Me0003 switzerland, cuba and india addressing the troika 1 (1)

1

Switzerland, Cuba and India: Addressing the Troika of ...

Switzerland, Cuba and India: Addressing the Troikaof Economic Problems in Three Economies

All the economies of the world face the problem of scarcity of resources, which limits the productionactivities. Scarcity of resources makes an economy face trade-offs as producing more of one commoditymeans producing less of another commodity. Such trade-offs compel an economy to answer thethree fundamental questions: What goods will be produced? How will the goods be produced? Andfor whom will the goods be produced? Economic Systems (Market, Command and Mixed) are theways through which countries address these three fundamental posers. Each type of economic systemhas its own way of deciding what commodities are to be produced, how and for whom.

Switzerland – A Market EconomySwitzerland comes closest to the idea of market economy or capitalism. Private entrepreneurship

forms the basis of the Swiss economic policy. By the year 2000, most of the government enterpriseswere privatised in Switzerland. Friedrich A. Hayek, the Austrian economist, opined, “Private propertyis the most important guarantee of freedom.”1 Property rights2 are important for the proper functioningof an economy. People in Switzerland are guaranteed private property rights, and they do not fearunjust dispossession. Switzerland has one of the best property rights regimes. It was ranked 8th out of115 countries with a score of 8.2 in the 2009 International Property Rights Index (IPRI)3 . Switzerlandis an international banking centre with many Multinational Corporations (MNCs). It is one of the

This case study was written by Hepsi Swarna under the direction of Akshaya Kumar Jena, IBSCDC . It is intended to be used as thebasis for class discussion rather than to illustrate either effective or ineffective handling of a management situation. The case wascompiled from published sources.

© 2009, IBSCDC.No part of this publication may be copied, stored, transmitted, reproduced or distributed in any form or medium whatsoeverwithout the permission of the copyright owner.

Ref. No.: ME0003

1 Dedigama C. Anne, “INTERNATIONAL PROPERTY RIGHTS INDEX (IPRI) 2009 Report”, http://www.internationalpropertyrightsindex.org./atr_Final1.pdf, page 11

2 Private property rights is one’s right to use their property, engage in lawful transactions related to the sale, purchase and mortgage ofthat property, and enjoy one’s property to the exclusion of others.

3 The 2009 International Property Rights Index (IPRI) is an international comparative study that measures the significance of

Background Reading: Chapter 1, “The Fundamentals of Economics –Markets and Government, ina Modern Economy”, Economics (Paul A. Samuelson and William D. Nordhaus)


2

world’s freest economies. Switzerland was ranked 9th (Exhibit I) with a score of 79.4 in the 2009Index of Economic Freedom4 .

Exhibit IIndex of Economic Freedom (2009): Top 10 Countries

Rank Country Score

1 Hong Kong 90.0

2 Singapore 87.1

3 Australia 82.6

4 Ireland 82.2

5 New Zealand 82.0

6 US 80.7

7 Canada 80.5

8 Denmark 80.0

9 Switzerland 79.4

10 UK 79.0

12 Netherlands 77

17 Finland 74.5Compiled by the author from: “2009 index of economic freedom – Ranking the Countries”, http://www.heritage.org/Index/Ranking.aspx

Most of the countries figuring in the index, – Hong Kong, Singapore, UK, US, Finland, Ireland,Denmark, Netherlands and Switzerland, are free market economies and these economies also havehigher per capita income (Exhibit II). According to UNDP’s 2008 statistical update, Switzerland’sGDP per capita for a population of 7.5 million people is $37,3965 . Switzerland has also some of thehighest wages in the world. Thus, a high standard of living prevails in the country. The marketeconomy of Switzerland has earned it a Human Development Index (HDI)6 of 0.9555, ranked 10th

out of 179 countries.7

4 Index of Economic Freedom is published by The Wall Street Journal and The Heritage Foundation every year. The index defineseconomic freedom as ‘the fundamental right of every human to control his or her own labour and property. In an economically freesociety, individuals are free to work, produce, consume, and invest in any way they please, with that freedom both protected by the stateand unconstrained by the state. In economically free societies, governments allow labour, capital and goods to move freely, and refrainfrom coercion or constraint of liberty beyond the extent necessary to protect and maintain liberty itself.’

