MODULE 1

What are Tariffs? Explain the types of Tariffs.

Tariff is the duties or taxes imposed on internationally traded products when they
pass the national borders. Thus, the tariff imposed on the imported commodity is
known as import tariff and similarly the tariff imposed on exported commodity is
termed as export tariff. Import tariffs are more important than the export tariff
and their effects are symmetrical to those for the imports.
Tariffs imposed by the government can be for protection or revenue purposes.
Revenue tariff – It is an import tax imposed on a good that is not domestically
produced. These tariffs are most common in developing countries.
Protective tariff – The purpose of protective tariff is to protect a domestic
industry from foreign competition. Tariffs in developed counties are primarily
designed to be protective tariffs.

Types of Tariffs

Specific tariff
This is one of the simplest forms of tariff. A specific tariff is shown in terms of a
given amount of money per physical unit of the imported product. For example, a
US importer of a German Computer may be required to pay a duty to the US
government of $50 per computer, regardless of the computer’s price. A specific
tariff is quite easy for a government to administer.
Its main disadvantage is that the extent of protection it affords home producers
varies inversely with changes in import prices. For example, a specific tariff of
$500 on computers will discourage imports priced at $30000 per computer to a
greater degree than those priced at $40000. During times of rising import prices,
a given specific tariff loses some of its protective effect. So, the domestic firms are
encouraged to produce less costly goods for which the degree of protection
against imports is higher.

Ad valorem tariff
It is measured as a % of the value of the imported good say, 10 %. This constant
percentage tariff evades the regressive nature of a specific tariff. This tariff
maintains a constant degree of protection for domestic producers during the
period of variation in prices. For example, if the tariff rate is 10% ad valorem and
the imported product price is $ 5000, then the duty will be $ 500. If the product
price increases, then the ad valorem tariff will also increase. This tariff is like
proportional tax where the real proportional tax burden doesn’t change as the tax
base changes.

Compound tariff
It is comprised of both a specific tariff & an ad valorem tariff. For example, $10
per imported product plus 5% of the value of the imported good such compound
tariffs are common on agricultural products whose prices tend to fluctuate.

What is Free Trade? Give arguments for and against it.

A trade policy of placing no restrictions on the movement of goods between
countries is known as the policy of “Free trade”. So, trade is free from all the tariff
and non-tariff barriers. Such a policy permits the flow of international commerce
in its natural environment and is free from all artificial impediments. Free trade
enables nations to focus on their core competitive advantages, thereby
maximizing economics output and fostering income growth for their citizens.

The following are some of the arguments in favor of free trade:

Promotes efficiency:
The strongest argument in favor of free trade is that it promotes international
specialization and division of labour. Each country specializes in the production of
those goods and services in which it has a comparative cost advantage over its
trading partners. This leads to optimum utilization of resources and lowers cost of
production. Countries do not need to produce those goods and services in which
they have cost disadvantage because they can acquire them from other countries.
Countries under free trade regime have to manage their resources better in order
to effectively compete with the rest of the world.

Promotes economic growth:

Because of free trade, global output increases. Countries with cost advantage can
produce goods on larger scale for the global market. This leads to economies of
scale, expansion of production base, higher level of employment, higher
aggregate demand and promote economic growth. China's remarkable economic
growth can largely be attributed to its massive export sector.

Encourages competitiveness:
Free trade promotes competition as there are few or no barriers to trade,
domestic industries are open to competition from global producers. This
incentivizes them to become more efficient, use better technology in order to
lower costs and be able to successfully compete with the best in the world. Free
trade encourages technology sharing among countries and promotes innovations.
Free trade also prevents domestic monopolies and prevents exploitation of
consumers.

Reduce prices:
Free trade allows imports to come in without barriers. Imports can meet
domestic shortages and lower prices, Imports that are not subject to tariffs can be
sold at lower prices and this can prove to be competitive to domestic producers
who will be incentivized to sell their products at lower prices to compete with
imported goods. Free trade also helps to prevent the formation of domestic
monopolies, and this helps to keep prices low. Lower prices benefit consumers
and increase welfare.

Promotes economic welfare:

Free trade policy helps to optimize world trade and to maximize world
production. This helps generate higher levels of employment, income and
consumption. The improvement in the standards of living of the people due to
larger production increases economic welfare. Larger production means a larger
exportable surplus and more exports. This results in a greater supply of goods and
services in the international market.

Greater international cooperation:

Free trade policy makes it necessary for countries to be dependent on each other.
Since each country tends to specialize in the production of those goods in which
they have comparative advantage, they have to rely on their trading partners for
those goods they do not produce This means that trading nations have to
cooperate with each other not only in trade but also politically. Such cooperation I
beneficial to global peace and security.

