world map
The world or global economy
The world- or global economy generally refers to the economy, which is based on economies of all of the world’s countries, national economies. Also global economy can be seen as the economy of global society and national economies – as economies of local societies, making the global one. It can be evaluated in various kind of ways. For instance, depending on the model used, the valuation that is arrived at can be represented in a certain currency, such as 2006 US dollars.
Over the past millennium, world population rose 22–fold. Per capita income increased 13–fold, world GDP nearly 300–fold. This contrasts sharply with the preceding millennium, when world population grew by only a sixth, and there was no advance in per capita income.
From the year 1000 to 1820 the advance in per capita income was a slow crawl — the world average rose about 50 per cent. Most of the growth went to accommodate a fourfold increase in population.
Since 1820, world development has been much more dynamic. Per capita income rose more than eightfold, population more than fivefold.
Per capita income growth is not the only indicator of welfare. Over the long run, there has been a dramatic increase in life expectation. In the year 1000, the average infant could expect to live about 24 years. A third would die in the first year of life, hunger and epidemic disease would ravage the survivors. There was an almost imperceptible rise up to 1820, mainly in Western Europe. Most of the improvement has occurred since then. Now the average infant can expect to survive 66 years.
The growth process
The growth process was uneven in space as well as time. The rise in life expectation and income has been most rapid in Western Europe, North America, Australasia and Japan. By 1820, this group had forged ahead to an income level twice that in the rest of the world. By 1998, the gap was 7:1. Between the United States and Africa the gap is now 20:1. This gap is still widening. Divergence is dominant but not inexorable. In the past half century, resurgent Asian countries have demonstrated that an important degree of catch–up is feasible. Nevertheless world economic growth has slowed substantially since 1973, and the Asian advance has been offset by stagnation or retrogression elsewhere.
THE WAY OF THE WORLD ECONOMY
For over a decade, most of the developed world has lived with low interest rates, high government borrowings, rising government deficits, unemployment, and modest growth. Their cheap money benefited the developing countries as well, who received loans and investments that gave better returns and stimulated development in the poorer countries. Export-oriented countries in Southeast Asia, Japan and China ran up growing current account surpluses and became creditors to the United States of America as they accumulated rising amounts of US treasury bonds. These had low returns but made the US the most indebted country in the world.
Countries like India that had kept its interest rates relatively high to combat inflation, found it attractive to borrow abroad as many Indian companies did. Many Indian non-residents arbitraged by depositing funds in banks in India. Indian foreign exchange reserves rose despite growing deficits in trade balance. India also further encouraged such volatile flows by opening routes that were free of capital gains tax (like Mauritius) and registering foreign financial institutions that could hide identities of remitters and investors. This helped Indian tax evaders to smuggle money out and bring it back through such routes to be laundered. India ran current account deficits that at times reached 3 per cent of gross domestic product and over, but such volatile inflows added to India’s foreign exchange reserves and provided cover for the deficits.
In the developed world, and especially in the US, the years of cheap and plentiful liquidity led to a boom in asset prices, especially of real estate, to a declining savings rate and to consumption on credit. Cheap Chinese goods helped the consumer splurge. The budget deficits and borrowings of the US government were also reflected in the finances of its households. Moreover, they made China the largest creditor of the US and added to its global clout.
After the economic collapse caused by the credit overreach by the financial sector, especially in the US, a major new legislation was passed in that country to prevent such a situation from developing again. There are questions whether the legislation can be implemented fully. The financial sector and the Republican Party also aim to render it ineffective.
Some consequences of the financial sector collapse of 2008 are clear. Instead of further integration, the European Economic Community appears to be in danger of splitting as countries like Ireland, Greece, Spain and Portugal pile up huge global debt and need handouts, primarily from a well-run German economic administration. The United Kingdom and the US also have high deficits and debts that they must reduce. That will require moderation in government social benefits and in people’s lifestyles in many rich countries as wages are kept controlled, benefits reduced, and government expenditure reductions cause unemployment and poor economic growth. The nation that needs this discipline most of all is the US. Efforts to curtail the deficit and the government debt are being made by both political parties. The curtailment will have maximum adverse impact on lower income households, while upper and high income households will most probably escape with little adverse impact. The Japanese economy has been in the doldrums for a decade, and is now shattered by the recent natural and man-made calamities. Its recovery will require more debt. An ageing population and a restrictive immigration policy make recovery problematic.
The US is making efforts also to curtail its import of crude oil. The discovery and the investments in shale oil have promise of sharply reducing, if not eliminating, US imports of energy. This will add to energy costs, curb energy use and affect automobile production. The cuts in social welfare expenditures assure that incomes in the US will grow more slowly and hence consumption and imports may not grow as fast.
The breakdown of regimes in Egypt, Tunisia, Yemen, Libya, Syria, and other Middle Eastern countries has already put pressure on crude prices that have reached record levels. This is a further pressure on world commodity inflation. World commodity prices have risen sharply (by 42 per cent and food items by 47 per cent. US subsidies for ethanol have led to land being diverted to corn from soya and wheat, whose supplies have relatively fallen from the US. Crop failures in China or India and increase in their imports will make the latter costlier.
China’s worries about inflation have made it reduce its stimulus spending and the expectation that China will focus more on domestic consumption growth and production than on exports. The agreement among Brazil, Russia, India and China to use their own currencies instead of the dollar in their trade interchanges will lead in the long run to a diminution in the role of the dollar as a global reserve currency.
This brief survey suggests that the global economy will slow down because of the developed countries and the tightening of their economic belts. Global warming and high energy prices will add to the pressure to reduce the consumption of energy and of products that use high energy, as in transportation. Lifestyle changes in the developed world are inevitable, especially after the Fukushima Daiichi nuclear disaster in Japan. This reduces the alternatives to coal. More expensive shale oil, solar and wind energy, along with gas, are likely to take much of the role of coal. Energy prices will be the key to higher costs and the consequent lifestyle changes.
India is in a more vulnerable position. Coal reserves are running out and Indian enterprises have not been able to buy up all the capacities they need to meet electricity needs in the future. More efficient coal use and carbon sequestration technologies will add further to energy costs along with the higher costs of coal. Imported crude and liquefied natural gas will be expensive. Nuclear energy will no longer be an important answer to India’s energy needs. Solar and wind energy will be expensive and, in any case, will meet only a fraction of the country’s requirements. Food production also does not show the required growth.
India has no choice but to improve its economic management. Wasteful government expenditures must become more efficient. Government deficits must be converted to balanced budgets. Subsidies must be carefully targeted so that only the deserving beneficiaries receive them and they do not get stolen. Energy prices must reflect their cost, not be sold below cost as it is today. This will require a major political change as irresponsible political leaders give it free or below cost to consumers. Distributed power needs to be encouraged, and managed by local authorities.
Inflation control must be a top priority. For this, not only must government expenditures be controlled so that budget deficits are reduced if not eliminated, but food production must also get top priority. Emphasis must be on finding employment in rural India in medium and small industries. India must also encourage manufacture of efficient agricultural pump sets and energy efficient power equipment.
Our priorities must change if we are not to face a difficult future. Economic growth cannot be the primary priority; inflation control and protecting the really poor must be a major priority along with more efficient administration so that social benefits reach those they must and are not stolen. Administrative reform is urgent and must put emphasis on accountability and efficient implementation.
