and profit is made is important in the overall system of inequality. The supremacy of short term political and economic policies diminishes hopes of long term sustainable economic equity. All is well while things are on the rise, but discrepancies between real growth and overall economic growth are a major issue worth tackling. There are fundamental political costs with severe economic implications for which no one is willing to take. Who is prepared to sacrifice the wealth and stability of one generation for long run and future well being of an economy? Unfortunately, the commitment to our grandchildren and environment is inexistent. 17


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Maybe China? Either way, another aspect of this debate is the perspective and world view with which we analyse inequality. Deciding what are our global development priorities for example or whether one system of political and economic rule is fairer over another, can always be interpreted differently depending on our incentives, our background and what role we are willing to play in a complex system. Major differences in this respect between the East and West only make it more complex and are evidence that we are dealing with any “wicked problem”9 . What this leads onto is t h e r e a li sa tio n th a t th e wo rld is an interconnected place and that markets and f l ow s o f mo n ey c ann o t escap e this characteristic of the system. Economic theory takes place in an ideal independent world, where variables are compared and indicators are prescribed to measure problems. This only goes to provide a partial understanding of interdependent processes. Why hasn’t this been into economics as it has been integrated in physics? The effort to create what is known as Internomics paralleled with that of Economics in Transition as mentioned before, is noble and arguably, of urgent need. Only in recent years has the OECD for example, began work on the benefits and dynamics of global value chains and interconnected economic interactions. The purpose of the science of Internomics wouldn't be to maximise material output but instead, to add to human insight and understanding10 . This means a lot for the overall reduction of inequality. $

The debate about what must be done to eradicate inequality is not complete without 9

mentioning the effect that financialisation and marketisation have had on economies. Michael J. Sander’s recent work complements some of the ideas mentioned above. He describes how markets and market values have come to govern our lives as never before, whereby we use markets to allocate health, education, public safety, national security, criminal justice, environmental protection, recreation, procreation, and other social goods. This process is known as marketisation. By putting our trust in markets instead of governments, crisis has shown us that our ability fo allocate efficiently is questionable and that progressively, markets have become detached from morals. But why worry about the market society in which everything is up for sale? $

“Making money is exciting! The adjustments that internomics and revised models can bring about do not make any judgement about the fact that money, trade and profit are essential elements for economic interaction.” $ Sander gives two answers to this question. When everything is for sale, individuals at the lower end of the pyramid are a lot more vulnerable to the price mechanism and their ability to purchase affluence changes. The extent to which money can buy intangible things makes the unequal distribution of wealth and income even larger. The second reason is the damaging tendency of markets. Price tags on particular goods ands services

https://www.wickedproblems.com/1_wicked_problems.php

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http://holisticeconomics.org/internomics.htm

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can have a corrosive effect. An example of this is the hiring of mercenaries to fight wars which spare the lives of our citizens, but who to a n e xte n t , co r r up t t h e mean ing of citizenship. The commodification of goods and services makes them instruments of profit and use when not everything can be valued in this way. Deciding how to value things is not merely an economic question, but a moral and political one which should be active in the public arena, as well as in academics and policy making. Because we have not decided case by case, what is the moral meaning and the proper way to value goods and services, we have drifted from a market economy to being in a market society. Financialisation consists of the process of reducing all value that is exchanged into financial instruments or derivatives. It has been escalated by the opportunities that marketisation creates, and enabled debt to sustain the rapid growth of economies, as well as further intensifying the market society. Thinking through the appropriate place of markets requires that we reason together, in public. Markets and morals n e e d to b e reco n nected an d sen sib le regulation and self regulation can be put in place to prevent similar crises in the future. $ The argument for a revised conception of the market and civil society is strong because it conceives that a market is a valuable and effective tool for organising productive activity. A market society on the other hand, is a way of life described by market values over which we can’t really control. We have to deliberately ask ourselves if we want a market economy, or a market society? What roles should each play and what implications would they have on public life and personal relation? While the questions above might stress the negative role that markets play in accentuating UWC Mahindra College

