India's Economic Condition

I've always thought of India as a country with a vast and impressive cultural environment. Its history is full of triumphs and discoveries. In ancient times, India was neck and neck with the Greeks when it came to advancements in medicine, astronomy, and mathematics. But the west soon advanced beyond the abilities of the east, leaving India as an emerging market, rather than a developed one.

However, India is one of the world's fastest growing economies. In the years leading up to the worldwide economic crisis, India was growing at a rate of about 9-10%. Unfortunately, 2008 led to booming inflation and slowed growth. Though the inflation has slowed considerably since then, so too has the economic growth, now at a rate of around 7.5%.

India has worked hard to improve its economic conditions. In the 1990's it developed a number of economic liberalization policies which encouraged significant amounts of foreign direct investment. In 2001 India became a part of BRIC (now BRICS), under the idea that Brazil, Russia, India and China were destined to be the next major providers of manufactured goods for the world. India also established the BRICS Economic Research group, allowing the member countries to bring their heads together and help each other move beyond the emerging and developing phases.

It seems to me that India has an excellent economic strategy. The country has reached out to other countries in similar economic straits, knowing that economic isolation is the last thing that will help the country grow. India understands the importance of research and development, prompting it to bring the BRICS countries together in their research, because the more minds focused on a project, the further along it will get. Where China has primarily been a location for cheap, unskilled labor, India has provided labor forces in the service and technology industries, through outsourcing from countries like the United States.

Like China, India is an enormously large country with a massive population. Many Indians leave the country for education elsewhere, but it seems as though enough return to prevent fatal brain drain.

Looking back on what I've learned about the history of India, I believe that the obstacle which threw it off it's course of advancement was the Imperial takeover by Britain. Though I'm sure Britain brought a great deal of western style development to India, it also interfered with India's eastern development. I can't help but wonder where India would be today had it not been colonized by Great Britain.

The developed countries of the world just can't seem to avoid sticking their noses into the business of less developed countries, can they? I don't deny that there is knowledge that could benefit emerging economies like India, but sharing that knowledge is seldom the goal of interference. Each country believes that they are acting in their own best interest, and that they should be. Perhaps it's true, that self-serving economic decisions provide the best engine for a country's growth. But I don't really believe that. And as I've said before, there are a number of different ways to act in one's own self-interest.

Far too often, developed countries believe that there is nothing that they can learn from countries that are less developed. But that's just another example of arrogance and shortsightedness. It comes back to the idea of comparative advantage. No one country can possibly have the absolute advantage in all areas, especially when you consider how widespread are industries have become. But if one country is highly efficient at a specific industry, yet needs to focus on a different one, because that's where their comparative advantage lies, isn't it in everyone's best interest to teach another country how to be as efficient as possible in that first industry?

Too many countries want to have a finger in every pie. Why can't they acknowledge that it simply doesn't make economic sense, and spread the wealth of knowledge with the rest of the world. If every country is able to produce whatever it is that they produce in the cheapest and most effective way possible, doesn't that make life better for everyone?

India has shown that it knows that it can't do everything itself. Being a part of BRICS, reaching out for foreign direct investment, these are ways of improving the country's overall productivity. India has the right idea, and I look forward to seeing it advance as years go by.

The European Union

There's no denying that I'm an idealist. I believe that the world can be so much better than it is. And despite all sorts of evidence to the contrary, I believe that people have it in them to do what's best, not just for themselves but for the world as well.

In a lot of ways the EU represents some of the first steps towards that ideal. Different countries working together, coming together to act as a single unit. 27 countries joined together to integrate the continent. How could that not be a good thing?  And certainly a number of the countries involved have benefited greatly. It's made travel and trade within Europe easier for everyone. But not everyone's a winner.

http://edition.cnn.com/2011/BUSINESS/06/19/europe.debt.explainer/index.html

This image shows government debt as a percentage of annual GDP as of 2010. Some of the countries have debt that is more than 100% of their annual GDP, while for others it's less than 40%. For the 16 countries that are part of the eurozone, the lack of an national currency has caused some serious problems. These are still individual nations, with individual economic difficulties, and some of the so-called benefits have actually increased these difficulties for some countries. Greece, for instance, with its massive amount of debt and high inflation, just can't keep up with the some of the rest of the European Union.

Some of these countries have required substantial bailouts from the EU in order to keep from going under. But if policy was adjusted to lower their inflation, it would harm those countries that have been successful with the euro.

