1. Australia seeks to revitalise Indo-Pacific ties
Deputy PM on a three-day visit, says New Delhi is one of Canberra’s closest security partners
India is one of Australia’s closest security partners and the government is focused on revitalising Australia’s historically deep engagement with our partners across the Indo-Pacific, Deputy Prime Minister and Defence Minister of Australia Richard Marles said ahead of a visit to India. The visit is scheduled from June 20 to 23.
This is the first high-level visit from Australia after the formation of a new government under Prime Minister Anthony Albanese in May, just two days before the Quad leaders summit in Tokyo where he met Prime Minister Narendra Modi.
Defence and security cooperation between India and Australia has significantly expanded in the past few years both at bilateral and multilateral levels.
“The rules-based international order that has brought peace and prosperity to the Indo-Pacific for decades is experiencing pressure, as we face shifts in the geostrategic order,” Mr. Marles said in a statement issued by the Australian Defence Ministry. “Australia stands ready to work closer with India in support of an open, inclusive and resilient Indo-Pacific”.
Noting that India and Australia are comprehensive strategic partners, Mr. Marles said he was committed to strengthening Australia’s defence and security cooperation with India. “I am looking forward to meeting with my counterpart, Defence Minister Rajnath Singh, and holding our first bilateral Defence Ministers’ meeting.”
“Minister Singh has been instrumental in advancing India-Australia defence ties and I look forward to working with him to enhance the defence pillar of our comprehensive strategic partnership,” he further added.
During the visit, Mr. Marles is also scheduled to meet External Affairs Minister S. Jaishankar and engage national security and defence policymakers.
Indo-Pacific Economic Framework (IPEF)
- Touted as a substantial step by the U.S. as part of its decade-old “pivot to Asia”, the framework is a declaration of a collective desire to make the Indo-Pacific region an engine of global economic growth.
- It is a US-led initiative that aims to strengthen economic partnership among participating countries to enhance resilience, sustainability, inclusiveness, economic growth, fairness, and competitiveness in the Indo-Pacific region.
- The IPEF was launched with a dozen initial partners who together represent 40% of the world GDP.
Opportunity for Indo-Pacific Region:
- It is a declaration of a collective desire to make the Indo-Pacific region an engine of global economic growth.
An Economic Vision:
- The Indo-Pacific covers half the population of the world and more than 60% of the global GDP and the nations who will join this framework in the future, are signing up to work toward an economic vision that will deliver for all people.
- Focus Areas: Unlike traditional trade blocs, IPEF won’t negotiate tariffs or market access, and the framework will focus on integrating partner countries in four areas which include:
- Trade: It intends to build high-standard, inclusive, free, and fair-trade commitments and develop new and creative approaches in trade and technology policy that advance a broad set of objectives that fuels economic activity and investment, promotes sustainable and inclusive economic growth, and benefits workers and consumers.
- Supply Chains: IPEF is committed to improving transparency, diversity, security, and sustainability in supply chains to make them more resilient and well-integrated.
- To coordinate crisis response measures; expand cooperation to better prepare for and mitigate the effects of disruptions to better ensure business continuity; improve logistical efficiency and support; and ensure access to key raw and processed materials, semiconductors, critical minerals, and clean energy technology.
- Clean Energy, Decarbonization, and Infrastructure: In line with the Paris Agreement goals and efforts to support the livelihood of peoples and workers, it plans to accelerate the development and deployment of clean energy technologies to decarbonize our economies and build resilience to climate impacts.
- This also involves deepening cooperation on technologies, on mobilizing finance, including concessional finance, and on seeking ways to improve competitiveness and enhance connectivity by supporting the development of sustainable and durable infrastructure and by providing technical assistance.
- Tax and Anti-Corruption: It is committed to promoting fair competition by enacting and enforcing effective and robust tax, anti-money laundering, and anti-bribery regimes in line with existing multilateral obligations, standards, and agreements to curb tax evasion and corruption in the Indo-Pacific region.
- This involves sharing expertise and seeking ways to support the capacity building necessary to advance accountable and transparent systems.
