Tuesday, September 13, 2011

Future of World Economies – Green Thoughts

The developed economies of the world, reeling under debt and rising unemployment, have been facing severe economic pressures ever since the crisis began in 2008.

One may wonder as to where the future of developed economies is heading. The developed economies still lead the world in high technology manufacture such as such as computer chips, aircraft etc. They will probably continue to do so for several more decades. However for the rest of manufacturing, ranging from undergarments to motorcars, it appears that high standards of living coupled with high wages in developed countries makes much of manufacturing uncompetitive in a globally trading world. It is partly for this reason that economies of the BRIC countries are growing rapidly while developed economies stagnate or struggle with insignificant growth.

The largest of developed economies, the US, that is largely consumer driven hopes to grow once again if consumer demand increases. However a sustainable future for mankind does not lie in increasing consumption but rather reducing consumption if it is already excessive and far above world averages. This is even more valid in a world where basic resources such as fossil fuels are rapidly being exhausted and consequently becoming more expensive with time. It is true that other sources of energy such as wind and solar will eventually replace traditional sources of energy but they are unlikely to be as cheap as the fossil fuels prepared for free by Mother Earth. The developed economies like USA must also consider that if consumption and retail sales do begin to rise again this may not be a win-win situation if the increased demand is catered to by trade deficits. Indeed that is what is likely to happen.

The other route suggested by economists of old is of stimulating growth through large government spending. This too appears to be a losing game in the present scenario if spending leads to more debt by governments already overburdened by debt. In future, it is becoming increasingly clear that democratic governments would have to be obliged to live within their means. However in the meantime the debt exists and one has to live and deal with it and the accompanying pain. Large stimuli are provided in the hope that they will eventually lead to rising demand and restore the economy on a path of growth fuelled by ever rising consumption. However this may not happen anymore and one may find that after the stimulus is exhausted the economy sinks once again. Indeed some such thing may have already happened with the earlier trillion-dollar stimulus of the American economy.

There exist some basic danger points in western economies that can trigger a recession once again any time in the future. One is government debt that has already been mentioned. Future generations must learn the lesson now and prevent governments from undertaking that route again. It is likely that they would have to add such safeguards into their constitutions because democratic government decisions are partly based on winning the next election. If such short-term goals are partly met by incurring a debt, left for the future generations to pay, then a time may come that the future debt becomes much too large to handle. Indeed it has already happened in most developed economies, most obviously in Greece, and a little less obviously yet in other developed countries Greece has lead the western civilization for two and half millennia followed by Rome.

A second danger point, that was the trigger for the most recent economic recession, is the behavior of private corporations such as banks. The total emoluments of the highest paid executives of such banks comprising of salary, bonus perks and benefits are such that they are several times the emoluments of the lowest paid employees of the same organization. The justification for that is that if these corporations make huge profits, the senior executives deserve a share. Does it have anything to do with greed? Senior executives need to eat better perhaps! A second rationale is that if they did not do it, a flight of talent will take place. Both these arguments are suspect. First if a corporation makes a huge profit then all its employees are responsible and not just the chief. What is the justification for the salary being one hundred times or more? Is ten times not enough?

What if there was a law in a country that dictated that the highest emolument of any employees might not be more than ten times that of the lowest paid employee? In that case, the senior management of the organization in direct or indirect collusion with the board members (The Goldman Sachs directors for example draw millions in compensation) would not be able to draw such high salaries, bonuses and perks. The profits would then have to be shared equitably with all employees or shareholders instead. Therefore such a law is indeed fair and worth considering. What about the flight of talent? That is so much baloney to the mind of this author. There are hundreds of others, even some unemployed, that are more talented than the CEO’s of many such high paying corporations. Placed in that position they would perform just as well. No human is hundred times more talented than other humans unless that other human is an idiot.

A senior executive is given a large bonus if his company makes a large profit. The situation becomes insidious if the large profit is made by gambling as in investment banking. Larger the risk, larger the profits! Gambling is legal in many countries. Gambling with other people’s money is legal in banks. If a large profit is made, the Board and the executives pocket the bonus. If it results in loss, the bank has still enough reserves for them to draw a smaller bonus and move on. Governments complained about this practice soon after the recession in 2008 and a little after pushed the matter under the carpet. The only government that has taken some steps in trying to insulate the public from the potential loss appears to be the UK government. They have developed a plan to implement albeit after a decade or so – long after the Greek and other crisis have eaten some more banks and the savings and pension funds of more of the public. The risk continues and if the recession and current unemployment was not sufficient for governments to act, perhaps they never will, at least not in our generation.

Returning back to our speculation on the future of developed or western economies it can be appreciated that the situation is somewhat different in the old and the new world. Countries like USA, Australia and Canada have huge land resources and fresh water sources as compared to the old world. A possibility exists that future Jobs in countries like USA would come from small-scale intensive agriculture. This intensive agriculture consists of small farms of about ten acre size that involve in labor intensive agriculture practices such as diary, horticulture, poultry, cheese making etc. With an increasing population around the world, there is a world demand for food. Thus, whereas countries like china or India can produce underwear or even a motorcar cheaply they are unable to produce enough food to control food prices within their countries in a rising demand scenario. Certainly this sort of future growth would involve a major shift in attitudes and practices in a country like USA, but it appears to be a feasible path. Such a solution however may not be available to Europe and Japan where land resources are limited and whatever exists is already being used intensively. Perhaps then a cycle of history will repeat that swept from Greece to Rome to Europe and the New World over a period of two and a half millennia.


ashok said...

John Myste had questioned the inclusion of "a return to land" in an earlier post on the economy. Therefore I wrote this one to elaborate more of my thoughts on that.

ashok said...

A day after I posted this, BBC reported that an investment banker has lost two billion dollars of UBS funds in trade. It appears that there has been some response from the public that they may withdraw their funds from UBS. There has probably been no response from our elected representatives in the various countries in which we live. They should not expect it just as those who withdraw money from UBS should not expect that another bank shall treat their money any better if it too deals in investment banking.

ashok said...

some Days after i wrote this blogpsost the IMF chief came out a couple od days ago and yesterday in a press conference saying many of the same things. Her press conference also addressed the matter of trade deficits posted in an earlier post.

Understandably the opinion of the IMF chief was based on much world economic data and analysis. Mine was not. It was based on brief sketches from the news and an intutive undestanding of human progress and history.