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the bottom percentiles of world populations, the possibility that wealth at the top should not be ignored. Making money is exciting! The adjustments that internomics and revised models can bring about do not make any judgement about the fact that money, trade and profit are essential elements for economic interaction. The perspective brought by entrepreneurism as a factor of production should guide us here, in that wealth and its distribution can actually inspire us. Why does greed and jealousy develop instead of ambition and cooperation? How can people develop a culture of creating things of value? How can we structure our economic model so human beings and the environment can coexist and yet see economic prosperity grow as well? Ultimately, economics is about people and their means to well being. The majorities’ well being is arguably at great risk. Rooted in this generalised inequality, we face a significant crisis of our philosophical stance to economic life. We need changes in epistemological framework of economics that allow us to conceive and analyse problems differently, in a way which is more aligned to long term solutions and practices. Rather than concrete practices, I’d like to emphasise the need for processes by which concrete practices can be created. Revision, participatory solution brainstorming, reformulation and structural changes to the economic models that we follow at every level are necessary to irradiate the overwhelming problem of inequality. Undoubtedly, there is more than enough that can and ought to be done.$

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Laissez-Faire Economics

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in the world that practices pure laissez-faire economics as of today, and it is unlikely we will see one in the future either. $

By Pranav Chinmay! Let me now move into argumentation and

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Laissez-faire means: Let the common man choose and act; do not force him to yield to a dictator.11 This definition certainly ascertains one impor tant quality of laissez-faire e co n o m i c al a nd p o litical th eo r y – its connections with individualist movements and libertarianism throughout the 18th, 19th and 20th centuries. I will explore (to what extent I can), laissez-faire economics and its status in society today.$

counter-argumentation before looking at evidence and then concluding about the status of laissez-faire economics.$

The positives of laissez-faire economics are fairl y e vident, and it is quite a catchy situation on the face of it. It posits a idealistic world where individual freedoms can truly supersede collective needs. It follows the very appealing principle of “let people do what they want to”.$

Simply put, laissez-faire values individual freedom over collectivistic ideals. Literally translated from French, it means ‘let them do/ be’. It emphasises absence of government regulation in economic transactions between private parties. This means no restrictions, tariffs or subsidies. Parties, however, are entitled to property rights that are regulated by the government. The ideas of laissez-faire are controversial, and for a very long time has been closely linked with capitalism. $

Idealistically, it hits all the check boxes. It creates incentives for improved performance, and prevents spiralling of individual ambition. It believes that the freer the market, the freer the people. It claims to be more effective, due to less intervention. The basic principle upon which pro-laissez-faire rests is that the combined actions of the public, each acting from self-interest make for more effective economic decisions than a central government can make. $

The history of laissez-faire economics is a curious one. It existed in principle for centuries, in various isolated parts of the world that did not influence each other. It grew independently in each of these places, but in most cases, disappeared. Adam Smith, long regarded as “the Marx of capitalism” (whatever that means), wrote at length about laissez-faire ideas. He closely entrenched the two ideas together and they have been connected ever since. Laissez-faire has taken on many forms and has grown significantly. There is no state

T h e n e g a t i v e s s e e m to o u t w e i g h t h e positives, however. There are several that come to mind, most of which would also be associated with capitalism’s flaws. Bad working conditions, no regulation of wages, no care for the little guy even though it claims to be individualistic. Laissez-faire would lead to monopolies in markets and create a huge disparity between upper and lower classes. While overall growth remains high, only the big guys reap the dividends. It rests upon opportunity only, which is not equally divided between all human beings.

11 von  Mises,  Ludwig,  ‘Human  Ac9on’  p.727-­‐732

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There are a number of these, and they rest upon the claim that no government intention destroys any possible hope of egalitarianism or even near-equality in markets, and leads to a giant, giant divide between rich and poor.$ A comparative look would suggest that the negatives are far too many. This is one of the reasons it is not in practice anywhere in the world today. The other being that it is too idealistic and does not always meet practical, real-world requirements. There are several

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claims that each of the depressions and recessions in world history were fuelled by an increase in laissez-faire policies, but that is not accepted by too many analysts. The laissez-faire model boils down to the eternal capitalism v/s communism debate, which, I believe, is simply unresolvable.$ While we continue to debate and figure out which model is the best, the world goes on. We need to figure out what works best, but perhaps more importantly, what doesn’t. 

