Category: Economics

The Economics of Innocent Fraud

The Economics of Innocent Fraud
John Kenneth Galbraith
Pocket Penguin 26
Price:Rs60

This book reveals the unacknowledged grip of the private sector on public life and considers our increasing tendency to accept blindly legal, legitimate, ‘innocent’ fraud.

I have put down some excerpts which I think have immense relevance in today’s world.

Some of the innocent frauds are
1) ‘Consumer choice shapes to the demand curve.’ ‘Belief in a market economy in which the consumer is sovereign is one of the most pervasive forms of fraud.’

Galbraith talked about how consumers were lured into believing that they are the king. I remember being taught in school that in today’s market, the consumer is the king and that he is the price maker, etc. He compares the tactics employed by corporations in affecting the choices of the consumer to that of political parties’ propaganda during the time of elections. There is so much monies being pumped into advertising, brand image, etc that very often it is these multinational companies which we lovingly call as MNC’s, who determine our purchasing patterns.

And because all these managers and CEO’s in the top are from good business schools, he has rightly written ‘Economics as taught and believed lags well behind the reality in all but the business schools’. The present day teaching and understanding of economics contrasts widely vis-‘-vis the reality.

2) ‘The composition of the GDP is determined not by the public at large but by those who produce its components.’ ‘Good performance is measured by the production of material objects and services. Not education or literature or the arts but the production of automobiles, including SUVs.’

Presently, the major concern by the planning institutions and committees are how to increase their respective economy’s GDP growth. Though India is growing with close to 8% GDP, large numbers of people are dying due to lack of health and food, and more sadly some are killing themselves because of the unfavourable situations they face.

3) ‘Here is the paradox. The word ‘work’ embraces equally those for whom it is a clear pleasure with no sense of the obligatory.’ ‘Also those who, having wealth and well-being, seize the rewards of leisure, personal friendship, public concern and expression and do not work at all.’ ‘Just because leisure is an acceptable alternative for the affluent, it can still be morally damaging for the poor’.Therefore, while idleness is good for a leisure class in the United States and all advanced countries, it is commonly condemned for the poor.’

In India too, scholars have pointed out that it is owing to the indolence of the workers that they remain poor.

4) ‘The corporate management illusion is our most sophisticated and in recent times one of our most evident forms of fraud.’ ‘Ownership, the stockholder, is routinely recognised, even celebrated, but all too evidently is without any managerial role.’ ‘Capitalism having given way to management cum bureaucracy, an appearance of relevance for owners is contrived. Here the fraud.’ ‘An accepted fraud.’

Textbooks and other media of teaching refer to the shareholders as owners of a company and who are entitled to suggest changes in policies. Reality shows that all what is happening is a huge puppet show, wherein the strings are being pulled by the management.
Moreover, in Galbraith’s words ‘It is also not surprising in an economic system where those favoured have freedom to fix their own reward.’ What motivates the present generation to become managers is mainly the fact that, fat chunks of salary paid to the CEO’s and the CFO’s.

5) He talks about the entrenched corpratocracy within the public sector and especially its influence on major policy decisions in the foreign affairs and battlefield decisions.

In India, much of the public expenditure is innocently siphoned off to the defence sectors. Where as priority areas like education and health are conveniently put off for later on the premises that the government lacks funds!

6) ‘It is that the future economic performance of the economy, the passage from good times to recession or depression and back, cannot be foretold.’ ‘The men and women so engaged believe and are believed by others to have knowledge of the unknown; research is thought to create such knowledge.’ ‘The financial world sustains a large, active, well-rewarded community based on compelled but seemingly sophisticated ignorance.’

‘On Wall Street, economists had not confined themselves to passive, unfavored reward. Instead they chose to forecast what most rewarded those requesting the research. Also they indulged in well-publicized prediction that was favourable to their personal holdings-prediction molded to serve personal gain or to protect against personal loss. A blight on professional economics; a fraud close to home.’

Some people involved at the lower and middle layers may be innocently harming the populace but the managers know.

Thus this book serves as an eye opener to those in the corporate world, to those planning to enter these MNC’s and to those questioning minds. Try to read this book to get more insights into this ‘real’ dismal world. Please post your views on this aspect of fraud that is innocent.

The Economics of Dumping

What is dumping’
According to WTO, a product is considered to be dumped if it is introduced into the commerce of another country at less than its normal value, if the export price of the product exported from one country to another is less than the comparable price, in the ordinary course of trade, for the like product when destined for consumption in the exporting country.

An illustration
Measuring tapes are sold in China or exported from China to Indonesia (if calculated in Indian rupees) at Rs 100, and the price of the same when exported from China to India is Rs 70, then it can be said that China is dumping measuring tapes in India.

Dumping margin
The difference between export price and normal value is called ‘dumping margin’. Dumping margin is calculated as percentage of export price. Thus, in the above example, dumping margin is 100-70=30, which is about 42% of the export price.

What is anti-dumping (AD)’
The WTO agreement allows governments to act against dumping where there is genuine (‘material’) injury to the competing domestic industry. In order to do that the government has to be able to show that dumping is taking place, calculate the extent of dumping (how much lower the export price is compared to the exporter’s home market price), and show that the dumping is causing injury or threatening to do so.
Anti-dumping action means charging extra import duty on the particular product from the particular exporting country in order to bring its price closer to the ‘normal value’ or to remove the injury to domestic industry in the importing country.

