Connect with us

Economy

Trade Negotiations: Geo-economics and Geopolitics

Published

on

Trade negotiations have been increasingly used as a political tool. This is the first thing that comes to mind when one is trying to understand what is happening around the trade war unleashed by the administration of Donald Trump practically on all fronts: against the EU, China, Russia, Mexico and Canada.

On the eve of a visit to Washington of the European Commission President Jean-Claude Juncker, Donald Trump suggested that the EU, at the same time as the USA, abandon customs duties, barriers and subsidies. He said in his Twitter account that he suggests this because they will refuse just the same …

The visit ended with the conclusion of a trade deal, including the deal on duties on car industry products, but the question remained: of course, geo-economics and geopolitics are strongly interrelated, but is it permissible to use trade negotiations as an instrument of political bargaining, and why do we increasingly see this?

Just before Junker’s visit the European Union and Japan signed world’s largest free trade agreement, the volume of which is estimated at one-third of the World gross product (GWP), and which directly affects about 600 million people. In contrast to the actions of the Trump Administration, which recently tightened import tariffs, this was seen as an important step in protecting free trade.

It was also reported that the European Commission is completing negotiations on the establishment of a free trade zone (FTA) with MERCOSUR, which in its scale can exceed the FTA with Japan (the members of this trade and economic union account for 250 million people and over 75% of Latin America’s total GDP ). Again, the question arises: is there still an immediate political context here, since the negotiations on the establishment of the FTA have been going on for years, if not for decades, and why is it announced right now about their triumphant conclusion?

The USA has a recent experience of large-scale trade negotiations, the politicization of which ended in a fiasco. The issue is the establishment of the Trans-Pacific Partnership (TTP), which implied the borders expansion and the deepening of interstate agreements on the unification of the legal field. It was planned to supplement the agreements on the liberalization of trade in goods and services under the norms of free trade agreements with the legal regulations on investment, innovation exchanges, protection of intellectual property, labor relations, management of migration flows, environmental standards and competition standards.

The USA tried to involve many Asian and Pacific countries in the creation of the TTP, but China, the main economic entity in Asia, was excluded from this union. For China, with its state protectionism in sensitive industries that provide economic growth and employment (and therefore important for political stability), the conditions of the TTP were initially unacceptable. Beijing, not without reason, suspected that the USA wanted to create a trade bloc in Asia without the participation of the PRC in order to kick China out of integration processes. That’s why China has tried to create an alternative to the TTP by promoting its project – the Regional Comprehensive Economic Partnership (RCEP).

As we recall, Donald Trump “buried” the TTP as a legacy of Barack Obama, and now this partnership under the “TTP Plus” brand is already living its life without the participation of the United States. The main thing is that after the TTP deal any other initiative of this kind (for example, the idea of the Indo-Pacific partnership) automatically raises fears among its potential participants: whether they will be drawn into confronting China, whose trade and economic relations are so important for many countries in South-East and South Asia.

The experience and lessons of US trade negotiations are, of course, important for Russia, but mainly in “how not to do.” In the same Asia-Pacific region, a large number of trade agreements operate, differing in the depth of liberalization and in the number of participants, which creates the potential danger of dividing the region into separate competing associations. Therefore, for Russian participants in trade negotiations, the choice is unambiguous: to avoid their unnecessary politicization and to act on the basis of transparency and openness, with mutual consideration of the interests and capabilities of the parties, by relating any possible agreements with the multilateral trading system of the WTO.

Russia’s participation in the negotiations on the creation of free trade zones and integration projects is determined by its long-term geo-economic and geopolitical considerations, and at present, when Russia is in search of an “entry point” to this process, the latter can be assessed as the most relevant.

Equally, and perhaps even more important for Russia is the fact that, unlike such trade and economic “giants” as the United States and China, it is now not so much interested in the development of liberalization of regional trade (trade liberalization), as in the strengthening of its transparency and trade-economic interconnection (trade facilitation), the creation of a fair, stable and balanced trade and economic system, including in Eurasia and the Asia-Pacific region, which responds to the priorities and development level of the Russian economy, especially its export-oriented commodity-producing industries.

That is why Russia has taken a course in upholding the priorities of transparency and interrelatedness of trade and economic relations since this is what helps it become an active and interested participant in the discussion of new rules for regional and world trade.