Aid or Trade? By Arnav Patel!

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Poverty has been defined by the World Bank as either moderate or extreme; moderate poverty describes the situation of those who live on under $2 (Purchasing Power Parity-PPP) a day, and extreme poverty refers to those living under $1.25 (PPP) a day (Duflo & Banerjee, 2011). In dealing with both the question arises, how do we solve poverty? Some economists argue that aid is required to help less economically developed countries escape poverty. Others have argued against this position, stating that the effects of interventions are unpredictable and often unsatisfactory, and therefore the problems should be left to market forces. $ Aid The argument for the use of aid centres on the existence of what is known as the poverty trap, the idea being that income can be depicted on an S-shaped curve (diagram on the right) (Duflo & Banerjee, 2011). People in the poverty trap zone have income that is too low today for them to afford necessities in the future, and therefore future income is even less, setting off a vicious cycle that drives the poor to the point at which they have no income left. By this theory, poverty can only be alleviated when the poor are given an external push (i.e. Aid) to break   free from the poverty trap zone. Rwanda is often cited as an example for aid succeeding in breaking the poverty trap. With the advent of UWC Mahindra College

aid in Rwanda, the country has sustained a GDP growth rate of 8% per capita GDP has 21


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r i se n f r om $5 67 in 20 0 0 to $15 92 i n 2013( (IMF, 2013)). $ Critics of aid argue that aid proponents unreasonably assume a streamlined aid allocation mechanism. Be it legal barriers such as unnecessary bureaucracy or illegal ones such as corruption, developing countries are rife with institutional inefficiencies that ensure an under-allocation or under-usage of povertyalleviating services. In India, government run hospitals and primary health centers exist, but due to the inconvenience the poor have to undergo to avail of some services, the poor don’t use the facilities altogether. Abhijit Banerjee, Angus Deaton & Esther Duflo conducted a study in which it was found that in Udaipur only approximately 25% of the poor used public healthcare facilities, the rest preferring private facilities and spiritual healers (Duflo & Banerjee, 2011). There would be no point in building new hospitals using foreign aid if no one would use them because they have to fill dozens of forms or face bad service at the hands of underpaid hospital staff to avail treatment. $ Another allegedly unreasonable assumption that aid proponents are accused of making is t h a t t h e p o o r a re r at io n al. Curre nt implementation methods do not ensure that every penny of what the poor save due to aid will be spent on the necessary goods and services needed to alleviate the poor. Shankar Subramaniam & Angus Deaton (for the Journal of Political Economy) conducted a study in which it was found that for an average Maharashtrian household, a $1 increase in income only meant a $0.67 increase in food expenditure (Duflo & Banerjee, 2011). This study tells us that food aid might reduce the price of buying jowar and bajra (cheapest

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sources of calories, which are required for productive work) in rural Maharashtra but that doesn’t mean that the poor are going to buy more jowar and bajra. The poor might start using their new disposable income to buy rice and wheat (more expensive sources of calories), or a TV with a DVD player. The study shows that it is unrealistic to assume that the poor want to maximize productivity, rather than satisfaction. $ Trade William Easterly offers a hands-off, laissezfaire approach to dealing with poverty. His approach embraces the idea that the free market works to provide the poor with what they want & need. This argument discards the S-shaped curve in favour of the inverted Lshaped curve (diagram on the next page) (Duflo & Banerjee, 2011) to describe income, claiming that the poor don’t demand what they need to alleviate themselves for reasons other than lack of income. Easterly argues that the poor simply do not feel that the returns from some of the provisions made for them by governmental aid are enough to make the provisions worth using so there is no point in providing them. The poor have no incentive to use the new school you just built for them using foreign aid because they feel that keeping their kids at home to work offers more to them in return. If the returns from sending kids to school were large enough then dem a nd for a ne w sc ho ol would h a ve increased and the market would have provided it. $