5 “2008 Statistical Update Switzerland”, http://hdrstats.undp.org/2008/countries/country_fact_sheets/cty_fs_CHE.html, December 18th2008

6 The HDI provides a composite measure of three dimensions of human development: living a long and healthy life (measured by lifeexpectancy), being educated (measured by adult literacy and enrolment at the primary, secondary and tertiary level) and having a decentstandard of living (measured by Purchasing Power Parity (PPP), income).

7 “2008 Statistical Update Switzerland”, op.cit.

3


In market economies, the means of production are owned by private individuals and mostcost-efficient techniques of production are used. Holderbank, Switzerland’s largest cement company,attributes its success to the best production technology and low production costs. Switzerland’smarket economy is based on international trade and banking. Swiss banks are known for very highstandards of banking and financial services. The Swiss are the leaders in private banking. In 2003, itwas reported that Switzerland with “its 400 banks manage ... one-third of the world’s wealth thatresides outside its country of origin”.8 The Swiss banks are not subjected to any legal scrutiny. Thatis why the money (legal/illegal) from the entire world is deposited in Swiss banks. In September2008, “the UBS of Switzerland revealed to the US that it held 47,000 secret accounts for Americans”.9

Capitalism results in generation of wealth – the Swiss banking business is an attestation to this fact.

Exhibit IINations with Highest Per Capita Income, World Bank (Revised in 2008)

Rank Country Per Capita Income(PPP* International$)

1 Liechtenstein 63, 590

4 Kuwait 49, 970

5 Norway 53, 320

6 Brunei Darussalam 49,900

9 Singapore 48, 520

10 US 45, 850

12 Hong Kong, China 44, 050

13 Switzerland 43, 870

17 Netherlands 39, 310

19 Ireland 37, 090

24 Denmark 36, 300

25 Finland 34,550

31 UK 33,800

* Purchasing Power Parity. The most common way of presenting the ‘per capita income’ data is PPP figures.

Compiled by the author from: “Gross national income per capita 2007, Atlas method and PPP”, http://siteresources.worldbank.org/DATASTATISTICS/Resources/GNIPC.pdf, October 17th 2008

8 Beng Kim Phar, “Capitalism’s Mistress: Private Banking”, http://www.globalpolicy.org/socecon/crisis/2003/0625mistress.htm, June25th 2003

9 Aiyar Shankkar, “Minting political capital”, http://in.elections.yahoo.com/articles.html?feed=http://in.news.yahoo.com/248/20090422/1585/tnl-minting-political-capital_1.html, April 22nd 2009


4

The Swiss are also known for their world-class watches, pharmaceuticals, electronics, chemicals,metals, precision instruments, chocolates, cheese and also for their ground breaking research andadvances in organic agriculture and poultry production. Chemicals and engineering products are thebiggest exports of Switzerland. Watches occupy third place in the country’s exports. About 95% ofSwitzerland’s watches are exported and it stands as the world largest watch exporter in terms ofvalue. In 2006, Swiss watch exports were valued at 13.7 billion francs10 . The average export price ofa Chinese watch in 2006 was $1, in Hong Kong it was $8, while Switzerland’s export price of a watchwas on an average $41011 .

Switzerland has extremely well-developed infrastructure for scientific research. The ResearchInstitute of Organic Agriculture is the world’s leading information and documentation centre fororganic agriculture. Swiss companies spend a lot of money on Research and Development due towhich they come up with very innovative products. Swatch, the famous Swiss watch company hasalways flirted with technology. Besides manufacturing watches, Swatch is into manufacturing“microprocessors, smartcard technology, portable telephones, and other future-oriented designs, suchas wristwatches that double as telephones, credit cards, even concert tickets”.12

The innovation in the field of technology in Switzerland, along with other factors like first-rateinfrastructure and efficient markets, has boosted Switzerland’s global competitiveness, and it hasbeen featuring among the top ten economies in the Global Competitive Index (GCI) for many years(Exhibit III). Switzerland was ranked as the second most competitive country in the global economyfor the years 2007 and 2008. The other capitalist countries like UK, US, Finland, Denmark, Netherlands,Singapore and Hong Kong have also been featuring in top ten countries of the GCI index.

