(C): Global Credit Crunch and - Case Study|Business ...€¦ · Behavioural Finance, Finance Case...

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Pedagogical Objectives

The case acts as a trigger for analysing thecrisis from various perspectives:

• Microeconomics

• Behavioural Finance

• Derivatives and Risk Management

• Accounting and Control

• Working Capital Management

• Leadership.

Industry Financial ServicesReference ECC0047Year of Pub. 2008Teaching Note AvailableStruct.Assign. Available

Keywords

Financial Crisis; Microeconomics,Behavioural Finance, Finance Case Study,Derivatives and Risk Management,Accounting and Control, Working CapitalManagement, Leadership, US SubprimeMortgage Market, Financial Crisis

US Subprime Mortgage Market(A): Financial Innovation and

Welfare EffectsIn 2007, the sharp rise in foreclosures inUS’ subprime mortgage market segmentsnowballed into a global financial crisis.Such a remarkable event is tracked in a setof three case studies. This set sensitisesstudents to the elements of the subprimecrisis.The first in the set, this case study ismeant to introduce students to variousfacets of real estate securitisation from adebt perspective. It primarily emphasisesthe unique aspects of US subprime mortgagemarket, a key segment in the fixed incomeuniverse. Debt instruments exploredinclude Adjustable Rate Mortgages (ARMs),residential Mortgage Backed Securities(MBS) and Collateralised Debt Obligations(CDOs). Spotlight is actually on howfinancial engineering works for corporate,as well as, social benefit.


• Why subprime mortgage marketevolved?

• Default risk and risk-based pricing

• Various debt instruments – both in theprimary and the secondary subprimemortgage market

• Players and structure of the US subprimemortgage industry

• Benefits and issues surrounding thesubprime mortgage market.

Industry Financial ServicesReference ECC0046

Year of Pub. 2008Teaching Note AvailableStruct.Assign. Available

Keywords

Financial Crisis; US Subprime MortgageMarket; Financial Innovation; DefaultRisk; Debt Instrument; Finance Case Study;Mortgage Backed Securities (MBS);Collateralised Debt Obligations (CDOs);Financial Crisis; Adjustable Rate Mortgages(ARMs); Mortgage Industry

US Financial Crisis: Is It theMoment for Bretton Woods II?

The case is meant to invoke the reasonand the origin behind the Bretton Woodssystem to provoke a debate as regards itsproposed rerun in the context of the USfinancial crisis (2008), which has begun toengulf the whole of the globalised worldand, therefore, cries out for a synchronisedglobal response. Whether the requisiteresponse should come from a BrettonWoods-style concord of yesteryears orfrom a reformatted Bretton Woods systemand, whether there is any scope for theBretton Woods II moment as such can allbe known and argued upon as the caseunfolds itself to the readers. The casecaptures the working of gold standard,floating exchange rate, adjustable peggedBretton Woods system, post-BrettonWoods informal system, the US housingbubble and burst, the credit crunch andfinally the financial crisis spilling all overthe globe.


• To understand the reasons for the originof the Bretton Woods System

• To analyse the factors leading to thedemise of the Bretton Woods System

• To understand the connection betweenthe post-Bretton Woods InformalSystem and the US Housing Boom

• To analyse the process by which the USHousing Boom led to the US and theGlobal Financial Crisis

• To debate over the revival of theBretton Woods System.

Industry Not ApplicableReference ECC0044Year of Pub. 2009Teaching Note AvailableStruct.Assign. Available

Keywords

US Financial crisis of 2008, HousingBubble, Subprime Crisis, MBS, FinancialDerivatives, Credit Crisis Indicators,Bailout, Deficit Financing, Liquidity Trap,Money Illusion Monetary Policy, FiscalPolicy, Deficit Financing, Paradox of

US Subprime Mortgage Market(C): Global Credit Crunch and

Crisis at Northern RockThis case study on subprime crisisconcentrates on liquidity – an asset’sproperty of being traded quickly and atlow cost. Particular attention is devotedto determinants of liquidity, liquidity riskand central bank intervention – all thathave arisen due to liquidity problems atNorthern Rock, due to the subprime crisis.With the help of this case, students willnot only understand the theoreticalunderpinnings of liquidity, but also analysethe credit market conditions that have ledto spread of subprime contagion to UK,resulting in collapse of Northern Rock.


This case study helps students to understandand analyse:

• Liquidity and its determinants

• Liquidity risk

• Global inter-bank lending

• Central bank intervention

• Issues in managing liquidity risk.


Keywords

Financial Crisis, Liquidity, Liquidity Risk,Global Inter-bank Lending, Central BankIntervention, US Subprime MortgageMarket, Finance Case Study, NorthernRock

US Subprime Mortgage Market(B): Crisis and its Aftermath

In 2007, increased foreclosure rates in theUS triggered a huge crisis – affecting thewhole set of participants in subprimemortgage market. This case study – secondin its series – looks into the havoc thecrisis created. The focus is on how levelsof intermediation, between the borrowerand the investor, created huge conflicts ofinterest and rapid collapse of the subprimemortgage market. Sophisticated investors,including many large investment banks thathave invested billions of dollars, fuelsubprime mortgage market. By the end ofAugust 2007, substantial amounts of theinvestors’ equity capital was lost – resultingin a huge credit crisis across the world.

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Thrift, Multiplier, Phillips Curve,Tradeoff, Stagflation, Quantity Theory ofMoney, Supply-Side Economics, LafferCurve, Broken Window Fallacy, HangoverTheory

US Financial Crisis: South Korea –1997 South East Asian Financial

Crisis vs 2008 Financial CrisisThis case study intends to compare andcontrast how South Korea was affected bythe 1997 South East Asian Financial Crisisand the 2008 US Financial Crisis. Capturingvery insightful observations from thecomparison, this case study enables aninteresting discussion on, which sectors(industries) of the South Korean economywere affected by 2008 US Financial Crisisin particular and how the economy as awhole fared and responded to the crises.Many argue, based on key and fundamentaleconomic indicators, that the SouthKorean economy is well equipped to dealwith any potential problematic situationamidst the crisis. This case study enables adebate on the efficacy of the few correctiveand damage-controlling measures initiatedby the government.


• To compare and contrast 1997 SouthEast Asian Financial Crisis and 2008 USFinancial Crisis from the standpoint ofSouth Korea; based on similarities anddissimilarities, reasons, measures taken,etc.

• To explore (if possible measure) theextent and intensity of US FinancialCrisis 2008 on South Korean economyand its key industries

• To understand the corrective measurestaken by the South Korean governmentto control the damage caused by USFinancial Crisis 2008 and to debate onthe efficacy of these measures.


Keywords

US Financial Crisis, South East Asia, AsianFinancial Crisis, 1997 Crisis, South Korea,Chaebols, Current Account Deficit, FiscalDeficit, Economic Indicators

US Financial Crisis: Prospects andPerils of Globalisation of

Financial MarketsThis case study analyses the pros and consof financial globalisation and its affects ondeveloping economies. It also helps in

debating the need for more regulations inglobal capital flows. The case study alsoprovides scope for discussion on the kindsof reforms needed to withstand the shocksof financial disturbances and futureimplications of globalisation on developingeconomies. Blame it on the greed of theinvestment bankers or theincomprehensible financial derivatives orthe inexplicable housing mortgage marketor the laidback regulators or theoverenthusiastic administrators, but thereal culprit of the US financial crisis (2008)is the obsession of the Americans to liveon credit and the federal government'saudacity in breeding colossal deficits.Reasoning is that if the US citizens wereprudent enough to discourage excessivelending by banks or had the governmentkept the deficits at manageable levels,curbing availability of liquidity to deservinglevels, the housing bubble would not havebuilt up and the subsequent crisis could havebeen avoided.

The aforecited phenomena – Americansliving on credit and Federal governmentencouraging deficits – were fed, for a longtime, by surpluses of the Asian economies,especially China. If history is any evidence,this crisis wasn’t the first that was built bycapital from across borders. During the late1970s, petrodollars, from oil exportingcountries were siphoned to emergingeconomies, principally in Latin Americathrough western banks. This ended in thefirst big crisis of modern times, whenMexico went bankrupt in 1982, bringingthe banks of New York and London totheir knees. Then again, from 2000, overa trillion dollars were channelled into thesubprime mortgage market of the US andrest of it is now a well-reported history.How was enormous money shipping acrossborders possible at the first place? Werethe modern financial deregulations the realcause? Could the crisis have been avertedwith tighter regulations over capital flows?The case study helps to analyse some ofthe problem areas of financial globalisationin classroom discussion.


• To explore the roots of financialglobalisation and persistent changes incurrency exchange systems

• To analyse the relation betweenglobalisation of financial markets anddevelopment of various economies

• To analyse whether capital inflows ofFIIs type are useful or harmful foremerging economies

• To debate the negative face of FIIs andanalyse the impact of financial turmoilon emerging economies during a crisis.

Industry Financial ServicesReference ECC0042Year of Pub. 2009

Teaching Note AvailableStruct.Assign. Available

Keywords

US Financial Crisis, FIIs, FDIs,Globalisation, Financial Markets, BrettonWoods System, Developing economies,Capital inflows, Mortgage BackedSecurities, Global economies, capital flowregulations, Most Financially IntegratedCountries, Less Financially IntegratedCountries, Degree of Financial Openness,Portfolio flows

US Financial Crisis: ParentalAgonies and Kids' (Untold)

AnxietiesThis case study gives an overview of theeffect on pre-teens and teens, by theforeclosures of subprime crisis andsubsequent financial crisis (2008). This caseis written to sensitise the participants onhow to go beyond the obvious in times ofsuch crises. Someone might argue, whatrole did kids play in this crisis? Well, theydid not play any role, they were mutewitnesses to all the happenings to theirbreadwinners – may it be parents, NGOs,etc. The crisis did affect all thesebreadwinners in more ways than one. Howshould this story be narrated to the kids?How would the kids receive this story?What kind of damage control initiativescould have been taken up? The caseevaluates the need for imparting value-based education, money managementtalents and savings habits in children tomake them responsible citizens.

The subprime mortgage crisis thatincubated in the US housing industrydevastated many Wall Street firms,Government-Sponsored Enterprises(GSEs), lenders, borrowers, investors andmost surprisingly, many voiceless victimsi.e., kids who were never involved in thisgreed game. The inability of borrowers torepay the high-interest bound subprimehome loans triggered huge surge inforeclosures, resulting in about 2 millionkids rendered homeless. Moreover, manypeople lost their jobs due to the crisis. Thus,the crisis victimised kids with frequentmobilities of homes, schools andneighbourhoods, reduction inentertainment, spending, etc., causinganxieties and behavioural problems in kids.


• To understand the reasons forbehavioural problems in kids duringdomestic financial problems

• To analyse the effects of US subprimecrisis and the subsequent financial crisison kids

• To examine the role of parents,educational institutions, government,




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media and society in explaining the crisisto the kids and explore the possibleoptions to contain any negativebehaviour

• To debate on the need of inculcatingsavings habits and money managementin children.


Keywords

US Financial crisis, Subprime, SubprimeMortgage Crisis, CDOs, CDSs,Foreclosures, Wall Street, InvestmentBonds, Lehman Brothers, AIG

US Financial Crisis: Is KeynesianEconomics Still Relevant?

This case was written primarily to debateon the relevance of Keynesian principlesin the wake of the US financial crisis(2008). J.M. Keynes in his classic, TheGeneral Theory of Employment, Interestand Money, not only demolished many aclassical myth such as paradox of thrift,supply creates its own demand, wage cutexpands employment and so on, but alsopresented a cogent doctrine to lift theeconomy from the depth of depression.Keynes' brilliant insight could detect thatinstability is the name of the game in acapitalist economy; and to fight it, theartillery is government intervention – butnot to the extent that the Marxists leeredfor. Whether Keynesian economics is areal remedy for the downslide or whetherit is worse than the malady is a stimulatingquestion that the case poses and pondersover. Whether Keynesianism suffers fromthe 'Broken Window Fallacy' or it breaksfree the economies of the world from theshackles of slump are among the aspectsdiscussed to revive the debate about therelevance of the great economist LordJohn Maynard Keynes.


• To understand the classicalmacroeconomic view

• To analyse why full employment is notthe norm of a capitalist economy

• To understand the mechanism ofKeynesian economic strategy

• To discuss the situation of stagflationthat Keynesian economic strategy failsto address

• To debate whether Keynesian economicshas again come to claim relevance inthe context of the US financial crisis(2008).


Keywords

US Financial Crisis, Toxic Assets, HousingBubble, Credit Crisis Indicators, BailoutPlan, Keynesian Economics, JohnMaynard Keynes, Great Depression,Liquidity Trap, Money Illusion, MonetaryPolicy, Deficit Financing, Paradox ofThrift, Phillips Curve, Stagflation, LafferCurve, Broken Window Fallacy

US Financial Crisis: India StablyStumbles

This case enables a discussion on how USFinancial Crisis (2008), has impacted theIndian economy and what should be theremedial measures. India, in its efforts tobe globally integrated, encouraged crossborder transactions by easing up theregulations. With US financial crisis (2008)having cascading effects on variouseconomies across the world, India also hasa share of its economic cake eaten awayby the financial crisis monster. However,while some sectors felt pronounced effects,other sectors were affected relatively less.This case highlights all those sectors thatare affected by the US financial crisis,directly and indirectly.

Due to stringent regulations, it has not, sofar, been into a serious disruption.However, India is witnessing someslowdown. India's export revenues havedeclined for the first time in the past 5years. The real estate markets in India haveslowed and home prices started fallingsharply. As the foreign investors pulled outmoney, stock market index fell. As thereis a panic among investors, there is noroom for fresh investments, which startedaffecting other industries. Moreover,Indian banks started tightening their credits/loans for the industry sector. Governmentof India along with Reserve Bank of Indiais taking conventional as well as non-conventional measures to increase liquidityin the financial system. India believes thatthese measures will reduce panic amonginvestors and help avoid major recessionor depression. The intriguing question hereis – Are these measures or policies enoughfor the current scenario?


• To understand the background and USfinancial crisis (2008) and its impact onworld economies, including emergingeconomies like India

• To understand the nature and intensityof US financial crisis (2008) on Indianeconomy and debate on the likely

damage it can cause to various sectors,especially those sectors that are globallyintegrated

• To debate on the efficacy of steps takenby Government of India and its variousregulatory authorities (RBI, SEBI, etc.)and explore further steps to be taken tokeep economic growth momentum on.


Keywords

US Financial Crisis , BRIC, INDIA,Subprime Mortgage, Financial Services,Stock Exchanges, Derivatives, ForeignInstitutional Investors (FII), Foreign DirectInvestment (FDI), GDP, Exports, InterestRate, Banks, Forex

US Financial Crisis: GlobalFinancial Markets – Need for

New Regulations?This case study is written primarily tofacilitate an interesting debate on, in thewake of US Financial Crisis (2008), whetherthe financial markets were overderegulated? many wonder if this crisis is aderivative of derivatives? Where are theregulators? This case also prompts a debateon the need and modalities of newmechanism required to ensure smoothfunctioning of financial markets.

Globalisation is the order of the day. Withglobalisation comes economic liberty,which in turn calls for lesser regulations,which has been the pattern in the globaleconomy since 1970s. The axiom thatfreedom would breed creativity and risksharing has driven deregulations in theglobal financial markets. Surely, financialmanagers became creative and spread therisk, little knowing that the same virtueswould spell doom to the whole worldeconomy. The regulators arecontemplating on reformulating andrechristening regulations again, to have abetter control on financial transactions andcreate a balance between exuberance andcontrolled risk sharing. The wheels forinducing regulations into the financialmarkets were set in motion with the G20summit, held in November 2008.


• To analyse the impact of deregulationson global financial markets

• To debate on whether the lack ofadequate supervision resulted in financialcrisis

• To discuss the alternatives to be adoptedto rectify the current financial system

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• To analyse the expected costs andbenefits of the new mechanism.


Keywords

US Financial crisis, Subprime mortgage,Housing, Recession, Deregulation, CrossBorder Capital Flows, Integration ofFinancial Markets, Globalisation, FinancialDerivative Instruments, Financial Services,Economic predictions, Bretton Woodssystem, Securitisation, The FinancialServices Modernization Act

US Financial Crisis: Decouplingand the Brazilian Economy

This case study is aimed at an analysis onhow various sectors of Brazil were affecteddue to the US financial crisis and also tovalidate the relevance of decoupling theoryfor the Brazilian economy. This case alsohelps debate on how a singular unintendedincidence – the US financial crisis in thiscase – could put the recovery efforts of aneconomy in jeopardy.

Brazil, some argue, was blessed in disguisewhen it was tested with perennial economiccrisis throughout the 1990s and globaldownturn following the September 11terrorist attacks. The economy not onlyemerged more resilient, but also grew self-sustainable. 2008 Statistics tell the wholestory – imports equal to 9% of the BrazilianGDP and exports about 12%. Just wheneconomists started believing that thiscountry is decoupled from thedevelopments in the US economy, the USfinancial crisis (2008) struck Brazil off-guard. The global credit dried up,unemployment increased, internationalinvestor confidence dwindled and above all,Brazilian real shrunk against the US dollar.Brazilian companies have bet huge amountson currency derivatives, since 2003, withthe assumption that the real wouldstrengthen against the US dollar. Whatshould companies do firstly to avoid animpending bankruptcy and stay afloat inthe medium term? What should begovernment's response?


• To understand the impact of the USfinancial crisis on an emerging economylike Brazil

• To analyse whether decoupling theoryholds good in today’s financially-integrated world

• To highlight the challenges Brazil facesas a result of this crisis.


Keywords

US Financial Crisis, Subprime Mortgage,Currency Derivatives, Decoupling Theory,Brazilian Economy, Brazilian real, Sadia,Aracruz, Grupo Votorantin, Credit Crunch

US Financial Crisis:Would the Bailout Work?

This case is written primarily to debateand destill the merits and demerits of $700billion bailout package. The sudden seizureof the US financial sector following thedomino effect of the fall of LehmanBrothers in mid-September 2008 has notonly sent shockwaves throughout the USeconomy but rippled across almost all thefinancial centres of the world. The caseprobes into various causes – bothproximate and remote – that have broughtabout the mess of distressed financial assets,frozen the credit market and choked thereal sector through its impact on bothconsumption and production. The massivebailout package that was quickly put inplace by the US government to rescue theeconomy is analysed with regard to itsefficacies and shortcomings. In the process,the aspects such as role of interest rate inthe housing bubble and burst, securitisationof mortgages, subprime lending, complexfinancial derivatives, blurring of theoperational distinctiveness betweencommercial banks and investment banks,debt delinquencies, foreclosures, creditcrunch, link between the financial sectorand the real sector, moral hazard, claw-back policy, relevance of Keynesianism vsneo-classical liberalism vs statist Marxismhave all been brought into discussion. Asthe case unfolds, one would tend to switchfrom rooting for the bailout, to dumping itto reformulating it. Whether the bailoutwould work or not will get its discussantsnew perspectives as the case progresseswith facts and logic from various angles.


• To analyse the causes of US financialcrisis

• To explore the relationship betweenfinancial sector and real sector

• To debate on the pros and cons of thebailout package.


Keywords

Financial Crisis; Subprime Mortgages;Housing Bubble; Toxic Assets; Bailout Plan;TARP; Bear Sterns; AIG; Fannie Mae;Freddie Mac; CDSs; Financial Derivatives;Moral Hazard; Liquidity Crunch; Claw-Back Policy

US Financial Crisis: Where are theUS Economists?

