The Problems of Graft in Small and Large Economies

        Graft is a scourge to the whole country and human civilization. For any economy the silent acceptance of graft or corruption as a way of existence has far reaching consequences in the economy of the country as well as the attitude of the people living in it. Graft and corruption on top levels of bureaucracy is the harbinger of the economic system breaking into two divisions- one the real economy and the other the second economy. A system by its very birth can have either have a free floating economy or a controlled one. In modern times there is little or reason to believe that a totally open or laissez-faire system exist or do any real good nor does a closed system that is even more dangerous and pathetic. In most developed countries a free economy is mainly seen to be one that has certain parameters of legal framework and operates within the confines of certain disciplines failing which it can be as awful as the rigid closed system that is found in the other extreme. The prime reason for enacting such a discipline is to allow all the actors a level playing field. Any deviation from the standard established rules of framework will mean that system erosion has started to take place and must be quickly arrested lest it becomes a malignant disease destroying the very ethical base that it is founded upon.

      An economic system therefore keeps the framework well defined within a period of time so that actors within the system can be as flexible within the parameters offered by the framework. Over a period of time the framework of the system is adjusted in some areas so as to be made compatible with the ground realities facing the economy of the country. The level playing field is very important as it imbues confidence among the masses such that they generally draw inspiration and also aspire to behave ethically and morally for the betterment of the whole society. There are no privileged actors within the framework. Yet a lot still needs to be done to wean away privileged actors in businesses and the economy of a country. There are in fact or ought to be only meritorious actors who through their hard work, excellent skills and foresight bring forth positive transformation in the system processes within the framework that are advantageous for themselves and the other people living within the system.

     If the system is allowed to function with numerous loopholes and power politics then the system breaks slowly and steadily. First, the people’s confidence in the system breaks, the second is the breaking of the legal parameters as control over the same is lost through people themselves, the third is the onset of general compliance to negativity and indifference and lastly there is a general rut in the whole of the system leading to uncontrollable economic chaos.

     In India graft has been hot news and the very stability of the economic system is now under stress. This is a dangerous signal. There is great deal of erosion as far as confidence of the people is concerned. This is the first signs of trouble. The second is the breaking or intentional breaking down of the legal parameters that form the base of the system. There is enough proof of this as far as the ground realities suggest. For instance, people generally are inclined to be principled minded and upright in their actions especially on the lower strata of the population. However, there are indications that it is not graft that is assuming importance as news item, but the extension of the same to the lower strata of the populace. In fact, it has been seen that those politicians booked under law and imprisoned have been welcomed with majority votes in their favor in their own constituencies. People have now started forming regional vested interests for meeting their ends than resort to upright questioning of the acts of their corrupted leaders. This if allowed to be carried out would assume gigantic levels of corruption in the economy and the second stage of rot would take place as the legal framework would be there in principle hammering away the law while the size able portion of the populace would be conveniently resorting to the stages set for the second economy.

Real and the Second Economy

    There is great danger of a second economy reaching unmanageable or untamed proportion if things go out of hand and there is no general consensus among the leaders to stem the rot by punishing the guilty both in top official portions, industry and in the parliament. The levels of danger posed by the second economy or call it the black economy has ample proof of destroying some of the world’s largest economies. A good example is the erstwhile U.S.S.R.  It all started with shortages of essential items and high prices and then later with the connivance of the officials the second economy started to boom covering the shortages and lust for good life and in the course of time it became rampant and started to challenge the real economy where the revenues to the government started to fall drastically. The supply chain that ran the second economy was not simply twice the efficiency of the real economy or the official economy, but was multi fold and this naturally toppled everything and the system became one of laissez faire although officially there still remained the well defined closed system. The freer system is always the natural course that people would take and has no artificial boundaries.  But a system over that of another system stems rot and the whole economy bursts into chaos. Remember, the erstwhile U.S.S.R had a rigid and disciplinary policing system yet in spite of that everything went haywire. Why? Because demand and supply mismatch cannot grow beyond a certain ratio or the masses start influencing and start exerting force on the very officialdom and bribing them monetarily or socially into stealthy connivance and this results in rot of the real economic system.A second economy also spirals up the inflation leaving out major part of the population from the minimum affordable standards.

