IIFT 2015 Question Paper

Read the following passages carefully and answer the questions given at the end of each passage

Because of the critical role played by steel in economic development, the steel industry is often considered, especially by the governments, which traditionally owned it, to be an indicator of economic prowess. World production has grown exponentially, but there were big highs and equally big lows all through the 1990s and up to 2002. Recovery from the two World Wars and the Great Depression of the 1930s caused massive disruption and lay-offs. Over-capacity and low steel prices continued to play havoc through the 1970s and 1980s and politicians began to lose their belief that the wealth of a nation was directly coupled to its steel production.

 This led to a wave of privatisations, as state-owned enterprises shed their financial liabilities to hungry capitalists. A whole new breed of steel-makers came into being using a new technology, the mini-mill. This used a smaller electric-arc furnace fed that just melts down ‘cold’ scrap. It was a cheaper process than the traditional ‘hot metal integrated mills’ with their mountains of ore and coal and monumental machinery, but it was used almost exclusively for lower-grade building and other ‘long’ products.

 By the beginning of 2005, the world steel industry was on a high, after decades of moving from apocalypse to break-even and then back to apocalypse. Since 2003, when a staggering 960 million tonnes were produced-compared to 21.9 million tonnes for aluminium-there had been unprecedented demand, mainly from China and India. China was both the biggest producer, the first country to exceed 200 million tonnes of crude steel in a year, and also its biggest consumer at 244 million tonnes. The global economy was also booming, but this was creating production bottlenecks for all steel-makers and by 2004 steel had for the first time hit an average of $650 per tonne shipped. Profit margins were better, but where was the growth to come from? In tandem, the costs of essential raw materials for steel-making - iron ore coking coal-had gone through the roof, along with bulk shipping costs. The key to future growth was to secure plants in emerging markets where ore and coal were close to production sites, labour costs were much lower and where technology and investment could spur greater savings.

But the central issue was that globally the industry remained a very fragmented one. No single company was producing 100 million tonnes a year, or 10 per cent of total world production. The name of the game was consolidation into fewer, bigger players. With this would come the chance for steel-makers to gain greater pricing power, increasing their profitability and the value of their shares. 

Two groups had begun to move ahead of the pack. One was Mittal Steel with its operational headquarters in London’s prestigious Berkeley Square. Mittal Steel was the world’s biggest producer of ‘long’ products. It was young, aggressive, fast, and a big risk-taker, fuelled by its founder Lakshmi Mittal’s visionary zeal to consolidate the industry. Its nearest rival, Arcelor - the world’s most profitable steel company, focusing on ‘flat’ products - was headed by the Frenchman Guy Dolle, and was a combination of three former state-owned European steel plants: Arbed of Luxembourg, Usinor from France and Spain’s Aceralia. These three were now merged, restructured and administered from the grandiose, chateau-like former Arbed headquarters in Luxembourg’s Avenue de la Liberte.

Both groups were passionate about steel. Mittal, already dubbed ‘the Carnegie from Calcutta’, had a clearer vision of the need to streamline steel, but Arcelor was determined to become the biggest as well as the best. Dominating the market would enable either firm to increase its pricing position with customers, the car-makers, ship-builders and construction firms, as well as chasing growth in the new markets of Asia, South America and Eastern Europe. 

Guy Dolle could hear the clump of Mittal’s feet marching ahead, and it hurt. Arcelor was Europe’s reigning steel champion and was arrogantly proud of it. It had a commanding market share of the specialised high-strength steel supplied to European car-makers, and a total overall production approaching 50 million tonnes a year, all with state-of-the-art technology. The group had repaired its consolidated balance sheet, ravished by decades of downturns and continual restructuring costs. It had invested heavily in the quest for best technology and had also acquired companies in Brazil, set up joint ventures in Russia, Japan and China and now was eagerly eyeing gateways to the North American car market. And to its long-suffering shareholders, starved of decent dividends, Arcelor was at last moving in the right direction, after the blood, sweat and tears of shifting from public to private sector. The Luxembourg group was clearly on a wake-up call, gunning to overtake Mittal Steel and keep it at bay.

