Month: August 2006

Irrational exuberance

I had come across the term ‘irrational exuberance’ many a times in newspapers and magazines in recent times. Today I decided to look up what it means.
The Oxford dictionary defines ‘irrational‘ as ‘without reason’ and ‘exuberance‘ as ‘full of high spirits or growing profusely.’

Origin of the term
The term “irrational exuberance” derives from some words that Alan Greenspan, former chairman of the Federal Reserve Board in Washington, used in a black-tie dinner speech entitled “The Challenge of Central Banking in a Democratic Society” before the American Enterprise Institute at the Washington Hilton Hotel December 5, 1996.
Fourteen pages into this long speech, which was televised live on C-SPAN, he posed a rhetorical question: “But how do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions as they have in Japan over the past decade'” He added that “We as central bankers need not be concerned if a collapsing financial asset bubble does not threaten to impair the real economy, its production, jobs and price stability.”
Immediately after he said this, the stock market in Tokyo, which was open as he gave this speech, fell sharply, and closed down 3%. Hong Kong fell 3%. Then markets in Frankfurt and London fell 4%. The stock market in the US fell 2% at the open of trade. The strong reaction of the markets to Greenspan’s seemingly harmless question was widely noted, and made the term irrational exuberance famous.

In the limelight
In the year 2000, Robert J. Shiller authored a book titled ‘Irrational exuberance‘. It was about the society’s obsession with the stock market and how it fuelled volatility in the financial markets. He said the people were infatuated with the stock markets and had forgotten about the potential of real assets, such as income from our livelihoods and homes.
In recent times, the newspapers and magazines have repeatedly been using this term when writing about the stock markets, especially regarding its volatility. I have seen it in The Hindu Business Line and Frontline in recent years.

Is it significant’
I feel it’s the apt word for the recent volatility in the stock markets. It tells us the reason for the increased presence of volatility in the markets and it’s not because of important changes in the economy or the company that the share prices fluctuate. Market news and sentiments of the people affect the market too. Neither should a market with strong fundamentals nor investors who have fundamentals resort to irrational behaviour.

JNU Entrance Exam: Essays

This post is meant for all those who could not get the previous question papers of JNU and for those who want to know what kind of essay questions are asked usually for the test. The examiners look for critical answers. Without some knowledge in the following mentioned areas, it would be difficult to give an opinionated answer.(You are required to answer only one essay: Marks alotted for an essay is 20)

2005
1) The need for a universal employment guarantee scheme in rural India
2) Business process outsourcing
3) Why India’s foreign exchange reserves are increasing
4) Utility possibility curves
5) The new patents regime in India
6) Competitive markets and optimality

2004
1) Why are prices for comparable good lower in poorer countries’
2) Discuss the relation between the Great Depression and Keynes’ theory
3) How does the Government of India define the poverty line’ Do you agree with it’ Discuss.
4) Discuss the rationale of the strategy of import substituting industrialisation in India during the 1950s and 1960s.
5) Discuss the concept of exploitation in Marx.

2003
1) The idea of Sustainable Development
2) The public distribution system in India
3) Causes of Unemployment in India
4) The impact of trade in Agriculture on Indian Agriculture
5) Parliamentary Democracy

2002(These are not the exact questions)

1) A note on Poverty ratio, Poverty indicators and poverty alleviations programmes.
2) Second 5 year plan.
3) Green revolution

2001(Most of them are not exact questions)
1) Food grain stocks.
2) ‘A Pareto optimal state may be perfectly disgusting.’ Comment
3) Opposition to big dams
4) Combination of scholarship/loans better than subsidised educational system
5) Is reduction in fiscal deficit necessary for high growth’
6) Need to redistribute land to the tiller in India.
7) Full employment is incompatible with the functioning of a capitalist economy.
8] Why is log-normal distribution the preferred distribution function for personal incomes’
9) What is meant by ‘Crowding out of private investment”

All the best to those who are preparing for the entrance next year! Please provide your view points on these topics, after quoting the question, so that interested students can get information on these topics. Please post your comments. They are important to all!

Trade Related Intellectual Property Rights a.k.a TRIPS

TRIPS is the commonly used acronym for Trade Related Intellectual Property Rights. When ever a meeting of the World Trade Organisation (WTO) commences, TRIPS come under the scrutiny of columnists and journalists. Why is that’ What is this thing that so often stirs up a hornets nest’ These are questions which every individual might ask.