India’s Vision for Indo-Pacific Region
- India’s trade in this region is growing rapidly, with overseas investments being directed towards the East, e.g., the Comprehensive Economic Partnership Agreements with Japan, South Korea, and Singapore, and the Free Trade Agreements with ASEAN (Association of Southeast Asian Nations) and Thailand.
- India has been active in championing a Free and Open Indo-Pacific. The US, Australia, and the members of the ASEAN have all expressed a common view that India plays a greater role in the region.
- India, along with its Quad partners, is upping its game in the Indo-Pacific.
- India’s view is to work with other like-minded countries in the Indo-Pacific region to cooperatively manage a rules-based multipolar regional order and prevent any single power from dominating the region or its waterways.
2. India faces near-term challenges: FinMin
Ministry flags upside risks to fiscal deficit target following cuts in excise duties on diesel, petrol
India is facing near-term challenges in managing its fiscal deficit, sustaining economic growth, reining in inflation and containing the current account deficit but the country is relatively better placed to weather these headwinds compared with other nations, the Finance Ministry said in its monthly economic report.
Near-term challenges need to be managed carefully without sacrificing the hard-earned macroeconomic stability, the ministry said .
“Many countries around the world, especially developed countries, face similar challenges. India is relatively better placed to weather these challenges because of its financial sector stability and its vaccination success in enabling the economy to open up,” it added.
India’s medium-term growth prospects remain bright as pent-up capacity expansion in the private sector is expected to drive capital formation and employment generation in the rest of this decade, it added.
Observing that the capex budget for 2022-23 was expected to underpin growth, the ministry said an upside risk to the budgeted level of gross fiscal deficit had emerged following cuts in excise duties on diesel and petrol.
An increase in the fiscal deficit may cause the current account deficit to widen, compounding the effect of costlier imports, and weaken the value of the rupee thereby further aggravating external imbalances, creating the risk (low at this time) of a cycle of wider deficits and a weaker currency, it said.
‘Must control spending’
“Rationalising non-capex expenditure has thus become critical, not only for protecting growth-supportive capex but also for avoiding fiscal slippages. Depreciation risk to rupee, however, still remains as long as net Foreign Portfolio Investor (FPI) outflows continue in response to the increase in policy rates and quantitative tightening in advanced economies as they wage a prolonged battle to calm inflation,” it said.
The imported components of high retail inflation in India have mainly been elevated global prices of crude and edible oil, it said, adding the onset of the summer heat wave has also contributed to the rise in food prices domestically.
However, going forward, it said, crude prices may be tempered as global growth weakens and the OPEC nations increase supply.
The momentum of economic activities sustained in the first two months of the current financial year augurs well for India to continue to be the quickest growing major economy in 2022-23, the ministry added.
Foreign Portfolio Investments
Foreign portfolio investments consist of securities and other financial assets that are held passively by a foreign investor. This does not provide the foreign investor with direct ownership of the financial asset in question.
Foreign portfolio investments can be done by individuals, companies or even government agencies. Such investments help entrepreneurs in diversifying their portfolio, giving them an edge in international markets.
An FPI will be featured in a country’s capital account and is part of the balance of payments which takes stock of money flowing in and out of the country over a specific period of time.
Benefits of Foreign Portfolio Investments are as follows:
- Portfolio diversification: FPI enables investors to diversify their portfolios on the international stage.
- International Credit: FPI can give creditors a large crest base as it provides access to credit in foreign nations.
- Benefits from the Exchange rates: If an investor has an FPI in a foreign country with a stronger currency than their own country, the difference in exchange rates between the two countries can benefit the investor.
Foreign Portfolio Investment vs Foreign Direct Investment
In a foreign portfolio investment, it is not necessary for an investor to actively manage the investment or the companies that issue the investment. In other words, they don’t have direct control over the assets.
Through foreign direct investment, an investor is allowed to purchase a direct business interest in a foreign country. For example, an investor based in Bangalore purchases a restaurant chain in Tokyo to lease to n American company that needs space to expand its operations. The investor’s goal is to create a long-term income stream while helping the company increase its profits.
This Foreign Direct Investment (FDI) investor controls their investments directly and plays an active role in deciding where the company puts the money. The investor helps in setting up the business and nurtures it to the point where he/she can ascertain there is a viable return on investment (ROI). Since the investor money is fully committed to the business, they will face liquidity and more risk when selling the interest.
