Responding to the global economic crisis can lead to a more sustainable economy - Essay Example

? Responding to the global economic crisis can lead to a more sustainable economy Introduction An economic crisis has swept over all the economies around the world between 2007 and 2009. The crisis had emerged due to the deregulation of financial institutions and banks in the developed countries such as the United States and the European nations. Financial break down occurred in these countries towards the middle of 2007 and intensified in the next year. The crisis had changed the economic working in most of these nations and led to stagnation of their economic growth (Obstfeld, Cho, and Mason 2012, 1). Bankruptcy filing by some of the largest financial institutions in the world, such as the Lehman Brothers and the Northern Rock, caused a steep collapse in the financial structure in the country and has triggered a global panic. It has disrupted the international trade pattern. The countries that take part in international trade are interlinked to one another through trade relations. Therefore the impact of recession created in the advanced countries owing to their economic and financial failure, have also spread to the other developing nations. This has brought in a recessionary pressure in the whole world (Takagi 2009). Financial crisis and recession in 2007 The twenty first century has been notified as “the era of great modernization”. However, these courses of events have caused concern about the economic growth pattern in the countries around the world. Depression in the business cycle in these cases has extended for more than four quarters (which is considered the maximum period of time for which an economy might stay in recession) (Arcega 2013). The future of the global economy is under lots of debates and discussion and experts opine that imbalances in the international trade pattern and overheating of the global economic structure and pose considerable importance on the economic future of all the countries. Hence, it is implied that the governments in these countries are required to take policy initiatives in response to this financial downturn in order to bring back stability in their economies (Obstfeld, Cho and Mason 2012, 2). In this context it has to be mentioned that the economic crunch has cast influence on the issue of sustainable development. The years prior to the financial crisis had witnessed good growth rate in the United States in terms of GDP. The GDP is commonly used as a measure of economic growth. The ideal growth rate of GDP is that particular rate of growth of the total national output, which is sustainable (Amadeo 2013). Macroeconomic policies therefore bear close connotation to sustainability issues (Eichengreen 2010). The financial crisis of 2007 has been compared by several experts to a bug that has eroded the hard earned benefits of good economic growth achieved by these economies prior to 2007. However, the more important question facing researchers and policy makers is that whether these development goals have been consistent with the concept of sustainable development. Sustainability and sustainable development The Federal government of the United States has applied the neo classical economic theory for attaining deep understanding of the economic issues occurring in these countries and curving out solutions from the fundamentals of this theory. The neo classical economic theory involves the dual notion of allocation of resources in the free market from within the resource endowment of the economy and the price system followed in such a market economy (Endres 2002, 6). Concept of sustainability Sustainability refers to the constraints put on the inter-temporal distribution of available resources that are used by the mankind for fulfillment of their current desires and requirements (Howarth 2010, 448). There are various notions about the concept of sustainability and these concepts are subjected to the economical, geographical, political, social and cultural precincts of each particular nation. Therefore, there is no strict and bounded definition of sustainability. ‘Sustainable development is the process of development in which not only the objectives of growth satisfies the underlying concept of sustainability, but also, the pattern of development adopted for achieving those objectives is compatible with sustainability condition (Parr and Zaretsky 2010, 8). The concept of sustainable development has been emphasized upon by researchers and environmentalists for a long time, but it has caught attention of policy makers towards the end of 1987 (Mulder and Bergh 2001, 80). It covers a wide vicinity of understanding regarding the development path of nations around the world. These nations are at different stages of development and therefore the policy prescriptions for these different countries would naturally differ. However, in general, all these policies embrace a common objective. Resource utilization by current generation should be such that it satisfies the necessities of this generation, but does not over-indulge in consumption of resources that might hurt the interest of the future generation. After the concept of sustainability was incorporated in the political agenda of different nations or the international organizations, economists got the opportunity to make higher levels of researches on the interaction happening between the economy and the ecology (Mulder and Bergh 2001, 81). In this set up, development process adopted by economies would