Qa Ans. Q2 Ans. ECONOMICS GROWTH AND DEVELOPMENT How does carbon trading help in reducing environmental degradation? Carbon trading is a market mechanism by which countries emitting less carbon can trade it in established market with those who emit more than what is permitted. Carbon trading market at 1. Local - level 2, National - level 3. International - level Carbon trading as a method to control carbon emission was mentioned in Berlin summit of UNFCCC and formulated in kyoto protocol, Benefits derived from carbon trading A. It puts a price on carbon emission in excess of deligated amount to control carbon emission. B. It is based on polluter pays principle, so rewards those who adopt cleaner technology. C. Helps in keeping a record which is available in real time wrt emitter and clean energy providers which is helpful for future target setting, D. Funds generated from carbon trading can be used for better development of clean energy sources. However, challenges of carbon trading like correct measurement, standardized sources and institutionalized dispute resolution are critical for sustainable carbon trading. How is HDI calculated by UNDP? Can there be better methods of assigning weight. HDI being published with HDR by UNDP since 1990. Method of calculating HDI. Life expentancy of given country-20 I. Health Index = allt inceX™ [life expectancy of best performing country—20 - (UN-DESA) IL. Education Index-(UNESCO) a. Mean years of schooling (MYS) b. Expected years of schooling F HDI calculation = (Health Index) (Education Index) (std. of living)]"/9 (Log of GNP per capital at PPP)’ - log $100 IIL, Standard of living = tandard of living [ log (75000) — log ($100) Page 1NEXT IAS Economics : Growth and Development Q3 Ans. Better methods of assigning weights 1. In Health Index; apart from life expectary: quality of life indicators like nutrition, availability of health care support, presence of sanitations clean drinking water and institutional development should to be given weight. Hence, qualitative data needs to be included. 2. Education index should cover quality of education Eg; PESA and reach of education via infrastructure support and active policy making for affirmative education. 3. Standard of living index can be improved by considering poverty alleviation, in equality removal, development of new assets, a money deprived section and basic living requirement link shatter. Itis possible to inclinde more weights and indexes, but trade off will be it will compromise the simplicity of index. HDI in simple with easy calculations. Discuss essential feature of growth models which incorporates R&D. Growth models which incorporates technology and R&D can have them as exogenous source and endogenous source. (1) Exogenous source: Solow model Y = F(K, AL) y=i&) (G+ntnk — s.f(k) Endogenous growth model: Romer model with endogenous technology. (AK =sy-dk) By = Ba 81) y=F{K, AL) = “Technology will impact and technology will get impacted by growth” .... Ais affected by labors involved in technology. ie. L, > labor in technology L, > labor in producing physical output (y) Catt, Page 2NEXT IAS Econo! : Growth and Development d, (Ea) (ts I yi fixed. and, || =& }+|—*=1]| |proportion is always fixe: CL PP * A=8L, Change in technology is affected by worker's efficiency 8 > [53A°] — Standing on shoulder’s effect >1 = every new knowledge created more and more to existing knowledge. Normally, we assume © < § <1 ie. old knowledge has both positive and negative aspects. > [A =v, | $ - Standing on shoulder’s effect 2, — Stepping on toes effect > multiple people doing same research = duplication - ante shown (2, = 2%)» (2) &q — growth rate in technology ) A/q to Romers; 84 = By = (2 | U-e) Suggestion: => If population growth in more; economic growth can be higher. => “Population has growth effect in (R&D) endogenous model. more population = higher (R&D) = higher grwoth”. Similarly, if ) is more, then in that case, growth will t and to be higher. > If people can think more ideas, growth rate. could be higher if bis more; growth rate will be higher. ‘Therefore, Modern economics, which became developed from less- development have shown some amount of adherence to romer model or R&D. Page 3NEXT IAS Economics : Growth and Development Q.4 In contemporary world, many countries are not following Kuznet’s pattern of structural change.’ Give reasons. (20M) (250 W) Ans. Moder economic growth is more affected by specialization and spread of specialization of physical and social infra-structure, improved participation in global supply chain and higher investments in R&D. Kuznet modern economic theory was given 50 years back. In those days, it was about yourself than participatin in global supply chain. Kuzent structural change theory Countries will become from agriculture dominated with initial industrialization, light consumer goods industry - textile, footwear and furniture’s will get developed. It will lead to development of complex consumer goods (watches, spectacular); light capital goods would start developing. Also, agriculture will change from subsistence to more commercial form. Thus, heavy industry, complex capital goods transportation, communication etc. with lead to growth of service sector. It will include specialized banking, specialized skill based training, Spread of modern technology and absorption of technology in all production function With manufacturing maturity more and with rising maturiety, service sector dominance starts taking place. Increased specialization leads to development of service sector dominance in proportional contribution to GDP with spread of software based industry, financial, entertainment and R&D. Inequality | pey However, Modern world has seen many continue including India moving from agriculture to service sector dominance.’ Such countries have missed ... the phase of (industrial dominance.) Why —> Reasons for shift outside the scope of kunzet, theory 1. Role of specialization = IT, ITes in India. 2. Discontinuous adoption of technology by late entrants to development process Accessibility to more modern technology created ... capital based growth, Many to jumped too service - Also due to poor logistical support available for the dominance of industrial sector in the economy. but service did not need logistical support to a very large extent. 3. Pre-dominance of lower end service in many developing countries like. Pity shop keeping trading, kirana shops etc. Page 4NEXT IAS Econo! 