Concepts of World Economy

Distribution networks supply goods and services to the economy and so there are three such models: state, market and state market mix. The state system is such that the state shall supply goods and services and the consumer shall not have to bear any burden of payment (USSR / Communist China), in the market mode of distribution the goods shall be brought in the market and the forces of demand and supply shall determine prices (Capitalist economies), the third kind is the most prevalent system where some services that are essential are supplied by the state whereas the remaining are open to the market to supply and for these the consumer has to bear prices. The goods supplied by the state shall be subsidised or be free.

Capitalism: This system emerged in the work of Adam Smith, Wealth of Nations (1776). It became popular among the countries of America and Europe. The system had the private sector deciding the questions like What to produce? How much to produce? What price to sell it at? Adam Smith wanted free competition, non-interference by state to ensure that the markets brought equilibrium.

Socialism: In this the state had a larger role in deciding the questions of distribution and supply, it also believed in collective ownership over all assets and means of production as was in USSR. The Communism philosophy believes in state ownership over everything and absolute power to state for running the economy (as in pre 1985 China). These philosophies saw their roots in Karl Marx’s work.

Market economy: The great depression of 1929 saw a failure of the Smithsonian ideas of Capitalism failing as the economies collapsed and large scale unemployment was seen. The new idea of economy was proposed by John Maynard Keynes. He suggested that the capitalist economies absorb certain good qualities of socialist economies like, production of basic goods and services.

This would mean that the state can guarantee a basic standard of living for the people and thus increase their purchasing power to create a demand for market based goods. His ideas helped the depression hit economies come out of the turmoil. The states now started producing the goods that were absolutely essential for survival “public goods”. The market forces were now focused on goods that were non-essential. This created a social sector.

A second version was proposed for the socialist states. They were advised to accept the self- correcting power of the market forces and move towards a mixed economy. The suggestion was rejected by the communist and socialist states and this would lead to their economic collapse as was seen in 1991 (USSR and most eastern European nations).

Some like China in 1985 started Open Door policy and this was seen as a transition to a market socialism. This was going to create a huge market economy in China but the same didn’t happen in USSR and there was a period of economic turmoil as the transition from pure socialism to mixed economy happened.

Democratic nations had smooth transitions and most favoured a mixed economy to a pure market or socialist one. Eventually it was decided that the mixed economy was the only solution for a country and the extreme form of capitalism or socialism was to be avoided. This ended the question of dichotomy of the older economic models.

India too started as a mixed economy however it had leaned more towards a socialist pattern till the structural changes in 1991. The socio economic and political forces in the country shall keep on reinventing this state market mix. However the East Asian economies took this shift from state control to a broader market control voluntarily whereas India did it under compulsions and too late i.e. 1990’s.

Washington Consensus

This was developed in Washington for helping the Latin American countries to come out of their crisis. The principles were

  1. Free flow of FDI

  2. Low tax rates and wider tax base

  3. Competitive currency rates.

  4. Secure property rights

  5. Deregulation, open trade, privatization

  6. Fiscal discipline

  7. Investment in fields that offer good economic returns or have potential to improve income distributions like healthcare, education and infrastructure.

It is a misguided belief that this system was an imposition of the Washington based institutions like IMF, WB and US treasury on developing countries. The anti-consensus people argued that these guidelines were forced on countries that sought funding or assistance from international agencies like IMF.

The consensus however gave rise to “Liberalization, Privatization and Globalization”. It also became known as “neo liberalism” as it was a rebirth of the Adam Smith based ideas of economy. India too saw the Washington consensus forced upon it by IMF during the “Balance of Payments” crisis in 1991. Open trade it was argued would only benefit the larger, developed economies as they were industrialised and not the poor countries whose industries couldn’t compete with them.

Sectors of an economy:

  1. Primary: Direct use of natural resources for production. E.g.: Agriculture, fishing, mining. India at the time of independence was an agrarian economy (A country where primary sector is responsible for 50% of the GDP, but now it is not so even though a large number of people still depend on primary sector for employment).

  2. Secondary: Manufacturing or industrial sector. (A country where secondary sector is responsible for 50% of the GDP – industrial economy).

