Saturday, December 21, 2013

World Economy - The Dual Challenge

The world economy faces dual challenges over the next few years to assure financing of the huge payment imbalances arising from the major oil price increases that have taken place and to promote fundamental adjustment to the changing world energy situation, which is at the heart of global economic difficulties. Rising cost of food items are also putting national economies under severe pressure. Whether a coordinated effort on the part of various nations succeeds in restoring a strong and stable global economy has a critical and direct bearing on the economic well-being of the world. The health of the world economy directly affects markets for the production of farm and factory products and the employment situation of the world. Nations are learning fast that in collective well-being lies the essence of personal well-being. Everybody's stake in a healthy world economy is growing stronger and stronger. 

International investment has become very important both at home and abroad. Exchange of capital outlay among nations is important, as through it production centres can be located at desired places and production can be carried on in the most economical way. Thereby exchange of technology also can be promoted, which again contributes to bring down the overall global cost of production. Labour may be less costly somewhere. Proximity to market reduces the transportation cost. Everybody then will be able to get things at a low cost.

Political and economic unrest in certain areas are putting a serious pressure on the well-being of the world economy. The political turmoil is the Middle East has contributed to uncertainty about future oil supplies at a time when the world economy is already facing a difficult situation since the 2008 recession, effects of which are still lingering. During the past 30-35 years widespread fluctuations in oil prices, which always remain very sensitive to changes, economic or non-economic, have given the world economy several jolts. Increase in oil prices during the past two years, a climbing inflation, balance of payments deficit, and lowering of income from foreign investments continue to disturb the major economies of the world. The changing face of the world economic environment is likely to make it not only more difficult for nations to obtain the much-needed financing, but more difficult also for them to make the economic adjustments required by changing external circumstances. Oil-importing nations are facing a deteriorating position in their current accounts.

As growth rates slow down, unemployment rises and trade deficits widen, many countries keep on feeling the pressure to keep their internal economy in fine tune. A coordinated and cooperative international response to the problems of the world economy, both political and economic, is needed to assure an effective solution, and maintain the essential economic framework. Oil price increase imposes serious hardship on the poorest nations, whose development plans need to be altered to accommodate increased payments for oil. Some individual countries are facing serious financial difficulties.

Over the next few years the world faces a dual task of assuring not only that growth in gross domestic product is achieved keeping the price level within a controllable limit, but also that basic economic adjustments are initiated and carried through to restore a sustainable basis for future world economic growth and development.

Finding out alternative sources of energy is what is needed the most, as a time will come when world fossil fuel reserves will start their steep downward swing. We have to keep in mind that world consumption of energy keeps on increasing. Nuclear energy is being considered hazardous and unsafe by many because of the disasters that have taken place. Harnessing solar energy, wind and water energy, using hydrogen as fuel to produce energy, or inventing some other synthetic fuel are the major options open. Some innovative technology needs to be developed which will be cost-effective or economically viable as well as clean and pollution-fee.

Protecting the world environment is also a serious challenge for everyone. Even way back in 1981 it was a known fact that energy use at such a large scale, mainly fossil fuel, even if otherwise feasible, could raise the average surface temperature of the earth with potentially catastrophic global effects. That has started happening and now we need to put a check on fossil fuel consumption to minimize emission of greenhouse gases. Burning of fossil fuels has contributed to the increase in carbon dioxide in the atmosphere. Global warming, a recent warming of the Earth's surface and lower atmosphere, is believed to be the result of a strengthening of the greenhouse effect mostly due to human-produced increases in atmospheric greenhouse gases. We still rely heavily on fossil fuel.

The Kyoto Protocol(adopted on December 11, 1997, and entered into force on February 16, 2005), aimed at fighting global warming, is an international environmental treaty with the goal of achieving the stabilization of greenhouse gas concentrations in the atmosphere at a level that would protect the climate system. The objective of the Kyoto climate change conference was to establish a legally binding international agreement, whereby all the participating nations commit themselves to tackling the issue of global warming and greenhouse gas emissions. The target agreed upon was an average reduction of 5.2% from 1990 levels by the year 2012.

The Copenhagen Accord (December 18, 2009) recognized the scientific issue for keeping temperature rise to no more than 2 degree C but did not contain commitments to emissions reduction to achieve that goal. The agreement was a vital first step and accepted that there was a lot more work to be done to get assurances so that it would become a legally binding treaty. It endorsed the continuation of the Kyoto Protocol, but was not legally binding and did not commit countries to agree to a binding successor to the Kyoto Protocol, whose present round ended in 2012.

The 2012 United Nations Climate Change Conference took place during November-December 2012, at the Qatar National Convention Centre in Doha. The conference reached an agreement to extend the life of the Kyoto Protocol, which had been due to expire at the end of 2012, until 2020, and to make a more concrete and real successor to the Kyoto Protocol,  set to be developed by 2015 and implemented by 2020. For the first time the concept of "loss and damage" has been incorporated,  an agreement in principle, which says that richer nations could be financially responsible to other nations for their failure to reduce carbon emissions.

In the actual field, nothing much has changed during the past 30 years. Now some clean, pollution-free source of energy, which will fulfill our long-term energy requirements, is needed to keep the earth and its atmosphere cool. The energy base of industrial civilization has to include some new energy source. The chances of success in creating a new energy base are reasonably good. Only the length of time available and the scale of resources devoted to the task will help determine the outcome.

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