examples of questions for political economy paper

7/27/2019 Examples of Questions for Political Economy Paper

1/7

The Great Depression (GD)

The Great Depression was a severe worldwide economic depressionin the decade preceding World War II.

It was the longest, most widespread, and deepest depression of the 20th century.

The depression originated in the U.S., after the fall in stock prices that began around September 4, 1929, and became worldw

news with the stock market crash of October 29, 1929 (known as Black Tuesday).

The Great Depression was a global economic crisis that may have been triggered by:

a. political decisions (war damages post-World War I),

b. protectionism (Congressional tariffs on European goods)c. The Stock Market Collapse of 1929.

Worldwide, there was increased unemployment, decreased government revenue, a drop in international trade.

At the height of the Great Depression in 1933, more than a quarter of the US labor force was unemployed. Some countries sa

change in leadership as a result of the economic disorder.

In the United States, the Great Depression is associated with Black Tuesday, the stock market crash of 29 October 1929,

although the country entered a recession months before the crash.

The Depression continued until the beginning of World War II, with Franklin D. Roosevelt

Change in economic indicators 192932

What were the major causes of the GD?

Financed by consumer credit and The USA were both the major source of, and the most deeply affected by, the Depression, whic

spread internationally. Major causes were:

Imbalances:

Inequality and industrial overproduction:

o The US, 23 to 29, manufacturing grew 32%- while wages grew only 8%.

o To ensure consumer power, huge expansion in Banks credit.

o Based on manufacturing growth, Stock Market rose steadily, later accelerated through Banks lending at 10% margin -

overheated Stock market

US Agricultural surpluses :

o Agri. incomes in US eroded sharply as over-production led to price crash; fell to 1/3rd per capita income.

European debt and US tariffs :

Post WW 1 Europe heavily indebted to US ($10.3bn) for war related borrowings; high US tariffs prevented generation o

Trade surpluses to repay debt.

Protectionism:

US raised tariff barriers twice within decade, 1922 and 1930

Gold standard:

Gold hoarding by US and France forced higher interest rates elsewhere and sharply reduced global money supply, worsening

Depression.

1

United

States

Great

Britain

France Germany

ndustrial production 46% 23% 24% 41%

Wholesale prices 32% 33% 34% 29%

Foreign trade 70% 60% 54% 61%

Unemployment +607% +129% +214% +232%
http://en.wikipedia.org/wiki/Depression_(economics)http://en.wikipedia.org/wiki/Depression_(economics)http://en.wikipedia.org/wiki/World_War_IIhttp://en.wikipedia.org/wiki/World_War_IIhttp://en.wikipedia.org/wiki/Wall_Street_Crash_of_1929http://en.wikipedia.org/wiki/Black_Tuesdayhttp://en.wikipedia.org/wiki/Depression_(economics)http://en.wikipedia.org/wiki/World_War_IIhttp://en.wikipedia.org/wiki/Wall_Street_Crash_of_1929http://en.wikipedia.org/wiki/Black_Tuesday


2/7

What mistakes were made by US authorities that led to the prolongation of the GD?

US Govt was strongly pro-business and pro- capital

interest rates low

Labour union powers limited

minimum wage declared illegal by US Supreme Court

US economy slowed mid 1920s from over-production

falling exports and over-indebted consumers

Stock Market crash.

2


3/7

What was the new way of thinking about economic management that originated with Keynes?

Keynes idea was an International Clearing House, covering all global Trade flows. The settlement unit would be a composite

basket of global commodity/gold prices Bancor with a rate set against each national currency.

Each country would be allowed an overdraft limit, proportionate to its trade flows. If its deficit exceeded this limit, it would be

penalised.

Simultaneously, if a countrys surplus exceeded its OD limit, it too, would be penalised.

So there would be pressure for each country to devalue/revalue to get back into balance; and no country would go on accumulatin

Reserves. Trade and development would proceed apace, with a trend to greater global equality.

How did Roosevelt apply this economic philosophy to get the US out of the GD, and what are some examples of how these policies

were implemented?

