IASbaba’s Daily Current Affairs – 11th April, 2016

IASbaba's Daily Current Affairs Analysis, IASbaba's Daily Current Affairs April 2016, International, National, UPSC

IASbaba’s Daily Current Affairs – 11th April, 2016

INTERNATIONAL/ECONOMICS

TOPIC:

General studies 2:

Effect of policies and politics of developed and developing countries on India’s interests

General Studies 3:

Effects of liberalization on the economy; Currency; Banking

Time for a single world currency

The world economic crisis shows the “inherent vulnerabilities and systemic risks in the existing international monetary system” and therefore, there is a need to better insulate countries from the ills of one country or one currency

Dominance of Dollars—

The pricing and trading of almost all standard commodities, including crude oil, are carried out in dollars (“dollar goods”)
Most international assets/liabilities are held in dollars (“dollar stocks”)
The dollar represents the “vehicle currency” in the international foreign exchange market

Role of the dollar (foreign exchange)

The exchange rate of any single currency vis-a-vis the dollar is taken as the most important indicator for its external value
Almost all foreign exchange transactions concern trades between the dollar and some other currency (the dollar serves as the “vehicle currency”)
Exchange rate expectations are formed primarily with respect to future movements of dollar rates

Thus—

Influences the relative price between commodities and manufactures in world trade,
The terms of trade between industrial and developing countries,
The speed of inflation and deflation in world trade
The level of the real interest on international debts

Historically speaking—

Collapse of the Bretton Woods system of fixed exchange rates in 1971 paved way for different crisis and mini-crisis because of the absence of any kind of global monetary order-

Despite the faults— it gave the world a monetary order, within which trade, investment and portfolio allocation decisions could be made without the distorting effect of uncertain, uncoordinated and volatile exchange rates
Utility of system of fixed exchange rates stands valid, thus, in a world even more globalized today, and even more subject to destabilizing volatility

Negotiations on the new global currency

Urgent need—

Destabilizing and destructive volatility in global trade
Investment and financial capital movement patterns induced or exacerbated by the excessive volatility of flexible exchange rate regimes
National objectives leveraging damaging spill-overs for other countries (how America’s economic problems — and by extension the dollar — can wreak havoc on nations around the world)
- In the form of excessive volatility in capital flows and associated movements in their exchange rates
- Crisis of 2013 had badly affected India, and so—the right thing for the Fed and others to do would be to take account of these harmful spill-overs when they formulate monetary policy

Arguments against a global currency—

Under fixed rates (or a common currency), countries would lose their ability to pursue independent monetary policy, and that this loss would be significant (the correlation of macroeconomic conditions across regions)
No parallel institution existing at the global level to establish adequate checks and balances
Desirable to maintain some level of competition, as through a number of channels, global currency competition provides a check on inflation

Major obstacles—

Would require acceptance from nations that have long used the dollar and hold huge stockpiles of the U.S. currency
Managing such a currency would require balancing the contradictory needs of countries with high and low growth or with trade surpluses or deficits

Keynes-

No national currency should serve as a world currency, instead, a genuine world currency should be created as a basket of the main national currencies
International settlements should be handled at fixed exchange rates by a “Clearing Union.”
Temporary disequilibria in global economic goods and financing should be corrected by expansionary policies in the surplus countries and not by belt-tightening measures in the deficit countries. In this way equilibrium can be restored at a higher rather than a lower level of activity

Way Ahead:

The IMF should create a “reserve currency” based on shares in the body held by its 185 member nations, known as special drawing rights, or SDRs- should be used for trade, pricing commodities and accounting, not just government finance.
The basket of currencies forming the basis for SDR valuation should be expanded to include currencies of all major economies. Proper representation and a bigger voice for the developing countries are the need of the hour

Connecting the Dots:

How does the interaction between dollar interest rates, dollar exchange rates and dollar prices determine the movements in the real interest on international debt?

NATIONAL

TOPIC: General studies 2:

Indian Constitution, significant provisions.
Constitutional Bodies – Election Commission & issues related to Election

Of liquor bans and the ballot box:

Alcohol and elections seem to be the two great signifiers of Indian politics as they both mark its deep sense of hypocrisy, populism, cynicism and realism.

Debates in constituent assembly over the issue of liquor ban:

The approach of Gandhians:

Prohibition of liquor, more than khadi, was often the ideological plank Gandhians identified themselves with.
During the Constituent Assembly debates, the Gandhians, in their ideological way, wanted to introduce prohibition as part of the Directive Principles of the Constitution.
In this, they, the Gandhians, were almost strict and correct in their attitudes.

Protest by the tribal leaders:

Many tribal leaders protested against the ban as it seeks to interfere with their religious right as consumption of liquor brewed from rice was part of a tribal religious tradition.

Constitutional provision wrt banning of liquor:

Article 47: Duty of the State to raise the level of nutrition and the standard of living and to improve public health The State shall regard the raising of the level of nutrition and the standard of living of its people and the improvement of public health as among its primary duties and, in particular, the State shall endeavour to bring about prohibition of the consumption except for medicinal purposes of intoxicating drinks and of drugs which are injurious to health

Politics of democracy and poverty:

Prohibition of liquor has a different logic.
It is a part of the Indian politics of democracy and the politics of poverty that we must try and understand.
Prohibition seeks to ban the production and consumption of alcohol in an attempt to control the social consequences of alcoholism.
Banning the consumption of alcohol has been a part of electoral politics.
Many people falsely locate it as a vestige of Gandhian ideology.
Prohibition is part of the symbolic politics of India where we create official diktats in order to conceal a series of epic violations.
But the logic and hypocrisy of prohibition lies in the fact that it helps get electoral support, especially that of women.

Policing and the loopholes:

Prohibition, as sociologists will tell us, never works completely. It is a policing system with too many loopholes.

Case study of Kerala:

The Kerala government introduced graded prohibition, arguing for the eventual idea of a liquor-free State.
It did so by restricting the provision of liquor to be served only in five-star hotels.
Yet, one could not quite decide whether liquor was the cause of Kerala’s social problems or a symptom of a wider social breakdown brought about by change.
The Supreme Court upheld the government’s decision while contending that introducing prohibition was a difficult task.

Pressure from the tourism industry:

However now the Kerala government bans the consumption of hard liquor but permits the consumption of beer and wine.
The tourism industry is often cited as a rationale for withdrawing prohibition.
The court itself read this decision as a two-step gateway to more consumption.
It is clear that the government is caught between two constituencies — a civil society of social workers and religious groups afraid of familial breakdown on the one hand and a tourism industry afraid that tourists may stay away from a puritanical Kerala on the other.

Way ahead:

The moral expression of prohibition is clear.
The requirements of revenue are equally demanding.
The real silence is about how to moderate the consequences of alcoholism.
Civil society and state must enter into a new conversation that goes deep into an understanding of social life and its possibilities.
Knee-jerk moralism or instrumental politics is the last thing the issue around the consumption of alcohol or governmentality needs.

Connecting the dots:

Critically examine the reasons for growing demand for banning alcohol consumption in India. Should alcohol consumption be banned in India. Substantiate.

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