It is panic for everyone

Inflation is on its highest mind-boggling 11 percent and many predict it will go up further. The middle class people those who start budgeting there expense before money comes in there hand. When the prices of essential things go higher, it adversely affected the middle class and poor people.

Current inflation is a global phenomenon and almost every country is suffering from it. The Goldman Sachs index of commodity price has been doubled since early 2007. Nominal price of oil increased by 150 % over the same period. In simple the global economy is just not producing enough to meet the rising world demand.

Some time ago the U.S president earned instant notoriety because he blamed China and India for the rise in food price. But there is a grain of truth in his statement. Emerging and developing countries have been growing very significantly faster than the rest of the world and there has been a steep increase in demand in these countries. This has been the major cause of the rise in the world demand because the economies of most developed countries have been stagnating.

Since there is no reason to believe that the world production will rise miraculously at least in near future, many people expecting that the price will keep on rising. And these expectations motivate the inflationary process. This cause trader to withhold stocks from the market in the hope to being able to sell these at higher price later on.

If government increase the domestic supply by importing food, will cause revenue loss as the price in international market is higher. At this time the credit policy becomes crucial. The Reserve Bank has to raise the interest rate and may also put restriction on the supply of credit. These measures will dampen overall aggregate demand in the economy by increasing the cost of burrowing, higher the cost of burrowing also discourage hoarding since the cost of maintaining the stock will become dearer.

Desperate time call desperate measures may be the time has come for the government to buy small quantity of food grain from the world market. This is an extremely costly option as the price is higher in the world market. The act of importing food will signal the domestic trader that the government is determined to curb the price; this in turn may induce the trader to release the stock because of the fear of making loss.

Of course the government will have to incur heavy loss on the food grain import because that food grain will sell at considerably lower cost than that of the imported price. It is important to subsidized basic food items which are consumed by the masses rather than the petroleum product which is only consumed by the richer.

Your comment is welcomed.

Oil price will fall down

We have witnessed the price hike of all petroleum products as the crude prices become higher in the international market. It rose up to 135$ per barrel. Usually when price go up demand falls. But world demand for oil has kept rising for five years even though the price has been become 4X of what it was earlier. The question arises that why the trend is not continuing with oil?

The short answer is the demand has indeed fallen in countries where consumers have borne the full brunt of higher price. In the US the price of petrol has crossed 4$ per gallon, so consumption is falling. But Oil demand is stayed high in Asia, where demand has been rising fastest. Why? Because most Asian governments have rigid price control on petroleum products. Though the global price has been skyrocketed, domestic price have risen very little, thanks to implicit government subsidies of trillions of dollars. This spares the pain of consumer. And in the absence of any pain, consumer have very rationally kept consuming. The International Energy Authority estimated in January 2008 the consumption in China, India and the middle East would rise by 1.2million barrels/day . This was partly because of highest growth of Asian nations and partly because of rigid price controls. The good news is that the Asian governments have decided to bite the bullet , china’s government has decided to increase the petrol and diesel prices by 18% and jet fuel by 25%. Malaysia has increased the price of petrol and diesel by 41% and Indonesia increased by 31%. Pakistan has announced to remove the subsidy which cost the 2.4 billion dollar last year by the end of 2008. In India the petrol is costlier by 5 Rs/liter and diesel by 3 Rs/ liter, these are timid, insufficient increase yet they should increase the conservation in coming months.

In sum many big Asian consumers, who earlier kept demand booming through price control, are finally changing course. That should cool demand in the second half of 2008 and so the price will come down.

Brain Drain...

With economic globalisation, talented professionals are on the move. One visible group is the information technology (IT) workers. They hail from select developing countries such as India, China, the Philippines and Eastern Europe who move to the OECD economies. The motivations for moving are mainly economic, seeking better jobs and higher income, although interlocking social factors such as family unions also influence the pattern of mobility.

IT is an important part of the “new economy.”
Most OECD countries want a share of this sector, but they face challenges in obtaining technical talent locally.

The labour market mismatch contributes to international mobility, but is compounded by the spectre of declining fertility rates, an aging population, and unpopularity of technical studies. China and India have become the major suppliers of technical professionals, with India having the largest pool of young people.

Immigration policies shape the mobility of IT professionals. Because of shortages, OECD governments have eased the entry of foreign skilled workers.

There are both positive and negative effects of international mobility. In the 1970s the outflows of talent were viewed as brain drain and public waste. If there is a relatively large outflow of talent over a long period, economic growth could be reduced, poverty increased and inequality worsened.

The Philippines may fit this unfortunate bill. Inequality results from a relatively smaller share of and greater demand for highly skilled professionals, evident from the huge income differential between Indian IT professionals and others.

Today emigration is seen as international mobility with several positive externalities such as remittance income, national human capital development, and national links to international innovation centres.

Remittance-income contributes foreign exchange and potentially economic development. A World Bank estimate put the total remittance inflows to developing countries at $126 billion in 2004.

Remittance income raises the economic well-being of most households. The engagement of IT professionals with a globalised industry brings in large export revenues, complementing the remittance income.

Today, India’s foreign exchange reserves are nearly $200 billion. Too rapid an expansion in foreign currency inflows leads to currency appreciation and inflationary pressure, known as the Dutch disease, commonly associated with oil economies. The rising value of the Indian rupee could undermine the competitiveness of both non-IT and IT exports.

With international mobility there’s also a migration “premium,” meaning higher salaries for IT workers as they have better prospects to work abroad. Hence, demand for technical education increases and subsequently educational infrastructure expands, thus raising the average education level over time.

A migration premium also suggests a wage-cost spiral that could erode India’s wage arbitrage advantage and compel firms to strategically diversify into higher-value production or face bankruptcy.

High wages could drive out small and medium enterprises too, leaving large firms to cherry pick the best talent.

But international mobility also means that Indian, Chinese and other professionals get to interact with their international counterparts located in innovation centers in the OECD countries. This facilitates the exchange of technical and commercial knowledge and opens up new export business opportunities.

The strong links between Bangalore, Shanghai and Silicon Valley are illustrative of this global network. One such international network is the Indus Entrepreneurs, or TiE, initiated in Silicon Valley in 1992 by Indian IT entrepreneurs. It has more than 40 chapters and 6,000 members worldwide.

Mobility contributes to national human capital development.

In India engineering admissions increased fivefold between 1992 and 2004. The number of IT admissions increased from 73,000 students in 1992 to 342,000 in 2004.

Mobility suggests that sending countries could gain their expatriate talent back if professional and economic opportunities were attractive, as they are increasingly so in China, India and Taiwan. Governments are busy courting talent by establishing R&D centres and science-technology parks.

These initiatives are designed to enhance the quality of economic growth by deploying expatriate talent for international competitiveness. Taiwan and China, and to a limited degree India, have experienced the return of high-skilled IT professionals.

Rich countries benefit directly from the subsidised supply of foreign IT workers.

Foreign talent helps maintain industry profitability. Indian and Chinese engineer-entrepreneurs in Silicon Valley contribute to US employment in R&D and design.

Receiving countries also benefit from foreign students’ revenues but more importantly from the future availability of highly educated foreign professionals.

The mobility of IT professionals suggests a range of costs and benefits for both receiving and sending countries,with the latter benefiting handsomely.