By 2005, the battle for supremacy had begun to heat up. Two projected state sell-offs by public auction, in Turkey and Ukraine, were particularly attractive commercially. Both auctions were taking place in October, within three weeks of each other. The first, in Turkey, was for the 46.3 percent of government-owned shares in Erdemir, a steel-maker producing 3.5 million tonnes a year for car-makers and other industrial clients in a country of seventy million people shaping up to join the European Union. Mittal and Arcelor both already owned minitory stakes in the Turkish company and were eager to get majority control.

Read the following passages carefully and answer the questions  given at the end of each passage:

In the decades that Otlet’s papers had sat gathering dust, his dream of a universal knowledge of network had found a new expression across the Atlantic, where a group of engineers and computer scientists laid the groundwork for what would eventually become the Internet.  Beginning during the Cold War, the United States poured money into a  series of advanced research projects that would eventually lead to  the creation of the technologies underpinning the present-day Internet. In 1990s, the World Wide Web appeared and quickly attracted a widespread audience, eventually establishing itself as the foundation of a global knowledge- sharing network much like the one that Otlet envisioned.

Today, the emergence of that network has triggered a series of dramatic - perhaps even “axial” - transformation. In 2011, the world’s population generated more than 1.8 zettabytes of data, including documents, images, phone calls, and radio and television signals. More than a billion  people now use Web browsers, and that number will almost certainly increase for years to come. In an era when almost anyone with a mobile phone can press a few keys to search the contents of the world’s libraries, when millions of people negotiate their personal relationships via online social networks, and when institutions of all stripes find their operations disrupted by the sometimes wrenching effects of networks, it scarcely seems like hyperbole - and has even become cliché - to suggest that the advent of the Internet ranks as an event of epochal significance.

While Otlet did not by any stretch of imagination “invent” the Internet - working as he did in an age before digital computers, magnetic storage, or packet - switching networks - nonetheless his vision looks nothing short of prophetic. In Otlet’s day, microfilm may have qualified as the most advanced information storage  technology, and the closest thing anyone had ever seen to database was a drawer full of index cards. Yet despite these analog limitations, he envisioned a global network of interconnected institutions that would alter the flow of information around the world, and in the process lead to profound social, cultural, and political transformations.

By today’s standards, Otlet’s proto-Web was a clumsy affair, relying on a patchwork system of index cards, file cabinets, telegraphs machines, and a small army of clerical workers. But in his writing he looked far ahead to a future in which networks circled the globe and data could  travel freely. Moreover, he imagined a wide range of expression taking shape across the network: distributed encyclopaedias, virtual classrooms, three-dimensional information spaces, social networks, and other forms of knowledge that anticipated the hyperlinked structure of today’s Web. He saw these developments as fundamentally connected to a
larger utopian project that would bring the world closer to a state of permanent and lasting peace and toward a state of collective spiritual enlightenment.

The conventional history of the Internet traces its roots through an Anglo-American lineage of early computer scientists like Charles Babbage, Ada Lovelace, and Alan Turing; networking visionaries like Vinton G. Cerf and Robert E. Kahn; as well as hypertext seers like Vannevar Bush, J.C. R. Licklider, Douglas Engelbart, Ted Nelson, and of course Tim Berners-Lee and Robert Cailliau, who in 1991 released their first version of the World Wide Web. The dominant influence of the modern computer industry has placed computer science at the center of  this story.