This case was written primarily to debateon the proactive role that could have beenplayed by some of the celebrated USeconomists. After all, these very (atleastsome of them) economists were advisingvarious economies across the world,whenever any of them faced eithereconomic or financial crisis. In 2008, theUS financial crisis assumed hugeproportions, shaking the world economy.The magnanimity of the crisis makes onewonder what the celebrated economists ofthe US were doing when the economy andits flagship financial services industry wasdeteriorating. Couldn't they foresee andforewarn about the consequences of themortgage mess? In fact, many economistsdid foresee and forewarn that the US washeaded for a huge financial crisis. Many ofthe economists' predictions werenevertheless ignored. The case study 'USFinancial Crisis: Where are the USEconomists?' presents the dilemmawhether the crisis was inevitableirrespective of the predictions. Wasignorance on all fronts the real culpritbehind the crisis?


• To understand if the US financial crisiswas inevitable

• To debate on whether US financial crisis(2008) could have been prevented ifsome of the US economists wereproactive

• To debate on the role played out by US-dominated two international institutions– IMF and World Bank – in preventingUS financial crisis (2008).

Industry Financial Services IndustryReference ECC0035Year of Pub. 2008Teaching Note AvailableStruct.Assign. Available

Keywords

Financial crisis; Subprime mortgage;Housing; Recession; US debacle;Economists; Paul Krugman; Joseph E.Stiglitz; Nouriel Roubini; Economicforecasts; Economic predictions; HenryPaulson; Alan Greenspan; Paul Volcker




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US Financial Crisis: US BankingSector at Crossroads?

This case study's objective is to questionand argue out the US banking sector's mega-banking model in the wake of US financialcrisis (2008). In 2008, the US financialcrisis has tumbled the performance of giantinvestment banks in the US. The USbanking sector had seen the demise of biginvestment banks like Lehman Brothers,Merrill Lynch and Bear Stearns. Added tothis the banking landscape of the US alsowitnessed conversions of investment bankslike Goldman Sachs and Morgan Stanleyinto bank holding companies. On the otherhand, the universal banks were also affectedat their worst by the crisis. The one-stop-shop model which proved expensive duringGreat depression is once again viewed asthe same by drawing many criticisms.Under such conditions, the changing statusof investment banks, with their riskmanagement skills, strong corporate base,prolific networks, is further increasing thecomplexities to universal banking model.The competition among the players isintensifying, ultimately affecting the wholeUS banking sector. This case dwells uponthe reasons for the failure of investmentbanking model and growing significance ofuniversal banking model. It also briefs aboutthe performance of universal bankingmodel at various intervals. It helps indebating on the continuance of universalbanking model and the mountingcomplexities to this model with newentrants.


• To understand and assess specialisedbanking model

• To debate on the role of universal banksin the US financial crisis

• To debate on the future of universalbanks with the new entrants.

Industry BankingReference ECC0034Year of Pub. 2008Teaching Note AvailableStruct.Assign. Available

Keywords

US Financial Crisis; Investment Banks;Universal banks; Glass-Steagall Act;Gramm-Leach-Bliley Act; SubprimeLosses; US Banking Sector; FederalReserve; Leveraged Business; GreatDepression; Goldman Sachs; MorganStanley; Bailout; Henry Paulson

US Financial Crisis: The Takeoverof Wachovia by Wells Fargo

Fargo In mid-2008, on the Wall Street,events took place at a breath taking pace– the financial institutions that were bidding

for other banks dramatically became praysin a matter of days. One such victim wasWachovia Corp. (Wachovia), which in lateOctober 2008 bid to acquire Merrill Lynch,but could not close the deal. By November2008, however, it could not sustain aloneand Wells Fargo gobbled it after a fiercebattle with Citigroup. This case studyfocuses on the circumstances that forcedWachovia to take a decision of selling itselfto Wells Fargo. It discusses the success storyof Wachovia, which rose from a smallfinancial institution to the third-largestbanking chain (based on total deposits andthe fifth-largest bank by marketcapitalisation) in US. The case analysesthe internal and external factors thatencouraged Wachovia to enter into themortgage business which victimised thebank through subprime lending. Evaluatingthe radical measures adopted by Wachoviato save itself from the repercussions ofthe acquisition of Golden West FinancialCorp. and of the credit marketdisturbances, the case study also helps indebating the alternative strategies thatwould have saved the bank in the crisis.


• To discuss the origin, growth and scopeof the activities of Wachovia

• To analyse the internal and externalfactors that enticed Wachovia to enterinto the mortgage business thatvictimised the bank

• To discuss the measures adopted byWachovia to save itself from thefinancial crisis.

Industry BankingReference ECC0033Year of Pub. 2008Teaching Note AvailableStruct.Assign. Available

Keywords

Financial Crisis; Subprime MortgageBusiness; Mortgage Backed Securities(MBS); Credit Default Swaps (CDS);Collateral Debt Obligations (CDOs);Subprime Mortgage Crisis; Citigroup; WellsFargo; Wachovia; Golden West FinancialCorp; Diversified Financial Services; Pick-A-Payment Loans; Adjustable RateMortgages (ARMs); NegativeAmortisation; Federal Deposit InsuranceCompany

US Financial Crisis: The Role ofSubprime Mortgages

This case study helps to unravel thesubpirme mortgage mystery byunderstanding MBSs and CDOs. This casestudy provides a backdrop forunderstanding the US financial crisis (2008).Adam Smith professed it's not at thebenevolence of the butcher or the baker

that the common man dines. Long afterthe Scottish scholar, more glamorousAmerican bankers bestowed a dream homefor all the Americans, who deserve one aswell as those who don't, based oncreditworthiness. Credit to the latter wasnamed as 'subprime' lending, whichultimately doomed the entire bankingsystem – a destiny that an undeservingeconomic benevolence attracts. The caseprovides an idea about how the prime andsubprime mortgage lending differs with eachother and the evolution and growth ofMortgage-Backed Securities (MBS) marketduring the booming years of US housingindustry. The case provides anunderstanding on how the greed nurturedby the financial institutions to earn heftyprofit margins from subprime lendingfinally led to the meltdown of housing andsubprime mortgage markets. It providesthe history of development of MBSmarket and the spread of risks across thefirms, by Government SponsoredEnterprises like Fannie Mae and FreddieMac and leading Wall Street firms like BearStearns, Lehman Brothers, Merrill Lynch,etc., and how the collapse of US housingboom resulted in global financial turmoil.


• To analyse the reasons that encouragedfinancial institutions to shift from primelending to subprime model of lending

• To understand the concept of MBS,promoted by financial institutions andits ill effects that triggered the currentcrisis

• To understand the recent developmentsin the US housing and banking industries

• To analyse how the subprime crisisaffected the housing and bankingorganisations.

Industry Banking and FinanceReference ECC0032Year of Pub. 2008Teaching Note AvailableStruct.Assign. Available

Keywords

Subprime; Mortgage; MBSs; CDOs;Housing Market; Foreclosures; BearStearns; AIG; Merrill Lynch; FinancialDerivatives; Financial innovation;Delinquencies; Financial turmoil; UShousing bubble

US Financial Crisis:The Fall of Merrill Lynch

The case is structured to resolve twointeresting dilemmas: (a) should MerrillLynch have heen saved through a mergerwith BoA? (b) What is the economic logicbehind BoA's decision to take over MerrillLynch in the midst of US financial crisis

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(2008)? The case presents a brief historyof Merrill Lynch and discusses the growthof Merrill Lynch, followed by itsinvolvement in subprime mortgagebusiness. It explores the financial historyof the firm in relation to mortgage-backedCollateralised Debt Obligations (CDOs).The case presents uncertainty created bydeclining housing markets and thefollowing credit squeeze. The case describesthe final attempts by the firm to survivein the tough financial conditions and theconsequences that led Bank of America(BoA) to take over Merrill Lynch.


• To analyse the factors that led MerrillLynch to enter into the mortgagebusiness and ultimately into US financialcrisis

• To understand the strategies adopted byMerrill Lynch confronting theuncertainty created by crumbling housingand credit markets

• To discuss the conditions that led BoAto takeover Merrill Lynch and what arethe alternative strategies the firm couldhave adopted to survive in the crisis.

Industry Investment BankingReference ECC0031Year of Pub. 2008Teaching Note AvailableStruct.Assign. Available

Keywords

Financial Crisis; Subprime MortgageBusiness; Mortgage Backed Securities(MBS); Financial Markets; Merrill Lynch;Bank of America; Collateral DebtObligations (CDOs); Credit Default Swaps(CDS); Subprime Mortgage Crisis;Investment Banking; Asset Management;Wealth Management; Charles E. Merrill;Hedge Funds

US Financial Crisis:The Fall of Lehman Brothers

Brothers collapse was probably the darkesthour of US financial crisis (2008). Othercompanies engulfed in the crisis were stillallowed to carry on their business with abailout mask. Many CEOs, analysts,industry experts and observers questionedvehemently why was Lehman Brothers letgo? The mighty investment bank, whichweathered many storms, surrendered like alame duck and quit the business in a week'stime when it was caught in the financialcrisis in mid-2008. After the strenuousefforts, the firm put through the 158 yearsfrom its origin as a small dry-goods storeto become the fourth-largest investmentbank in US, Lehman Brothers was chokedto death by losses on financial derivatives.The case study focuses on the involvementof Lehman Brothers in the subprime

mortgage business. It exposes the mistakescommitted by the investment bank andfollowing repercussions that led the firmto its final demise. The case also exploresvarious reasons behind the fall of LehmanBrothers and helps understand strategiesthat might sometime produce negativeeffects.


• To analyse the factors that enticedLehman Brothers to enter into thesubprime mortgage business andultimately into the US financial crisis

• To understand strategies adopted byLehman Brothers during deterioratingmortgage market conditions

• To analyse the factors that led to thebankruptcy of the Lehman Brothers

• To debate on whether Lehman Brothersshould have been bailed out rather thanallowing it to collapse.

Industry Investment BankingReference ECC0030Year of Pub. 2008Teaching Note AvailableStruct.Assign. Available

Keywords

Financial Crisis; Subprime MortgageBusines; Investment Banking; MortgageBacked Securities (MBS); Lehman Brothers;Credit Default Swaps (CDS); CollateralDebt Obligations (CDOs); Aurora LoanServices; Asset Management; CapitalManagement; Home loans; RiskManagement; Alternative-A Loans; BNCMortgage; Subprime Mortgage Crisis

US Financial Crisis:The Chinese Connection

Well, what not one can do with a trilliondollars? Ask China. Accumulating massiveforeign exchange reserves through exports,China gained the power to challenge US'economic supremacy. China not only fedthe US financial institutions' with muchneeded dollars that expanded the bubble,but also contemplated on bailing the USout of the crisis. Analysts and experts calledupon China to redefine the global economicbalance by using its foreign exchangereserves to gain pre-eminence on USinstead of bailing it out. Others, however,believe that China lacks the expertise tochallenge US. The case study describes theimpact of 2008 financial crisis on US andChina. The case study highlights these issuesand presents the dilemma concerningChina's future course of action. ShouldChina attempt to challenge US and therebybecome a key player in the worldeconomy? Or should it bailout US and saveits own economic growth?


• To understand the reasons behind China'srapid growth

• To understand the dynamics of theChina-US trade relations

• To analyse China's role in causing andresolving the US financial crisis.


Keywords

Subprime; Mortgage; Financial Crisis;China; FDI; Yuan; Renminbi; US Tradedeficit; Foreign Exchange Reserves; Bail-out; US-China Trade relations

US Financial Crisis:The Bailout of AIG

The growth of subprime mortgage marketresulted in development of numerousfinancial instruments – meant to diversifythe risk – which were grosslyincomprehensible. The alphabet soup offinancial derivatives is largely blamed forthe US Financial Crisis and AIG, for itspart insured all the instruments withouteven evaluating the risk. The case attemptsto explain the concept of Credit DefaultSwaps (CDS) and examine the role ofAmerican International Group (AIG) in thesubprime context. The case also describeshow these instruments were insured by AIG,making the buyers of the instrumentsbelieve that they bear no risk at all. Whenthe disguise was revealed, AIG was forcedto pay for all their worth. The risk at AIGresulted into a huge $441 billion worth ofCDS, which brought the company to thebrink of bankruptcy. The company couldnot fund all the risk and the bubble builtaround these instruments burst into a globalfinancial crisis.


• To analyse how AIG's business strategieshave transformed it into a leading insurerduring the 20th century

• To understand the effects of expansionof subprime market on insurancecompanies

• To understand how financial institutionsspread the risk from one to another

• To analyse the causes of burst of housingbubble and its effect on AIG.

Industry InsuranceReference ECC0028Year of Pub. 2008Teaching Note AvailableStruct.Assign. Available




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Keywords

Financial Crisis; Subprime; AIG; Bailout;CDS; MBS; Investment Bank; FederalReserve; Insurance; Portfolio; FinancialDerivatives; Henry Paulson; AIGFP; Supersenior CDS portfolio

US Financial Crisis: No Limits onExecutive Compensation?

Remember Gordon Gekko's signature linein the Hollywood movie Wall Street,"Greed, for lack of a better word, is good.Greed is right, greed works. Greed clarifies,cuts through, and captures the essence ofthe evolutionary spirit. Greed, in all of itsforms; greed for life, for money, for love,knowledge has marked the upward surge ofmankind. And greed, you mark my words,will not only save Teldar Paper, but thatother malfunctioning corporation calledthe USA." This became the corporatemantra for most of the executives in theUS financial services market.

The stock market boom in the 1990sbrought in windfalls for financial executives,whose pay was linked to company's stockprice performance. This increase in paywas attributable to the grant date value ofstock option grants. Their greed wasrewarded with huge incentives even at thecost of their companies' poor performance.

As predicted by analysts, sky fell on USfinancial services industry. In 2008, stockmarket crashed at an all-time low, leadingto one of the worst financial crises eversince the Great Depression. The bigfinancial institutions of the world likeMerrill Lynch, Morgan Stanley, GoldmanSachs, Citigroup, Wachovia, WashingtonMutual, etc., lost their fortunes. Manyblamed the CEO compensation as theculprit for the economic fallout. However,few analysts opine that as the US financialcorporations have increased in sizedramatically over the past decade, theCEOs of these large financial companiesbecame accountable to the shareholders,which in turn forced them to 'cook thebooks'. Although the urge to earn moreand the need to survive in the competitionprompted these executives to resort tomalpractices, but does not seem a fairexcuse as the corporate governancepractices are under threat.

But, few questioned why a CEO's pay isscrutinised only when companies are doingbadly and not when they are doingextremely well? Who should be blamed forthe gamble – the CEO or the system?


• To examine the role of CEO in ensuringthe company's long-term profits whilemanaging risks and returns

• To figure out how far CEO's paypackages inspired the erstwhileinvestment banks to embrace high riskfinancial derivatives

• To debate on who should be heldresponsible for the failure of the financialservices institutions in the US.


Keywords

Financial crisis; Subprime Mortgage;Executive pay; CEO; Boards; Governance;Compensation; ESOPS; Sarbanes Oxley;Bailout; Housing Bubble

US Financial Crisis: MorganStanley as a Universal Bank

In 2008, the US Financial Crisis assumedhuge proportions, swallowing one firm afterthe other, particularly the once gloriousinvestment banks. Morgan Stanley (MS),a successful investment bank since itsinception, was no exception. The case study,'US Financial Crisis: Morgan Stanley as aUniversal Bank', deals with the status ofMS pre- and post- financial crisis. The caseexamines the involvement of MS in thefinancial crisis through its business in thesubprime market. In the aftermath of thefinancial crisis, to save itself frombankruptcy and fading into oblivion, thebank decided to convert itself into a bankholding company. The dilemma presentedin the case is if MS will be able to continuethe tradition of its glorious past even in itsnew role of a bank holding company.


• To understand the major factorsresponsible for US Financial Crisis(2008)

• To understand and assess differentbanking business models

• To critically examine Morgan Stanley'sdecision to operate as a bank holdingcompany.

Industry Financial Services IndustryReference ECC0026Year of Pub. 2008Teaching Note AvailableStruct.Assign. Available

Keywords

Subprime; Financial crisis; US Banks;Investment Bank; Universal Bank;Bankruptcy; Morgan Stanley; CDOs;Bailout; Federal Reserve; Bank holdingCompany

US Financial Crisis: Is the GreatDepression II in the Making?

This case study is written primarily toanswer one simple, yet inconclusivequestion: Should US Financial Crisis(2008) be termed Great Depression II? TheGreat Depression of the 1930s is such atraumatic economic experience thatwhenever there is any slump in economicactivity, a spontaneous spooky senseoccupies people's mindscape. The casestudy relates the US Financial Crisis of 2008to the Great Depression of 1929 by takinginto consideration the key magnitudes ofthe economic decline in those days and atpresent. The benefits of hindsight, the stateof global integration, the availability ofpolicy options – then and now – have alsobeen touched upon. In the process, the caseanalyses an array of concepts likeeconomic slowdown, recession, depression,various gauges to judge the severity of theeconomic downturn, various indicators ofrecession, Baltic freight index, subprimemortgage, housing bubble, CDO, CDS,Minsky moment, monetary policy, fiscalpolicy, Phillips curve, stagflation, etc. Italso goes on an exploration of the causesof the Great Depression as pointed out byKeynesians, Monetarists, Marxists and neo-classical Misesians; the cures prescribed bythem; the measures actually implemented;and the degree of success achieved.Whether – in the realm of an economy –history repeats itself or merely rhymescome off as the main focus as the caseuncovers.


• To understand the various concepts ofeconomic downturn and themethodologies of their measurement

• To analyse how economic downturn is afrequent feature of a capitalist economy

• To explore the causes of the GreatDepression of 1929

• To debate whether economic downturnof 2008 would slide into depression.


Keywords

Financial Crisis; Subprime Mortgages;Housing Bubble Depression; Recession;Slowdown; CDOs; CDSs; KeynesianEconomics; Keynes; Federal Reserve;Milton Friedman; JK Galbraith; MinksyKindlebergerMoment; Kindleberger

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US Financial Crisis: Is Credit CardDebacle in the Making?

Is credit card debacle in the making? Noone knows, really. Credit Cards, innovatedin the mid-20th century, cultivated theculture of 'spend now, pay later' among theUS consumers, which was later welcomedand adopted through out the world. Creditcard usage increased very rapidly over theyears, due to the attractive offers given bythe credit card companies (led mostly bybanks). Consumer spending is very vitalfor an economy to grow and the USconsumers supported their economy byliving beyond their means with the help ofcredit cards. Over the years the credit cardindustry largely left unregulated, drove theconsumers to borrow excessively resultingin alarming levels of credit card debt. Afterthe financial crisis in 2008, suddenly thecredit card debt became unmanageable.Credit card companies are facing huge creditcard losses, due to rising credit card defaults.To cover their losses credit card companieshave raised the interest rates and to limitthe exposure the companies lowered thecredit limits. In the wake of massiveunemployment due to the financial crisis,consumer confidence touched its everlowest levels and credit crunch has made itdifficult for consumers to carry on withtheir day to day activities. It is beingpredicted that the next crisis would be thecredit card crisis, if the default rates arenot contained in time.


• To understand the US consumer spendinghabits and the role of credit cards inboosting consumer spending

• To debate on the role and usage of creditcards as demand inducing instruments

• To examine the possible repercussionsdue to the increasing credit card defaultsin the US economy.