Such a course is consistent with the long-term geo-economic and geopolitical interests of Russia, primarily in such a priority area as Eurasian integration and the development of the Eurasian Economic Union (EEU).

And here it is necessary to remember the lessons of the recent past connected with excessive politicization. The intensification of Russia’s and the EU policy towards the countries of the region of their “common neighborhood” led to the fact that some of them (Ukraine, Georgia, Moldova) were faced with a tough choice in favor of the priority development of relations with the EU or the Eurasian association. In a number of countries, this has greatly reduced the opportunities for the traditionally conducted by their governments maneuvering strategy between Moscow and Brussels and led to an internal political escalation.

In Moscow, this was well understood, and there were no contradictions between the processes of Eurasian integration and the development of relations with the European Union, if the EEU and the European Union began to base their interaction on the principles of free trade and compatible regulatory systems.

However, the European Union held the view that the obligations within the framework of the Customs Union exclude for its members the very possibility of introducing a free trade zone (FTA) with the European Union – in contrast to the CIS Multilateral Free Trade Zone (based on a treaty signed in October 2011 by Kazakhstan, Russia, Byelorussia, Kyrgyzstan, Tajikistan, Armenia, Moldova and Ukraine), which does not presuppose the work of supranational bodies. From Moscow’s point of view, such obstacles can be lifted if one follows the path of establishing an FTA between the EU and the EEU.

In the article published by the German newspaper  “Süddeutsche Zeitung” in November 2010, Vladimir Putin (at that time the Russian prime minister) put forward a long-term plan for the construction of a free trade zone between Russia and the EU (by the way, at that time the World political vocabulary acquired the term “conjugation”).

Unfortunately, this idea, dictated by absolutely economic logic, was coolly received in European political circles, and the reply from Brussels was, not without political arrogance, that the EU’s relations with the above countries do not require Russia’s participation. Show Europe then a little more foresight, many undesirable events in the post-Soviet space could have been avoided …

Russia is still trying to convince its partners to abandon the opposition of European and Eurasian integration in favor of conjugating both projects. So far, unfortunately, neither the post-Soviet integration, nor the EU is consistent with these aspirations.

However, the dynamic development of integration processes in the Asia-Pacific Region offers Europe and Eurasia a new challenge. Given the geographical situation of the post-Soviet countries between Europe and Asia, the development of infrastructure networks and cross-border transport projects with access to China and other countries, the APR would create conditions that would ensure a more favorable external environment for the conjugation of Eurasian and European integration and strengthen the competitiveness of these integration entities.

And here economic logic would help to gradually overcome political contradictions. The solution of the accumulated geopolitical problems could be the creation of a common free trade zone of the EU, the EEU, Ukraine and other Eastern Partnership countries associated with the EU. However, in addition to political will, it takes time to solve a large number of purely economic and technical issues. Effectively, such a project can be facilitated by the fact that all the countries involved are either WTO members or are planning to become them in the near future.

First published in our partner International Affairs

Ph.D. in Political Science, An active member of the Academy of Military Science, Chief Researcher, Institute of Far Eastern Studies of the Russian Academy of Sciences (IFES RAS)

Continue Reading
Comments

Economy

Millionaires for Humanity Petition: Who does not want to sign

Published

on

Recently millionaires from different countries signed a petition under the name “Millionaire for Humanity” demanding their respective governments to raise taxes on them to help with the coronavirus pandemic. More than 80 individuals have signed the letter, and most signatories belong to the developed nations like the US, UK, and Germany. One of the key aspects of the petition is that taxes can only create a huge impact against charitable contributions, no matter how generous these contributions are. It might be a rare and historic moment to witness wealthy individuals quoting “Tax us, Tax us, Tax us” to fund the social sector like health, education, and security. The phrase “rebalance our world through wealth tax” seems like a unique moment of truth for the wealthy to play their part towards humanity.

But is the voluntary action enough to counter the state’s inaction to tax the wealthy? A few individuals’ voluntary actions are a drop in the ocean that might not even make a dent to make all wealthy accountable?Wealthy do indeed pay proportionate taxes according to their state laws in many parts of the world. But the bitter truth is that there are also increased tax avoidance cases by the wealthy, which the Paradise Papers, Panama Papers, and other evidence show. That is why there is a rigorous debate on taxing the rich even more.