Less government intervention in trade:

If a country follows free trade policy, it will have less government intervention in
trade. Generally, a restrictive trade policy lead to corruption? at the bureaucratic
level.

The following are some of the arguments against free trade policy:

Disadvantageous for less developed countries:

Free trade is generally advantageous to developed countries as they have the
comparative advantage in the production of many goods and services that use
advanced technology and have lower real cost of production. Smaller producers in
less developed countries who do not have access to advanced technology cannot
effectively compete with foreign firms and may find it difficult to survive.

Destruction of domestic industries:

Free trade can lead to dumping and destroy domestic industries. Severe
competition may develop between domestic and foreign producers. Domestic
industries often lower their prices to compete with low priced foreign products.
This affects their profits, and they may get wiped out. In such situations they seek
protection against foreign competition through tariffs, quotas or subsidies.

Unbalanced economic development:

Free trade promotes international specialization. Countries tend to produce only
a few products in which they have comparative advantage and neglect the
production of other products that they import from other countries. Thus, some
sectors of the economy perpetually remain neglected, leading to unbalanced
economic development.

Dangers of over dependence:

Free trade makes countries over dependent on each other. Therefore, in case of
any problem in any country, its trading partners will also get affected. For
example, if a country is dependent on another country for supply of some
essential agricultural raw material, and the exporting country faces a severe
drought, then the importing country will have to face shortage of the raw
material and the consequent shortage of the finished product. Over dependence
Can also lead to political dominance of more powerful countries over less
powerful trading partners.

Dumping of foreign goods:

Without any tariff barriers, there is the danger of foreign sellers dumping low
quality goods in a country. Often harmful, poor quality and low technology
products are dumped by multinational companies in less developed countries.
This endangers local industries as well as adversely affects the interest of
consumers.

What is Protectionism? Give arguments for and against it

Protectionism is the policy of protecting domestic industries against foreign

competition by using tariffs, import quotas, subsidies and many other measures
to restrict imports or make them more expensive. Though there is general
agreement by most economists that free trade, with minimum restrictions,
benefits the world economy, many countries choose to use protectionist policies.
Import tariffs are the most used protectionist measures. They raise the price of
imports, making them more expensive than domestic products. Import quotas are
an example of non-tariff barrier to trade.
They set an absolute limit on the amount of certain goods that can be imported
into a country and are more effective than tariffs because they have a direct
impact on the amount imported. Subsidies given to domestic producers lower
their cost of production, giving them a competitive edge over the more expensive
imports.

The following are some of the arguments in favour of the policy of

protectionism:

Infant industry argument:

During their early stages of growth, new industries need protection from
competition from foreign firms. The new industries are not mature enough to
face competition from imports by well-established foreign firms and may not be
able to survive. This is more significant in the case of nations that are launching
on industrialization. New industries initially have high costs of production as they
may not have economies of scale. Therefore, they are not likely to be able to
compete with low-cost imports. When tariffs are imposed on imports, they
become relatively more expensive than domestically produced goods. This helps
infant industries compete with imports. However, it is important that such
protection should be temporary and should be withdrawn once an industry
becomes mature enough to face competition. If protection continues, the
industries will become inefficient and not bring in innovations.
Infant industry argument is not against free trade as it argues for only temporary
protection of new industries.

Diversification argument:
Some economists argue in favor of protectionism as one of the means to increase
product diversification of a country. When countries promote free trade, they
tend to specialize in the production of a few goods that they produce most
efficiently and import the rest. This leads to unbalanced economic growth. When
countries follow protectionism, they restrict imports of several goods and services
and are therefore forced to produce them domestically. This results in a
diversified production base and more balanced economic growth. Also, if
countries over specialize, they become over dependent on imports. In case there
are problems with the supply of imports, the countries will face shortages as they
do not have a diversified domestic production base. Therefore, protectionism is a
better policy to follow in order to achieve a diversified and well-balanced
production base.

Employment argument:
Protectionist policies restrict imports, promote domestic industries and therefore
generate employment in domestic industries. Imposition of tariffs restricts certain
imports. This results in money staying within the economy. This money will be
spent on purchasing domestically produced goods. As these home industries
expand, employment in them also increases. As employment increases in some
sectors, it will have a multiplier effect and expand demand, production and
employment in other sectors too, bringing about overall growth. Tariffs imposed
on imports might result in foreign investments coming in to produce the goods
within the country rather than importing them. Such inflow a foreign investment
will generate employment.

