The current essay demonstrates the scenario of Indian economic crisis in 2014. Causes and impact to India was talked in the first section; influence on other economy especially to Australia was analyzed and Stolper-Samuelson Theorem was applied in section 2; similar situations in history were mentioned in the third section.
1. Describe its causes – economic or non-economic (2% for creativity). In 2014, many emerging economies are facing liquidity crisis, especially India. It was the aftermath of the US QE exit. The QE is the monetary policy applied by countries like US, UK, and some EU members, that to expand the money supply and leverage; it was an effective short-term fix to boost investment and economy growth, yet when it became too long, it caused negative influence in both domestic and the global economy. Indian economy is highly dependent on foreign capital inflows, and most of them are the cheap money brought from countries with QE policies.
With vast investment, the India government spent a lot on infrastructures and manufacture plants that the government kept a deficit account these years. Deficits became problematic when investment capitals stopped. Economically, short of money directly make those on-going projects unfinished; quitting QE will appreciate foreign currencies like USD while make the India currency Rupee comparably depreciate; when Rupee is weaker, there will be inflation in domestic commodity price. Non- economically, delay or stagnation of projects along with weak Rupee drove a loss of confidence on India economy, bear stock and gold market caused the equity and houses prices dropped,.
India is exposed under financial crisis bought by deep troubles at home and abroad: weak Rupee performance due to comparably strong dollar; market gloom due to foreign investment withdraws; domestic commodity price surge due to inflation caused by currency devaluation; GDP growth slowed and Indian government is facing questions on its creditability and huge deficit account.
Below charts show the economic effects of how QE policies in the rest of the world affected India and caused financial crisis: First of all, when foreign currencies (like USD) tapered the investment injection to India (S0 to S1, q0 to q1), Rupee devaluated (as more Rupee need for 1 dollar, r0 to r1); as Rupee devaluated, price of imported goods increased, higher cost shift the aggregate supply leftwards and caused higher price level (P to P1) and lower real GDP (Y to Y1).
2. Describe its impact on world trade and commodity prices, and use the Stolper Samuelson theorem to predict the effect on income distribution in Australia.
As mentioned above, stagnation of foreign investment and weak Rupee caused slower GDP growth and higher commodities prices. Devaluation of Rupee makes Indian government even harder to repay its deficits, which in turn affected all the economy activities globally. As one of the two superpowers in Asia, India has considerable economic influence over Australia. Indians are less rich compare with the rest of the world; therefore less Indians would come to Australia for study.
Education market is negatively affected and there will be job losses or even closing down in education sector in Australia. As a net energy importer, India has large demand for Australian energy products, especially for coal (for coal is the main energy resource in India). Comparably strong Australian dollar makes Aussie products less favored by India, expect the mining products, for those are necessities. According to Stolper-Samuelson theorem, assuming full employment and free labor mobility, as the demand for mining products stay steady while demand for luxury products or other non-necessities slowdown, there will be different changes in mining and other sectors.
For mining as a capital-intensive industry, selling price increase will increase capital and rent costs, but lower the real wage; on the other hand, labor sectors like agriculture and services industries, shrink foreign demand results price cuts, which wage level also decreases yet capital and rent costs rises. Below charts show how the Stolper-Samuelson Theorem applies on the interactions between capital/rent and wage costs.
The green line represents the labor-intensive industry (marked as L, like agriculture) and the orange line represents the capital-intensive industry (marked as C, like mining); when there’s a price increase on capital-intensive products, the curve shifts rightwards (to C1), capital/rent cost increases (r to r1) while wage level decreases (w to w1); when there’s a price drop on labor-intensive products, the curve shifts leftwards (to L1), capital/rent cost increases (r to r1) while wage level decreases (w to w1);
Moreover, weak economy in India may promote talent immigrations for skilled labor (e.g., from IT industry) moving to Australia. Economically, increased abroad labor supply would lower the wage level in Australia, which may cut costs of producing and make Australian goods and services more attractive to the rest of the world; Non-economically, gathering of professions will boost technology improvement, that would have Australian more competitive; on the other hand, a surplus of labor supply may cause social problems like unemployment and high government payment on unemployment insurance.