Industry Credit Card IndustryReference ECC0024Year of Pub. 2008Teaching Note AvailableStruct.Assign. Available

Keywords

Financial Crisis; Subprime Mortgage; CreditCards; Credit Bubble; Housing Market;Bank Of America; American Express;Default; Overdraft; Consumer Spending;Revolving Credit; Consumer Spending

US Financial Crisis: Iceland’sUnintended Consequences

The Economist observed, "Iceland'sbanking collapse is the biggest, relative tothe size of an economy, that any countryhas ever suffered. There are lessons to be

learnt beyond its shores." Blame it onglobalisation – financial structures of manycountries collapsed due to the mayhemcaused by the recent US Financial Crisis.The fallout of one economy has itsrepercussions on the operations of othercountries across the world as a result ofglobalisation. Iceland, an otherwiseoblivion nation from Europe, got theattention of global media. The case studyexamines how Iceland was struck by theUS Financial Crisis and how as a result itstood on the verge of national bankruptcy.The case also helps to understand theeconomic history of the country. Finally,it poses two important questions: (1) WasIceland an unintended consequence ofglobalization or was it a case of definitefall out of globalization? (2) What shouldIceland do reconstruct its financial structureand resurrect its economy – both in theshort run (the immediate steps to be taken)and in the long run?


• To understand the economic history ofIceland and its globalisation journey

• To analyse and reflect on the causesresponsible for Iceland’s banking crisisand debate whether it was co-incidentalor consequential of US Financial Crisis(2008)

• To suggest short term and long termmeasures for Iceland’s economy andbanking system to be revived

• To debate on Iceland’s banking collapsein the light of globalisation debate.

Industry Financial ServicesReference ECC0023Year of Pub. 2008Teaching Note AvailableStruct.Assign Available

Keywords

Financial Crisis; Subprime Market; Iceland;Globalisation; IMF; Capital Markets;Offshore Investments; Trade Flows;Surplus Reserves; Arbitrage; Orphan Bank

US Financial Crisis: How Far Canthe Rating Agencies be Blamed?This case was written primarily to debateon the role of credit rating agencies in USFinancial Crisis (2008). The investmentand lending decisions are usually madeamong various alternatives, by taking cuesfrom credit ratings. The better the creditrating grades, the lower the risk of aninstrument, was the assumption. Did creditRating Agencies play any role in the USFinancial Crisis as they rated severalstructured products and companies'financial position. They were opaque intheir methodologies and failed to noticethe complexities in the financial

derivatives in the early stages. Close onthe heels of statements made by the headsof some of the credit rating agencies –S&P, Moody's, etc – the case makes aninteresting debate in the classroom.


• To understand the role and importanceof CRAs in assessing a company'sfinancial position

• To debate over the accuracy of the ratingsystem in understanding themethodologies

• To analyse the impact of changes inrating on the operations of the company,which is being rated

• To ascertain the role of CRAs in the USFinancial Crisis (2008).

Industry Financial ServicesReference ECC0022Year of Pub. 2008Teaching Note AvailableStruct.Assign Available

Keywords

Financial Crisis; Subprime Mortgage;Housing Market; Credit Rating; S&P;Moody’s; SEC; NRSRO; CDS; CDO; CreditWorthiness; AAA Rating; A+ Rating; Fitch;Financial Derivative

US Financial Crisis: GoldmanSachs in the New Terrain

For most part of the 21st century, GoldmanSachs epitomised the spirit of investmentbanking and rained wealth for the investors.As the financial crisis unfolded, however,the financial derivatives on its balancesheet – dubbed as 'weapons of financial massdestruction' by Warren Buffet – rewrotethe fate of the company. The case dealswith the benefits of organisational cultureand growth strategies of Goldman Sachs.The company's pioneering stand in 'WhiteKnight' strategy is a classic example of itsbusiness strategies. It successfully avertedsubprime exposure while most of its rivalscollapsed due to the financial turmoil. Toavoid the fate of others, it converted itsstatus into a stable commercial bank withlong-term business goals. The case studyattempts to examine the organisationalculture and business strategies adopted bythe company with a long-term businessstrategy.


• To understand factors responsible forGoldman Sachs coming unscathed in USFinancial Crisis (2008)

• To understand how organisational culturecan play a positive role in a globalcorporation





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• To analyse how financial derivativemarkets rose and fell with subprimemortgage market

• To analyse how organisations can avertthe crisis with successful businessstrategies.

Industry BankingReference ECC0021Year of Pub. 2008Teaching Note AvailableStruct.Assign Available

Keywords

Financial Crisis; Subprime Mortgage;Goldman Sachs; Derivatives; FinancialInnovation; CDO; MBSs; InvestmentBanks; Financial Derivatives; Bailout; RiskManagement; GSAMP; Organisationalculture; Business strategy

US Financial Crisis: Fannie Maeand Freddie Mac at the Core

The mortgage finance giants, FederalNational Mortgage Association (FannieMae) and Federal Home Loan MortgageCorporation (Freddie Mac), which wereactually incorporated to support the UShome market after the Great Depressionof the 1930s, incurred huge losses andultimately went into conservatorship.According to many economists, thebusiness model of twin giants is responsiblefor the failure. Their status as GovernmentSponsored Enterprise (GSE) provedadvantageous to them in terms of highleverage and tax exemptions. Over theyears, the companies, under the mask ofGSE enjoyed many privileges over theircompetitors by lobbying the politicians andpassing regulations in their favour.However, both the giants, which enteredinto the subprime lending because ofgrowing political pressure and competitionin the 1990s, have by the middle of 2008become the major holders of mortgagedebt. The companies with their mountinglosses posed serious threat to US as well asglobal financial sector. On September 7th

2008, the Federal government took overthe worst wounded twins of subprimemortgage debacle.

This case dwells upon the reasons for thebailout of Fannie Mae and Freddie Mac. Itbriefly analyses the changing operationsof twin giants over a period. It helps indebating – 1) Is the business model of giantsresponsible for failure? 2) Is the decisionof bailout wise on part of the federalgovernment, which saved the giants fromowning up their mistakes? 3) Should themodel be continued after conservatorship?


• To understand the involvement ofFannie Mae and Freddie Mac in the USFinancial Crisis

• To analyse the reasons behind the bailoutof Fannie Mae and Freddie Mac

• To analyse the flawed business model ofFannie Mae and Freddie Mac.

Industry US Housing IndustryReference ECC0020Year of Pub. 2008Teaching Note AvailableStruct.Assign Available

Keywords

Financial Crisis; US Financial Crisis; FannieMae; Freddie Mac; Subprime; Housing;Interest Rates; Leverage; MBS; Credit;Retail Credit; CDO's; Mortgages

US Financial Crisis: Effects onGlobal Banking

This case, while giving US' role in pursuingfree market philosophy both domesticallyas well as internationally also highlightshow US banking institutions have becomeharbingers of 'Mega Banking' model. Thecase focuses on the role of global banks inincreasing the wealth in the world markets.It brings out the role of these banks in theUS Financial Crisis and cites the problemswith the US financial system. In the lightof US Financial Crisis (2008), what shouldbe the alternate strategies? Does this crisisspell a doomsday for global bankingsuperhouses? Wealth maximisation was theaxiom that has been driving all the modernday corporations. To realise this ultimatedream, while some companies have simplyinvented new products and with that newindustries, some other companies stuck tothe age-old business models, but expandedto new segments. Banking falls into thelatter category. Banks from the developedworld, especially those from US, expandedtheir size and scope aided by globalisationand liberalisation. Sure, they have expandedtheir size and scope, and with that theyalso have increased their risk exposure. Asevident from the US Financial Crisis, theso called global banks have becomevulnerable to changes in any part of theglobe.


• To explain the fallout of the subprimecrisis into a global financial crisis

• To understand the involvements of globalbanks in the crisis and their changingfacet with the crisis

• To examine the consequences of thecrisis and the problems that it will unfoldto global banks.

Industry BankingReference ECC0019Year of Pub. 2008Teaching Note AvailableStruct.Assign Available

Keywords

Financial Crisis; Subprime MortgageBusiness; Mortgage Backed Securities(MBS); Credit Default Swaps (CDS);Collateral Debt Obligations (CDOs);Subprime Mortgage Crisis; US Treasurybonds; Fractional Reserve banking;Investment banks; Global Financial Order;UBS; Global Banks; Financial Innovation;Foreign Investments

US Financial Crisis: CronyCapitalism? Privatising Profits

and Socialising Losses?US has been winning accolades for itscapitalism till the recent past, withcountries world over aspiring to follow thecapitalism model of US. The majorsupporting factor for this model has beenincreased succeess recorded by UScompanies – their valuations, share prices,global reach, etc. However, with some ofthe big names in that list getting obliteratedwith some unwarranted business practices,the model was questioned initially andloathed later. What's Crony capitalism,anyway? Was it one of the reasons for USFinancial Crisis (2008)? This case study'sinformation would enable an interestingdebate on these two questions and relatedissues. In this crisis, the fundamentalprinciple of capitalism 'he who reaps thegains should also bear the losses' was brokenby socialising the losses, through the bailoutof the banks, which were responsible forthe crisis in the first place, using taxpayers'money.


• To analyse the relationship that existedhistorically between government andbusiness in the US

• To debate on the connotations of cronycapitalism in the US

• To debate on whether the recentfinancial crisis has anything to do withcrony capitalism.

Industry FinancialReference ECC0018Year of Pub. 2008Teaching Note AvailableStruct.Assign Available

Keywords

Financial Crisis; Crony capitalism;Government Connections; PoliticalFavouritism; Capitalism; DisasterCapitalism; Fannie Mae and Freddie Mac;Campaign Donations; Political Campaigns;

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Bear Stearns; JP Morgan; Goldman Sachs;Business’s and government; $700 billionBailout; Lehman Brothers; Wa Mu;Regulation

US Financial Crisis: Bailout,Whose Burden is that Anyway?

This case is written to raise an interestingdebate on who has to bear the burden ofthe bailout package announced to tide overthe US Financial Crisis (2008). On October3rd 2008, the most expensive governmentintervention in business history – in theform of a $700 billion bailout package –was approved by the US Congress. Thisintervention is in addition to the bailoutthat the government extended to FannieMae and Freddie Mac, AIG and the BigThree auto companies. The massivepackage of $1 trillion is being financedusing taxpayers' money to prevent thecurrent crisis from deteriorating further andthereby gradually stabilising the economy.However, it is being argued that, it is unfairtowards the heavily burdened US taxpayerto bear the additional burden of bailing outthe Wall Street firms. The US FinancialCrisis is an outcome of the financialindustry's greed along with irresponsible risktaken by the Wall Street financial wizards,who pocketed tens of millions of dollarswhile creating the bubble. Thus, the UStaxpayers feel that they are being penalisedfor the greed of the managers of bigfinancial institutions, as when profits weremade they were kept private, but lossesare being socialised.


• To analyse the relation between taxationand economic growth

• To understand the historical perspectiveof taxation in US and the burden on UStaxpayers in the recent times

• To analyse and debate the impact ofcurrent financial crisis on the UStaxpayer.

Industry FinancialReference ECC0017Year of Pub. 2008Teaching Note AvailableStruct.Assign Available

Keywords

Financial Crisis; Subprime Mortgage;Housing; Investment Banks; AIG; Bailout;Bear Stearns; Rescue Plan; Tax Payers;Taxation; US Tax System

US Financial Crisis: A Story ofSmart Bankers and Laid Back

Regulators?Immediately post US Financial Crisis in2008, the blame game began as to who wasresponsible for the gargantuan financialcrisis. While some blamed the regulatorsfor their laxity and inaction in monitoringthe financial markets, many others saidthat the greed of the Wall Street bankerswas responsible for the mess. It was evensuggested that the smart investmentbankers outplayed the regulators incircumventing the rules and regulations.The case study discusses the role of thebankers and the regulators in the USeconomy and to what extent were theyresponsible for the financial crisis. Thedilemma in the case is whether the idea oflaissez faire is stretched too far.


• To understand the role of regulators andinvestment bankers in Americaneconomy

• To analyse the contribution of both theregulators and the bankers inprecipitating the US Financial Crisis

• To understand if the investment bankersoutsmarted the regulators.

Industry Financial Services IndustryReference ECC0016Year of Pub. 2008Teaching Note AvailableStruct.Assign Available

Keywords

Financial crisis; Federal Reserve; SEC;Subprime; Mortgage; Interest rate;Housing; CAMEL; Basel; Bankingregulations; Financial markets;Deregulation

US Financial Crisis: Effects on UKBanks

This case study was primarily written toraise a debate on whether UK has lostanother industry to the unwarrantedmarket forces. Many argue that UK hadbeen losing its preeminence in one industryafter another. Starting with the textileindustry, many industries in the UK havelost their competitive edge. The USFinancial Crisis (2008) along with thesubprime crisis (2007) seemed to havedelivered a severe blow to UK’s bankingsector. In September 2007, Northern Rocksought liquidity support from thegovernment, as it failed to raise capital inthe open market. Consequently, NorthernRock was nationalised. Eventually, mostof the top banks in Britain, like Royal Bankof Scotland, that were solvent and well-capitalised collapsed suddenly in 2008. Asthe financial debacle was fast spreading

across all the banks the UK governmentadopted desperate measures to contain thecrisis. On April 21st 2008, BoE announceda £50 billion ‘special liquidity scheme’ thatfocused on transfer of high-qualitygovernment debt for high-risk commercialbank mortgage debt. This amount was laterincreased to £200 billion. The governmentalso guaranteed wholesale liabilities to thetune of £250 billion for a period of 6months with a possible extension.

Pedagogical Objectives:

• To understand the rise of UK banks andtheir role in international finance andtrade

• To assess the impact of the US FinancialCrisis on UK banks and problemsemerging with it

• To analyse if the steps taken by GordonBrown’s administration are adequate tosave UK banking sector from the fallout.

Industry BankingReference No. ECC0015Year of Pub. 2008Teaching Note AvailableStruc.Assign. Available

Keywords

Economic Crisis Case Study; FinancialCrisis; Subprime Mortgage Business;Mortgage Backed Securities (MBS); CreditDefault Swaps (CDS); Collateral DebtObligations (CDOs); Global Banking; UKInternational banking; UK financialsystem; European banks; Northern Rock;Bradford & Bingley; Royal Bank ofScotland; Gorden Brown

Turkey’s Economy: TheTurnaround Miracle

Modern Turkey was founded by MustafaKemal, the father of the Turks, after theFirst World War. Under his leadership,Turkey adopted secularism and democracy,and embraced legal, social and politicalreforms. After his death in 1938, thepredominant feature of Turkey’s politicswas the considerable power enjoyed by itsmilitary. The military successfully stagedthree coups (between 1960 and 1980),effectively destabilising Turkey’s politicaland economic environment. In additionto the unstable political scenario, thecountry’s growth and development werefurther hampered by four major crises thathit Turkey, between 1989 and 2002,destroying its financial structure. After eachcrisis, Turkey borrowed heavily from theInternational Monetary Fund (IMF),making the country one of the Fund’slargest debtors. In such conditions, theJustice and Development Party came topower in November 2002.





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• To discuss the turnaround of the Turkisheconomy by Pime Minister Recep TayyipErdogan

• To discuss the challenges Turkey is facingto sustain its growth.

Industry Not ApplicableReference No. ECC0014Year of Pub. 2005Teaching Note Not AvailableStruc.Assign. Not Available

Keywords

Republic of Turkey; Turkey’s economy;Political reforms; Justice and DevelopmentParty (AKP); Fiscal policy; Labour marketreforms; Economic crisis; Politicalenvironment; International MonetaryFund (IMF); Banking Regulation andSupervisory Agency (BRSA); SavingsDeposits Insurance Fund (SDIF); Economicturnaround; Taxation system; Structuralreforms; European Union membership.

Brazil’s Economy: Fixing itsFinances

Brazil, despite its rich natural and humanresources, had been a social and economicunder-achiever, plagued by poverty, debt,high interest rates, high rate ofunemployment, crumbling ports androadways, and horrendous crime. By 2002,the country’s foreign debt stood at 56% ofthe gross domestic product and the impactof development measures taken in the pastyears was hardly visible. The Braziliangovernment under Luiz Inacio ‘Lula’ daSilva, with the assistance of internationalbodies like the International MonetaryFund and the World Bank, undertook thetask of reforming the country’s economy.The reform programme encouragedindustries and exports. By 2004, thereform process was showing positiveresults, although a lot remained to be done.

Pedagogical Objective

• To discuss the various reforms adoptedby Brazilian economy in the wake ofeconomic challenges.


Keywords

Brazil; Luiz Inacio ‘Lula’ da Silva (Lula);GDP (gross domestic product); Real plan;Social and economic reforms; Economicrestructuring; Brazilian InfrastructureInvestment Fund; Foreign-currency debt;Pension scheme; VAT (value added tax);Manaus Free Trade Zone; Tax holiday;

IMF (International Monetary Fund);China; Mercosur.

Dominican Republic: LeonelFernandez’s Turnaround Efforts

During the reign of Leonel Fernandez asthe President of the Dominican Republicfrom 1996-2000, the Dominican economyhad an impressive growth at the rate of7%. But, the terrorist attack on September11th 2001, and the subsequent slow downof the US economy, had a negative impacton the Dominican economy. Added to this,a banking crisis in 2003 further pushed thecountry into economic distress. In 2004,Leonel Fernandez was elected the newPresident of the Dominican Republic,amidst expectations that he would revivethe Dominican economy. But, he facedgrave economic challenges. The country’sforeign debt stood at $7 billion, the inflationrate was 43%, and the Dominican currency,the peso, had depreciated to more thanhalf its value against the dollar since 2000.There was an unsustainable energy crisis,the tourism industry was struggling andexports had plummeted. Added to this, hisparty has had minority representation inthe Senate and the Chamber of Deputies.


• To discuss the turnaround efforts, whichwere crucial for the future of the countryas well as for the political career ofLeonel Fernandez.


Keywords

Dominican Republic; Caribbean island;Economic crises; Economic restructuring;Fiscal policy; Monetary policy; Tourism;Free trade zones; Debt restructuring;Exchange rate; Leonel Fernandez;International Monetary Fund (IMF); FreeTrade Agreement; CARICOM (Caribbeancommunity and Common Market).

Southeast AsianDebtRestructuring Institutions: The

LessonsThe Asian crisis of 1997 had a severeimpact on the financial condition of SouthAsian countries. The scale of the financialdistress in the Southeast Asian economieswas large by any standard. The revivalstrategies adopted by these countries weresimilar. As part of their efforts to revitalisethe economies, they all focused on settingup debt restructuring institutions. However,by mid-2004, the majority of agencies were

either closed or were about to pull theirshutters down.


• To discuss the measures adopted by theseinstitutions for the revival of theirbanking sector, and their experiences inthe restructuring process

• To discuss on the importance ofrestructuring institutions, their role as atool for economic revival and, the lessonsthey have got to offer.


Keywords

Southeast Asian debt restructuringinstitutions; Asian economic crisis; Banks’debt restructuring; Indonesian BankRestructuring Agency (IBRA); Assetmanagement; restructuring company; Assetquality; Thailand Asset ManagementCorporation (TAMC); FinancialInstitutions Development Fund (FIDF);Financial Restructuring Agency; Bank ofThailand; Non-performing loans (NPLs);Korea Asset Management Corporation(KAMCO); Debt Recovery Agency;Danaharta; National Asset ManagementCompany of Malaysia; Corporate andfinancial restructuring.

Australia: Managing the CurrentAccount Deficit

The Australian economy had a consistentgrowth, which was supported by an increasein domestic demand. For many years, theGDP (gross domestic product) growth ratewas high, but the country had currentaccount deficit. The Australiangovernment took measures such as floatingthe Australian dollar, tightening itsmonetary policy and cutting the tariffs toencourage trade and reduce the gap in thetrade balance. The government alsoimplemented structural reforms likeintroducing a new tax system and thesuperannuation guarantee scheme.Although these reforms helped to increasethe public revenue and encourage savingsamong the people, the Australiangovernment was unable to manage thecurrent account deficit. The currentaccount deficit followed a cyclical trend,as it reduced in 2001 and widened again in2003.