3. Editorial-1: The choice is narrowing the circle or widening it
The nation must remain diverse and inclusive, continuing to build itself on the principles in the Preamble
An editorial comment recently opined ‘India is witnessing the progressive normalisation of minority baiting’. Some developments in a related context lend credence to it.
Recent happenings within the country and their reactions in lands far and near tend to pose the problem. The sequencing is relevant and must not be interchanged. The reactions beyond our shores were not autonomous and were induced by what was said to audiences at home, by whom it was said, and why it became critical and induced reactions, immediate and over a passage of time.
One aspect of the matter, understandably played up in the domestic media, is the reaction in the Gulf Cooperation Council and Persian Gulf countries with whom India has extensive and diverse political and commercial relations. These also provide gainful employment to many million Indian nationals whose remittances are an important source of foreign exchange remittances, in turn sustaining millions of households. Each of these has been quantified. In strategic terms, the region is India’s extended neighbourhood; so is the case with Malaysia and Indonesia and Brunei in Southeast Asia.
It is evident that the malaise (while being domestic in its origin) has global dimensions. Its external manifestations are aggravated by modern means of communication. By the same logic, the correctives have to emanate in the context of domestic perceptions and practices.
An emerging disquiet
Muslims are our largest religious minority, constituting 14.3% of the total population and numbering over 200 million. If considered along with the populations in Indonesia, Pakistan and Bangladesh, they constitute the largest Muslim group anywhere in the world. They are spread all over the country and are well integrated, but of late, signs of disquiet have been evident in all segments of the community.
The reason for this are the remarks uttered in media debates by two spokespersons of the ruling party reflecting on the personality of the Prophet. After a lapse of over a week of deafening silence, one of these persons was suspended and the membership of the second dispensed with. Both actions are viewed as inadequate by the community. No reaction has emanated from senior levels of government. The silence of institutional bodies such as the National Human Rights Commission of India and of the National Commission for Minorities is intriguing; so is the apparent reticence of the judiciary.
On the contrary, the use of strong-arm tactics and bulldozers to counter public demonstrations seeking firmer action against alleged culprits is suggestive of bias and has been aptly summed up in a candid editorial comment: ‘there is little doubt that the demolitions amount to an abuse of power, a challenge to the rule of law and are inherently illegal due to the absence of due process or proportionality’. Some observers have even opined that the bulldozer is an instrument to silence the minorities since its use in similar cases involving non-minority public is wanting.
What then could be the intent? Would it be to discipline, and thereby give rise to a feeling of denial with all its consequences?
Furtherance of hate
The operative constitutional principle in social behaviour should be the promotion of equality and fraternity. In actual practice it is the contrary; this results in furtherance of hate by denigration. In an earlier period, this used to focus principally on regional types and linguistic expressions. This was found to be troublesome since retaliation in kind was often quick and in equal measure. The alternative was to denigrate faiths or socio-religious practices in competitive one-upmanship. An easy target in this was the numerous but socially and economically weaker segments that could even be mocked in terms of assumed backwardness. And, since most of our fellow citizens have reverence for traditional beliefs, ‘experts’ were soon discovered for these target areas. The public’s addiction to popular television and its concocted levels of debate (premised on a preference for the brash and the articulate) invariably produces the desired results sought in some sections.
Indic versus non-Indic
A categorising segment of recent origin is the differentiation between Indic and non-Indic. This, put together with the existential diversity of faiths, seeks to divide fellow citizens between those who pursue Indic faiths assumed to be of Indian origin and those who subscribe to Christianity and Islam allegedly of external import. The argument is premised on a certain reading of Indian history and the sociological issue is sought to be premised on what constitutes Indianness, ignoring that our society is ‘a mosaic in which primordial cleavages both intersect and intermix with contemporary socio-economic segments’.