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Before assuming that trade is the most viable option in alleviating poverty, a few flaws in the argument must be noted. Proponents of trade assume a different kind of rationality amongst the poor from aid proponents which is just as unrealistic. Easterly’s free market model assumes that when the poor need something they will demand the correct good. This however is not necessarily true. Before assuming that trade is the most viable option in alleviating poverty, a few flaws in the argument must be noted. Proponents of trade assume a different kind of rationality amongst the poor from aid proponents which is just as unrealistic. Easterly’s free market model assumes that when the poor need something they will demand the correct good, which is not always the case. The aforementioned study conducted by Banerjee, Deaton & Duflo showed that when the poor in Udaipur fall sick only 25% of them use public health facilities, while another 25% go to b h o p a s (spiritual healers) and the remaining 50% use private healthcare services of which a small fraction have trained medical professionals (Duflo & Banerjee, 2011). In cases like this, aid could work, through subsidies and supply side policies, to shift demand to the services necessary to alleviate the poor from their situation. $

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The second argument is that even though most households in the world are not caught in a poverty trap, countries on the whole are sometimes caught in a situation where the population is stuck at a point at or nearly at the origin of the inverted L-shaped curve. Countries like those in sub-Saharan Africa have a majority of their population working as subsistence farmers who barely manage to nourish their household. These people seem to be ver y close to what Jeff rey Sachs desc ribe s i n his book T HE EN D OF POVERTY as the threshold level of income which a household must cross to benefit from trade (Sachs, 2005). They would not be able to accelerate along the curve unless an external force was to push them in some way or the other along the curve. $ Solution? The former deputy finance minister of Mexico, Santiago Levy devised a system in which the government gives varying amounts of money i.e. ‘Conditional Cash Transfers’ to households based on how much formal education their children receive (Duflo & Banerjee, 2011). This system allows the government to control what services the poor use and at the same time leaves allocation of the service to the free market. Conditional Cash transfers are an example of an ideal middle ground that includes the advantages and negates the flaws of both Aid & Trade; The ideal path to alleviating poverty is neither aid nor trade but rather a combination of the two; the implementation of aid in such a way that it incentivises trade. 


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Bibliography Communism & Justice: Is Communism Fair?$

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Blunden, Andy. "Archive: Marxists." Marxists website. July 10th, 2009. http://www.marxists.org/ archive/marx/works/sw/course/mscp.pdf (accessed November 18, 2013).$ Diquattro, Arthur. "Liberal Theory and the Idea of Communist Justice." The American Political Science Review, Vol. 92, No. 1, 1998: 83-96.$ Holz, Hans Heinz. "Ten Theses of Marxist-Leninist Theory." In Downfall and Future of Socialism, by Hans Heinz Holz, 32-40. Minneapolis: MEP Publications, 1992.$

! Aid or Trade? ! Duflo, E., & Banerjee, A. (2011). Poor Economics. Randomhouse India.$ IMF. (2013). "Report for Selected Countries and Subjects: Rwanda, 2000, Gross domestic product based on purchasing-power-parity (PPP) per capita GDP". World Economic Outlook Database.$ Sachs, J. (2005). The End of Poverty. Penguin Press.

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Editor in Chief John Roy Dommett, UWCMC 14’$

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CoEditor$ Arnav Patel, UWCMC 14’$

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Partnerships:

Distribution & Image Rongfei Lu, UWCMC 14’$

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Writer: Elias Tuomaala, UWCMC 14’$ Yashaswi Mohanty, UWCMC 14’$ By Pranav Chinmay, UWCMC 15’$

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Faculty Advisors Arvin Dang$ Malika Anand$

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EBF Newsletter  

EBF is an ongoing initiative at UWC Mahindra College which holds panel discussions with guest speakers. This newsletter is the first of a re...