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


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

  1. 1. 1 Switzerland, Cuba and India:Addressing the Troika of ... Switzerland, Cuba and India: Addressing the Troika of Economic Problems in Three Economies All the economies of the world face the problem of scarcity of resources, which limits the production activities. Scarcity of resources makes an economy face trade-offs as producing more of one commodity means producing less of another commodity. Such trade-offs compel an economy to answer the three fundamental questions: What goods will be produced? How will the goods be produced? And for whom will the goods be produced? Economic Systems (Market, Command and Mixed) are the ways through which countries address these three fundamental posers. Each type of economic system has its own way of deciding what commodities are to be produced, how and for whom. Switzerland – A Market Economy Switzerland 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 enterprises were privatised in Switzerland. FriedrichA. Hayek, theAustrian economist, opined, “Private property isthemostimportantguaranteeoffreedom.”1 Property rights2 are important for the proper functioning of an economy. People in Switzerland are guaranteed private property rights, and they do not fear unjust dispossession. Switzerland has one of the best property rights regimes. It was ranked 8th out of 115 countries with a score of 8.2 in the 2009 International Property Rights Index (IPRI)3 . Switzerland is 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 the basis for class discussion rather than to illustrate either effective or ineffective handling of a management situation. The case was compiled from published sources. © 2009, IBSCDC. No part of this publication may be copied, stored, transmitted, reproduced or distributed in any form or medium whatsoever without the permission of the copyright owner. Ref. No.: ME0003 1 Dedigama C. Anne, “INTERNATIONAL PROPERTY RIGHTS INDEX (IPRI) 2009 Report”, http://, 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 of that 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, in a Modern Economy”, Economics (Paul A. Samuelson and William D. Nordhaus)
  2. 2. Switzerland, Cuba and India:Addressing the Troika of ... 2 world’s freest economies. Switzerland was ranked 9th (Exhibit I) with a score of 79.4 in the 2009 Index of Economic Freedom4 . Exhibit I Index 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 74.5 Compiled by the author from: “2009 index of economic freedom – Ranking the Countries”, 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 have higher per capita income (Exhibit II). According to UNDP’s 2008 statistical update, Switzerland’s GDP per capita for a population of 7.5 million people is $37,3965 . Switzerland has also some of the highest wages in the world. Thus, a high standard of living prevails in the country. The market economy 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 defines economic freedom as ‘the fundamental right of every human to control his or her own labour and property. In an economically free society, individuals are free to work, produce, consume, and invest in any way they please, with that freedom both protected by the state and unconstrained by the state. In economically free societies, governments allow labour, capital and goods to move freely, and refrain from coercion or constraint of liberty beyond the extent necessary to protect and maintain liberty itself.’ 5 “2008 Statistical Update Switzerland”,, December 18th 2008 6 The HDI provides a composite measure of three dimensions of human development: living a long and healthy life (measured by life expectancy), being educated (measured by adult literacy and enrolment at the primary, secondary and tertiary level) and having a decent standard of living (measured by Purchasing Power Parity (PPP), income). 7 “2008 Statistical Update Switzerland”, op.cit.