Monetized and Non-Monetized Assets

  In most economies there are monetized and non-monetized assets and these must be carefully defined. If in countries these are not easy to distinguish then the monetized assets are defined and the rest are defined as non-monetized as and when they appear before the public view and understanding they are to be defined only as such. This distinguishing factor is very important especially in those countries which have a lot of cultural and natural resource assets. This would again mean that the monetized wealth alone should be under the finance ministry and the rest of the non-monetized assets should be with a ministry of culture or forest and so on. If a non-monetized asset has to be monetized then a separate legislation has to be passed in the parliament and then the matter is passed on to the ministry of finance for further legitimizing the asset for commercial purposes. Why is this important? Because all assets of a nation need not be monetized as there may be a social or cultural angle for it or that it can only be done with the concerted approval of all stakeholders.

      It must be remembered that there is no perfect system anywhere in the world and that all governments and regulators strive towards achieving that level of perfection close to myth. This again means that there are continuous efforts being made to create dents on the system by outside or internal forces so as to be in a comparatively advantageous position within that system. This would naturally mean that there ought to be steady and relentless watch on the system to keep out any negativity. In short there are always the efforts to make dents in the real economy for an easier monetary gain through the second economy thus being created. The actors can be anyone and not limited to a few social groups. But the speedy progress of the second economy is assured when the advantageous groups with the tacit understanding of the political parties make the most out of the situation hastening in corruption and anarchy within the system. Obviously, larger the dent, the larger would be second economy. In fact, the second economy grows in inverse proportion to the real economy, the latter being slowly squeezed into submission leading to chaos in the economy on the whole.

      The forces that operate secondary economy are to be found everywhere and it is only the percentage that varies and it is of utmost importance for the regulatory authorities to fine tune the system towards the set framework than allow it to drift. Hence, the above distinction of maintaining the monetized and non-monetized assets of a country and the process by which a country’s non-monetized assets are monetized. For example dents are caused by unscrupulous traders and nefarious elements and these people continue making dents on the well defined economic framework and hence continuous vigilance as well prudence of action needs to be taken such that there is no confusion of non-monetized assets and resources being improperly monetized. An example would make matter clear. Suppose a reserve forest under the ministry of forest is a non-monetized asset of the country. Now in course of time a few poachers are caught with a few tusks after having killed a few elephants. The tusks in this case are non-monetized asset that would have otherwise been taken and sold into the market creating a dent (small or large) in the real economic system. Here, the best option with the government is to burn the captured tusks as they do in some African countries or let the same remain in the hands of the ministry of forest or ministry of culture and only in course of time by an act of the parliament, they are to be sold off as some other products other than raw tusks. In other words, through such process there is less danger of making a dent in the real economy through bureaucratic connivance which later can become insurmountable and go out of control.

       The above is a small example and the graft can be extended to smuggling of goods, printing fake currencies, cultivating and trading in opium and drugs, unlicensed industries, money laundering, kickbacks, sales of malicious software, Internet viral attacks and funding and many other illegal activities. In fact, there is steady rate of energy being used by some of the society’s evil people to make small or large dents on the larger interests of the society and the framework of a democratic, plural and freer system.

The Economic System as a self adjusting System

It is seen that in a good economic system there is always an ongoing process to self adjust the anomalies that develop within the system. The anomalies, intentional or otherwise or recurring technically within the system, have to be contained through identifying and analyzing the gaps between the differentiation caused by the demand and supply constraints. In well developed economic system the interaction played by the network of economic activities within a well defined flexible framework consistently identifies, adjusts and rectifies to the basics of economic activities within the given framework quite efficiently and automatically. This also means that all stakeholders with tacit understanding of the legal and commercial machinery abide by the rules without any misgivings or confusions.