4. Availability of cheaper manufacturing imports port globalization 1990s, became dominant force importing in cheaper goods. : Growth and Development Countries started specializing in a peculiar way. (Agri) (Middle east High end servicing However, in the longer run, it has been seen that, countries which had followed pattern suggested by kuznets have tended to have comparatively “better growth” even in delocalizing phase and even in the case when - markets abroad are less willing to purchase their commodity and services. They are more stable, balanced in growth, shared prosperity (ASEAN countries) - malasiya, Thailand, S. korea. They shifted from agriculture to industry and then towards services - compared to jump to services. o—_,—® @-ep => Majority of workers in agriculture and contribution from service is disproportionately high. Eg: 44% work force in Ag > GVA +(16% to GDP) and 30% workforce in service ~ (63% to GDP) Therefore, Dualist Economy came into picture.” Thus focus should be regarding MSNEs, skills and labor intensive manufacturing. Q.5 Can MNC investments defeat the objective of inclusive growth? Give reason for your answer? Ans. MNCs bring FDI in a developing economy by setting up their subsidiary unit for their production and distribution. It can result in displacing certain existing,” Units and giving new business opportunity to the domestic units” Problems created by MNCs which could lead to non-inclusive growth are - (110 words) 1. They can lead to base erosion and profit shifting, Using resources and goods in one country but shifting tax payment to another country resulting into deprivation of tax-revenues realization to government and thus affect social welfare schemes. 2. MNCS can bring in capital intensive technologies in a labor abundant system leading to non-inclusive growth. 3. MNCs can come, capture the market and could potentially displaces small and marginal enterprise along with Khadi and village industries. Thus, their presence could seriously hamper cottage industries - creating job loss and loss to self-worth. Also, indigenous (indigenous) capacity to produce goods also gets affected Page 5NEXT IAS Economics : Growth and Development Q6 Ans, 4. If MNCs are deep pocketed and are very large and if they start practicing predatory pricing. Firms with deeper pockets will survive and smaller firms (indigenous firms in local area) may not be able to survive. — It could lead to to monopoly in future”, 5. They could start affecting local labor structure and local finance structure by giving much money to local suppliers in term other firms in local area may be wiped off their important inputs and thus could be wiped out. 6. Environmental deterioration: An MNC does not have stakes in country - just there to extract resources and make tremendour profits. Thus, they may use technologies which are environmentally less conducive and that can again result in losses.” Sustainable development takes a back seat and poor population is on the front to face the adversity coming out of climate change and global warming, compared to relatively rich.” However, type of policies wrt legal system, administrative efficiency and institutional development can also arrow that MNC investments can be used to promote inclusion. 1. Rationalizing and simplifying corporate tax structure to check avoidances and using tax-revenue for compensation to displaced. DTAA —> re-negotations. Do not let tax hearens participate much in your country’s investment pattern and that would help. 2. Establishing regulatory bodies (CCI) to prevent predatory pricing, single sourcing, monopolistic practices. 3. Initiating policy support like MI, starting India for domestic manufacturing through fiscal concession, R&D, market failure prevention and improved training of workforce and development for growth. 4. Creates special purpose fund to use increase in forex reserve, government revenue and other cash flows to create social security support for vulnerable section of society. EDI is setting factory, production unit | FPlisrelatively more inflationary asit Production values will be created and | doesn’t necessarily creats more (0/P) hhence both dd and se-side support. in the economy. Therefore, If these suggestions are adopted, then its possible to have MNCs entering an economy without hampering inclusive growth. What are causes of market failure in Agriculture sector? How government intervention can mitigate this. (15M) Market in perfect competition is expected to allocate resources most effectively with no dead weight loss. However, presence of externalities, imperfact competition, poor information flow etc. can lead to market failure. In case of agricultural market, market failures is most expected because of various reasons that come into it.” => In agricultural market, market failure could be due to Page 6NEXT IAS Econo! : Growth and Development 1. Price volatility (a) Due to inelastic supply and demand there can be huge fluctuation in price with the quantity that comes in due to () Cobb-web phenomenon Farmer's operate with a long with (p,,) as decision variable i p, for buyers lead to ss-dd mismatch (©) Sudden climatic and weather related issues like hail storms, put attacks, rodents attack etc. Price signalling is weak and pricing allocation power is not complete (b) Income flow to farmeris not direct. Agricultural markets show inter-dependency between farmers and traders who purchase from farmers. Farmer's take loan from Traders to buy inputs etc.. and many small & marginal farmers are net buyer of grains. (©) There is environmental cost involved - due to intensive farming, Short. run —> itmay give you good return but it (long-run) may led to erosion of top soil, soil leaching, so -on > Environmental degradation - as it may cause growing wrong crops - agroclimatically incorrectly chosen crops. —> Growing water intersive crop in dry region. — Growing via wrong technique. —> Flood - cultivation in paddy cropping methane serious sources of pollution. (d) Positive externalities of farming may not be respected by market. (a) Food security [strategic-autonomous] against (lewis model) Samual Balance Effect: Even developed countries don’t want to depand heavily on importer wrt food security. In that case, they tend to pay more to their farmers, a little more than otherwise to keep people in farming. (€) Single buyer- Monoprony in the market for ag. commodities Results into more returns more returns to Traders and less to farmers. Government intervention in farming 1 Buffer stock [for food security] + Providing price support (during -distress.) Procurement price: to assure to buffer stock FSA, 2013 MSP : > “Minimum” Support Price (SP) —> should not be too high. cama New method -(incentive based) Agriculture today is at High cost , High price and High Risk economy. Hence, it is not sustainable for small and marginal farmers. Page 7NEXT IAS Economics : Growth and Development Q7 Ans. Also, Farmers - Highly {hetrogeneous community] 86% of farmer <5 acre of level 0.5% of farmer > 10 hol of