World Economy - 2014

 

The prices of food items have increased manifold during the last three years. In 2008 the prices of wheat and rice had doubled. Rising price of food items affect the poor and the lower middle class the most, because they spend a major portion of their income on purchase of food items. But apparently there is no shortage of food items. Better storage facilities of food grains are required, mainly in the developing countries to preserve what has been produced. Wastage cannot be afforded. Developing nations, with borrowings and investments from developed nations, have moved forward a bit. But they also have not been able to divert the fruits of development in the right direction. Rising Oil prices have affected the balance of payments.

Low interest rates, deficit budgets, and government borrowings have dampened the growth of the world economy. As a result of moderate growth, unemployment has cropped up. Accumulation of wealth and liquidity in the hands of a few has affected the economies adversely. Developing nations have tried to control inflation by keeping the interest rate high. High interest rate discourages investment and growth of gross domestic product. In spite of their best efforts to keep the economy away from the pressure of inflationary price rise, through monetary and fiscal policies, effective demand has not gone down as desired. Without proper investment decisions, employment has been affected adversely.

A huge capital resource is remaining sunk in fixed assets. Conversion into liquid assets is not so easy. Markets, on one side, are getting flooded with consumer durables. Over-emphasis on opportunities in some areas has resulted in an unbalanced growth of the world economy. Some areas have progressed, while some have fallen back. Governments need to put a judicious check on expenditure, subsidies and benefits to mellow down the price rise. But that again gives rise to unemployment. It has to be ensured that subsidies and benefits reach those sections of the population for which it is meant.

Per unit cost of energy is increasing. This adds to the production cost. So the price rise is not only because of high effective demand. It is also a case of cost-push inflation. Need to find alternative sources of energy are necessary. A suitable alternative for coal needs to be found out. The energy resource needs to be used more effectively and judiciously. Nuclear energy is not appearing to be a very safe long-term option. Those who are at the helm of managing the energy resources have to handle the situation with more caution and care, keeping in mind long-term effects of their decisions and actions.

It is required to boost the economies with fresh investments, but the moment that is done, prices will rise further. More areas have to be brought under food grain cultivation to increase food production. New technologies have to be implemented to get more yields from the same land. Importing food grains puts pressure on the economy, as it is always costlier. Transportation cost also adds to the cost. Local yields have to be raised. Cutting down the cost is an absolute necessity.

Attention should be shifted to less saturated areas where small and medium scale industries can and need to be developed. Capital resources should be diverted to areas and sectors where it is needed the most. This will increase the output. More supply of goods and services will then bring down the price level. This will create fresh employment as well, which will gear up the economies with a more equitable distribution of income. A change in consumption pattern and lifestyle is required. Collective well-being should get a big priority. Too much of optimism, with respect to revenue earning, is required to be curtailed. Speculative activities, based on the rising price level, should be controlled, keeping in mind that ultimately it will be a self-defeating policy. Governments need to chalk out their fiscal and monetary policies very judiciously. Distribution system needs to be smooth enough to bring parity in price level. Governments will have to manage their debts, if any, efficiently.

Most of the economies need to swing back to a near non-inflationary situation. A total evaluation and overhauling of the world economic structure needs to be done with sufficient co-operation among countries.

World Economy - 2012 onwards

The world economy is currently undergoing a radical change, possibly for the better. The traditional ways of trade, industry and commerce are changing. Privatization is taking place in certain key sectors. Governments are trying to concentrate on more important areas like defence, disaster management, social and cultural uplifting etc. However, the changes themselves are not taking place very fast. These are undergoing at a moderate pace.

Art and culture are getting industrialized. The world is undergoing a thorough cultural change, and when art and culture changes, everything else changes.  Now we have the notion that a poet or a dramatist is not only born, he can be groomed up into also; he can be made.

Technological changes are also taking place at a fast pace, though certain technological advancements are being assumed to bring some potential adverse effects on life and living.

The small artisans who were catering the local, or at the most the regional market are finding markets at far off places. Transport and communication has improved dramatically. Tele-communication is still advancing by leaps and bounds making the world a very closely-knit network. It has now become very easy to showcase ones' products at distant markets.

The small industries, which were, until the turn of this century, operating at a very small scale with moderate profit margins are attracting big investors. The small scale manufacturers are getting orders, which are thousand times bigger than what is was previously. Big players are entering into micro cottage industry sectors, which never had dreamt of entering the international market.

The basic and heavy industries are operating at a low ebb. There is comparatively less demand for steel and chemicals. Automobile industry will sooner or later get saturated. So unless new sectors are boosted up creating more income for the moderate and relatively weaker sections, the basic and heavy industries will continue to suffer. Real estate business will fail to get revived. But a real estate boom will no longer possibly be looked upon with great optimism by the experts. 