According to Oxfam’s 2020 report world’s 2,153 dollar billionaires had more wealth than 4.6 billion people or 60% of the world population in 2019. Even in the aftermath of COVID-19 there has been no change in the millionaire’s status quo who actually saw their wealth grow exponentially. According to Forbes magazine report, 10 billionaires gained $51.3 billion or Rs 3.9 lakh crore (at exchange rate of Rs 76) in just a week between April 2 and 9 when the global economy was almost shut (except for a few essentials) and millions were losing their incomes and jobs.They did this through the stock market. These billionaires included Jeff Bezos, Mark Zuckerberg, Warren Buffett, Elon Musk, Bill Gates, and Mukesh Ambani.

Thus the paper analyses two main issues in relation to the petition. Firstly, why similar actions were not taken by the wealthy in the developing nations, with focus on India? Secondly, will a voluntary compliance mechanism via a petition resolve the ongoing issue of tax evasion by the wealthy?

  1. Why there is no similar petition in developing countries?

The petition seems to appear as a global movement, but in reality, it is a mere representative of the few wealthy individuals residing in developed economies. The less participation and debate amongst the developing countries on taxing the rich can be understood in terms of their societal and cultural background. In India, it is easier to project it as a home to the poorest, but it is also a home for some of the world’s wealthiest people. In this context, it is essential to understand how the wealthier population’s nature changed significantly since Independence and how a favourable tax system helped them to grow.

1.1. From Inherited wealth to private enterprise:

When the British left, a handful of business families and dynastic royalties were in charge of key economic industries. These dynastic royalties had amassed and inherited great fortunes over time due to their close ties to the colonial administration. Although there was poverty amongst the general population, the most lavish lifestyles were only enjoyed by the princely classes, some business houses and large zamindars (landlords).

Primarily the inherited wealth was the primary source of wealth amongst the wealthier population.

However, between 1961 and 1986, India’s notorious macroeconomic plight undermined a progressive effort to reduce the incumbent rich’s size and importance. Low economic growth was accompanied by a sharp reduction of the real value of wealth held by the top 0.1%. The backdrop for this decline was itself rooted in the integration of India when the government quickly took steps to abolish inherited wealth amongst the super-rich royalty. Hence inflation, progressive taxation, and nationalization that characterized the late 1960s and 1970s punished the outdated rentier class and expropriated much-existing wealth.

In the 1990s, domestic and external liberalization happened in India, resulting in the deregulation of taxation and private investment. This led to a rapid increase in stock market capitalization relative to GDP. In fact, given the tremendous rise in stock market capitalization, it seems possible that wealth concentration in India may have surpassed its pre-1970 levels in recent decades. This transformative wealth dynamics of the 1960s and 1970s are crucial to understanding how the elite class, once populated by inherited wealth, is now made up of private enterprises.

However, the rise of the new private enterprise did not address income inequality, only to make the rich richer and the poor more miserable. According to Oxfam’s January 2020 report ‘Time to Care‘ said, in 2019, the wealth of top 1% Indians went up by 46% while that of the bottom 50% by 3%. In 2019, the top 1% Indians held 42.5% of national wealth, which is, more than 4 times the wealth of 953 million people constituting the bottom 70%. The bottom 50% held just 2.5% of national wealth. According to the Credit Suisse’s ‘Global Wealth Report of 2019‘, there were 7,59,000 dollar millionaires in India 2019, up from 725,000 in 2018 and 34,000 in 2010. This shows that even as a developing economy we do not have a dearth of wealthy people who are unable to participate in the petition.

1.2. How the tax system works favourably for the wealthy?

In developing countries, the governments’ primary focus is on resource mobilization, which dictates their tax system. This is due to the unequal income distribution. However, the tax system is also designed in such a way that makes it harder to tax the rich. This is because wealthy taxpayers’ political and economic power often prevents the government from developing fiscal reforms to increase their tax burdens.

Moreover, there are high personal exemptions and the plethora of other exemptions and deductions that benefit those with high incomes (for example, the exemption of capital gains from tax, generous deductions for medical and educational expenses, the low taxation of financial income). India has been an active recipient of FDI for decades. As a result, it results in lower effective tax rates for MNCs.

Simultaneously, the government keeps on slashing the corporate income tax rate during every budget, providing strong incentives for taxpayers to choose the corporate form of doing business for purely tax reasons. For instance, the Indian government slashed corporate tax to 22% (without exemptions) for domestic companies in September 2019, bringing the effective rate to 25.17%  (with surcharge and cess). Such a move happened when the economy had nose-dived for several consecutive quarters.