  3. 3. 3 Switzerland, Cuba and India:Addressing the Troika of ... In market economies, the means of production are owned by private individuals and most cost-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’s market economy is based on international trade and banking. Swiss banks are known for very high standards of banking and financial services. The Swiss are the leaders in private banking. In 2003, it was reported that Switzerland with “its 400 banks manage ... one-third of the world’s wealth that resides outside its country of origin”.8 The Swiss banks are not subjected to any legal scrutiny. That is why the money (legal/illegal) from the entire world is deposited in Swiss banks. In September 2008, “the UBS of Switzerland revealed to the US that it held 47,000 secret accounts forAmericans”.9 Capitalism results in generation of wealth – the Swiss banking business is an attestation to this fact. Exhibit II Nations 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 BruneiDarussalam 49,900 9 Singapore 48, 520 10 US 45, 850 12 HongKong,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 PPPfigures. Compiled by the author from: “Gross national income per capita 2007, Atlas method and PPP”, http://, October 17th 2008 8 Beng Kim Phar, “Capitalism’s Mistress: Private Banking”,, June 25th2003 9 Aiyar Shankkar, “Minting political capital”, 248/20090422/1585/tnl-minting-political-capital_1.html, April 22nd 2009
  4. 4. Switzerland, Cuba and India:Addressing the Troika of ... 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 and advances in organic agriculture and poultry production. Chemicals and engineering products are the biggest exports of Switzerland. Watches occupy third place in the country’s exports. About 95% of Switzerland’s watches are exported and it stands as the world largest watch exporter in terms of value. In 2006, Swiss watch exports were valued at 13.7 billion francs10 . The average export price of a Chinese watch in 2006 was $1, in Hong Kong it was $8, while Switzerland’s export price of a watch was on an average $41011 . Switzerland has extremely well-developed infrastructure for scientific research. The Research Institute of Organic Agriculture is the world’s leading information and documentation centre for organic agriculture. Swiss companies spend a lot of money on Research and Development due to which they come up with very innovative products. Swatch, the famous Swiss watch company has always flirted with technology. Besides manufacturing watches, Swatch is into manufacturing “microprocessors, smartcard technology, portable telephones, and other future-oriented designs, such as 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-rate infrastructure and efficient markets, has boosted Switzerland’s global competitiveness, and it has been 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 economy for 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 and investment 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 trade and investment. Exports generate lot of income and bost the economic growth. “The Swiss economy earns roughly half of its corporate earnings from the export industry, and 62% of Swiss exports are destined for the EU market.”14 GovernmenthasaverylimitedroletoplayinSwitzerland.ThenewagriculturalpolicyofSwitzerland, which came into effect from January 1st 1999 “began eliminating detailed market regulations and reducingdirectgovernmentinterventioninsettingupofmarketprices”.15 Most of the Swiss government 10 “The Swiss watch industry”,, 11 Ibid. 12 “The Swatch Group SA”, History.html 13 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 infrastructure and business environment. 14 “Background Note: Switzerland”,, January 2009 15 “Switzerland”, asset_upload_file346_6225.pdf, page 354
  5. 5. 5 Switzerland, Cuba and India:Addressing the Troika of ... 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 Germany Kong SAR 8 UK Netherlands Canada Iceland Switzerland Switzerland Singapore Japan Netherlands 9 Switzerland Sweden Norway Norway Japan Norway Sweden UK Japan 10 Taiwan NewZealand Denmark Australia Iceland Australia Hong Kong Netherlands Canada SAR * Switzerland for the year 2001 ranked 15th CompiledbytheauthorfromGlobalCompetitivenessReports2000–2008 Exhibit III Global Competitiveness Index: 2000–2008 Exhibit IV Trade Barriers – 2008 (in % of weighted tariff) Source: “2008 World Trade Indicators published by the World Bank”, displaystory.cfm?story_id=115860 Hong Kong Switzerland Turkey US Australia Canada EU24* Japan China SouthAfrica Russia South Korea Brazil Mexico India 0 3 6 9 12 15 *EU 27 excluding Bulgaria, Cyprus, Romania nil
  6. 6. Switzerland, Cuba and India:Addressing the Troika of ... 6 activities are confined to provision of public services like defence, railways, infrastructure and post office. 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 the US financial crisis was alleged to be a result of corruption and greed, most of the market economies are 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 International Corruption Perceptions Index16 2008’ (Exhibit V). In contrast, command economy of Cuba was ranked 65th and the mixed economy of India was ranked 85th , which shows a very high level of corruption in these economies. The biggest drawback of Switzerland is that it is characterised by inequality of income and wealth. Astudy by the World Institute for Development Economics Research in 2006 using the statistics for Source: “Transparency International Corruption Perceptions Index – 2008”, TI_CP_Index_2008.pdf, pages 4 and 5 Exhibit V Transparency 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 the study, 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 also have concentration of wealth in few hands.According aWorld Resources Institute report, Switzerland’s Country Rank Country/ Territory CPI Score 2008 1 Denmark 9.3 1 Sweden 9.3 1 New Zealand 9.3 4 Singapore 9.2 5 Finland 9.0 5 Switzerland 9.0 7 Iceland 8.9 7 Netherlands 8.9 9 Australia 8.7 9 Canada 8.7 65 Cuba 4.3 85 India 3.4 * A country or territory’s CPI score indicates the degree of public sector corruption as perceived by business people and country analysts, and ranges between 10 (highly clean) and 0 (highly corrupt).