This ideological effort in a quest of ‘purifying exclusiveness’ is premised on our reading of history. A relevant question is whose history — of India defined in the period of British rule, or of India traditionally defined as Bharat? The latter would include many segments of southern Asia covered today by the South Asian Association for Regional Cooperation (SAARC) countries. Furthermore, and in terms of what is sought to be presented as our history would also include parts of Afghanistan and even of Iran since the latter was depicted by M.S. Golwalkar as ‘nothing but the base of Aryabhumi’. One consequence of this would be to categorise Ghazni, Khilji, Lodi, etc. not as foreign invaders but as domestic brigands who committed acts of loot and plunder and even succeeded in establishing kingdoms. Nor can the landmass of Bharat be described in terms of faith alone since there was a period of several centuries when Buddhism was the dominant religion. Furthermore, in the centuries when the rulers were Muslims, no effort seems to have been made to carry out mass conversions; on the contrary, the influence of Sufi saints was more pervasive.
The Indian reality of migrating groups seeking greener pastures since times immemorial qualifies our nomenclature of a ‘civilisational state’ and is better depicted in Raghupati Rai Firaq’s couplet: Sar zamin-e-hind par aqwam-e-alam ke Firaq/Qafile baste gae hindostan banta gaya (Caravans from nations of the world kept coming and contributed to the formation of Hindostan).
Linguistically, India has also been called ‘a land of linguistic minorities’. The Linguistic Survey of India and the research of Ganesh Devy bring forth the regional diversity of living languages. This lends credence to outbursts against linguistic homogeneity that is attempted periodically in the guise of national unity.
In multiple senses, our national choice thus lies in an ever-widening circle and in resisting all attempts, however well meaning, in abridging it. India is and must remain diverse and inclusive, and continue to build itself on the principles inscribed in the Preamble.
4. Editorial-2: An unjust pursuit
Julian Assange deserves freedom, not persecution for investigative journalism
The United States’s relentless pursuit of Julian Assange received a fillip after the British Home Secretary, Priti Patel, gave the go-ahead to extradite him to the U.S. Wanted for criminal charges, which include violation of the country’s Espionage Act of 1917, Mr. Assange could face punishment ranging up to 175 years in prison if convicted in the U.S. The charges were framed under the Donald Trump administration after accusing him of collaborating with U.S. soldier Chelsea Manning who published classified documents and communications on wikileaks.org, the website run by Mr. Assange. Mr. Assange is the first journalist to have been charged under the First World War era Act. Ironically, during the tenure of Mr. Trump’s predecessor, Barack Obama (U.S. President Joe Biden was the Vice-President then) the Justice Department had concluded that it would not pursue criminal charges against Mr. Assange and WikiLeaks as it would pose grave threats to the country’s press freedom laws, particularly the first amendment of the U.S. Constitution that guarantees freedom of expression. The cables and documents published by WikiLeaks reveal the severe abuse of international and humanitarian law, war excesses and crimes committed in Iraq and Afghanistan by the U.S. government among others, besides shining a light on the inner workings of the elite in democracies and autocracies across the world. The diplomatic cables in particular, initially released after careful redaction by media organisations, and other documents went on to form the bulwark of a large repertoire of investigative journalism. In a rational world, the perpetrators of the excesses revealed by WikiLeaks would have been pursued for justice while Mr. Assange would have been released from his harsh and extended stay in a British prison.
Yet, the dogged pursuit of Mr. Assange has been renewed by the Biden administration. The only guarantee that it has provided is that it will not hold him in a maximum security prison, which has strict confinement rules, and that if convicted, he could serve his sentence in his native Australia if he requested it. Its position runs counter to its stated aim of bringing the U.S. back to the forefront of world democracies that promote values enshrined in the West as pivotal, such as freedom of expression accorded to the press. Subjecting Mr. Assange to trial will be a blow against media freedom in the U.S. and will also criminalise investigative journalism, particularly one that is pointed at the inner workings of the deep state. Mr. Assange’s representatives have filed an appeal before the British High Court. With the present Labor party-led Australian government — Mr. Assange remains an Australian citizen — also expressing its displeasure at the continued pursuit, the onus is on the British judiciary to do right by him.