land 25 Acre of land MSP does not reach right people at right time” “Opportunity created once-are first-hand taken by => [Rich farmers] ie, Richer and powerful ones => C2 > Indeally should be done. However, due to Less informed market, Cost structure of Inidan farming is not trasnparent Therefore, Focus should be towards low cost farming, instensive farming, multiple cropping, mixed farming, allied activities and use of labor intensive technologies “Subsidies for more-environmental freindly technique of production. + Drip irrigation + One district: one crop.” (UDOP) + "Farmers should be encouraged to produce right set of crops” Tariffs on import on high end crops—> agriculture produced domentically can get better price. Tariffs on high end products could be allowed Giving subsidy to promot investment in agriculture + Ligation support + Land levelling support (mixing of soil) + Crops protection support - hedging and protecting the crop from crop failure. + Port harvesting support - like marketing support, storage support, creating the structures ete, + Agriculture infra support & of $ 1 lakh crore announced recently can fill that gap” + “Inventing in agriculture-reduce cost of production for small & marginal farmers”. Therefore, Rural markets in general and agricultural markets in particular do have a lot of discontinuity and externalities due to which government interference will be needed for better allocational efficiency. In Harrod’s model of growth, if expected growth rate exceeds warranted growth rate.. What will be the relation between actual growth rate and expected growth rate. g= [: actual growth rate |; [= —> warranted growth rate(g,,) } © Te Ler Bn = Bit Boon expected growth rate... According to question If expected growth rate > warranted growth rate if [(g,) > (g,)] + Growth rate of productive labor force is greater than your growth rate of capital infusion in the economy. Page 8NEXT IAS Econo! : Growth and Development + “We call it jobless growth in the economy.” Allso, As labor force grows at a faster rate > demand side grows at a factor rate: people are demanding more and more product but supply capacity is week. [. @> 8,1 Then, explaining adjustments to equilibrium, And knife-edge in-stability (8 ( I actual growth ( 8 5} > warranted growth ; | &y = BP By s natural rate of growth] Expected growth & actual growth are similar Q.8 What is Doha development’ agenda? explain how it negotiated TRIMS and TRIPS among nations? Ans. Doha Ministerial conducted in 2001 (Nov), at WTO meet is called as Doha Development Agenda. Acrimonious meeting Developing countries complaining that - polices (policy) of WTO has not much focused upon implementation issue and has focused more and more on new negotiations and developing countries were found warranting their interests US wanted agreements on trade facilitation agreement and more flow of investments into countries but countries like India wanted first negotiations on issues already negotiated and how they will be implemented in future. India followed along with china and many other developing countries to took stance against US, EU, Japan and finally forced them to accept several charges that took place in Doha- development Agenda To ensure —> How trade to be equal and “DDA because it follows the requirement that developing countries expressed. Decisions taken 1. Pharmaceutical production brought under compulsory licensing, + India and other developing countries were allowed to manufacturing via generic medicine. 2. Poor countries were allowed food security based subsidies. Agricultural subsides were allowed. + Amber Box subsidies + Blue Box subsidies + Green Box subsidies For developed countries- time bound subsidy removal. Over yr, Syr 7yr. Page 9NEXT IAS Economics : Growth and Development 3. Negotiations on movement of labor for service made movement to be completed in time bound manner. eg: H1-B visa 4. Subsidy and protection to domestic industry will continue > on strategic basis, if they are critical for country. Removal of patronizing rule like multiplier agreement Eg: Development counties used to give quotar to developing countries regarding how much they can sell for were to developing country. 6. Gl will be used to grant protection to arear specilization in: + Basmati Rice to Punjab. 7. Anti-dumping rules to be negotiated. + Antidumping clauses were brought by Americans against import from India. and China’ + Both countries wanted a properly defined anti-dumping rules and WTO ministrial agreed (at Doha) Negotiation in anti-dumping rulers to exist: then it will be implemented. It will give following benefits to India: 1, Allowing better market accessibility to Indian products. Allowing Indian workers to go abroad to work for their service purpose, Allowing Indian Pharmocentical to keep producing generic medicines even for export. However, developed countries kept delaying the implementation process and therefore WTO could not make significant progress between 2001 and 2010. That made WTO toothless and gave rise to regional trade agreements. + RCEP : BRICS etc. Q.9 Kuzentj’s hypothesis predicts decline in Income inequalitie in long-run. Recent decade, trends indeveloping and developed economics, (do they support it)? Give Reason. Ans. Kuzent's hypothesis Inequality data = (1915-1988) > (1988-1970) Per capita-income Implication was:- growth automatically lead to equity “TRICKLE down effect” + “As shown by deaton and picketty, decades starting 1980 till now has seen a revival of inequality.” Page 10NEXT IAS Economics : Growth and Development oN L In US, Europe and several other developing countries * Policy of neoliberalism promoting more private property.” Reduced-taxation”, increased interference of corporate in public decision making and increase in trust and educational cost has led to rising inequlity with rising per-capita income after 1980. Recent data does not accept kuznet’s hypothesis rather both Daton and picketty suggested tha with improvements in technology, new challenges will emerge w.t.tacceptance of kuznet’s hypotheis, because, with improvement in technology, those who are better in using technology can become better off and can increase inequality while other starts suffering. KC was okay between 1915-1980 + But beyond 1980, there are serious challenge that it is facing. (Therefore, steps to promote inclusive growth should be taken.) Q.10 Explain why market and state have complementary roles in economic development. Ans. Markets do not necessarily mean physical space, or any particular place but where buyer and seller meet and trade. Government —> role of administration and public asset management. Role of market is to assure current evaluation of scarcity of a resources and scarcity of a product before