Question

Select a 3-5 year period of time and analyze the macroeconomic issues occurring in a foreign country during that period of time. You should be looking for cause and effect issues/impacts. For example: there is some kind of problem in the economy and what is the government's response and then what is the impact of the government's response? The same topic will be used for all 3 parts of the project.

Write a detailed description of the root causes of the current economic downturn. Remember economic downturns are usually thought of as recessions because these are the most common, but may also include periods of severe (hyper) inflation or stagflation (a simultaneous increase in unemployment and inflation).

Within the discussion, please relate the root causes to either market failure or government failure or both. You must include a section (at least 2-3 paragraphs) about how market failure and/or government failure played a role.

Submit a report that is 2-3 pages long, typed double-spaced. This report should be well written with a introduction and conclusion and use appropriate citation

Answer 1

Macroeconomic issue:

India is a land of diverse cultures, living within a giant boundary of love, hope and warmth. India has also made the headlines due to its power-packed economic growth over the years. When the world was hit hard by the U.S. recession, India cushioned its fall by minimizing the impact of such a hard blow. However, although the Indian Economy has performed better than most other developing economies, there were certain macroeconomic challenges that plagued the economy for a long time. Problems of poverty and inequality have made India infamous. Inflation has been on the tail for a long time, raising the cost of living and worsening the condition for those below the poverty line. There has also been a steady decline in exports relative to imports and the investment growth has also fallen over the years. However, one of the most important macroeconomic issues that India has been dealing with is the problem of unemployment. Unemployment is defined as a situation where able bodied human beings who are willing to work, are not being able to find jobs. During 2015-2016, unemployment rate shot up to be the highest in the last five years. Well trained youngsters dropped applications for the posts of sweepers and peons, eating away jobs of those who were less educated and banked on those jobs for a living. Therefore India’s chief macroeconomic challenge is the creation of ‘productive jobs’ for about 500 million unemployed youth out of a population of approximately 1.21 billion people.

Causes of the macroeconomic issue:

Some of the primary causes of unemployment are as follows:

• India’s development trajectory shows that the industrial sector skipped the required amount of growth. People from the agricultural sector shifted more to the service sector. Thus, the productivity increased in the primary and tertiary sector, skipping the secondary sector related to industries. Archaic machinery and dated technology have together contributed to fearfully low levels of productivity and employment in manufacturing, thereby reducing exports.
• India is predominantly an agricultural economy where majority of the population relies on agriculture as their occupation. However, both seasonal and disguised unemployment trouble workers of the sector. This is because of lack of suitable alternative opportunities for such workers.
• Faulty planning has aggravated the problem of unemployment with focus being put on the wrong sectors at the wrong time.
• Lack of practical training as a part of educational course is another reason why most Indians fail to increase productivity. Education being very theoretical in that country has not made every Indian ready for the highly technology-driven world.
• Lastly and most important, asymmetry of information is another reason why the problem of unemployment has become severe. On one hand, this leads to unemployment where the educated youth is sitting at home and looking for jobs. Even though suitable jobs are there in the economy, the information regarding them doesn’t reach the required individuals. On the other hand, educated youngsters are getting into jobs well below their levels of education, to earn bread for their families. This is also a direct impact of asymmetric information, where individuals are unaware of suitable job opportunities available for them. This in turn leaves that section of India unemployed who are actually not educated enough to do high end jobs and depend on low-education-requirement jobs for making ends meet.