• To discuss the reasons that led to thegrowing deficits in the current accountof Australia and how the Australiangovernment tried to manage it.

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Australia’s current account deficit;Domestic demand; Superannuationguarantee scheme; Australian dollar;Reserve Bank of Australia; Inflationtargeting and monetary policy; Net foreignliabilities; Goods and services tax;Australian accounting standards; AustralianBureau of Statistics; First home ownersscheme; Household savings ratio; Nationalsavings; Fiscal expenditures; Australianeconomy.

The Southeast Asian EconomicCrisis

In the early 1990s, Mexican imports weremore than their exports. To finance thisgap in foreign trade, the Mexicangovernment introduced short-term dollarindexed bonds. The resultant increase inthe public debt led to the Mexican crisisand later to devaluation of the Mexicanpeso. The economists had predicted theMexican crisis, much before it took place.Similarly, the International Monetary Fund(IMF) authorities had predicted theSoutheast Asian crisis, which began inThailand in 1997. During 1995-1996, thecapital inflow into the Southeast Asiannations increased in the form of foreignportfolio investments. In 1996, Thailandhad accumulated a current account deficitof 7.9% of its gross domestic product(GDP). Speculation in the currency marketand economic instability led to thedevaluation of the Thai baht. This resultedin a contagion effect on other Asiancountries, as they devalued their respectivecurrencies and changed their exchange ratepolicies.


• To discuss the reasons that led to theSoutheast Asian crisis and how it spreadfrom Thailand to the other SoutheastAsian countries

• To compare the Mexican crisis, whichled to devaluations in South America,with the Thai economic crisis, whichled to devaluations in the SoutheastAsian nations.


Keywords

Fixed exchange rate system; Currentaccount deficit; Foreign exchange reserves;

Short-term dollar indexed debt; Currencypegging; Basket of currencies; Thai baht;Korean won; Indonesian rupiah; Foreignportfolio investment; South Koreanchaebols; Inflation rate; Bank of Thailand;Malaysian Central Bank; MonetaryAuthority of Singapore; Japan export-import bank; Structural reforms; contagioneffect.

Chinese Economy: StructuralProblems and Bank OverlendingThe last two decades of the 20th centurywitnessed rapid economic growth in Chinawith the growth reaching 9.1% in 2003.However, the growth was widely opined tobe unbalanced on account of the majorityof investments being in a few key sectors.It was apprehended that such hugeinvestments in a few key industries coupledwith reckless lending by the majorcommercial banks might lead to aninflationary situation in the country.


• To discuss the factors that led to theoverheating of some sectors of theChinese economy, the blind investmentsby the Chinese banks and the steps takenby the Chinese government to usher ina balanced and sustainable economicgrowth of the nation.


Keywords

China; National Bureau of Statistics; StateDevelopment and Reform Commission;Blind investments; Broad money (M2);Industrial and Commercial Bank of China;Bank of China; China Construction Bank;Agricultural Bank of China; GD MideaHolding Co; KPMG; China BankRegulatory Commission (CBRC); GeneralMotors; Volkswagen; Toyota.

The Russian Financial Crisis andAfter

Russia was the largest state of the USSR.Under the Presidency of Gorbachev in1990-1991, the soviet governmentintroduced privatisation reforms. Followingthe reforms, the retail prices in the USSRincreased and the real gross domesticproduct reduced. After breaking away fromthe USSR in 1991, Russia startedtransforming into a market-orientedeconomy. In order to stabilise its economy,the Russian Central Bank increased theinterest rates and issued government bondscalled GKOs. By 1997, inflation had beenbrought down and the rouble, the Russian

currency, had stabilised. But following theAsian crisis, the foreign investors in Russialost their confidence in both the currencyand bond markets. Forced by the mountingpressure, the Russian government allowedthe rouble to float and stopped thepayment on GKOs to the value of $40billion.


• To discuss the reasons that led to theRussian financial crisis and how theforeign trade of Russia has helped tobring back economic stability in thecountry.


Keywords

Russian financial; economic crisis;Perestroika restructuring programme;Five-year plans; Privatisation; TheRussian trading system; Devaluation of therouble; Exchange rate float; Russianeconomy; Boris Yeltsin; Russian dollar peg;Market oriented economy; Balance ofpayments; The Russian rouble; ruble;Russian Central Bank; Union of SovietSocialist Republics.

The Brazilian Financial Crisis andAfter

Brazil’s economy was diversified with well-developed agricultural, mining,manufacturing and service sectors. Butduring the Great Depression in the 1930s,the prices of Brazil’s exports fell. In thelater years, Brazil experienced an increasein inflation. To control the inflation, theMinister of Finance, Fernando HenriqueCardoso launched the ‘real’ plan in January1994. A new currency, the real, wasintroduced and it was pegged to the USdollar. Under the ‘real’ plan, the economybecame stable. But the devaluation of theMexican peso, the Asian crisis and theRussian crisis affected Brazil’s economy.There were huge capital outflows and tomaintain the exchange rate thegovernment had to use its foreign reserves.In November 1998, Brazil received afinancial package of $41.5 billion fromthe International Monetary Fund (IMF),but the continuous outflow of capital fromBrazil forced the Brazilian government tofloat the real. Brazil’s exports grew afterthe change in its exchange rate. In 2001the terrorist attack on the US slowed downBrazil’s economic growth. The IMFprovided another package of $30 billionto Brazil. In 2003, Brazil’s economyshowed signs of recovery.





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• To discuss the situation, which led tothe Brazilian crisis and how the Brazilianeconomy recovered from this crisis.


Keywords

Brazilian financial crisis; InternationalMonetary Fund; Fernando HenriqueCardoso; One-sided peg; Fiscal austeritypackage plan; Inter-AmericanDevelopment Bank; Monetary policy;Depreciating currency; Brazilian economy;Fernando Collar De Mello; Financial rescuepackage; The real plan; stabilisation plan;Unit of real value (URV); Current accountdeficits; Mercosur.

The Argentine Financial CrisisBefore World War II, Argentina was oneof the most prosperous countries in theworld in terms of agricultural and energyresources. Since the 1940s, its economicgrowth had declined as it changed itsfinancial and trade policies. In 1991, theConvertibility Law was introduced throughwhich the exchange rate of the Argentinepeso was fixed at one peso per US dollar.Between 1991 and 1994, Argentina'seconomy grew and its deficits decreased.But the devaluation of the Mexican pesoin 1994 and the devaluation of the Brazilianreal in 1998 shook the confidence of theinvestors. The government took manymeasures to control the economicsituation, but the country's deficitscontinued to increase. In January 2002,the Currency Board arrangement wasabandoned and the peso was devalued.During 2002 and 2003, Argentina showeda trade surplus in its balance of payments.


• To discuss the economic challenges thatArgentina is facing, in the light of hugeexternal debts.


Keywords

Argentine financial crisis; ConvertibilityLaw; Economic stability; Devaluation ofthe Mexican peso; Currency board;President Eduardo Duhalde; Balance ofpayments; Import substitution policy; FreeTrade Agreement; Financial rescuepackage; Domingo Cavallo; Inter-

American Development Bank; Currentaccount deficits; Zero deficit law.

Deflation in JapanAfter the end of the Second World War,Japan began to rebuild its economy. Itembarked on a journey of rapidindustrialisation with the support of itsfinancial institutions, which became thedrivers of its growth. Japan gave birth tothe concept of 'just-in-time inventory' andother concepts, which have become thepillars of various corporations around theworld. At one point in time it seemed thatthe Japanese economy would surpass thatof America and emerge as the economicgiant of the world. But after a satisfactoryjourney of almost three decades, today theJapanese economy is an economy indistress and is officially confirmed to besuffering from deflation, the main culpritthat gave us the 'Great Depression'.


• To discuss how the Japanese economywas rebuilt after the end of the SecondWorld War with the help of a highlyregulated financial sector

• To discuss the events that led to thegradual deregulation of the financialsector and how the country’s economytransformed into a 'bubble economy'

• To discuss the bubble that burst in 1991,the collapse of the financial institutions,the policy measures adopted by the Bankof Japan and the subsequentgovernments and their relevance to themost talked about problem faced by thecountry – deflation.


Keywords

Deflation; Liquidity trap; Regulatedfinancial sector; Maastricht criterion;Bubble economy; Asset price bubble;Nikkei; Bank of Japan; Banking crisis;Zaibatsus; Keiretsu.

Mad Cow Disease and USDA'sResponse

In 2003, the US beef industry had a majorset back with the outbreak of BovineSpongiform Encephalopathy (BSE) alsocalled mad cow disease. There was animmediate impact on the US beef industryas there was a ban on the US beef fromtrade partners. United States Departmentof Agriculture (USDA), an organisationthat was set up to safeguard the interest of

the farmers and ranchers, had a tough timein getting back the lost trade. But inspiteof the initiatives of the USDA, theprospects of lifting of the ban seemed grim.


• To discuss the economic implicationson the US beef industry after theoutbreak of mad cow disease and themeasures taken up by the USDA in thisregard.

Industry Beef IndustryReference No. ECC0003Year of Pub. 2004Teaching Note Not AvailableStruc.Assign. Not Available

Keywords

Mad cow disease and USDA; United StatesDepartment of Agriculture; United Statesbeef industry; Protectionism; Trade tariffs;World Trade Organisation; Anti-dumping;International beef market; Economicimplications of beef ban; The US economy;Beef imports and exports; UN Food andAgricultural Organisation; NationalCattlemen's Beef Association; AnnVeneman; European Union ban on US beef.

Californian Economy: TheChallenges Ahead

California, once ranked the fifth largesteconomy in the world, saw an economicdownturn during 1999-2002. The state wasconsidered a global powerhouse of softwareand services industry in the 1990s. But theeconomic recession worldwide andparticularly its effect on the softwareindustry took its toll on the Californianeconomy. Certain government policiessuch as worker’s compensation law,unemployment benefits, power crises andvarious anti-business laws impaired thecorporate performance. This causedsoaring budget deficits, unemployment ratesand a sinking consumer sentiment index.Eventually it resulted in a recall electionin 2003.


• To understand the various issues relatedto the staggering deficit of the state

• To discuss the challenges that lie aheadfor the new administration of California.


Keywords

Californian economy; Budget deficit;Consumer sentiment index; Power crisisin California; Unemployment insuranceprogramme; Workers’ compensation; Paid

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and spent heavily on their needs. Seeingthe potential of this untapped marketmany companies like Procter & Gamble(PG), Nestlé (NSRGY) and Polo RalphLauren (RL) entered the pet productmarket. Although companies were tryingto satisfy the needs of pet owners,increasing demand of pet owners to getthe best for their pets has raised an ethicalissue. Also how long would the pet economysustain is a question that needs to beanswered?


• To understand the factors behind theemergence of niche markets

• To analyse the emerging scope of petproducts market in US

• To understand the challenges involvedin sustaining evolving niche markets.

Industry Financial ServicesReference FCP0023AYear of Pub. 2008Teaching Note AvailableStruct.Assign. Available

Keywords

Pets; Changing Lifestyle; Empty Nesters;American Pets Product Manufacturers;Association (APPMA); Fiscal Policy CaseStudy; Pet Food; Pet Boarding; PetVeterinary Care; Pet Sitting

Global Inflationary Trends: RisingPressure on Central Banks

From the last two decades of the 20th

century, as more and more developingnations opened up the economies, theirrapid growth and demand for resources hasworried major central banks. In the processof feeding these economies with massiveresources, global economy has beengrappling with inflationary concerns.Business is no more normal for centralbankers. They are forced to deal withdomestic inflation, whose cause of whichis entangled with global trade – riddlingenough to engage the central bankers forlong. Economists feel that the centralbanks are exposed to a tricky situationwhere they are not allowed to alter thedirection and pattern of foreign trade –the cause: but will have to come in termswith domestic inflation – the effect. Thiscase study helps analyse the effects ofglobalisation on inflation in the worldeconomy. The case will also help in debatingthe alternatives available for central banksto deal with the effects of global inflationon their respective economies.


• To know why countries involve in tradeand the impact of integrating aneconomy with global economy

family leave; Arnold Schwarzenegger; GaryDavis; Anti-business laws; Recall elections;Gross domestic product; US unemploymentrate; California power exchange; Disabilitybenefits.

Caribbean Sugar: Implications ofEuropean Connection

The history of sugar in the Caribbean canbe traced back to the 17th century whenthe Dutch introduced sugarcane to theseislands in the 1640s. Since then, the sugarindustry had been the backbone of theCaribbean economies. In 1965, theCaribbean region, with its ten sugarexporting countries, had a peak annualsugar production of 1.4 million tons.However, in just thirty years, by 1995, theCaribbean sugar production had droppedto 0.8 million tons per annum and theregion was left with only six sugar exportingcountries.


• To discuss how excessive economicprotectionism by the European nationsled to inefficiencies in the Caribbeansugar industry and finally crippled theindustry in the wake of globalisation thatdid away with the protectionist policies.

Industry SugarReference No. ECC0001Year of Pub. 2003Teaching Note Not AvailableStruc.Assign. Not Available

Keywords

Sugar in the Caribbean; Sugar productionin the Caribbean; Agriculture in theCaribbean region; ACP-EU sugar protocol;Sugar industry in Cuba; Sugar industry inJamaica; Sugar industry in Trinidad andTobago; Caroni sugar factory; WTO andCaribbean sugar; Caribbean political maps;Colonial rule in the Caribbean; Cost ofsugar production in the Caribbean;European guaranteed price for sugar; Mid-Atlantic colonies; Impacts of globalisationon Caribbean sugar.

Pet Economy in US: Will it Sustainfor Long?

From the early 7000-5800 BC pets havebeen part of human life. Earlier they wereused for hunting, guarding etc. However,as the civilisation evolved, the relationshipbetween pets and human beings graduallychanged. Pets were increasingly consideredas a part of family, companions and manybegan to flaunt their pets for social status.Pet owners treated pets as their children

• To discuss the effect of globalisation onthe decisions of central banks, especiallyin dealing with inflationary pressures.

Industry Not ApplicableReference FCP0022Year of Pub. 2007Teaching Note AvailableStruct.Assign. Available

Keywords

Globalisation; Factors helping the processof Globalisation; Inflation, Real andNominal Wages; Real and Nominal InterestRates; General Price Level; Global Trade;Offshoring and Outsourcing; Phases ofGlobalisation; Government’s Role in aGlobal Economy; Fiscal Policy Case Study;Inflation and Interest Rate Dynamics;Central Bank’s Role in a Global Inflation;Global Trade in Services; Monetary Policy

The Burgeoning IndianEconomy: Signs of Overheating?The Indian economy, for most of itsindependent history, was under the stranglesof the Licence Raj. But it opened up in1991. Subsequently, its economic activitywas integrated with the global economy,and record growth ensued. However, by mid-2000s, Indian economy is rattled as mosteconomic variables – such as stock indices,interest rates and fiscal deficit – are on theincreasing trend. Moreover its economicgrowth mostly rode on the success ofliberalising several sectors, at the cost ofothers sectors. Policymakers would have atough time tackling these economicimbalances.

Effects of economic reforms on varioussectors and their effectiveness can bethoroughly discussed through this case.Economic impact of monetary and fiscalpolicies needn’t be neglected.


• To understand and analyse the processof economic reforms in India

• To analyse these reforms’ effectiveness

• To know how ‘multiplier ’ and‘accelerator’ play out in an economy’sgrowth rate

• To debate on the desirable growth ratefor a country like India.

Industry Not ApplicableReference FCP0021Year of Pub. 2007Teaching Note AvailableStruct.Assign. Available

Keywords

Indian Economy; Multiplier Effect;Accelerator Effect; Crowding Out Effect;Interest Rates; Fiscal Policy Case Study;


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Exchange Rates; Human DevelopmentIndex; Economic Reforms and Growth;Public and Private Investment; Economicand Social Impacts of Rapid Growth; FiveYear Plans; Monetary Policy; Fiscal Policy

Burgeoning Chinese Economy:Signs of Overheating?

Huge foreign and domestic investment –along with high productivity gains – mainlydrives China’s economic growth. Massiveunder-priced savings were poured into hugeinvestment projects, supported by cheaplabour. But these very factors – that fuelledChina’s growth – are allegedly inching theeconomy towards overheating. For whichthe government drew administrativemeasures and monetary policy, whoseeffectiveness is doubtful. Moreover, Chinais dotted by contrasting features. It is theworld’s second largest economy on PPPbasis; but ranks 81 on the HumanDevelopment Index. Its GDP has beengrowing above 10% consistently since2003. But it has 18% of the world’s poor –along with naive welfare programmes, redtape and a swelling pollution.

The case study helps analyse how China’sgrowth drivers are becoming counter-productive. It also helps debate how goodis economic growth, at various social costs.


• To understand and analyse the processof economic reforms in China

• To analyse these reforms’ effectiveness

• To know how ‘multiplier ’ and‘accelerator’ play out in an economy’sgrowth rate

• To debate on the desirable growth ratefor a country like China.

Industry Financial ServicesReference FCP0020Year of Pub. 2007Teaching Note AvailableStruct.Assign. Available

Keywords

Chinese Economy; Multiplier Effect;Accelerator Effect; Crowding Out Effect,Interest Rates; Exchange Rates;Transformation of Controlled Economy;Fiscal Policy Case Study; HumanDevelopment Index; Economic Reformsand Growth; Public and PrivateInvestment; Sectoral and Societal Impactsof Rapid Growth

Foreign Direct Investment in2005: Shifting towards Services?

In recent years, few things have createdsuch a debate as has the impact of Foreign

Direct Investment (FDI) on the country’seconomy. While a school of thought arguesin favor of greater FDI into the country,another school focuses on therepercussions FDI is likely to have on thedomestic industry. While traditionally FDIhas flowed into manufacturing, of late adiscernible trend is towards FDI in services.The case traces the roots of this movementof FDI in the services and discusses theimpact, positive or negative on thecountry’s economic growth


• FDI and country’s development• Importance of FDI in services• Factors behind the shift in FDI from

manufacturing to services• Future trends of FDI• Theories of international trade and FDI

inflows.

Industry EconomyReference No. FCP0019BYear of Pub. 2005Teaching Note Not AvailableStruc.Assign. Not Available

Keywords

Trade Theory; Service Industry;Comparative Cost Theory; Developedcountries vs Developing countries;Economic Growth; Government Policy;Developmental Theories; WorldInvestment Report; InternationalEconomics; FDI and Society;Developmental Economics.

Rating the Credit-Rating AgenciesCredit rating started in USA in the late19th century when early rating agenciesbegan publishing financial analyses onrailroad companies. Over the years,numerous regulations were created togovern the level of non-investment gradedebt that institutional investors (banks,insurance companies and corporatepension funds) could own. But the turn ofthe 21st century brought a slew of problemsfor the credit rating agencies (CRAs) asthey failed to detect signals of the collapseof companies like Enron Corp. andWorldCom Inc. The creditworthiness ofthe rating agencies and validity of theprocesses and methodologies adopted forrating began to be questioned and demandsfor strengthening regulations began to bemade. The Congress began to pressurisethe SEC to re-examine the role of creditrating agencies and proposed greateroversight of the rating firms’anticompetitive practices and conflicts ofinterest. A debate on whether subjectingrating agencies to substantive monitoringby the SEC and abandoning the NRSROdesignation also ensued. A few critics alsoproposed establishing a separate regulatory

set-up to monitor the rating agencies. Themajor question revolved around the extentof regulatory involvement in ensuring thesafety and soundness of the rating process.Experts felt that these regulations wouldchange the very nature of the ratingindustry in the US.


• To discuss what is Credit Rating• To discuss the credibility of credit rating

agencies• To discuss the effective criteria’s to rate

companies, shares and bonds.