Balance of payments argument:

imposition of tariffs and quotas restrict imports and save foreign exchange.
Therefore, they help in improving a country's balance of payments position.
Tariffs Can else be used to make a nation's terms of trade more favorable a
country exports commodities with relatively elastic demand, then imposition of
tariffs can improve its bey of trade more effectively. Tariffs will make imports
expensive and if demand is elastic, then the demand for imported goods will fall
significantly. This will help save fore, exchange and correct balance of payments
deficit.

Pauper labour argument:

In industrially advanced countries the cost of labour is higher than that in less
industrially advanced countries. Generally, in less developed highly populated
countries labour costs are low. These countries have; comparative advantage in
the production of labour intensive commodities over those countries that have
higher labour cos Therefore, it is argued that if industrially advanced economies
allow free imports from low labour cost economies, their domestic labour will
face competition from cheap foreign labour. There will be job losses and labour
will lose sources of livelihood. This is termed as a pauper labour argument. Br
imposing tariffs and quotas on imports from countries with low labour cost, the
policy makers try to prevent high wag domestic labour from losing their
livelihoods and deterioration of standard of living. This argument is usually used
by politicians and labour organizations for arguing for protection of domestic
labour to meet their individual gains.

Anti-dumping argument:
Dumping is the act of selling goods cheap in the foreign market in order to gain
market access and kill competition. Often countries that have cost advantage
dump goods in high-cost markets. This harms the domestic producers and labour.
In order to protect domestic industries and workers, tariffs are imposed on
imports.

Source of government revenue:

By adopting a protections policy through tariffs, the government not only fulfills
all to above mentioned objectives but also cans revenue. If nation imports are
relatively inelastic, then even if tariffs are imposed the commodities will have to
be imported because they may I necessities or scarce. This will ensure high
revenue collected by the government.

Strategic arguments:
Certain industries are of strategic importance to a nation either in terms of
economic and social development or in terms of defense. For example, minerals,
metals, oil, agriculture. Those who believe in protectionist policies argue that such
industries are extremely important for a nation and need to be protected from
foreign competition through tariffs and non-tariff barriers.

Self sufficiency:
One of the strong arguments in favor of protectionism that was popular soon
after the Second World War was that countries need to be self-sufficient and not
depend on other countries for their needs. Protectionist policies encourage
import substitution and force countries to produce most of their needs and
become self-sufficient.
Following are some of the arguments against the policy of
protectionism:

Inefficiency of resources allocation:

The imposition of tariffs and quotas results in loss of allocative efficiency.
Producers who are protected from foreign competition do not have enough
incentive to reduce costs and innovate. In the long run, they become less
competitive and fall behind the rest of the world.

Protection to undeserving industries:

Though infant industry argument seems theoretically logical, in reality the policy
has been used to protect inefficient industries. First of all, it is difficult to decide
which new industries need protection from foreign competition. Once protection
is given, it is difficult to withdraw it even when an industry matures because such
an industry continues to seek protection. Protection also creates vested interest
and political corruption. Protected industries tend to become inefficient as they
do not face serious competition from the best in the world. They become used to
government assistance and do not have the incentive to innovate.

Unemployment in the export sector:

The employment argument for protection seems a strong one but in practice it
may not be so. Exports are used to earn foreign exchange that Pay for imports.
When imports are restricted through tariffs and quotas, they are expected to
increase demand for domestic goods and services and generate employment
within the country. However, when imports are curtailed, exports will be reduced
as other nations will put similar barriers to expo from the protectionist nation. As
the export sector shrinks, additional employment created in this sector will also
shrink Thus, the employment created by restricting imports will neutralized by
loss of employment in the export sector.

Diversification not always possible:

One of the arguments favour of protectionism is that it encourages a country;
industries to diversify. However, not all countries possess the natural, human and
financial capital to bring about large-scale diversification of their industries and
produce almost everything that their people need. Even if they do produce those
goods in which they do not have comparative advantage, they will do so at higher
cost and inefficiently. This raises the price of the goods and people will end up
paying more for them. b case a country wants to diversify, and it doesn't possess
the necessary resources, it will have to import them. Thus, no country can achieve
a wide range of diversification by using protectionist policies and by remaining
isolated.

Labour is is not the only factor of production:

It is argued that countries with high labour cost import goods from those with low
labour cost, the labour in the high-cost country will last their high income and
standard of living. But labour is not the only factor of production. When a country
adopts capital intensive techniques of production, it will reduce its average cost,
despite high labour cost. On the other hand, countries with low labour costs tend
to use labor-intensive techniques which usually have low productivity and high
real cost. Thus, industrially advanced countries pay higher wages not because
labour is scarce but because productivity of labour is high. Low wages do not
necessarily mean low cost as the real cost of labour will be high due to low
productivity.