  3. Tertiary: Service sector. E.g. Banking, finance. (A country where tertiary sector is responsible for 50% of the GDP – Service economy).


The British rule lasted for two centuries before India won its independence in 1947. The sole purpose of the British economic policy was to reduce India into a feeder economy for expansion of Britain’s own modern industrial base. Pre independence India had a flourishing economy based on agriculture and handicrafts. The quality of workmanship in field on textiles and precious stones was high leading to a worldwide base for Indian products. The British policy was to turn India into an exporter of raw materials and consumer of finished goods. This led to disruption of Indian economy. The British never made any attempt to calculate the national or per capita income. Amongst Indian economists V.K.R.V Rao was first to do so.

Indian Economy



                                                                                                Fig 1: GDP


The Indian economy was highly agrarian as 85% of Indians depended on it. But the sector remained stagnant as the British focused on extracting maximum revenue from it without any capital development. The revenue collection system further aggravated woes. The poor productivity, lack of irrigation and other factors led to ruin of this sector. Although a few areas that grew cash crops were seen to prosper but here to rural indebtedness increased as food crops were neglected. Finally after partition the fertile and irrigated jute growing areas went to Pakistan and India lost its monopoly.


The Indian industry which was mainly handicraft based was destroyed by British. The reason being to support the industrial base of Britain. The export of finished machine made goods flooded India and the artisans couldn’t compete with them. The second half of the 19th century saw jute industry dominated by foreigner in east India and cotton mills dominated by Indians in western India. Iron and steel plants were started around the beginning of 20th century and after the Second World War the cement, sugar, paper industry started. But the contribution of these to GDP remained small. Moreover these remained confined to railways, ports, communications and other departmental undertakings.

Foreign trade

The foreign trade was an export surplus but the trade surplus went mostly in fuelling the expenses of the colonial administration in India. The common people never got the benefit of this trade. The trade also led to acute shortage of commodity for domestic demands. The British capital investment in railways was to benefit its own industrial base as the markets expanded. The communication facilities too were for the purpose of law and order and the Indians never derived any benefit out of it.



                                                                    Fig 2: Economy of the world

In all the British domination was seen in all aspects of the Indian economy and was the main reason it remained stagnant for two centuries.

The structure and organization of Villages and Towns

  • The village community was based on a simple division of labour. There existed classes of people called farmers, weavers, goldsmiths, carpenters, potters, oil pressers, washermen, cobblers, barber-surgeons, etc. All these occupations were hereditary and passed by tradi­tion from father to son. These craftsmen were paid a stipend out of the crops at the harvest time in lieu of the services performed

  • Most of the food produced in the village was consumed by the village population itself. The raw materials produced from primary industries were the feed for the handicrafts. Thus the interdependence of agriculture and hand industry provided the basis of the small village republics to function independently of the outside world.

  • The villages although were self sufficient but they did acknowledge some outside authority, may be that of a local princeling, who in turn may be under a Muslim Nawab or a Hindu king, by paying a portion of the agricultural produce varying between one-sixth to one-third or even in some periods one-half as land revenue. The land revenue sustained the government.

  • The villages also had panchayats for dispute resolution and money lenders who lent at exorbitant rates to farmers. The villages existed in peace but still were affected by wars and aggression. But lack of transportation and a central government helped their survival.

  • The Indian industries "not only supplied all local wants but also enabled India to export its finished products to foreign countries."

  • Thus, Indian exports consisted chiefly of manufactures like cotton and silk fabrics, calicos, artistic wares, silk and woollen cloth. Besides, there were other articles of commerce like pepper, cinnamon, opium, indigo, etc.

  • In this way, Europe was a customer of Indian manufactures during the 17th and 18th centuries. It was this superior industrial status of India in the pre-British period that prompted the Industrial Commission (1918) to record :

  • "At a time when the West of Europe, the birth place of modern industrial system, was inhabited by uncivilised tribes, India was famous for the wealth of her rulers and for high artistic skill of her craftsmen. And even at a much later period, when the merchant adventurers from the West made their first appearance in India, the industrial development of this country was, at any rate, not inferior to that of the more advanced European nations".

