Future Economic Stagnation for Rich Countries - Essay Example

Future Economic Stagnation for Rich Countries Introduction There used to be a time when there existed a few rich countries who dominated the world economy and their contribution to the global GDP was around two-third. This means that the rest of the world was under developed and had a falling economy rate. Later, the world faced some crisis which shook the rich countries’ economy and at the same time helped the developing countries to grow at a high pace. This led to the possibility of economic stagnation of the rich countries in near future. Discussion European countries, America, Japan and some other nations once used to rule the global economy. These rich countries had a growing economic structure which had created a huge gap between the living standards of these countries and of developing countries. This gap proved to be the differentiating factor between the developed and third-world countries. But in the current scenario, globalization has worked in favor of developing economies. Several developing countries, majorly Asian economies, are growing at such a high pace that the gap between the rich and the developing countries has shortened big time. Forecast For Future Economic Stagnation The direction in which the current economic situation is heading towards, it can be foreseen that the West may face an economic stagnation due to the emergence of the developing economies. Reasons This forecast depends upon the following three major reasons: Recent Western Recession Insufficient Supply Slow Recovery from Financial Crisis Recent Western Recession The first reason is the economic recession of 2008-09. This recession proved to be the fiercest for the rich countries as it left no such ways to enable them to recover subsequently. Consequently, a huge degree of unemployment followed this recession and the economies got shaken all over. Presently, some economies have started growing again but the pace with which they are recovering is too slow. Insufficient Supply The second reason that is considered as the base of the forecasting of economic stagnation is the diminishing rate of supply. This has a chain effect as the trend rate on which an economy runs and gets measured and is determined by the level of demand, is dependent on the workers’ supply and their productivity. Further, this productivity is dependent on the rate of capital investment and the speed of improvement. The main thing that is to be worried about is the diminishing rate of supply of workers. In near future, the number of workers who would cross their working-age limit will rise drastically and would possibly occur in Europe, Japan and America, majorly. All these factors have set a limit to the future growth of an economy, making it hard for them to even service their public debts. This will continue to occur unless a major change like enhancing the labor force if a greater number of the capable people start to work or larger number of immigrants is permitted to get into the country and serve as a labor, or the efficiency of the workers get boosted up. This slowing down of the economic growth can be eased by rapid production but does not seem to occur in the coming time. This slow productivity growth did exist before the financial crisis as well but it got paced up after getting hit by the crisis. Slow Recovery from Financial Crisis The third reason which is alarming for the economies is the weak recovery of the economies from the financial crisis. The potential and skilled workers would lose their skills and motivation when they face a long span being unemployed. This long period would deter their morale and capabilities which in long-run would result in the waste of potential labor. According to some economists who possess a positive approach, the past experience of America’s recession proved that the crises do not have an impact that could last for too long. A time comes when an economy comes out of the crisis and hits back amazingly. Therefore, there is a possibility that a more effective process is lined up following this high unemployment. However, a large number of economists think that this crisis has already caused some damage to the economies of some rich countries. According to an analysis by OECD, around 3% potential output of rich economies would be knocked down, out of which many of them have already been hit. Taking the example of Japan during the last two decades, it can be concluded that the more the duration the crisis sustains, causing demand to fall, the more intense damage would it make. The productivity of Japan fell during the 1990s after getting hit by the economic crash. Later, less potential workers with the working age were left, that long with the poor policies, caused the economy to fail to recover and faced the deflation, resulting in the continuous slow supply and weak demand. Recommendations for Avoiding the Future Economic Stagnation Improving Short-Term Demand and Efficient Supply In order to recover from the crises and to grow rapidly, the rich countries must start favoring short-term demand and improving long-term supply. But surprisingly, these two strategies are not considered as compliments but alternatives. No country can recover from the financial crises in a short time. It needs to tackle the several effects that have been made by the crises. A proper planning is required to eliminate the effects of crises and to start growing again. Boosting Medium-Term Growth The economists of Europe have emphasized more on improving the expansion and medium-term growth that favors such improvements which includes the flexibility of the labor markets, increase in production activities and decrease in the number of pensioners such that the drop-out labor can work back into the market to provide an added stimulus. Role of Government Along with this, the governments should also put their effort and think more logically regarding the ways of supporting the demand and making better the supply which can in return increase the productivity. Conclusion The reasons discussed above prove that many developing countries which did not have to face the severe impacts of the crises due to their already poor economy are developing at a rapid pace and the difference between the rich and developing economies is getting shorter. On the other hand the rich economies are likely to face economic stagnation as they would tend to recover from the crises and get back on the track that would lead them again to a successful economy. Rapid growth is not an easy target to achieve in no time as it will not impede the ruthless swing of economic stability to the developing world. The developing countries will eventually come to lead the world economy due to the fact that they are more populated than the rich ones. But the question of anticipated economic stagnation depends on the pace of progression, the rich countries follow. References “How to grow”, The Economist, retrieved on Oct. 7th 2010, http://www.economist.com/node/17173886?story_id=17173886  Grossman, Gene M. and Elhanan Helpman, (2008), Innovation and Growth in the Global Economy. Cambridge, Mass.: MIT Press, pp. 59-71. Acemoglu D. and F. Zilibotti, (2006), "Productivity Differences," Quarterly Journal of Economics, pp. 125-139. Rebelo, Sergio. (2005). “Long Run Policy Analysis and Long Run Growth,” Journal Of Political Economy, 500-521. Read More