Industry Credit RatingReference No. FCP0018BYear of Pub. 2005Teaching Note Not AvailableStruc.Assign. Not Available

Keywords

Credit Rating Agencies; Standard 7&Poor’s; Fitch Rating Services; Moody’s;Enron Scandal; WorldCom Scandal;Sarbanes-Oxley Act; US Credit Rating;History of Credit Rating; NRSRO; Creditrating regulations; Dun & Bradstreet; Creditratings; Credit rating marketing.

Gold in 2005: Getting Dearer?For ages gold has fascinated mankind. Ithas been not only been an adornment butalso used as a currency for centuries. Eventoday, it has continued to baffleeconomists, policymakers, and laymenalike. The demand for gold in manycountries is driven by jewellery. Thoughgold has ceased to be a currency for long,most central banks continue to issuecurrencies backed by certain percentage ofgold. The lack of co-relation between goldand other economic indicators andcurrencies has made gold a safe avenue forinvestment in spite of its volatility.


• Gold’s role as monetary unit• Impact Washington agreement on gold

sales and gold leasing market• Gold market, its structure, working and

constituents• Relation between gold and currencies• Relation between gold and economic

indicators like GDP, inflation, interestrates etc

• Gold as an investment tool.

Industry Gold IndustryReference No. FCP0017BYear of Pub. 2005Teaching Note Not AvailableStruc.Assign. Not Available

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Gold markets; Investment management;Bullion markets; Central Bank andMonetary Economics; Portfoliomanagement; International finance;International finance; InternationalEconomics; Supply and Demand; Riskanalysis; Washington Agreement and GoldLeasing; Gold and the Dollar; Reservecurrency; Derivative markets; Hedging;Commodity Markets.

Japan Post: Privatisation WoesIn September 2004, Japanese PrimeMinister Junichiro Koizumi formallyannounced his plans to privatise JapanPost, the world’s largest financialinstitution which manages 330 trillion yen($3 trillion) in savings and insurancedeposits. Privatisation of Japan Post is saidto be the most important reform measure,which Koizumi had long planned toundertake when he was appointed thePostal Minister in 1992. Since then, hehad been persistently exploring theviability of the privatisation plans throughthe consensual approach among variousgroups, viz, a section of people within theparty and opposition and industry expertswho are against privatising Japan Post.However, Koizumi’s privatisation plansencountered hurdles as many argued thatprivatisation would result in loss of jobs.Experts believed that it might not giveany significant economic benefits as theythink that the loan market is alreadyovercrowded and many Japanesecompanies, which have rich cash flows,are not in need of such huge investments.However, Koizumi was persistent with hisplans and on August 8 th 2005, he tabledthe bill of postal privatisation before theParliament. The Upper House voted downthe bill by 125 to 108 votes. This ledKoizumi to dissolve the Parliament andcalled for fresh elections. When the resultswere declared, Koizumi’s LDP (LiberalDemocratic Party) secured 296 seats outof a total of 480 seats and on October 14th 2005, the Upper House of Japan’sParliament passed the bill to privatise theJapan Post in phases by 2007, the bill wasapproved by 134 to 100.


• To discuss the problems faced by PrimeMinister Junichiro Koizumi inprivatizing Japan Post

• To discuss the effect of privatization onthe Japanese economy.

Industry Financial ServicesReference No. FCP0016Year of Pub. 2006Teaching Note Not AvailableStruc.Assign. Not Available

Keywords

Japan Post; Koizumi; Japanese economy;United States of America; LDP (LiberalDemocratic Party); Public debt; USTreasury Bonds; Fiscal deficit; Post Master;Privatisation; Postal reforms; Financialservices.Progressive Tax System vs FlatTax Regime: Weighing the Options

While most of the nations are under theprogressive tax system, in which richpeople pay a proportionately greateramount of tax than the poorer sections,the Baltic nations of Estonia, Latvia andLithuania and others like Russia and HongKong seem to be thriving under the flat-rate tax regime. Motivated by thesuccessful implementation of the flat-ratetax system, many countries, like Sweden,Poland, the Czech Republic, and the UKhave been eliberating on whether or not toexperiment with the newer tax structureand whether it would be as effective in theireconomies as in the Baltic and othernations.


• To compare the progressive and flat taxstructures

• To discuss the impact of flat rate of taxon the capitalistic economies like theUS and Canada.

Industry Financial ServicesReference No. FCP0015Year of Pub. 2005Teaching Note AvailableStruc.Assign. Available

Keywords

Progressive rate tax; Flat rate tax; Taxavoidance and tax evasion; Gross DomesticProduct (GDP); Foreign investment;Capital gain, dividend and interest earnings;Index of Economic Freedom; Adam Smith’s‘cannons of taxation’; Marginal tax rate;Taxable income; The Laffer curve; Free-market economy; Value-added tax (VAT);Regressive tax.

The Economics of SavingsIn any economy, savings provide not onlyrequired capital for economic growth butalso ensure further demand in the economy.Adam Smith said, ‘…at portion which heannually saves, as for the sake of the profitit is immediately employed as a capital, isconsumed in the same manner…but by adifferent set of people’. But someeconomists argue that spending will createits own demand and therefore savings arenot that important. In the last quarter ofthe 20th century, western countries, Anglo-Saxon nations in particular, have embracedthis notion and encouraged their populace

to spend more. By the turn of the 20thcentury, these nations were saddled withlow saving rates, some even with negative,New Zealand, for example. And this hasset some economists to rethink the savingsphilosophy.


• To discuss the importance of savings fora healthy economy

• To discuss the strategies to be adoptedfor healthy savings rate in an economy.


Keywords

National savings rate; Spending; Demandside; Supply side; National borrowings;Current account; National accounting;Household savings; Budget surplus ordeficit; Public spending; Savings glut; Globalmoney mobilisation; Circular flow ofmoney.

‘Chilean Model’: What it Takes toGrow at 5.5% P.A.?

Chile, the world’s largest copper producingcountry, had initiated a number of structuraland fiscal reforms over the years. In 1990,the Chilean government introduced theGrowth and Equity Model with theobjective of attaining macroeconomicstability and improving socio-economicjustice in Chile. By implementing thismodel, the government tried to achievecompetitiveness on both the domestic andthe foreign market, along with overallgrowth of social equity and democracy. In2000, the government introduced acounter-cyclical fiscal policy, which wasbased on the rule that if the Chileaneconomy grew at 5.5% a year, then it wouldshow a fiscal surplus of 1% of GDP (grossdomestic product).


• To discuss the Chilean Model forattaining economic stability

• To discuss how Economic reformsdeveloped Chilean financial system.


Keywords

Chilean model; Copper exports; Growthand Equity Model; Counter-cyclical fiscalpolicy; Economic reforms.

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Restructuring Dilemma of USA’sMedicaid: Politics or

Economics?The US Federal government has proposedto reduce its share in Medicaid expenditureto cut its fiscal deficits and the States arereeling under huge health care budgets thatare twice the expenditure on education.Meanwhile, as 40 million baby boomers agein the US, the focus of Medicaid’s fundingshifts from medical expenses on poormothers and children for providing custodialcare to the elderly and disabled. WithMedicaid estimated to spend $444 billion ayear by 2010, its survival is in question.


• To discuss the various strategies adoptedby the US federal government to cut theMedicaid expenditure.


Keywords

Medicaid; Medicare; Public health care inthe USA; Public health insuranceprogramme in the USA; Crowding outeffect; Supplemental security income; Aidto families with dependent children; Publicexpenditure; Ageing of baby boomers.

Heavily Indebted PoorCountries’ Debt: Should it be

Written Off?The world’s 137 poorest nations owe atotal of $2.6 trillion in international debt,and these countries on an average spend25% of their national budget in repayingthe debt, depleting the countries’ resourcesto invest in infrastructure, education,healthcare and other social programmes.Fearing that debt repayment will rob thesecountries of their future, a number of policymakers and international activist groupscalled on the lenders to write off the debtof the poor countries. On the other hand,multilateral lenders like the InternationalMonetary Fund (IMF) and the World Bankcited that debt cancellation was notbeneficial for the financial health of theinternational creditors and it might hurtthe poor countries more than helpingthem. Instead, the Heavily Indebted PoorCountries’ (HIPC) debt initiative waslaunched with the objective to cut the debtof 38 heavily indebted poor countries tosustainable levels.


• To discuss the HIPC initiative in writingoff debt for the economic developmentof poor countries.


Keywords

Highly Indebted Poor Countries (HIPC);HIPC Initiative; Debt write off; Debtcancellation; International debt; Debtrescheduling; Poverty reduction; Debtrelief; International Monetary Fund (IMF);World Bank; Paris Club; AmericasMillennium Challenge Corp.

Corporate Tax in the EuropeanUnion: Tax Harmonization vs Tax

CompetitionThe European Union (EU) was the largestsingle market in the world. The idea ofharmonising the corporate tax rate, tofurther the goal of a single market thatprovides similar conditions to companiesacross national borders, has been floatedin the EU for sometime now but has notbeen acceptable to all the countries. Asinvestment conditions within the EUbecome more homogenous, individualcountries like Ireland have used taxcompetition as a means of differentiatingthemselves and attracting foreigninvestment. The expansion of the EU onMay 1 st 2004 has brought the issue backinto the limelight. High tax member stateslike Germany have strongly argued for taxharmonisation and a minimum corporatetax rate, while low tax member states likeIreland and the new EU members haveopposed any such proposal.


• To discuss the conflict of interests withinthe EU on the issue of corporate tax

• To discuss the merits and demerits oftax harmonisation and tax competition.


Keywords

Corporate tax in the European Union; Taxharmonisation; tax competition; EuropeanCompetition Commission; Foreign directinvestment; Structural funds; Labourproductivity; Unemployment; Fiscaldumping; Single market; GDP (gross

domestic product) growth; GerhardSchroeder; Turnaround by tax policy;Ireland; Growth and stability pact; Fiscaldeficits.

Gas Taxes: USA’s DilemmaThe US imports 11 million barrels of fuelevery day, which constitutes 55% of itstotal consumption. This over dependencymakes the US economy vulnerable to thefluctuating international fuel prices as everypenny increase in the oil prices sucks out abillion dollars from the economy. Besides,historically any surge in crude oil prices inthe international market has pushed theUS economy into recession. Althougheconomists have been advocating highergas taxes for a long time, politicians fearingany move in that direction to be suicidalhave not addressed the issue.


• To discuss the economies anddiseconomies of higher gas taxes in theUS.


Keywords

US gasoline taxes; Fuel consumption in US;Petro-dollar shipping from US; USdependency on Middle East for fuel;Petroleum bill of the US; Corporateaverage fuel economy (CAFE); Progressiveand regressive taxes; International fuelprices; The affect of higher oil prices onUS economy; Inflation adjusted gasolineprices in the US; Incidence of tax; Growingoil consumption in US.

Gordon Brown’s FiscalManagement

In the UK, the Chancellor of the Exchequeris considered the driver of the economicengine. Gordon Brown was appointed asthe Chancellor in 1997 and was expectedto become the longest serving in office.During his seven years in office, Brownwas successful in putting an end to the‘boom’ and ‘bust’ cycle of Britain’seconomy. The framework through whichthe government implemented fiscal policywas set out in the Code of Fiscal Stability,which became an act of law through the1998 Finance Bill. By adhering to the tworules of the fiscal code, Brown believedthat he had achieved the macroeconomicpolicy objectives of high employment, lowinflation, growth and balance of payments/trade equilibrium.

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• To discuss the changes in fiscalframework and monetary policy shapedby Brown and their consequences onBritain’s economy

• To discuss the relationship betweeninterest rate, inflation, economic growthand how these variables are influencedby monetary and fiscal policy actions.


Keywords

Gordon Brown’s fiscal management;Chancellor; exchequer; treasury; Britisheconomy; budget; Kenneth Clarke;Prudence; prosperity; The Code of FiscalStability; Golden rule; sustainableinvestment rule; Bank of England;Inflation; interest rates; unemploymentrates; economic growth; Britainsmanufacturing base; Exports and imports;Retail price inflation; Shadow Chancellor;Taxation; Public spending; governmentexpenditure.

India’s Forex ReservesAfter its independence from the British in1947, India formulated its economicpolicies to attain self-reliance, encourageproductivity and attract foreigninvestment. For the first fifty years afterindependence, the Indian government wasunable to maintain a comfortable level offoreign exchange reserves and it also facedthe problem of increasing external debt.But the economic reforms of the late1990s helped the country to accumulateforex reserves of $100 billion.


• To discuss the position of the Indianforex reserves over the years

• To discuss how the Indian governmentmanages its forex reserves.

Industry Financial ServicesReference No. FCP0007Year of Pub. 2004Teaching Note AvailableStruc.Assign. Not Available

Keywords

India’s forex reserves; Five-year plan;Industrial policy statement; ForeignExchange Regulation Act (FERA);Planning Commission; Balance ofpayment; Liberalisation policy;Monopolies and restrictive trade policies;Cash assistance scheme; Liberalisedexchange rate management system; Short-term liabilities; Current account deficit;

Management of forex reserves; ForeignExchange Management Act (FEMA);External debt.

Ireland: Turnaround by TaxPolicy

Less than 20 years ago, Ireland was termedas the ‘Sick Man of Europe’ owing to itshigh unemployment rates, burgeoningpublic debt, and high levels of emigration.But since 1987 it has made brisk progressby undertaking a series of measures, themost prominent of which was its policy ofgranting special tax incentives to foreigninvestment in the manufacturing sector andto financial services companies set upwithin a special centre in Dublin. This lowtax regime was always an apple of discordbetween Ireland and the European Union.But it helped the country attract a largenumber of foreign companies seeking lowtax jurisdictions for their investments. Theresult has been a remarkable turnaround inthe Irish economy, which has since beendubbed the ‘Celtic Tiger’.


• To discuss the Irish tax policy and itsrole in the country’s development.


Keywords

Ireland turnaround by tax policy; Anglo-Irish Free Trade Agreement; Foreign directinvestment; Protectionism; Ireland’seconomy; Tax competition; tax arbitrage;Fianna Fail; Supply side economies;European Union’s (EU) tax package;European Single Market; InternationalFinancial Services Center (IFSC); EuropeanEconomic Community; European Union;Collective investment (mutual) fund;Corporate tax rate; tax incentives; CelticTiger.

Greenspan’s Economic Policies:Managing Through Booms and

BustsDr Alan Greenspan is the Chairman of theFederal Reserve of the US and also headsthe Federal Open Market Committee(FOMC), the Fed’s principal monetarypolicymaking body. He has been at thecentre of US monetary policy decisionssince 1987, when he was first appointed tothe board. He took office for a fourth termon June 20 th 2000. Over his 17-year stintas Chairman of the Fed, he has led theeconomy through several booms and busts.Quite a few people regard him as the man

who gave the US economy its longestboom in its history since the October 1929crash. Dr Greenspan was conferredknighthood by Britain’s Queen Elizabethin 2002, for his contribution to the globaleconomic stability.


• To discuss the Fed’s actions, under DrGreenspan through July 1990-March1991 recession, the boom of the 1990s,and the recession in 2001

• To discuss the prevalent conditions thatcould have been the premise on whichsuch decisions were made.


Keywords

Alan Greenspan; US Monetary Policy;Greenspan’s economic policies; US FederalReserve Chairman; Booms and busts; 1990-1991 recession; 1990s boom; Recession in2001; Southeast Asian crisis;Unemployment and inflation; Irrationalexuberance; Short-term interest rates; USeconomy; Gross domestic product; Trade,fiscal, current account deficits.

China’s FDIs in AsiaChina has been a recipient of huge overseasinvestments since 1992, with manymultinational companies setting up a basethere. In 2003 alone, China received closeto $57 billion. While there was a hugeinflow of investments into China there wasalso a huge outflow from the country.China’s foreign direct investments (FDIs)to other countries was mostly concentratedin the Asian sub continent.


• To discuss the reasons behind China’shuge investment outflows and theeconomic and trade implications.


Keywords

Foreign direct investment in Asia; Chineseinvestments in Asia; Balance of payments;Foreign trade; Bilateral economic ties;Free Trade Agreement; Haier; Ministryof Foreign Trade and EconomicDevelopment; ASEAN countries; ChinaNational Petroleum and Natural GasCommission; China Ocean Shipping

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Company; Association of South EastAsian Nations; Manufacturing andassembly trade; Japan External TradeOrganisation; Multinational andtransnational companies.

FDI: India vs ChinaThough India and China enjoy manysimilarities, China has surged ahead of Indiain terms of economic progress. WhileIndia’s per capita income is $440 China’sper capita income stood at $990. In China,3% of the population is below the povertyline and in India it is 30-40%. China openedup its economy before India and couldtherefore attract foreign investment whichhelped it to emerge as a ‘workshop of theworld’. Though India is trying to catch upwith China in terms of foreign directinvestment (FDI), China is way ahead.China received FDI of $52.7 billion in 2002where as in the case of India, the figurestood at $4.67 billion. Since the openingup of the economy in 1978, China enjoyeda steady flow of FDI.


• To discuss how the Chinese governmentplayed a proactive role in encouragingthe foreign investments and at the sametime protecting the local companies

• To discuss the differences in approachesthat both the countries are adopting toattract FDI and how India can catch up.

Industry Financial ServicesReference No. FCP0003Year of Pub. 2004Teaching Note AvailableStruc.Assign. Not Available

Keywords

Foreign direct investment (FDI); India andChina; Role of government; Specialeconomic zones; Business environment;Red tape; Infrastructure.

China’s FDI OutflowsInherent weaknesses in the pay-as-you-gosystem and political expediencies, whichcontributed to the problems in the pensionsystem, necessitated pension reforms. In1981, Chile pioneered the pension reforms.These reforms were radical and had far-reaching consequences. The countries thathad never reformed their pension systemsdue to a myriad of problems startedemulating the Chilean Pension Model.Since then this model has been attractinglots of interest all over the worl With alleyes set on China’s Foreign DirectInvestment (FDI) inflows, the country’soutflows drew little attention. Restrictionsremained on FDI outflows from China.

Notwithstanding these restrictions, Chinahad encouraged outward investment sincethe late 1970s when reforms first began.By the mid-1990s, Chinese companiesbegan using this outflow route seriously.China believed that to excel in foreign tradeand to prosper, such foreign operationswere mandatory. By 2000, China hadinvested in 6,298 enterprises in over 160locations with investments running into$11.36 billion. This move represented onestep towards building ‘Brand China’. It alsoprovided China with a plank for the nextstage of its structural reforms which wasexpected to transform it into a full-fledgedmarket economy.


• To discuss China’s efforts to emerge as afull-fledged market economy and therole of FDI outflows in achieving thisobjective.


Keywords

Foreign direct investment; FDI (foreigndirect investment) outflow and FDI(foreign direct investment) inflow; China;Haier; Shanghai Electric; D’Long StrategicInvestments; Sinopec; Brand; Newmarkets; Foreign technology; GDP (grossdomestic product); Original equipmentmanufacturers (OEM); Cheap labour;World Trade Organisation (WTO).

Chilean Pension ModelInherent weaknesses in the pay-as-you-gosystem and political expediencies, whichcontributed to the problems in the pensionsystem, necessitated pension reforms. In1981, Chile pioneered the pension reforms.These reforms were radical and had far-reaching consequences. The countries thathad never reformed their pension systemsdue to a myriad of problems startedemulating the Chilean Pension Model.Since then this model has been attractinglots of interest all over the world.


• To understand the inherent weaknessesin the pay-as-you-go pension system,the economic implications of pensionsystem and how Chile successfullytransformed the existing pension systemto emerge as an example for rest of theworld.

