Institutions and Economic Development Long Answer Type Questions Part 3
Question 1.
Write about the Role of IMF in Economic Development.
Answer:
The International Monetary Fund is a global organisation founded in 1944 m the post-war economic settlement which included the Bretton-Woods system of managed exchange rates. J.M.Keynes and Harry Dexter White both played an important role in its development.
Its primary aim is to help stabilise exchange rates and provide loans to countries in need. Nearly all members of the United Nations are members of the IMF with a few exceptions such as Cuba, Lichtenstein, and Andorra.
Functions of IMF
- International monetary cooperation.
- Promote exchange rate stability.
- To help deal with balance of payments adjustment
- Help deal with economic crisis by providing international coordination – loans, plus advice.
Role of IMF
1. Economic surveillance and monitoring: IMF produces reports on member countries’ economies and suggests areas of weakness / possible danger (e.g. unbalanced economies with large current account deficit/excess debt levels., The idea is to work on crisis prevention by highlighting areas of economic imbalance. A list of IMF reports on member countries are available at IMF Countries
2. Loans to countries with a financial crisis: The IMF has $300 billion of loanable funds. This comes from member countries who deposit a certain amount on joining. In times of financial/economic crisis, the IMF may be willing to make available loans as part of a financial readjustment.
3. Conditional loans/structural adjustment: When giving loans, the IMF usually insist on certain criteria being met. These can include policies to reduce inflation (tightening of monetary policy)
- Reduce inflation (tightening of monetary policy)
- Deficit-reducing policies (higher tax)
- Supply-side policies, such as privatisation, deregulation and improved tax collection.
- Removing price controls
- Free trade – removing tariff barriers
- Devaluation of currency to reduce current account deficit.
4. Technical assistance and economic training: The IMF produce many reports and publications. They can also offer support for local economies.
Question 2.
Explain the role of Foreign Trade in Economic Development.
Answer:
Foreign trade enlarges the market for a country’s output. Exports may lead to? increase in national output and may become an engine of growth. Expansion of a country’s foreign trade may energise an otherwise stagnant economy and may lead it onto the path of economic growth and prosperity. The role/need/importance of foreign trade can be judged by the following faces:
1. Foreign Trade and Economic Development: Foreign trade plays very important role in the economic development of any country. Pakistan also exports a lot of agricultural product to other countries and imports the capital goods from other countries. Therefore, it is not wrong to say that economic development of a country depends of foreign trade.
2. Foreign Exchange Earning: Foreign trade provides foreign exchange which can be used to remove the poverty and other productive purposes.
3. Market Expansion: The demand factor plays very important role in increasing the production of any country. The foreign trade expands the market and encourages the producers. In Pakistan home market is very limited due to poverty. So it is necessary chat we should sell our product in other countries.
4. Increase in Investment: Foreign trade encourages the investor to increase the investment to produce more goods. So the rate of investment increases.
5. Foreign Investment: Besides the local investment, foreign trade provides incentives for the foreign investors to invest in those countries where there is a shortage of investment.
6. Increase in National Income: Foreign trade increases the scale of production and national income of the country. To meet the foreign demand we increase the production on large scale so GNP also increases.
7. Decrease in Unemployment: With the rise in the demand of goods domestic resources are fully utilized and it increases the rate of development in the country and reduces the unemployment in the world.
8. Price Stability: Foreign trade helps to bring stability in price level. All those goods which are short and prices are increasing can be imported and those goods which are surplus can be exported. There by stopping fluctuation in prices.
9. Specialization: There is a difference in the quality and quantity of various factors of production in different countries. Each country adopts the specialization in the production of those commodities, in which it has comparative advantage. So all trading countries enjoy profit through international trade.
10. Remove Monopolies: Foreign trade also discourages the monopolies. Where every any monopolist increases the prices, government allows the import of goods to reduce the prices in the country.
11. Removal of Food Shortage: India is also facing the food shortage problem. To remove the food shortage India has imported the wheat many times. So due to foreign trade we are solving this problem for many years.
12. Agricultural Development: Agricultural development is the back bone in our economy. Foreign trade has played very important role for the development of our agriculture sector. Every year we export rice, cotton, fruits and vegetables to other countries. The export of goods makes our farmer more prosperous. It inspires the spirit of development in them.
Question 3.
What are the different types of plans?
Answer:
According to the nature and use of planning. Planning can be divided into four types. They are
1. Perspective plans: A perspective plan is a macro plan formulated for a period of 15 to 20 years, keeping in view the long term needs and long term objectives.
2. Five Year Plans: Five year plans are designed for a period of five years. A five year plan is an integral part of perspective plan. After the completion of five years, the achieved targets will be reviewed.
3. Annual Plans: Annual plan is a part of a five year plan. The targets of five year plans are divided into annual targets and detailed plans will be prepared year wise.