Roosevelt became President in 1932 with mandate to provide relief and employment

Roosevelts 100 days:

fiscal and regulatory intervention

lower interest rates;

social welfare programmes

Banking recovery

Passed Glass-Steagall law created FDIC and separated Commercial and Investment banking; Set up Security Exchang

Commission (SEC) Created Civil Conservation Corps: environment development, employed 2.5mn

Passed Agricultural Adjustment Act: restricted Agricultural production, to raise prices; invested in farming modernizatio

US left Gold standard

Massive building of Dam and irrigation infrastructure covering 7 States;

Established National Industrial Recovery Act

Public Works Administration constructions of schools, roads, civil amenities, employed 4 mn people;

National Recovery Administration: involved Businesses in recovery strategy;

National Housing Agency: lent for home mortgages

FERA: direct cash relief to the poorest;

National Labour Relations Act: empowered labour Unions;

Fair Labour standards: ensured minimum wage;

Social Security Act: provided for provision of Pensions; Unemployment insurance; child welfare support;

US moved out of Depression, but interest rate rise in 1937 slowed economy again.

The Golden Age of the mixed economy.

How did WW2 change the Global political environment, and what initiatives did the US take to support its Free World

allies (e.g., Marshall Aid; NATO).

Keynesian model of fiscal intervention and

tolerance for moderate inflation, plus

social welfare programmes and

Labour/capital consensus on wage and price controls, allowed rapid recovery post WW2, and sustained growth thereafter. Cold War increased US support of Europe through Marshall Aid, and US funding of European defence via NATO both

supported European economic success.

Three Pillars

1. US role as Superpower: pre WW2, multi-polar Powers; post, only two. US assumes responsibility for free-world through

economic and military support of allies.

2. Institutional arrangements to support global economic management: Financial Institutions (BWI), common framework of

economic policies, and strong international co-operation , all as outcome of lessons learnt from the Great Depression;

3


4/7

3. The rise of Social Market economies the Mixed Economy- validated Keynesian economic thesis : high investment and high

production with low inflation and low unemployment possible when State (fiscal) intervention balances market forces.

NATO

Post Korean War, Communist victory in China, and Russian domination of Communist states in eastern Europe, US formed NAT

along with Western European partners.

Purely in economic terms, NATO beneficial to Western Europe in 50s and 60s; amount equal to 1% of GDP spent on NATO

within Europe, benefitting local economies; further European countries reduced their own defence expenditures.

How were the Institutions created via the United Nations ( the Breton Wood Institutions, i.e., IMF, IBRD/IFC, GATT etc) suppos

to address the major weaknesses of the international economic system prior to WW2 that contributed to worsening the GD?

BWIs created to assist with short term BOP issues(IMF) and with long-term development needs(IBRD); GATT created, later to

become WTO.

Named for a 1944 meeting of 44 nations at Bretton Woods, New Hampshire.

The purpose was to design a postwar international monetary system.

The goal was exchange rate stability without the gold standard.

The result was the creation of the IMF and the World Bank.

Under the Bretton Woods system, the U.S. dollar was pegged to gold at $35 per ounce and other currencies were pegged to the U

dollar.

Each country was responsible for maintaining its exchange rate within 1% of the adopted par value by buying or selling foreign

reserves as necessary.

The Bretton Woods system was a dollar-based gold exchange standard.

The Bretton Woods family (1944)

International Monetary Fund (IMF)

World Bank (WB)

World Trade Organisation (from 1995)

replacing the General Agreement on Tariffs and Trade (GATT)

Re-shaping the Role of Bretton Woods Institutions

Strengthening global economic governance is a logical and critical response to the development challenges in the context of

reaching globalization.

BWIs remains important pillars of the global economic governance in terms of global aid architecture and international finanarchitecture.

Since Monterrey Conference, new progress achieved, new trend developing, new challenges emerging, calling for new direction

BWIs.

Background: Bretton Woods

With the world at war, participants from each of the Allied countries convened on July 1, 1944 in Bretton Woods, New Hamps

to create a new international monetary system.

The breakdown of the inter-war gold standard, and the mutually destructive economic policies that followed, convinced leaders

a new set of cooperative monetary and trade arrangements was a prerequisite for world peace and prosperity.

The outcome of the conference, known as the Bretton Woods Agreement, included the creation of an adjustable peg exchange r

system (termed the par value system) and the establishment of two international organizations (the IMF and the IBRD) that w

created in the hopes of maintaining economic cooperation among the participating countries.