Industry Financial ServicesReference No. FCP0001Year of Pub. 2003

Teaching Note Not AvailableStruc.Assign. Not Available

Keywords

Chilean pension system; Social securitysystem; Pay-as-you-go system; Individualretirement accounts and individual capitalaccounts; Pension reforms;Administradoras de Fondos de Pensiones;Superintendencia de Administradoras deFondos de Pensiones; SAFP; Recognitionbonds; Privatisation of pension system;General Pinochet; Superintendent ofPension Fund Management Companies;EMPART; Servicio de Seguro Social;CANAEMPU.

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Bhutan's Gross NationalHappiness: An Economic Reality

or Wishful Thinking?In the 18th century, British philosopher andeconomist Jeremy Bentham advocatedthat the ultimate goal of state policy oughtto be maximisation of happiness of itscitizens. But measurement of happiness hasremained elusive for the welfareeconomists and government establishmentsalike. The shortcomings of Marshalliancardinal measure of well-being and theillegitimacy of interpersonal comparisonof well-being led to surrogate measurementof a country’s development in terms ofGDP which was believed to be the obviousmeans of happiness. When disconnectbetween GDP and happiness becamemanifest in available data of variouscountries across space and time, it wasrealised that GDP is merely one amongthe many means and loses its relevance inhappiness matrix after a certain thresholdlevel. This is because GDP addresses merephysical or material needs of human beingswhile people do have other importantneeds as well, such as spiritual andemotional. Confronted with this outwardexperience and conditioned by its ownBuddhist impulse, Bhutan has embarkedupon designing a new measure ofdevelopment, called Gross NationalHappiness (GNH). Aided and encouragedby the recent progress in happinessresearch, Bhutan attempts to trackhappiness directly instead of sticking tothe imperfect proxy route of GDP. And inthe process, the Bhutanese experimentsparks debates on the issue involving variousconcepts pertaining to National IncomeAccounting and Welfare Economics.

This case helps analyse the shortcomingsof conventional measures such as GNP,GDP, NNP, NDP and other relevantvariants. The case also helps inunderstanding the difficulties in measuringhappiness and also appreciating the

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relevance of concepts such as Easterlin’sParadox, MEW, HDI, externalities, Paretooptimality, aspiration treadmill andrelative income hypothesis.


• To understand the various concepts ofnational income and theirinterconnectedness and to analyse theshortcomings in national incomeaccounting

• To understand the concept of nationalwell-being and debate on its constituents

• To analyse the difficulties in themeasurement of a nation’s well-being

• To study the various conceptsunderpinning income and well-beingrelationship.

Industry Not ApplicableReference MAC0011Year of Pub. 2009Teaching Note AvailableStruct.Assign. Available

Keywords

Gross National Product, Gross NationalHappiness, Wellness Matri, HumanDevelopment Index, Diener’s HappinessFormula, Income-Happiness Correlation,Aspiration Treadmill, Relative IncomeHypothesis, Paradox of Thrift, Five Pillarsof Happiness, Well-being MandalasEasterlin’s Paradox, ImpossibilityTheorem

Fidel Castro’s Cuba: Waiting foran Economic Miracle?

Fidel Castro announced handing over Cubato his younger brother Raul Castro, in 2008.This evoked mixed responses from theeconomic and political fraternity acrossthe globe. One school professes the changein leadership would prove to be a new dawnfor the Cuban economy, which was longcurtailed by centralised resource allocation.This outlook was backed by the hope thatRaul Castro, now at helm, could converthis murmurs of economic liberalisationinto a strong voice. But there’s anotherschool that doubts if the younger Castrocan come out of his big brother’s shadowand act independently. This case studyhelps debate the potential political andeconomic obstacles to Raul – for changingthe course of Cuban economy, should hewish to. The bigger question is would hewant to depart from the existing policies.After all, many economic pundits say, hegrew up in Fidel Castro’s shadow. Can hebreak his elder sibling’s iron curtain? DoesRaul have that stature? Will Cubaneconomy adjust to the change? Why didFidel Castro primarily side with the socialistsociety? How did his individual interestsruin Cuba’s economic prospects?


• To understand Rostow’s economicanalysis of countries

• To discuss growth possibilities usingProduction Possibility Frontier (PPF)

• To estimate Potential GDP of a nation

• To debate over relevant fiscal andmonetary policies to be adopted atvarious times

• To debate on the economic optionsavailable to Raul Castro.


Keywords

Socialistic pattern of Society; Fidel Castro;Cuban revolution; US embargo on Cuba;Rostow’s Growth Theory; ProductionPossibility Frontier; Cuban Economy;Centralised Economy; DependencyTheory; Resource Allocation and Planning;Economic Cost of Centralized ResourcePlanning; Macroeconomics Case Studies;Cuba’s Trade Relationship with Venezuela;Raul Castron

Economics and US PresidentialElections

Never mix emotions with economics. Thisadage does not seem to ring well with themodern-day politicians. Tracking the USpresidents, in the post-World War II era,reveals that all of them have tinkered withthe budgets for political motives. In onesense, a ruler cannot avoid it. But to whatextent can the politicians define theeconomic state? In a democratic setup, itis the common man who will ultimatelyanswer this. The electoral pattern in theUS since 1950s suggests some evidence forthis. This case study dwells upon thecorrelation between US’ economiccondition in an election year and theelectoral behaviour. Why is it thatRepublicans ruled longer than Democratsbut still were victims of recession, at theballot battle? Can they reverse the trendin 2008 elections, in the face of news overeconomic slowdown?


• To analyse IS-LM Model

• To understand efficacy of fiscal policyat different equilibrium conditions

• To discuss the recession’s economic andpolitical effects

• To debate whether a nation’s economicagenda can be independent of its politicalestablishment.


Keywords

US Presidential Elections; GreatDepression; Recession and US PresidentialElections; Republicans and Democrats;Unemployment and recession; WarSpending; Budget Deficit; GDP Growth andInterest Rates; Macroeconomics CaseStudies; Current Account Deficits;Economic Indicators

UK’s Sterling Appreciation: TheExternal Factors

Is it calm after storm; or calm before stormfor the UK’s central bank, the Bank ofEngland (BoE)? The BoE has weatheredthe aftermath of abandoning the ExchangeRate Mechanism (ERM) in 1992 andsubsequent free float of sterling. But it isnot yet due for smooth sailing, for anothercurrency crisis seems to be round the cornerwith sterling rising steeply against dollar.Already the manufacturing sector hastaken the brunt and few other pieces ofthe UK economy are preparing to follow.But the BoE believes that UK economy,which had withstood many trials andtribulations of the world economy throughmid 1990s and early 2000s, is flexibleenough to counter all variations of sterlingagainst all major world currencies.This casestudy helps debate whether a currencyappreciation arises out of extraneousfactors (assuming a stable domesticeconomy) and not always from country’seconomic fundamentals.


• To understand the concept of exchangerate equilibrium

• To understand the factors that determinethe currency demand

• Impact of interest rate and inflation onthe exchange rate

• Effects of a currency’s appreciation/depreciation on the economy

• To analyse how extraneous factors wouldcontribute to a currency’s appreciation.


Keywords

Pound Sterling; Exchange RateMechanism; Currency Appreciation;Supply-led Growth; Reserve Currency;Capital Inflows; Consumer Price Inflation;

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Exchange Rate; Macroeconomics CaseStudies; Interest Rates; Terms of Trade;Current Account Deficit; Credit Crisis

Price Levels in Japan: AMacroeconomic Conundrum

Not very often is a country’s macro-economic data is foxing, and still seldom isthe case when the general cost of livingescalates and the central bank is busy dealingwith deflation. Aauthorities at Bank ofJapan are at similar logger-heads. Theofficial consumer price index (CPI)indicates a decline, but\consumerscomplain climbing expenses. The Bankacts by the CPI, not based on people’sperceptions, and so neglects consumerwoes. Economists maintain that the lowerincome groups – with less than ¥2 milliona year – will be the most affected, withincreased cost of living. The case helpsanalyse if a central bank can depend merelyon a set of standard indicators to guidemonetary policy; or should the indicatorsbe changed, based on the prevailingeconomic exigencies. The case also helpsdiscuss if price level indices always reflectthe actual cost of living.


• To discuss how changes in the generalprice level of an economy are tracked

• To examine how well price-levelindicators – like the CPI – reflect theliving costs.


Keywords

Bank of Japan; Japanese Price Levels;Inflation and Deflation; MacroeconomicsCase Studies; Consumer Price Index; PriceStability; Trend Inflation; GDP Deflator;Aggregate Price Index; Real and NominalGDP; Cost of Living; Standard of Living;Statistically Measured Price Movements

Trade Deficits, Current AccountDeficits and Exchange Rates in

US: The Policy ImplicationsBy 1950s, the US became an economicsuperpower – exacting trade relations withalmost all countries and posted huge tradesurplus with all trading partners. This soongave US dollar universal acceptance andelevated it to the status of world’s singlelargest reserve currency. However, in thewake of globalisation and the emergenceof low-cost manufacturers, US trade surplustook a dent and eventually turned into

deficit. The introduction of euro – singlecurrency for 15 European nations – in2002, challenged the dollar as the reservecurrency backed by EU’s trade with rest ofthe world. Since then, dollar has beenweakening – even further after it wagedtwo costly wars, swelling its current accountdeficits. Aggravated by widespreaduncertainty over the US economy, causedby subprime mortgage crisis, the dollarseemed to lose its long-held status as astrong reserve currency. With remotechances of improvement in the country’sbalances, dollar’s recovery is far off.Thiscase study helps analyse whether it ispossible for the governments or the centralbanks to control all factors responsible forexchange rate fluctuations.


• To understand various types of deficit

• To analyse the factors responsible forexchange rate fluctuation

• To understand how far current accountdeficit leads to the exchange ratefluctuations.


Keywords

US Dollar; Current Account Deficit;Currency Pegging; Trade Deficit; MarshallPlan; Dollar Depreciation; Capital Inflows;Budget Deficit; Carter Bonds;Macroeconomics Case Studies; Recession;Reserve Currency; Monetary Policy

The Dragon is coming-ChineseM&A’s Outside China

Chinese companies that were earlier knownfor being a cheap source of manufacturinghad been attempting to transformthemselves into global companies throughthe Merger and Acquisition route. With agrowing economy, China eyed for channelsof growth in order to meet its need fornatural resources and raw materials. Thecase provides a brief on the reasons behindthe overseas M&A’s by the Chinesecompanies and also analyses the level ofsuccess in their attempts. The case providesscope for discussion on M&A’s, SWOTanalysis on the Chinese companies and therole of the Government in aiding thecompanies to achieve their globalambitions.


• The case helps in understanding howM&A’s make or break a company

• It points out the mistakes thatcompanies make while going for M&Aand elaborates on the requirements for asuccessful merger/acquisition

• Also highlights the importance of theGovernment’s role in making thecompanies globally competitive.

Industry EconomyReference No. MAC0005CYear of Pub. 2006Teaching Note Not AvailableStruc.Assign. Not Available

Keywords

M&A; Lenovo; IBM ; China; Asia ; TCL;CNOOC; Haier ; Oil; metal; Chinese.

OPEC in 2004The case talks about the Organization ofthe Petroleum Exporting Countries(OPEC). OPEC had 11 member nations in2004 and was one of the most importantforces in the world oil market. It controlled70% of the world’s oil reserves and 35% ofgas reserves. OPEC as an oil cartel wasmost successful in the 1970s. However,since then, there were several events whichreduced OPEC’s market share from 63 %in the 1970s to about 38 % in 2004. OPECfaced competition not only from producerssuch as Russia and Norway, to whom theyhad lost a majority of their market sharebut also from the growth of non-oil energysources. As OPEC’s member nations wereprimarily dependant on oil for theirincome, OPEC’s power to control oilprices was of great concern to them. Thecase talks about the various factors thatdetermined OPEC’s future as a cartel.


• Structure and economics of the worldoil industry

• How do cartels work and what are theinherent factors that make or breakthem?

• What is the role of internationalgeopolitics on oil production, supply andpricing?

• How did OPEC’s production and pricingpolicies affect its market share?

• What should OPEC’s strategy be toregain a part or more of its lost marketshare?

Industry Oil IndustryReference No. MAC0004BYear of Pub. 2005Teaching Note Not AvailableStruc.Assign. Not Available

Keywords

OPEC; Oil Ind; Crude Oil; Pricing oil;Production Quotes; Oil crisis; Oil

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Exploration; Oil & Geopolitics; Saudi &Oil; US & Oil; Russia & Oil; China & Oil;Oil energy sources.

Business Confidence? Very High;Consumer Spending? Very Low:

How to get the GermanConsumer to Spend More?

The world’s third largest economy,Germany, witnessed a CAGR of just 1%during the period 1999-2004, which wasone of the lowest in the G8 countries. Lowconsumer spending was cited as the mainreason for the dismal economicperformance, which had resulted in lowdomestic demand and high unemploymentrates. However, in 2006, Germany’sbusiness confidence index reached a 15-year high, invigorating the economy.Meanwhile, analysts projected it to be atemporary phenomenon, which was theresult of the frenzied infrastructuredevelopment and business activities inpreparation for hosting the 2006 FIFAWorld Cup.


• To understand the relationship betweenconsumption and saving

• To understand the relationship betweenemployment, demand, inflation andGDP

• To discuss whether the rise in businessconfidence index of Germany is real oris just a temporary phenomenon

• To discuss the economic impact ofhosting international events like theFIFA World Cup

• To discuss the reasons for the lowconsumer spending in Germany

• To discuss measures that would encouragethe German consumer to spend moreand thus revive the economy.

Industry Not ApplicableReference No. MAC0003Year of Pub. 2006Teaching Note Not AvailableStruc.Assign. Not Available

Keywords

Consumption Savings; BusinessConfidence; Domestic Demand; ManagingBudget Deficits; Monetary Policy FiscalPolicy; Economic Reforms; ManagingInflation; Labour Policy Reforms;Minimum Wage Policy; Economic Impactof Hosting FIFA World Cup.

Singapore: The growth of a smalleconomy

Singapore , an island-state, ranked sixth inthe Growth Competitiveness Index (GCI)in the Global Competitiveness Report2005-2006 by the World Economic Forum(WEF). With a population of 4.3 million,equivalent to a state in the U.S., it was oneof the fastest growing economies in Asia.The financial crisis in 1997-98 hit theAsian economies very hard. Before theycould recover from it, the 2000-2001,dot.com bust. It impacted Singapore themost as it relied heavily on export to theUS, UK and Japan. (It continued its growthdespite the environmental obstacles. By2004, it was one of the fastest growingsmall economies in terms of the growth ofGross Domestic Product (GDP).

In 2005, despite being ranked fifth in theBusiness Competitiveness by the WorldEconomic Forum it faced challenges. Chinaand India were becoming major marketsand consequently threat to Singapore’sexport industries.

The case describes the strategies andinitiatives taken by Singapore since itsindependence. Singapore leveraged on itsgeographical competitive advantage bybecoming a global entrope’ hub, but withemergence of competition in this industry,it adopted a twin-tier industry structure,pushing manufacturing as much as servicesindustries. Thus, it diversified its dependenceto industries like tourism and electronics.


• To understand the economicaldevelopment of a small economy likeSingapore

• To discuss the competitive advantagesof the nation (porter ’s Nationaladvantage theory)

• To discuss the initiatives taken bySingapore for becoming the fastestgrowing small economy 2006

• To debate the threats posed to itseconomical development withemergence of Asian countries aspowerful economies.

Industry Economy of SingaporeReference No. MAC0002AYear of Pub. 2006Teaching Note Not AvailableStruc.Assign. Not Available

Keywords

Nation’s growth strategy; PeripheralVision; Diversification in related Industries;Economic development; Businessenvironment; Competitive Advantage;Singapore; Asian tigers.

National Income Accounting: ACase Study of China

After three decades of central planning itwas time for China to emerge fromisolation and become an important playerin the world economy. Economic reformssince 1978 have taken China to a newtrajectory of growth. Evolution into anopen economy has synchronised themovement of macroeconomic variableslike growth rate, inflation, and exchangerate, with the rest of the world. Any policychange in China now has its impact on theworld economy.


• To understand the evolution of China’seconomic growth

• To debate on the inequalities betweenthe geographical regions within China

• To understand macroeconomic conceptsusing China as an example

• To analyse the movement of economicvariables in the background of reformsin China

• To understand the interrelationshipsbetween macroeconomic variables likeGDP, GNP, potential output, inflation,interest rate and exchange rate.

Industry Not ApplicableReference No. MAC0001Year of Pub. 2006Teaching Note AvailableStruc.Assign. Available

Keywords

Economics; China’s Economic Growth;GDP (Real & Nominal, Potential &Actual); Inflation; Interest Rates;Exchange Rates; Economic Reforms ofChina; Income Disparity; National Income;Currency Revaluation & Devaluation.

OPEC: The Economics of a Cartel(C)

The third and final case, in the three caseseries, deals with the output and pricingmechanism of oil among OPEC members.OPEC members decided upon output quotasand price levels of oil. In order to achievehigher profits, by crippling supplies in theinternational markets, they did not expandtheir outputs – which led to fluctuations inthe prices. No increase in supplies madethe dealers stock oil and further increasethe price and OPEC, through this process,has made enormous profits. They alsobegan to discriminate between theircustomers by following differential price

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mechanism – making OPEC the priceleader. On the production side, quota systemresulted in differences within the cartel andalso with the non-OPEC countries. Thestrategy that OPEC and its each memberfollowed is always debatable. The case studyhelps analyse the strategies followed byOPEC and non-OPEC countries using GameTheory. It also helps in discussing theeffects of differential pricing mechanismon consumers.


• To analyse the degrees of pricediscrimination

• To analyse the effect on producers andconsumers using Game Theory

• To understand the pricing and outputeffects using Hotelling model andEdgeworth model.

Industry Not ApplicableReference MIC0007Year of Pub. 2008Teaching Note AvailableStruct.Assign. Available

Keywords

Oil Prices; Oil Supplies; Organisation ofPetroleum Exporting Countries (OPEC);Cartel; Oligopoly; Origin and Evolutionof OPEC; Crude Oil Production and Prices;Individual and market demand and supply;Elasticity of demand and supply;Consumer's utility; preference and budgetconstraint; Microeconomics Case Study;Behaviour of OPEC and non-OPECcountries; Game Theory

OPEC: The Economics of a Cartel(B)

The second case, in the three part casestudy series, deals with competitivedynamics of OPEC. In economics somewords are considered notorious for theirimplications – one such word is cartel.Everyone who saw 'God Father', would drawparallels to cartel's clandestine motives andactions. After having established theobjectives of forming OPEC, this caseenables the students to debate on the waysand means adopted to reach its objectives.Even if the OPEC countries produce oil atlower levels than their capacity, they wouldstill have surplus, but the global oil supplieswill be strangled. The OPEC members usedthis strategy to control global oil prices asearly as in 1970s. However, by mid-1980sOPEC was unable to withstand thecompetitive pressures from the non-OPECcountries. Under these circumstancesOPEC started to behave more like a carteland faced many challenges. This case couldbe used to analyse pricing mechanism ofoil and, the effects of cartelisation onsupply and demand in the global oil supplies.


• To analyse the effects of cartelisationon the producers and consumers

• To understand differences in theoperations of OPEC and non-OPECcountries in controlling their respectiveoil supplies.