According to the IMF, the combination of tax incentives and low corporate tax rates leads to the following:

  • Increased incidences of tax evasion due to the ease with which multinationals seem able to avoid tax, combined with the three-decade-long decline in corporate tax rates, undermines both tax revenue and faith in the fairness of the overall tax system and
  • the current situation is especially harmful to low-income countries, depriving them of much-needed revenue to help them achieve higher economic growth, reduce poverty and meet the 2030 Sustainable Development Goals.

Hence, it can be observed that wealthy individuals are provided with a plethora of tax incentives in a developing economy to prevent capital flight. However, this does not translate into high tax morale for these individuals due to increased tax evasion incidences. Now is the time for the wealthy to take part in the petition to share responsibility in rebuilding the economy.

  • Will the Petition be effective in achieving fair taxation by the wealthy?

2.1. Assessing the problem of tax evasion by the wealthy

Empirical data has shown (e.g., E. Hofmann, Voracek, Bock,& Kirchler, 2017b[1]), that the motivation to engage in tax avoidance and evasion increases with wealth. Recent studies indicate that tax evasion is directly proportional to wealth, with the top 0.01% of the wealth distribution (i.e., households with more than $40 million in net wealth) evades almost 30% of their wealth and income tax versus 3% by taxpayers overall (Altstaeder, Johannesen, & Zucman, 2017[2]). With the aim to minimize their taxes, it is easier for the wealthy to hire tax agents who are skilled in devising ways to achieve that(Sakurai & Braithwaite, 2001[3]).

Tax avoidance is a huge issue that amounts to $240 billion every year (Rs 18.24 lakh crore), according to OECD-G20’s anti-tax avoidance initiative, ‘Action Plan on Base Erosion and Profit Shifting’ (BEPS). Recent data by Fair Tax Mark shows that Facebook, Google and four other US tech giants, described as the Silicon Six (others being Netflix, Amazon, Microsoft, and Apple) had avoided paying $100 billion tax (Rs 760,000 crore) between 2010 and 2019. Due to tax evasion, according to 2019 IMF study, the non-OECD countries are losing 1.3% of their GDP or $200 billion of revenue every year while the OECD countries about 1% of GDP or close to $450 billion.

Nonetheless, the blame cannot be squarely put on the wealthy for causing tax evasion. It is the legal, political, and economic context of national tax loopholes which not only give the wealthy many more opportunities to avoid taxes than the average citizen but might also create an ideal environment that legitimises aggressive tax avoidance behaviour.

2.2. How the petition will help in combating massive tax evasion problem?

It can be said that the petition is an example of committed motivation by the wealthy which drives them to pay taxes because of a felt moral duty(Gangl et al., 2015[4]) or due to emotional stress, caused by anticipated guilt or shame (Blaufus, Bob, Otto, & Wolf, 2017[5]). However before delving into the question whether such an initiative will be effective to combat tax evasion in the long run, it is important to understand the social psychological process that motivates the wealthy to either pay or evade taxes.

The wealthy can easily identify and compare themselves with other wealthy individuals as a result of pychological process in relation to belonging to a particular group. As a result they imitate not only lifestyles but also tax behviours out of comparison and competition, because one does not want to fall behind in the financial race (Mols & Jetten, 2017[6]).For instance, if all wealthy friends move money to offshore tax havens, then the individual will also more likely do that.

Also, wealthy individuals do acquire a heightened sense of self-esteem, freedom, and perceived control, which increases the willingness to resist anything that hinders freedom (Brehm, 1966[7]). Taxes on the wealthy is a classical case where the rich find it as an attack on their personal freedom for which they look for ways to fight against it. In fact, experimental research shows that coercive fines and audits increase taxpayer reactance more than less coercive attempts by the tax authorities (Gangl, Pfabigan, Lamm, Kirchler, & Hofmann, 2017). Thus, when faced with coercive form of taxation wealthier individuals will be motivated to employ more resources (compared to the average taxpayers) to escape this situation. This might make the classical coercive attempts to increase the tax honesty less effective.