There is yet another remarkable point to be noted about such a well defined system is that the economic system is by itself a large colossus where ideas, whether refined or crude, can be tested at will and their results checked instantly. This means any good idea could be given a lab test within the existing system to understand the viability or their ability to integrate within the system or make a renewed effort to modify a positive idea to integrate better within the framework.

But what about imperfections within the system that gives rise to anomalies in investments, finance, politics and social progress? These can be solved by making the system responsive enough to the self adjusting mechanism that it is built for. For instance in a developed and developing economy due to recession there is dearth of investments. No new projects are being started and even those that do are slow and there is lack of enthusiasm especially among established investors. Many might start a project with the hope of reaping a reward in the future and do not take risk of establishing a full grown project, but rather a make shift shelter to be dismantled or allowed to grow at whims and fancy of the stakeholders.

This may be a simple yet on the look of it would seem a big hurdle. True, during the downturn the investors are generally timid to take a plunge as they feel that they risk their money. Yet in a good economic system where there is excellent flow of information about viable and also non-viable project then a few upstarts may go and take risk come what may.

Sector by Sector and Industry by Industry Trade Cycles

In modern economies there is need for taking into consideration the industry by industry or industry specific trade cycle that clearly defines the position the industry in relation to the larger all encompassing economic cycle that the whole economy is experiencing. This will help in identifying the best performers and their analysis can give insight to forge ahead during difficult times. However, this is not enough. There is hitherto unseen or less debated issue and that is factual free flow of information of viable and non viable investments like product manufacturing, services and other business activities. This is very important factor that enables business activities to shoot up even during worse times.

It is seen that there is steady flow of graduates from business or non-business alike who have young fresh minds yet have no steady thought for investments or hatching up to an idea to take to trading or manufacturing. They have to introduce themselves to the thought of investing and this is carried out during a course of time and mostly after a period of service in one or more areas. Maybe a few do take the risk at the very initial stage and only a minuscule among these is actually successful while the rest fail to make any impact. Why is this so? This is because of the artificial divide of proper information flow. As stated earlier the high performing economic system do speaks out automatically and therefore it is pertinent for the government to create proper mechanism that the economy does so.

The government can therefore bring out an official business and investment gazette in offline as well as online forms and that too on a fortnightly or monthly basis clearly stating the existing investment opportunities, gaps in investments and their potentials, lab tested or researched projects, half baked projects and ideas and their reasons, new potential projects and general details of finance and availability of resources and inputs. The gazette must always repeat the projects that have no takers for a considerable period of time. The idea is to make the economic system with its educated graduates to speak for itself. It is quite obvious that sooner or later a few graduates would take up one or more such projects and with a proper system of finance the idea would create a chain of opportunities including employment.  In short, the system should be made to speak for itself. Everything else like the legal, governmental, education, employment, social parameters all fall into place and work efficiently in this self adjusting automated economic system.

Extraneous Problems

Here the extraneous problems are those effecting the proper fusion of trade, manufacturing, information sharing and finance. Due to the presence of systems that are not quite compatible to the domestic system or can be fused or adjusted with the existing system the domestic economic system comes under pressure. For instance, the presence of closed economy or a dictatorial regime can pose problems to the domestic economy which wants to increase its share of international trade. Other than these there may be legal hurdles and not so easy flow of information. Again, some economic system due to their own peculiar financial system like the Islamic banking, Swiss numbered banking or Luxembourg system and several others can pose great pressure due to so called integration taking place between a regular banking system followed in democratic and freer economic system with those of these systems. Great many problems of unemployment, growth and investments within the domestic economic environment can disappear with the very removal of differentiation in the interaction of such financial medium. There are undue advantages pocketed by such system by remaining aloof from the regular banking function and then interacting stealthily and covertly into the system through extraneous ways harming the domestic regular system. So too is the case with lopsided rules and regulations by one thwarted by another. All these are causes of anomalies for the self automated economic system and can give rise to graft.