Keywords

Oil Prices; Oil Supplies; Organisation ofPetroleum Exporting Countries (OPEC);Microeconomics Case Study; Cartel;Oligopoly; Origin and Evolution of OPEC;Crude Oil Production and Prices; Individualand market demand and supply; Elasticityof demand and supply; Consumer's utility;preference and budget constraint;Behaviour of OPEC and non-OPECcountries; Degrees of price discrimination;Hotelling and Edgeworth models

OPEC: The Economics of a Cartel(A)

The basic premise of this three-part caseis to let the students derive as manyeconomics concepts as possible fromOPEC and the economics of cartel. Thiswould enable them to derive major microeconomics concepts – market structure,cost structure, consumer behaviour andrelated concepts – and can also be linkedto Game Theory (as is done in the CaseStudy (C)). These three cases can be usedin managerial/business economics coursesand the economics of competition in astrategy module. The first case deals withthe intricacies of OPEC; the necessity, theorigination and the evolution of theorganisation into a cartel. It was arguedthat since the oil exporters were exploitedby the western governments and themultinational corporations, OPEC wascreated. And the organisation pledged tosafeguard members' interests. After havingunderstood the historical foundations ofOPEC, the students can analyse OPEC'snature and the interlink ages between oilindustry's supply and demand dynamics.


• To analyse the factors that effectdemand and supply of oil

• To understand the different concepts ofconsumer theory

• To examine the changes in income andprice with the help of income-substitution effects

• To analyse the concept of elasticity andits types.


Keywords

Oil Prices; Oil Supplies; Organisation ofPetroleum Exporting Countries (OPEC);Cartel; Oligopoly; Origin and Evolutionof OPEC; Microeconomics Case Study;Crude Oil Production and Prices; Individualand market demand and supply; Elasticityof demand and supply; Consumer's utility;preference and budget constraint

Rising Food Prices in China: AStorm Gathering Around ‘Piggy

Bank’?Inflation in China is very often taken tobe as common as flying horses. Naivety bespared, if it stems from the generalunderstanding that market forces areseldom scot-free in a controlled economy.More so, if one is talking about somethingdeclared as a part of national security. But,here is the truth. In 2007, inflation in Chinarecorded 6.5%, the highest in 11 years –mainly due to price increase in pork, aChinese staple. A country which boasts tobe the world’s largest producer of pork,was hit hard by blue-ear disease, killing asmany as a million pigs in 2006 andincreasing the prices of an importantingredient in pig feeding, corn.Consequently, the raising food prises stirredpublic agitation. None would be moresensitive to inflation than the rulingCommunist Party, which rose to power in1949 by the catastrophic inflation thatdestroyed the credibility of its nationalistrivals. Also it has to remember how twodecades ago, inflation incited broaderdiscontent that culminated in theTiananmen Square protests of 1989.Worried establishment did take measuresto contain inflation that have ironicallybeen self-defeating. This case study can beused to debate whether the central banks(and even governments) can focus on the‘core’ commodity prices, rather than theentire basket, to contain inflation.


• To study the negative effects ofliberalisation in China

• To analyse the effects of food crisis oninflation

• To understand the concept of tradesurplus – and analyse its impact (if any)on inflation

• To understand the relation betweendecline in real interest rates and inflationrise.

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Keywords

Chinese Economy; Food Security; FoodCrisis; Household Responsibility System;Interest Rates; Retail and WholesaleIndices; Human Development Index;Economic Reforms in China; Inflation;Microeconomics Case Study; Income-Expenditure Pattern; Five Year Plans;Monetary Policy; Fiscal Policy; ConsumerPrice Index

Natural Gas: The Fuel of the NewCentury?

The increase in prices of oil had set off adebate among the policy makers, industryanalysts and observers over the need tolook for alternative sources of energy.Rapid industrialization around the worldhad led to an energy driven economy. Astage has reached where one cannotimagine life without oil. In this contextreplacement of oil is even more difficult.Most experts feel that natural gas could bethe next big thing. This case tries toexamine whether natural gas could playthe role the oil played in the twentiethcentury. The case looks at the demand andsupply aspects of gas, seeks to understandthe dynamics and geopolitics of naturalgas, and examines the environmentalimpact of gas and the pricing related issues.


• Role of Energy in the World Economy

• Need for alternatives to oil

• Role of natural gas as an alternativeenergy source

• Likelihood of natural gas emerging asan alternative energy source

• Supply and demand patterns of naturalgas

• Issues relating to pricing of natural gas

• Environmental issues related to thevarious energy sources

• Geopolitics of gas.

Industry EnergyReference No. MIC0003BYear of Pub. 2005Teaching Note Not AvailableStruc.Assign. Not Available

Keywords

Oil vs. Gas; Alternative Fuels;Environmental Issues; Economics ofNatural Gas; LNG (Liquefied Natural Gas);CNG (Compressed; Natural Gas);Geopolitics of Gas; Russia and Gas; Middle

Eastern Oil & Gas; OPEC; Natural Gasdemand & supply; Natural Gas & securityissues; Energy policy; Energy security.

The Economics of Hosting theOlympics

A fortnight-long extravaganza of sportingevents, records, medals and tears,mesmerised audience, spectacular stadiums,floodlit-bathed city centers, folks fromacross the globe, scintillating structures andbreathtaking moments. Thus goes thedescription of the Olympics for the generalaudience. However, for the economists, ittranslates into billions of dollars investedin infrastructure and thereby injecting agrowth pill into the economy.


• To discuss the short and the long-termeconomic benefits that prompt nationsto bid for Olympics despite the colossalinvestments involved.

Industry Professional Sports Teams &Organisations

Reference No. MIC0002Year of Pub. 2004Teaching Note Not AvailableStruc.Assign. Not Available

Keywords

The economics of mega sports events;Olympics; The economic impacts of theOlympics; Non-recurring expenditures;Economic boom before the Olympics;Athens Olympics; Beijing Olympics;Infrastructural development and Olympics;Capital investment in Olympics; Economicgrowth cycle; Urban development due toOlympics; Countries bidding for Olympics;Economy after the Olympics; Effects ofOlympics on gross domestic product andgrowth rates; Broadcasting rights ofOlympics.

Transfer PricingRapid globalisation has seen increasinglevels of intra-firm trade between affiliatessituated in different countries. Companiesfrequently shift profits to low taxjurisdictions in order to maximize returns.This is most commonly done through‘transfer pricing’ of tangibles andintangibles between group companies.However, despite the tightening of transferpricing litigation around the world, lawsare difficult to implement because theyinvolve significant levels of interpretationas to where value is actually created.


• To discuss the issues relating to taxavoidance/evasion by shifting profits to

low tax countries through transferpricing.

Industry Not ApplicableReference No. MIC0001Year of Pub. 2004Teaching Note Not AvailableStruc.Assign. Not Available

Keywords

Transfer pricing and arm’s length pricing;Comparable uncontrolled price; Avoidanceof double taxation; Standard cost system;GlaxoSmithKline and Compaq ComputerCorporation; Comparable profits method;Seagate Technology Inc; Cost plus method;Royalty payments; Tax avoidance;Activity based costing; Internal RevenueService; Weighted average sale price;Standard material, manufacturing cost;Profit split method.

Foreign

Currency Reserves in EmergingEconomies: Inflationary

PressuresEconomic crises in the developingcountries – Mexico (1994), the East Asianeconomies (1997), Russia (1998), Brazil(1999), Turkey (2000), Argentina (2001)and Venezuela (2002) – have taught alesson or two for the rest of the world. Allcountries learnt, some the hard way, thatshortage in FOREX reserves could causean irreparable damage to the economy andhave begun to amass foreign capital. Alsodue to increased pace of globalisation,during 2000s, most of the emergingeconomies have been flooded with foreignreserves. From late 2006, global inflationstarted to increase due to a host of reasons.Economic pundits were quick to correlategrowing FOREX reserves with alarminginflation and profess that excess of foreigncurrency is equally bad as its dearth. As aresult, by 2008, the emerging economiesare experimenting with variousmacroeconomic instruments to control theexcess inflow of foreign capital into theireconomies. This case study helps debatewhether there is any correlation betweeninflation and FOREX reserves. If yes, howare they interlinked? What measures cancentral banks take to mitigate the ill-effectsof FOREX reserves? In what ways can theycheck the inflow of FOREX reserves? Howmuch foreign capital is desirable and howmuch is too much?


• To understand various facets of FOREXreserves and the implications for aneconomy

• To analyse the sterilisation policy of acentral bank

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• To debate on inflationary pressures dueto the inflow of foreign currencies

• To understand and analyse relationshipbetween the size of FOREX reserves andother macroeconomic variables.

Industry Not ApplicableReference MOP0027Year of Pub. 2008Teaching Note AvailableStruct.Assign. Available

Keywords

Foreign Currency Reserves; Need forholding foreign reserves; Sources of foreignreserves; Foreign Direct Investment,Optimum size of FOREX reserves; Risksand costs of FOREX reserves; MonetaryPolicy Case Study; Global inflationarypressures

Inflation Targeting as a MonetaryPolicy Tool: The Case of Bank of

EnglandSince Adam Smith’s time, stable price levelhas been a gospel. The assumption – thateconomic growth, when achieved at ahealthy inflation level, will keep defuseeconomic turbulences – makes economistsand policymakers formulate the rightdosage of inflation. Many policies andmechanisms, to hit that right balance, havebeen professed and implemented in variouseconomies. Their efficiency has been putto litmus test every time the respectiveeconomies felt a riffle, notwithstanding theintensity. The latest addition to thesemechanisms is inflation targeting. ThoughNew Zealand has been the harbinger ofinflation targeting, its success in the UKfor a decade and half has won it largefanfare. UK adopted inflation targeting,more out of compulsion than convictionin 1992, when it needed an anchor toinduce monetary discipline and guide allother variables. From then on, the newmechanism has been delivering goods till2007, when for the first time it strayedfrom its target. Doubters have not refrainedfrom casting shadows over the efficacy ofinflation targeting and are preaching newmechanisms.This case study helps discussthe effectiveness of inflation targeting asa monetary policy tool in a globalisedenvironment and also to debate over thecentral bank’s role in striking a balancebetween growth and inflation.


• To discuss the reasons for inflation andits effect on the economy

• Inflation targeting as a monetary policytool

• Reasons for adopting inflation targeting.


Keywords

Bank of England; Inflation; MonetaryPolicy and Central Banks; InflationTargeting; Consumer Price Index; PriceStability; Monetary Policy Case Study;Trend Inflation; OperationalIndependence of a Central Bank; AggregatePrice Index; Monetary Targeting;Exchange Rate Targeting

Hyperinflation in Zimbabwe:Robert Mugabe Thrives,

Economy SuffersDuring the early 1980s, Zimbabwe’spresident, Robert Mugabe’s economicpolicies ushered in unprecedented progress.This however did not last long. By mid-1980s, Mugabe’s regime substitutedeconomic gains for political motives.Economic mismanagement resulted ininflation, which snowballed intohyperinflation by 2007. Zimbabwe’scentral bank did take measures to reduceor control the rise in inflation – all ofwhich were futile. Economists predict thatinflation may soon touch 100,000%, if itgrows unarrested.

The case study helps analyse the natureand causes of various kinds of inflation,and their impact on the economy. It alsohelps debate possible measures to controlZimbabwe’s growing inflation. Deepanalysis reveals Zimbabwean central bankto be in a fix: it has to decide what is urgentand what is important. It has to containinflation urgently. More importantly, agrowth mechanism is needed. Yet howshould these two goals be balanced – aneconomic quandary, to be resolved by theclass.


• To understand causes and types ofinflation

• To analyse reasons for hyperinflationand debate whether there is anyrelationship between hyperinflation andgovernment actions

• To debate on central bank’s possiblerecourse to contain inflation.


Keywords

Wholesale price index; Types of Inflation;Cost push inflation; Unemployment and

Inflation; Fiscal Policy; Monetary Policy;Consumer Price Index; Demand PullInflation; Monetary Policy Case Study;Hyperinflation; Money Supply; QuantityTheory of Money; Controlled Economy

Global Inflation: Monetary PolicyDebate

Right from the last quarter of the pastcentury, as nations opened up theireconomies, low-cost countries pouredcheap imports and cheaper labour into theworld economy. This allowed centralbankers to stay with aggressive growthtargets – relieving their fears of inflation.Yet the growing global economy – ataround 5% from 2004 to 2006 that mayremain for 2007–2010 – unleashes aresource crunch. Globalisation – that helpedhigh growth rates, with low inflation, forabout two decades – is now widely blamedfor the panics about inflation. Economistsfeel that the monetary policies may gettighter to counter the soaring demand,which may halt economic growth.

This case study helps analyse the effectsof globalisation on growth and inflation inthe new economy. The case will also helpin debating the role of emerging economiesin fuelling (if at all) global inflation.


• To discuss the impact of globalisationon inflation

• To study the relationship betweeninterest rates and inflation

• To realise the role of central banks in agreatly globalised world.


Keywords

Globalisation; Factors helping the processof Globalisation; Inflation; Real andNominal Wages; Real and Nominal InterestRates; General Price Level; DeadweightLoss; Offshoring and Outsourcing;Monetary Policy Case Study; ImportTariffs; Governmentâ•™s Role in a GlobalEconomy; Inflation and Interest RateDynamics

Currency Appreciation andSouth Korean Economy:

Shipbuilding Industry at theCentre of the Storm?

South Korean policymakers introducedImport Substitution Industrialisation (ISI)as a measure to encourage the domestic

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businesses and bring economy back ongrowth track, after the Korean war of early1950s. During 1960s, the governmentintroduced many export-promotionpolicies. However, by 1970s, thegovernment’s focus was on manufacturingand to support this production-led growth,Heavy and Chemical Industries (HCI)initiative was introduced. Shipbuilding wasand is a focused industry that accounts foralmost 4% of South Korea’s GDP (as per2007 estimates). Yet it was blamed forwon’s recent appreciation – from 1,145per dollar in 2004 to 984 by January 2006– adversely affecting other export sectors.Its government tried to arrest the risingwon, whose outcomes are still ambiguous.

The case study helps analyse howdevelopments in one sector affect thewhole economy. Debates can ensue abouthow governments should act, when benefitsfrom one sector subvert other sectors.


• To understand a currency’s appreciation,depreciation, revaluation anddevaluation

• To examine the economic impact ofcurrency appreciation

• To debate on various alternatives whilecontrolling appreciation.


Keywords

South Korean Economy; CurrencyAppreciation; Currency Depreciation;Currency Revaluation; CurrencyDevaluation; Exchange Rate; Real andNominal Exchange Rates; MonetaryPolicy Case Study; Hedging; ComparativeCost Advantage; Economic Effects ofCurrency Appreciation; Measures toControl Currency Appreciation

Economic Reforms in Poland: ACase of Inflation Targeting

Poland joined the European Union (EU)in May 2004, together with 9 otherEuropean countries. The accession to theEuropean Union was the first step in theeconomic integration of the countries intoEurope, inclusion to the EuropeanMonetary Union (EMU) being the finaltarget. The countries would have to replacetheir currencies with the Euro within areasonable time-frame. For inclusion in theEMU, the countries would have to fulfillcertain criteria, collectively known as theMaastricht Criteria. One of the criteria wasthat the countries had to bring down annualinflation rate to within 1.5% of the average

of three EU countries with the lowestinflation rates. After remaining acommand economy under Communist rulefrom 1945 to 1989, Poland liberalized itseconomy with the help of the BalcerowiczPlan in 1989. The plan, though largelysuccessful in bringing down inflation tomoderate levels (from 70.3% in 1991 to11.8% in 1998), could not reduce inflationto the levels required for Poland's accessioninto the EMU. In 1998, Poland adopted'Inflation Targeting', a mix of monetaryand fiscal policies aimed primarily atbringing down inflation to the Maastrichtlevels. Though such policies were followedby many countries during that period,including Hungary and Czech Republic,Poland was one of the few countries tosuccessfully implement this policy. Itcurrently has one of the lowest inflationrates in the EU (the average inflation ratein Poland between 2001 and 2005 was2.8%). This case investigates themonetary-fiscal policy mix that enabledPoland to succeed where many othersfailed. It also analyses the long-term effectsof the reforms plan and whether it wouldhelp Poland achieve its final goal – theaccession to the EMU.


• To understand the importance of fiscalprudence in shaping an effectivemonetary policy

• To analyse the pros and cons of inflationtargeting monetary policy.

Industry Not ApplicableReference MOP0022KYear of Pub. 2006Teaching Note Not AvailableStruct.Assign. Not Available

Keywords

Poland; Economics; Macroeconomic;Inflation; Reform; Targeting; Stagflation;Interest rate; Exchange rate; Fiscal deficit;European Union (EU); EuropeanMonetary Union (EMU); Euro; MonetaryPolicy Case Study; Transition economy;Policy

Euro in 2004Euro could be considered a uniqueexperiment in the sense that the integrationof currencies had not been carried outbefore. The scale of integration was alsoimmense. The case traces the events leadingto the creation of Euro and the impactEuro has had in the first five years. Itexamines Euro’s performance taking alook at the price stability in Europe, itsrole as a reserve currency, promotion oftrade and its emergence as internationalcurrency. Its performance in theinternational financial markets and the

extent of its acceptance as an internationalcurrency will shape up its future. Thechallenges facing it such as the expansionof European Union, the collapse in Growthand Stability Pact, UK staying out of Eurohave also been looked into.


• Role of World Currency

• Euro vs. Dollar

• European integration

• Lessons for other trade blocs. Are theylikely to move in similar direction?

• Should UK join Euro?

• European economy after theintroduction of Euro

• European Monetary System

• Can be used to explain Mundell’s model.

Industry Capital MarketsReference No. MOP0021BYear of Pub. 2005Teaching Note Not AvailableStruc.Assign. Not Available

Keywords

Euro; European Economy; Europeanintegration; Euro vs. Dollar; Monetaryindependence; Currency integration;Mundell’s Model; International Finance;International economics; Europeaneconomics; Growth & stability Pact;Maastricht Treaty; Reserve Currency;European Monetary Union; VehicleCurrency.

The Power of the US Dollar: TheWaning Glory?

After the end of the Second World War,backed by the powerful US economy, thedollar gained the status of an internationalcurrency almost overnight under theBretton Woods system of internationalfinance. Even after the collapse of theBretton Woods system in 1971, the usageof dollars for trading oil, the world’s mostvaluable commodity, continued, resultingin dollar hegemony. In the following years,the dollar established its presence in allaspects of international finance, and at onetime, more than 80% of global currencyreserves were dollar denominated. The USeconomy reaped massive seignorage gainsand became the ‘Super Power’ of thetwentieth century. But the US failed tomaintain the value of the dollar. Uncheckedspending by successive US administrationsresulted in a huge pile of trade and currentaccount deficit that eroded the value ofthe dollar.

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• To discuss the importance of the USdollar among the internationalcurrencies

• To discuss the future of the internationalmonetary system.

Industry Not ApplicableReference No. MOP0020Year of Pub. 2005Teaching Note Not AvailableStruc.Assign. Not Available

Keywords

Dollar hegemony; International monetarysystem; Global financial system;International trade; USA’s fiscal policy;Foreign exchange reserves; Globaleconomic crisis and recession; USA’scurrent account deficit; Plaza Accord; Netinternational investment position; Globalcurrency; The gold standard; BrettonWoods system; Alternative globalcurrencies; European Union economicgrowth.

China: Importing Commoditiesand Exporting Inflation?

Even after 25 years of economic reform,China presents an enigmatic picture ofpolitical and business environment. Unlikethe developed economies, China’seconomic engine heavily depends onmanufacturing and its inexpensive labourresources. Over the years, this reliance ledto over-investment and over-capacity incertain sectors such as oil, steel and cement.While this is just one side of the coin,China’s socialist banking approach hasadded more to the already heated economy.As a result, the country’s scorchingeconomic growth sent inflationary anddeflationary reverberations across theworld by rising prices of the globally tradedcommodities like oil, cement, steel andother metals.