In such a scenario, the voluntary form of tax compliance might appear as the ultimate solution to fight against reactance. Such a form of compliance comes with trust in the tax system, and thus, people accept their tax obligations without threatening audits and fines. However, state measures like suspending fines and audits or tax amnesties, which gives leeway to rich taxpayers to repatriate their money from tax havens without being fined, also show no long‐term positive effect (Alm & Beck, 1993[8]; Toro, Story, Hartnett, Russell, & Van‐Driessche, 2017[9]). Thus, it is important to combine voluntary and coercive tax measures to ensure fair taxation with a sense of tax honesty on the part of the wealthy individuals.

3. Conclusion

In view of the COVID-19 it is apparent that the petition by the few wealthy individuals brings in a wave of hope towards achieving fair taxation for the sake of humanity. However, the outreach is still not global, with a participation of a fraction of wealthy individuals from a few developed economies.Thus, there is a need to ensure the huge participation of wealthy people, not only from developing economies but those involved in tax evasion.

As discussed in the article,  tax-related decisions of the wealthy are different from average taxpayers due to social psychological differences of belonging to a particular community. So a unique approach must be followed to motivate the wealthier population to pay their share of taxes.

3.1. Possible solutions:

There are many ways to motivate the wealthy, either in developed or in developing countries, to contribute more taxes to the benefit of society. It is true that mere public plea to join the campaign will not attract the attention of majority of wealthy individuals. On the other hand, coercive audit or fines to ensure fair taxation also does not help much towards the cause. For example, a fine of 18.8 million Euros imposed on Portugal’s football superstar Cristiano Ronaldo did not diminish the fame and positive image associated with the player.

One possible solution to influence the tax decisions of the wealthy is to combine coercive and voluntary state measures by publicly naming and shaming the wealthy individuals who resist to be part of the global campaign or pay their fair share of taxes. Thus, if such accusations on famous wealthy individuals like Chief Executive Officers or politicians violate ordinary citizens’ tax morale, these latter might start questioning the reasons for their tax honesty. For instance, after Greece published a blacklist of over 4,000 citizens who owed tax money to the state (Aswestopoulos, 2012[10]),  it experienced a decline in the shadow economy’s size from 25.4% in 2010 to 22.0% in 2016 (Schneider, 2016[11]). This way, identifying evaders publicly may act as punishment and a deterrent from engaging in aggressive tax avoidance. However, it is equally true that shaming needs active public support and media coverage, without which the debate towards fair taxation will lose its grip. So the time is ripe for citizens to join their hands in the global movement towards fair tax and compel the wealthy to be accountable.


[1]Ackermann, L., Becker, B., Daubenberger, M., Faigle, P., Polke‐Majewski, K., Rohrbeck, F., … Schröm, O. (2017, June). Cum‐ex. The great tax robbery. Zeit Online .

[2]Altstaeder, A., Johannesen, N., & Zucman, G. (2017). Tax evasion and inequality . Retrieved from http://www.nielsjohannesen.net/wp-content/uploads/AJZ2017.pdf

[3]Sakurai, Y., & Braithwaite, V. (2001). Taxpayers’ perceptions of the ideal tax adviser: Playing safe or saving dollars ? Working Paper No 5, The Australian National University, Centre of Tax System Integrity.

[4]Gangl, K., Hofmann, E., & Kirchler, E. (2015). Tax authorities’ interaction with taxpayers: A conception of compliance in social dilemmas by power and trust. New Ideas in Psychology37, 13–23. https://doi.org/10.1016/j.newideapsych.2014.12

[5]Blaufus, K., Bob, J., Otto, P. E., & Wolf, N. (2017). The effect of tax privacy on tax compliance – An experimental investigation. European Accounting Review26(3), 561–580.

[6]Mols, F., & Jetten, J. (2017). The wealth paradox. Economic prosperity and the hardening of attitudes. Cambridge, UK: Cambridge University Press.

[7]Brehm, J. W. (1966). A theory of psychological reactance. Oxford, UK: Academic Press.

[8]Alm, J., & Beck, W. (1993). Tax amnesties and compliance in the long run: A time series analysis. National Tax Journal46(1), 53–60.

