ECONOMICS MIX
Developing economies need a balance in their liberalization policies
Developing economies have emerged as the major contributors in business today. They serve as a catalyst in various financial markets, mergers and acquisitions, research and development etc. They host most of the sunrise industries such as ITES and have forced most of the MNCs to change their business models before. The BRIC nations have been predicted by Goldman Sachs Investment Bank to become among the four most dominant economies by the year 2050. The report states that in BRIC nations, the number of people with an annual income over a threshold of $3,000 will double in number within three years and reach 800 million people within a decade. This predicts a massive rise in the size of the middle class in these nations. In 2025, it is calculated that the number of people in BRIC nations earning over $15,000 may reach over 200 million. This indicates that a huge pickup in demand will not be restricted to basic goods but impact higher-priced goods as well. According to the report, first China and then a decade later India will begin to dominate the world economy. The rapid growth needs a high scale of investment in various sectors of the industry which attracts many risks such as volatility of financial markets, value of currency, bubble-bursts etc. which are shared by the companies, investors, employees, government and society at large. The liberalization policies of such economies have to be framed carefully. India is a case in point which experienced a rollercoaster ride in the last few years.
John Maynard Keynes, the 20th century British economist, in his Keynesian Theory promoted a mixed economy in which both the state and the private sector are considered to play an important role. He believed that in the long run economic systems would not automatically correct themselves to optimal level, even if they did, it would be a very long run indeed. He tersely states his view in his famous quote- “In the long run, we are all dead”. This theory is in stark contradiction to that advocated by Milton Friedman, the American Nobel Laureate economist and public intellectual, who was a strong proponent of laissez-faire capitalism. Milton asserted that business is not the business of the government that is markets and the private sector operate best without state intervention.
Keynesian Theory seems to be the closest to be followed for the liberalization policies in the developing economies, but there is also a need to leave a major portion of the market to the demand and supply equilibrium as argued by Milton in his Monetarist School of Economics or Quantities Theory of Money. In the current Indian scenario, the government needs to regulate the investments, convertibility, exchange rate, inflation, while not hampering the growth. The government should not confine itself to being a watchdog, but make investments in infrastructure, energy and education. The liberalization has to be implemented in a phased manner. It also has an obligation to regulate the impact of rapid industrialization on the environment. Red-tapism is another hurdle to economic development that has to be minimized. India saw FDI inflows of $11.12 billion in 2006 while this year by May these have already reached a figure $10 billion. This is in spite of the roadblocks due to inhibiting policies, labour-laws and bureaucracy. A T Kearney has ranked India as the second most attractive destination in ‘FDI Confidence Index’ for 2005 and the most attractive location for off-shoring of services. Economic growth is driving FDI and trade, and not vice versa. India is the second fastest growing major economy in the world, with a GDP growth rate of 9.4% for the fiscal year 2006–2007. The financial markets in the country have seen ups and downs in recent months. Rupee appreciation has cut the margins and hence the profits of exporters, though inflation is fairly under control. In these circumstances, the government needs to protect the interests of all the parties- be it investors or companies. It is high time it realizes its role in pushing the growth story to new heights.
The significance of Milton’s Monetarism and the concept of laissez-faire increase over the Keynesian Theory as the economy moves towards development. Thus at a developing stage, there needs to be a perfect economics mix, a blend of the two major theories to have a balanced and sustained growth.
-Parikshit A