Trade has been the key to Switzerland’s prosperity and growth. It has very liberal trade andinvestment policies, with minimum trade barriers (Exhibit IV). In Global Enabling Trade Index13

released by World Economic Forum for the very first time in 2008, Switzerland was ranked 9th

among 118 countries signifying its business-friendly environment and openness to international tradeand investment. Exports generate lot of income and bost the economic growth. “The Swiss economyearns roughly half of its corporate earnings from the export industry, and 62% of Swiss exports aredestined for the EU market.”14

Government has a very limited role to play in Switzerland. The new agricultural policy of Switzerland,which came into effect from January 1st 1999 “began eliminating detailed market regulations andreducing direct government intervention in setting up of market prices”.15 Most of the Swiss government

10 “The Swiss watch industry”, http://www.swissworld.org/en/switzerland/swiss_specials/swiss_watches/the_swiss_watch_industry/,11 Ibid.12 “The Swatch Group SA”, http://www.fundinguniverse.com/company-histories/The-Swatch-Group-SA-Company-

History.html13 The Global Enabling Trade Index, 2008 intends to present a cross-country analysis of the large number of measures facilitating

trade. The report covers four areas: market access, border administration, and transport and communications infrastructureand business environment.

14 “Background Note: Switzerland”, http://www.state.gov/r/pa/ei/bgn/3431.htm, January 200915 “Switzerland”,http:/ /www.ustr.gov/assets/Document_Library/Reports_Publications/2003/2003_NTE_Report/

asset_upload_file346_6225.pdf, page 354

5


Rank 2000 2001* 2002 2003 2004 2005 2006 2007 2008

1 US Finland US Finland Finland Finland US US US

2 Singapore US Finland US US US UK Switzerland Switzerland

3 Netherlands Canada Taiwan Sweden Sweden Sweden Denmark Denmark Denmark

4 Ireland Singapore Singapore Denmark Taiwan Denmark Switzerland Sweden Sweden

5 Finland Australia Sweden Taiwan Denmark Taiwan Japan Germany Singapore

6 Canada Norway Switzerland Singapore Norway Singapore Finland Finland Finland

7 Hong Taiwan Australia Switzerland Singapore Iceland Germany Singapore GermanyKong SAR

8 UK Netherlands Canada Iceland Switzerland Switzerland Singapore Japan Netherlands

9 Switzerland Sweden Norway Norway Japan Norway Sweden UK Japan

10 Taiwan New Zealand Denmark Australia Iceland Australia Hong Kong Netherlands CanadaSAR

* Switzerland for the year 2001 ranked 15th

Compiled by the author from Global Competitiveness Reports 2000–2008

Exhibit IIIGlobal Competitiveness Index: 2000–2008

Exhibit IVTrade Barriers – 2008 (in % of weighted tariff)

Source: “2008 World Trade Indicators published by the World Bank”, http://www.economist.com/markets/indicators/displaystory.cfm?story_id=115860

Hong KongSwitzerland

TurkeyUS

AustraliaCanadaEU24*JapanChina

South AfricaRussia

South KoreaBrazil

MexicoIndia

0 3 6 9 12 15

*EU 27 excluding Bulgaria, Cyprus, Romania

nil


6

activities are confined to provision of public services like defence, railways, infrastructure and postoffice. The government policy aims at maintaining macro-economic stability in the country.