The effects of graft therefore have far reaching consequences in the economy of a country and can derail the real economy if proper action is not taken. The following table can throw some light into what would happen if the proportion of graft in relation to the GDP numbers escalates.

GRAFT  SIZE AS % OF GDP	EFFECTS ON THE ECONOMY	SOCIAL CONSEQUENCES OF GRAFT
Below 10% of GDP	The economy is stable and progressive as a self automated system.	People are generally confident of the government and the economy and will positively and ethically contribute to the overall growth.
11% to 20% of GDP	The economy is showing signs of extraneous pressures from bad elements and financial malpractices. Yet the overall economy is in fine shape.	People are hopeful of corrective measures to stem the extraneous element’s advance. The people are cautious and would generally protest against any unethical practices.
21% to 30% of GDP	Strains in the economy would be visible as the emerging second economy (black economy) starts to run its course.	People would generally lash out against authorities for the escalating malpractices in trade and finance. If no steps are taken it would lead to confusion and some percentage of the population would compromise on their ethical behavior as it would be more profitable.
31% and above	The second economy will try to emerge as the better of the real economy. There will be intense pressure, chaos in the financial and investment scenario as well as the rules and regulation. Prices will soar.	People would experience extreme pressures in keeping their ethical behavior and honesty. A significant percentage of the population would slowly compromise on values and demand for the extension of the same evil graft to address their high living costs.

Mystery of the Mysterious Inflation and Organic and Inorganic growth

         Economic growth can take place in two ways and these are the organic route while the other is the inorganic route within an economic system. Both organic and inorganic route of an economy are never substitutes of each other nor are they independent of each other. The division is important primarily in the way the money is utilized in investments. It is the standard practice of most economies to make fiscal policy changes by the government and monetary policies of the Central Bank to spurt growth in an economy. However, it also seen that in most cases the reliance is heavily on the inorganic growth strategy than the direct organic route. Although the inorganic route over a period of time contributes to the organic growth of the economic system, it is by itself not sufficient enough especially when the economic growth of a country is slowing down or is in the grip of a recession. Here, there is need to channel funding of large mega structures that lead to growth, employment and value addition to the overall GDP.

        How does inorganic growth take place? Inorganic growth within the system takes place if there is greater liquidity within the system and these pave way for more investments in sectors which are already competitive or are in the verge of being competitive. The monetary interventions of the Central Bank would inevitably lead to more money inside the system with the idea that most parts of the money that the commercial banks have could be given as loan for purchase of consumer goods, investments in the innovative sectors and smaller and larger infrastructure projects. These are good if the overall economy is robust and there is still scope for newer investments to move forward each with their respective growth strategies and for existing organizations to expand their operations. However, more monetary easing when there is a downturn would lead to inflation as there is not many viable investment options in an economy experiencing a down slide.

        Does this mean that monetary easing is wrong? The idea behind any monetary easing is based upon the fact that some investors would surely bring about some kind of innovation that are way ahead of prevalent applications and can bring in greater transformation in the life of its citizens. These investments undoubtedly add to the GDP numbers yet during downturns there are only few investments of such nature and these too look risky. Yet providing liquidity inside the system assumes importance that some of the investments would catapult the growth of the economy unlike anything seen before. True, there have been instances in several countries where such sudden spurt in the economy had taken place due to one or other form of ground breaking inventions. Yet waiting for something like this to happen simply by providing liquidity into the system is not sufficient as the government initiative must be there to kick start such a growth by investing in large mega infrastructural projects, engineering projects, space projects, high levels of innovation in health, sanitation by forming consortium of investors including the government as an investor or monitoring authority. This is of foremost importance as most nations are aiming at near money instruments hoping that it would do the job of indirectly or directly stimulating an investment drive and save a debt ridden nation from an economical debacle. True, this would happen if some part of the money does stimulate an investment bringing about a path breaking technology or say bring about something like a unique substitute for oil or a range of technology that can further revolutionize the investment climate. However, this is still a matter of speculation until one such innovative investment do the job. Otherwise, the rest of the money is invested over and over again along the line of existing products with some changes mainly that of consumer goods, some services and other peripherals and with a stagnant population this becomes even more difficult to sustain.  Ultimately, there is rampant competition and not many people get employed. This is the prime reason why in spite of monetary policy easing and economy remaining liquid there is still unemployment and underemployment.