5. Editorila-3: At the centre of job creation
The government should re-establish its role as the principal employment generator
With his announcement that 10 lakh government jobs will be provided over the next 18 months on a “mission mode”, Prime Minister Narendra Modi sent four messages. One, the creation of employment is indeed a problem and can no longer be hidden from the public discourse. Two, the private sector, especially modern sectors such as the service and manufacturing sectors, which are dominated by multinational companies, have not created many jobs. Even if the Information Technology sector or the modern gig economy have created jobs, these are either very high-skilled jobs or low-skilled ones. Three, the government in the Nehruvian scheme of development occupied an important place in the labour market. The National Democratic Alliance (NDA) government, whose ideology is different and which often attacks the Nehruvian model, is now ironically forced to step in as persistently rising inflation, unemployment and underemployment threaten to politically affect it. And four, the NDA government has blown the 2024 general election bugle.
A populist announcement made by any government needs to be critically studied. Let’s look at some employment data. First, the last year for which we have information on employment in the organised sector from the Directorate General of Employment and Training is 2012. The statistics were provided under the employment market information programme. The NDA government is at present relying on the Employees’ Provident Fund Organisation/National Pension System/Employees’ State Insurance Scheme registrations and exits as indicators of the formal labour market. This could be misleading as companies may be increasing registrations to cross the threshold to become eligible to fall under any of these. Hence, this might be more a case of formalisation rather than employment generation. Second, media reports show that more than 85% of those aspiring for those 10 lakh jobs could be consumed by existing vacancies in Central government departments (8,72,243). In that sense, the pronouncement possibly does not indicate 10 lakh new jobs. Third, 241 central public sector enterprises (CPSEs) have been shedding jobs in recent years — jobs declined from 10.84 lakh in 2017-18 to 10.71 lakh in 2018-19 and to 9.22 lakh in 2019-20. Mr. Modi did not speak of employment creation by the CPSEs though this downward trend is a cause for concern.
The 10 lakh jobs creation also needs to be seen in the context of the labour market. Even though the labour force and workforce participation rates have increased marginally, there is a decline in the quality of jobs, viz. there is a rise in the unpaid segment of the self-employed and a rise in the share of the agricultural sector in total employment over the last three Periodic Labour Force Surveys (43% to 47%). This is a historical retrogression. This huge mass of workers contributes, thanks to low productivity, to about one-sixth of our national income, which does not augur well for a healthy economy. On the other hand, the manufacturing sector’s share in national income has declined in 2020-21 (10.9%) compared to that in 2018-19 (12.1%).
Again, even though the aggregate usual status unemployment rate has slightly declined by a few percentage points (4.8% in 2019-20 to 4.6% in 2020-21), the current daily status unemployment figure (internationally used statistic) is at 7.5% for all persons in 2020-21. The educated unemployment rate (secondary school and above) in general and youth unemployment (15-29 years) in particular in the urban areas have very marginally fallen from 2019-20 to 2020-21, but they still high enough to cause concern (in double digits). Employment shares in the informal enterprises have increased — for men (71% to 75%), women (55% to 57%) and all persons (68% to 71%) from 2017-18 to 2020-21. Even though the share of regular salaried workers who did not have a formal employment contract, paid leave and eligibility for any form social security have declined for both genders, the level is still high. The government could score a point or two by showing that there is a declining tendency in several labour market variables. But an honest government would concede that the levels of several variables remained discomfortingly high even after three decades of economic reforms.
Role of private sector
Even as the Nehruvian model of development is attacked in the current dominant political discourse, we cannot avoid placing the government at the centre of employment creation beyond a certain point. The private sector creates jobs in response to market forces and while taking into consideration radically altering technological developments. We cannot rely on the projections about employment generation by the gig economy. They are estimates computed by a trade body or by consulting agencies which have vested interests. As they are political economy agents influencing government policies, their predictions need to be read with many pinches of salt. The job recovery stories, which are published from to time in the pink press, based on employment service providers such as Monster Employment Index, need to be seen in the context of a highly job-impoverished economy such as ours. Projects in the modern private sector consume a lot of capital to generate very few jobs. For instance, recently, there was a report that the Adani Group has invested ₹70,000 crore (or ₹700 million) in Uttar Pradesh to create merely 30,000 jobs. Foreign Direct Investment, which at any rate is highly capital-intensive, goes mostly into the non-manufacturing sectors.