Corruption is less in market economies than in command and mixed economies. Even though theUS financial crisis was alleged to be a result of corruption and greed, most of the market economiesare characterised by low levels of corruption. In a market economy, the scope for corruption is pre-empted to a great extent. Switzerland was ranked 5th out of 180 countries in ‘Transparency InternationalCorruption Perceptions Index16 2008’ (Exhibit V). In contrast, command economy of Cuba wasranked 65th and the mixed economy of India was ranked 85th, which shows a very high level ofcorruption in these economies.

The biggest drawback of Switzerland is that it is characterised by inequality of income and wealth.A study by the World Institute for Development Economics Research in 2006 using the statistics for

Source: “Transparency International Corruption Perceptions Index – 2008”, http://webcasts.acc.com/handouts/TI_CP_Index_2008.pdf, pages 4 and 5

Exhibit VTransparency International Corruption Perceptions Index* – 2008

16 The CPI indicates the degree of public sector corruption, and it ranges between 10 (highly clean) and 0 (highly corrupt).

the year 2000 came up with the data on wealth distribution for the whole world. According to thestudy, Switzerland had the highest concentration of wealth in the top 10% of the adult population(Exhibit VI). Other capitalist countries like US, Denmark, France, UK, Germany and Finland alsohave concentration of wealth in few hands. According a World Resources Institute report, Switzerland’s

Country Rank Country/ Territory CPI Score 20081 Denmark 9.31 Sweden 9.31 New Zealand 9.34 Singapore 9.25 Finland 9.05 Switzerland 9.07 Iceland 8.97 Netherlands 8.99 Australia 8.79 Canada 8.765 Cuba 4.385 India 3.4

* A country or territory’s CPI score indicates the degree of public sector corruption as perceived by business people andcountry analysts, and ranges between 10 (highly clean) and 0 (highly corrupt).

7


Gini coefficient17 is 0.33. The percentage of total income earned by the richest 20% of the populationin Switzerland is 40.3% and the percentage of total income earned by the poorest 20% of thepopulation is 6.9%.18

Country Wealth Owned by the Top 10%

Switzerland 71.3%

US 69.8%

Denmark 65.0%

France 61.0%

Sweden 58.6%

UK 56.0%

Canada 53.0%

Norway 50.5%

Germany 44.4%

Finland 42.3%

Exhibit VIPercentage of Wealth Held by the Top 10% of the Adult Population in

Various Countries

Source: Domhoff William G., “Wealth, Income, and Power”, http://sociology.ucsc.edu/whorulesamerica/power/wealth.html,September 2005 (Updated on December 2006)

Cuba – Command Economy“There is the Cuban joke that in the socialist paradise, there are only three minor economic

problems left to solve: breakfast, lunch and dinner.”19

Cuba, Iran, Libya and North Korea are some of the countries where command economy stillexists. Around 90% of the Cuban economy with a population of 11.4 million people is controlled bythe state. The government controls all means of production and determines prices for most of thegoods in the economy. It interferes heavily in the day-to-day economic lives of the Cuban people.Private entrepreneurship is thoroughly discouraged in Cuba. Laws governing private property are

17 Gini coefficient is the most commonly used measure of inequality of income distribution. The coefficient varies between 0, which reflectscomplete equality and 1, which indicates complete inequality (one person has all the income or consumption, all others have none).

18 “Economics, Business, and the Environment”, http://earthtrends.wri.org/text/economics-business/country-profile-174.html

19 Roberts M. James, “Cuba’s Phony Transition: Fidel Resigns, Raul Reigns”, http://www.heritage.org/Research/LatinAmerica/wm1820.cfm, February 19th 2008


8

very complex in Cuba. Even though the constitution of Cuba allows Cubans to hold private property,they cannot buy or sell property. This shows that Cuba does not have proper property rights in placeand that could be one of the reasons why it did not feature in 2009 IPRI. The government controls allthe spheres of life in Cuba. The governmental spending for the year 2008 equalled 72.6% of GDP20 .