  • The period is broadly divided into industrial growth during the 19th century and industrial progress during the 20th century. It was mainly the private sector - whether indigenous or foreign — that carried industrialization forward.

  • Only after the First World War some protection was granted to Indian industries otherwise Indian industry had to weather all storms and face world com­petition on its own strength. This explains the slow growth of industrialization.

  • Within the Indian community, conditions were not favourable for the emergence of industrial leaders, partly because of the peculiar way in which factory industry came to India, as compared to its development in England.

  • In the West two principal groups were ready to set up factories : the merchants and the master craftsmen. The merchants had capital, marketing ability and capacity to manage labour. The master craftsmen did not have capital but had understood the materials and their proper handling.

  • Because of certain peculiar features, neither Indian merchants nor Indian craftsmen took interest in the factory system

  • Most Indian merchants belonged to the Baniya or moneylending community. They possessed capital and were always eager for its security and profits. But when the factory system was introduced in India by the British, the merchant class found greater opportunities for trad

  • The development of shipping nd railways resulted in larger trade, both external and internal. Besides, there were more opportunities for lending money. Thus, the merchants found greater scope for profits in their traditional occupations and hence did not give them up and take to the factory industries.

  • At the same time, Indian craftsmen too did not play the part played by their western counter-parts in the field of industrialization because they did not possess large capital. Besides, they were without proper training and education.

Tariff Protection to Indian Industries

  • In 1923 the Government controlled by the British agreed to give tariff protection to the Indian industries on recommendation of the First Fiscal Commission.

  • The protection was given from the period of 1924 to 1939 and extended to key sectors. This was used to full advantage by the Indian entrepreneurs and they succeeded in capturing the Indian market and also eliminating foreign competition by 1939.

  • The First World war was a boon for the local industry as the demand for goods increased. New industries came up to meet this demand and this led to full utilization of capacity and increase in output. Such industries were known as war babies.

  • The tariff protection and war together made Indian industrialists dominant compared to foreigners.

Causes of slow growth of private enterprise in India's industrialization (1850-1957)

  • Unimaginative private enterprise.

    • One impor­tant reason frequently mentioned is the inadequacy of entrepreneurial ability

    • Indians were reluctant to enter the industrial field because of the comparatively easier and secure scope for profit which existed in trading and moneylending.

    • The Britishers who pioneered industrial change in India were not really interested in industriali­zation of the country as such. But then Indian industri­alists too were so short-sighted, they rarely bothered about the future and cared very little for replacement and for renovation of machinery.

    • They were influenced by nepotism rather than ability in their choice of personnel. They were also influenced by their trading background viz., high price and high profit margin rather than low prices and larger sales.

  • Problem of capital and private enterprise

    • :In the 19th and 20th centuries, Indian industrialists had suffered from lack of adequate capital. Just as British enterprise was prominent, so also British Capital was significant in India's industrialisation.

    • Capital was scarce not only because the resources of the country were underdevel­ oped but also because the avenues for the investment of surplus wealth were few. There were no Government loans or company stocks and debentures. Accordingly, people held their wealth in the form of gold and silver.

    • There was complete absence of financial institutions to help the transfer of savings to industrial investment. The indigenous financial institutions concerned themselves with rural moneylending and financing of internal trade.

    • In the beginning funds for investment came from surpluses earned in rural moneylending and trading. But in course of time new resources were also tapped. For instance rulers and princes, those who amassed wealth from opium trade and in the cotton boom during the civil war in America, wealthy professional people like doctors and lawyers, Government officials, etc.-these people were induced to part with their wealth and savings for investment in industrial enterprise.

  • Private enterprise and the role of the Govern­ment.

    • One of the important reasons and according to some authorities, the most important reason for the slow growth of Indian industries was the lack of support from the Government.

    • Indian enterprise was operating under a foreign government which was extremely unsympathetic to native private enterprise.

    • The tariff policy in India reflected the needs of business interests in Great Britain. The British interests advocated free access to the Indian market. Till 1924 the Government refused to impose custom duties on the import of foreign goods. Even when they imposed low duties on some goods for purposes of collecting revenue, they sought to neutralise their effects by imposing equivalent excise duties on goods of local origin.

    • When the Government ultimately adopted a policy of protec­ tion, it did not give protection to all industries but only to a few selected industries which fulfilled certain specified conditions.


