Trigger 4: How do the external factors and resources affect national economy?

1. What kind of uncontrollable external factors affect the economy?

According to The Global Risk report 2016 there are a few issues that are highly risky for our future, our policies and the economy.  These are as follows: 

Top ten risks in terms of likelihood:

Large scale involuntary migration

Extreme weather events

Failure to stop climate change

Interstate conflicts

Natural catastrophes

Failure of national governance

Unemployment

Data fraud

Water crisis

Illicit trade

Top ten risks in terms of impact:

Failure of climate change mitigation

Weapons of mass destruction

Water crisis

Large scale involuntary migration

Energy price shock

Biodiversity loss

Fiscal prices

Infectious diseases

Asset bubble

Social instability

There are also trends in our society that will inevitably shape our economy: 

• Climate change,

• urbanisation,  

• environmental degradation, 

• growing middle class in rising economies, 

• increased mobility, 

• chronic disease, 

• cyber dependency, 

• aging population, 

• wealth disparity, 

• shift in power, 

• changing governance landscape, 

• nationalism, 

• polarization

Some other issues that are mentioned to effect a nation's economy are: 

• "Consumer confidence. Consumer and business confidence is very important for determining economic growth. If consumers are confident about the future they will be encouraged to borrow and spend. If they are pessimistic they will save and reduce spending.
• Asset prices. Rising house prices create a positive wealth effect. People can re-mortgage against the rising value of their home and this encourages more consumer spending. House prices are an important factor in the UK, because so many people are homeowners.
•  Real wages. Recently, the UK has experienced a situation of falling real wages. Inflation has been higher than nominal wage, causing a decline in real incomes. In this situation, consumers will have to cut back on spending – in particular reducing their purchase of luxury items.
• Value of exchange rate. If the Pound devalued, exports would become more competitive and imports more expensive. This would help to increase demand for domestic goods and services. A depreciation could cause inflation, but in the short term at least it can provide a boost to growth.
• Banking sector. The 2008 Credit crunch showed how influential the banking sector can be in determining investment and growth. If the banks lose money and no longer want to lend, it can make it very difficult for firms and consumers leading to a decline in investment."
  
• Interest rates. Lower interest rates would make borrowing cheaper and should encourage firms to invest and consumers to spend. People with mortgages will have lower monthly mortgage payments so more disposable income to spend. However, 2009-16 we had a period of very low interest rates, but due to low confidence and reluctant bank lending, economic growth was still sluggish."

2.How to effectively use country’s resources?

Resources are scars, each economy needs to make the most of their own resources, and make sure they do it in a sustainable way. 

Robert Constanza has researched ecological economics and has set out guidelines for a sustainable economy. Unfortunate Constanza's views are in my personal opinion a bit naive, for example Sustainability will never be the ultimate goal over GDP growth. 

“Assuring sustainability of ecological economic systems depends on our ability to make local and short-term goals (like local economic growth and private interest) consistent with global and long-term goals (like sustainability and welfare). “

Taboos, trial and error are no longer sufficient to ensure effective and sustainable use of resources.  

Economies need:

-A hierarchy of goals, where sustainability replaces GDP as the ultimate goal

-global ecological economic model

-Price adjustment based on sustainability

-Develop policies that do not lead to a decline in natural capital

 3. How does political environment affect national economy ?

Political systems and economic growth: 

It has long been thought in the Western world, that democracy equals economic growth. This is actually not always the case. Many countries that are less democratic are today growing at an impressive rate (for example China). Studies show, that it is in fact economic freedom, not political freedom, that leads to growth. A liberal economy will increases a nation’s GDP.

“If economic freedom can be established in a poor country, the growth would be encouraged, and the country would eventually tend to become more democratic on its own.” 

The Political system of Democracy is too bureaucratic, effecting nation’s economies, hindering rapid growth. For example the US isstruggling due to it’s political system.

4. What are the consequences of external factors affecting the economy?

Below I have presented all of the top ten things listed above bye the World Economic Forum, and their effects on the economy in short.

Migration: “where migration expands the workforce, aggregate GDP can be expected to grow. However, the situation is less clear when it comes to per capita GDP growth. “ 

-OECD

Extreme weather: “The empirical outcomes suggest that the budgetary impact of extreme weather events ranges between 0.23% and 1.1% of GDP depending on the country group and the measure for extreme weather events” 

-European Central Bank, 2009 

Climate Change: "Taken as a whole, the range of published evidence indicates that the net damage costs of climate change are likely to be significant and to increase over time."

- Intergovernmental Panel on Climate Change 

Interstate conflicts:  “Wars slow the economy. Estimates indicate that civil war reduces annual growth by .01 to .13 percentage points, and high-intensity interstate conflict reduces annual growth by .18 to 2.77 percentage points. On the other hand, lowintensity conflict slows growth much less than high-intensity conflict, and may slightly increase it. The detrimental effect of conflict on growth is intensified when examining nondemocracies, low income countries, and countries in Africa.”   

- Solomon W. Polachek Department of Economics and Department of Political Science State University of New York at Binghamton  

Natural catastrophes:  “Major natural disasters can and do have severe negative short-run economic impacts. Disasters also appear to have adverse longer-term consequences for economic growth, development and poverty reduction. “  

-Charlotte Benson, Edvard Clay, 2003

Unemployment: More social benefits needed, less taxpayers

-Investopedia 

Government failure: Government failure is a situation where government intervention in the economy to correct a market failure creates inefficiency and leads to a misallocation of scarce resources. 

-Economics Online 

Water crisis: “Right now, many companies already consider water resources when making decisions about where to invest or locate facilities. And they are giving preference to areas where water risks are lowest. These businesses understand what policymakers are now coming to realize: When water resources are unhealthy or unreliable, businesses cannot grow and cannot hire or sustain a workforce. Local commerce suffers, incomes decline, tax revenues fall. The effects are very real and they are felt immediately and acutely. “

-Growing Blue

Illicit trade: “Impact on the global economy of illicit trade and criminal activity – 8%-15% of global GDP – US$ 750 billion– US$ 1 billion in narcotics trafficking – US$ 650 billion in counterfeit goods – US$ 20 billion-40 billion in environmental crime”

 -OAS, Davos-Klosters