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Taking account of environmental costs





Case 1

Global Economics

Economic problems on a grand scale

‘Globalisation’ has become a fashionable term in recent years. But what does it mean in the context of economics? It refers to the integration and interdependence of the world economy. This interdependence has increased dramatically in the past 40 years and has had a profound effect on national economies and the ability – or inability – of their governments to tackle economic problems.

Globalisation has a number of dimensions:

• Global transport and communications have improved, especially with growth in air transport and the information technology revolution. Between 1930 and 2007, the cost of a three-minute telephone call from London to New York fell from $244.65 to $0.15.

• International trade and movements of finance have increased, as government restrictions on imports and on the flow of money and capital abroad have diminished (or in many cases have been abolished). Between 1970 and 2007, well over 100 countries eliminated foreign exchange controls. These countries are now free to exchange their currency into others when they wish to buy imports.

• Giant ‘multinational’ companies, such as General Motors, Sony, GlaxoSmithKline, Nestlé and McDonald’s, have expanded their operations to more and more countries. In 2006, the stock of global foreign capital invested in industries in other countries was valued at over $11.5 trillion ($11,500,000 million). It grew at a staggering average of 12 per cent a year between 1990 and 2006.

• Consumer tastes for a whole range of products from trainers, hamburgers, soft drinks and computer games to spectator sports and television soaps have become more similar.

Just as we can look at macroeconomic and microeconomic issues for a particular economy, so too we can look at these issues in the context of the global economy.

 

Global macroeconomics

What causes the global economy to grow? Why does this growth tend to fluctuate? Why was it that most countries experienced rapid economic growth in the late 1980s, often with accelerating inflation, and yet a recession in the early 1990s? Clearly there are international forces at work here.



The point is that countries are interdependent, especially those countries within a particular region, such as the European Union, North America or East Asia. Thus when Thailand and Indonesia experienced a financial and banking crisis in 1997 and a resulting recession, the effects spread rapidly around the region. By early 1998, Japan, South Korea and other East Asian economies were also experiencing a large economic downturn. But then the effects spread beyond the region. By mid-1998, the Russian economy was in virtual ‘free-fall’ as international investors pulled out, and by the autumn countries in Latin America had come under attack. Leaders of the seven most powerful industrial nations (the G7 – the USA, Japan, Germany, France, Italy, the UK and Canada) were anxiously seeking policies to deal with a possible global recession as the ‘Asian contagion’ spread.

If solutions to global problems are to be found, then do they require global action? Will the uncoordinated actions of individual governments be sufficient?

These are issues we shall address in Chapters 12 and 13 of the textbook.

 

Global microeconomics

Just as we can study the what, how and for whom questions within a country, so we can study them within the global economy. How will output (what), techniques (how) and incomes (for whom) differ between countries? Why will a poor African country produce a large proportion of primary products (food and raw materials) using relatively labour-intensive techniques, whereas countries in western Europe produce a large proportion of manufactured products and services, using technology that is often sophisticated and highly automated. And why does the degree of inequality within countries differ from one country to another? Why, for example, did the poorest 40 per cent of the population receive 24 per cent of national income in both Norway and Finland in the early 2000s, but only 8 per cent in Brazil?



Then there is the question of distribution between countries. In the richest 5 countries of the world, the average person’s income can buy the equivalent of $40 000 worth of goods and services. In the poorest 5 countries, it can buy only $600 worth. This concentration of buying power in the rich countries then affects what goods the world produces. Clearly, world production will be geared towards satisfying consumer demands in the rich countries.

Can international policies – for example, policies to reduce barriers to international trade – lead to greater equality in income distribution? How important are multinational organisations, such as manufacturing companies and banks, in determining the pattern of output? Just how much are a country’s microeconomic decisions determined by its citizens? These too are big issues and we will be examining them at various points throughout the book.

 

Question What dangers do you see from increasing globalisation in the world economy?

Case 2

Green Economics

Taking account of environmental costs

People have become concerned by a number of environmental problems in recent years. These include:

• Acid rain. This is caused by sulphur and nitrogen emissions from power stations, industry and cars. It has been blamed for 'Walsterben' (forest death) in Central Europe and the contamination of many lakes and streams, with the death of fish and plant life.

• The greenhouse effect. This is caused by carbon dioxide and other gases emitted again by power stations, various industries and cars. The fear is that these gases will cause a heating of the Earth's atmosphere. This will lead to climatic changes which will affect food production. It will also lead to a raising of sea levels and flooding as part of the polar ice caps melts.

• Depletion of the ozone layer. This is caused by the use of CFC gases in aerosols, refrigerators and the manufacture of polystyrene foam. The ozone layer protects us from harmful ultra-violet radiation from the sun. A depletion of this layer could lead to increased skin cancer.

• Nuclear radiation. The fear is that accidents or sabotage at nuclear power stations could cause dangerous releases of radiation. The disposal of nuclear waste is another environmental problem.

• Land and river pollution. The tipping of toxic waste into the ground or into rivers can cause long-term environmental damage. Soils can be poisoned; rivers and seas can become polluted. It is not just industry that is to blame here. Sewage pollutes rivers and seas. Nitrogen run-off and slurry from farming are also major pollutants.



It was not until the late 1960s and early 1970s that the 'environment' became more firmly part of the political agenda in most European countries. It was largely a response to the spectacular growth of not only the Western economies, but also the continued and extensive industrialisation of the Eastern bloc countries such as Poland and the USSR.

'Green groups' sprang up round the world. These groups realised that if economic growth was to be sustained then environmental damage could grow at an alarming rate.

The problems such groups have encountered in attempting to change attitudes and economic strategies have been immense. Certain governments have been reluctant to enter international environmental agreements perceiving them to be against their national interest. The cut in sulphur dioxide emissions from power stations is one such example.

The costs of pollution abatement are high, especially in the short run. As long as these short-run costs are greater than the perceived costs of continuing pollution, then industry and government will continue to incur them. The consequences of this, however, could be devastating and far more costly in the long run, in both a financial and an environmental sense.

What can economists (see HYPERLINK "http://www.greeneconomics.net/"also, and HYPERLINK "http://www.progress.org/green/" also) say about the causes of these environmental problems? There are three common features of these problems:

Ignorance. It is often not for many years that the nature and causes of environmental damage are realised. Take the case of aerosols. It was not until the 1980s that scientists connected their use to ozone depletion.

The polluters do not pay. The costs of pollution are rarely paid by the polluters. Economists call such costs external costs. Because polluters rarely pay to clean up their pollution or compensate those who suffer, they frequently ignore the problem.

Present gains for future costs. The environmental costs of industrialisation often build up slowly and do not become critical for many years. The benefits of industrialisation, however, are more immediate. Thus both governments, consumers and industry are frequently prepared to continue with various practices and leave future generations to worry about their environmental consequences. The problem then is a reflection of the importance people attach to the present relative to the future.

Environmentalists recognise these problems and try through the political process and various pressure groups, such as Friends of the Earth and Greenpeace, to reduce people's ignorance and to change their attitudes.

They stress the need for clean technologies, for environmentally sound growth and for greater responsibility by industry, consumers and government alike. Policies, they argue, should prevent problems occurring and not merely be a reaction to them once they are nearing crisis point. If growth is to be sustainable into the long term, with a real increase in the quality of life, then current growth must not be at the expense of the environment.

 

Question Should all polluting activities be banned? Could pollution ever be justified? Explain your answer.

 

Case 3

 








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