Question

SHORT ANSWERS

a. Macroeconomic Disequilibrium Describe the macroeconomic disequilibrium in the Soviet Union. Why was there a disequilibrium? What was the resulting problem?

b. Indicative Planning Some have argued that indicative planning is attractive as a mechanism for resource allocation because it eliminates some of the negative features of directive planning while retaining positive features. Comment.

c. Why has investment been very high in the East Asian Economies? When answering the question, relate to concepts such as saving, consumption, the structure of the financial system, etc.

ESSAY TOPICS

A. Active Labor Market Policy Explain the role of government in promoting full employment in Sweden through its active labor market policies. Explain why active labor market policies are more important in Sweden than in the United States. What are the three general programs constituting active labor market policy in Sweden. Explain them and their relative importance in Sweden.

B. The Rhine Model Describe the German (Rhine) economic model. What are its characteristics? What are its main institutions? How has Germany reformed its labor markets in the early 2000s? What has been the consequence of the euro on the German economy?

C. Describe the East Asian economic miracle. What were its main characteristics? How involved were respective countries’ governments? What happened with labor, capital, etc? Was is really a miracle?

Answer 1

a. Macro-economic disequilibrium occurs when markets fail to find its equilibrium point. For example, if prices are lower than equilibrium prices, demand will be more than actual supply.

In the past, to reach growth Soviet Union wanted to apply all tricks to reach there quicker. The problem was there was barely any investments in infrastructure that was a serious bottleneck. The pressure of achieving growth and service old debts, was brought on both enterprises and ministers to meet demanding production targets. Whereas, extremely low and unmeaningful interest charges (0-2% on credits, and a 6% annual charge on the stock of fixed capital of enterprises) created excess demand for investment funds, which resulted in longer inventory periods with stock of unfinished projects. There was almost no technological advancement to support production. The real sector of the economy is, therefore, under pressure of overambitious annual production plans, which impose heavy fiscal and monetary burdens. Attempts to generate a supply response through the decentralization of decision making and the liberalization of various monetary and credit instruments failed to produce the desired results; instead, they increased the money supply and aggravated the general state of disequilibrium.

b. Indicative planning or planning by inducement, is a kind of planning state does to maximize economic performance by elimination market imperfections. It is mostly found in capitalist countries as well as in mixed economies, like India. The essence of indicative planning is that it recognizes not only consumers’ sovereignty but also produc­ers’ freedom so that the targets and priorities of the plans are achieved. It then involves a middle path of planning mechanism and mar­ket mechanism—a kind of coordination be­tween private and public activities. This kind of planning is better than direct planning wherein central planning authority takes all decisions such as resource allocation without looking at market conditions as per predetermined plans and budget. For example, India’s Eighth Plan changed from direct to indicative. Under indicative planning those industries and sectors are identified where future growth is to be encouraged. The main aim here will be to develop the core sector through allocation and optimal utilization of funds.

Indicative planning is, thus, a perfect compro­mise a system between freedom and planning that enjoys the advantages of both the market and the planned economies, while avoiding the disadvantages usually connected with these pure systems. Hence, it is centralized in its formu­lation and It is decentralized as far as execution of plans is concerned.   

c. Savings rates in East Asian economies averages about 30% of GDP, while is significantly higher than that in Sub-Saharan Africa, Latin-America and in the high-income economies. The difference between domestic savings and investment is foreign capital outflow. The East Asian economies as a group are the only developing economies in which savings exceeds investment, making them net exporters of capital.

International investors are attracted to sound macro-economic fundamentals i.e. high savings rate, small fiscal deficits, stable exchange rate and elastic workforce that leads to large scale economies. Few decades ago, most of the east Asian countries were backed by Japan that established low cost manufacturing hubs in many of east Asian countries.

There's increased allowance of FDI, given the flexible monetary and fiscal structure of these countries to enhance growth, that has increased investments.

A. Essay topic:

Active Labor Market Policy: Explain the role of government in promoting full employment in Sweden through its active labor market policies. Explain why active labor market policies are more important in Sweden than in the United States. What are the three general programs constituting active labor market policy in Sweden. Explain them and their relative importance in Sweden.

Answer: In the early 1990s, the Swedish labor market was hit by unemployment rate of 10%. The steep increase in unemployment reflected both an increased inflow and a longer duration of unemployment spells. Many measures, including programmes to reduce unemployment, have been implemented by the government in response to the economic crisis. Swedish labor market policy is based on the activation principle.

Active labor market policies are employment measures specifically targeted at unemployed. Conventional active labor policies comprise of 3:

i.) Job broking activities: Emphasis is laid on helping the unemployed to find suitable vacancies. This task is carried out by the public employment service (PES) offices who must ensure that vacancies are rapidly and properly filled and that job seekers find employment quickly. Unemployed persons must register with the PES to be eligible for unemployment benefits. The PES also makes decisions about placements in almost all the labor market programmes. The establishment of private employment agencies run for profit has been allowed since 1993. Employment agencies are permitted only to charge fees to employers and not employees. It was estimated in 1995 that private employment agencies filled only 0.4% of all vacancies.

Labor market programmes have been established to provide training and work experience through temporary jobs and through subsidies for employment. It is estimated that about 5% of the labor force, amounting in 1994 to 309,000 individuals, participate in labor market programmes.

ii) Labor market training: Originally, labor-market training consisted mainly of vocational training programs, but over time schemes containing more general education Active Labor-Market Policies in Sweden have become more important. Computer activity centers, which were introduced in 1995, represent another innovation; in addition an IT program (Swit) was launched by the government in 1998 in cooperation with the Confederation of Swedish Industries. The duration of training programs has usually been six months. Participants have received training grants equivalent to unemployment compensation.

iii) Subsidized employment:

The classical measure was relief works, those consisted of temporary jobs (around six months), which were usually arranged

in the public sector, but to some extent also in the private sector, and where employers obtained a subsidy for employing individuals

selected by the public employment offices. In the 1990s, relief works were largely replaced by work-experience schemes. These consisted of activities that were often arranged by various non-profit organizations. The aim was to organize activities that would not crowd out regular employment. Participants in work-experience schemes received unemployment compensation. Recruitment subsidies and (more recently) employment subsidies are programs that are more similar to regular employment. Both programs have entailed wage subsidies to employers for hiring unemployed (mainly long-term unemployed). Participants have been paid regular wages according to collective agreements. There were many other schemes as well, such as 'Self-employment Grants", "work practice programs", "Youth schemes" etc.

Active labor market policies are more important in Sweden than in US as US already comprises of very flexible labor markets (dependent on market forces) and good social security programs. It has ambitious labor force with high job search intensity and lower reservation wages. Hence, unemployment spells are very short lived in US than in Sweden. Hence for that short-lived unemployment, US workers are given unemployment benefits. However, US has spent way less on active labor market policies whereas it has mostly focused on passive one. May be active policies like "job search assistance", "training" etc can be utilized by USA for better labor market dynamic.