Quantity and quality of jobs
Employment is not merely about numbers and growth figures. We need to concentrate on enabling the creation of decent work and a sustainable labour market to which India is committed as a member of the United Nations and the International Labour Organization. Wittingly or otherwise, the government’s role in employment generation has entered into popular discourse and discussions on policy formation. While even one job is a miracle, we need millions. The government should play a significant role soon. A lean and mean government, which is often prescribed by the neoliberal project, often results in governance deficit. The government should re-establish its role as the principal employment generator through jobs in its ministries and CPSEs and through assured employment generation programmes like MGNREGA.
6. El Salvador’s Bitcoin bet
How has the adoption of Bitcoin as an official currency worked out for the Central American country?
The crash in the price of Bitcoin from around $69,000 in November last year to around $20,000 this week has caused losses to investors around the world. It is said that the El Salvador government’s investment of over $100 million in Bitcoin has lost more than half of its value till date due to the crash
Bitcoin offers a chance for the El Salvador government to cut down its reliance on the U.S. dollar to fund its spending.
However, most citizens of El Salvador have been reluctant to adopt Bitcoin as a medium of exchange, that is, as money.
The story so far: The crash in the price of Bitcoin and other cryptocurrencies has put El Salvador’s government in trouble. The Central American country, led by President Nayib Bukele who is a self-proclaimed fan of cryptocurrencies, had adopted Bitcoin as an official currency in September last year. The crash in the price of Bitcoin has raised concerns over the government’s ability to repay its debt.
What is the problem in El Salvador?
The crash in the price of Bitcoin from around $69,000 in November last year to around $20,000 this week has caused losses to investors around the world. According to some estimates, the average cryptocurrency investor is deep in losses after the significant correction in the prices of cryptocurrencies. The crash in Bitcoin’s price has not spared the government of El Salvador either. President Bukele has been using taxpayer’s money to bet on Bitcoin. In fact, a lot of times when the price of Bitcoin crashed steeply, he had gone on popular social media site Twitter to announce to the world that he was ‘buying the dip’ (this refers to purchasing an asset after it has dropped in price). Even during the current crash, he has plunged into the market to buy Bitcoin and has urged citizens of El Salvador to be patient. It is said that the El Salvador government’s investment of over $100 million in Bitcoin has lost more than half of its value till date due to the crash.
Why did El Salvador adopt Bitcoin as an official currency?
In 2001, El Salvador had adopted the U.S. dollar as its official currency. After Bitcoin was adopted as an official currency in September last year, both Bitcoin and the U.S. dollar have been used as official currencies. The El Salvador government has been trying to encourage citizens to primarily use Bitcoin for their daily transactions. It even came out with a payments wallet named Chivo which gave out for free Bitcoin worth $30 initially to encourage people to use Bitcoin in transactions.
Analysts believe that the decision to adopt Bitcoin as an official currency may have to do with the El Salvador government’s inability to borrow in U.S. dollars. El Salvador’s public debt has risen to over 100% of gross domestic product and its recent attempt to borrow $1 billion using bonds backed by Bitcoin failed. The government’s bonds are trading at a steep discount and are classified as junk by investors. President Bukele has already had to rely on financial help from the International Monetary Fund (IMF) and the World Bank to meet his government’s spending needs. It should be noted that while the El Salvador government can tax its citizens to meet its need for dollars, it could turn out to be an unpopular move among citizens. Many believe that the President has mismanaged funds received from abroad during the pandemic and this has made international organisations hesitant to lend any more dollars to his government. The IMF had also opposed President Bukele’s decision to make Bitcoin an official currency.
Bitcoin offers a chance for the El Salvador government to cut down its reliance on the U.S. dollar to fund its spending. Greater adoption of Bitcoin in El Salvador will allow the government to tax and spend in Bitcoins instead of U.S. dollars. This maybe why the government is making various attempts to encourage the use of Bitcoin over U.S. dollars by its citizens. Mr. Bukele has also set up geothermal plants to power his Bitcoin mining facilities. He can use the mined Bitcoins to directly fund his government’s domestic spending if Bitcoin gains greater acceptance in the country. Otherwise, he can exchange his Bitcoin for U.S. dollars and use it to repay debt or even spend it on the domestic economy since the dollar is still the most commonly accepted currency in El Salvador. This is why the fall in the price of Bitcoin is worrying analysts. A crash in Bitcoin’s price against the U.S. dollar means that the government will have to sell its Bitcoin for fewer dollars, thus affecting its capacity to repay dollar debt.