Mysterious Inflation

        Above all excess liquidity in the system is a sure sign of inflation and may even lead to hyperinflation. But does that mean that investments would lead to inflation. Here lies the mystery of inflation. It is seen that conditions brought about by excess liquidation and no gainful employment and this added with social pressures like subsidies and welfare are a bane although from the social angle these are also unavoidable as in India which has a lot of poverty and excess labor employed in land. Does this mean that there ought to be continuous subsidy or welfare to the people? The answer is that there should be no permanent subsidy or doles from the exchequer other than periodic intervention of such methods as population do shift from the stages of unemployment to employment, migration of labor from the villages to urban areas and sudden demand of labor due to spurt in economic activities at a particular region. Therefore, looking into the genuineness of the situation should such a method be followed which may be group specific or family specific or place specific.

         If one does study inflation of a particular region then one would notice that the inflation on consumable items or those like absolute necessities are higher when the region is experiencing lesser growth and more people are unemployed yet they are all under welfare system or getting subsidies as per a permanent welfare or subsidy act or unemployment benefits. Let’s call this situation X. However, if these people who are generally unemployed or underemployed in that region were to be weaned out of the welfare or subsidy system they would undoubtedly face the perils of poverty and hence wouldn’t be able to spend more and thus bring down inflation. Let’s call this situation Y. Thus, in the first situation X the people generally drove to subsidies and doles as it were available to one and all and therefore only remained complacent to their own status even while they do get employment or are underemployed or remain periodically employed while still pocketing the welfare fund. Add to this the excess cash in their hands they would surely spent it more on consumable items increasing the prices of the consumer goods even more. In sharp contrast is the case when the government or a large investment group through a large project employs the people of the region and also forces them to work by removing the welfare fund and subsidies then the rate of increase in inflation would be slightly higher over the rate when the situation is in Y yet much lower than when the situation is in X. This can be called the Z situation. It would seem surprising that in the situation Z most people are gainfully employed and yet they tend to spend lesser on consumer items, but take on more responsibility by saving for the future or keeping money as reserves or invest in long term instruments and assets. The idea of compulsive shopping slowly decreases which they would have otherwise resorted to in situation X mainly to ward off boredom and engaging in profligate behavior. Therefore, in situation Z inflation increases proportionate to the wage increase in the existing labor force and the immigrant labor force while in situation X, the people by their nature would remain in spending spree with a permanent welfare or subsidized system in place. The above situation stands good even after taking into factor like the irrational consumer behavior especially among certain individuals. However, it is assumed that there will not be commodities imported at lower than market price from other places into the particular region and that the meaning of consumable durables would be different from region to region and country to country. The main idea is to understand the inflationary aspect on the economic system of a particular region.

      There is quite a similarity with people who go for holidaying or vacationing. People who are otherwise quite prudent in their routine life or mostly tend to be so in their regular life, spent more than they can really afford upon the urge and the psychological feelings that they are on a holiday. Many travelers or vacationers even take loans for the mind boggling spending spree without any iota of responsibility as if there would never be another day tomorrow. This psychology here is that the more relaxed you are without much purpose you spend liberally to spend your time on deliberate spending whether to meet your immediate wants or not.