fixing price on it Market can act best on allocational efficiency which input to use, which o/p to produce, and how much scarce factor, should be utilized in production. But market factor due to imperfect competition therefore, markets need to be supported by + Contract enfercement (law and order) + Rule based (bound business) + Ensuring equitable distribution of resource take place ‘+ Monopolization can be controled. + Government also assure protection to private property. + Better arbitration measures. should be put in place. + Also, there can be situation of government failure also. It may not be possible to distributes things well-in the absence of market. Also, when we impose to collect taxes as revenue, we first need market to impose that tax.” > Also, to give subsidy for production needs, markets, are needed Also, Fine imposition also needs a market to exist. Page 11NEXT IAS Economics : Growth and Development Qn Ans. Government can help in market failure and market can act as government failure. Markets pray oats Government —» to distribute in a manner, where best returns could be available to each individual across the social system. And, that is why—> they are more complementary to each other than substitutes of each other. , State vs market be replaced by [state and mkt] (Prof sen + Prof. Dreze) :(2008) -Book. You need both market and government to come together their together for making sure that + Allocational efficiency and * Distributional efficiency both are achieved in economy.” + Market Phobia:—> Only centralized planning + Market Mania:—> Only free market Market and government has more co-ordinating and co-operative role than conflicting role with each other.” How does rural economic activities create environmental degradation in developing countries? Rural (economics) economic activities in developing economies do not have technology support to always practice clear production technique- due to access to modern production technology and pressure of enough revenue generation and there is always a trade of (b/w) [economics and environment] —> “Impact of economic activity on environment Land degradation:—» via a) Top soil erosion due to intensive cultivation b) wrong -cultivation practice ©) Excessive use of fertilize, chemicals and pesticide ) Leaching, satiation €) Poor agro-climatic choice of crop. £) Over grazing and over tilling - sand mining, road const. > house constrictive Water table depletion and increase in wate pollution. (i) Over extraction through tubwells and borings. (i) Under maintenance of tanks, culterts and wells. (iii) Damping of industrial water from industries like, food processing, leather goods, tanneris etc Air pollution. Indoor Air Pollution: cooking via fuel wood (wooding/wood burning) Outdoor Air Pollution Page 12NEXT IAS Economics : Growth and Development + Methane emission from rice field + Dust due to threshing activi + Digging of ground + Poor covering crew (hunk..); spread to all area -> creating pollution + Stubble burning in punjab — Also more pressure on natural resources in general; Deforestation activities For furniture and clearing forested lend to be brought under cultivation especially (slash and burning) Land pollution Air pollution Water pollution Deforestation Intensive use of natural resources Practices for cleaner (production) production technique Right set of information, correct incertive mechanism, both—> (economic and prescriptive) + Solution should be followed. + Information set being available + Institutional support available eg: Village panchayats could be used to provison information to villagers. about environmental best practices and techniques along with medium to long run impact of non-prudent methods and step in activities and pervernce impact ot farming and farmers, overall. Steps like + UJJAWALA scheme + Sarve Siksha Abhiyan (SSA, RTE) *Also bringing harmony between environment and economy by extending incintivising subsidies to farmers. eg: PMKUSUM, Soil Health and ete. oN — ts Q.12 What policies would you suggested to combact negative environmental externatlities. private Ms socialism. (20M) ‘Ans. Negative externalitis of environment imply that social cost of degradation is higher than private cost of degradation, creating the [SC,>PC, ] threat of over exploitation of resources. There are two main categories of environmental regulations: Page 13NEXT IAS Economics : Growth and Development ‘A, Prescriptives regulations, B. Environmental regulations Prescripties regulations are along called “command and control regulations. It define the steps that polluter has to take to control environmental degradation. It is determined by regulatory authorities A. Technological regulation: (i) BS Norm (V1) - based vehicles (i) Choice of techniques-engines ete. Benefits 1. Easy to verify 2. Flexible & could be changed 3. Easy to administrator B. Setting performance standards: (i) Emmision level, use of polluting fuel —> such prescription at times could become difficult for follower and implementor to comprehend and complex and difficult to understand. Cons i, Real cost of administration in too high ii, It weakens incentive to develop and discover new innovations. Economic Industries They try to convert social cost into private cost. 1. Imposing a fee Changing a money from polluter per unit of pollution permitted, 2. Creating marketable permits Normal steel mill and fishing example Firm Firm? 4 ee Pollution by Pollution by Tallowed — 2allowed 3. Setting up liability on producers to compensate (pigouvian tax) MSc MC Page 14NEXT IAS Advantage of E.I Coarse bargaining + green- counting : Growth and Development 1, Internalization of social cost... so this encourage innovations on cleaner technologies. 2. Satisties equimarginal principle, iu. marginal cost to pollute (MC),cier™ MB petaton Die-advantage 1, With environmental understanding keeps evolving and its dynamics hence, cost and benefits analysis need to be keep evolving with new understanding Politically difficult to implement/ economic interest involved, group interest involved. 