Nonetheless Otlet’s work, grounded in an age before microchips and semiconductors, opened the door to an alternative stream of thought, one undergirding our present-day information age even though it has little to do with the history of digital computing. Well before the first Web servers started sending data packets across the Internet, a number of other early twentieth- century figures were pondering the possibility of a new, networked society: H.G. Wells, the English science fiction writer and social activist, who dreamed of building a World Brain, Emanuel Goldberg, a Russian Jew who invented a fully functional  mechanical search engine in 1930s Germany before fleeing the Nazis;  Scotland’s Patrick Geddes and Austria’s Otto Neurath, who both explored new kinds of highly designed, propagandistic museum exhibits designed to foster social change; Germany’s Wilhelm Ostwald, the Nobel Prize-winning chemist who aspired to build a vast new ‘brain of humanity’; the sculptor Hendrik Andersen and the architect Le Corbusier, both of whom dreamed of designing a World City to house a new, one-world government with a networked information repository at its epicentre. Each shared a commitment to social transformation through the use of available technologies. They also each shared a direct connection to Paul Otlet, who seems to connect a series of major turning points in the history of the early twentieth-century information age, synthesizing and incorporating their ideas along with his own, and ultimately coming tantalizingly close to building a fully integrated global information network.

Read the following passages carefully and answer the questions  given at the end of each passage:

Every loan has a lender and a borrower; both voluntarily engage in the transaction. If the loan goes bad, there is at least a prima facie case that the lender is as guilty as the borrower. In fact, since lenders are supposed to be sophisticated in risk analysis and in making judgments about a reasonable debt burden, they should perhaps bear even more culpability.

Does it make a difference if we say there is over-lending rather than over-borrowing? The difference in where we see the problem affects where we seek the solution. Is the problem more on the side of the lenders, that they are not exercising due diligence in judging who is creditworthy? Or on the borrowers, being profligate and irresponsible? If we consider the problem to be over borrowing, then we naturally think of making it more difficult for borrowers to discharge their debts, on the contrary, if the problem is over lending, we focus on strengthening incentives for lenders to exercise due diligence.

The political economy of over-borrowing is easy to understand. The current borrowing government benefits and later governments have to deal with the consequences. But why have sophisticated, profit maximizing lenders so often over-lent? Lenders encourage indebtedness because it is profitable. Developing country governments are sometimes even pressured to over-borrow. There may be kickbacks in loans, or even to be influenced by Western businessmen and financiers. They wine and dine those responsible for borrowing as they sell their loan packages, and tell them why this is good time to borrow, why their particular package is attractive, why this is the right time to restructure debt? Countries that are not sure that borrowing is worth the risk are told how important it is to establish a credit rating: borrow even if you really don’t need the money.

Excessive borrowing increases the chance of a crisis, and the cost of a crisis are borne not just by lenders but by all of society. In recent years, IMF programs may have resulted in significant further distortions in lenders’ incentives. When crisis occurred, the IMF lent money in what was called a ‘bail-out’- but the money was not really a bail-out for the country; it was a bail out for western banks. In both East Asia and Latin America, bail-outs provided money to repay foreign creditors, thus absolving creditors from having to bear the costs of their mistaken lending. In some instances, governments even assumed private liabilities, effectively socializing private risk. The creditors were left off the hook, but the IMF’s money wasn’t gift, just another loan- and the developing country was left to pay the bill. In effect, the poor country’s taxpayers paid for rich country’s lending mistakes.

The bail-outs give rise to the famous ‘moral hazard’ problem. Moral hazard arises when a party does not bear all the risks associated with his action and as a result does not do everything he can to avoid risk. The term originates in the insurance literature; it was deemed immoral for an individual to take less care in preventing a fire simply because he had insurance coverage. It is of course, simply a matter of incentives: those with insurance may not set their houses on fire deliberately, but their incentive to avoid a fire is still weakened. With loans, the risk is default, with all of its consequences; lenders can reduce that risk simply by lending less. If they perceive a high likelihood of a bail-out, they lend more than they otherwise would.

Lending markets are also characterized by, in the famous words of former chairman of the U.S. Federal Reserve Alan Greenspan, ‘irrational exuberance’, as well as irrational pessimism. Lenders rush into a market in a mood of optimism, and rush out when the mood changes. Markets move in fads and fashions, and it is hard to resist joining the latest fad. If only one firm were affected by a mood of irrational optimism, it would have to bear the cost of its mistake; but when large numbers share the mood, in a fad, there are macroeconomic consequences, potentially affecting everyone in the country.