According to the WTO, ‘Intellectual property rights are the rights given to persons over the creations of their minds. They usually give the creator an exclusive right over the use of his/her creation for a certain period of time.’
The Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) was first negotiated in WTO’s 1986-94 Uruguay Round.

The reasons behind the need for TRIPS, given by the WTO is that ‘The extent of protection and enforcement of these rights varied widely around the world; and as intellectual property became more important in trade, these differences became a source of tension in international economic relations. New internationally-agreed trade rules for intellectual property rights were seen as a way to introduce more order and predictability, and for disputes to be settled more systematically.’

TRIPS has introduced the following standards of protection.

1) Copyright
2) Trademarks
3) Geographical indications
4) Industrial designs
5) Patents
6) Integrated circuits layout designs
7) Undisclosed information and trade secrets

(For more details on these measures visit the WTO web site)

(An example of an Indian Geographical indication is Basmati Rice, Darjeeling Tea, Kanchipuram Silk Saree, etc.)

These measures have been advocated so as to reward and promote creativity and innovations. How far they have rewarded creativity is debatable. These measures provide them rights over their own inventions.

My concerns
One major reason for me to be concerned is because these TRIPS agreement took place during the early Globalisation years (1986-94). This was a period of liberalisation, privatisation and market integration with the global economy for many developing nations like India, China, Argentina, etc. India became a member of WTO on January 1, 1995.This was a period where the ‘Creativity Economy’ was booming. Getting hold of patents, copyrights etc is a time consuming and tedious task, especially in the developing countries as the flow of processes and services were not very advanced and smooth. The developed nations exploited this opportunity. They protected themselves by gathering a lot of patents and copyrights, which made manufacturing and allied activities difficult for the developing countries. The rich nations enjoyed a comparative advantage over the poor ones and also widened the inequalities, in their quest to become economic and political superpowers.

Has TRIPS benefited the common man’ Have they significantly improved the growth of the Indian economy’

India: Management of Foreign Exchange

[This is related to a JNUEE essay question of 2005.]
[Reference: Charan Singh 2005]

Trends
India followed a restrictive external sector policy until 1991, mainly designed to conserve limited FER for essential imports (petroleum goods and food grains), restrict capital mobility, and discourage entry of multinationals. The external sector strategy since 1991, though gradual in approach, has shifted from import substitution to export promotion, with sufficiency of FER as an important element. As a result of measures initiated to liberalize capital inflows, India’s FER (mainly foreign currency assets) have increased from US$6 billion at end-March 1991 to US$140 billion at end-March 2005. India ranks fifth in the world in holdings of FER in 2004.
The current account was opened in August 1994, and the capital account is cautiously, though gradually, being liberalized.

Objectives
1) To preserve the long term value of reserves in terms of purchasing power over goods and services.
2) To minimise risk and volatility in returns.(ensuring safety and liquidity)
3) To provide confidence to domestic and foreign investors in markets.

What Are the Sources of Rising Foreign Exchange Reserves’
The main sources of rising FER in India are inflows of foreign investment (more portfolio than direct) and banking capital, including deposits by non-resident Indians. Foreign portfolio investment is considered less stable than foreign direct investment but here in India most of our FER is made up of foreign portfolio investment.

How Are the Foreign Exchange Reserves Managed in India’
The Reserve Bank of India (RBI), in consultation with the Government of India, currently manages FER. The essential framework for investment is conservative and is provided by the RBI Act, 1934, which requires that investments be made in foreign government securities (with maturity not exceeding 10 years), and that deposits be placed with other central banks, international commercial banks, and the Bank for International Settlement following a multicurrency and multi-market approach. The direct financial return on holdings of foreign currency assets is low, given the low interest rates prevailing in the international markets.

Singapore model
Singapore has earned a return of 9.5 per cent a year, in US dollar terms compared to a mere 3.1 per cent India has earned.

More Details
For more details visit The Hindu Business line: Following the Singapore model.
For those interested in knowing more about Indian FER and for those preparing for JNU entrance exam, go through this paper by Charan Singh.

Posted@ Undergraduate Economics