      Thus, where the economy is experiencing organic growth there is lesser tendency for inflation to shoot up dramatically in proportion to than when the economy is growing inorganically. Hence, the idea is to give stress on organic growth and that inorganic growth is a contributory part of the overall organic growth. This also means that monetary policy matters provide the liquidity to the system only when necessary and that larger responsibility is on the government’s fiscal policy where debt burden or deficit is channeled primarily in funding larger product or ground breaking research projects both for driving growth and creating mass employment. A part of this debt can be used for periodic interventions in welfare funding, providing subsidies and the like but no more. At rough estimate the monetary interventions shouldn’t be more than thirty to thirty five percent of the overall GDP as above this means hyperinflation which can derail the process of growth. If however, it is found that there is low inflation pattern in an economy in spite of high liquidity then there will be mass unemployment and no growth in the economy. This is mainly due to the fact that the people have less confidence in the economy of a country and their future and would reconcile to psychological state of ‘unsure inactivity’ in living their lives and spending patterns.

Reviving Confidence in the Economy

       There must be greater confidence in any economy where there is not much room for domestic consumption and investment opportunity. As a social science there must be relative stability in the minds of the people to take further risks. This can only be ensured if there is some positive news coming in and not just loud noise of a great future. It is psychological state that human either goes on thinking a lot of positive sides or go on thinking along the lines of negative paths. This is where the governments should place their priorities. It isn’t sufficient for the governments to publicize about such and such future event, but take concrete steps in fulfilling of some large projects which would spiral growth in all sectors whether related or unrelated. In modern economies with information boom a slight success in one sector can bring about noticeable positive changes in other sector as the confidence aspect of human being which is a potent force to kick start a stagnant economy is a contributory factor in development. Yet in economies which are really in an economic trough this would need a few more steps from the government by pitching forth into a few mega projects with the help of consortium of investors. This has already been stated in my article ‘Economic System and Future of Societies’.

         One of the most interesting factors in modern information driven economy is that if the necessary proactive steps like some new innovative investments or tax rebates or specialized application is undertaken in all specified core sectors of the economy then the economy gathers strength by the very nature of instilling confidence among the investors and general populace. This can be done by the government or the regulators or a group of entrepreneurs. Yet the whole action can boomerang in the reverse direction if only loud proclamations are made and no concrete steps are taken. This is the boon as well as the tragedy of the information driven economic world.

Investment in Emerging Economies

In order to boost the economy of the world on the whole it is inevitable to invest in emerging economies as these are best way to give a good fillip to the international trade as there can be no immediate solution to the problem and chaos that already exists. International trade with emerging economies as well as underdeveloped countries gives an extension to the existing market and can be a boon to both investors from developed nations as well as those in these countries. However, there is a problem here in international trade and this is the problem of trade surplus and the single currency based trade or to be more precise the dollar based trade. It is quite interesting to note that as on today there hasn’t been a clear cut answer to this problem which has seen a lot of chaos that exists in today’s world.

Recycling of Trade Surpluses of countries

      In order to understand trade surpluses and how to recycle them we must understand why there is an international trade in the first place. International trade between countries takes place because one country’s surplus is mitigated by the other country’s deficits in those products and services which one country has comparative advantage over the other and also due to political considerations, historical conditions, technological prowess, larger resource base and a growing population with large demand base and others. Thus, it is implicit in international trade that one country extends support or trades in goods and services due to the very reason that the other has something equal to give in return to cover its own deficit. In other words, international trade is a great equalizer and as such no one country is superior to the other over the exchange of products or services. Cocooned in itself and its territories no country  by itself, however superior it may be in technological or investing skills, can add value to its GDP without the base provided by the other country in the form of population, resource and territorial access. Hence, it is in reality a 50/50 participation no matter what except of course for the value of goods and services traded and the access to the territory and human populace base.

Trade through multiple currencies or one single world currency

       There are actually a few good options for international trade exists to promote multi-lateral trade ties between countries. The idea of one single country for easier and smoother transaction has been there in the minds of the economists for some time and for the moment there has been no proper substitute for any such reserve currency other than the US dollar. The idea is to have one single standard reserve currency which would lead to proper trade among countries without exchange rate fluctuations, same global interest rates, no transaction costs, smoothness of the medium and others. However, this is far cry from its actual implementation with nations being divided into different cultural entities, religion, language and their own respect to their own nation state and its local currency.