How well has Bitcoin done in El Salvador?
Most citizens of El Salvador have been reluctant to adopt Bitcoin as a medium of exchange, that is, as money. Many citizens, it is claimed, registered on the payments wallet Chivo that was pushed by the government simply to sell off their free Bitcoin in exchange for $30. It should be noted that the acceptance of cryptocurrencies in general has been miniscule across the globe. This has been the case despite the fact that the supply of cryptocurrencies is limited by design, which could potentially help them maintain or increase in value over time. One big reason for the low acceptance of cryptocurrencies has been their extreme price volatility, making them an unreliable store of value. People in general are hesitant to accept something as money if they are not fairly sure about its likely value in the future.
7. Dutch disease
How countries see uneven growth due to the sudden discovery of natural resources
Dutch Disease in economics refers to a phenomenon wherein a country witnesses uneven growth across sectors due to the discovery of natural resources, especially large oil reserves. According to the concept, when a country discovers natural resources and starts exporting them to the rest of the world, it causes the exchange rate of the currency to appreciate significantly and this, in turn, discourages the exports from other sectors while encouraging the import of cheaper alternatives.
While the idea was first proposed by economists Peter Neary and Max Corden in 1982, the term ‘Dutch disease’ was first coined by The Economist in 1977 to describe the decline of the manufacturing industry in the Netherlands.
The origin of the term
In the 1960s, the Netherlands discovered gas reserves in the North Sea. The subsequent export of oil and the appreciation of the Dutch currency made Dutch exports of all non-oil products less competitive on the world market. Unemployment rose from 1.1% to 5.1% and capital investment in the country dropped. Following this, over the years, the country witnessed a downfall in the industrial sector.
According to a recent research paper titled “40 years of Dutch Disease literature: lessons for developing countries”, by Edouard Mien and Michael Goujon, the framework of the model of the phenomenon is based on three sectors: energy (traditionally oil, gas or mining resources), tradeables, and non-tradeables of a small economy. As labour and capital are immobile internationally, the Dutch disease is a “purely domestic phenomenon” which cannot be “exported.”
The model is concentrated on the spending and resource-movement effects. That is, exports of energy generate additional revenue for the factory owner and the government (through taxes), hence increasing the demand for tradeable and non-tradeable products in the country. The boom in the energy sector forces labour to move out of trade and service sectors, creating a shortage of manpower in these two sectors. This reduces the output in the trade and service sector due to the gap between supply and demand. At the end, output in the trade sector declines and the service sector stagnates, resulting in the downfall of the economy in the long-run.
However, there are theories that contradict this model. For instance, Fredrick van der Pleog in 2011 explained that if the trade or manufacturing sector is more capital-intensive than the service sector, then the boom in the energy sector will be shifted to the trade sector resulting in an absolute fall in the service sector.
How to combat the Dutch disease
Mien and Goujon also focus on what the developing resource-rich countries should do to avoid the occurrence of the Dutch disease.
First, the role of fiscal policy can prevent the adverse effects of Dutch disease. According to the researchers, the role of fiscal policy is important to control the boom following the discovery of natural resources. Rising income due to the export of natural resources should be adjusted with cautious spending on public welfare. The study focusses on the efficient use of revenues coming from taxation to compensate for the adverse effects of the Dutch disease.
The second important move is to promote spending policies. Public spending such as concentrating on imports of tradeables rather than non-tradeables would help slow the impact of the Dutch disease. Private spending in order to improve the productivity of private firms would also help reduce the impact.
Third is monetary policy. The choice of an appropriate monetary policy is important for macroeconomic management in commodity-exporting countries. With the discovery of natural resources, the country sees a huge inflow of money, especially foreign currency. The export of natural resources tends to affect the equilibrium in the money and exchange rate markets. The Dutch disease can be prevented if the central bank raises the banking system reserve’s requirement, which decreases domestic credit.