Cuba, once a colony of US, gained its independence through the Cuban Revolution in 1959. FidelCastro (Fidel) overthrew Fulgencio Batista’s US-backed army and established his empire. On accountof the ongoing friction between Cuba and US, in 1960, Cuba nationalised three US oil refineriesnamely, Texaco (on June 29th 1960), Esso (on July 1st1960) and Shell (on July 1st1960). Thus, onJuly 3rd 1960, US suspended trading sugar with Cuba, by passing the Sugar Act in the Congress.Nearly 80% of the Cuban sugar exports to US were cut off. Cuba retaliated by nationalising all USbusinesses and commercial property on July 5th 1960. The following day, the then US PresidentDwight David Eisenhower cancelled the 700,000 tonnes of sugar remaining in Cuba’s quota for 1960.USSR decided to buy the 700,000 tonnes of sugar cut by US, and thus the sugar-for-oil exchangebetween Cuba and USSR was born. It was estimated at that time that Cuba was doing 85% of itstrade with USSR.

In September 1960, Cuba nationalised all US banks. On October 13th 1960, Fidel nationalisedlocal firms, which included large agricultural estates, sugar refineries, banks, mining firms, largeindustries and privately owned urban property. Following this, US imposed a trade and economicembargo on Cuba excluding food and medicine on October 19th 1960.

Cuba defended itself against the US invasion at Bay of Pigs on April 17th 1961 and defeated theUS army after 3 days of fighting. On May 1st 1961, Fidel declared Cuba as a socialist country anddeclared himself as “a Marxist-Leninist and extended his personal dominion over every dimension ofgovernment”.21 Fidel established a centrally planned system and nationalised all means of production.

Even after the imposition of US embargo, Cuban agricultural production remained high, withUSSR buying sugar from it at more than the market price. But in early 1990s, as the USSR collapsed,so did Cuban economy and its agricultural production. Instead of choosing to open up its markets andagricultural production to the forces of free markets, Cuban government continued to control agriculturalproduction and marketing. As a result of the socialist management, the sugar production startedfalling, and hence the once prosperous sugar industry lost all its glory. It was opined, “Inefficientplanting and cultivation methods, poor management, shortages of spare parts, and poor transportationinfrastructure combined to deter the recovery of the sector.”22 Sugar industry fell from 8.1 millionmetric tonnes in 1989 to 3.5 million metric tonnes in 1995. In June 2002, Cuba “announced it wouldhave to close half of the country’s 156 decrepit sugar mills”.23

Shortages are common in Cuba, due to poorly run state factories and firms. Command economiesresult in the formation of shadow or black markets. Cuba’s black market has been flourishing becausewhen the government controls the distribution of goods and services, producers start selling things

20 “Cuba”, http://www.heritage.org/Index/Country/Cuba,21 Johnson Stephen, “Time For Consensus On Cuba”, http://www.heritage.org/research/latinamerica/bg1579.cfm, August

30th 200222 “Cuba’s Phony Transition: Fidel Resigns, Raul Reigns”, op.cit.23 Ibid.

9


illegally. Cubans have been increasingly buying the needed food and clothing from the black marketsat very high prices. The black markets bypass all the government restrictions. Moreover, Cubans getto buy the very essential items which are not available at the government ration shops.

In Cuba, government exercises control over employment issues. As per the Government statistics,about 75% of the labour force is employed by the state. The actual figure is however, closer to93%.”24 A meagre 3% of the total workforce (4.87 million) is allowed to be self-employed. If aforeign company intends to hire workers, it can be done only through the recognised state agencies.Workers are paid only a fraction of the amount that is charged to foreign companies.

Cuba has a very hostile business and investment environment characterised by dense regulationsand impenetrable communist bureaucracy. Trade is non-transparent and the government controlsimports and exports. The non-tariff barriers to trade are very restrictive. All these put together aredeterring foreign investment in Cuba. Most of the foreign investment in Cuba, takes place throughjoint ventures with state companies, which have majority of the ownership. A paper titled “The Legaland Administrative Framework for Foreign Trade and Investment by European Companies in Cuba”,given to the Cuban government by the European Union in July 2002 contained the problems thatwere encountered in the operations of joint ventures in Cuba. The paper pointed out the difficulty inobtaining work permits for foreign employees. It also complained that EU joint venture partners hadno say in hiring employees and often they were forced by the Cuban government to hire employeeswho were professionally not suitable and securing finance was also very difficult.25 The Cubangovernment did not respond. Cuba has been witnessing fall in foreign investment due to such difficultinvestment environment “Of the 540 joint ventures formed since the Cuban Government issued thefirst legislation on foreign investment in 1982 ... 287 remained at the close of 2005 ... Foreign directinvestment flows decreased from $448 million in 2000 to $39 million in 2001 and were at zero in2002.”26