[9]Toro, J., Story, T., Hartnett, D., Russell, B., & Van‐Driessche, F. (2017). Italy. Enhancing governance and effectiveness of the fiscal agencies. Interantional Monetary Fund. Fiscal Affairs Department . Retrieved from http://www.mef.gov.it/inevidenza/documenti/Rapporto_FMI_Eng.pdf

[10]Aswestopoulos, W. (2012, January). Finanzamt stellt “Liste der Schande” ins Netz. Focus Online . Retrieved from http://www.focus.de/finanzen/news/staatsverschuldung/liste-der-schande-viele-deutsche-unter-griechischen-steuersuendern_aid_706059.html

[11]Schneider, F. (2016). Estimating the size of the shadow economies of highly‐developed countries: Selected results. CESifo Dice Report14(4), 44–53.

Continue Reading

Economy

Decoding European Union’s Economy

Aakash Agarwal

Published

on

European Union (EU) is a political and economic union which consists of 27 member countries. It acts as one economic unit in the world economy and is considered a major world trading power. They are subject to obligation and privileges of the membership. It focuses on comprehensive growth of all countries.

The Formation

The EU was formed to end the centuries of warfare that culminated during World War II. The union was founded in 1992 with the Maastricht treaty but was given its reformed structure and powers in 2007 with the Lisbon treaty. Under these treaties, the 27 members agree to come together with their sovereignty and delegate many decision-making powers to the unified body. Currently, there are seven official EU institutions which are made for the executive, judicial and financial functions. The primary aim of this treaty was to boost economic social and political integration amongst the nation.

The European Central Bank is the EU’s central bank . It regulates monetary policy and manages bank lending rates and foreign exchange reserves . The institution over the

years has expanded and strengthened its own authority. It has proved to be a competent institution and is serving its purpose.

However, It has also faced a series of unforeseen circumstances including the 2008

economic crisis, an influx of migrants from the Middle East and Africa and Brexit Negotiations. In June 2016 the United Kingdom decided to leave the European Unionand officially from 31 January 2020, the United Kingdom is no longer part of the EU.

Breakdown Of The Economy

Most countries that are a part of the European Union and use the same currency Euro. A group of nineteen of the twenty-seven EU members use the Euro currency. Therefore the trade process is simplified and the rest of the EU is also legally required to join the eurozone at some point. In terms of the total value of all the goods and services, it is considered bigger than the US economy. The 19 EU member states that comprise the euro area accounted for 85.5% of the EU’s GDP in 2019. However, due to the unforeseen circumstances implemented across the world in 2020 GDP is down by 3.8% in the euro area and 3.5% in the EU.

The EU’s trade structure has helped it to become one of the world’s largest economies after China. In 2018 it surpassed China’s GDP with a difference of $3.3 trillion. These measurements use purchasing power parity to the account of discrepancy between each country’s standard of living. Some experts argue that the EU produces more but the US still a larger economy, whereas the US is a country and the EU is a trading area which compiles the 27 countries. Despite the eurozone debt crisis, the EU is staggering towards a bigger fiscal integration. The EU’s currency, the euro has successfully competed with the global currency dollar. The EU’s exports in 2019 were for products petroleum, automobiles and medication while its top imports are petroleum, communications equipment, and natural gas.

Classification Of Eu Budget

The biggest chunk of the percent spent on the agricultural sector. Which includes the direct payment to farmers development of fisheries, forest and rural areas. The second chunk goes into economic, social and territorial cohesion, which is meant to help the EU’s less developed countries. It includes infrastructure, job development, technical assistance for

Small business. The rest is spent on research and development and building the EU’s foreign policy which is under Global Europe. The EU budget must balance as it has no authority to spend more than it takes in.

Trade

The 64% trade is undertaken within the EU states. The trade with the rest of the world accounts for some 15.6% of global imports and exports. The EU countries had the second-largest share of global imports and exports of goods in 2016.

Employability

After the global economic crisis and eurozone turbulence in 2008, the employability saw a rise in future.


The Economy Post Covid-19

The world economy has witnessed a plethora of ups and downs in this pandemic. European Union leaders sealed a 750 million – euro ($857billion) deal for their coronavirus blighted economies after a marathon talk. The EU was slow to coordinate initially with the pandemic and already weakened by Brexit, It was important for an upfront on economic aid which would demonstrate its come back. Earlier it has been observed bitter rows over how the grants would be managed. Council President Michel said securing a deal as “not only about money, it’s about people, about the European future, about our unity.”

Chancellor of Germany Angela Merkel said on Monday that EU leaders had come up with a “framework” for a possible agreement. Whereas Michel told, “This agreement sends a concrete signal that Europe is a force for action”. French President Emmanuel Macron, who spearheaded the deal with German Chancellor Angela Merkel, hailed it as “truly historic”.