ensure that resources are allocated for various economic activities at present in a vigilant way. This would help in preserving enough resources for the generations to come in future so that they can fulfill their own interests (Morse 2010, 17). This is done with the aim of helping the future generations to live a good standard of life. However, while following the neo classical economics, government and economists often ignores the fact that human activities involve three separate interfaces, namely, economy, society and environment. Interaction between these interfaces provides a wide variety of opportunities that profit oriented producers might utilize to maximize profit objectives of their business organizations. In most of these cases, such profit maximization becomes an optimization exercise maintaining the hard core rules of economics but ignoring the basic notion of sustainability. This has been the theoretical reason behind the crumbling of the economic structures of some of the most advanced economies of the world. The crisis that embarked on the global financial system is an outcome of this phenomenon. Responding to global economic crisis: Re-thinking conventional methods of production According to some experts, if the governments can respond to the current global economic crisis with appropriateness, it might help in the creation of a sustainable global economy powered by stable economic and financial structures. At present, given the fragile economic condition, it requires a vast rethinking of the economic as well as social policies guiding these countries to develop a new process of development that would be sustainable (Global Financial Development Report 2012). There has already been excessive and wasteful consumption of resources by the advanced industrialized nations. The reserve of natural resources in the world is limited. If these resources are utilized to maximize output following the short run production function, it would definitively allow the economy to reach the optimum level of output in the current production cycle and also in the production cycles to come in near future. But policy makers have to consider whether, the economy could produce this same amount of output using lesser quantities of natural resources. This requires rethinking of the methods of production and development of new production technologies. International economic relations among countries are influenced by the level of sustainability of their ecosystems (UN Documents 2013). In this global village economic relations among nations are the underpinnings of national as well as international economic activities. This implies that the unsustainable conditions and inconsistent issues prevailing in some countries would affect the economic activities of the other economic partners of those countries. With the collapse of the banking sector, the financial crisis had initially hit the developed countries of the West. In a very short period of time it became “an economic-trade crisis” (Heyzer 2013) in the countries in the Pacific region and Asia. There has been contraction in the global trade in goods and services. The global economic crisis requires a holistic approach to development. Responsive actions by the countries in a scattered manner would not lead to the desired result. Economists are more concerned about understanding the seriousness of problems related to the environment from economic point of view. Human activities are based on the resources obtained from nature and are therefore causing harm to the environment. In the conventional neoclassical theory, producers (firms) and consumers (households) are considered ‘economic agents’ and cost-benefit analyses are done by comparing the gains achieved by both sides (Soderbaum 2008, 19). However, it is difficult to directly measure the effects of these activities on the environment. Often the proxy variables considered for calculating the effects on environment are not appropriate and do not reflect the extent of impact transparently. If the development practices are unsustainable it would lead to brittle relationships. This would not serve the goal of creating a sustainable global economy. This is well illustrated by the financial break down of the US economy. A number of factors led to this event and blame is put on financial institutions, credit agencies, government, regulators, housing policies and lastly consumers. Unrestricted credit facilities and manipulation of financial statements are some of the unethical business practices that have been identified during investigation of the financial crisis of 2007 (Get the Facts on the Sub-Prime Mortgage Meltdown 2007). Since bubbles were created in the housing market, it was anticipated that these bubbles would burst. Similar situation also occurred in the European countries. Investment in the real estate market increased by more than the economy could support. Credit faculties were provided relentlessly and mortgage banks provided loans without verifying the credibility of the borrowers. Hence towards the end of 2007 these financial institutions were unable to recover the loans provided by them. A number of major banks in filed for bankruptcy which marked the beginning of the financial breakdown in the economy. Financial crunch occurring in these countries did not remain restrained within the geographic boundaries of these economies. The financial breakdown took the shape of crisis and pushed the economy into recession. While the American economy was dipped into recession, other trade partners