  7. 7. 7 Switzerland, Cuba and India:Addressing the Troika of ... Gini coefficient17 is 0.33. The percentage of total income earned by the richest 20% of the population in Switzerland is 40.3% and the percentage of total income earned by the poorest 20% of the population 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 VI Percentage of Wealth Held by the Top 10% of the Adult Population in Various Countries Source:DomhoffWilliamG.,“Wealth,Income,andPower”,, 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 still exists.Around 90% of the Cuban economy with a population of 11.4 million people is controlled by the state. The government controls all means of production and determines prices for most of the goods 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 reflects complete 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”, 174.html 19 Roberts M. James, “Cuba’s Phony Transition: Fidel Resigns, Raul Reigns”, LatinAmerica/wm1820.cfm, February 19th 2008
  8. 8. Switzerland, Cuba and India:Addressing the Troika of ... 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 place and that could be one of the reasons why it did not feature in 2009 IPRI. The government controls all the 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. Fidel Castro (Fidel) overthrew Fulgencio Batista’s US-backed army and established his empire. On account of the ongoing friction between Cuba and US, in 1960, Cuba nationalised three US oil refineries namely, Texaco (on June 29th 1960), Esso (on July 1st 1960) and Shell (on July 1st 1960). Thus, on July 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 US businesses and commercial property on July 5th 1960. The following day, the then US President Dwight 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 exchange between Cuba and USSR was born. It was estimated at that time that Cuba was doing 85% of its trade with USSR. In September 1960, Cuba nationalised all US banks. On October 13th 1960, Fidel nationalised local firms, which included large agricultural estates, sugar refineries, banks, mining firms, large industries and privately owned urban property. Following this, US imposed a trade and economic embargo 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 the US army after 3 days of fighting. On May 1st 1961, Fidel declared Cuba as a socialist country and declared himself as “a Marxist-Leninist and extended his personal dominion over every dimension of government”.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, with USSR 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 and agriculturalproductiontotheforcesoffreemarkets,Cubangovernmentcontinuedtocontrolagricultural production and marketing. As a result of the socialist management, the sugar production started falling, and hence the once prosperous sugar industry lost all its glory. It was opined, “Inefficient planting and cultivation methods, poor management, shortages of spare parts, and poor transportation infrastructure combined to deter the recovery of the sector.”22 Sugar industry fell from 8.1 million metric tonnes in 1989 to 3.5 million metric tonnes in 1995. In June 2002, Cuba “announced it would have 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 economies result in the formation of shadow or black markets. Cuba’s black market has been flourishing because when the government controls the distribution of goods and services, producers start selling things 20 “Cuba”,, 21 Johnson Stephen, “Time For Consensus On Cuba”,, August 30th 2002 22 “Cuba’s Phony Transition: Fidel Resigns, Raul Reigns”, op.cit. 23 Ibid.