But Currently, Countries like France, Spain and smaller nations in the EU have been adversely affected, It is believed that the economies of France and Spain will shrink by over 10%. The Country’s GDP is not expected to return to last year’s level before 2022. Earlier this month that it expects the EU economy to shrink 8.3% in 2020, The European Commission said considerably worse than the 7.4% slump predicted two months ago.

Comparisons With India

The deficiency in India’s COVID relief package is inadequate fiscal spending ( just 1% of GDP). For spending more the government will have to borrow more. However, without spending, the economy will likely struggle a little longer. Whereas in the EU package Euro 390 billion of grants. Cheap loans and credit guarantees are important but for a declining economy, stress should be given more to wage subsidies and emphasis on the MSME sector.

The meeting of the EU is the first major in-person gathering of world leaders since the COVID-19. The ideal emphasis which every leader is saying is the concept of ‘fundamental of the internal market should begin again with all necessary precautions and not just countries most affected by the crisis but also for those which benefit the most from the internal.

Continue Reading

Economy

Covid-19: Implications on Kerala’s Consumption Expenditure Pattern

Sancy K. Jose

Published

on

According to Keynes, “The consumption of a person or a society depends on his current level of income that is absolute income called absolute income hypothesis.”The Covid -19 pandemic has given a new pathway to the Kerala’s consumption model. There is a change in the consumption pattern, from non-food items to food items.

Also, there has been is a shift in consumption pattern within food items due to different factors. Why is there a change in the overall consumption pattern during the pandemic? Why there is a change in the consumption pattern within food category? In this article I would like to explore and analyse the immediate implications of COVID-19 on Kerala’s consumption expenditure pattern.

Non-food consumption expenditure

The present crisis due to the pandemic was unexpected. The Global lockdown is a newand different experience, surprising many. However, the consumers are not convinced that the lockdown would be the only way to save lives. At the same time, the strategy of lockdown is to contain the spread of the virus, established various implications to the consumer consumption pattern put the economy unpredictable. Consumption will determine the demand and supply of the economy. Without demand there will be neither production nor growth. Moreover, the continuous lockdown affects the movement of goods and consumption.

Due to the lockdown, only essential goods were available in the market like groceries, medicines, milk, vegetables, etc. So the total non-food consumption expenditures were minimal. However, the consumption percentage of essential medical products have been increased during the lockdown. 

Shops were closed during the strict period of lockdown. This unusual situation pushed the consumers not consume the durables goods. For example clothes, footwear were not consumed. As the transportation was completely stalled due to the lockdown people’s movements were completely restricted.

Likewise, the educational department was complete in chaos. The education department is linked with transportation, health, food, stationery and many more. When the transportation department was at a standstill, the consumption pattern had serious short term impacts and will have further impacts in the long run also. The reason is when the consumers fail to turn toward these sectors will have no demand for related products. Hence, there was no production. It is better to remember here about the words of Adam Smith, “Consumption is the sole end and purpose of all production.” 

Several reports indicate that during the first month of lockdown the total non-food consumption expenditure was decreased. But there was a significant increase in the consumption of medicines of the total households, in anticipation of shortage of medicines. There was a significant decrease in the total conveyance expenditure also. But there was a significant increase in monthly conveyance expenditure of households for the people working in the banking sector and the health sector, due to the lack of public transportation and they needed to use their own vehicles and taxis.

Food consumption expenditure

The lockdown scenario indicates the decrease in income for the consumers unprecedentedly affected the market. The consumers have a reservation to go out freely to purchase their usual essential requirements during the lockdown. For example fish is not available – because there was a ban on fishing to combat the spreading of the virus. Some of them were utilizing their home grown vegetables.

However, there were no changes in the consumption of milk related products. Packaged food items consumption slightly declined due to the stalled transportation. In addition to this the price of essential commodities also increased due to no substitutes. Moreover, a strictly managed supply chain, shortage of laborers to lift stocks from the wholesale markets for essential goods and the minimal supply are the reason for increase in price of essential commodities. A close look of the Kerala society indicates the increasing in price of the essential food products due to purely a supply side matter but also an increase in demand for essential food items also the causes for increase in food prices. 