        The idea of a single currency has been there in the mind even when Keynes suggested ‘bancor’ as the international currency. Before, we accept this basic condition of a single currency we must once again think of economics as a social science and there no nation that are the same, but are divided even within their own neighboring geography. Again, the US currency which is actually an extension of what one may call it the imperial arm is not an international currency in the true sense of the term. It had a free run based on the strength of it being a petro-dollar and the transparency of the country’s financial sector. It was all right so long as US was calling the shots everywhere (from US stand point) but now there is going to be an irreversible swing in favor of other currencies and likely opposition from the Yuan.

        In real economics no currency can be called an international currency just because it is originating from a country with great economic and military prowess, but that the international currency must have the stamp of approval of the World Bank after getting the requisite majority vote in the UN. Suppose US dollar were to be certified as such then each note before circulation must be stamped by the World Bank. Then dollar becomes Dollar 1 for the purpose of world currency while the ones in circulation within the US would have to be Dollar 2 with a slight decrease in value than Dollar 1 initially. Then Dollar 1 is floated as world currency with full convertibility and then gradually the Dollar 2 should be faced out. The reason why dollar is not instantly made a global currency is that the rest of the world would have to meet with the debt obligations of the previous dollar without much reason as US has a piled up enough to make the whole world go under. There is talk within the US that with the size of debt it owes to China the latter might buy out half of US and more and then run the show on its own.

        But thankfully enough we are geographically, culturally, religiously and linguistically a divided wonderland. I say thankfully because there will be no one nation that would pull the shots in the future but a group of well defined geographically interlinked countries that would have their own sovereignty kept intact. Surely, with some of the inherent difficulties these groups of nations like the European Union would have their own currency limiting the number of currencies in circulation to half a dozen or a dozen. This is what the immediate future world would like and surely beneficial as some advantages of single currency would be there if not all its merits. Hence, for another 100 years this would be what we might see around the world with nations not able to see eye to eye in most of the points of a globalized world. As economics is a social science and not one brought about an independent ruling we have to subject ourselves to certain anomalies that comes with it. Further, due to the rapidly evolving e-banking system a lot of problems inherent in converting different currencies would go.

      Thus, in the foreseeable future we would as nations confront and go on confronting the balance of trade position.

How to adjust the Surpluses in International Trade

Given to reason that there will not be a single currency in the foreseeable future and that the world trade would go on among consortium of countries having a common currency and also some individual nations by the sheer size of their economic size, we can safely assume that the surpluses of nations would have to be adjusted. This is in fact a must as there are grave dangers associated with continued balance of trade positions and balance of payment positions between countries. There is convincing reason to believe that an overstretched surplus and deficit position can have severe economic, political and social repercussions as we see in today’s world. In fact, the most permanent thing in both economical and socio-political and socio- economical world is CHANGE. This means that what we project today may not hold well after a period of time until and unless there is time bound programs and treaties. Having said that there are still countries due to their colonial positions or strength of their superiority over others in trade and commerce and technology had a feeling that there isn’t any need for periodic interventions in international agreements and leveling or recycling of international trade surpluses and balancing the international trade deficits.

           The idea that the trade surpluses for some countries can continue for an indefinite period of time while some countries can have trade deficits as long as others have trade surpluses result from colonial or imperialistic perception that somehow or other there are a few countries which in the long run stand to gain. This would have been the case still had not the surpluses tilted favorably to some ideologically separate and almost close door countries. The case here is that of the US and China and there are reports in the media by different scholars as to whether this is a sound policy.

          Hence, to bring about the much needed equilibrium in international trade, two mutually trading countries must have a time bound treaty during which period it must maintain equilibrium. Thus, taking into consideration the aspect of change in world environment, a maximum period of 5 years must be the limit within which two or more countries must maintain equilibrium status or status-quo.

         How is it possible for two or more countries to come to equilibrium so that a renewed treaty stretching for not more than five years can be continued from zero balance? This can be done as given below.