  9. 9. 9 Switzerland, Cuba and India:Addressing the Troika of ... illegally. Cubans have been increasingly buying the needed food and clothing from the black markets at very high prices. The black markets bypass all the government restrictions. Moreover, Cubans get to 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 to 93%.”24 A meagre 3% of the total workforce (4.87 million) is allowed to be self-employed. If a foreign 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 regulations and impenetrable communist bureaucracy. Trade is non-transparent and the government controls imports and exports. The non-tariff barriers to trade are very restrictive. All these put together are deterring foreign investment in Cuba. Most of the foreign investment in Cuba, takes place through joint ventures with state companies, which have majority of the ownership.Apaper titled “The Legal andAdministrative 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 that were encountered in the operations of joint ventures in Cuba. The paper pointed out the difficulty in obtaining work permits for foreign employees. It also complained that EU joint venture partners had no say in hiring employees and often they were forced by the Cuban government to hire employees who were professionally not suitable and securing finance was also very difficult.25 The Cuban government did not respond. Cuba has been witnessing fall in foreign investment due to such difficult investment environment “Of the 540 joint ventures formed since the Cuban Government issued the first legislation on foreign investment in 1982 ... 287 remained at the close of 2005 ... Foreign direct investment flows decreased from $448 million in 2000 to $39 million in 2001 and were at zero in 2002.”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 is punishable under the law in Cuba. Access to internet and outside media is heavily controlled. It is illegal in Cuba to own a TV satellite dish. The 2009 Index of Economic Freedom, ranked Cuba 177 out of 179 countries. The two countries ranked after it are Zimbabwe and North Korea; both of them are command economies. Command economies are characterised by equitable distribution of income and wealth. Cuba under Fidel in 1960s witnessed more equitable wages. The income gap between the farmers and the urban workers decreased as wages were controlled by the government. Fidels’s agenda, employment for all, brought all the classes on the same platform. All Cuban children go to school and even a remote village has a school in Cuba. It has a literacy rate of 99.8%. Cubans also enjoy a good healthcare, and they have achieved many breakthroughs in the field of biotechnology.And that is why 24 “Background Note: Cuba”,, August 2008 25 Ibid. 26 Ibid.
  10. 10. Switzerland, Cuba and India:Addressing the Troika of ... 10 HDI ranked Cuba 48th out of 179 countries (Exhibit VII). By 1986, Cuba’s Gini coefficient of 0.25 was among the lowest in the world. Cuba has set an example of an egalitarian economy. ExhibitVII Cuba’s Human Development Index – 2006 Source: “2008 Statistical Update Cuba”,, December 18th 2008 But in 1990s, following the collapse of USSR, Cuban economy was in a deep crisis. To alleviate thecrisis,Cubaintroducedsomemarketreforms,likelegalisationofdollar,allowingforeigninvestment, opening of the country for tourism, legalisation of some private enterprises and self-employment for 150 occupations. Following the legalisation of dollar, the Cuban Peso became worthless and inequalities between the Cubans rose. The Cubans who had access to dollars earned higher incomes. Jobs like driving taxis’ and working at restaurants which earned salaries/tips in dollars from foreign businesses and 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. FidelinhisCuba“establishedSoviet-stylerationingofhousing,goods,andfood”27 . Cuba’s rationing system started in 1962, which severely limited the quantity and choice of Cuban consumers. People of Cuba for many decades have been surviving on ration books that provide limited amount of essential products like rice and beans. Cuban parents can buy subsidised milk powder (which comes to one glass a day) for children less than 7 years of age. Once a child turns 8 years old, it is not available. 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 desperate attempt to feed their families, have turned to prostitution so that they get enough money to buy provisions for the remaining half of the month in the expensive Cuban black markets. In October 2008, it was reported that the Cuban government was putting a limit on how much fruits and vegetables Cuban 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 a moderate level of inflation (Exhibit VIII). 27 “Cuba’s Phony Transition: Fidel Resigns, Raul Reigns”, op.cit 28 Garcia Anne-Marie, “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. 11. 