Disadvantage to domestic consumers:

Imposition of tariffs makes imports more expensive. If the imports have low pris
elasticity of demand, that is, even if the price rises, they will still be consumed
because they are necessities of the are not available in the country. As a result,
consumers end up purchasing these goods at a high price or have to restrict their
consumption in case of very high prices. In both cases, consumers' welfare will be
reduced due to the protectionist policy followed by the government.

Retaliation by other countries:

A country following protectionist policy in trade will face similar policies from
other countries where it exports its goods and services. Thus, ultimately
protectionist policy will harm a country's export sector and will reduce its capacity
to earn foreign exchange.
The current trend in commercial trade policies being followed by major trading
nations indicates that after decades of pursuing liberal or free trade policies, they
are now increasingly adopting protectionist trade policies. The trade war started
by the present government of the United States of America through imposition of
tariff barriers on imports from other countries, particularly from China, indicates a
trend towards protectionism.

Write a short note on Dumping.

Trade barriers may also result from dumping. Dumping is recognized as a form of
international price discrimination. It happens when foreign buyers are charged
reduced prices as compared to domestic buyers for the same product after
considering the transportation cost and tariff duties.

Forms of Dumping

Sporadic Dumping
Sporadic dumping is the occasional sale of a commodity at below cost or at a
lower price abroad than domestically in order to discharge an unanticipated and
temporary surplus of the commodity without having to reduce the domestic
prices.

Predatory Dumping
Predatory Dumping is the temporary sale of a commodity at below cost or at a
lower price abroad to knock out foreign producers out of the market, post which
prices are increased to reap the fruits of the newly acquired monopoly abroad.

Persistent Dumping
Persistent Dumping is a continuous tendency of a domestic monopolist to
maximize total profits by selling the commodity at a higher price in the domestic
market than the international market.

Causes of Dumping
Dumping usually occurs due to the following reasons
Producers in one country are trying to be in competition with the producers in
other countries.
Producers are trying to clear off excess stuff which they are not able to sell in their
own country.
Producers can make profit by dividing sales into domestic and foreign markets
and then charging each market whatever price the buyers are willing to pay.

What are Cartels? Explain with real life examples.

An international cartel is an organization of suppliers of a commodity located in

different nations (or a group of governments) that agrees to restrict output and
exports of the commodity with the aim of maximizing or increasing the total
profits of the organization.
Although domestic cartels are illegal in the United States and restricted in Europe,
the power of international cartels cannot easily be countered because they do not
fall under the jurisdiction of any one nation.
The most notorious of present-day international cartels is OPEC (Organization of
Petroleum Exporting Countries), which, by restricting production and exports,
succeeded in quadrupling the price of crude oil between 1973 and 1974.
Another example is the International Air Transport Association, a cartel of major
international airlines that met annually until 2007 to set international air fares
and policies.
An international cartel is more likely to be successful if there are only a few
international suppliers of an essential commodity for which there are no close
substitutes. OPEC fulfilled these requirements very well during the 1970s.
When there are many international suppliers, however, it is more difficult to
organize them into an effective cartel.
Similarly, when good substitutes for the commodity are available, the attempt by
an international cartel to restrict output and exports toincrease prices and profits
will only lead buyers to shift to substitute commodities.
This explains the failure of, or inability to set up, international cartels in minerals
other than petroleum and tin, and agricultural products other than sugar, coffee,
cocoa, and rubber.
Since the power of a cartel lies in its ability to restrict output and exports, there is
an incentive for any one supplier to remain outside the cartel or to “cheat” on it
by unrestricted
Since the power of a cartel lies in its ability to restrict output and exports, there is
an incentive for any one supplier to remain outside the cartel or to “cheat” on it
by unrestricted sales at slightly below the cartel price.
This became painfully evident to OPEC during the 1980s when high petroleum
prices greatly stimulated petroleum exploration and production by nonmembers
(such as the United Kingdom, Norway, and Mexico).
The resulting increase in supply, together with conservation measures that
reduced the increase in the demand for petroleum products, led to sharply lower
petroleum prices in the 1980s and most of the 1990s as compared to the 1970s.
It also showed that, as predicted by economic theory, cartels are inherently
unstable and often collapse or fail.
If successful, however, a cartel could behave exactly as a monopolist (a
centralized cartel) in maximizing its total profits

Import Quotas v/s Tariff Quotas

Import quotas and tariffs have the same objectives, that is to reduce the level of
imports to protect the domestic industries, correct balance of payment deficit,
expand domestic employment and economic activities. Still, they are
distinguished based on following points: -

The revenue effects

The tariff brings revenue to the government whereas quotas do not. When quota
instead of tariff is used to restrict imports, the sum of money that would have
appeared as government revenue with a tariff is collected by the one who
receives an import license. License holders are able to buy imports and resell
them at a higher price in the domestic market.