The ITO (International Trade Organization) was also part of the original Bretton Woods plan. Its charter was never ratified, tho

GATT (and more recently the WTO) subsumed some of its original goals.

The Role of the IMF

The IMF's two original responsibilities were to:

administer the par value system

provide members financial assistance to enable them to maintain their par values in the face of short-term balanc

payments shortfalls.

The Role of the IBRD

4


5/7

The International Bank for Reconstruction and Development was designed chiefly to supply the capital needed for post-war

reconstruction and long term development projects.

Although the IMF and IBRD institutions are explicitly separate in terms of charter, funding and staff, membership in the IMF is a

prerequisite for membership in the IBRD.

Over the years 1956-1988 four additional agencies were combined with the IBRD to make up the World Bank Group:

The (original) International Bank for Reconstruction and Development (IBRD)

The International Finance Corporation (IFC)

The International Development Association (IDA)

The Multilateral Investment Guarantee Agency (MIGA)

The International Centre for Settlement of Investment Disputes (ICSID)

What key policies implemented by European leaders, and what associated events, allowed high sustainable growth across

Europe, in the period 1947 to 1970?

Three factors primarily responsible for accelerating growth:

Free trade:

Political principle: integrate Europe through trade, to avoid future wars. European openness to trade i.e. X+I/GDP rose on avera

from 20% to 55% by 1960.

Improved technology;

Partly from knowledge developed from Military production; partly catching up with US technology that had continued to grow;

establishment of European J/Vs, collaborative research and development;

Capacity to run Budget and Current Account deficits: Marshall Aid helped Capital inflows; moderate inflation but low interest rates exchange rate stable to strengthening, because of

rapid increase in export volumes and capabilities.

Europe was successful mixed economy.

High welfare expenditure, and Govt ownership of utilities

some heavy industry (Aeronautical; specialized steel and chemicals; Mining), with encouragement of private sector across all oth

sectors.

Highly trained and productive labour force; immigration encouraged, stopped excessive wage increases;

How did Stagflation develop in the 1970s, and what problem emerged that encouraged Policy makers to reject Keynesian

demand-management principles, in favour of supply-side principles that gave the lead in economic management to the

Market ?

Smithsonian agreement (1973) ended $ convertibility into Gold: $/Gold convertibility had kept countries keen to maintain fixed

exchange rate against $.

$ became fiat currency, i.e. $ liquidity could simply be expanded by US Govt printing notes, unlinked to US Gold stock.

Regime of fixed exchange rates ended; henceforth, floating Exchange rates started to become the norm( linked, or free float).

Oil price hikes in 1973, again in 1979, accelerated inflation, running between 12% and 20% mid to late 70s. Huge currency

fluctuations, instability;

Labour broke tradition of ex-post wage increases, now sought to be preemptively indexed against inflation: manufacturing costs

rose, demand fell, and unemployment increased. Several rounds of Income and Wages policies failed.

Keynesian expectation that high inflation would not be possible in periods of high unemployment, collapsed: Stagflation took ho

rising prices with falling employment. Enter the Monetarists; Milton Friedman had argued, in the 60s, that:

i) in long run, inflation was always caused by money supply growth rising above its long-term trend and,

ii) unemployment was the result of imbalances and bottlenecks in the inherent supply and demand functions, and that MS growt

above NAIRU would make the Phillips curve vertical.

Central Banks given job of managing money supply via interest rates; $ rates went up to 20%, to reduce demand. CB role reduce

one target: the inflation rate.

Reagan/Thatcher supply-side revolution commenced: key was to increase investment through low tax rates, liberalization of capi

controls; deregulation; and privatisation;.

5


6/7

Globalisation accelerateda new world order for economic Policy Management.

China

What were the foundations of Chinas massive economic growth? What was the contribution of Maos era that gave Chin

the stability and organisation to assume rapid, sustainable growth?