The citizens of Cuba are denied the freedom of expression – the freedom of speech and press.Cuban jails contain prisoners of conscience, who have been detained just because of their beliefs.Cubans are denied the right to change their government. Assembly of more than three persons ispunishable under the law in Cuba. Access to internet and outside media is heavily controlled. It isillegal in Cuba to own a TV satellite dish. The 2009 Index of Economic Freedom, ranked Cuba 177out of 179 countries. The two countries ranked after it are Zimbabwe and North Korea; both of themare command economies.

Command economies are characterised by equitable distribution of income and wealth. Cubaunder Fidel in 1960s witnessed more equitable wages. The income gap between the farmers and theurban workers decreased as wages were controlled by the government. Fidels’s agenda, employmentfor all, brought all the classes on the same platform. All Cuban children go to school and even aremote village has a school in Cuba. It has a literacy rate of 99.8%. Cubans also enjoy a goodhealthcare, and they have achieved many breakthroughs in the field of biotechnology. And that is why

24 “Background Note: Cuba”, http://www.state.gov/r/pa/ei/bgn/2886.htm, August 200825 Ibid.26 Ibid.


10

HDI ranked Cuba 48th out of 179 countries (Exhibit VII). By 1986, Cuba’s Gini coefficient of 0.25was among the lowest in the world. Cuba has set an example of an egalitarian economy.

Exhibit VIICuba’s Human Development Index – 2006

Source: “2008 Statistical Update Cuba”, http://hdrstats.undp.org/2008/countries/country_fact_sheets/cty_fs_CUB.html,December 18th 2008

But in 1990s, following the collapse of USSR, Cuban economy was in a deep crisis. To alleviatethe crisis, Cuba introduced some market reforms, like legalisation of dollar, allowing foreign investment,opening of the country for tourism, legalisation of some private enterprises and self-employment for150 occupations. Following the legalisation of dollar, the Cuban Peso became worthless and inequalitiesbetween the Cubans rose. The Cubans who had access to dollars earned higher incomes. Jobs likedriving taxis’ and working at restaurants which earned salaries/tips in dollars from foreign businessesand tourists became highly desirable. Cuba’s Gini coefficient of 0.40 in 1999 turned up similar to US’.The Cuban government tightly controlled the small private sector that evolved during 1990s.

Fidel in his Cuba “established Soviet-style rationing of housing, goods, and food”27 . Cuba’s rationingsystem started in 1962, which severely limited the quantity and choice of Cuban consumers. Peopleof Cuba for many decades have been surviving on ration books that provide limited amount ofessential products like rice and beans. Cuban parents can buy subsidised milk powder (which comesto one glass a day) for children less than 7 years of age. Once a child turns 8 years old, it is notavailable. Fresh fruits and meat are scarce and beyond the reach of ordinary Cubans. The ration,which the government provides, lasts only 10–15 days and many Cuban women, in a desperateattempt to feed their families, have turned to prostitution so that they get enough money to buyprovisions for the remaining half of the month in the expensive Cuban black markets. In October2008, it was reported that the Cuban government was putting a limit on how much fruits and vegetablesCuban people can buy in farmers’ market. Lettuce was “limited to two pounds per person”.28

Command economies have very low unemployment rate compared to market and mixed economies.Cuban government has been committed to provide employment to each of its citizen. Cuba also has amoderate level of inflation (Exhibit VIII).