The whole money multiplier cycle needs to be energized with potentially prospective endeavours so that the whole economy gets charged up.

Investors are on the look out for new, prospective sectors, which promises a steady and secured flow of income.

Energy charges are rising fast. Need for renewable, cheaper sources of energy are necessary. Unless energy is made cheap, it is difficult to control cost-push inflation in a situation where demand-pull inflation is already having its daily share everywhere. Changes in lifestyle for less consumption, general awareness about the pollution of nature and its drastic changes, conservation of natural resources and more dependence on nature by curtailing artificial means of comforts and luxuries are needed the most. A mass realization about balancing the world economy with its natural resources will surely go a long way to remove the problems the world is facing currently and will ensure a much better tomorrow.

Destabilized economy and corrective measures

Fiscal Policy

When the economy does not function properly under the influence of unemployment, depression or inflation, the government tries to make certain changes in its expenditure policy to bring in the desired changes, and to eliminate the forces that are destabilizing the economy.

There are two basic measures that a government can undertake to stabilize the economy.

1. Government Expenditure

Increase in government expenditure acts as an investment. It gets added to the private investment that is prevailing in the economy. Thus, more government expenditure generates more employment and income, and takes the economy to a new equilibrium position.

2. Taxation

Government Expenditure expands the economy, whereas taxation contracts the economy. More taxation reduces the disposable income of individuals. This reduces their capacity to spend on consumer goods. A rise in taxes lowers the demand curve of the economy. This reduces income and employment. This is necessary during periods of inflation, when prices are moving upwards.

A reduction in taxes will give more income in the hands of consumers. Demand will increase, and new investment and income will be generated. This is necessary during periods of depression. Cut in taxes helps the economy to recover from a depressed state.

Monetary policy is aimed to control the supply of money in an economy. The central bank, which acts as the agent for the government, determines and controls the money supply according to the need of the economy.
Monetary policy is a tool or a process through which a government, central bank, or monetary authority of a country controls
(a) the supply of money,
(b) availability of money, and
(c) cost of money or rate of interest to attain certain sets of objectives to promote the growth and stability of the economy.

Cash reserve Ratio (CRR) is the amount of money or funds that the banks have to keep with the central monetary authority, mainly the central bank of the country.  If the central bank decides to increase the CRR, commercial banks are left with lesser money in hand.  The central banking authority uses the CRR to pull out excess money from the economy or put in more money into the economy.

Commercial banks are always required to maintain with the central monetary authority an average cash balance, the amount of which shall not be less than a certain percentage (say 4-5%) of their total demand and time Liabilities.

Repo(ssession) rate or discount rate is the rate at which the central bank of a country lends money to commercial banks. It is an instrument of monetary policy. Whenever banks have any shortage of funds they can borrow from the central bank. A reduction in the repo(ssession) rate helps banks to get money at a cheaper rate and vice versa. 

Reverse Repo(ssession) rate is the rate is at which the central monetary authority of a country borrows money from commercial banks, or the rate at which the central monetary authority pays to commercial banks for keeping surplus funds with it (above CRR-determined amount).

An increase in reverse repo. rate can prompt banks to deposit more funds with the central bank to earn higher returns on idle cash. It is also a tool, which can be used by the central bank to pull out excess money from the banking system or the country's economy as a whole.
Repo(ssession) rate, reverse repo(ssession) rate and Cash Reserve Ratio are all determined by the central monetary authority of a country.
 
When the growth rate of an economy slows down abnormally, it is an indication there is possible dearth of liquid capital. Along with this there may be a great decrease in optimism among investors. This affects the supply side of the economy due to lower and lower rates of production of goods and services. As a resultant effect inflation sets in. Too much money starts chasing too few goods causing a spiraling price rise. Dearth or scarcity of capital may be caused by sinking of capital in assets, which are absolutely non-performing, like gold and silver, or are non-performing in relation to the current economic scenario. Less optimism increases the dampening effect. An acute imbalance of excess government expenditure over government income, including foreign trade (balance of payments) deficits (imports exceeding exports) destabilizes the economy further and pushes it towards possible stagflation, which is stagnation (abnormally slow growth rate) and inflation (price rise) combined.

But the peculiar aspect of this whole depressing economic affair might have been initially caused by an excess demand for goods and services created in one or more sectors of the economy, causing excess income in the hands of people working in those sectors. This excess income, mainly due to over-caution, gets invested and consequently sunk in relatively secured non-performing assets, causing a drain out of effective, production-oriented capital from the economy.

Under such circumstances, an effective combination of monetary (short term measure) and fiscal policy (long term measure) has to be adopted by the government to gear up the economic growth rate and bring down the rate of price rise.