3. Environment cannot be treated like economic commodity. it is something far from the reach of putting values on “un-valuable” Tradeoff between economic growth and environmental development is best exposed by economics compensation, where marginal benefit and marginal cost should be brought together, IMB (Higher) > MC = With right policies, society can pay for environmental degradtion and it can be done through incentivizing environmentally cleaner technology. Trade off between economy and environment can be resolved by not only creating MB and MC principle but also developing institutional setup by which winner can compensate the loosers and also economic system doesn’t face-in stability in growth process.” Q.13 What is solow residual? what are its implications? (150 Words - 10M) Ans. Solow residual is the factor of technology contributing to growth of an economy by contributing to total factor productivity. In other words, solow residual explains that part of growth which can not be explained by labor and capital.” Slow model with technological production function Y = F(K, AL) and factor of discounting is (A/L) (4-1 £) yt (nt+n+8)K —— df(k) © k = (K/AL) kK (0) Page 15NEXT IAS Economics : Growth and Development Qua Ans. Equilibrium equation in steady state is kos FR) ned => There are two important implication of solow model . Explains sustained growth of global economy. Technology Pay keeps increasing in this model at the rate (x) and y increase at the rate (nn) [under CRS] and L increases at rate (n). = In equilibrium growth rate (0/p) Yt [per-capita Income growth (n)] Also, said - In part 120 years global gdp grew at 2% which very well matches growth rate of technological coefficient in the rate 120 years. Solow residual y Aner Convergence = Solow residual accounts for conditional convergence 1. All economic will finally converage to a given level of growth rate —> (g) + If initial level of technology are similar and + Growth rate of technology was similar + Solow residual is an important policy paraments making economies of the day focus on their technical cofficient, Eg, Space research R&D investments Electronics development What are the implication of trade in higher education under GATS for India? Trade in higher education in about setting off shore compuser of university. Norme and regulation in allowing trade in (foreign edu) higher education. Benefits for India 1. Our students may not have to go abroad and also prevent from putting on so much of money, 2. Availability of equality education in India. Brings possibility of improving domestic industries education by - Learning by doing method Better demonistration effect. More autonomy to profs. 4. Fill the gap of skilled labor to match the world class labor. Page 16NEXT IAS Economics : Growth and Development Qs Ans, 5. Revenue opportunities for Indian universities to start getting revenue by setting off shore campus. 6. Potential to reduce - brain drain out of country, Challenges 1. Threat of loosing sovereignty in (by) fixing educational as standards 2. Cultural differences can dominate educational provision leading to social unrest. 3. School education has to be changed re-train in a big way 4. Intellectual property rights law has to be reformed IR. Educational trading could help India achieve higher level of global recognition and promote world class labor but internal reforms and challenges needed to be taken first to join multilatural education setup.” + Like Institutition of imminence (Eminence) (1,E) + Uchhater Avshkar Yojana to promote trade in higher education under GATS. In view of economic uncertainties, Hirschman approach to economic Development makes more sense. Discuss. Hirschman Theory of unbalanced growth. DPA 2 Role of unbalanced growth under un-certainty Dimenter’s confession Hirschman linkage under uncertainty, linkage can be operated. ‘You can go step by step, rather than putting all your money at one place.” Mainly under-technological uncertainty and financial un-certainty, it is advisable to follow unbalanced growth strategy. This is because 1. Choice of social overhead capital and directly productive capacity can be kept dynamic depending on development path. 2. Makes it possible to shift production strategy to new emerging sector. (new winners/ or seen-rise sector) 3. Captures not only old linkage but can also cover new linkage arising out of changing production dynamics. 4. Does not put financial burden of providing support to several project simultaneously, which can improves economy’s capability to change discourse in case of sudden changes in financial availability situation. Page 17NEXT IAS Economics : Growth and Development Q.16 Ans. Q7 Ans. Hirschman unbalanced growth theory is based on linkages between (consumer goods; capital goods); (capital goods and services) and different sectors in the economy, so in an uncertain situation, sectors which are not even related to each other can develop linkages and there linkage can help in the development of economy. Trade off between environment and development stands un-resolved? Comment in view of USA exiting Paris climate agreement. Debate began in 1960s with Kuznet curve which was -\ shaped, was implying economic growth will automatically resolve the problem of “enviromental degradations.” By 1970s, it was understood, environmental problems will not automatically get resolved by economic growth. There are positive policy approach required to address the problem of environmental degradation. Global efforts : Rome Summit Copenhanger summit (1988) UNFCCC (Rio De Jenerio) (1992) Kyoto Protocol (1996-97) Countries need to take steps to help mitigate the environmental impact.”*due to anthroposcene phase, we humans are going through. By 2010 With the failure of global economic system after sub prime crises and rise of populism, conservatives who have been kep saying, environment and human development are not closely related and have been keeping their views parochial and narrow wrt. to nationalistic view of environment rather than a global view and then, they have been saying environmental impacts are exaggerated. In this view, election of populist government like in US resulted in quitting Paris Accord. However its proven scientifically that human impact on climate change is visible. The debate can be about degree of impact. However, Rising trend of global average temperature cannot be negated. Problems which are of global nature and can be solved only by global co-operation and Paris accord is very right step in that direction to solve the global problem of taking historical contingencies in view.” and making sure, human race can be saved from the impact of human themselves on environment Illustrate the nation of perverse subsidy in the context of natural resource sector. (10 m) Perverse subsidy which brings adverse impact to environmental and economic over a period of time. Perverse subsidy are those which create perverse income in the economy resulting in negative impact on both economy and ecology. Under Natural resource system, perverse subsidy (is) can be observed in typical sectors. Page 18NEXT IAS Economics : Growth and Development ‘A. Observation in natural sector 1, Electricity subsidy in agriculture sector. Over extraction of ground water Ground water getting down Top soil leaching/Erosion due to accessive irrigation 2. Fertiliser subsidy Soil fertility eroding Top soil leaching 3. Water subsidy Water-wastage Poor