Steps taken by the government to counter the issue:

The government’s response in this area has been worth discussion. Since the Modi government came into power in 2014 and the unemployment rate shot up in 2015, light will be thrown on steps taken by the current government only. The Modi government has not done anything in particular to target the gravity of unemployment in India. However, marginally the attempts made were as follows:

• The government upped the intake of employees in government jobs. This again means absorption in the tertiary sector of services.
• Focus was put on the dimly lit secondary sector of manufacturing through programmes like “Make In India”. It is an attempt to increase production in India where up to 100% FDI has been permitted in most of the 25 sectors that Make In India covers, with exceptions in space, defence and media. This was done with the intention of increasing FDI and creating productive jobs in the manufacturing sector in India. Different jobs suitable for different age groups and different qualifications would thus be created.
• “Startup India” has been a similar programme, encouraging various start-ups to e born in India. Ideas of start-ups which couldn’t be materialized earlier due to lack of funds would now be started with increased investment from countries like Japan.
• “Skill India” is another programme launched by the Modi Government to tackle the problem of lack of training. The aim is to train Indians in different skills so that they are able to make suitable candidates of themselves for various jobs across the country and abroad.

Impact of government's actions on the economy:

However, irrespective of these steps taken, the impact has not been favourable to employment indices. In fact, some of the programmes have adversely affected and worsened unemployment in India.

• Firstly, the government is yet to fulfil half of the objectives stated in each of these programmes. Most of the promises made by the Modi government have not been kept.
• Secondly, programmes like “Make In India”, even though with a good intention, backfired due to faulty implementation. Experts severely criticized this programme by stating basic problems like labour being cheap but the overall cost of production is high for manufacturing in India. Unless manufacturing in India is more cost effective (and profitable) than importing, there is no way that this programme will be a success. In the words of certain experts, it was better to “Make For India” rather than “Make In India”.
• Thirdly the overnight surprise strategy of demonetization was more a shock than a surprise. Banning notes and reducing the value of certain denomination to zero had its share of ill effects on the economy of India. The first few months of 2017, immediately after demonetization in 2016 end, saw more than 1 million Indians losing their jobs. Alongside loss of jobs, the labour participation rate also dropped, making demonetization hit Indian macro economy hard.

Analysis of Market failure and Government failure:

India is an economy where the market forces of demand and supply are allowed to function, with sufficient government control whenever necessary. Thus, the root causes of unemployment can be put on both failure of the market and failure of the government. Market failure happens when the forces of demand and supply cannot efficiently allocate resources to ensure maximum benefit to agents in the economy. Similar to how product markets fail, labour markets can also fail, resulting in unemployment beyond the minimum amount. Some of the causes of labour market failure in the Indian Economy include gaps in skill and training. Firms fear from providing free training to individuals who are likely to switch to higher paid jobs by putting the previous training to use. They fear that workers would free-ride on the merit goods, which is otherwise a positive externality. This is where the government has to step in to increase training levels up to the social optimum. Also, occupational and industrial immobility where there is a lack of opportunity for workers to switch jobs or fields of work, result in market failure. Additionally, the lack of symmetry of information is another cause of labour market failure to correctly match labour demand and labour supply.

However, the government is equally to blame for the problems of unemployment. Lack of effective implementation of development plans, make the plans remain only on paper. Government failure thus occurs where the intervention of the government in presence of market failure results in misallocation of scarce resources resulting in inefficient outcomes. Apart from aiding in improvement of technology, encouraging training etc, getting in the way of free movement of market forces is another important example of government’s failure. Where it’s better for India to import certain goods rather than produce them domestically with an increased cost of production, programmes like Make In India forcefully oppose the natural working of market forces of demand and supply. Forcing India to produce at higher prices leaves those products unsold where cheaper substitutes are in fact available. The result is thus inefficient level of output and productivity. In a world which is increasingly globalized and interconnected, forceful methods of import substitution aren’t the best methods to increase domestic productivity.

In conclusion, India has a mammoth task ahead of creating millions of productive jobs. Unemployment has worsened over the years, making it the most prominent macroeconomic issue hurting India. Proper workers should be allocated to appropriate jobs matching their level of education and training and also their interests. Market forces should be given freedom in certain areas and proper, planned government intervention is required, unlike drastic ones like demonetization. Though time consuming, this critical task is doable with proper plans and without hurling empty promises of better lives to hopeful Indians in exchange of votes.