• To understand the impact of China’s fast-paced economic growth on othercountries

• To discuss the proactive steps that Chinaneeds to take http://cdcwebsite/cdc/Case%20Studies/Abstracts/Economics/Monetary%20Policy/MOP0019.htmtocool its economy.


Keywords

China’s overheated economy; Inflation anddeflation; Global prices of commodities;

Demand for oil, steel and cement;Consumer expenditure and consumption;China’s GDP (gross domestic product);China’s oil production; Daqing oil field;The great leap forward; The policy of self-reliance; Zhou Enlai and the fourmodernisations; Flawed banking system.

Germany’s Economic Dilemma:To Save or to Spend?

Germany, in common with the rest ofcontinental Europe, has been sufferingfrom a lack of demand, caused in part bythe Germans’ high propensity to save.Other European members, subject tosimilar macro economic constraints, havedone far better. What really sets Germanyapart from its more successful Europeanneighbours are its structural rigidities, itshigh wages and non-wage labour costs, anda rigid labour market. Schröder, who cameto power promising economic revival, metonly partial success. His economic policiescould not revive consumers’ confidence,and left them in a state of suspendedanimation - to spend or to save.


• To discuss ‘how the propensity to save’can have an adverse or favorable impacton a country’s economy

• To discuss the effectiveness of Keynesianeconomics in reviving Europeanmembers’ economies within theconstraints of the European Union’s‘stability and growth pact’ and theEuropean Central Bank’s monetarypolicy decisions.


Keywords

German’s propensity to save; The Germaneconomy; Gross domestic product; Privateconsumption; Gerhard Schroder; Economicrecession; German reunification; EuropeanUnion (EU); Social market economy;Corporate taxation; Federal budgetexpenditures; Social security; pensionreforms; Unemployment in Germany;Business confidence; Mittlestandcompanies.

Yuan: To Peg or Not to PegThe Chinese Yuan is pegged to the USdollar and the exchange rate is maintainedby large-scale purchases of the dollar fromthe open market by the People’s Bank ofChina. Buoyed by an undervalued Yuan,China has been enjoying large trade

surpluses with the US and has built hugeforeign exchange reserves. This, coupledwith a fall in the US dollar, has increasedpressure on China to remove the dollarpeg or at least make the Yuan moreflexible. But China has been resisting sucha move.


• To discuss the implications of the Yuan-dollar peg and the impact on the tradebetween the two countries.


Keywords

Chinese yuan, renminbi; US dollar;Currency pegging; Balance of payments;Reserve currency; Exchange rates;Unemployment; Asian financial crisis;Chinese economy; China’s foreign trade;China’s exports and imports; People’s Bankof China; Inflation rate; Free float; TheBig Mac Index.

America’s Dollar Policy: WeakDollar vs Strong Dollar

The world was on a de facto dollar standard,which meant that the Americangovernment’s currency policy had thepotential to affect not only internationaltrade but also domestic policies of differentcountries. Since the Bretton Woodsagreement, American currency policy hadbeen alternating from a strong dollar to aweak dollar. But it was under Clinton’sadministration that America stated as amatter of policy that a strong dollar was inits interest. But careful analysis of thedollar ’s movements and the FederalReserve’s policies indicated contradictionsbetween policy statements and stateintervention. Since George Shultz (1972–1974), nearly every treasury secretary withthe notable exception of Robert Rubin,made some effort to depress the value ofdollar. However, their actions did notalways lead to consequences they desired.


• To discuss the intricate relationshipbetween interest rates, purchasing powerand exchange rate in determining andfollowing a currency policy namelyAmerica’s dollar policy

• To discuss the future implication of therelationships among the said variables.

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Strong dollar versus weak dollar; Goldstandard; Bretton Woods system; TheGreat Depression; Exchange rate system;The United States Federal Reserve; USmonetary policy; Bank prime lending rate;US fiscal and current account deficits;Balance of payments; US exports andimports; US economy; Reserve currency;Open competitive currency markets;Interest rates.

The Appreciating CanadianDollar: The Implications for the

Canadian EconomyThe Canadian dollar, also called the‘loonie’, had been traditionally based onthe floating exchange rate. Based on itspurchasing power, it was opined that theloonie’s value was perfect at $0.815.However, the loonie, which was traded at$0.8934 in 1991, continuously fell till2003, before it again started surging at arapid pace.


• To discuss the reasons for the fall of theloonie since 1991, apart from the factorsthat prompted its sharp rise since January2003, and its implications for theCanadian economy.


Keywords

Canada; Canada’s economy; Canadiandollar; Loonie; Floating exchange rate;Exchange rate; Fixed exchange rate;History of the Canadian dollar; DominionNotes Act; Bank of Canada Act; Effects ofcurrency fluctuations on economy;International Monetary Fund; Anti-inflationary policies of Canada; Factorsaffecting currency appreciation; Currencyfluctuations.

Monetary Policy: Hungary vsPoland

Hungary and Poland, two of the fastestgrowing economies in central Europe, areto join the European Union in May 2004.Since the 1980s, both countries hadexperienced unfavourable political andeconomic conditions. Both had a historyof hyperinflation, high levels of foreigndebt and a poor institutional and economicframework. During the 1990s, thesecountries went through a transitional phaseand intensified their efforts for economicrevival. By January 2004, with an efficient

monetary policy, Poland had beensuccessful in curbing the inflation andachieving price stability. In contrast,Hungary was struggling with high interestrates.


• To discuss the relationship betweeninterest rates, inflation and the value ofthe currency in the background of thepolicies of two central Europeancountries.


Keywords

Hungarian and Polish monetary policies;Interest rates; Inflation targeting monetarypolicy; Revaluation and devaluation ofcurrency; Leszek Balcerowicz andZsigmond Jarai; Maastricht criteria; Budgetdeficits; Hyperinflation; Gross domesticproduct (GDP); Composition of currencybasket; Reference rate and exchange rate;Forint and zloty; European MonetaryUnion; Narodowy Bank Polski (NationalBank of Poland); Magyar Nemzeti Bank(Central Bank of Hungary).

Currency PeggingFrom 1870 to 1914, countries all over theworld followed the gold standard system,where all the currencies were linked to gold.After World War II, the Bretton Woodssystem was introduced, where all thecurrencies were fixed against the US dollar.In 1971, the Bretton Woods system wasabandoned because of wide spread inflationall over the world. Most of the developingcountries continued to peg, either to theUS dollar or to the French franc. By thelate 1970s, many countries had shiftedfrom single currency pegs to pegs definedin terms of basket of currencies. After theAsian crisis of 1997-1998, many countrieslike Russia, Brazil, Ecuador, Thailand andKorea shifted from a pegged exchange ratesystem to the floating rate system.Whereas countries like China, Malaysia andBolivia continued with the pegged system.


• To discuss the meaning, efficacy andramifications of having a fixed exchangerate system and a floating exchange ratesystem.


Keywords

Currency pegging; Bretton Woods system;Basket of currencies; Special drawing rights;Pegged exchange rates; Bank Negara;Malaysian dollar ringgit; ConvertibilityLaw; Domingo Cavallo; South Americancountries; Fiscal deficits; Monetary andfiscal policies; People’s bank of China;World Trade Organisation; Foreigncurrency reserves.

US Fiscal DeficitThe Congressional Budget Office projectedthat the US budget would run a deficit of$500 billion for the fiscal year 2005. TheUS, which had a surplus of $99 billion in2000, recorded a deficit of $375 billion bythe end of 2003. The InternationalMonetary Fund, which had been a strongcritic of budget deficits, came out with manyreports showcasing the need for controllingthe spiraling budget deficit of the US.


• To discuss the US fiscal deficits and theexpected and possible ramifications onthe US as well as the world economy.


Keywords

US fiscal deficits; Declining US dollar;Balance of Payments; Rising interest rates;Unemployment compensation; Budgetdeficit and surplus; Tax revenue; US GrossDomestic Product; International MonetaryFund; Economics stimulus package; USpublic debt; US economy; Recession; Budgetexpenditure on subsidies; US MonetaryPolicy.

Dollarization and Countries’Experiences

In the 1800s, the US did not have a domesticcurrency. The French franc, Spanish dollar,Portuguese escudo and English shilling wereall used in the US. Like the US, many othercountries had a foreign currency at somepoint in their history. Most of the LatinAmerican countries had experiencedunofficial dollarisation, whereas countrieslike Ecuador, El Salvador and East Timorhad officially dollarized their currencies.Other countries like Bhutan, Namibia andBahamas had semiofficially dollarized theireconomies. Dollarization directly linkedthe economy of the dollarized nation withthe economy of the issuing country.

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• To discuss the experiences of variousdollarised countries

• To discuss the effects of the differenttypes of dollarisation on the economythat adopted any other currency as itsdomestic currency.


Keywords

Official and unofficial dollarisation;Currency boards; Spanish milled dollar;Foreign currency; Southeast Asian financialcrisis; Currency pegging; Bank of Namibia;US dollar; Foreign exchange reserves;Belarus National Bank; South AfricanReserve Bank; Common monetary area;Central Bank of El Salvador; CentralPayment Office; United NationsTransitional Administration in East Timor.

Currency Boards and Countries’Experiences

The system of currency boards originatedin Britain in the 1800s. Soon the conceptof currency boards spread among theBritish colonies in Africa, Asia, theCaribbean and the Pacific Islands. In the1990s, this system was introduced in thosecountries, which were troubled by highinflation and financial instability. Butgradually, the currency boards were replacedby the central banks. By 2002, 174countries had established their own centralbanks. However, other countries like HongKong, Estonia and Lithuania continued tohave currency boards and they did notpermit any monetary policies.


• To discuss the mechanism of currencyboards of different countries

• To discuss the differences between thecentral bank and the currency boardarrangement.


Keywords

Currency board system; Foreign currencyassets; Issue department; Convertibilitysystem; Bank of England; Hong KongMonetary Authority; Linked exchange ratesystem; European Union; Current accountdeficit; Floating exchange rate system;

Banking supervision department; Openmarket operations; Monetary policies;Lender of the last resort; Central bank.

Britain’s Housing Market: Poundvs US Dollar Dilemma

Low interest rates were one of the primereasons for the sustained booms in Britain’shousing market, while a weak dollar wasone of the prime reasons for astrengthening pound. The Monetary PolicyCommittee of the Bank of England wascaught in a dilemma whether to containthe booming housing market by increasinginterest rates or restrain the appreciatingpound by decreasing interest rates. Finally,the Monetary Policy Committee chose tocontain the housing market by increasinginterest rates with the hope that the poundwould not appreciate much. However, thefalling dollar did not seem to help them.


• To discuss the relationship betweeninterest rates, the pound’s exchange rateand the housing market.


Keywords

Britain’s housing market; UK pound vs USdollar; Spot exchange rate; Interest rates;Bank of England; Gold exchange standard;Depreciation of the pound; Inflation anddeflation; European Union; Base rate;Monetary Policy Committee; Boom andbusts in the housing market; Blackwednesday; European Central Bank;Overvalued dollar.

US Trade Deficits

By December 2003, the trade deficits ofthe US reached a record high of $490.8billion, having major deficits with othercountries – China, Japan and Canada. Thegrowing deficit has been a concern forAmerican trade and commerce. Thegrowing trade deficit has often been citedas proof of the unfair trade practices abroador a lack of competitiveness among USindustries. Economists view trade deficitsas just a macroeconomic reality ofinvestments flowing from abroad.However, the growing deficit has oftenbeen a point of discussion because of itscascading effect on the economy.


• To discuss the underlying issues for thegrowing trade deficit of the US, especiallywith countries such as Japan and China

• To discuss the consequences of a tradedeficit.

Industry Not ApplicableReference No. MOP0008Year of Pub. 2004Teaching Note AvailableStruc.Assign. Not Available

Keywords

US trade deficits; Macroeconomics; UStrade with China and Japan; US economy;Renmini peg to the dollar; Yen vs dollar;Yuan vs dollar; Productivity of Chineselabour; The Big Mac index; Current accountdeficit; Tariff barriers; US gross domesticproduct; Balance of payments; US importsand exports; Exchange rate

THE 1997 DEVALUATION OF THETHAI BAHT AND AFTER

The abundant natural resources and theagricultural advantage were the majorfactors that supported Thailand’s economybefore the 1970s. Later, as the demand foragricultural products decreased, Thailandstarted developing an export-orientedmanufacturing sector. International tradewith the United States and Japan increased.In 1984, Thailand’s currency, baht waspegged to a basket of currencies and 80%of the basket was dollar denominated.During 1996-1997, increase in foreigninvestment and borrowing, appreciation ofthe US dollar, and speculation in thecurrency market led to overvaluation ofthe baht. In July 1997, Thailand floatedthe baht, which resulted in a 15%devaluation. This affected the trade andinvestment sectors of the country. Thedevaluation helped Thailand to improveits trade with Japan, the US, the EuropeanUnion and the Association of SoutheastAsian Nations (ASEAN).


• To discuss the reasons that led to thedevaluation of the baht and the relationbetween the exchange rate and foreigntrade of Thailand.


Keywords

Devaluation of the Thai baht; Thailand’seconomy; Bank of Thailand; Current

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account deficit; Basket of currencies;Monetary targeting regime; Association ofSoutheast Asian Nations (ASEAN);Speculation in the currency market;Foreign investment; Foreign currencyreserves; Memorandum of economicpolicies; Non-performing loans; Bailoutpackage; Southeast Asian financial crisis;International Monetary Fund

South Korea’s Currency Crisis in1997 and After

The economy of South Korea was basedon its labour-intensive industries and afavourable international market. Thenominal rate of the Korean currency, thewon, was fixed at 484 per dollar. A reductionin the exports, during 1980, led to thedevaluation of the won to 580 per dollar.Later, in 1993, South Korea allowed thewon to fluctuate within a permitted rangeof plus or minus 2% against the dollar. In1997, the Korean banks extensivelyborrowed foreign capital on a short-termbasis and then lent on a long-term basiswithout proper evaluation of risks. Thisled to the Korean currency crisis, andaffected the foreign trade of the country.After widening the permitted range of thewon to 10% for a short period, the Koreangovernment allowed the won to float freelyin December 1997. The Korean tradeshowed improvement by the end of 1999.


• To discuss the reasons that led to thecurrency crisis in South Korea, and itseffects on the foreign trade of thecountry.


Keywords

South Korea’s currency crisis; SouthKorean economy; Foreign exchangemarket; Bank of Korea; South Koreanchaebol; Korean won; Devaluation of theKorean won; Asian development bank;Long-term investment; Short-termborrowing; Memorandum on economicpolicies; Non-performing loans; IMFbailout package; South East Asian financialcrisis; International Monetary Fund

The 1994 Devaluation ofMexican Peso and After

From the 1940s till the mid-1970s, theMexican economy enjoyed a strong growth.Vast petroleum and oil reserves were

discovered in Mexico in the 1970s. TheMexican government expected that theincome earned by exporting petroleumwould help them balance their spending. Butin 1976, Mexico’s balance of paymentsshowed a deficit. The government allowedthe peso to float in 1976, which resulted inpeso depreciation. Decreased demand andlower prices of petrol made the governmentdevalue the peso in 1983. In 1994, Mexicosigned the North America Free TradeAgreement (NAFTA) and expected itsforeign trade to increase. But the growingcurrent account deficit and large short-termborrowing led to another devaluation inDecember 1994. The devaluation of thepeso affected trade with the US and othercountries. The Mexican government triedto improve its economic conditions bytaking advantages under the NAFTA. OnJanuary 1 st 2004, Mexico ranked eighth inthe world among the largest tradingcountries.


• To discuss the effect of devaluation onthe foreign trade of Mexico

• To discuss the relation between theexchange rate and the exports of Mexico.


Keywords

Mexican economy; Devaluation of theMexican peso; North American Free TradeAgreement; Balance of payments; Currentaccount deficit; Foreign exchange reserves;International Monetary Fund; PresidentErnesto Zedillo; Foreign trade balance;Exchange rate band; World TradeOrganisation; Mexican exports; Peggingwith the dollar; Free floating currency;Currency depreciation

UK and the EuroThe case study throws light on the issuesof whether the UK, which is the secondlargest economy in Europe, would join theEconomic and Monetary Union (EMU)of the European Union (EU) and adoptthe euro as its currency. UK is a member ofthe EU but in 1997 it announced fiveeconomic tests to judge whether and whenit would be in the UK’s interests to join theEMU. Gordon Brown, the Chancellor ofthe Exchequer, in his address to theParliament on June 9th 2003, announcedthe results of the five economic tests, butno concrete results have been derived onthis issue yet.


• To discuss whether it would be beneficialfor the country to adopt the euro as itssingle legal tender.


Keywords

UK and the euro; Economic and MonetaryUnion (EMU); Assessment of the fiveeconomic tests; European Union (EU);Convergence criteria of the EMU; Singlecurrency and investments in the UK; Pricedifferentials and macroeconomic stability;Nominal and real interest rates in the UKand the euro area; GDP (gross domesticproduct) growth rate in the UK and theeuro zone; Referendum in the UK; Bankof England; EMU and the UK’s financialservices industry; Labour markets in theUK; Maastricht Treaty; Exchange RateMechanism.

US Dollar vs the YuanThe US has always favoured a ‘strong dollarpolicy’. However, China’s currency, theyuan, is pegged to the dollar at about 8.28.The US, through the recent visit of itsTreasury Secretary, John Snow, to Beijing,and through the G7 Communique, has speltout the need for market determinedexchange rates. US wants the Chinese pegto be replaced by free float, as pegging hasresulted in the relocation of productionbase to China and a trade deficit with China.The currency peg has helped China toincrease employment rates. The yuan isundervalued and so adoption of free floatwould make it stronger against the dollar.The currency peg has helped China toreplace some of Japan’s exports to the US.It has also brought more deflation into thealready deflated Japanese economy.


• To discuss the importance of currencypegging and its implications on theexports & imports of an economy

• To discuss the need of market determinedexchange rates.


Keywords

Yuan; Yen; Renminbi; Dollar; Exchangerate; Interest; Balance of trade; Deficit andsurplus; Deflation; Inflation; Currentaccount; Weak; Strong; Imports; Exports

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US Dollar vs the YenTrediationally, the US has been favouringa ‘strong dollar policy’. But the recentremarks of the Treasury Secretary hint atthe need for a weak dollar against theJapanese yen. The weakening of the yenagainst the dollar is resulting in cheaperimports from Japan and costlier exportsto Japan. For Japan, a weaker yen will helpincrease the exports to the US and mightalso fuel inflation in the Japanese economy.The Bank of Japan has been embarking oncurrency market interventions to stop theyen from rising. The G7 Communiqué andthe US Treasury Secretary’s visit to Japanhave increased the pressure on Japan to letthe exchange rates be determined purelyby the market.


• To discuss the currency policy in thewake of globalisation

• To discuss the scope of currencies indetermining the imports and exports ofan economy.

Industry Not AvailableReference No. MOP0002Year of Pub. 2003Teaching Note AvailableStruc.Assign. Available

Keywords

Yen; Dollar; Exchange rate; Japan; Interest;Surplus; Deficit; Exports; Imports;Deflation; Inflation; G7; Translation;Balance of trade; Current account.

Euro vs the US DollarThe case study revolves around the impactof the single currency of the EuropeanUnion (EU), the euro, in the InternationalMonetary System. Various factors that ledto the international acceptance of thecurrency have been considered vis-à-vis theeuro.


• To discuss whether the euro will breakthe dollar ’s hegemony in the worldmarkets.


Keywords

Euro; Dollar; International MonetarySystem; Single currency; Denominationcurrency for oil trade; Reserve currency;European Union; Stability and growthpact; European Monetary System;European Central Bank; Economic and

Monetary Union; Convergence criteria;European Commission; Gold reserve; UKeconomic tests.

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