agro climatic choice of crops Wood selling-lumbering subsidy B. Subsidies to fossil fuel Petroleum Diesel Acid rain Urban heat island. Global warming Subsidies for nuclear energy Toxic/nuclear radiation D. Water subsidy Over extraction of water Urban Falling groud water table Rural E, Subsidies on foretary + resulting into over logging cutting of trees Even if activities are to be subsidized wrt. environmentally sensitive sector, it is ... to gives subsidy not on the basis of increasing demand but for the basis of increasing supply” which can promote soil, forest and water conservation + agro-climatic practices etc.” Q.18 Under what conditions economic growth reduces employment growth? Discuss. Ans, When structural change gradually moved from agricultural dominance to light manufacturing and consumer goods industries with skill development, growth of output and growth of employment become closely reated to each other. Conventional macro economic (Keymsians + Classicals) considers employment and output together but with great depression; Ind IR; it was understood; all growth may not lead to employment and that is because technology can be labor enhancing and technology can be labor saving, inturn creating lesser employment. Codition of economic growth not result in employment growth that creates less employment 1. (gn > gw) - under Harrod Domar Model Effective labor force rising at a faster pace while capital accumulation is not enough to absorb labor force.” Page 19NEXT IAS Economics : Growth and Development Resulting in rising unemployment. When growth is based on particular sector; which is capital-intensive If linkages are not strong. If its service led growth with dominance of upper end services (IT + ITes) Growth based on automation and skill development not matching the requirements of markets. Growth based on export of natural resources. Ep : Dutch disease issue Economy growing fast with no commensurate increment in employment. Therefore, policy makers have to remain awake to there factors; and take corrective remedial actions as soon as, they start showing their impact. Well distributed and equilable growth in the “sustainable growth” Q19 Ans. Heavy key + Basic industries shift to consumer goods in 1960s (late) Heavy industrialization B-vakil model was not given importance. Upper end industries Services led industries Capital intensive model Poor labor laws, - all culminated in jab less growth, Describe the growth path, if the economy attains will give maximum consumption (per capita) then any other growth path. Golden rule steady level of consumption. 1. Solow model explained GRSS which could help in achieving such growth path 2. So low model “ y= F(A, AL) (nen (y)_ fk ac) * ar y= 0601 Choice of golden rule steady stock in to choose optimum savings rate which can lead to optimum k* such that consumption per capita is maximized. Grain Ow ¢| Ls Page 20NEXT IAS Economics : Growth and Development Q.20 Ans. If an economy is above to that level of investments, then it has to reduce that level of investments; to achieve k’, ‘And, if economy is below to that level of investments critical for achieving k’,; thus investments has to rise.” Rostow stage of growth Practics these models) Marxian development model Libenrtein" critical model theory Model [Assumption Model Explanation Conclusion Pollution income progression of agrarian communities (clean) to industrial economics (pollution intense) to service economy (cleaner) would appear to be false if pollution (appear) + (Increase) again due to high level of income and consumption of people @ large. Discuss (ISM) v Explanation of Kuznel curve Answer framework 4 Criticism of Kuznel curve Way forward - ~ | Manaiocig, \ Modern Economic Growth (MEG) in developed countries give rise to belief that growth of per capita income self corrects pollution and environmental degradation. Environmental polltion Criticism 1 There is no one to one relation b/w environmental degradation and economic growth, Latin America + West Asia eg, Brazil, Argentina Arabia “It is therefore observed that environmental degradation solved by economic growth is not an automatic phenomenon. Society focussing on education and environment. Institutional mechanism for environmental safety. Legal support + Admin support Page 21NEXT IAS Economics : Growth and Development Q21 Ans. Q.22 Ans. Only then, we see with rise in environmental pollution, we tend to be more cautions and with more pay; we tend to see and realize environment getting better and better. Indicate Ricardo legacy which is inherited in Lewis Model. Ricardo legacy inherited in Lewis model in labor theory of value. Labor theory of value + Labor is the only factor of production. + Efficient workers help in producing, + Efficient worker — dd for more wages —> High efficiency (O/p) > (Wage) increased [Cycle] With such activity; (O/p) will also rise *Labor is homogenous. Lewis model structural change model Lewis assumed + Homogenous labor + Seamless transfer of labor from agricultures to industry. With transfer — productivity will rise and wage rate will rise Migration of worker from Ag to Industry Subsidise have both porisitve and negative impact on economy. Explain this statement and illustrate your answer with Indian experience. [20M] Grants and lump sums given by the government to households and firms subsides: There are broadly two type of subsidies 1. Direct subsidy [Support-income of consumers] — UJJAWAL Scheme, PM-KISAN 2. Indirect subsidy [Reduce price in market] — In case of fertiliser subsidy. Page 22NEXT IAS Benefit of subsidy in an economy : Growth and Development 1. Lowering price and controlling inflation + Keronsene subsidy (fuel) + Food subsidy (NFS Act 2013) 2. Preventing decline of industries or supporting industrialisation. Tax expenditure of govt Giving tax rebate to new industries Industries in backward region (subsidies are offered) ~15% tax to new manufacturing firms setting up after 2018. ~22% to corporate tax. 3. Support to food processing industries is a interest subvention method. + Support to MSME via credit guarantee + Matsya sampada scheme + $3 billion for MSME (under ECLGS) 4, Improved supply of goods Benfits: + Increased supply of goods + Reduced logitical cost to firms + Improved essentials supply + Water (JJM] + Electricity [Saubhagya scheme] + School [SSA, RTE] + Hospitals [Healthcare] + Food [NFSA, NDM] + Provision of commodities through storage facilities, logistic support, transportation e.g,, + Bharat Mala sagarmala etc Challenges + Forex-burden (Fired exchange) + Mkt distort + Negative of subsidies + Perverse subsidies — Land, water, air, deforestation + Ecological + Economical + Land [Fertiliser subsidy] + Encourages wastage — Wastage of food at FCI + Wastage of water — Flood irrigation 2. Creating deed weight loss by misallocation of resources Page 23NEXT IAS Economics : Growth and Development — aol. to society Te Giving subsidy + Govt. incurring a, higher cort while CS and PS are not adding upto that, + Commodity subsidy - like subsidy on fuel, food can create-dWL with excess demand and M-matching it; but cost being high. Eg., PDS (in) India. 