27 “Cuba’s Phony Transition: Fidel Resigns, Raul Reigns”, op.cit28 Garcia Anne-Marie, “Cuba Begins Rationing Food”, http://www.infowars.com/cuba-begins-rationing-food/, October 12th

2008

HDI value 2006

Life expectancy at birth (years) 2006

Adult literacy rate (ages 15 and above (%)) 2006

Combined primary, secondary and tertiary gross enrolment ratio (%) 2006

GDP per capita (PPP in $) 2006

0.855 77.9 99.8 94.8 6,876

11


There are very few markets in Cuba and many of the farmers are prohibited from selling theirextra produce in the markets. In February 2008, Fidel Castro’s nearly five decades of rule came to anend when his brother Raul Castro (Raul) was appointed the President of Cuba. President Raul in2008 announced that farmers will be allowed to sell their extra produce in local markets and also,there will be large scale distribution of land to private farmers. However, “farmers still face rulesabout what and how much they can plant, and risk losing their land if they fail to meet governmentproduction quotas. They are also required by law to sell any surplus to farmers’ markets”.29

With the coming of Raul to power, some are hoping that Cuba may open up and witness somechanges in the economic realm. But many analysts believe Cuba’s transition to a market economy isnot possible as long as Fidel is alive. However, to make a start in loosening the Cuban economy, Raulin February 2008 made some announcements (Exhibit IX). Countries like Canada, Spain, China andRussia are emerging as prominent foreign investors in Cuba. Many analysts agree with the notion thatCuba will slowly make a transition to a conventional market economy.

Country Inflation (CPI) (%) Unemployment Rate (%)

Switzerland 0.9 2.5

Cuba 3.6 1.8

India 6.4 7.2

Exhibit VIIIInflation and Unemployment Figures of Switzerland, Cuba and India – 2008

Compiled by the author from 2009 Index of Economic Freedom

Exhibit IXAnnouncements made by Raul Castro (February 2008)

• Expanding access to public land for private farmers

• Permitting some Cubans to own their homes

• Increasing wages and retirement pensions

• Licensing private taxis to operate

• Limited deregulation of the construction industry

• Expanding access to certain previously restricted consumer goods (like cell phones, computers,microwaves, toasters, DVD players, motorcycles, air conditioners, electric ovens, andagricultural supplies and tools)

• Launching a new 24-hr. television station to include mostly foreign-produced content.

Compiled by the author from: “Background Note: Cuba”, http://www.state.gov/r/pa/ei/bgn/2886.htm, August 2008

29 “Cuba giving land to private farmers”, http://economictimes.indiatimes.com/articleshow/msid-2929895,prtpage-1.cms, April 6th 2008


12

India: Mixed EconomyJawaharlal Nehru, India’s first Prime Minister introduced the concept of mixed economy in India.

He intended to incorporate the best features of market and command economy in India. Till 1990s,the government occupied a very important role in the economy and private sector was severelyregulated and thoroughly discouraged by excessive bureaucratic controls. State was actively involvedin providing for healthcare, education, defence and development of infrastructure in the country. Allthe other major industries like mining, banking and insurance, communications, transportation,manufacturing and construction were also under government control.

In 1990s, there was a paradigm shift in the Indian economic policy. Private sector was invited totake on sectors like education, communications, civil aviation, healthcare, banking and insurance. Asa result, government and private players were present in most of the sectors simultaneously. In thecivil aviation sector, there have been government’s Indian Airlines and Air India, co-existing withprivate airlines like East West Airlines, Air Deccan, Go Air, Jet Airways, Kingfisher Airlines, etc.Private sectors also started having a firm grip on educational and healthcare sectors. India’s financialsectors have (as on 2009), “28 state-owned banks controlling about 71% of commercial banking, 29private banks, and 31 foreign banks.”30 In the recent times, development of infrastructure has beenopened to private sectors also. There is private property in India, but it needs improvement in the areaof protection of property rights. India was ranked 46th in 2009 IPRI with a score of 5.6.