  • The theory of "demographic transition" postulates a three stage sequence of birth and death rate as typically associated with economic development.

  • First Stage of Demographic Transition :

    • Death rates are high in the first stage of an agrarian economy on account of poor diets, primitive sanitation and absence of effective medical aid.

    • Birth rates are also high in this stage as a consequence of widespread prevalence of illiteracy, absence of knowledge about family planning techniques, early age of marriage and, deep-rooted social beliefs and customs about the size of the family, attitude towards children.

    • In such a society the actual rate of growth of population is not high since high birth rate is balanced by high death rate. It is a stage of high growth potential but of low actual growth.

  • Second Stage of Demographic Transition :

    • Economic development also brings about all-round im­provement including the improvement in transport which makes the supply of food regular. All these factors tend to reduce death rate.

    • Thus in the second stage, birth rate remains high but death rate begins to decline rapidly. This accelerates the growth of population. High growth poten­tial of the first stage is realized in the high actual growth in the second stage as a consequence of decline in death rate.

    • High birth rate and falling death rate contribute to the growth of the average size of the family in the second stage.

  • The Third Stage of Demographic Transition :

    • Economic development further changes the character of the economy from an agrarian to a partially industrial­ized one. With the growth of industrialization, popula­tion tends to shift away from rural areas towards industrial and commercial centres.

    • One of the features of economic development is typically increasing urbaniza­tion, and children are usually more of a burden and less of an asset in an urban setting than in a rural. The consciousness to maintain reasonable standard of living tends to reduce the size of family in an industrialized economy; since the death rate is already low, this is possible only if birth rate falls.

    • Thus, the characteristics of the third stage are low birth rate, low death rate, small family size and low growth rate of population. This is the stage of incipient decline of population.

  • Historically it has been observed that death rate can be controlled more easily because the measures to reduce death rate are exogenous in nature and hence readily acceptable to the people.

  • But the reduction of birth rate can be brought about by operating on endogenous factors, like changing social attitudes and customs, beliefs and dogmas about the size of the family, about marriage, etc. This requires a much longer time than the fall of death rate.

  • Consequently, birth rate tend to fall after a time lag. The second stage of demographic evolution has, therefore, been termed as the stage of population explosion. This stage is the most hazardous period for a developing economy.

Q.Which of the following has/have occurred in India after its liberalization of economic policies in 1991?
1. Share of agriculture in GDP increased enormously.
2. Share of India’s exports in world trade increased.
3. FDI inflows increased.
4. India’s foreign exchange reserves increased enormously.
Select the correct answer using the codes given below : (UPSC CSAT 2017)

  1. 1 and 4 only

  2. 2, 3 and 4 only

  3. 2 and 3 only

  4. 1, 2, 3 and 4

Ans . B

Q.Consider the following in respect of ‘National Career Service’:
1. National Career Service is an initiative of the Department of Personnel and Training, Government of India.
2. National Career Service has been launched in a Mission Mode to improve the employment opportunities to uneducated youth of the country.
Which of the above statements is/are correct? (UPSC CSAT 2017)

  1. 1 only

  2. 2 only

  3. Both 1 and 2

  4. Neither 1 nor 2

Ans . B

  1. Labour Ministry launched this portal in 2015.

Q.With reference to ‘National Skills Qualification Framework (NSQF)’, which of the statements given below is/are correct?
1. Under NSQF, a learner can acquire the certification for competency only through formal learning.
2. An outcome expected from the implementation of NSQF is the mobility between vocational and general education.
Select the correct answer using the code given below: (UPSC CSAT 2017)

  1. 1 only

  2. 2 only

  3. Both 1 and 2

  4. Neither 1 nor 2

Ans . B

Q.Recognition of Prior Learning Scheme’ is sometimes mentioned in the news with reference to (UPSC CSAT 2017)

  1. Certifying the skills acquired by construction workers through traditional channels.

  2. Enrolling the persons in Universities for distance learning programmes

  3. Reserving some skilled jobs to rural and urban poor in some public sector undertakings

  4. Certifying the skills acquired by trainees under the National Skill Development Programme

Ans . A

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