         It must be reiterated as written already above that two countries while trading are doing it on mutually agreed and mutually beneficial agreement and that there is no superiority of another country over the other as both stand to gain out of it. Let’s call this aspect ‘mutually agreed opening of trade’ (MAOT). Now in this example there are two countries A and B for easy understanding of things. It is seen that after a period of 5 years country A has a surplus of Rs100 while country B with its trade of 5 years with A has a deficit of Rs100. Now at the end of 5 years period officials of countries A and B meet together and close the treaty with a mutual program of action. This aspect can be called ‘mutually agreed closing of trade’ (MACT). After closing the trade a new one is opened so that they may take the advantage of each others comparative advantage of trade.

     Now what is to be done with country A’s surplus and country B’s deficit? Country A (surplus country) and Country B (deficit country) has three options as follows:

(1)    Country A can receive down payment in an internationally acceptable currency or currencies which is by rule an unacceptable practice as an international trade has been committed which is mutually beneficial to both parties right at the signing of the treaty. This can be resorted to if only there is permanent closing of trade for a foreseeable future period.

(2)    Country B can level of the balance tilted unfavorably towards it by selling off from its resources which may include natural resources, creating tourism centers, recreation centers or such like programs.

(3)    Country A (Surplus country) will invest in Country B (deficit country) fully its surplus with the latter or draw out a plan where B is also an equal stakeholder in the investment and must bear the risks of profits or losses which can be 50/50.

         The above salient points are the best available options of which the No.3 the last option has an agreement which is implied that both the countries must bear the burden or loss or profit  with the surplus as the very initial idea of entering into MOAT is due to the advantages each one has is some respects over the other. Mostly the last strategy will hold good as there might be social, economical and political implications in the above two options, that is, 1&2. There is another hitherto not much looked into advantage in the third option. By giving equal stakes in the investments both A and B can be speeding up and contributing to the overall growth of world trade and at the same time contributing to the organic growth of the global economic system. Again, both A & B are driven with zeal to capture and expand their economies by signing the treaty and as such a surplus need not be biased as there is an explicit understanding that deficit B has suffered the deficit purposely to give an added advantage to surplus A country. If a project is mutually agreed upon then both countries gain further and if the project cost is slightly higher than the balance of Rs.100 as in our example then the increased amount can be divided according to a mutually agreed ratio. Yet when Rs100 is invested by A the surplus country it is implied that the surplus is the cause of conceding B’s territorial resources and workforce and market base and hence any profit or loss is 50/50. This is the reason why international trade is mutually beneficial and is a great economic leveler. Similar would be the case if the surplus is invested by two countries in another country C with the hope of reaping rewards 50/50 out of the investment.  By coming and closing (MACT) the two countries can renew yet another treaty for a period of 5 years.

        In order to make matters clearer another example would be serve to remove whatever confusions that may arise.

        Suppose there are two island countries X & Y having good trade relations over the years. To make it even simpler they trade only in 2 items. X country sells apples to Y country over which it has a comparative advantage while Y country sells to X oranges over which it has a comparative advantage. Both the nations due to the quantity of produce and particular cost of producing each others produce have been maintaining equilibrium for several happy years. Now in course of time, X starts making large ships so as to increase the standard of living of the people of the nation by allocating better jobs. Y doesn’t do anything as it has sufficient yachts and boats. X in order to further increase the standard of the people of its natives goes out and out for dialogue and publicity with Y and an agreement is signed. Under the said agreement X country produces one extra large ship and sells it to Y country for its use. There is a trade surplus in favor of X although Y is a sure participant in the whole game.

        Here although X enjoyed a surplus it is not a profit over a trade for X country has already reaped the profit by producing the extra ship and after having sold it to X. Here, the surplus is merely a monetary surplus data kept in the form of exchange (Y’s currency) at X’s account. Similarly, the deficit of country Y is merely a monetary deficit data that is kept in the form of exchange (X’s currency as a liability) at Y’s account. In other words, both X & Y are liable to the surplus equally as well as to the deficit that arose in their bilateral trade.