Corruption and bribery

Distribution of import licenses may give rise to corruption and bribery on the part
of government officials. Import tariffs do not create such evils as government
corruption, political favoritism etc.

Monopoly profit
Quotas create a monopoly profit for those who have import licenses. This means
that the consumer surplus is converted into monopoly profits. Thus, quotas are
likely to lead to a greater loss of consumer welfare. Whereas if a tariff is imposed
domestic price will be equal to import price plus tariff.

Nature of protectionism
In its protective effect, trade shelters the domestic market from competition by
foreign firms, while import quota offers protection to old inefficient firms as
import licenses are generally offered to them.

Price Differential
Tariffs and Quota also differ in price differentials between domestic price and the
world price, in the case of a tariff, the domestic price differs from the world price
by the amount of a tariff duty. But under quota domestic price would exceed the
tariffs, because when the quantity imported is fixed, instability in demand and
supply conditions in the domestic and world markets have to be adjusted not
through changing import quantities but through altered prices

Stability
An import quota is unstable because it can be changed at the discretion of the
bureaucracy, while a tariff is stable because any change in tariff policy requires
legislative approval.

Preventing Recession
Quotas may also be used as a device to prevent the international transmission of
severe recession. Recession generally causes a fall in prices, and this may
encourage exports. A country may make use of quotas to safeguard their interest
against such recession

MODULE 4

What are Advantages and disadvantages of free

movement of labour?

Advantages of free movement of labour

Can help deal with labour shortages

Countries may experience labour shortages, especially in certain skilled positions
or undesirable jobs many domestic workers don’t want to do. Immigrants can fill
these vacancies. The UK has relied on many immigrants to work in the NHS, filling
skilled jobs, such as nurses and doctors. Across the UK, migrants account for
approx. 10% of doctors.)

Can diminish the rise in unemployment.

If there is free movement of labour, then workers from overseas can take
temporary jobs when an economy is booming and then return home, when the
boom is over. This is particularly beneficial for cyclical job markets, such as
construction. For example, during the Irish property boom (2000-2007),
construction workers migrated to Ireland. However, the property collapse and
subsequent recession saw many immigrants from eastern Europe return to their
native country. “The number of Personal Public Service (PPS) Numbers issued to
non-Irish nationals went down by nearly 50% between 2008 and 2009, and over
the past two years the number of employment permits issued has dropped by
66%.” (Without this free movement of labour, the rise in unemployment would
have been sharper in Ireland.

Can prevent wage inflation.

If an economy experiences labour shortages, it will put strong upward pressure on
wages; higher wages can easily lead to inflationary pressures. Free movement of
labour means rising wages will attract more labour into a country and this will
prevent excess wage inflation.

Labour migration creates additional demand.

Many focus on the increase in labour supply, pushing down wages, but migration
also leads to additional demand. UK economic growth has been boosted by the
rise in population (partly caused by net migration).
More flexible labour markets.
In an economy, there may appear shortages in certain professions such as
teaching and nursing. These vacancies can take a long time to fill because of the
time taken to undertake training. If there is free movement of labour, qualified
workers will be attracted to fill these vacancies, making the economy more
flexible and overcome shortages quicker.

Fill undesirable jobs.

In developed countries, there are often jobs which are difficult to fill because they
are deemed unsavory. This may involve cleaning, bar work or dangerous jobs.
Immigrants may be willing to fill these jobs because of the wage premium from
working in that country.

Opportunities for workers to work elsewhere.

In addition to migration into the country. Free movement of labour enables
people to work (and retire) elsewhere. During EU membership, over two million
British workers moved abroad – taken advantage of free movement of people.

Help to deal with demographic challenges.

Many countries in Western Europe are experiencing a demographic time-bomb –
with a rapidly ageing population. This places a strain on public finances because
people over 65 are net recipients of state spending (pensions + healthcare, less
income tax contributions). Free movement of labour can see young immigrants
come to areas of declining working population and make a net contribution to
public finances.)

Helps to reduce regional inequalities.