Adam Smith
Quoting Adam Smith, ‘by restraining, either by duties, or by absolute prohibitions, the importation of such goods from foreign countries as can be produced at home, the monopoly of the home market is more or less secured to the domestic industry employed in producing them.’ Thus Adam Smith was of the opinion, that, the importing countries should discourage those imports which will harm the domestic industries, by imposing duties on such items. Here he was referring to import duties but in the present economic scenario, import duties alone cannot discourage dumping. Thus the need arises for imposing anti-dumping duties.

Anti-dumping measures
1) Anti-dumping duty: This is imposed at the time of imports, in addition to other customs duties. The purpose of antidumping duty is to raise the price of the commodity when introduced in the market of the importing country.
2) Price undertaking: If the exporter himself undertakes to raise the price of the product then the importing country can consider it and accept it instead of imposing antidumping duty.

Calculating the extent of dumping
GATT (Article 6) provides three methods to calculate a product’s ‘normal value’. The main one is based on the price in the exporter’s domestic market. When this cannot be used, two alternatives are available ‘ the price charged by the exporter in another country, or a calculation based on the combination of the exporter’s production costs, other expenses and normal profit margins. And the agreement also specifies how a fair comparison can be made between the export price and what would be a normal price.

Case study ‘
This case study supports the hypothesis that the dumping country need not be very developed so as to indulge in dumping. China is the world’s largest producer of apples. China has flooded the US market with apple juice concentrate along with textiles and garments. In the beginning of May 2000, an anti-dumping duty to the extent of 51.74% was imposed on Chinese apple concentrate. In United States, the price of Chinese apple concentrate is still low even after the imposition of anti-dumping duties due to their extremely low cost of production. China does not occupy a position among the world’s developed nations.

Case study ”
This case study brings out the injury that can be caused by dumping to the domestic firms. Anti-dumping investigations are taking place against import of Silk fabrics from China. It has caused injury to Indian silk domestic industry by causing significant decline in production, decline in capacity utilization, closure of several power looms, decline in sales, drop in employment, loss of market share in demand and decline in profitability.
Share of exports from China has increased in absolute terms as well as in relation to demand of product in India. This affects the small scale industries involved in the production of silk adversely.

The threat of dumping
In developing countries, especially those neighbouring the non-market economies, dumping can pose a serious threat. Dumping from China in India is an example of this. More than one-third cases decided by the Designated Authority in India involve China. These exporters are indulging in very aggressive pricing which is evident from the huge dumping margin. Moreover, in a majority of the cases, the exporters and producers of the exporting country have not cooperated in the investigation process.

References
1) WTO
2) CENTAD

Why fear subsidies’

Agricultural subsidies and the refusal of the US and EU to phase them out are preventing poorer countries from developing and damaging multilateral trade says Joseph Stiglitz in Taipei times.

KICK-ASS, a website started by the Guardian aimed at kicking into oblivion all agricultural subsidies, states that ‘over 60% of US farmers don’t get any subsidies at all and manage to survive. New Zealand abandoned subsidies unilaterally some years ago and its farming industry has thrived.’

The main concerns are
1) With elections looming in November, US President George W. Bush could not “sacrifice” the 25,000 wealthy cotton farmers or the 10,000 prosperous rice farmers and their campaign contributions.
2) With 70 percent or so of people in developing countries depending directly or indirectly on agriculture, they are the losers under the current regime.
3) If markets are opened up, countries should be given the right to countervail US and European subsidies.

In India, more than 60% of the populace depend on agriculture for their livelihood. The subsidies that the developed nations offer their farmers vis-‘-vis to what the developing countries can offer is very large. The developing nations find it difficult to withstand this competition in the world markets. If the subsidies are not reduced by the US and the EU, it will be the developing nations who will have to bear the brunt.

Creative Destruction

Where have all the cycle rickshaws gone’
Where have all the type writers absconded along with the typists’

So many call centres have materialised!
SEZs are sprouting out!

Well, the economy has undergone many changes, though all for the better. But the predicament is that, not all have gotten better. This has resulted in increasing disparities of income (Which is bound to happen in a meritocracy like India). I have been intrigued by this phenomenon.

Then I came across Joseph Schumpeter. And when I read through his works, I realised that he had already talked of this phenomenon, long back in 1942.

This is what creative destruction means- ‘Creative destruction refers to the incessant product and process innovation mechanism by which new production units replace outdated ones.’
This restructuring process permeates major aspects of macroeconomic performance, not only long-run growth but also economic fluctuations, structural adjustment and the functioning of factor markets.

Davis, Haltiwanger and Schuh (1996) concluded that over ten per cent of the jobs that exist at any point in time did not exist a year before or will not exist a year later. That is, over ten per cent of existing jobs are destroyed each year and about the same amount is created within the same year.

So be on the look out for such changes. I could pen down only two of them. If you have recognised others, please comment.

Do you feel that the creation outweighs the destruction’ Does this contribute to rising inequalities’ Is it not that the negative externalities from creative destruction do more harm than good’