3. Document any historical crises that might be relevant for your answer (4%). The current India financial crisis is somewhat similar to many cases in the history. The 1929 Great Depression started after the “Black Tuesday” of stock market crash in 29 October; astonishing unemployment rate had got many people lost home and the depression lasted until 1933 (America’s Story).
The Great Depression is very representative because it was caused by many typical indicators like subprime bubble burst, capital rupture, unbalanced industrial structure, and pessimistic over future economy (Bemanke & James 1991). One thing different is that the Great Depression results commodity prices drop where the 2014 India crisis results inflations. The price level increases while GDP slowdown could be explained as India’s high dependency on foreign investment and the vulnerability of Rupee.
Drug policy can change supply and demand curves. Penalizing supplying reduces equilibrium quantity and raises equilibrium price while penalizing users reduces both. It is found that different policies have their advantages and limitation. An example in Singapore indicates death penalty for suppling drags but some disagree regarding social perspective.
There is an ongoing debate about drugs prohibition by government. Advocates believe prohibition can reduce drugs trafficking and use, so that lower crime, improving productivity and increasing people’s health. Opponents believe prohibition has only modest effects on trafficking and use while causing many problems such as numerous other negative side effects and increased crime and corruption. One issue in this debate is the effect of drugs prohibition on government budgets.
Prohibition entails direct enforcement costs, and prohibition prevents taxation of drug production and sale. Understandably, thus, some politicians, commentators, interest groups, and citizens have embraced unconventional approaches to closing fiscal gaps, such as legalizing drugs. The enforcement costs would be negligible and governments could levy taxes on the production and sale of drug. Also, government expenditure would decline and gains in tax revenue.
The figure analyses the market for drug if there were no government intervention. The equilibrium would be at point A, which price P1 and Q1. Total revenue of sellers and total spending by buyers would be the area of the rectangle P1*Q1.
The other figure shows the effect of a government effort to restrict supply through any of several methods, including vigilant customs inspections, arrest and stiff penalties for drug dealer, or efforts to reduce drug traffic from producing countries like Thailand. The decrease in supply is represented by a leftward shift of the supply curve, establishing a new equilibrium at price P2 and quantity Q2. All this suggest that supply restrictions if they successfully reduce the equilibrium quantity of drug and will also raise its equilibrium price.
Similarly, based on the inelastic demand for illegal drugs, has led many economists to advocate the controlled legalization of most currently illegal drugs. Others advocate a shift of emphasis in the war from decreasing supply to decreasing demand. Policies that might decrease the demand for illegal drugs and shift the demand curve leftward include stiffer penalties on drugs users.
The figure shows a policy of reducing demand. As the demand curve shifts leftward, price falls from P1 to P3, and quantity demanded falls from Q1 to Q3. This would lead to total expenditure on drugs decrease and can contribute to a low crime rate by drug users and make the drug industry less attractive to potential dealers and producers.
Opponents to the policy of full legalization
Opponents believe that the legalization of drugs would increase use, lad to more experimentation by youth, and exacerbate the existing deleterious effects that drugs have on society (Smith, 2011). They are of the opinion that government subsidization of addicts would have crippling effects on the economy. They also feel that legalization would help to create a large black market for drugs.
The point of view is that dealers will still be involved in crime and violence and those users will still need to support themselves by engaging in criminal activity, thus, it will result in even larger prison populations. Basically, they believe that the legalization of drugs would lead to increases, not reductions, in crime because there would be more addicts and because of the aforementioned black market (Wilson, 1990). Also, they believe the legalize drugs would have devastating effects on public health, the economy, quality of life, culture and society as a whole.
Opponents to the policy of penalizing use
There are some arguments that against the drugs uses. For example, the failure of prohibition to prevent consumption of illicit drugs shows that existing policies do not work. It would be preferable to use the money saved by ending prohibition to provide more drug rehabilitation centres and more drug education. More than this though, prohibition creates a powerful supply vacuum which can only be filled by criminals.
The consequence of this is less safe drugs (from adulteration), violence and stronger organised crime elements. Moreover, by criminalising drug users, prohibition needlessly removes people from potential employment and use to society and possibly creates criminals out of people who wouldn’t otherwise be so inclined. Some illegal drugs are no more dangerous than the legal drugs of alcohol and tobacco.