1+ (AwL) due tosubsidy DD. 0,0) Q a @ & 3. Poor targetting of subsides leading to both * Allocational and distributional loss + Inclusion error [Including better off] + Exclusion error [Where beneficiary gets excluded] eg,, “Fertiliser subsidy; food subsidy” Depends upon knowledge about ground level, de-centralization of governance reduced corruption and better administration measure combined with cross-checks with social auditing are key to ensure subsidy achieves their stated objectives are key to ensure subsidy achieves their stated objectives Q.23 Do you think root of Harrod’s in-stability problem lies in assumption of (wage-price) rigidty. Give arguments in favour of your answer. (10M) Ans. Harrod’s instability is mainly because of wage price rigidity assumptions. Harrod’s model — actual growth rate should be equal to warranted growth rate. (<)=(G) —rss cg) m for stability *Harrod'’s in-stabil If (wage-price) is kept flexible, then say: (g > g.,) Excess demand in the market Page 24NEXT IAS Econo! : Growth and Development Capacity of investment to create dd is higher than capcity of investments create supply. > Higher dd due to higher multiplier impact and lesser supply because of lesser accelerator impact. Now with wage price flexibility with excess demand, => It will lead to price rise and price increase would mean. ‘Your demand start getting muted and will become a little less, supplier will get incentilized and their accelerator coefficient will rise and that would leed to higher supply. B Social cost of pollution — Ecological degradation It would help in better/conservation of resources, green accounting and critical for sustainability. “Discuss the role of renewable energy resources to maintain environmetnal sustainability cost India’s reference. Dominant role of fossil fuel based source of energy in environmetal degradation and global warming and how sustainable development require renewable energe. CO, emissions have been high. CFG have been high in emission. HFC (HCFC) are also high. Conventional source of energy results in polluting environment greatly” (Land, sea, air) life destruction” Convential sources of energy are challenged from non-conventional source of energy. In Indian context, there are several possible renewable sources like biogas, wind, solar, ocean thermal energy etc.” However, various policy landscape is mainly supporting for solar, wind and to some extent bio-gas. The role of renewable. 1. They are cheaper after installation because of cheaper raw material wind + solar 2. They are complimentary to each other (HYBR10)-73% WIND (Monsoon) + solar 3. “Off-grid connectivity - Localized assurance of electricity”. 4. Meeting sustainable development goals and long run ecological upgradation. = “High level of potential” e.g: Tropical country (748 GW - solar potential) 7500 km of court line (WIND) Continuous falling cost with continuous innovations incentivize to go on for solar energy. Page 27NEXT IAS Economics : Growth and Development Q.29 Ans. eg: PMKUSU - off grid electricity support. Challenge 1. Availability of land + High cost of land 2. High cost of installations 3. High maintenance cost (wind energy) 4. Low usage of capacityPlant load factor is low <40% 5. Steps taken to promote renewable energy in India e.g: PMKUSUM: Subsidy to farmers and support by central and state govt. Intent has been shown by Govt. of India through mega push on solar energy and wind energy, targeting 450 GW/500GW by 2030, (Non fossil fuel energy - 50% of total energy demand) Therefore, Better policy support: Admine support required And continuous hand holding help achieve (COP-21) - Pairs target and could help meet SDG targets SDG - 6: for clean energy. Examine international efforts to reduce global warming. Threat of global warming impact 07°C 1900 - 2012-1 Himalaya melts - 0.5% key expected would low 40% of its core by 200 Impact or climate change: Eg. — Rising global sea level — Loss of livelihoods. —> Melting glaciers and polar regions => More incidence of drought and floods. — Affecting rain pattern International efforts: Rome summit Stockholm (1988) Copenhagen summit Ria Earth summit (1992) (UNFCEE) Berlin summit Kyoto (1996) COP(21): Paris climate summit (60 words) To control the rise of global temperature to below 2°C the pre-industrial day’s temperature. MoP(28) Kigali: to control HFC, CFCs - 2015-16 9. COP(24) catowise - Rule to sefier global summit —> Global warning is presenting a real danger. Nog pene Green have gases are hampering a lot. Page 28nEXxT IAS Steps taken: 1. Reducing em 2. Carbon trading - Clean Development Mechanism (CDM) Emission trading, Joint liability. Therefore, state level efforts, people level efforts and society will have to make an effort to assure that global warming be reduced and green house gas emission can be controlled, so that we can see a more prosperous world, compared to the threat, of having a world, where sustain ability become a problem. : Growth and Development n COP - 21 International climate agreement legally binding to keep global warming at (15°C to 2.0°C) in accordance with IPCC report. Q.30 Examine the process of reaching the riacardian steady states. How can the tendency toward steady state be countered? Ans. Ricardian steady state: A/Q to Ricardo, as economic development proceed, share of profit (part of which is used for re-investment keeps falling) and share of wages, which is only relevant for consumption keeps rising, till all income generated with economy reaching marginal quality of land goes to worker. This is called Ricardian steady state. After that, economic growth is not possible. There is no change in consumption and no change in production activity, technology becomes constant as nothing more left to re-invest.” [Ricardo-classical uw omits] Savings done by capitalists out of can be re-invested. workers were meant for consumptions. (Output) er (wage line) (Total product curve)* (Rent and Profit) 2 Tabor” aber)” For Ricards, once you reach point E, Where production function was inter setting with ‘wage lines. {E — Ricardan steady state.] (i Initial capitalist tried flattening the wage line. Method to delay the reach to steady state. (ii) Path breaking technical revolution of (1820 to 1920), (1870 to 1920), (1870 to 1920) (ii) Introducing government led-investment. Page 29NEXT IAS Economics : Growth and Development Government