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Sustainability of World Economy: Talk # 1

Recently the President of Kazakhstan, Nursultan Nazarbayev launched a new economic policy “Nurly Zhol”, which has an aim to lead the nation’s course in conditions of continuing economic crisis. To remind, the recent global economic crisis in its scope is the deepest since the great depression of the early 30-ies of the last century. It was first caused by systematic crisis of financial system; soon it spread around the whole world and almost all sectors of world economy.

 

In this series of articles, I want to discuss some aspects of Sustainability of World Economy. First, to warm up, let’s briefly see what are the #8 Factors of Economic Crisis?

#1 Innovation

The decline in production was caused by the same factors that preceded its dynamic growth: innovation and globalization. Whereas innovation affects the qualitative parameters of this paradox, the globalization does it for quantitative side. The economic rise prior to crisis was the most prolonged and intense: innovation was a base for the efficiency of production. Rapid spread of new technologies bring not only innovations to businesses, but it also formed many new types of relationships in the world economy. Increase in labor productivity ensured simultaneous growth of profits and real income in many countries. It allowed to reduce the negative impact of rising commodity prices, especially of oil, and anchored the inflation processes. The consequences of more rational use of natural resources operated in the same way.

#2 Multiplier effect

The rise covered all the countries and was one of the most synchronized in the history of business cycles. During the rise many things changed noticeably the configuration of economy. A number of developing countries became the beneficiaries of rise due to combination of globalization and innovative development. The developing countries have strengthened their position significantly, they became an engine of growth, and the gap between developing and the developed decreased a lot. As for the developing countries, such as BRICs, the rapid development of production largely relied on high savings rate, and, the huge influx of labor. Moreover, net investments played a significant role in enhancing production as a net inflow of capital from developed economies, bringing new approaches of economic management and research and development centers as well. The essence of the economic dimension of globalization is, firstly, in a sharp, even explosive, increasing role of international component in all factors, links and mechanisms. There is an intensive strengthening of international economic linkages and interdependencies of different countries and regions of the world.

#3 Financial transformation

Developing countries became active in the international flows of foreign direct investment (FDI), and not only as importers, but also as exporters of capital. The cases of acquiring control over western corporations increased so far. Consequently, the center of gravity of global financing began to move from the “Global West” to “Global East”, magnifying capital inflows from the rapidly developing countries and countries with economies in transition. The competitive advantages of highly innovative and technological potential, patterns of huge investments in human capital, power of the multinational corporations nowadays set trends in global course. European economic transformation demonstrated a successful and an unprecedented case, where intensive development and integration processes took place. FDIs does not simply act as a source of funds, but also refer to the transfer of new technologies, the introduction of a subsidiary companies, modern management techniques and means of distribution.

#4 Economic components

The circulation of services developed at a faster rate relative to the material production sectors, contributing to structural change of economic system by the growing service component. The non-producing sector has become the core of post-industrial economy, causing a number of fruitful effects. To illustrate, investments in human capital affected the growing importance of intellectual sectors – education, health and science, greatly expanded the boundaries of the market and competition in services, encouraging cross-border expansion. The services, such as marketing, engineering, consulting, financial and other services, are more actively coming out in international traffic. In recent years, a fast-growing form of international economic relations, as an offshore outsourcing services – the transfer of certain functions to foreign companies, by the commercial organizations.

#5 Financial hypertrophy

One of the most important features of world economic development of last time – is financialization, the hyperextension of the financial and credit sphere, the rapid development of the stock market. The securities market has created its own, artificial reality, which is increasingly detached from the real economy. Financial transactions increasingly dissociated themselves from commodity production and trade and develop autonomously, according to some autonomous dynamics and rules. In this way the financial sector increased its dominance over the rest of economic activities in general. Financialization is a process of wealth accumulation, in which profits are made not through trade or production of goods, but through speculations on financial channels. Characteristically, nowadays the prices of raw materials are mainly formed in the financial markets, and are less dependent on the actions of their manufacturers.

6# New entrants

The rapid development of financial markets has determined the flourishing financial institutions. Banks, especially the Investment Banks, have become major economic players whose influence noticeably exceeded their formal role as mediators in the capital markets. Since the beginning of this decade, there was a boom in the hedge fund industry – Investment Funds whose operations are characterized by a high degree of risk and aggressiveness, as well as Private Equity Funds.

7# M&As, TNCs and SWF

Business consolidation processes take place throughout the world and cover all areas of economic activity. As a result the configuration of the corporate system has undergone significant changes, FDIs take a form of cross-border Mergers and Acquisitions, the so-called mega-deal Trans-National Corporations. Another new phenomenon of the global economy became Sovereign Wealth Funds – organizations that operate in international capital markets with budget funds of one or several developing countries and the governments monitoring them.

8# Polycentrism

Another form of internationalization – regionalization – is now developing along with globalization. It refers to the organization of production and the market in a specific geographical area. On the one hand, regionalization is a definite step towards globalization – it is economic polycentrism. On the other – the special interests of participants in the regional associations weaken the control mechanisms of bigger actors, such as World Bank. Regionalization of the world economy and liberalization of foreign economic relations significantly increased openness of national economies – their involvement in the international division of labor; this is how economic borders become increasingly transparent. On the other hand, the institutional, legal and technological barriers that separate national economies are ready to collapse, since now they are having less regulating power.

This was the brief summary of pre-history of the crisis, the global conditions in which economy was hit globally. Next time we will talk more about different aspects of world economy as is, so let’s Begin with the End in Mind.

 

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