On the other hand, proponents of medical drugs such as marijuana argue that it can be a safe and effective treatment for the symptoms of cancer, AIDS, multiple sclerosis, pain, glaucoma, epilepsy, and other conditions. They cite dozens of peer-reviewed studies, prominent medical organizations, major government reports, and the use of marijuana as medicine throughout world history (Barton, 2007).
Opponents to the policy of penalizing supply
All criminal and civil penalties against production, distribution, sale, and possession would cease because the policy might impose drugs specific regulations and taxes if in a legalized drugs regime, as occurs now for alcohol and tobacco. This would affect government budgets such as government would save the resources currently devoted to arresting, prosecuting, and incarcerating drugs producers and consumers (Holland, 2010).
Also, government would collect tax revenue on the production and sale of legal drugs. The tax rates on drugs might be the same as those applied generally, or they might be higher, as with alcohol and tobacco. Miron (2005) indicates that drugs such as Marijuana legalization would reduce government expenditures by roughly $8 billion annually and would generate tax revenue of approximately $2.4 billion annually if drugs were taxed like all other goods.
Opponents to the policy of penalizing both use and supply
Criticisms of the current drug policy are varied and come from a wide variety of perspective. For example, current policy is not meeting its goals of reducing illegal drug use or its consequences. Demand for illegal drugs has not been reduced in vulnerable population or in the general population as evidenced by recent significant increases in illegal drug use among high school seniors (Inciardi, 1999).
The high percentage of illegal drug use among arrestees indicates that current policy significantly contributes to criminal behaviour among drug users. This suggests that drug law simply criminalize a medical and public health problem and ask the legal system to deal with what it is, in fact, unable to affect a medical condition. Also, the drugs can be used in medicine to treat the various diseases that people have.
Singapore, where is a Southeast Asian island city-state, is facing the rising of drug consumption and healthcare costs problems. The government of Singapore constitutes a range of severe polices to solve these marijuana problems. Acutely Singapore is close to the Golden Triangle opium production region, which is the 2nd largest opium production centre in the world, as well as a major transport hub.
Hence it is a transshipment point for illicit drugs, as well as minor market given the relative affluence of society (TheRealSingapore, 2013). Therefore, the drug demand will always remain, as will drug trafficking, due to Singapore status as a transport hub. In fact, the social mechanisms are harmed by the drug due to the crime, also the individual health are damaged by the marijuana (TheRealSingapore, 2013).
For the actual policy on marijuana in Singapore, according to international business time 2011, Singapore, like much of Southeast Asia, has very draconian laws, particularly with respect to drug trafficking. Sometime, the drug trafficking often leads to the death penalty. In my opinion, I disagree with the death penalty due to the drug trade refer to the opponents to the policy of penalizing supply above. In Singapore, it is the penalizing supply only.
For example, any adult convicted of trafficking at least 15 grams of heroin, 30 grams of cocaine or 500 grams of cannabis, faces mandatory death penalty (international business time 2011). So far, estimates that at least 400 people have been executed in the island since 1991, mostly on drug-related convictions.
Thus, Singapore has very small population about 5-million population; it has one of the world’s highest rates of executions per capita (international business time 2011). In addition, Singapore has defended its drug policies. In 2009, The UN Human Rights Council strongly disagrees that States should refrain from using the death penalty in relation to drug-related offenses. However, Singapore protects their drug policy that the death penalty has become major policy to deterring drug (international business time 2011).
One of the reasons why someone refuses the analysis of economic to solve this problem is that the drug problem is not only the economic problem but also the social and health problems. Although using the economic analysis to deal with the drug problem that it can give the government maximum financial benefits, it will badly influence the health problem of people.
Also the rate of social crime will increase due to the drug trade. According to Buddy (2013), the drug increase alertness and physical activity. Marijuana use causes short-term memory loss, decreases sperm and testosterone production in men, and may disrupt the menstrual cycle and cause miscarriage and stillbirth in women. To sum up, the drug trade brings the negative social and health problems more than the economic benefits.