11 Switzerland, Cuba and India:Addressing the Troika of ... There are very few markets in Cuba and many of the farmers are prohibited from selling their extra produce in the markets. In February 2008, Fidel Castro’s nearly five decades of rule came to an end when his brother Raul Castro (Raul) was appointed the President of Cuba. President Raul in 2008 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 rules about what and how much they can plant, and risk losing their land if they fail to meet government production 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 some changes in the economic realm. But many analysts believe Cuba’s transition to a market economy is not possible as long as Fidel is alive. However, to make a start in loosening the Cuban economy, Raul in February 2008 made some announcements (Exhibit IX). Countries like Canada, Spain, China and Russia are emerging as prominent foreign investors in Cuba. Many analysts agree with the notion that Cuba 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 ExhibitVIII Inflation and Unemployment Figures of Switzerland, Cuba and India – 2008 Compiledbytheauthorfrom2009 Index ofEconomicFreedom ExhibitIX Announcements 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 • Expandingaccesstocertainpreviouslyrestrictedconsumergoods(likecellphones,computers, microwaves, toasters, DVD players, motorcycles, air conditioners, electric ovens, and agricultural supplies and tools) • Launching a new 24-hr. television station to include mostly foreign-produced content. Compiledbytheauthorfrom:“BackgroundNote:Cuba”,,August2008 29 “Cuba giving land to private farmers”,,prtpage-1.cms,April 6th 2008
  12. 12. Switzerland, Cuba and India:Addressing the Troika of ... 12 India: Mixed Economy Jawaharlal 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 severely regulated and thoroughly discouraged by excessive bureaucratic controls. State was actively involved in providing for healthcare, education, defence and development of infrastructure in the country.All the 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 to take on sectors like education, communications, civil aviation, healthcare, banking and insurance.As a result, government and private players were present in most of the sectors simultaneously. In the civil aviation sector, there have been government’s Indian Airlines and Air India, co-existing with private 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 financial sectors have (as on 2009), “28 state-owned banks controlling about 71% of commercial banking, 29 private banks, and 31 foreign banks.”30 In the recent times, development of infrastructure has been opened to private sectors also. There is private property in India, but it needs improvement in the area of 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 got slashed due to the healthy competition between the air carriers. Private sector in India has set very high standards in the education, healthcare, banking and tourism segments. Since private sector’s aim is maximisation of profit, they venture only into those avenues which will increase their revenues. Therefore, the government provides services to rural and low-income people who are largely untouched by the private sector. Indian government has retained the ownership over 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 total government 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, the decision about consumption of goods and service rests entirely on the consumers. Indian consumers decide what to buy out of all the choices given. And incomes of the consumers and prices of goods and services also play an important role in determining consumption. In the recent years, Indian consumers have become environment friendly and “eighty-eight percent of Indian consumers are prepared to pay more for goods that are environmental friendly.”32 Prices in Indian markets are 30 “India”,, 2009 31 Ibid. 32 “Indian consumers favour eco-friendly products: study”, consumers-favour-eco-friendly-products-study_100129834.html,
  13. 13. 13 Switzerland, Cuba and India:Addressing the Troika of ... determined by the interaction of demand and supply forces of goods and services. Even though Indian government does not tell people what to buy or sell, it is actively involved in regulating the market. Corruption is very highly prevalent in India (Exhibit VI). In India, the difference between the public and private sector is clearly visible. Public sector undertakings have become the property of a few politicians. Despite being run by the government, Indian economy is characterised by a great disparity between the rich and the poor. India’s Gini coefficient is 0.38 where 46.1% of the total income is earned by the richest 20% of the population, and just 8.1% of the income is earned by the poorest 20% of the population.33 Compared to market economies, mixed economies have a low standard of living measured in terms of HDI and per capita GDP. India’s HDI value34 is 0.609 with a rank of 132nd and its GDP per capita35 is $2,489. India is ranked 123rd in the 2009 Index of Economic Freedom. Out of all the three economies, Switzerland is the freest economy followed by India and Cuba (Exhibit X). Compiledbytheauthorfrom“ExploretheData”, Exhibit X 2009 Index of Economic Freedom of Cuba, India and Switzerland – A Comparative Analysis 33 “Country Profile – India”, 34 “2008 Statistical Update India”,, December 18th 2008 35 Ibid. Most of the market economies of the world like Switzerland, US, Singapore, Hong Kong have relatively open market systems in their respective countries. Neither market economy nor command economy exists in pure form. The basic difference between the two is that while in a market economy buyers and sellers decide the three basic questions of the economy, in a command economy the government pulls the string. In some degree or other, all the economies of the world are mixed economies, with market features and government controls existing simultaneously. The question that remains 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