The Case:
Before
the formulation of World Trade Organization (WTO), there were a lot of
barriers in international trade throughout the world. However these
barriers seem to be abolished to some extent as member countries of the
WTO exceed the figure of 150. All the member countries including
Pakistan have agreed and accepted the agreement and principles of WTO
like Non-Discrimination, Reciprocity, Binding and Enforceable
Commitments and Transparency. According to the World Bank, a lot of
fruits have been achieved through this globalization like poverty and
income disparity reduction. While considering the case of Pakistan, it
seems that Pakistanhas not achieved much from the globalization. The
poverty condition has been worsening as 65 percent of the people are
living below the one dollar poverty line.
Requirements:
Being an economist, analyze the factors which are causing economic slowdown rather than a boost in result of globalization.
Solution:
Possible Causes for Economic Slow-down and Recession
Recessions are often caused by a lack in effective
demand since people try to accumulate money (new savings are then
possibly higher than investments).
When people
perceive that money is becoming scarce or may become scarce in the
future, they will reduce spending and increase savings, lowering demand.
When inflation in a country is higher than in other countries, the
currency becomes more expensive, exports become more expensive and
exports will decline or grow slower, lowering the economic growth.
When financial bubbles burst and asset prices decline, investment and
consumption decline and thus overall demand declines.
In case enterprises or consumers first need to reduce a debt burden that
has become too high relative to their assets holdings due to fallen
asset prices, demand will be pressed down till the debt-asset ratio is
back on an acceptable level.
An external factor as aging demographics may cause a higher savings and lower investment environment.
External shocks to the economy that increase prices considerably (like
increase in oil prices) could lower the demand and put in the economy in
recession.
A growth recession happens when the
capacity in the economy expands faster than that demand and the economy
grow, resulting in over-capacity and possibly deflation.
When an economy is facing a period with lesser (growth in) demand due
to demographics, nervousness about the future or lack of attractive
innovation, and demand cannot be stimulated with lower interest rates,
the economy is in a ‘liquidity trap”.
Economic Growth
Emerging economies that start to export more
manufactured goods and services create higher paying jobs; reduce the
pressure on land, increase rural wages, lower unemployment, increase
wages further and thus increasing their overall prosperity.
Increasing foreign investment in a country increases the demand for
that currency and increases the value of that currency.
Increasing demand increases import.
An overheating economy with fast increasing investments, money supply
and credits can lead to higher wages and costs, more expensive exports,
lower exports, higher imports, and higher currency (trade) deficits.
Technological development and innovation increase productivity. This
drives investment and increases profits, pushing growth, but also
limiting inflation.
An external impulse like increasing exports could get a country out of a slump.