When the Communist Party of China came to power in 1949, its leaders' fundamental long-range goals were

o to transform China into a modern, powerful, socialist nation.

o In economic terms these objectives meant industrialization, improvement ofliving standards, narrowing ofincome differen

and production of modernmilitary equipment.

o As the years passed, the leadership continued to subscribe to these goals. But the economic policies formulated to achieve th

were dramatically altered on several occasions in response to major changes in the economy, internal politics, and internatiopolitical and economic developments.

foundations of Chinas massive economic growth

o Powerful administrative structure and service

o Huge agri-production

o strong irrigation systems and canalo Large industrial base: first manufacturer of iron, on large scale; paper/printing; ceramics; commercial textiles; gunpowder, e

contribution of Maos era that gave China the stability and organisation to assume rapid, sustainable growth

Maos China grew at 4/5% pa, but production gains largely offset by population growth;

Maos plans envisaged rapid achievement of agricultural surpluses to feed urban areas

Central Planning of economic production throughout period

financial incentives ( profits, and profit participation) and new technology necessary for major change in prospects

Through 70s, massive focus began on upgrading technical education

India

Comment on Indias transition from a 3.5% GDP growth trajectory, to achieving levels of 9% in recent years. What were

the major developments over the period? How did Nehruvian development policies assist in building a base fo future Indgrowth?

Comment on Indias transition from a 3.5% GDP growth trajectory, to achieving levels of 9% in recent years

o Nehruvian Socialism - !947 to late 1970s low (3.5%) GDP growth

o Liberalisation and take-off 1991 to 2008 growth 7% average, reaching 9%

o India has world-class companies in IT, Petrochemicals, Pharmaceuticals, Steel, Auto, and Telecom sectors

major developments over the period

Indira Gandhi (PM 66 77; 80 84 ) enlarged public sector by nationalising Banks, Insurance and Mining. Under Gharreebe

Hatao slogan, undertook populist measures ( e.g., provision of mass housing; salary increases etc).Budget and Current Account

deficits rose sharply.

By 1981, India had to turn to IMF for a $6bn programme prepaid, but IMFs macro-economic conditionality's commenced the

Reform process.

Nehruvian development policies assist in building a base fo future Indian growth

o Nehrus objective was economic self-sufficiency for India

o Central Planning, under Planning Commission reporting to PM; Five Year Plans commenced in 1952

o Land Reforms (partially successful), and merger of Indian States into Union undertaken

o To ensure broad based development, heavy emphasis on Directed lending by Banks, to SME and Agri-business, and to

backward Regions

6
http://en.wikipedia.org/wiki/Communist_Party_of_Chinahttp://en.wikipedia.org/wiki/Socialisthttp://en.wikipedia.org/wiki/Industrializationhttp://en.wikipedia.org/wiki/Industrializationhttp://en.wikipedia.org/wiki/Living_standardhttp://en.wikipedia.org/wiki/Living_standardhttp://en.wikipedia.org/wiki/Living_standardhttp://en.wikipedia.org/wiki/Income_inequality_metricshttp://en.wikipedia.org/wiki/Military_equipmenthttp://en.wikipedia.org/wiki/Military_equipmenthttp://en.wikipedia.org/wiki/Military_equipmenthttp://en.wikipedia.org/wiki/Communist_Party_of_Chinahttp://en.wikipedia.org/wiki/Socialisthttp://en.wikipedia.org/wiki/Industrializationhttp://en.wikipedia.org/wiki/Living_standardhttp://en.wikipedia.org/wiki/Income_inequality_metricshttp://en.wikipedia.org/wiki/Military_equipment


7/7

o Nehru drove setting up of 7 IITs (Ind.Inst.Tech), towards late 50s, to create engineering skills needed for heavy industrialization

o Green Revolution starting early 60s; several dams had been built, and new seeds (IRRI) greatly increased Indias rice producti

o by focusing on technical education; Energy and infrastructure; heavy industry all areas that Private sector lacked capital for, or

interest in Nehruvian period laid base for success of Indian private sector in later years.

o Major reasons are offered to justify the foundational role of N polices:

o + Large, closed market taught Indian manufacturers how to work with narrow margin by exploiting scale and cost reductio

local purchase of intermediate goods; strong domestic commerce assisted expansion.

o + Coal developed in public sector, supplies65% of Indias electric power.

o + Food self-sufficiency by 1979 could not have been achieved with Govt intervention through Dams, seeds, subsidies, Land

reforms;o + Nehrus focus on technological education laid base for India's IT sector.

/

7

examples of questions for political economy paper

Documents