Free movement of labour should help to resolve regional disparities between the
economic unions. Free movement of labour has enabled workers in Eastern
Europe to save money and increase their living standards. Some of this income
will be saved and sent home to increase living standards in Eastern Europe. After
joining the EU, countries like Portugal, Spain and Ireland did get closer to average
EU GDP per capita levels.

Disadvantages and problems of free movement of labour

Large net flows of people cause infrastructure problems.

There is concern that a rapid rise in population places strain on public services –
health, education and housing. In theory, a rising working population should
directly increase GDP, leading to more tax revenues which can be used to spend
on improving public services. However, in the UK, the net migration has occurred
during a period of restrained public spending. Real GDP per capita growth has
been low, and the government has been committed to cutting aspects of public
spending. Therefore, the rise in population has put pressure on public services,
with people feeling that public services, like the NHS have been under pressure
because supply hasn’t met the growing demand from rising immigrant
population.

Large net flows exacerbated housing crisis.

The UK has a housing crisis – demand is growing faster than the ability (or
willingness) to build new houses, the result is house prices and rents have been
rising faster than prices and wages, increasing living costs. The large net flows of
migrants have not caused this housing crisis, but the additional flows of people
have exacerbated the gap between supply and demand. In theory, more houses
could be built to deal with rising demand and population growth. But this is
complicated by the fact UK has limited land it is willing to give up building, e.g.,
protests building new houses on greenbelt land.
Congestion
Even if public services and housing increased to meet supply, you could argue a
rising population leads to a decline in quality of life because it increases
population density and congestion. For example, in the UK, there is limited land to
build new roads (without going through the countryside). Therefore, a rapid rise
in population due to the free movement of labour will contribute to more traffic
congestion, which has both economic and social costs.

Downward pressure on wages.

The argument is that, if you allow large net flows of workers from low wage
countries, these workers will be willing to bid down wages and the increase in the
supply of labour will lead to a fall in wages of native-born workers. This is
particularly the case for unskilled workers who are closer substitutes for
immigrant labour.

Brain-Drain” Developing countries may lose their best skilled labour.

Workers may be attracted to developed countries with higher wages, making it
difficult for developing countries to retain skilled staff. This could harm economic
development in developing countries. For example, an estimated two million
Poles have emigrated to Western Europe (primarily UK, Germany, Ireland) whilst
retaining resident status. This means Poland has lost a significant part of its most
educated and dynamic workforce. This ‘brain- drain‘ leads to various costs

Labour cannot be treated as a factor of production.

In a boom period, immigrants are often welcomed (or at least tolerated) but in a
downturn protectionist sentiment often turns against foreign workers and foreign
workers may be first to be discarded. But it is not so easy to ‘return home’ There
are many geographical immobility
Non-economic issues.
This is mainly concerned with economic issues, but undeniably important is the
perceptions of people who feel overwhelmed by a large influx of people with
different cultures changing the nature of the area. This resentment at rapid
immigration is not a new phenomenon. The UK experienced worse after the
1960s immigration from the Commonwealth. Migrants tend to become absorbed
into communities over time. However, it is the rapid influx of people into an area
that people can find unsettling – especially if there are existing social problems,
such as poor housing, high unemployment and crime.

WHAT IS FDI. EXPLAIN THE TYPES OF FDI.

The term ‘foreign capital’ is a comprehensive term and includes any inflow of
capital in home country from abroad. It may be in the form of foreign aid or loans
and grants from the host country or an institution at the government level as well
as foreign investment and commercial borrowings at the enterprise level or both.
Foreign capital may flow in ally country with technological collaboration as well.
In countries like China, Thailand, Malaysia and Singapore contribution of foreign
capital has been extremely encouraging. But in Latin America and African
Countries foreign capital flow has not been satisfactory. Foreign capital is useful
for both developed and developing countries.
Advanced countries try actively to invest capital in developing countries. In India,
foreign capital has been given a significant role, although it has been changing
overtime. In the early phases of planning, foreign capital has been used as a
means to supplement domestic investment. Later on, there were technological
collaborations between foreign and Indian entrepreneurs. But since July 1991,
there has been a tremendous change in government’s policy (commonly called
liberalization policy) about foreign investments.

1. Foreign Aid:
 It consists of loans and grants. Loans may be taken from individual countries or
from institutional agencies like World Bank, IMF and International Financial
Corporation. Usually loans are taken for medium- and long-term capital needs of
a country. Loans impose a heavy burden on the borrower country because they
are to be repaid, along with interest, called surviving of loans. Loans may be tied
because of restrictions. Such restrictions may be in the form of end use or in the
form of source. Grants are given by public or private charitable organisations.
They are given for relief purposes and immediate use grants may be time bound
and can be used only for specific purpose. Loans involve repayment obligations,
whereas grants are non- refunded. It is important to see that grants are properly
utilized for the specified purpose. Any foreign capital in the form of aid should be
pledged on the basis of its purpose, mode of repayment, cost to the borrower and
political considerations. For it is not only uncertain, usually not extended for
public sector but for consumer goods industries and do not create means for its
repayment. It is therefore better to create ‘trade’ rather than ‘aid’ from a foreign
country.