4. Rolling Plans: This kind of plan does not have a fixed period of time. It has only duration and moves forward. As it moves forward, the completed year will be deleted and next year will be added. So the plan rolls continuously. This concept was introduced by Gunnar Myrdal and suggested to Government of India by Prof. Lakdawala in 1978 (During Janata Government Period). ,It was discontinued after 1979 due to collapse of the Government.
Question 4.
Economic Federalism.
Answer:
The economics of federalism views the primary task of government as solving the failures of private markets to satisfy the demands of citizens for goods and services. These failures arise whenever cooperative action is needed to ensure the provision of goods or services at the lowest cost. Examples include all goods where sharing a fixed resource is efficient, as with the theory of public goods, or where one person’s actions generates external benefits or imposes costs on others. What is needed in both cases is a means of discovering citizens’ willingness to pay for each publicly provided good and service and a means to collect sufficient payments to cover production costs.
The economic task for federalism is to provide a means to solve these market failures. For goods and services for which congestion becomes evident within relatively small populations, and where the spatial reach of any externalities is modest, economic federalism recommends using small local governments.
Question 5.
Roles Performed by Financial Institution
Answer:
Financial institutions play a pivotal role in every economy. They are regulated by a central government organization for banking and non-banking financial institutions. These institutions help in bridging the gap between idle savings and investment and its borrowers, i.e., from net savers to net borrowers.
Following are the list of roles performed by Financial Institutions
1. Regulation of Monetary Supply: Financial institutions like the central bank help in regulating the money supply in the economy. They do it to maintain stability and control inflation. The central bank applies various measures like increasing or decreasing repo rate, cash reserve ratio, open market operations, i.e., buying and selling government securities tb regulate liquidity in the economy.
2. Banking Services: Financial institutions, like commercial banks, help their customers by providing savings and deposit services. They provide credit facilities like overdraft facilities to the customers for catering to the need for short-term funds. Commercial banks also extend several kinds of loans like personal loans, education loans, mortgage or home loans to their customers.
3. Insurance Services: Financial institutions, like insurance companies, help to mobilize savings and investment in productive activities. In return, they provide assurance to investors against their life or some particular asset at the time of need. In other words, they transfer their customer’s risk of loss to themselves.
4. Capital Formation: Financial institutions help in capital formation, i.e., increase in capital stock like the plant, machinery, tools and equipment, buildings, means of transport and communication, etc. They do so by mobilizing the idle savings from individuals in the economy to the investor through various monetary services.
5. Investment Advice: There are a number of investment options available at the disposal of individuals as well as businesses. But in the current swift changing environment, it is very difficult to choose the best option. Almost all financial institutions (banking or non-banking) -have an investment advisory desk that helps customers, investors, businesses to choose the best investment option available in the market according to their risk appetite and other factors.
Question 6.
Role of Asian Development Bank (ADB) in economic development.
Answer:
It was formed to foster economic growth and co-operation in the region of Asia and the Pacific and to contribute to the acceleration of economic development of the developing countries of the region. The basic objective of the Bank is to encourage economic and financial co-operation among the regional members. Members enjoy the right to construct projects supported by Bank loans.
In 28 years of operation, the Bank has become a major catalyst in promot-ing the development of the most populous and fastest-growing region in the world today. The Bank’s principal functions are:
- To make loans and equity investments for the economic and social advancement of developing member countries;
- To provide technical assistance for the preparation and execution of development projects and programmes and advisory services
- To promote investment of public and private capital for development purposes; and
- To respond to requests for assistance in coordinating development policies and plans of member countries.
In its operations, the Bank is also required to give special attention to the needs of the smaller or less-developed countries and give priority to regional, sub-regional and national projects and programs which will contribute to the harmonious economic growth of the region as a whole.
Question 7.
Role of FDI and FII in Economic Development.
Answer:
New industrial policy 1991, has brought new dimensions to the Indian economy through Globalization. The basic motto like self-sustainability, domestic savings and infrastructure development were replaced by robust economic growth since a decade. Global trade vanished the cross borders and paved the way for international business. Indian economy was influenced by western countries through their investments in to the financial system. Thus, the sources of foreign capital like FDI, FII were become dominant players in capital formation as well as risky too. These investments were welcomed through direct participation in production areas or investing in stock exchanges.
Foreign Direct Investment:
Foreign Direct Investment may be of any of the form like long-term, short-term capital and equity. It does not include the purchase of shares. FDI enhance employment opportunities and skills, innovations, technology support to the company with their expertise. India become the favor most destination due to the following reasons:
- Availability of abundant raw materials
- High interest rates for investments
- Tax regimes
- Ease of transactions
The FDI may also affect due to the government trade barriers and policies for the foreign investments and leads to less or more effective towards contribution in economy as well as GDP of the economy.
Foreign institutional Investors:
FII is an institutional body situated in a foreign country and invest in domestic country through stock markets. FDI and FII activities are go hand by hand. FII provide liquidity and value based trading, price fixing of the shares that are issued by the company. FII plays a vital role in stock markets and causes market volatility. This embosses a larger effect on domestic financial markets like stock market, money markets and foreign exchange markets.