The European Union is a giant leap forward towards a completely integrated international economy. Europe has bravely gone ahead of the rest of the world in uniting governments and economies. But what would happen if the European Union continued to spread? Already we've seen that a common currency can't protect countries from problems with debt and inflation. In addition, Great Britain's refusal to adopt the euro is just one example of how countries may fear that joining the EU or the eurozone will cost them their national sovereignty. Can anyone picture the United States giving up the dollar for the euro? No, the U.S. would surely insist that the American dollar be the international standard.

In fact, let's look at the United States. The U.S. is a single country, with a single overall government and the FDIC overseeing the economic issues for all of the states, yet each state retains its own government. But is the U.S. really an example of a successful economic system? Some states are on the verge of bankruptcy, and the country as a whole is facing massive debt.

The idealist in me wants to believe that if it were only possible for the entire world to band together under a single currency with an outside economic monitor half the world's problems would be solved. Peace would about, debts would be repaid, the international recession would end. Sadly, I'm also a realist. I don't believe that such a thing is possible, certainly not anytime soon. And ultimately, who's to say that the problems the EU is currently facing wouldn't explode one thousand-fold if the results were replicated world-wide.

Still, though the European Union has been around for over 50 years, in economic terms it's still a baby. They're still working the kinks out of the system. These next few years are crucial ones to watch, to see how the EU deals with the economic crises in Greece, Italy, Spain and elsewhere. Maybe they'll come up with a brilliant solution, and the European Union will become the strongest economic force in the world. Or maybe they'll flounder, and have to take some sort of drastic measures just to stay standing. But either way, the world will be watching, and hopefully learning.

I don't believe that we can have a successful international economy until the world is truly integrated in more ways than just financially, and we're still a ways away from even that. The European Union is an example we can look to. They are pioneers in globalization, and its important that the rest of the world realizes that. The world is changing faster every year, and I believe that without some sort of international unity everything will fall apart. We'll see another Great Depression or another World War. And because the world is more interdependent than it ever has been before, the effects will be so much more devastating. Please, let us learn from the mistakes of our past, and the mistakes of our present, so that we may have a future.

Import Substitution

When I consider import substitution, the main thing that occurs to me is that this idea has been around for a long time. Mercantilism was based on a lot of the same basic concepts: mainly, export without much importing, and do for yourselves within the country, don't rely on trade. But what also remains true is that while import substitution and trade policies like may have short-term benefits, in the long run they are always damaging to the countries that enact them.

The problem with import substitution is in its most basic assumption. In order to replace imports with domestically produced items, a country has to have the resources available to do so. On the simplest level, one of the reasons we have trade is that not all countries have the same raw materials available. The United States, for example, isn't going to have the best luck growing its own coffee plants. It can be done. There are species of coffee plants that don't need have such limited requirements for growth. The this is, they generally don't make the best tasting coffee. And that brings me to the next issue of import substitution: quality.

It's all very well for a country to say it's going to make what it needs itself, and perhaps only import those few raw materials that just aren't available within its borders. However, different countries have varying levels of technology available to them. They can only create within their own limits. And without competition from more advanced countries, the technological advancement is much slower.

There is a reason that the theory of comparative advantage replaced mercantilism. Why should a country waste its labor and capital resources manufacturing inferior products? If that capital is instead invested into those industries in which the country has a comparative advantage, jobs will be created in those industries.

To me, import substitution feels a lot like a small child at the playground who says to his friends, "I don't need you, I can have fun all by myself." A limited comparison, I know, but it's true all the same. I think it represents the crippling shortsightedness of most people. People tend to act in their own self-interest. But there are a lot of different ways to improve one's condition. That's the whole point of comparative advantage. Sure, the U.S. may be more efficient at producing both cotton and wine than the U.K, but if the U.S. does nothing but produce and export, and the U.K. does nothing but import, eventually the U.K. is going to run our of capital with which to purchase both wine and cotton. The U.S. loses because it runs out of outside customers, and is producing more than its own people need, and the U.K. loses because its people have no jobs and the country has no money. That's import substitution. Every country in the world wants to run a trade surplus, all of the time. Why wouldn't they? Who doesn't want to be making more money than they're spending. But it's not a sustainable reality.

It's true that import substitution has benefited countries in certain situations for a limited time, for example, Japan after World War II. But it makes sense for an injured country to curl into a corner and lick its wounds after a situation like that. And now Japan is one of the dominating forces in the international economy.

Trade policy has to be flexible. A country needs to be able to respond to the world as it changes. Blindly adopting a policy of import substitution will bring a country's economy down. In the BRICS countries import substitution was briefly helpful, but sticking with those policies for too long inevitably led to damage. Economic development requires competition, true access to the factors of supply and demand, and most importantly, international interaction. Without these things economies with stagnate. Too many trade policies are created for short-term benefits. If countries don't start taking a much longer view the world is never going to truly move forward.