2. Private Foreign Investment:

It is of two types – (i) Foreign Direct Investment (ii) Foreign Portfolio Investment.
Foreign investment and collaboration with a forcing nation are closely
interrelated, but they are different from each other. Capital investment is
participation of a foreign country in capital of recipient country’s enterprises.
Collaboration, on the other hand means providing technical and managerial
knowhow, licensing franchise, trade-marks and patents by a host country to home
country.

WHAT IS FDI?
Foreign direct investment (FDI) is an ownership stake in a foreign company or
project made by an investor, company, or government from another country.
Generally, the term is used to describe a business decision to acquire a substantial
stake in a foreign business or to buy it outright to expand operations to a new
region. The term is usually not used to describe a stock investment in a foreign
company alone. FDI is a key element in international economic integration
because it creates stable and long-lasting links between economies.

Types of FDI

1. Greenfield Investments
Greenfield Investments are the primary target of a host nation’s promotional
efforts.

Merits
•Create new production capacity and jobs.
• Transfer technology
• Additional capital investments.
Demerits
• Loss of market share of domestic firms.
• Profits flow back entirely to the multinational’s home country.

2. Mergers and Acquisitions

Cross-border acquisitions occur when the control of assets an operation is
transferred from a local to a foreign company, with that local company becoming
an affiliate of the foreign company. This represents 77% flows in developed
nations and 33% of all flows in developing nations. For example, TATA group and
Starbucks

3. Horizontal FDI
 Horizontal FDI occurs when a company investment is made for conducting the
similar business operations in another country.
For example, the Spain-based company Zara may invest in or purchase the Indian
company Fab India, which also produces similar products as Zara does. Since both
the companies belong to the same industry of merchandise and apparel, the FDI
is classified as horizontal FDI.

4. Vertical FDI Vertical integration is the expansion of a firm into a stage of the
production process other than that of the original business.
Backward- investment into industry that provides inputs into a firm's domestic
production.
For instance, the Swiss Coffee producer Nescafe may invest in coffee plantations
in countries such as Brazil, Columbia, Vietnam, etc. Since the investing firm
purchases, a supplier in the supply chain, this type of FDI is known as backward
vertical integration
Forward- investment in industry that utilizes the outputs from a firm's domestic
production. forward vertical integration is said to occur when a company invests
in another foreign company which is ranked higher in the supply chain, for
instance, a coffee company in India may wish to invest in a French grocery brand.

WHAT IS IMF?

The IMF is an international financial institution, headquartered in Washington,

D.C., consisting of 190 countries working to foster global monetary cooperation,
secure financial stability, facilitate international trade, promote high employment
and sustainable economic growth, and reduce poverty around the world while
periodically depending on the World Bank for its resources.
Formed in July 1944, at the Bretton Woods Conference primarily by the ideas of
Harry Dexter White and John Maynard Keynes, it came into formal existence in
1945 with 29 member countries and the goal of reconstructing the international
monetary system. It now plays a central role in the management of balance of
payments difficulties and international financial crises.
Countries contribute funds to a pool through a quota system from which
countries experiencing balance of payments problems can borrow money. As of
2016, the fund had SDR 477 billion (about US$667 billion).
Through the fund and other activities such as the gathering of statistics and
analysis, surveillance of its members' economies, and the demand for policies, the
IMF works to improve the economies of its member countries.
The current Managing Director (MD) and Chairwoman of the IMF is Bulgarian
economist Kristalina Georgieva, who has held the post since October 1, 2019.
Gita Gopinath was appointed as Chief Economist of IMF from 1 October 2018.

LIQUIDTY OF IMF

The IMF tries to keep its resources in liquid form. However, the Fund has
resources in gold also. IN 1969, through an amendment IMF introduced Special
Drawing Rights (SDR).
The Special Drawing Rights is an international reserve asset, formed by the IMF in
1969. This was formed to further enhance the official reserve of the member
countries. The SDR's value is based on a basket of five main international
currencies, and it can be exchanged for freely usable Currencies.
To begin with, SDR’s value was kept equal to 0.888671 grams of fine gold- which
was equal to 1 US dollar at that point of time. Today it consists of the pound
sterling, euro, Japanese yen, pound sterling, & U.S. dollar. The calculation of its
value is done by taking the sum of specific amounts of the four basket currencies
valued in U.S. dollars, based on exchange rates announced at noon every day in
the London market.
Under its Articles of Agreement, the IMF may allocate SDRs to member countries
in proportion to their IMF quotas.