of the USA also faced the effects of recession. Since the USA is a big country in terms of its participation in trade in a number of commodities and services in the international market, fall in aggregate demand in the USA potentially affected countries that are exporters to the USA. The agricultural countries are the primarily producers of raw materials and they export raw materials to the developed nations. Although export of raw materials form a significant part in developing economies, they face difficulties in managing their environments and their natural resources. This happens due to their economic and technological backwardness and also because of the pressure that they are subjected to in the international market. They face adverse price situations and instability in the international front. Inefficient management of resources hampers efforts towards developing sustained production methods. As stated earlier, sustainable use of resources require reconsideration of the conventional production technologies and involve higher levels of investment into research and development (R&D). Many of the developing countries and some of the developed countries are facing a weak financial system after recession crept in. They are faced with problems of low economic productivity, low national income and high debt burden. Due to these factors investment in R&D by the medium and big companies has shrunk. The governments are also cutting down public spending in order to reduce the amount of national and international debt. Due to fall in aggregate demand (as an outcome of recession) the expert sector of the countries has faced reduced income. There have been lower levels of investment which has slackened the intensity of capital inflow into the developing countries. Thus, the developing countries are affected in the aftermath of the economic recession that originally occurred in the developed countries. Conclusion: Need for sustainable development All the countries are therefore induced to make more rigorous utilization of the resource base available to them both nationally and internationally. The primary objective is to increase level of production in the economy and achieve higher GDP growth rate. Now, if resources are used in reckless manner, it would violate the conditions of sustainability. This would further lead to the establishment of unsustainable relations of production (Savona, Citron and Olden 2011, 45). The economic relationships shared among the countries would degrade further. Hence, it is important for governments to take care that, production choices made by producers in their economies are sustainable. This objective might be achieved by bringing shifts in the consumption pattern at the individual level, educating the population about the unsustainable production practices and discouraging them from consuming such products or services, increasing surveillance over the activities of the financial institution in the economy, making changes in the development plans for the agricultural sector and making policies about resource allocation and consumption (Heyzer 2013). As the economies are moving on the path of development, sustainable development theory is increasingly being intimidated. Development is leading to the consumption of more resources which implies that fewer amount of resources would be available for use in future. Hence it is a threat and also a challenge in the sense that going by the theories of sustainability the private producers and the governments are equally responsible for making sustainable choice of resource consumption. Activities made by the different sectors in the economy are found to very costly in terms of the degradation of the environment created by these activities. Impacts of these activities are on the humans are also severe. As can be seen in case of the global financial crisis, there are costs in terms of rise in unemployment and fall in job security, rise in poverty and fall in income level. This preaches that there is severe need for adopting sustainable development policies. Reference List Amadeo, Kimberly. 2013. What Is the Ideal GDP Growth Rate? About. About.com. http://useconomy.about.com/od/grossdomesticproduct/f/Ideal_GDP.htm . Arcega, Mil. 2013. European Recession Now Longer Than 2008 Financial Crisis. VOA News. Voice of America. Accessed 15 July, http://www.voanews.com/content/europe-recession-financial-crisis/1661912.html . Eichengreen, Barry. 2010. Macroeconomic and Financial Policies Before and After the Crisis. Berkeley. University of California. http://emlab.berkeley.edu/~eichengr/macro_finan_policies_8-31-10.pdf. Endres, Anthony. 2002. Neoclassical Microeconomic Theory: The Founding Austrian Vision. London: Rutledge. Get the Facts on the Sub-Prime Mortgage Meltdown. 2007. FOX News. FOX News Network. http://www.foxnews.com/story/2007/03/19/get-facts-on-sub-prime-mortgage-meltdown/ . Global Financial Development Report. 2012. World Bank. The World Bank Group. /http://econ.worldbank.org/WBSITE/EXTERNAL/EXTDEC/EXTGLOBALFINREPORT/0,,menuPK:8816192~pagePK:64168176~piPK:64168140~theSitePK:8816097,00.html . Heyzer, Noeleen. 2013. The Impact of the Financial and Economic Crisis on Sustainable Development, Particularly their Social Implications. UNESCAP. United Nations ESCAP. http://www.unescap.org/speeches/impact-financial-and-economic-crisis-sustainable-development-particularly-their-social . Howarth, Richard B. 2010. Defining Sustainability: Special Issue of Land Economics. 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