In common the increase of essential food related products are in a huge demands during this lockdown is not surprising. When it comes to food consumption expenditure, the consumption of pulses has increased, even though total food expenditure has declined. Pulses were kept in stock in the fear of running out. More than 50% of households have spent very low on consumption of food due to the decreased income, they depend on ration shops for rice, wheat and other essential commodities.

The consumption of cereals slightly declined during the pandemic when compared with before the lockdown. The consumption of pulses, milk & milk products, salt & sugar are slightly increasing during this time. However, the consumption of products like pan, tobacco intoxicants and beverages are went up to nil during the lockdown because of its non-availability.

Moreover, egg, fish & meat were largely less consumed. Furthermore, vegetables and fruits were also less consumed. The market report about Kerala’s consumption shows that a reservation of people spend less for food items make us to draw a line that they are moderately affected because of the lockdown. It means their consumption pattern was altered due to their decline in income but fails to necessarily impact in the consumption of large quantity of essential food items could not be a surprise. This mainly because in particular places the consumers might have had the uninterrupted supply of essential items, well managed by the local administration gives confidence to the people makes them reserved for consuming more food items though they are essential for them for the next day use. However, the pattern of consumption obviously will not reflect the mood of entire Kerala would be a surprise for us. One thing is very clear that the consumption pattern curve drastically shifted from consumers friendly to the mood of accepting what is available in the market. Product substitutes are completely missing and consumers have not had many choices.

Conclusion

The decline in income completely decreased the purchasing power of the consumers prior to the Covid-19 indicating about the lavish spending culture of the Kerala consumers. However, the immediate short term impact of the covid-19 on Kerala’s consumption expenditure has changed from luxury to essential. We can say that the shift in consumption pattern of Kerala consumers tells us that human nature will change their attitude with in a moment when the nature changes against them for balancing. Here, the decision in change in consumption pattern is absolutely based on their survival.

Many express their fear would be well perceived that the consumption pattern of spending model will be around the food and necessity items than the luxury products will stay for a long term till the pandemic should be contained with the vaccine. The main reason for this is the lack of purchasing power. When the liquidity flow become normal then the consumption pattern also will be come to a normal stage. It means that when the difficult times disappear, the consumption pattern will also change.

Now the Indian government and the WHO also started saying that until the vaccine reach citizens the best way to handle the pandemic would be to live with the virus. At the same time how the government will be going to resume the economic activity will decide our income in the coming days. Accordingly the pendulum of the consumption pattern will also swing. This is a serious debate whether the instability will resume to normal in the short-run. However, once the government relaxes the lockdown though the government order 144 still prevails, it is visible outside that people are moving out with special masks and other standard precautionary measures. Thus the economy activity will be resumed along with the warning of the virus spread.

Just before ending the arguments the pandemic teaches us lot of lessons. For the rich the pandemic would not be a big challenge. For the poor it will be a disaster. For the middle class if they have enough savings their consumption pattern will not alter extremely but they always will be very cautious.

Continue Reading

Publications

Latest

Eastern Europe57 mins ago

The political inertia of the EU in the South Caucasus becoming a serious problem for the West

The geopolitical panorama  in the South Caucasus, which has strategic importance for Europe, has changed dramatically in recent years. Different...

Americas3 hours ago

China Replacing Russia as the Boogeyman in the U.S. Presidential Campaign

During the 2016 U.S. Presidential bid, Russia was picked as a scapegoat to justify the loss endured by the Democratic...

Africa5 hours ago

Armed Bandits: The Novel Security Threat in Nigeria

The shrinking of Lake Chad which has led to competition between farmers and herders over scarce resources coupled with Boko...

Newsdesk6 hours ago

AfDB presents findings of the Angola Green Mini-Grid Market Assessment

The African Development Bank hosted a webinar to present the findings and recommendations of the Angola Green Mini-Grid Market Assessment...

Newsdesk7 hours ago

Ten Years to Midnight: Four urgent global crises and their strategic solutions

The world has 10 years to solve its urgent challenges or it will be too late. In his new book, TEN...

International Law9 hours ago

Refugees In The Outbreak Of The Pandemic

The COVID-19 today is having an adverse impact on our lives although it has brought exceptional changes in climate and...

Middle East10 hours ago

Between Missiles and Flour: The Inside-Outside Game of Hezbollah in Lebanon

The Hezbollah is armed. Gunfire of Hezbollah and Amal supporters became audible on Beirut’s streets on early Sunday morning on...

Trending