QUOTAS OF IMF

Mostly the amount for IMF loans is pooled in by the member countries through
the payment of quotas. Each member of the IMF is provided with a quota amount
when it joins the IMF.
The quota is assigned according to its comparative position in the world economy.
The quota of a member country determines its maximum financial obligation to
the IMF, its voting power, and has an impact on its access to IMF financing.
The current quota formula is a weighted average of GDP (weight of 50%),
openness (30%), economic variability (15%), and international reserves (5%).
The denomination of Quotas is the Special Drawing Rights (SDRs), which is the
IMF’s unit of account.
The value of the SDR is based on a basket of five currencies—the U.S. dollar, the
euro, the Chinese renminbi, the Japanese yen, and the British pound sterling.
whereas the smallest member in IMF is Tuvalu, with a current quota of SDR 1.8
million which is about $2.78 million.
A member's quota subscription determines the maximum number of financial
resources the member is obliged to provide to the IMF. When a member joins the
Fund, it needs to pay the subscription in full: up to 25 percent must be paid in
SDRs or generally accepted currencies (such as the U.S. dollar, the yen, the pound
sterling or the euro), while the rest can be given in the member nation's own
Currency.
The quota also determines a member's voting power to quite an extent in IMF
decisions. The IMF votes of each member are made of basic votes plus, one extra
vote for each SDR 100,000 of quota. The number of basic votes is now fixed at
5.502 percent of total votes from the 2008 reform.
The maximum amount of financing a member can obtain from the IMF is based
on its quota. A member can borrow up to 200 percent of its quota annually and
600 percent cumulatively. However, access may be higher in exceptional
circumstances.

CONDITIONALITY ITH REFERENCE TO INDIA

When a country borrows from the IMF, its government agrees to adjust its
economic policies to rise above the problems that brought the economy to a
situation where it had to look for financial help from the international community.
These loan conditions are necessary because they are there to ensure that the
country will be able to repay the Fund so that the resources can be made
available to other members in need as well.
Lending by the IMF always involves policy conditions. IMF conditionality majorly
focused on macroeconomic policies, till the 1980s. Subsequently, the intricacy
and reach of structural conditions improved, indicating the IMF’s growing concern
in low-income and transition countries, where economic stability and growth was
hampered by structural problems.
The guiding principles on conditionality were revised in 2002 following a
comprehensive review. In March 2009, the IMF further restructured its
conditionality framework in the context of an all-inclusive reform to build up its
capacity to avoid and find solutions to the crises.

REFERENCE TO INDIA

India joined the IMF on December 27, 1945, as one of the IMF's founding
members.
While India has not been a frequent user of IMF resources, IMF credit has been
instrumental in helping India respond to emerging balance of payments problems
on two occasions.
In 1981-82, the borrowing amount by India was SDR 3.9 billion under an Extended
Fund Facility, the largest collection in IMF history at the time. In 1991-93, the
borrowing amount by India borrowed was a total of SDR 2.2 billion under two
standby arrangements, and in 1991 it borrowed SDR 1.4 billion under the
Compensatory Financing Facility.
India has not taken any financial assistance from the IMF from 1993. All the loans
taken from International Monetary Fund have been completed and repaid on 31
May2000.
In IMF, the ex-officio Governor on the Board of Governors is the finance minister.
RBI Governor is the alternate Governor at the IMF. Currently Dr. Rakesh Mohan,
an Executive Director represents India at the IMF who represents three other
countries as well, viz. Bangladesh, Sri Lanka and Bhutan.
In the 2010 Fourteenth General Review of Quotas, India’s total quota increased
from SDR 5821.5 million to SDR 13,114.4 million. With this increase, India’s share
would increase to 2.75 % (from 2.44%), which is the 8th largest quota in the IMF.
Though, if voting share is considered, India (along with its constituency countries
Viz. Bangladesh, Sri Lanka and Bhutan) is ranked 17th in the list of 24
constituencies at the Executive Board.
India has received technical assistance in several areas in the last few years from
the Fund, including the development of the government securities market,
foreign exchange market reform, public expenditure management, tax and
customs administration, and strengthening statistical systems.
Indian officials have been provided with trainings in national accounts, tax
administration, balance of payments compilation, monetary policy, and other
areas by the IMF since 1981.