with Budget surplus, if could invest back into the economy, then again production function keep shifting upward. - Delaying the ricardians steady state. However, empirical evidence to ricardane theory is modern world happens to be less useful due to continuous growth in technology and improvement in human skills. Q.31 With Doha round (2001) with multilateral trade talk stalled regional trade agreements have emerged as an alternative approach to increase trade and spur economic growth and lower unemployment rate in participating countries explains. Ans. WTO (2001-2013) 2013 - Bali Agreement Regional trade agreements: RCEP creation (2012), Trans-pacific Partnership conclusion. Trans-Atlantic trade partnership—> To exclude India + China Transpacific partnership > BRICS (New development Bank) AUB RCEP-2012-Negotiations Multilateral under- standing at forum like WTO at premium forum and countries have hone continuously. with the statement with no new development. Then big countries have tried their own solution TPP (America) CEP - aninstitution (comprehensive economic partnership) 30% of global GDP: 50% of population Regional agreements because, countries wanted to gain and they do not want to loose out on their business, opportunities. * Benefit of regional trade agreement (i) Geographical proximity Supported by gravity model of trade GDP. GDP, (ii) Similar trade and preference, helps. (ii) Speedy established free-trade agreements helps boosting exports. (iv) Lesser number of courtiers. Find simple to reach conclusions. (v) Complementarity in production capacity. Global (Value-chain) However, for smaller trade economics, India/ other its important that multilateral agreements are kept alive - because bargaining capacity will be higher compared in bigger economics compared to bilateral/regional agreement.” Page 30NEXT IAS Economics : Growth and Development Q.32 Ans. Q.33 Ans. Balanced growth strategy of development patterns of investment has to be misinconforming not with find derived demands but with final dd as well. Argue whether this statement is about avoiding bottleneck in sustain sectors and excess capacity in others and promoting import - Substitution. (20M) BGS (Balanced growth strategy) BGS was not protectionist but based on discovering right linkage in the economy for removing demand and supply side bottlenecks to break vicious cycle of poverty. Dd side method of breaking viscious cycle of poverty, ss side method of breaking vicious cycle of poverty. Investments made under Balanced growth strategy should make use of derived demand - (dd for inputs) based on dd for output] in conjunction with final demand that there should be investments done in such a manner that market is able to firtilize co- ordination b/w derived dd and final in the market. Eg: Investments Balance growth talked about internal balance and external balance Balanced grwoth strategy was not for import substitution, only in the case of finding internal and external balance ie if commodity could be produced with more efficiency and lesser cost, in that case, there would be no excess capacity in commodities in production process. Our develoment strategy has been proposed in terms of faste, more inclusive and sustainable growth. Does the three components sit together will? Agree for your answer... Grow faster growth inclusiveness sustainability (environmentally) Adres SS “8 Sustainable Faster growth - GDP growth at a higher level Inclusiveness - deprived are included in growth process. Sustainbility > Degradation is minimized and ecological sustainbility is maintained. “All the three are not against each other”. Rathter, they support each other in achieving objectives. ® Faster growth will result —> creation of more resources. Page 31NEXT IAS Economics : Growth and Development Q.34 More resource - with technical and institutional support - environmental degradation can be checked better. Environmental protection laws, clear technology set up + better awarenes: among people.” Faster growth will create enough resources for re-distribution among deprived section to promote affirmative action. Eg. Investing more on healthcare, education sanitation to help promote their participation in growth and development enablement. Similarly inclusive growth will simply —> more and more people are able to improve their standard of living, uplift themselves on income ladder —» more developed. “A ° cd-© Will give factor workforce by giving skilled workforce, healthy workforce. Will also ensure environmental sustainability by + awareness * popularized - renewable energy + practice (Life) - Lifestyle for environment. Growth with environmental sustainbility will lead to sustainable use of natural resources and prevent degradation of natural capital e.g: soil protection —y curtail - soil erosion Better nutrition Growth «+ Sustainability \e/ (inclusive) Inclusive growth, faster growth and sustainable are supportive, if country has right social institutions, technical support and administration and policy support + (collaboration) is the key” Eg, Japan, Assam, Nordic countries (FG: LG : SG) Explain Levis model of structural change from agriculture to industrial economy. State three major criticism of Levis model. (a) Assumptions. (b) Explanation of Levis model Agriculture Industry i Page 32NEXT IAS Graph (©) Conclusion : Growth and Development It was improved upon (Re-Fe) model-3 paneled figure small explanations + Perfect importation: of just making was absent * and Industrial mkt are countinuous Complete the graphs from notes- given by SIR + Agriculture mkt are discontinous + Sen's criticism of levis {If all workers shift to Industry from Agriculture Food security will be compromised Famine & hunger possibility was ignored by levis model By EN A. Workers are not homogeneous. Also, Critism: B. No seamless transfer of workers. C. Food security D. Capital intensive - Industrialization Q.35. (H-D) model Knif edge equilibrium and Harrod’s instability. Ans. (Harrod-domar model) (ay) vy Accelerator coefficient { C, Capital output ratio: C= & Page 33NEXT IAS Economics : Growth and Development (8).(8 ler te) Growth rate of output in actual world should be equal to| 2) and will be stable, only if Where cr via accelerator coefficient and c is the (Capital (0/p) ratio) C:: Capacity of investment to creats more demand and cr is the capacity of investment to create more supply. H-D model was creating both more (dd-is) side side possibility (i) if 8 Bw (4.1) / le cl Marginal capacity to create supply Marginal capacity of capital to create demand is higher. ‘As you start investing more, g will rise at faster rate than g,, Thus, equilibrium will rather worsen than improving,” 2. IfE Reason is lack of complete information in the market. Page 34