The private sector’s role in the economy has raised overall production and efficiency.Telecommunication sector, after the entry of private players became very efficient and cost-effective.The advent of private sector in civil aviation increased the comfort in travelling and the airfares gotslashed due to the healthy competition between the air carriers. Private sector in India has set veryhigh standards in the education, healthcare, banking and tourism segments.

Since private sector’s aim is maximisation of profit, they venture only into those avenues whichwill increase their revenues. Therefore, the government provides services to rural and low-incomepeople who are largely untouched by the private sector. Indian government has retained the ownershipover the strategic sectors like defence and artillery, maintenance of law and order and railways. Thus,in India, government controls the sectors which are important for its growth and stability. The totalgovernment expenditure in India is moderate, equalling 27.2% of GDP.31

India has a huge consumer base. It is the second largest consumer market in terms of population.While production of goods and services are carried by both private individuals and government, thedecision about consumption of goods and service rests entirely on the consumers. Indian consumersdecide what to buy out of all the choices given. And incomes of the consumers and prices of goodsand services also play an important role in determining consumption. In the recent years, Indianconsumers have become environment friendly and “eighty-eight percent of Indian consumers areprepared to pay more for goods that are environmental friendly.”32 Prices in Indian markets are

30 “India”, http://www.heritage.org/Index/Country/India, 200931 Ibid.32 “Indian consumers favour eco-friendly products: study”, http://www.thaindian.com/newsportal/business/indian-

consumers-favour-eco-friendly-products-study_100129834.html,

13


determined by the interaction of demand and supply forces of goods and services. Even thoughIndian government does not tell people what to buy or sell, it is actively involved in regulating themarket.

Corruption is very highly prevalent in India (Exhibit VI). In India, the difference between thepublic and private sector is clearly visible. Public sector undertakings have become the property of afew politicians. Despite being run by the government, Indian economy is characterised by a greatdisparity between the rich and the poor. India’s Gini coefficient is 0.38 where 46.1% of the totalincome is earned by the richest 20% of the population, and just 8.1% of the income is earned by thepoorest 20% of the population.33

Compared to market economies, mixed economies have a low standard of living measured interms of HDI and per capita GDP. India’s HDI value34 is 0.609 with a rank of 132nd and its GDP percapita35 is $2,489. India is ranked 123rd in the 2009 Index of Economic Freedom. Out of all the threeeconomies, Switzerland is the freest economy followed by India and Cuba (Exhibit X).

Compiled by the author from “Explore the Data”, http://www.heritage.org/Index/Explore.aspx

Exhibit X2009 Index of Economic Freedom of Cuba, India and Switzerland – A

Comparative Analysis

33 “Country Profile – India”, http://earthtrends.wri.org/text/economics-business/country-profile-85.html34 “2008 Statistical Update India”, http://hdrstats.undp.org/2008/countries/country_fact_sheets/cty_fs_IND.html, December

18th 200835 Ibid.

Most of the market economies of the world like Switzerland, US, Singapore, Hong Kong haverelatively open market systems in their respective countries. Neither market economy nor commandeconomy exists in pure form. The basic difference between the two is that while in a market economybuyers and sellers decide the three basic questions of the economy, in a command economy thegovernment pulls the string. In some degree or other, all the economies of the world are mixedeconomies, with market features and government controls existing simultaneously. The question thatremains to be answered is how much mixed an economy should be.

Country Name

Overall Score

Business Freedom

Trade Freedom

Fiscal Freedom

Government Size

Monetary Freedom

Investment Freedom

Financial Freedom

Property Rights

Freedom from

Corruption

Labour Freedom

Cuba 27.9 10.0 64.4 45.9 - 67.0 10.0 10.0 10.0 42.0 20.0 India 54.4 54.4 51.0 73.8 77.8 69.3 30.0 40.0 50.0 35.0 62.3

Switzerland 79.4 82.9 85.4 67.5 65.3 83.9 70.0 80.0 90.0 90.0 79.2

Me0003 switzerland, cuba and india addressing the troika 1 (1)

Documents

Transcript of Me0003 switzerland, cuba and india addressing the troika 1 (1)